In re Beardsley

• Citation: 38 F. Supp. 799
• Decision Date: 14 May 1941
• Docket Number: No. 9544.,9544.
• Parties: In re BEARDSLEY.
• Court: U.S. District Court — District of Maryland

38 F. Supp. 799

In re BEARDSLEY.

No. 9544.

District Court, D. Maryland.

May 14, 1941.

COPYRIGHT MATERIAL OMITTED

Irving B. Grandberg, of Baltimore, Md., for York Ice Machinery Co.

Galvin & McCourt, of Baltimore, Md. (J. Irvin McCourt, of Baltimore, Md.), for A. E. Kaestner Co.

W. Brewster Deen, of Denton, Md., for trustee.

COLEMAN, District Judge.

This case is before the Court upon the petition of the York Ice Machinery Corporation, a judgment creditor of the bankrupt, Cecil J. Beardsley, to review an order of the Referee finally ratifying a private sale of the bankrupt's assets subject to certain liens, but free and clear of certain other liens (including the judgment lien of the petitioner). This sale the trustee in bankruptcy had been authorized to make, subject to the right of creditors to object thereto, by a previous order of the Referee.

The petitioner asserts that the sale was invalid because the bankrupt's property should have been sold subject to and not free and clear of its judgment lien, unless the proceeds of the sale are sufficient to pay the amount of petitioner's judgment lien with interest and costs, in full, as a preferred claim on such proceeds. The trustee, on his part, asserts that the sale was the one most advantageous to all parties in interest that could have been made and that therefore, it should be finally ratified and the proceeds distributed as directed by the Court. The purchaser is the Walnut Bank Farms, a partnership and not a creditor of the bankrupt.

The bankrupt traded under the name of Beardsley Milk Company and was engaged at Denton, Maryland, in the business of pasteurizing milk, making ice cream and chocolate milk drinks, and delivering these products to consumers on various routes on the Eastern Shore of Maryland. He purchased his raw milk direct from the farmer. On October 19th, 1940, he made a general assignment for the benefit of his creditors of all of his property to Wesley E. Thawley, trustee, who pursuant to an order of the Circuit Court for Caroline County, Maryland, proceeded to act as trustee on behalf of Beardsley's creditors, continuing to operate the business until November 16th, 1940. On that date, pursuant to authority of the State Court, he accepted an offer, subject to ratification by the State Court, for the purchase of all of Beardsley's assets by the same purchaser, namely, the Walnut Bank Farms, that is now before this Court in these bankruptcy proceedings as the purchaser of the same assets upon the same terms and conditions. Ratification was refused by the State Court because Thawley, trustee, had no authority under the jurisdiction of the State Court, to sell the property free and clear of any liens; and also, because of the fact that three days after the trustee accepted the offer, namely, on November 19th, 1940, a petition to have Beardsley adjudicated an involuntary bankrupt was filed in this Court by his creditors and he was so adjudicated on the same day. Thawley, trustee, had, before offering the property at private sale, endeavored to sell Beardsley's property at public sale pursuant to authority of the State Court but receiving no bids, resorted to private sale. It was the trustee's contention while subject to the jurisdiction of the State Court, and has also been since under the jurisdiction of the bankruptcy court, that although he had operated the business at a loss, it could best be sold as a whole, as a going concern.

The same Wesley E. Thawley being duly elected trustee in bankruptcy by Beardsley's creditors, was authorized to continue the business pending disposition of Beardsley's assets and he petitioned this Court for authority to accept the offer that had previously been made at private sale for the bankrupt's property, upon the same terms and conditions and for the same consideration. Such authority was granted by order of the Referee subject to prior notice being given to all creditors as required by the Bankruptcy Act and their right to be heard in objection to such sale. Such requirements were complied with by the Referee; and the present petitioner and another secured creditor, the E. A. Kaestner Corporation, excepted to the ratification of the sale, the exceptions of the present petitioner, made for the reasons already explained, being overruled by the Referee. The exceptions of the other creditor were withdrawn. The sale was finally ratified by the Referee and the matter is now before this Court on the petition of the York Ice Machinery Corporation to review this action of the Referee.

The appraisal of the bankrupt's property made pursuant to the requirements of the Bankruptcy Act shows his realty to be worth $1,200 and his personalty $4,512.30. Summarized, the conditions of the sale now under review were that the bankrupt's realty and personalty should be disposed of as a unit for $4,000 cash, the purchaser assuming two mortgages held by third parties on the realty amounting to $880.49 and also three conditional sales contracts covering personalty amounting to $1,477.47, these mortgages and contracts all being valid and prior in date to the liens of the present objecting creditor and also of the Kaestner Company, thus making a total purchase price, including the value of the assumed liens, $6,357.96. Apportioning this sum between the realty and personalty on the basis of the respective appraised values, we have $1,335 as representing the proceeds of the sale of the realty, and $5,022.96 as representing proceeds of the sale of the personalty. Deducting the amount of the assumed mortgages on the realty from the $1,335 thus allocated to the realty, it follows that of the $4,000 cash purchase price, $454.51 represents the cash proceeds of the sale of the realty. Likewise, deducting the amount of the assumed conditional sales contracts on the personalty from the allocated sum of $5,022.96, it follows that the balance or $3,545.49 of the $4,000 cash purchase price represents the cash proceeds from the sale of the personalty.

In addition to the five liens just mentioned which the purchaser of the bankrupt's property assumed, there were outstanding against his property at the time of the sale certain other liens held by the present petitioner, the York Ice Machinery Corporation, and by another secured creditor already referred to, the E. A. Kaestner Corporation, and it was with respect to these additional liens that the sale was made free and clear, pursuant to the Referee's order. The Kaestner Corporation had a judgment lien for approximately $832.78 and a chattel mortgage for approximately $2,100. The validity of these liens has not been challenged because of the fact that they were obtained prior to four months of the filing of the petition in bankruptcy. The York Company has a judgment for approximately $525 against Beardsley which became a lien on the realty by virtue of its recordation on July 11th, 1940 (see Maryland Code Annotated (1939) Article 26, Section 20); and on the personalty by virtue of a writ of fieri facias issued and levied on July 31st, 1940. Since, however, the petition to adjudicate Beardsley a bankrupt was filed in this Court on November 19th, 1941, while the first mentioned lien is not voidable because it arose prior to the four months' period, the last mentioned is voidable since it was acquired after July 19th, that is, within four months from the filing of the petition in bankruptcy. Therefore, pursuant to the provisions of Section 67, sub. a(1) of the Bankruptcy Act, 11 U.S. C.A. § 107, sub. a(1), if Beardsley was insolvent at the time this last mentioned lien arose, as seems reasonably certain, the trustee is required to take the requisite steps to avoid it. See Fischer v. Pauline Oil Co., 309 U.S. 294, 60 S.Ct. 535, 84 L.Ed. 764.

Having thus reviewed the somewhat complicated facts, we now turn to a consideration of the legal principles which must control in determining whether the action of the Referee was proper under the Bankruptcy Act, in ratifying the sale by the trustee.

The power of a bankruptcy court to sell property of a bankrupt free and clear of liens, although not conferred in terms by the Bankruptcy Act, is nevertheless well established. Van Huffel v. Harkelrode, 284 U.S. 225, 52 S.Ct. 115, 76 L.Ed. 256, 78 A.L.R. 453. But it is equally well settled that this power should not be exercised unless it is reasonably clear that the property will bring more than the encumbrances and expenses of sale. See Tawney v. Clemson, 81 F.2d 300; Federal Land Bank of Baltimore v. Kurtz, 70 F.2d 46; Union Electrical Co. v. Hubbard, 242 F. 248, all of which are decisions of the Circuit Court of Appeals for this Circuit. See, also, Hoehn v. McIntosh, 6 Cir., 110 F.2d 199; Coulter v. Blieden, 8 Cir., 104 F.2d 29, certiorari denied, 308 U.S. 583, 60 S.Ct. 106, 84 L.Ed. 488; In re Miller, 7 Cir., 95 F.2d 441. The basis for this rule is that lien creditors must be satisfied in full before the bankrupt's other creditors, represented by his trustee, can acquire any interest in his property. Section 64, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, fixes the order of distribution of the bankrupt's estate, but only with respect to those whose rights are junior to the rights of those holding valid liens at the date of the filing of the petition in bankruptcy. See In re Centralia Refining Co., D.C., 35 F.Supp. 599; In re Penticoff, D.C., 36 F.Supp. 1.

It is to be noted that although the specific language in the Bankruptcy Act protecting valid liens, Section 67, sub. d, 11 U.S.C.A. § 107, sub. d, as it appeared prior to the amendments of 1938, is not carried into the new Act, the requirement of the law remains the same because the present Section 70, 11 U.S.C.A. § 110, provides, in effect, that the trustee's title is subject to valid liens, since he acquires only the title of the bankrupt. Therefore, the trustee should not assume jurisdiction over a bankrupt's lien-encumbered property...