In re Bialac, Bankruptcy No. B-80-2700-PHX-RGM
| Decision Date | 09 February 1982 |
| Docket Number | 81-466.,B-81-1221-PHX-RGM,Adv. No. 81-467,Bankruptcy No. B-80-2700-PHX-RGM |
| Citation | 16 BR 982 |
| Parties | In re Samuel BIALAC, Debtor. In re James BIALAC, Debtor. |
| Court | U.S. Bankruptcy Court — District of Arizona |
Gerald K. Smith, Phoenix, Ariz., for debtors.
Amy R. Coy, and Newman R. Porter, Phoenix, Ariz., for Harsh Inv. Corp.
This action constitutes but another chapter in the continuing "litigation soap opera"1 involving the Bialac family and Harsh Investment Corporation, (HIC).
The present controversy between the parties stems from a transaction in 1965 in which members of the Bialac family acting through Rental Development Corporation (RDC) sold an apartment complex and shopping center known as Park Lee Alice Apartments to HIC through its wholly owned subsidiary Harsh Building Company (HBC). The sale was financed by the Federal Housing Administration through a "surplus cash note." In addition to the note, the Bialacs acquired secondary financing in contravention of the rules and regulations set up by the F.H.A. Subsequently, RDC defaulted on this secondary financing and HIC as guarantor paid the principal and interest. HIC then brought suit in Arizona state court against RDC and the Bialac family. In state court proceedings before Judge Sandra D. O'Connor, case No. C-196753, the court found the secondary financing to be void, and held that the surplus cash note was the sole enforceable financing vehicle. In addition, HIC was given a security interest in the surplus cash note, which created the unique situation of HIC having a security interest in a note made by its wholly owned subsidiary HBC.
Rental Development Corporation (RDC) was dissolved by the Bialac family and the note was transferred to the Bialacs as shareholders of RDC in the following manner:
Samuel and Lee Bialac held a one-third interest; Jerry Bialac held a one-third interest; and Alice Bialac Altman and James T. Bialac each held one-sixth.
After all appeals in Arizona state courts were exhausted HIC sought to foreclose on its security interest in the note against the Bialacs. At this point the Bankruptcy Court first entered the picture when Samuel Bialac filed a Chapter 11 petition (No. 80-2700) on December 2, 1980.
On January 12, 1981, HIC filed an adversary complaint (ADV No. 81-17) seeking relief from the automatic stay on Samuel Bialac's interest in the note. On February 25, 1981, Bankruptcy Judge Edward Davis lifted the stay on Samuel Bialac's one-third interest in the note. As a result of the decision by Judge Davis, HIC prepared to foreclose on its security interest in the note by noticing a sale of the note on June 1, 1981. Minutes before the sale was to be held, James Bialac filed a Chapter 11 petition (No. 81-1221). Rather than postpone the sale, it was determined by HIC that only five-sixths of the note would be sold, thereby attempting to omit James Bialac's interest in the note so as to respect the automatic stay imposed by 11 U.S.C. § 362 on his interest.
Subsequent to the sale, the decision of Judge Davis to lift the stay as to Samuel Bialac's one-third interest was appealed to the Ninth Circuit Bankruptcy Appellate Panels. Judge Davis's decision was affirmed on November 18, 1981, and is reported in In re Bialac, supra.
Also subsequent to the June 1, 1981 sale, HIC brought an adversary proceeding in this court against James Bialac (ADV No. 81-466) in which it sought to lift the automatic stay as to his remaining one-sixth interest in the note. After extended hearings, this court entered an order on October 8, 1981 continuing the stay, noting that at the time the above-mentioned appeal to the Bankruptcy Appellate Panels had not been decided, and also that it would be unjust to lift the automatic stay at that time in light of the equity status of the note. A copy of that opinion is attached.
The present proceedings comprise two issues which were segregated from prior proceedings concerning the lifting of the automatic stay. In Samuel Bialac's Chapter 11 case, the related adversary proceeding (ADV No. 81-467) questioned whether the sale of five-sixths of the surplus cash note was performed in a commercially reasonable manner. This same argument was raised in an adversary complaint filed by James Bialac (ADV No. 81-466). In addition, James Bialac argues that the sale of five-sixths of the surplus cash note violated the automatic stay with respect to his one-sixth interest in the note, since the sale diminished the value of his one-sixth interest and adversely affected his subrogation and redemption rights. These issues were consolidated, and testimony and evidence were presented at the trial thereon. The Bialacs seek to have the entire sale of June 1, 1981 set aside, and also seek to enjoin HIC from selling, assigning or transferring any part of the note.
The issue of whether the June 1, 1981 sale of the fractional five-sixths of the surplus note was performed in a commercially reasonable manner will be discussed first. It is therefore necessary to set forth additional facts and circumstances surrounding the sale itself.
On May 22, 1981, HIC noticed a public sale of the entire surplus cash note for June 1, 1981, at 2:00 P.M. Copies of the notice were sent to each of the five judgment debtors and to their counsel by certified mail. Copies were posted in two separate places at the Maricopa County Courthouse. In addition, the notice was published a total of six times in the two largest Phoenix metropolitan newspapers, such notices appearing on May 27, 28 and 29, 1981, in each of the two papers. Notices were also sent to a total of seven individuals who deal in discounted promissory notes and therefore were potentially interested in the sale of the asset. Earlier, by letter dated April 1, 1981, counsel for HIC had asked counsel for the Bialacs to suggest any additional persons who might be interested in bidding on the surplus cash note.
The sale was scheduled for 2:00 P.M., and at 1:13 P.M. on June 1, 1981, James Bialac filed a Chapter 11 petition. Within minutes after filing, a copy of the petition was served on counsel for HIC. At that time counsel for the Bialacs were advised that the sale would continue as to the interests of the four judgment debtors in the surplus cash note who were not involved in the James Bialac Chapter 11 case and that the sale would not include James Bialac's one-sixth undivided interest in the note.
At the sale, counsel for the Bialacs and representatives of HIC were present. In addition, Mr. Jay Golde, a person who had been attracted by the notice of sale, was present. The only bid cast at the sale was that of HIC in the amount of $160,000. The sale was thus consummated with HIC claiming a five-sixths interest in the note.
The Bialacs present two separate grounds for their argument that the sale was commercially unreasonable. First, it is argued that the note that was noticed to the public was not the note that was sold at the sale in that only five-sixths of the note was actually sold. Second, that insufficient information was provided to potential purchasers concerning the financial condition of HIC, the parent and controlling entity of HBC, the maker of the note.
In defense, HIC presents several arguments in support of the validity of the sale. First, it argues that this court lacks jurisdiction in deciding the issue of commercial reasonableness. They point out that with respect to Samuel Bialac, the same issues were raised in arguments made before the Ninth Circuit Court of Appeals in seeking to stay the sale. That court reviewed some of the same deficiencies in the notice of the sale as alleged in the current proceedings, and refused to stay the sale. HIC contends that such a ruling is res judicata. HIC also argues that James Bialac lacks standing to contest the sale because his interest was not sold.
At the outset, this court finds and holds that it has jurisdiction over the matters presented. While similar issues were presented to the Ninth Circuit in seeking to stay the sale, a different question is involved in the present proceedings. Here, in addition to alleged defects in the notice of sale, are allegations as to misconduct surrounding the sale itself. This court is looking at a sale that has taken place, while the Ninth Circuit was looking at a proposed sale. Clearly the issue before the court now concerns facts that were not in existence at prior proceedings. We are also guided by the case of In re Staff Mortgage & Investment Corp., 625 F.2d 281 (9th Cir. 1980) which held with regard to an analogous fact situation that a decision involving a bankrupt in one proceeding does not necessarily prevent the institution of a new proceeding involving the same issues.
While we conclude that the previous proceedings are not a res judicata bar to the proceedings before this court, this court will consider the decisions of the Ninth Circuit to be stare decisis with respect to the issues of notice that are identical to those issues presented before this court and is guided by the rulings therein.
As to the issue concerning the standing of James Bialac to contest the validity of the sale, we hold that he has standing in that he alleges injury in fact to his rights including the right of redemption. The relevant inquiry is whether, assuming the practicability of the claim, the debtor has shown an injury to himself that is likely to be redressed by a favorable decision. Simon v. Eastern Kentucky Welfare Rights Organization, 96 S.Ct. 1917, 426 U.S. 26, 48 L.Ed.2d 450 (1976). The mere fact that James Bialac's one-sixth interest was not sold does not prevent the possibility of injury having occurred to his property interests in the note.
In addition to the above-mentioned jurisdictional objections, HIC makes several substantive arguments in defense of the sale. First it notes that there is no...
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