In re Cormier

• Decision Date: 14 February 2008
• Docket Number: No. GT 05-16241.,GT 05-16241.
• Citation: 382 B.R. 377
• Parties: In re Michael J. CORMIER and Linda E. Cormier, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

Page 377

382 B.R. 377

In re Michael J. CORMIER and Linda E. Cormier, Debtors.

No. GT 05-16241.

United States Bankruptcy Court, W.D. Michigan.

February 14, 2008.

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James W. Boyd, Esq., Traverse City, Michigan, Chapter 7 Trustee, "Trustee."

Wallace H. Tuttle, Esq., Traverse City, Michigan, Attorney for Michael J. Cormier and Linda E. Cormier, "Debtors."

OPINION REGARDING TRUSTEE'S PROPOSED SALE OF STOCK

JAMES D. GREGG, Chief Judge.

I. INTRODUCTION

The Sixth Circuit Bankruptcy Appellate Panel ("BAP") has issued a recent decision which gives this court pause. Olson v. Anderson (In re Anderson), 377 B.R. 865 (6th Cir. BAP 2007) ("Anderson BAP"). In this contested matter, what was to have been a relatively straightforward opinion about the Debtors (who were the successful high bidders) objecting to the Trustee's auction sale has become considerably more complicated. If the Anderson BAP opinion is narrowly construed, based upon its unique facts, it is probably correctly decided. However, if Anderson BAP is broadly construed, its result may be far-reaching, and drastically modify the federal exemption design, resulting in some debtors figuratively and fortuitously sliding down a rainbow to be gifted a pot of unwarranted bankruptcy largesse.

II. ISSUES

May the Trustee sell stock in a closely held Michigan corporation at an auction sale? Did the stock cease to be property of the estate, thereby precluding the Trustee's sale, based upon the Debtors' claimed federal catchall exemption? Do the Debtors have standing to object to the sale even though they were the highest bidder?

III. JURISDICTION

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334 & 157(a) and Local Rule 83.2(a) of the United States District Court for the Western District of Michigan (which refers all bankruptcy cases and related matters to this bankruptcy court). This matter is a core proceeding because it pertains to "exemptions from property of the estate," 28 U.S.C. § 157(b)(2)(B), the "sale of property," 28 U.S.C. § 157(b)(2)(N) and the "administration of the estate," 28 U.S.C. § 157(b)(2)(A).

This opinion constitutes the court's findings of facts and conclusions of law in accordance with FED. R. BANKR.P. 7052. This bankruptcy case was filed before the generally effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (commonly referred to as "BAPCPA"). The issues presented are therefore decided under the pre-BAPCPA Bankruptcy Code, 11 U.S.C. §§ 101-1330, inclusive, with statutory references hereinafter noted as "§ ___."

IV. FACTS AND PROCEDURAL BACKGROUND

Michael J. Cormier and Linda E. Cormier, "Debtors," filed their voluntary joint petition under chapter 7 of the Bankruptcy Code on October 10, 2005. Dkt. 1. James W. Boyd, "Trustee," was appointed to administer the bankruptcy case. When the case was filed, the Debtors filed Schedules A-J and their Statement of Financial Affairs. The Debtors failed to disclose their 4.167% ownership interest in stock of TTAP Investments, Inc. (the "stock"), or to claim the stock as exempt property. Only on their Schedule I, pertaining to Current Income, did the Debtors allude to the stock as "Mineral Rights" from which they received $1,277 per month.

At the § 341 meeting ("first meeting"), the Trustee asked about the "Mineral Rights" and first learned of the Debtors' stock ownership. After the first meeting, the Trustee attempted to obtain information regarding the stock. On November 2, 2006, he filed a motion seeking turnover of royalties and corporate documents. Dkt. 14. Thereafter, on November 17, 2006, the Debtors filed their first amended Schedules B and C. Dkt. 17. They listed the stock as jointly owned with a current market value of $1.00. On Schedule C, they claimed the stock as exempt in the amount of $1.00 under the so-called federal "catchall" exemption, § 522(d)(5).

On December 18, 2006, a stipulation to substitute the Debtors' current attorney for their prior attorney was filed, and the order permitting substitution was entered on December 21, 2006. Dkt. 18 and 20. Second amended Schedules B and C were then filed on February 21, 2007. On Schedule B, in paragraph 13, under "Stock and interests in incorporated and unincorporated businesses," the Debtors finally listed a "4.167% joint stock interest in TTAP Investments, Inc." and stated the "current value" as 11.00." On Schedule Property Claimed as Exempt, the Debtors listed the joint stock interest and claimed exemptions under § 522(d)(5) as follows: Husband — $9,650 and Wife — $4,500. The total amount claimed as exempt equaled $14,150. Once again, the Debtors listed the current value of the stock as $1.00.¹ The Trustee did not object to the Debtors' claimed exemptions.

The Trustee continued to seek information about the stock. While the parties agreed to adjourn the hearing regarding the requested turnover of royalties and corporate records, the Trustee sought and obtained an Order Granting Motion for [Rule] 2004 Examination. Dkt. 22 and 23.

After some additional information was obtained, on October 2, 2007, the Trustee filed his Motion to Sell Stock in TTAP Investments, Inc. (the "Sale Motion"). Dkt. 30. Per the Sale Motion: (1) the corporation itself, TTAP, made an opening offer to purchase the stock in the amount of $26,826; (2) the Debtors then made an opening higher offer of $27,000; (3) the Trustee requested to sell the stock to the highest bidder at a subsequent telephone auction; (4) the Debtors were permitted to credit bid their claimed exemption totaling $14,150 toward the purchase price; (5) upon completion of the auction sale, the bankruptcy estate's interest in the stock would be conveyed to the highest bidder by assignment; and (6) the successful bidder would be entitled to receive all royalties and dividend payments commencing November 1, 2007, provided the sale closed on or before October 31, 2007.

After notice and a hearing on October 19, 2007, the court approved the requested auction sale.² At that hearing, the court did not recognize any storm clouds approaching — any clouds appeared to be cirrocumulus rather than cumulonimbus in nature. The Debtors' attorney stated: "We have some concerns about the proper authority of the corporation [TTAP Investments, Inc., generally herein "TTAP"] to bid but I believe that will be dealt with at the time of the auction." Tr. I at 3. Then it was stated that "we would have no objection for the court order to be entered." Id. The order approving the auction sale, entitled "Order Confirming Sale," was filed on October 24, 2007, signed on October 29, 2007 and entered on October 30, 2007.³ Dkt. 36 and 40. While the order permitting the auction sale to take place was being processed for entry, the auction proceeded.

On October 23, 2007, a telephonic auction of the stock occurred. The Debtors' initial opening offer of $27,000 was subject to competitive bidding; after TTAP eventually bid $46,000 for the stock, the Debtors bid $47,000, which was the final bid. Dkt. 37; Tr. III at 2. Almost immediately thereafter, on October 24, 2007, the Trustee filed his "Motion for Entry of Order Confirming Sale of Debtor's [sic] Stock in T.T.A.P. Investments, Inc. Pursuant to Auction Conducted on October 23, 2007" ("Confirmation of Auction Sale Motion"). Dkt. 37. In that motion, the Trustee requested the sale be approved, the sale be closed on or before November 30, 2007, and that if the Debtors, as the successful highest bidder, failed to timely close the sale, the Trustee be authorized to sell the stock to TTAP at its last highest bid of $46,000.

The court promptly set the Confirmation of Auction Sale Motion for hearing on November 2, 2007. Dkt. 38. On October 30, 2007, the Debtors filed their objection to the Confirmation of Auction Sale Motion. Surprise! Because of a glitch, when the hearing commenced on November 2, 2007, the court was unaware of any objection. It believed, because the Debtors were the high bidders, that the sale was uncontested. Wrong!⁴ The Debtors' attorney then argued that the sale of the stock to his own clients should not be approved. (Cumulonimbus clouds erupted in the Traverse City courtroom. This is only supposed to happen in the summer — not in November.)⁵

At the hearing, the court questioned the Debtors' standing to object to the sale because they were the successful bidders. Tr. II at 4. After conceding the Trustee could administer the property if a portion of the stock was nonexempt, the Debtors' attorney argued that the Debtors had the right to raise whether the corporate bylaws had been followed. Tr. II at 4-5. The issue was squarely presented about who might enforce the stock restrictions, the Debtors, the Trustee, shareholders of the corporation (were the Debtors shareholders after they filed their bankruptcy case?), or the corporation itself. Tr. II at 6. The Trustee asserted that the Debtors lacked standing to object because their exemption amount would be paid in full. Tr. II at 7.

After hearing more argument, in great part about the Debtors' ability to object to the sale or not, after they appeared to be willing participants at the sale, the court stated it believed the Debtors' arguments to be "disingenuous." Tr. II at 7-12.⁶ After refusing to withdraw their bid⁷ and continuing to argue they had standing to object to the sale based upon the stock restrictions, the court ruled the Debtors had "no standing" and that the Trustee possessed the ability to challenge whether stock restrictions were properly followed based upon § 541 of the Bankruptcy Code.⁸ Tr. II at 13. The court then orally overruled the Debtors' objection and approved the sale to the. Debtors under the "conditions that were noticed out." Tr. II at 14.

In accordance with the oral bench decision by the court rendered on Friday afternoon, November 2, 2007, the Trustee promptly filed a...