In re Exennium, Inc.
| Decision Date | 13 August 1982 |
| Docket Number | Bankruptcy No. LA-81-00731-JM.,BAP No. CC-81-1296-HVG |
| Citation | 23 BR 782 |
| Parties | In re EXENNIUM, INC., dba Axiom Television, Griffeys TV and Appliances, Griffeys House of Portables, Griffeys TV and Portables, Griffeys Electronics, Debtors. KARBACH ENTERPRISES, a California limited partnership, Appellant, v. EXENNIUM, INC., Debtor and Irving Sulmeyer, Trustee, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Daniel H. Slate, Gendel, Raskoff, Shapiro & Quittner, Los Angeles, Cal., for appellant.
Joseph Bernfeld, Pacht, Ross, Warne, Bernhard & Sears, Inc., Max H. Rush, Sulmeyer, Kupetz, Baumann & Rothman, Los Angeles, Cal., for appellees.
Before HUGHES, VOLINN and GEORGE, Bankruptcy Judges.
This appeal presents issues of bankruptcy administration relating to sales of property. We reverse the orders appealed. We first hold in part II that the appeals are not moot. We next hold in part III that debtor's attorney is ineligible to purchase property of the estate and that such a sale is void. In Part IV we discuss the effect of that holding on sales that were not appealed and, in part V, we cite the trustee's failure to conduct a public auction as an alternative basis for reversal.
Exennium, Inc. operated retail television and appliance businesses in four leased locations. On November 25, 1980, its attorneys, Pierson & Letteau, notified one of the lessors (Karbach Enterprises) that Exennium planned to assign its lease to a third party. They requested Karbach's consent as required by the lease. Karbach replied by requesting financial information about the third party. Nothing came of this exchange.
A voluntary petition under Chapter 11 was filed for Exennium, Inc. by Pierson & Letteau on January 22, 1981. The law firm thereafter filed a statement of affairs and schedules of creditors and assets. Sometime in February, Pierson & Letteau withdrew as attorneys of record for the debtor (as well as de facto attorneys for the debtor-in-possession) and were replaced by Joseph Bernfeld. Meanwhile, on February 5, the debtor consented to appointment of a trustee by the United States trustee.
The appointed trustee soon terminated business operations. According to Mr. Bernfeld,
The trustee prepared and filed a notice of proposed sale, which was mailed by the clerk of the bankruptcy court to all creditors listed in the schedules and was published in a legal newspaper. The trustee did not otherwise undertake to notify anyone of the proposed sale. No objection or request for hearing before the court having been filed, the sale took place on the premises leased from Karbach on May 14.
Pierson successfully bid $50,000 for all of the property offered by the trustee, including all of the debtor's tangible personal property plus its name and goodwill, but excluding the four unexpired leases. Sale of the leases was continued to the following day in the trustee's office, at which time Pierson's offer of $78,000 for the leases was accepted. By letter of the same date, May 15, Pierson notified Karbach of his purchase.
None of the lessors received notice of the proposed sale for the reason that they were omitted by Pierson & Letteau from the debtor's schedule of creditors, the basis of the clerk's mailing.
Karbach filed an objection to the assumption or assignment of the leasehold interest on May 26 and, on June 18, an application to reopen the sale of the leasehold interests. Also in June, the trustee filed a motion for an order permitting assumption and assignment of the leases. All of the motions were heard initially on July 7, 1981 and were decided on August 17, 1981.
During the July 7 hearing, Karbach offered to buy its lease from the trustee for $50,000 net to the estate; this was explained as $50,000 cash plus a waiver of its administrative rent claim. The offer was opposed by the attorney for the debtor, Bernfeld, and apparently by the trustee. Prior to the continued hearing on August 17, the trustee notified the court that it now favored the Karbach offer. The trustee pointed out that Pierson's $78,000 could be fully consumed in curing defaults on the four leases and might not even be enough.
At the August 17 hearing, however, the trustee supported an amended offer by Pierson which not only obligated him to pay any sums over $78,000 needed to cure the rent defaults but to hold the estate harmless from certain claims by retail customers as well.
Meanwhile, the then attorney for the debtor, Bernfeld, strenuously opposed the Karbach offer. In addressing the court, he said:
The debtor needs the leases to reorganize itself. Without the leases it is dead; without the Long Beach Karbach lease being protected it is dead . . .
Later:
The present suggestion of the trustee is to confirm it to Mr. Pierson. We have an understanding with Mr. Pierson. He has already written in a letter under his own signature that he will make a reasonable deal with the debtor.
At the conclusion of the August 17 hearing, the court agreed to sign an order permitting the trustee to assume and assign the four leases. Even before that order was signed on August 31, however, Pierson's law firm wrote (on August 26) to Karbach's attorney:
Since our court appearance of August 17, 1981 it has become increasingly problematical as to whether or not a reorganization can be effected. In the absence of such a reorganization Mr. Pierson, of course, would intend to sublease the subject premises . . .
This appeal, by Karbach, is from the order permitting assignment of the lease to Pierson. The court's rulings on Karbach's motion to reopen the sale is implicit in this order and is treated as such by the parties to the appeal.
Early in this appeal, the trustee (as well as the debtor) moved to dismiss the appeal on the grounds that Karbach had not obtained a stay pending appeal and that matter was therefore moot. The trustee relied on 11 U.S.C. § 363(m) and Bankruptcy Rule 805. We denied the motion without prejudice.
Subsection (m) of section 363 provides in part that the "reversal . . . on appeal of an authorization under subsection (b) . . . of a sale or lease of property does not affect the validity of a sale or lease under such authorization . . . unless such authorization and such sale were stayed pending appeal."
Subsection (b) of section 363 provides that the trustee may sell property of the estate "other than in the ordinary course of business" after notice and hearing.
We do not understand Karbach to have appealed from any order authorizing the trustee to sell property other than in the ordinary course of business. (There was no order reflected in the record). It has appealed instead from the order confirming the sale to Pierson and from the order declining to reopen the sale.
Accordingly, the motion to dismiss the appeal is itself moot to the extent it relies on 11 U.S.C. § 363(m).
Bankruptcy Rule 805 provides, in relevant part: "Unless an order approving a sale of property . . . is stayed pending appeal, the sale to a good faith purchaser . . . shall not be affected by the reversal or modification of such an order on appeal . . ." Thus, in contrast with section 363(m), this rule applies to the actual sale (more accurately, to the order approving the actual sale) made pursuant to the authorization obtained under section 363(b).
B.R. 805 is inapplicable to the trustee's sale of personal property to Pierson because the trustee did not seek or obtain an order approving (confirming) that sale. The trustee did obtain an order permitting assumption and assignment of the leases, however, which we consider equivalent to an order approving sale for purposes of B.R. 805.
However, the panel was advised that Pierson was maintaining the status quo while awaiting outcome of the appeal. That in itself would make B.R. 805 inapplicable. In re Cada Investments, Inc., 664 F.2d 1158 (9th Cir. 1981).
Furthermore, we find it difficult to believe that one who is disqualified for public policy reasons to purchase can be a good faith purchaser under B.R. 805. Thus, B.R. 805 is inapplicable under the facts of this case.
Aside from the foregoing statute and rule, an appeal of an order confirming a bankruptcy sale is moot if the sale has been consummated and the purchaser is not before the court. In re Royal Properties, Inc., 621 F.2d 984, 986 (9th Cir. 1980). Pierson is not a formal party to this appeal. However, as noted above, the transaction has not been consummated.
For the foregoing reasons, we again deny the trustee's motion to dismiss Karbach's appeal as being moot.
We next address the question of Pierson's qualification to purchase property of the estate. Karbach urges that "an attorney for the debtor has a very strong responsibility to act in no way inconsistent with that which he or she perceives to be in the best interests of the estate." The trustee defends Pierson's qualifications as a buyer by noting the absence of any provision in the Bankruptcy Code disqualifying "an attorney who has ceased representing the Debtor . . ." and noting the "overriding policy . . . that the estate realized the greatest economic benefit from the sale of its assets . . ."
We reject the trustee's arguments and hold that Pierson was disqualified as a buyer and that the sales to him were void.
It is hornbook law that an attorney owes a duty to his client to take no action that is in conflict with the client's interests. An attorney who appears in court assumes additional duties to the court and to parties to the matter in which appearance is made. Finally, a...
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