In re Spenlinhauer, Civ. 98-446-P-C.

• Decision Date: 08 March 1999
• Docket Number: No. Civ. 98-446-P-C.,Civ. 98-446-P-C.
• Citation: 231 BR 429
• Parties: In re Robert J. SPENLINHAUER, Appellant-Debtor.
• Court: U.S. District Court — District of Maine

231 B.R. 429 (1999)

In re Robert J. SPENLINHAUER, Appellant-Debtor.

No. Civ. 98-446-P-C.

United States District Court, D. Maine.

March 8, 1999.

COPYRIGHT MATERIAL OMITTED

Gregory A. Tselikis, Bernstein, Shur, Sawyer & Nelson, Portland, Maine, for appellant Robert J. Spenlinhauer.

U. Charles Remmel II, Kelly, Remmel & Zimmerman, Portland, Maine, for appellee John & Stephen Spenlinhauer.

Stephen G. Morrell, Eaton, Peabody, Bradford & Veague, P.A., Brunswick, Maine, for Peter O'Donnell Trustee.

MEMORANDUM OF DECISION AND ORDER

GENE CARTER, District Judge.

Robert J. Spenlinhauer, Appellant, appeals from an order entered by the bankruptcy court authorizing the sale of his interest in the JRS Realty Trust of Maine (the "JRS Trust") and the release of all the estate's claims against the JRS Trust interest purchasers that arose as a result of Appellant's interest in the JRS Trust. Before this Court, Appellant contends that: 1) the bankruptcy court's finding that the sale of the JRS Trust interest was in good faith is clearly erroneous because it was based entirely upon evidence not properly admitted and 2) the bankruptcy court improperly authorized a release of the estates's claims against the purchasers of the JRS Trust interest.

I. BACKGROUND

A. Parties and Transactions.

In 1979, the JRS Trust was settled by Appellant and his two brothers, John and Stephen Spenlinhauer. The three brothers were the trustees and the beneficiaries of the JRS Trust. Memorandum of Decision of Bankruptcy Court, May 16, 1995 ("Bankruptcy Court Decision") Record on Appeal No. 3 at 2. The sole business purpose of the JRS Trust was to maintain and lease certain real estate and buildings in the Wells Industrial Park in Wells, Maine from the Wells Industrial Development Corporation ("WIDC"). Id. By virtue of a sublease, the JRS Trust leased WIDC to a company called Spencer Press of Maine, Inc., a wholly owned subsidiary of Spencer Press, Inc., ("Spencer Press") owned by Appellant, his mother, his two brothers, and the Spenlinhauer Family Trust. See id. at 2 n. 2.

In 1988, Appellant sold his stock in Spencer Press and, thus, has had no controlling interest in Spencer Press since that time. See id. Appellant remained a beneficiary of the JRS Trust until September 28, 1990, when he filed a voluntary petition under Chapter 11. See id. Upon that bankruptcy filing, Appellant's beneficial interest in the JRS Trust became property of his bankruptcy estate pursuant to 11 U.S.C. § 541. When the Industrial Revenue Bonds ("IRBs") were refinanced in October 1995, the trustees of the JRS Trust and the directors of Spencer Press amended the sublease to give Spencer Press an option to extend the term of the lease. Transcript of Continued Hearing On Motion to Sell Free and Clear of Liens, November 10, 1998, at 8. During the option term, Spencer Press would recover the cost of additional improvements it made to the premises through approximately $5,000,000 in rent credits. Id. The JRS Trust would receive reduced rent during the option term, but would own the premises and the improvements at the end of the term. See id. The bonds were refinanced a second time and some of the proceeds were used as working capital for Spencer Press. Id. at 8-9. On October 29, 1998, Appellant commenced an action in this Court against Spencer Press, the director of Spencer Press, and the trustees of the JRS Trust, alleging that the defendants violated the automatic stay by exercising control over property of the estate by effecting the refinancings of the premises and adversely impacting the rent due to the JRS Trust.

B. Bankruptcy Court Proceedings and Order.

In October 1994, Appellant's Chapter 11 case was converted into a Chapter 7 proceeding. Id. at 1. On September 28, 1998, the Chapter 7 trustee moved the bankruptcy court for an order, pursuant to 11 U.S.C. § 363(b), authorizing the sale of the bankruptcy estate's interest in the JRS Trust, according to the terms and conditions of the purchase and sale agreement ("Sale Agreement") (Record on Appeal No. 8), to his brothers, who, as mentioned above, are trustees and beneficiaries of the JRS Trust and own shares in Spencer Press. See Motion for Order Authorizing Trustee to Sell Property Free and Clear of Liens and Encumbrances (Record on Appeal No. 8). From this point forward, the Court will refer to John and Stephen Spenlinhauer as "the Purchasers." Under the terms of the Sale Agreement, the purchasers would acquire the JRS Trust interest, via a trustee's deed, for $500,000. See id. The Sale Agreement did not specifically mention that the trustee would release all claims against the Purchasers connected with the JRS Trust interest. See Sale Agreement.

On October 29, 1998, the same day that he filed his case in this Court regarding the refinancings of the Spencer Press sublease, Appellant filed a timely objection to the motion authorizing the sale of the interest in the JRS Trust. Former Debtor's Objection to Trustee's Motion for Order Authorizing Trustee to Sell Property Free and Clear of Liens and Encumbrances (Record on Appeal No. 12). The bankruptcy court held a telephonic hearing on the motion on November 3, 1998. The hearing was continued until 2:00 p.m. on November 10, 1998. After hearing arguments from counsel and considering a verified affidavit submitted by counsel for Spencer Press, Mr. Gordon C. Ayer ("Ayer Affidavit"), Bankruptcy Judge Haines authorized the sale of Appellant's interest in the JRS Trust to the purchasers, found that the sale was in good faith, and authorized a release of all of the estate's claims against the purchasers connected with the JRS Trust interest.

1. The Ayer Affidavit

It was during the hearing on November 10, 1998, that Appellant first learned of the Ayer Affidavit — which describing the lease amendments and the IRB refinancings in considerable detail. The Ayer Affidavit was delivered to the bankruptcy court on November 10, 1998, and to Appellant's counsel's office that morning via Federal Express. During the hearing, Appellant offered the following in response to the Ayer Affidavit:

Perkins: First, your Honor, I would say that we\'re at a bit of a disadvantage. We do not have the affidavit that\'s been mentioned. I suppose the mail — we could still get something late today, but as of this moment we have not seen this affidavit, so it is very difficult for me to address it in any fashion or to have submitted countering affidavits.

Remmel: Your Honor, I believe that affidavit is there. It was Federal Expressed for a.m. delivery.

. . . .

Court: . . . Go ahead, Mr. Perkins. I understand you haven\'t seen it anyway.

Transcript of Continued Hearing On Motion to Sell Free and Clear of Liens, November 10, 1998, at 5-6. Counsel for the Appellant then proceeded to state his position and did not again mention the Ayer Affidavit.

2. Good Faith Sale

The bankruptcy court found that the acquisition of Appellant's JRS Trust interest by the Purchasers was made in good faith. In the November 10, 1998, hearing, Bankruptcy Judge Haines declared that, "the only verified information I have before me is the information provided by Mr. Ayer's affidavit. Mr. Spenlinhauer the Appellant may not have had an opportunity, and I don't find one way or the other on this, to respond to Mr. Ayer's affidavit, but neither has Mr. Spenlinhauer put forward any sworn or attested statement in support of his personal allegations against the trustee or the Purchasers." Id. at 11. Bankruptcy Judge Haines explained, "I find based on Mr. Ayer's affidavit that they are indeed good-faith purchasers under Section 363(m)." Id. In its final order, the bankruptcy court ordered that "at consummation of the sale to John and Stephen Spenlinhauer, they will be deemed purchasers of such property `in good faith' within the meaning of § 363(m) of the Bankruptcy Code." Order Authorizing Trustee to Sell Property Free and Clear of Liens (Docket No. 14) at 2 ¶ f.

3. The Release of Claims

The Purchasers indicated at the first hearing conducted on November 3, 1998, that they were seeking a release of any breach of fiduciary duty or other claims related to the lease amendment and IRB refinancings held by the trustee on behalf of the bankruptcy estate. The following colloquy took place at the first hearing:

Court: Let me ask you this,. . . . Can this sale go forward with — I mean, I — it wouldn\'t have to be a formal reservation of rights. I mean, I didn\'t read it as there being any requirement in connection with the sale that there be mutual releases or any releases as between the trustee of the bankruptcy case and the purchasers.

Ayer: Judge, we never asked for that.

Court: Okay. So we could go — it can go forward without that?

Ayer: Well, because of what\'s currently happening I kind of wish it wouldn\'t but I don\'t think that\'s particularly relevant. I mean, we have worked very diligently to make sure that the rent involved here has always been market rate.

Court: Okay.

Ayer: The refinancing has always been for the construction of additions.

Court: Well, you\'re getting into the merits of it as opposed to whether or not you\'re insisting on a release, and the trustee can go forward and evaluate the trustee\'s interests for that,. . . .

Transcript of Continued Hearing On Motion to Sell Free and Clear of Liens November 3, 1998, at 11-12. At this point, the bankruptcy court continued the hearing in order to give the bankruptcy estate trustee an opportunity to evaluate his potential claims. At the hearing held on November 10, 1998, counsel for the bankruptcy trustee informed the bankruptcy court that the Purchasers expected that "the Trustee will convey to them all of the estate's interests arising out of the beneficial interest in the JRS Trust, and that that means that we are not only going to convey the property but also any causes of action of rights in action that might arise out of that interest." Transcript of...