In re Stanley Engineering Corporation

• Decision Date: 06 November 1947
• Docket Number: No. 9420.,9420.
• Citation: 164 F.2d 316
• Parties: In re STANLEY ENGINEERING CORPORATION.
• Court: U.S. Court of Appeals — Third Circuit

164 F.2d 316 (1947)

In re STANLEY ENGINEERING CORPORATION.

No. 9420.

Circuit Court of Appeals, Third Circuit.

Argued June 5, 1947.

Reargued October 17, 1947.

Decided November 6, 1947.

Writ of Certiorari Denied January 5, 1948.

Abraham E. Freedman, of Philadelphia, Pa., for appellant.

John Edward Sheridan and David Rosen, both of Philadelphia, for trustee.

Before BIGGS, MARIS, GOODRICH, McLAUGHLIN, O'CONNELL and KALODNER, Circuit Judges.

Writ of Certiorari Denied January 5, 1948. See 68 S.Ct. 351.

KALODNER, Circuit Judge.

Is it an abuse of discretion for a bankruptcy court to fail to confirm a judicial sale, which was properly conducted and which produced a bid substantially in excess of the appraised value of the property, in the absence of unfairness, fraud or mistake, or gross inadequacy of price, and where the only apparent reason for the court's action is its desire to obtain the benefit of a higher bid made at the confirmation hearing by another party?

That is the primary issue presented by this appeal. A secondary question presented is whether it is reversible error for the bankruptcy court to award the property to another party making a higher bid at the confirmation hearing fixed to take action on the public sale.

The questions posed arise out of an appeal from the action of the bankruptcy court in refusing to confirm a sale of real estate to the high bidder at a public sale and in accepting a higher bid made by a second party at the confirmation hearing. The facts may be briefly stated as follows:

On April 8, 1947, the bankruptcy court authorized the sale of the assets of the Stanley Engineering Corporation in a bankruptcy proceeding.¹ Three disinterested appraisers appointed by the court valued the realty assets of the corporation at $50,000. The real estate was assessed at $45,000 by the City of Philadelphia for the year 1947. Pursuant to the court order the realty was offered for sale at public auction May 7, 1947. The public sale was "well-advertised"² and "well-attended". There was spirited competitive bidding starting at $35,000 or $36,000, with the appellant, Morris Galman, making the highest bid, of $57,250. The bid was 14½% in excess of the appraised value of the property. Following the acceptance of the Galman bid by the auctioneer he entered into a contract of sale with the agents of the trustees and submitted a certified check for 15% of the purchase price. On the following day counsel for the trustees presented a petition to the bankruptcy court to confirm the sale. It was then that counsel for the Gaby Company appeared and offered $63,250 for the realty, approximately 10% higher than the appellant's bid.

At this point the court below inquired of the parties present as to the adequacy and scope of the advertising of the sale, the manner in which it was conducted, the nature of the bidding, the appraisement, etc.; and the facts previously related were elicited. Counsel for the Gaby Company stated in discussing the sale, "There was a pretty big crowd there. I never saw so many turn out for a sale. * * * In my opinion there was nothing at all irregular. The sale was one of the best conducted sales that I have ever seen in my experience at the bar." Counsel for the trustees stated that the sale was a "good one" and that the sale was extensively advertised, properly conducted and that there was no fraud or collusion "or anything of that kind". He vigorously urged the court to confirm the public sale and to award the property to Galman, the high bidder.

After presentation of these facts the Court announced that the submission of the higher bid by the Gaby Company raised "a grave question of policy" requiring further deliberation. The hearing was then adjourned.

On May 12th a second hearing was had. At that time the court, referring to the fact that the $63,250 bid at the confirmation hearing was $6,000 in excess of the bid at the public sale, stated "I am not going to take the responsibility of refusing $6,000 to these creditors. * * *" The court announced that it contemplated directing a new public sale contingent upon the filing of a bond by the Gaby Company to insure the renewal of its bid at such public sale, plus expenses of advertising, auctioneer commissions, and other costs. The court then adjourned the hearing with the statement that it would announce its final decision, affirming the Galman bid or directing a new sale, the following day.

A third and final hearing was had on May 13th. At that time the court stated that while it subscribed to cited decisions that public sales should be confirmed where they were properly conducted in the absence of unfairness, fraud, or mistake, or gross inadequacy of price, "What makes this case exceptional * * * is the fact it (the Gaby bid) is 10% above (the Galman bid)."

The court indicated that in view of the circumstances it would enter an order directing a new public sale contingent upon the Gaby Company's filing the bond previously discussed. At this point, counsel for the trustees urged the court to avoid the delay of another public sale and to conclude the matter after giving Galman the opportunity to make a further bid. The court acceded to this suggestion. At the afternoon session the court asked counsel for the Gaby Company whether he desired to bid. In response he made a bid of $63,250. Counsel for Galman then stated that he would match that bid, whereupon counsel for Gaby increased his bid to $67,250. The court thereupon inquired of counsel for Galman whether he desired to make any further bid and when advised that he would not do so the Gaby bid of $67,250 was accepted by the court.

The court then made a statement asserting that its action in refusing to confirm the public sale and its award of the property to the Gaby Company was due to the fact that the latter bid was almost 20% higher than the public sale bid, and that it was incumbent upon the court to obtain the higher price in the interest of the creditors.

This summary makes it crystal clear that the bankruptcy court's rejection of the Galman bid at the public sale and its acceptance of the higher Gaby bid at the confirmation hearings was solely due to the court's desire to obtain for the benefit of the creditors, the $10,000 difference between the two bids.³

The court made no finding of inadequacy of price, gross or otherwise, in the Galman bid nor did it make any finding that there was unfairness, fraud or mistake in the conduct of the public sale. There was not even a suggestion of inadequacy of price anywhere in the proceedings below.

The Bankruptcy Act, as amended by Section 1, 52 Stat. 879 (1938), 11 U.S.C.A. § 110, sub. f, provides as follows: "* * * Real and personal property shall, when practicable, be sold subject to the approval of the court. It shall not be sold otherwise than subject to the approval of the court for less than 75 per centum of its appraised value. * * *"

While the extent of the power of the bankruptcy court, in denying confirmation or setting aside judicial sales, is not spelled out in the statute, the extent of such power has been spelled out in numerous decisions.

These decisions establish:

That judicial sales, made upon due notice and in accordance with law, will be confirmed unless (a) there was fraud, unfairness or mistake in the conduct of the sale; or (b) the price brought at the sale was so grossly inadequate as to shock the conscience of the court and raise a presumption of fraud, unfairness or mistake. Mere inadequacy of price is not a sufficient ground for setting aside a judicial sale where there was no unfairness in the conduct of the sale. In determining whether gross inadequacy exists the bankruptcy court must take into consideration appraisement of the property as a guide in the exercise of its discretion in accordance with the intendment of the statute cited. Where the bankruptcy court fails to confirm a judicial sale in the absence of unfairness, fraud or mistake or gross inadequacy of price, its action will be reversed on the ground of abuse of its legal discretion.

We subscribed to the principles enumerated in Jacobsohn v. Larkey, 3 Cir., 1917, 245 F. 538, page 541, L.R.A.1918C, 1176. In doing so we stated as follows:

"Judicial sales are an indispensable part of the machinery employed in administering bankrupt estates. Public policy requires stability in such sales. The Ruby, D.C., 38 F. 622; In re Burr Mfg. & Supply Co., 2 Cir. 217 F. 16, 19, 133 C.C.A. 126. To induce bidding at such sales and reliance upon them, the purpose of the law is that they shall be final. Pewabic Mining Co. v. Mason, 145 U.S. 349, 356, 12 S.Ct. 887, 36 L.Ed. 732; they are not to be disturbed except for substantial reasons.

"After much experience in scrutinizing bidding at judicial sales, courts now uniformly hold that the mere offer to pay more than the price bid is not a substantial ground for setting aside a sale, recognizing nothing will more certainly tend to discourage and prevent bidding than a judicial determination that the highest bidder may be deprived of the advantage of his accepted bid by an offer of another person, subsequently made, to bid higher on resale. Morrisse v. Inglis, 46 N.J.Eq. 306, 19 A. 16; In re Metallic Specialty Mfg. Co., D.C., 193 F. 300; In re Shapiro, D.C., 154 F. 673." (Emphasis supplied.)

In Pewabic Mining Co. v. Mason, 1892, 145 U.S. 349, page 356, 12 S.Ct. 887, page 888, 36 L.Ed. 732, the Supreme Court said: "Yet the purpose of the law is that the sale shall be final; and to insure reliance upon such sales, and induce biddings, it is essential that no sale be set aside for trifling reasons, or on account of matters which ought to have been attended to by the complaining party prior thereto. * * *" See also Bovay v. Townsend, 8 Cir., 1935, 78 F.2d 343, 105 A.L.R. 359; American Trading and Production Corporation v. Connor, 4 Cir., 1940, 109 F.2d 871.

A clear exposition of the governing...