In re Wheeler Technology, Inc.

• Decision Date: 16 January 1992
• Docket Number: BAP No. WW-91-1373 ROMe,Bankruptcy No. 90-33683T.
• Parties: In re WHEELER TECHNOLOGY, INC., aka Wheeler Aircraft, Debtor. Hugh SMITH, Alexair, Inc., Appellants, v. WHEELER TECHNOLOGY, INC., Unsecured Creditors Committee, United States Trustee, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

139 B.R. 235 (1992)

In re WHEELER TECHNOLOGY, INC., aka Wheeler Aircraft, Debtor Hugh SMITH, Alexair, Inc., Appellants, v. WHEELER TECHNOLOGY, INC., Unsecured Creditors Committee, United States Trustee, Appellees.

BAP No. WW-91-1373 ROMe, Bankruptcy No. 90-33683T.

United States Bankruptcy Appellate Panel, of the Ninth Circuit.

Argued and Submitted September 20, 1991.

Decided January 16, 1992.

Paul B. Snyder, Tacoma, Wash., for appellants.

J. Todd Tracy, Seattle, Wash., for appellees.

Before RUSSELL, OLLASON, and MEYERS, Bankruptcy Judges.

MEMORANDUM

RUSSELL, Bankruptcy Judge:

A creditor appeals from an order of the bankruptcy court removing him from the Unsecured Creditors' Committee for failure to comply with a court order to return goods in his possession that the debtor was attempting to redeem under Washington law. The order requiring the turnover of the goods was the result of a motion rather than an adversary proceeding as is required by the Bankruptcy Rules. The court subsequently awarded the debtor attorney's fees and costs incurred in recovering the goods held by the creditor. We reverse and vacate the orders.

I. FACTS

Creditor Hugh Smith and Alexair, Inc.¹ ("Hugh Smith/Alexair") appeals from the April 10, 1991 order on the bankruptcy court entitled "Order on Final Hearing Re Order to Show Cause to Hugh Smith and/or Alexair, Inc." Hugh Smith was a creditor of the debtor, Wheeler Technology, Inc., aka Wheeler Aircraft Company ("Wheeler"). Wheeler was in the business of constructing airplane kits sold for home built airplanes. Wheeler stored proprietary molds and plugs for these kits at a storage unit operated by Point Fosdick Landlockers.

When Wheeler fell behind in rent payments on the storage unit, Point Fosdick Landlockers sold the contents at a private sale on October 4, 1990 to the appellant, Mr. Hugh Smith/Alexair, Inc. The day after the sale, on October 5, 1990, Alexair and two other creditors filed an involuntary Chapter 7² petition against Wheeler. On October 29, 1990, Wheeler converted the involuntary Chapter 7 to a voluntary Chapter 11. On December 12, the U.S. Trustee appointed an Unsecured Creditors' Committee and the appellant, Hugh Smith was among those appointed³.

In January 1991, Wheeler learned that Hugh Smith/Alexair had purchased the contents of the storage unit and obtained an order for Hugh Smith to be examined regarding the purchase under Bankruptcy Rule 2004. Prior to the examination, counsel for Wheeler advised counsel for Hugh Smith/Alexair that Wheeler was exercising its redemption rights under Washington state law, Wash.Rev.Code ž 19.150.110, and that he was holding a check for the amount necessary to redeem the property from Hugh Smith/Alexair.

On February 12, 1991, after being served with the Rule 2004 order and having been notified that Wheeler was exercising its redemption rights, Hugh Smith/Alexair, Inc. transferred the goods to a purchaser in Canada. On February 14, 1991 at the Rule 2004 examination, Wheeler attempted to tender the cashiers check to redeem the goods. The tender was rejected because (1) the check was made payable to Hugh Smith, not Alexair, Inc., the name on the bill of sale and (2) because the check did not include costs allowable under the state statute. Wash.Rev.Code ž 19.150.110.

Counsel for Wheeler contacted the Canadian purchaser, advising him that Wheeler was exercising its redemption rights. The Canadian purchaser responded that he would return the goods upon payments of the costs incurred in shipping the goods to Canada.

As expiration of the six month redemption period approached, Wheeler still did not have information on the costs incurred by Hugh Smith/Alexair. Wheeler filed an ex parte Motion for Order to Show Cause to hold Hugh Smith/Alexair in contempt for failure to provide an accounting of the costs incurred in the purchase of the goods from the storage unit. The hearing was set for March 12, 1991 and Hugh Smith was personally served. The Canadian purchaser was served via facsimile and over-night mail.

The Canadian purchaser did not appear at the hearing and Hugh Smith requested a continuance that was denied. The court orally ruled that the goods must be returned to the United States and delivered to Wheeler, Inc. by March 20, 1991. The court further ordered Hugh Smith/Alexair, Inc. to be removed from the Unsecured Creditors' Committee pending the return of the goods.

A hearing was scheduled to determine what additional costs, if any, Wheeler should pay and to consider monetary sanctions. At the final hearing, the court permanently removed Hugh Smith/Alexair from the Unsecured Creditors' Committee for (1) knowingly violating the automatic stay by removing property of the estate out of the United States and (2) for failure to comply with the court's March 19, 1991 order directing the return of the goods by March 20, 1991. In an order entered April 10, 1991 the court imposed monetary sanctions of $2,059.76 in attorney's fees and costs to be paid to Wheeler by Hugh Smith/Alexair pursuant to ž 362(h).

II. ISSUES

1.) Whether the court abused its discretion in removing the appellant from the Unsecured Creditors' Committee as a sanction for violating the automatic stay and for failing to comply with the order directing return of the subject property by March 20, 1991.

2.) Whether a turnover of property can be ordered by the bankruptcy court without the benefit of an adversary proceeding.

III. STANDARD OF REVIEW

We review the imposition of sanctions for an abuse of discretion. See Callow v. Amerace Corp., 681 F.2d 1242, 1243 (9th Cir.1982). The interpretation and application of the Bankruptcy Rules is purely a question of law and is reviewed de novo. In re Holm, 931 F.2d 620 (9th Cir.1991); In re Cardinal Enterprises, 68 B.R. 460, 462 (9th Cir. BAP 1986), aff'd without opinion, Cardinal Enterprises v. Far West Federal Bank, 844 F.2d 791 (9th Cir.1988).

IV. DISCUSSION

A. Removal From The Creditors' Committee

The bankruptcy court, in its oral findings of fact and conclusions of law⁴, found the actions of the appellant especially egregious because of his position on the Unsecured Creditors' Committee and the fact that he had above average knowledge of not only the automatic stay, but also that the debtor attempted to exercise its redemption rights. Those facts were largely undisputed⁵. (See ER 11)

The issue of whether a court is empowered to remove a creditor from the Creditors' Committee presented some difficulty, as the court recognized:

Despite the absence of section 1102(c)⁶ from the Code as of 1986, it defies the Court\'s imagination that this Court would not be in a position to enforce its orders through all appropriate means, particularly when one is dealing with a member of the official Creditors\' Committee who acts for all of the creditors within the unsecured class, to require that person to put aside specific concerns and conditions and a specific desire to benefit certain parties potentially by taking these kinds of actions in the circumstances where that person owes a duty to the committee in general and to the creditors of that class in general.

And thus if Mr. Smith was not willing to comply with the Court order, I could see no recourse and still see no recourse than to determine under section 105 that he should not be a member of a constituent representative group in the case. To do so, to permit him to remain in that position if he desired to ignore the Court order, in my view would be rewarding activities that are far from those that the Court would expect of a member of the Creditors\' Committee now.

See, ER 10:16-17.

We agree with the Hugh Smith/Alexair's assertion that the court had acted beyond its powers in removing him from the Creditors' Committee as a sanction. As the court noted in the 1986 revision of the Code, Congress deleted ž 1102(c) which had given the bankruptcy court the power, after notice and a hearing, to change the membership or size of the Creditors' Committee that it had appointed.

Since the 1986 revision of ž 1102, bankruptcy courts have held that courts no longer have this power because of the 1986 nationwide expansion of the Office of the U.S. Trustee. The power to appoint and delete members of the Creditors' Committee now resides exclusively with the U.S. Trustee. Matter of Gates Engineering Co., Inc., 104 B.R. 653, 654 (Bankr.D.Del. 1989) ("Subsequent to 1986, subsection (c) was deleted in ž 1102 so that the court no longer had any authority over the composition of committees appointed by the U.S. Trustee."); In re Drexel Burnham Lambert Group, Inc., 118 B.R. 209, 210 (Bankr. S.D.N.Y.1990) ("Noteworthy is the absence of any indication in the statute that the court may add to or delete an unsecured creditor from a committee.").

At least one bankruptcy court has rejected an attempt to use ž 105⁷ to achieve a result contrary to the legislative history and Congressional intent in deleting sub-section (c) of ž 1102. Matter of Gates Engineering, 104 B.R. 653, 654 (Bankr. D.Del.1989) ("However, the court cannot under the provisions of ž 105 circumvent the unambiguous language of the three sections of the Code previously stated in light of the deletion of subsection (c) in 1986.")

We agree with the interpretation set forth in the above cases and therefore must reverse the April 10, 1991 order of the court removing the appellant, Hugh Smith/Alexair from the Unsecured Creditors' Committee.

B. Turnover of Property

Wheeler's action to recover property was inappropriately brought by means of an ex parte motion where an adversary proceeding is required. Bankruptcy Rule 7001 explicitly states that an action to recover money or property is an adversary proceeding, subject to the procedural rules therein.

On March 4, 1991, Wheeler filed an ex parte Motion and Order to Show Cause why Hugh Smith/Alexair should not be held in contempt for not providing Wheeler with a breakdown of...