In re Zsa Zsa Limited, 70 B 736.

• Decision Date: 29 December 1972
• Docket Number: No. 70 B 736.,70 B 736.
• Parties: In the Matter of ZSA ZSA LIMITED, Bankrupt.
• Court: U.S. District Court — Southern District of New York

352 F. Supp. 665

In the Matter of ZSA ZSA LIMITED, Bankrupt.

No. 70 B 736.

United States District Court, S. D. New York.

December 29, 1972.

Jacob Oliner, Trustee, pro se; Solomon P. Glushak, New York City, of counsel.

Cahill, Gordon, Sonnett, Reindel & Ohl, by Thomas F. Curnin, New York City, for Secured Creditors.

POLLACK, District Judge.

This is a petition to review a sale made on order of a Referee in Bankruptcy.

Prior to adjudication as a bankrupt and during proceedings pending against it under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., Zsa Zsa Limited (the debtor and presently the bankrupt) made a settlement with certain of its secured creditors, which recognized the security interest of those creditors in property of the debtor. The settlement was approved by the Referee administering the Chapter XI proceedings. Following this approval, the creditors sold the collateral at a judicially approved sale intended to liquidate the secured debt. That sale was unsuccessfully attacked before the Referee by a trustee in bankruptcy who was appointed after the settlement with the creditors but before the sale. The trustee contended that the sale was improperly conducted.

For the reasons shown hereafter, the objections to the sale are overruled and the order approving it is confirmed.

I.

The settlement between Zsa Zsa and its secured creditors during the Chapter XI proceedings came before Judge Tenney on a petition to review the same. The settlement and the interests which emerged therefrom were upheld on the review. Judge Tenney traced the background as follows.

Zsa Zsa, Ltd. was in the cosmetics and allied products business. On September 23, 1970, it petitioned for a Chapter XI arrangement. First National City Bank (FNCB), at that time, held a security interest obtained July 23, 1970 covering all the personal property, inventory, and accounts receivable of the debtor; this interest secured advances to be made by FNCB to the debtor of the lesser of $450,000 or of an amount equalling 70% of the debtor's accounts receivable, taken at face value. Elmer and Donald Slavik and George Millay ("Slavik and Millay" hereinafter) the present respondents, who controlled the debtor, were guarantors of this loan; however, a collateral agreement was entered simultaneously between the debtor and Slavik and Millay, under which the debtor was to indemnify Slavik and Millay for any payments made under their guarantee.

When the agreements were made, the debtor had already borrowed $65,000 from FNCB; in the summer of 1970, debtor borrowed an additional $225,000.

In October, 1970, Slavik and Millay entered into an agreement with McBrides Industries ("McBrides"), under which McBrides was to assume management control of the debtor; this agreement looked towards a merger between Zsa Zsa and McBrides, following the former's discharge from Chapter XI.

In December, 1970, FNCB went against Slavik and Millay, as guarantors, when the debtor failed to comply with the loan agreement. Slavik and Millay paid a remaining balance of $253,981.86, plus interest of $5,795. FNCB simultaneously assigned debtor's notes and FNCB's security interest to Slavik and Millay.

On June 11, 1971, Slavik and Millay moved in the arrangement proceedings for a foreclosure on the debtor's assets, pursuant to the assigned security interest. The debtor and the secured creditors agreed to a settlement which the referee approved on October 28, 1971. A reopening sought by a general creditor was denied and the settlement was reaffirmed on December 3, 1971. In the settlement Zsa Zsa recognized the security interest of Slavik and Millay in the amount of $300,000. As previously stated, the settlement was upheld by Judge Tenney on a review of the Referee's approval. A Trustee in bankruptcy was appointed on February 2, 1972 when Zsa Zsa was adjudicated a bankrupt. While the petition for review of the settlement made during the Chapter XI proceedings was pending, the sale now in question was made, viz., in March, 1972.

II.

The validity of the sale in question depends on whether the facts and circumstances of the sale establish that it was held in a commercially reasonable manner. N.Y.U.C.C. § 9-504(3). A review thereof shows that the instant sale satisfies this standard.

The conditions for the sale were molded in a series of communications between the secured creditors' counsel and the trustee and in an adversary hearing held before the Referee on March 6, 1972. Originally, the creditors had planned a private sale of the collateral upon written bids at the offices of their counsel. However, creditors' counsel, in order to minimize opposition to the sale and purportedly to secure the highest possible price, recommended a public sale.

A public sale was scheduled for March 8, 1972; however, prior thereto, on March 6, upon motion of the Trustee, a hearing was held before the Referee to consider the terms of the planned public sale. At that hearing, there was thorough discussion of major aspects of the prospective sale and an uninhibited opportunity to be heard on any and all terms of the sale. The trustee objected to the inclusion of accounts receivable in the collateral to be sold, argued that the credit terms to be extended to potential purchasers should not be left to the sole discretion of the secured creditors, claimed that a bulk sale of this collateral would discourage bidders, and criticized the time and notice being given for the sale. The trustee did not, however, object to a public sale of any of the collateral except the accounts receivable. Assuming arguendo a reversal on appeal of Judge Tenney's approval of the settlement between the debtor and its secured creditors, the trustee concedes that he nonetheless would proceed with a similar sale of the assets (excepting the accounts). Although he makes a point of the matter at this time, the trustee did not, at that hearing before the sale, request any representation from the secured creditors to the effect that the inventory lists which were open for inspection were accurate.

As a result of the pre-sale hearing, and adopting the request of the trustee, the date of sale was postponed until March 10, to allow further time for publicity, planning, and inspection. Furthermore, the wording in the public notice of sale was modified at the Referee's instance to more sharply reveal that the sale was subject to be confirmed by the Referee. Moreover the creditors agreed to offer the goods both in bulk and smaller lots, and the Referee agreed to consider approval of the sale as a check on the creditor's discretion over credit terms.

The prospective sale was then publicly advertised. Public notice thereof appeared in The New York Times, on each of March 2, 5, 8 and 10, 1972. The notice adequately described the types of goods to be sold, specified the conditions of sale, referred to documents and samples which bidders could inspect prior to the sale date, and indicated that the sale was subject to the Referee's confirmation. An inventory list as of January 31, 1972 was available for inspection both at the bankrupt's warehouse and at the auctioneer's New York office; samples of the inventory were available for inspection at the warehouse on five dates before the sale.

The sale took place on March 10 at 24-32 46th Street, Astoria, Queens, where the debtor's main inventory was located. Stanley Straus, President of David Straus & Co., Inc., an auctioneer with approximately 25 years experience, conducted the sale. Fourteen people registered their presence at the sale.

The terms of the sale provided for both bulk and lot bidding, with the specific proviso that the seller could reject bids aggregating less than $300,000 for the full estate sold. For the purposes of the sale, the debtor's property subject to the security agreement was grouped into five lots. Lot # 1, the key part of the estate, consisted of finished cosmetics and works in progress—generally described as the physical inventory—including treatment and body creams, fragrances, lipsticks and lipstick refills, liquid make-ups and make-up creams, and unspecified additional items. Lot # 2 included components such as boxes, labels, etc.; Lot # 3, office furniture; Lot # 4, warehouse equipment; and Lot # 5, accounts receivable.

At the sale, the auctioneer first solicited bulk bids for the entire collateral. McBrides bid $300,000, the minimum amount set by the terms of sale and an amount identical to the offer McBrides had submitted when the private sale was considered. No other bulk bids were made and the auctioneer proceeded to call for bids on each of the five specified lots. Again, McBrides was the sole bidder, offering by lot an aggregate of $77,500. Pursuant to the terms of sale, the lot bids were then ignored, and the bulk bid of $300,000 was accepted. For this bid, McBrides acquired, in addition to the items in lots # 2-5, an inventory given an estimated retail value of $3.5-million, a wholesale value of $1.5-million, and a cost value of $500,000.

On March 21, 1972, a hearing was held before the Referee to determine whether the sale should be confirmed. The trustee contended that the advertisement run in The New York Times was insufficient in terms of timing and content; that the size of the lots was too large and their composition too varied to attract a large buying public; that the boxes containing the inventory should have been opened for full inspection; and that the failure of the auctioneer to represent that the January 31, 1972 inventory lists shown to the bidders were accurate in all respects discouraged active bidding. Additionally, the trustee alleged that the public sale was rigged to insure the passage of the assets to McBrides, which had announced plans to carry on the sale of the Zsa Zsa line through a subsidiary, Zsa Zsa International. Slavik and Millay— as principals of the bankrupt, as secured creditors of the bankrupt,...