M.R.R. Traders, Inc. v. Cave Atlantique, Inc.

• Decision Date: 22 April 1986
• Docket Number: Nos. 85-1726,85-1727,s. 85-1726
• Citation: 788 F.2d 816
• Parties: Bankr. L. Rep. P 71,110 M.R.R. TRADERS, INC., Appellee, v. CAVE ATLANTIQUE, INC., Debtor, Appellant. M.R.R. TRADERS, INC., Appellee, v. Louis F. DiGIOVANNI, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 816

788 F.2d 816

Bankr. L. Rep. P 71,110

M.R.R. TRADERS, INC., Appellee, v. CAVE ATLANTIQUE, INC., Debtor, Appellant.

M.R.R. TRADERS, INC., Appellee, v. Louis F. DiGIOVANNI, Defendant, Appellant.

Nos. 85-1726, 85-1727.

United States Court of Appeals First Circuit.

Argued Jan. 10, 1986.

Decided April 22, 1986.

Stephen E. Shamban with whom Cheryl A. Salden and Loventhal & Shamban were on brief for debtor, appellant Cave Atlantique, Inc.

Vincent J. Panico and Alan M. Pampanin, on brief, for defendant, appellant Louis F. DiGiovanni.

Howard J. Wayne with whom Lawson & Wayne was, on brief, for appellee M.R.R. Traders, Inc.

Before BOWNES, ALDRICH and BREYER, Circuit Judges.

BREYER, Circuit Judge.

This case arises out of a bankruptcy judge's decision to cancel the sale of an asset (a liquor license) of the bankrupt debtor and to resell it by auction. The district court held that the bankruptcy judge erred in setting aside the already completed sale. We do not agree with the district court's conclusion.

The factual background of the case is as follows: Originally, the debtor, a wine shop called Cave Atlantique, had a contract with its landlord, appellant Louis DiGiovanni, giving DiGiovanni an option to buy its liquor license for $11,000. In the hope of obtaining more money for the license, Cave Atlantique, with the bankruptcy court's approval, rejected the contract. See 11 U.S.C. Sec. 365(a) (permitting rejection of executory contracts). Later, the appellee, M.R.R. Traders, Inc., offered Cave Atlantique $18,000 for the license.

Following bankruptcy court procedures, M.R.R. Traders and Cave Atlantique prepared a notice of the proposed sale; they obtained a court order shortening the ordinary twenty day response time; and they sent the notice to creditors (and others) on October 5, 1984. The notice called for the submission of counteroffers or objections by October 9. On October 26, no one having objected, the bankruptcy court approved the sale to M.R.R. for $18,000.

Twelve days later (on November 7), DiGiovanni asked the court to reconsider its approval of the sale. He said that his attorneys had just learned about M.R.R.'s offer, that he wished to bid for the license, and that he would pay at least $20,000 for it.

The court held a hearing the following week. It then became clear that Cave Atlantique's lawyers had made a mistake in sending out the notice. Apparently, they sent the notice to DiGiovanni himself, but they did not send a copy to DiGiovanni's lawyer. They said that normally copies of all papers had been sent to DiGiovanni's counsel. But, they explained, a new secretary unfamiliar with the notice procedure had not included DiGiovanni's lawyer in the mailing. Cave Atlantique's counsel said that "not putting [DiGiovanni's lawyer's] name on the service list ... was an oversight on my part."

The bankruptcy court set aside the sale to M.R.R. It held an auction on the spot. And, DiGiovanni won the auction, eventually bidding $40,000 for the license. M.R.R. appealed to the district court, which held that the bankruptcy court had acted unlawfully. The district court concluded that the parties had violated no procedural rule prior to the initial sale; and the initial sale was not sufficiently unfair to warrant a new one.

The basic legal standard that governs this appeal is that set forth in In re Stanley Engineering Corp., 164 F.2d 316 (3d Cir.1947), cert. denied, 332 U.S. 847, 68 S.Ct. 351, 92 L.Ed. 417 (1948). The Third Circuit there said that a court may set aside a judicial sale, "made upon due notice" if:

(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.

In re Stanley Engineering Corp., 164 F.2d at 318. In this instance, the two questions of "due notice" and "unfairness" become one, for here the inadequate notice is what arguably made the sale unfair.

Had the bankruptcy court simply held the sale "unfair" when it set the sale aside, we would have no trouble finding that it acted within the bounds of its discretion. In re Time Sales Finance Corp., 445 F.2d 385, 386-87 (3d Cir.1971) (sale set aside as fundamentally unfair due to lack of adequate notice), cert. denied, 405 U.S. 917, 92 S.Ct. 940, 30 L.Ed.2d 786 (1972); In re Lamont, 453 F.Supp. 608, 610 (N.D.N.Y.1978) (same); In re Cada Investments, Inc., 664 F.2d 1158, 1162 (9th Cir.1981) (reviewing court will overturn bankruptcy judge's decision that sale was unfair only for an abuse of discretion); In re M & M Transportation Co., 13 B.R. 861, 867 (Bankr.S.D.N.Y.1981); cf. In re Coughlin, 27 B.R. 632, 635 (Bankr.App. 1st Cir.1983). After all, Cave Atlantique had previously sent notices to DiGiovanni's attorney; it knew he wanted to bid on the liquor license; it failed to send the sale notice through an oversight; and the license was available for sale only because the court had just set aside DiGiovanni's right to buy it for $11,000.

The bankruptcy court might have believed that DiGiovanni had reasonably assumed his lawyer would deal with the sale and that he need not check in each instance to see that the lawyer received notice as well. Moreover, DiGiovanni acted promptly to reopen the sale; the twelve additional days of delay did not, in themselves, prejudice M.R.R. Taken together, these factors would adequately support an initial bankruptcy court finding that the sale was sufficiently "unfair" to permit a new one, particularly in light of the bankruptcy court's duty to preserve the value of a bankrupt estate for creditors. Compare In re Muscongus Bay Co., 597 F.2d 11, 12-13 (1st Cir.1979) (sale set aside where a new bidder offered initially 12.3 percent and eventually 21.5 percent more than prior bidder).

This case is...