Rosehedge Corporation v. Sterett

• Decision Date: 28 January 1960
• Docket Number: No. 15915.,15915.
• Parties: ROSEHEDGE CORPORATION, Appellant, v. Millie STERETT, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

274 F.2d 786 (1960)

ROSEHEDGE CORPORATION, Appellant, v. Millie STERETT, Appellee.

No. 15915.

United States Court of Appeals Ninth Circuit.

January 28, 1960.

Charles J. Katz, Samuel W. Blum, Los Angeles, Cal., William G. Ruymann, Las Vegas, Nev., for appellant.

Arthur N. Greenberg, Los Angeles, Cal., for appellee.

Before STEPHENS, BARNES and MERRILL, Circuit Judges.

MERRILL, Circuit Judge.

This case involves proceedings under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., which have culminated in a sale of the properties of the bankrupt. The properties were purchased on behalf of Appellant Rosehedge, a secured creditor of the bankrupt. The District Court, upon a review of the order of the referee confirming the sale, entered its order approving and confirming the sale, but added a proviso the effect of which was to cancel appellant's chattel mortgage upon the personal property included in the sale. This appeal is taken from that provision in the order of the District Court.

The ultimate question is whether, in purchasing the property of the bankrupt, Rosehedge had utilized its claim against the bankrupt as a credit upon or part payment of the purchase price. If so, the claim had been satisfied and it was proper to require the cancellation or surrender of the security for such debt.

Rosehedge assigns as error the judgment of the District Court upon this ultimate question. It further contends that, in entertaining the question at all, the District Court acted without jurisdiction or in abuse of discretion.

The bankrupt is Moulin Rouge, Inc., which owned real and personal property in Las Vegas, Nevada.

The claim of Rosehedge against the bankrupt was in the sum of $154,846.65. This one debt was secured in two ways: first, by a trust deed dated May 24, 1955, covering the realty of the bankrupt; second, by a chattel mortgage of the same date against the personal property of the bankrupt.

Appellee Sterett had a claim against the bankrupt in the sum of $35,000, secured by a chattel mortgage against the personal property of the bankrupt dated July 5, 1955, and subsequent in priority to the Rosehedge chattel mortgage.

On September 6, 1957, the real and personal property of the bankrupt estate was sold to one S. Kohn, who was acting for and on behalf of Rosehedge. The bid of S. Kohn was in writing and purported on its face to be subject to the Rosehedge deed of trust and to the Rosehedge and Sterett chattel mortgages. This sale was confirmed by order of the referee on September 23, 1957.

On October 3, 1957, Sterett (joined by the bankrupt and by a general creditor) petitioned the District Court for review of the order confirming sale in an effort to have the sale set aside. The contention that the claim of Rosehedge had been satisfied by the sale was not made in the petition for review. Hearing on this petition was had before the District Court on October 28, 1957. The petition was denied and the sale approved and confirmed.

In the course of the hearing before the District Court, Sterett filed a memorandum of law in support of her petition. In this memorandum, for the first time, she urged that the claim of Rosehedge had been satisfied. This suggestion was adopted by the court. In its order of confirmation, it ordered Rosehedge to deposit in escrow a release of its chattel mortgage.

Rosehedge first contends that the District Court improperly entertained Sterett's petition for review, claiming that Sterett was not aggrieved by the referee's order confirming sale and thus was not entitled to review of that order. Rosehedge relies upon the well established proposition that, where property is sold subject to existing mortgages, the sale cannot affect the security or remedy of any mortgagee, and therefore they cannot be regarded as aggrieved by the sale. Smith v. McKenna Brass Manufacturing Company, 3 Cir., 1938, 98 F.2d 537; In re Humeston, 2 Cir., 1936, 83 F.2d 187; In re North Star Ice & Coal Company, D.C.E.D.Tenn.1918, 252 F. 301. See, Gotkin v. Korn, 1950, 86 U.S.App.D.C. 372, 182 F.2d 380.

This contention, however, ignores the nature of the present dispute. In those cases where it is conceded that the sale in question was subject to all mortgages, it may well be true that a mortgagee would have no standing to challenge the propriety of such sale.

Here, however, the very issue is whether the sale was subject to Rosehedge's deed of trust and chattel mortgage or was free and clear of such encumbrances with the debt being utilized and satisfied. The determination of this issue has a direct bearing upon the rights of Sterett with respect to the security for her claim. In the one case, the lien of Rosehedge is prior to hers; in the other, it is not.

It is true that the status of Sterett as an aggrieved party did not appear from the petition. This does not, however deprive the court of jurisdiction. Biggs v. Mays, 8 Cir., 1942, 125 F.2d 693; Forsher v. Graham, 6 Cir., 1929, 32 F.2d 654; cf. Pfister v. Northern Illinois Finance Co., 1942, 317 U.S. 144, 63 S.Ct. 133, 87 L.Ed. 146. The discretion of the court to entertain the dispute under these circumstances is discussed later in this opinion.

Accordingly, this contention is rejected.

Rosehedge next contends that the present controversy was not properly the concern of the court in bankruptcy, since the dispute is limited to the rights and priorities of private parties as between themselves and is not one in which either the trustee or the bankrupt estate has any interest.

Ordinarily a bankruptcy court cannot entertain jurisdiction of a collateral private controversy; e. g., Evarts v. Eloy Gin Corporation, 9 Cir., 1953, 204 F.2d 712, certiorari denied, 1953, 346 U.S. 876, 74 S.Ct. 129, 98 L.Ed. 384; Smith v. Chase National Bank, 8 Cir., 1936, 84 F.2d 608. Here, however, the dispute involved a review of proceedings had before the referee and the construction and clarification of those proceedings: matters in which the court has jurisdiction and interest. Accordingly, this contention is rejected.

We turn to a consideration of the judgment of the District Court upon the ultimate question involved in this dispute: whether the sale of the assets of the bankrupt was such as to extinguish the Rosehedge claim.

The District Court ruled as a matter of law that the Rosehedge claim was extinguished. This we are compelled to conclude was error. We need only refer to the language of the written bid submitted by S. Kohn on behalf of Rosehedge and accepted by the referee.

The bid was an offer to purchase the realty and improvements "for the sum of $116,000.00 cash free and clear of and from all liens, claims and encumbrances excepting the following * *." There follows a listing of eight exceptions, the eighth being the Rosehedge trust deed. The bid further specifies that the sum of $116,000 is to include all of the "furniture, furnishings, gaming equipment of all kinds and all other tangible personal property pertaining to the business of Moulin Rouge; but subject, however to all valid and subsisting conditional sales contracts and chattel mortgages against said personal property."

Upon the face of the bid, therefore, it would appear that the sale was for $116,000 cash; that the debt of Rosehedge was not to be utilized on account of the purchase price, and that the sale was to be of the property subject to the Rosehedge trust deed and chattel mortgage.

Rosehedge, for this reason, contends that it is entitled, as a matter of law, to judgment to the effect that its claim was not extinguished.

The bid, however, must be read in the context of the proceedings in the course of which it was submitted. The question is whether, when so read, the intent of the parties is clear.

We note the following history.

Prior to the commencement of bankruptcy proceedings, Rosehedge had commenced foreclosure of its trust deed. After commencement of the bankruptcy proceedings, October 19, 1955, this foreclosure was stayed by order of the referee. On June 19, 1956, Rosehedge and the trustee entered into a stipulation which provided that, pending the determination of certain motions and objections interposed by Rosehedge in the bankruptcy proceedings, the trustee might proceed to sale of the assets of the bankrupt "free and clear of and from the pledge liens held, possessed and asserted by * * * Rosehedge and free and clear of and from the lien imposed and created by the Rosehedge deed of trust. * * *." It then provided, as conditions, that the sale should be without prejudice to the rights, liens and security asserted or held by Rosehedge, but that its lien rights "shall be transferred to the proceeds derived from such sale * * *." Further, it was stipulated that Rosehedge might be a bidder at the sale and become a purchaser and, in bidding, "may and shall be entitled to use on account of any and all bids made * * * the amount of its * * * indebtedness * * *."

The sale of the bankrupt assets was ordered on July 6, 1956. As so ordered (and subject to the qualifying phrase, "upon such terms as the court shall hereafter approve"), it was a sale "free and clear of the liens set forth in the petition." Those liens were specified in the order of sale and included the Rosehedge trust deed and chattel mortgage. The order of sale further expressly approved the stipulation of June 19, 1956, between Rosehedge and ...