Stephens Industries, Inc. v. McClung

• Decision Date: 28 April 1986
• Docket Number: No. 85-5694,85-5694
• Citation: 14 C.B.C.2d 1298,789 F.2d 386
• Parties: 14 Collier Bankr.Cas.2d 1298, Bankr. L. Rep. P 71,113 STEPHENS INDUSTRIES, INC., Plaintiff-Appellant, v. James R. McCLUNG, Trustee in Bankruptcy, etc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 386

789 F.2d 386

14 Collier Bankr.Cas.2d 1298, Bankr. L. Rep. P 71,113

STEPHENS INDUSTRIES, INC., Plaintiff-Appellant, v. James R. McCLUNG, Trustee in Bankruptcy, etc., Defendant-Appellee.

No. 85-5694.

United States Court of Appeals, Sixth Circuit.

Argued March 10, 1986.

Decided April 28, 1986.

Rodney S. Justice (argued), Wilson, Stavros and Justice, Ashland, Ky., for plaintiff-appellant.

James D. Lyon (argued), Odell & Howard, Lexington, Ky., for defendant-appellee.

Before KENNEDY and RYAN, Circuit Judges and CELEBREZZE, Senior Circuit judge.

CORNELIA G. KENNEDY, Circuit Judge.

Appellant, Stephens Industries, Inc. ("SI"), appeals from the District Court's order affirming the Bankruptcy Court's order approving the sale of the assets of the debtor, American Signal Corporation ("ASC"), a/k/a WPRT AM/FM Radio Station. From 1952 until 1980, SI owned and operated radio station WPRT in Prestonsburg, Kentucky. In July 1980, SI sold the radio station to ASC. Under the purchase agreement, SI transferred all the radio station's assets to ASC and applied to the FCC for formal transfer of the broadcasting licenses. ASC agreed to pay a small down payment and signed a $252,000 promissory note payable over a nine-year period for the balance of the purchase price. As part of the transaction, ASC granted SI a mortgage and security lien on the conveyed assets to secure the unpaid balance of the purchase price.

ASC made installment payments until 1982, when it defaulted. SI commenced a civil action in the Floyd County, Kentucky Circuit Court to foreclose on the mortgage and for return of all the property conveyed to ASC in 1980. As a result of the civil action, ASC filed for Chapter 11 in the Bankruptcy Court for the United States District Court for the Eastern District of Kentucky on December 17, 1982 seeking protection from SI and all its other secured and unsecured creditors. Under Chapter 11, ASC maintained the radio station as a debtor in possession until ASC abandoned this status and the Bankruptcy Court appointed James R. McClung as trustee on September 23, 1983. When the trustee took control of ASC's estate, the estate consisted of two small tracts of land where the radio station had built its AM and FM antennae, various broadcasting and office equipment, and the two FCC licenses. In addition, ASC had leased some broadcasting equipment from Rockwell International Corporation ("Rockwell"). ASC had encumbered all its physical assets for more than their value. Court-appointed appraisers concluded that the tracts of land were worth $4,500 and that the leased equipment was worth approximately $29,645. Besides secured creditors, ASC had numerous unsecured creditors and owed taxes and administrative expenses to various priority creditors. The trustee was unable to operate the radio station at a profit. Eventually, the trustee faced the prospect of shutting down operations because ASC's dilapidated equipment was failing and ASC could not meet payroll and other necessary operating expenses. ASC's only unencumbered assets were the FCC licenses. If the station went off the air for an extended period of time, however, FCC rules could require forfeiture of the licenses. Consequently, the trustee decided to sell the radio station as a going concern and to propose a plan of liquidation under 11 U.S.C. Sec. 1123(a)(5)(D) and (b)(4).

In August 1984, the trustee signed an agreement to sell ASC's assets to James C. Ball and Robert Smallwood for $275,000 over an eleven-year payment period subject to the Bankruptcy Court's approval. The parties later modified the purchase price to $200,000 cash. On October 31, 1984, the trustee filed a motion in the Bankruptcy Court asking for authorization to sell ASC's assets to Ball and Smallwood. On November 10, 1984, SI filed an objection to the proposed sale and requested that the Bankruptcy Court lift the automatic stay of the proceedings in the Floyd County Circuit Court. At a hearing on the proposed sale on November 19, 1984, the Bankruptcy Court gave SI until November 28, 1984 to make a counteroffer to purchase ASC's assets "for a sum in excess of $200,000.00 in cash." SI responded but its counteroffer did not mention cash or a sum certain of money. Instead, SI proposed to "set off" its claimed lien of approximately $300,000 in exchange for ASC's tangible property and the licenses. SI offered to deposit earnest money and an unspecified bond. In a November 30, 1984 order, the Bankruptcy Court ruled that SI's counteroffer did not match the $200,000 cash offer from Ball and Smallwood. The Bankruptcy Court rejected SI's counteroffer sub silentio concluding that since SI could not have a secured lien on the FCC licenses, SI only had a $7,900 secured lien. Although the Bankruptcy Court "[was] dissatisfied with the evidence as to the nature and extent of the advertising done by the debtor in possession in an attempt to effectuate a sale of the debtor's radio station," the Bankruptcy Court entered an order on November 30, 1984 approving the sale to Ball and Smallwood for $200,000 cash. The Bankruptcy Court noted that: "The debtor is without funds to continue operation of the station while attempting to effectuate a better sale."

On December 5, 1984, SI moved to modify, amend or set aside the November 30, 1984 order claiming that the Bankruptcy Court misunderstood SI's counteroffer. On December 10, 1984, SI moved to hold the closing of the sale to Ball and Smallwood in abeyance until the Bankruptcy Court could hear the motion to modify, amend or set aside the previous order. On December 11, 1984, the Bankruptcy Court stayed the closing until December 13, 1984 so that SI could make a cash bid on the property. SI, however, failed to submit a cash bid and the trustee closed the sale of the property pending FCC approval. Pursuant to the Bankruptcy Court's directions, the trustee placed the proceeds in escrow. On December 18, 1984, the Bankruptcy Court heard SI's motion to modify, amend or set aside the December 10, 1984 order. On January 9, 1985, the Bankruptcy Court entered an order overruling SI's motion. SI appealed to the United States District Court for the Eastern District of Kentucky. The District Court affirmed the Bankruptcy Court's order approving the sale and overruling SI's motions to lift the automatic stay and to stay the sale of ASC's assets.

Essentially, SI raises three issues in this appeal: (1) Whether the Bankruptcy Court erred in approving the sale of ASC's assets because the sale prejudiced SI's rights as a secured creditor under Chapter 11; (2) Whether the Bankruptcy Court abused its discretion in approving the sale because the trustee did not sell the assets in a commercially reasonable manner; and (3) Whether the Bankruptcy Court's refusal to grant SI adequate protection by lifting the automatic stay so that SI could pursue its remedies in the Floyd County Circuit Court foreclosure action constituted an abuse of discretion. For the reasons set forth below, we affirm the District Court's order affirming the Bankruptcy Court's order approving the sale of the assets and refusing to lift the automatic stay.

I.

Initially, SI argues that the Bankruptcy Court erred in approving the sale of ASC's assets under 11 U.S.C. Sec. 363(b)(1) ¹ because the sale prejudiced SI's rights as a secured creditor. The District Court affirmed the Bankruptcy Court's order authorizing the sale of ASC's assets. In reviewing a district court order regarding the final order of a bankruptcy court, this Court, in essence, reviews the final order of the bankruptcy court. See In re Global Western Development Corporation, 759 F.2d 724, 726 (9th Cir.1985).

Title 11 U.S.C. Sec. 363(b)(1) allows a bankruptcy court, after notice and hearing, to authorize the sale of the debtor's assets outside the ordinary course of business. In In re Coastal Cable T.V., Inc., 24 B.R. 609, 611 (Bankr. 1st Cir.1982), vacated on other grounds, 709 F.2d 762 (1st Cir.1983), the Bankruptcy Appellate Panel for the First Circuit stated that: "This power falls within the sound discretion of the trial court." See also In re Ancor Exploration Company, 30 B.R. 802, 808 (Bankr.N.D.Okla.1983) ("the bankruptcy court should have wide latitude in approving even a private sale of all or substantially all of the estate assets not in the ordinary course of business under Sec. 363(b)"). Accordingly, we review the Bankruptcy Court's order authorizing the sale of the assets under an abuse of discretion standard. As the Ninth Circuit stated in In re Posner, 700 F.2d 1243, 1246 (9th Cir.), cert. denied, 464 U.S. 848, 104 S.Ct. 155, 78 L.Ed.2d 143 (1983), "a reviewing court may determine that the Bankruptcy Court abused its discretion only when there is a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of all the relevant factors."

In determining whether the Bankruptcy Court abused its discretion, this Court reviews the Bankruptcy Court's findings of fact under the "clearly erroneous" standard. Bankr. R. 8013. We review the Bankruptcy Court's conclusions of law, however, de novo. See In re Golf Course Builders Leasing, Inc., 768 F.2d 1167, 1169 (10th Cir.1985); In re Global Western Development Corporation, supra.

SI contends that Sec. 363(b)(1) does not permit a Chapter 11 trustee to liquidate ASC's assets because such action would change a Chapter 11 reorganization, 11 U.S.C. Secs. 1101-1146, into a Chapter 7 liquidation, 11 U.S.C. Secs. 701-728. SI cites In re Braniff Airways, Inc., 700 F.2d 935, reh'g denied, 705 F.2d 450 (5th Cir.1983), to support its position. In Braniff, the Fifth Circuit held that the district court could not approve, under Sec. 363(b), a transaction providing for Braniff's transfer of cash, airplanes and equipment, terminal leases and landing slots in exchange for travel scrip, unsecured notes, and a profit participation in the...