Transcontinental Energy Corp., In re, 81-5680

• Decision Date: 06 August 1982
• Docket Number: No. 81-5680,81-5680
• Citation: 683 F.2d 326
• Parties: 6 Collier Bankr.Cas.2d 1475 In re TRANSCONTINENTAL ENERGY CORPORATION, a Nevada Corp., fka Oil Producers & Refiners, Inc., fka Transcontinental Power Co., Bankrupt. Owen E. JACKSON, Dr. S. H. Montgomery and George L. Naron, Appellants, v. PACIFIC ENERGY RESOURCES, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 326

683 F.2d 326

6 Collier Bankr.Cas.2d 1475

In re TRANSCONTINENTAL ENERGY CORPORATION, a Nevada Corp.,

fka Oil Producers & Refiners, Inc., fka

Transcontinental Power Co., Bankrupt.

Owen E. JACKSON, Dr. S. H. Montgomery and George L. Naron, Appellants, v. PACIFIC ENERGY RESOURCES, Appellee.

No. 81-5680.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 6, 1982.

Decided Aug. 6, 1982.

Robert R. Hodges, Mix & Hodges, Redondo Beach, Cal., Ronald Gene Self, Arvin, Cal., for appellants.

Joseph L. Golden, Los Angles, Cal., argued, for appellee; O'Melveny & Myers, Los Angeles, Cal., Albright, McGimsey & Stoddard, Las Vegas, Nev., on brief.

Appeal from the United States District Court for the District of Nevada.

Before BROWNING, Chief Judge, TANG and FARRIS, Circuit Judges.

FARRIS, Circuit Judge:

BACKGROUND

Transcontinental Energy Corporation went into bankruptcy in late 1977. Its assets included limited partnership interests in four oil producing properties. These were sold with the bankruptcy court's approval to appellee Pacific Energy Resources, a company whose controlling owner was Richard Young. After the sale, a group of Transcontinental's minority shareholders and creditors petitioned the bankruptcy court to set that sale aside because of inadequate price, mistake, fraud, and breach of fiduciary duty. After holding a full evidentiary hearing, the bankruptcy court denied the request. The bankruptcy court also denied two motions to reopen the hearing to receive additional evidence, and a motion to reconsider the exclusion of a deposition from the hearing. In re Transcontinental Energy Corp., 1 B.R. 460 (Bkrtcy.D.Nev.1979). The district court affirmed. The shareholders appeal.

VALIDITY OF THE SALE

We are especially hesitant to set aside confirmed bankruptcy sales, but will do so "when compelling equities outweigh the interests in finality." In re Cada Investments, Inc., 664 F.2d 1158, 1162 (9th Cir. 1981); see Proctor & Gamble Mfg. Co. v. Metcalf, 173 F.2d 207, 209 (9th Cir. 1949). Because of the great interest in the finality of judicial sales, the standard for setting aside a confirmed sale is stricter than the standard for rejecting a proposed sale. In re General Insecticide Co., 403 F.2d 629, 630-31 (2d Cir. 1968).

The shareholders rely primarily on two related theories for setting aside the sale. The shareholders first argue that Transcontinental's president, Edward Dewey, breached his fiduciary duty of loyalty by assisting Pacific Energy in the competitive bidding process, and that Pacific Energy, through its controlling shareholder, Richard Young, knowingly participated in and profited from this breach of fiduciary duty. A third party cannot knowingly take advantage of a fiduciary's breach of duty. Jackson v. Smith, 254 U.S. 586, 589, 41 S.Ct. 200, 201, 65 L.Ed. 418 (1921); Restatement (Second) of Trusts § 326 (1959). However, in this case the bankruptcy court found that the shareholders had failed to prove Dewey had committed any acts which would constitute a breach of fiduciary duty; the bankruptcy court found only "(u) nsubstantiated hypotheses and groundless innuendos." Transcontinental, 1 B.R. at 463. This finding is not clearly erroneous. We therefore reject the shareholders' argument predicated on third party participation in a breach of fiduciary duty.

The shareholders next argue that because Pacific Energy's controlling shareholder, Young, stood in a direct fiduciary relationship with Transcontinental, Pacific Energy was disqualified from acquiring any assets of the bankrupt estate. The claim of a direct fiduciary relationship between Young and Transcontinental is based on 1) Young's status as operator and manager of one of the four oil producing properties in which Transcontinental had a leasehold interest, and which was subsequently sold to Young's company, and 2) the fact that Young and Transcontinental's president, Dewey, had had several prior business dealings together. Young had helped Dewey obtain financing for a new company, and Dewey had helped Young and Pacific Energy in connection with their acquisition of interests in certain oil producing properties. The shareholders claim this contact between Young and Transcontinental and between Young and Dewey was sufficient to create a fiduciary relationship and disqualify Young and Pacific Energy from acquiring any of the assets of the bankrupt estate.

But not every employee of a bankrupt is disqualified from purchasing the bankrupt's assets; the equitable bar applies only to employees whose position within the bankrupt requires unfailing loyalty, trust, and confidence. Even a fair transaction for adequate consideration will be set aside if there is an appearance of impropriety and a great potential for a conflict of interests.

The shareholders rely too heavily on the broad dicta in Donovan & Schuenke v. Sampsell, 226 F.2d 804 (9th Cir.), cert. denied, 350 U.S. 895, 76 S.Ct. 152, 100 L.Ed. 787 (1955):

The considerations of public policy make any person a trustee or fiduciary who has had a connection with any other person or entity or who has been employed or concerned with the affairs of others and thereby acquired a knowledge of the property and concerns of the others.

Id. at 811. See also In re Frazin & Oppenheim, 181 F. 307, 309 (2d Cir. 1910).

Donovan & Schuenke involved the sale of a bankrupt's assets to the bankrupt's former president, who at the time of the sale was employed by the trustee and appointed by the court to help sell the assets. In contrast, Young was never an officer of Transcontinental, had been neither hired by the trustee nor appointed by the court to assist with the sale of any of Transcontinental's assets, and in fact only helped in the management of one of the four oil and gas producing properties involved in this action. The bankruptcy court found that Young's business dealings with Dewey were on an arms' length basis, and rejected the allegation that there was a connection between these other dealings and the sale of Transcontinental's oil leasehold interests. The bankruptcy court concluded that Young was merely an independent contractor whose employment was not approved by the court or trustee. While we agree with the shareholders that Young had more responsibility than an independent contractor and that the court placed too much emphasis on the absence of any official approval of Young's employment, we reject their argument that his employment status within Transcontinental was significant enough to warrant setting aside the sale. Young operated only one of the four oil producing properties involved in this action. These oil properties comprised only a part of Transcontinental's entire estate. Unlike a corporate officer, who would have a more comprehensive knowledge of a bankrupt's overall financial health, Young had acquired greater knowledge of only one portion of Transcontinental's assets. Acquisition of this knowledge alone does...