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In re Chung King Inc.

January 18, 1985

IN THE MATTER OF CHUNG KING, INC., DEBTOR, APPEAL OF MICHAEL T. NIGRO


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 5322 -- Nicholas J. Bua, Judge.

Author: Cummings

Before CUMMINGS, Chief Judge, BAUER, Circuit Judge, and DUMBAULD, Senior District Judge.*fn*

CUMMINGS, Chief Judge. Appellant Michael Nigro appeals from the district court's affirmance of an order entered by Bankruptcy Judge Robert Eisen. On June 9, 1983, the bankruptcy court vacated its previous order of March 31, 1983, which had confirmed the sale of the debtor's property to appellant for $120,000. Nigro alleges, as he did in the district court, that the bankruptcy court abused its discretion in vacating its earlier order and in conducting a new sale. For the reasons set forth below, we reverse the bankruptcy court's June 9 order despite the objections of bankruptcy trustee Biallas and sole creditor Win Kwong Liu.

I

Michael Nigro, an attorney, represented Alan Yong, the principal of the debtor in the bankruptcy proceedings below. On March 17, 1983, Raymond Costello, then trustee of the bankruptcy estate of the debtor Chung King, Inc., filed a complaint seeking court permission to sell real estate owned by the bankruptcy estate to the Unity Masonic Lodge for $116,300. The trustee estimated in his complaint that the sale would net approximately $4,000 for the estate after paying off the liens on the property. At a March 31 hearing held by Judge Eisen, Nigro, acting on his own behalf, presented an offer of $120,000 to purchase the property. The trustee recommended that the bankruptcy court approve the sale to Nigro and estimated that the proposed sale would net "$8,000 or $9,000 maybe even less" for the bankruptcy estate (p. 8 of R. Item 11). At the March 31 hearing the court approved the $120,000 sale to Nigro and issued a confirming order. The court also approved a settlement entered into between the trustee and the sole creditor, Mr. Win Liu, to split any net proceeds from the sale.

Nigro performed a title search subsequent to the court's March 31 confirmation and discovered that $4,526.30 in back taxes assessed against the property remained unpaid. He then prepared a closing statement which showed a net loss to the estate of $2,238.78 from the approved sale of $120,000. He conferred with the trustee and agreed to make up the $2,238.78 loss to the estate on the sale (Nigro Br. 3; p. 3 of R. Item 13) by increasing the offer to $124,275.29 (Nigro Reply Br. 3).

Upon learning that the bankruptcy estate would not receive any proceeds if the property were sold to Nigro for $120,000 and that Unity Masonic Lodge had made a subsequent offer of $125,000, creditor Win Liu filed a motion requesting the bankruptcy court to vacate its March 31 order. At the May 10 hearing on Liu's motion, Unity Masonic complained that it had not received sufficient notice of the March 31 hearing nor the $120,000 Nigro bid and that Nigro had enjoyed a "preferred position" in the bidding as lawyer for Alan Yong, the debtor's principal. The court indicated that there was sufficient notice but offered to vacate the sale if a sufficiently higher new offer was made (pp. 10, 12-13 of R. Item 12). Judge Eisen stated that the $125,000 offer of Unity Masonic would benefit the creditor only minimally (yielding $362.36 (p. 9 of R. Item 12)) and would not justify setting aside the sale to Nigro (p. 8 of R. Item 12). The court continued the hearing until June 8, 1983, at which time new offers were to be considered.

At the June 8 hearing, Unity Masonic presented a bid of $135,000 for the property. The bankruptcy court then ruled that the offer was sufficiently greater than Nigro's $120,000 bid to justify reopening the bidding. The court set 9:30 A.M. the following day as the deadline for any additional bids, and on June 9 it vacated the March 31st sale and approved the sale of the property to Nigro, who had his client's permission to purchase the property "on his own" (p. 4 of R. Item 7), for $142,000.

Nigro appealed the bankruptcy court's decision to vacate and requested that the March 31 order, allowing sale of the property to Nigro for $120,000, be reinstated. The district court ruled that the bankruptcy court's vacating of the confirmed March 31 sale was proper because of the mistaken failure to consider back taxes in approving the sale and because of the significant difference between the confirmed sale price of $120,000 and the later $135,000 bid by Unity Masonic. The court, however, rejected the appellees' claims that Unity Masonic's lack of adequate notice of Nigro's $120,000 bid or Nigro's "preferred position" as the debtor principal's attorney were valid grounds for affirming the bankruptcy court June 9 order vacating the sale of the property to Nigro for $120,000. Consequently, Judge Bua affirmed the bankruptcy court's June 9 order approving the sale of the property to Nigro for $142,000.

II

It is important to define the specific issue before us in order to ensure that the appropriate legal standards are applied. We are reviewing the June 9 decision of the bankruptcy court to vacate a confirmed sale. The setting aside of an order confirming a sale involves different concerns and less discretion on the bankruptcy judge's part than the denial of confirmation of a sale in the first instance. See, e.g., In re General Insecticide Co., 403 F.2d 629, 630-631 (2d Cir. 1968); 4B COLLIER ON BANKRUPTCY, P70.98 [17], pp. 1182-1187 (14th ed. 1978). The bankruptcy court's confirmation or refusal to confirm a sale only will be overturned in extreme cases if there has been an abuse of discretion. Mere inadequacy of price or minor errors in the judicial sale process may justify a bankruptcy judge's refusal to confirm. In re Webcor, 392 F.2d 893, 898 (7th Cir. 1968); Smith v. Juhan, 311 F.2d 670, 671-673 (10th Cir. 1962); In re Jewett & Sowers Oil Co., 86 F.2d 497, 498 (7th Cir. 1936); In re Burr Manufacturing and Supply Co., 217 F. 16, 21 (2d Cir. 1914); 4B COLLIER ON BANKRUPTCY, P70.98 [17], pp. 1182, 1187, 1192. The governing principle at a confirmation proceeding is the securing of the highest price for the bankruptcy estate. See In re Insecticide, 403 F.2d at 631.

A bankruptcy court may vacate a prior order confirming a sale, however, only in very limited circumstances in the exercise of its powers as a court of equity. In re Beck Industries, Inc., 605 F.2d 624, 634 (2d Cir. 1979); Mason v. Ashback, 383 F.2d 779, 780 (10th Cir. 1967). This Court stated the relevant standard in Webcor as: "once the sale * * * [is] confirmed, the existence of fraud, mistake or a like infirmity would be necessary to set [a] confirmed sale aside." 392 F.2d at 899. See Bankruptcy Rule 9024 (applying to bankruptcy cases Fed. R. Civ. Pro. 60, which allows a judgment to be set aside for "(1) mistake, inadvertence, surprise or excusable neglect * * * (3) fraud, misrepresentation * * * (6) any reason justifying relief * * *. Fed. R. Civ. Pro. 60(b)). As explained in Webcor, "if parties are to be encouraged to bid at judicial sales there must be stability in such sales and a time must come when a fair bid is accepted and the proceedings are ended." In re Webcor, 392 F.2d at 899. This policy of finality protects confirmed sales unless "compelling equities" outweigh the interests in finality. In re Transcontinental Energy, 683 F.2d 326, 328 (9th Cir. 1982); Matter of Cada Investments, Inc., 664 F.2d 1158, 1162 (9th Cir. 1981). See also In re Time Sales Finance, 445 F.2d 385, 386-387 (3d Cir. 1971) (requiring a "fundamental defect" to vitiate a confirmed sale); In re Lamont, 453 F. Supp. 608, 609-610 (N.D.N.Y. 1978), affirmed, 603 F.2d 213 (requiring a "fundamental" defect which would "shock the conscience of the chancellor" to set aside a confirmed sale); 4B COLLIER ON BANKRUPTCY, P70.98 [17], p. 1187.

While this equitable determination is largely within the province of the bankruptcy court, Webcor, 392 F.2d at 898, the court's range of discretion on this matter is quite narrow. The failure to apply the appropriate standard or the vacating of a sale because of minor errors would amount to an abuse of discretion.

It is also well settled that after confirmation, the offer of a substantially higher sale price alone is insufficient to set aside a confirmed sale unless the initial sale price is so grossly inadequate as to shock the conscience of the ...


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