Mark Bell Furniture Warehouse, Inc. v. D.M. Reid Associates, Ltd. (In Re Mark Bell Furniture Warehouse, Inc.) , 153 F.2d 7 ( 1993 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-2045
IN RE MARK BELL FURNITURE WAREHOUSE, INCORPORATED,
Debtor,
MARK BELL FURNITURE WAREHOUSE, INCORPORATED,
Plaintiff, Appellant,
v.
D. M. REID ASSOCIATES, LTD.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Selya, Circuit Judge,
Coffin, Senior Circuit Judge,
and Cyr, Circuit Judge.
Leon Aronson for appellant.
Gordon P. Katz with whom Donald R. Lassman and Widett, Slater &
Goldman, P.C. were on brief for appellee.
May 4, 1993
CYR, Circuit Judge. An involuntary chapter 7 petition
CYR, Circuit Judge.
was filed against Mark Bell Furniture Warehouse, Inc. ("Debtor")
in 1988. The property of the chapter 7 estate included a pre-
petition cause of action against D. M. Reid Associates ("Reid").
Mark Bell ("Bell"), Debtor's president and sole shareholder,
urged the chapter 7 trustee to litigate the claim against Reid.
When the trustee failed to pursue the claim, Bell offered to
purchase the cause of action from the estate for $250. The
notice of the proposed private sale to Bell invited upset bids in
excess of $500, subject to the condition that qualifying bidders
would be asked to submit competing sealed bids at auction. Reid
submitted an upset bid in the amount of $501.
At the auction sale conducted before the bankruptcy
court on March 9, 1992, Bell submitted a sealed bid for $1000 and
Reid bid "$1000 plus the amount of [Bell's bid]." Although both
the trustee and the bankruptcy judge voiced concerns as to the
propriety of Reid's "relative" bid, neither Bell nor Debtor's
counsel objected. The trustee accepted Reid's $2000 bid. Debtor
did not seek to stay the sale. Three days later, Reid tendered
$2000 to the trustee, and the trustee delivered a bill of sale.
Debtor appealed to the district court, contending that
Reid's relative bid should be declared void and that the trustee
should be directed to accept Bell's lower bid. The district
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court dismissed the appeal as moot, based on Debtor's failure to
obtain a stay of the sale pending appeal.1
Absent a stay pending appeal, Bankruptcy Code 363(m)
precludes appellate relief invalidating a sale to a "good faith"
purchaser. See In re Onouli-Kona Land Co., 846 F.2d 1170, 1171-
72 (9th Cir. 1988). On the theory that "[t]he finality and reli-
ability of judicial sales enhance the value of assets sold in
bankruptcy," In re Tri-Cran, Inc., 98 B.R. 609, 617 (Bankr. D.
Mass. 1989), section 363(m) ensures protection of a successful
bidder's "good faith" reliance on a consummated sale. See In re
Sax, 796 F.2d 994, 998 (7th Cir. 1986); International Union v.
Morse Tool, Inc., 85 B.R. 666, 667 (D. Mass. 1988). A "good
faith" purchaser is one who buys property in good faith and for
value, without knowledge of adverse claims. In re Tri-Cran, 98
B.R. at 615-19 (citing Greylock Glen Corp. v. Community Sav.
Bank, 656 F.2d 1, 4 (1st Cir. 1981)). "Good faith" is a mixed
question of law and fact. In re Abbotts Dairies of Pennsylvania,
Inc., 788 F.2d 143, 147 (3d Cir. 1986). "Good faith" purchaser
1The district court relied on Bankruptcy Code 363(m),
which provides:
The reversal or modification on appeal of an
authorization under subsection (b) or (c) of
this section of a sale or lease of property
does not affect the validity of a sale or
lease under such authorization to an entity
that purchased or leased such property in
good faith, whether or not such entity knew
of the pendency of the appeal, unless such
authorization and such sale or lease were
stayed pending appeal.
11 U.S.C. 363(m).
3
status is precluded by, inter alia, fraud, collusion with the
trustee, and taking "grossly unfair advantage" of other bidders.
In re Andy Frain Servs., Inc., 798 F.2d 1113, 1125 (7th Cir.
1986); Willemain v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985);
In re Bel Air Assocs., Ltd., 706 F.2d 301, 305 (10th Cir. 1983).
In its appeal to the district court, Debtor contended
that "relative" or "sharp" bids are illegal per se, hence grossly
unfair, see, e.g., Holliday v. Higbee, 172 F.2d 316, 318 (10th
Cir. 1949); Trump v. Mason, 190 F. Supp. 887, 888 (D.D.C. 1961)
(noting that relative bids "destroy the integrity of the [sealed]
bidding system").2 Thus, Debtor argued, Reid became a "bad
faith" purchaser merely by submitting the unannounced relative
bid.3 The district court recognized the "problematic" nature of
the "bad faith" claim urged by Debtor, but decided that the
presumed "evil" of relative bidding lay in concealing the fact
that a relative bid had prevailed. The court concluded that no
"bad faith" was shown on the part of Reid since all auction par-
ticipants (and bystanders) were informed of Reid's relative bid,
2The notices of appeal filed in the bankruptcy court, see
Fed. R. Bankr. P. 8002(a), 9001(1),(3), 9002(2),(3), and in the
district court, see Fed. R. App. P. 4(a)(1), 6(a), 6(b)(1),
designate Debtor as the only appellant. Accordingly, Bell is not
a party to the present appeal. Pontarelli v. Stone, 930 F.2d
104, 108 (1st Cir. 1991) (holding that court of appeals lacks
jurisdiction of appeal by party not designated in notice of
appeal as required under Fed. R. App. P. 3(c)).
3"Relative" or "sharp" bidding is highly unusual in bank-
ruptcy cases. Although we do not condone its unannounced use, we
leave for another day whether relative bidding is ever appropri-
ate or practicable in the context of a judicial sale.
4
were afforded an opportunity to object to it, and acquiesced
until well after the bid was accepted and the sale consummated.
Debtor again argues on appeal that the relative bidding
which took place in this case amounted to "bad faith." We need
not decide this claim, however, because it was not preserved in
the bankruptcy court. See In re LaRoche, 969 F.2d 1299, 1305
(1st Cir. 1992) (arguments not raised in bankruptcy court cannot
be raised for the first time on appeal) (citing In re 604 Colum-
bus Ave. Realty Trust, 968 F.2d 1332, 1343 (1st Cir. 1992)).
Debtor had ample opportunity to object to the relative bid
submitted by Reid, the trustee's acceptance of Reid's bid, and
the consummation of the sale. After the sealed bids were opened,
the bankruptcy judge and the trustee engaged in an extended
discussion as to the appropriateness of relative bidding.
Although both Bell and Debtor's counsel were present, neither
challenged the propriety of the bid or the bidding. Nor did
Debtor request a stay. In sum, at no time did the Debtor alert
the bankruptcy court to the "unfairness" claim later raised in
its appeal to the district court.4
4At oral argument, Debtor disclaimed any contention whatever
that relative bidding, per se, violates public policy, or that it
contravenes the policy favoring maximization of liquidation
recoveries in bankruptcy proceedings. Debtor's retreat to its
"unfair surprise" claim completely undermined its earlier conten-
tion that Reid's relative bid was void ab initio. See Short v.
Sun Newspapers, Inc., 300 N.W.2d 781 (Minn. 1980). Accordingly,
Debtor's remaining claim that Bell was unfairly surprised by
Reid's relative bid might portend, at most, that Reid's bid
was voidable upon timely objection by an unsuccessful bidder.
5
Appellate claim preclusion is especially appropriate in
these circumstances, where a timely objection before the bank-
ruptcy court might well have enabled the prompt submission of
nonrelative bids by the assembled participants. At the very
least, it would have permitted the bankruptcy court to make
findings of fact and conclusions of law as to whether any cog-
nizable unfairness occurred in this case. See Poliquin v. Garden
Way, Inc., F.2d , (1st Cir. 1993) [Nos. 92-1115, 92-
1116, slip op. at 8 (1st Cir. Mar. 24, 1993)] (explaining impor-
tance of "raise or waive" rule in the litigation "winnowing
process," as it enables courts to "narrow what remains to be
decided[;] [i]f lawyers could pursue on appeal issues not proper-
ly raised below, there would be little incentive to get it right
the first time and no end of retrials").
Even assuming its "unfairness" claim were preserved,
however, Debtor would lack "standing" to assert it. See In re
Dein Host, Inc., 835 F.2d 402, 404 (1st Cir. 1987) (court of
appeals "duty bound" to undertake preliminary inquiry into
"standing"). Debtor does not allege that it is an "aggrieved
person," nor does the record indicate that Debtor possesses
"standing." See, e.g., Rumford Pharmacy, Inc. v. City of East
Providence, 970 F.2d 996, 1001 (1st Cir. 1992) ("standing"
requires, inter alia, "personal injury fairly traceable to the
allegedly unlawful conduct"); see also In re Lovitt, 757 F.2d
1035, 1039 (9th Cir.), cert. denied, 474 U.S. 849 (1985).
6
First, all the Debtor's property became property of the
chapter 7 estate long before the auction sale. See Bankruptcy
Code 303, 541; 11 U.S.C. 303, 541. The chapter 7 trustee,
not the chapter 7 debtor, is responsible for collecting all
property of the estate and reducing it to money. See Bankruptcy
Code 704(1); 11 U.S.C. 704(1); cf. Fed. R. Bankr. P. 2010
(authorizing proceeding on trustee's bond for breach of condition
of "faithful performance of official duties"). Second, it is
well established that a chapter 7 debtor generally lacks "stand-
ing" to challenge a bankruptcy court judgment confirming a sale
of property of the chapter 7 estate:
A chapter 7 debtor is not considered a "per-
son aggrieved," as [it] lacks a pecuniary
interest in the "property of the estate."
There are two exceptions: (1) if the debtor
can show that a successful appeal would gen-
erate assets in excess of liabilities, enti-
tling the debtor to a distribution of surplus
under Bankruptcy Code 726(a)(6), 11 U.S.C.
726(a)(6), or (2) the order appealed from
affects the terms of the debtor's discharge
in bankruptcy.
In re Thompson, 965 F.2d 1136, 1144 (1st Cir. 1992); see also In
re Goodwin's Discount Furniture, Inc., 16 B.R. 885, 887-88
(Bankr. 1st Cir. 1982). In this case, an estate surplus is
neither suggested by the Debtor nor by the record, as the chapter
7 estate was hopelessly insolvent.5 Third, Debtor submitted no
bid. Rather, Mark Bell, Debtor's president and sole shareholder,
submitted a private offer in his own name; the chapter 7 trustee
5For example, the trustee represented in the notice of
proposed private sale that the estate had "no funds" with which
to pursue the cause of action against Reid.
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designated Bell as the offeror in his notice of proposed private
sale ("to Mark Bell or his nominee") (emphasis added), and Bell
submitted a sealed bid in his personal capacity ("sealed bid of
Mark Bell"). See also supra note 2.
In sum, Debtor failed to preserve any cognizable claim
of injury resulting from the order approving the sale. Thus, we
need not, indeed should not, address the idiosyncrasies attending
section 363(m) "mootness" and the scope of the "bad faith"
defense.
Appeal dismissed; no costs to either party.
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