Opinion
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: September 24, 2009
Appeal from the United States Bankruptcy Court for the District of Nevada. Honorable Mike K. Nakagawa, Chief Bankruptcy Judge, Presiding. Bk. No. 08-13995-MKN.
Before: Kurtz, Montali and Dunn, Bankruptcy Judges.
Hon. Frank L. Kurtz, Bankruptcy Judge for the Eastern District of Washington, sitting by designation.
MEMORANDUM
The subject of this appeal is an order authorizing the auction sale of approximately 2 acres of vacant Florida beachfront property free and clear of timeshare interests. On appeal, four owners of timeshares challenge the auction order, arguing that their timeshare interests are not property of the debtor's estate and not subject to sale by the bankruptcy court. In response, the debtor argues the issue is being raised for the first time on appeal and further argues that timeshare interests are property of the estate and can be sold by authority of 11 U.S.C. § § 363(b) and (f).
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated after the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
Our motions panel initially denied the timeshare owners' request for a stay pending appeal, reasoning that they had failed to show that they would succeed on appeal due to their failure to raise their appellate issue before the trial court. Thereafter the timeshare owners' renewed request for stay was granted. In granting the stay, the motions panel questioned whether the interests of the timeshare owners should have been determined by the bankruptcy court before authorizing the sale, citing Popp v. Zimmerman (In re Popp), 323 B.R. 260, 272 (9th Cir. BAP 2005) and whether the appropriate procedure for the auction order was an adversary proceeding as opposed to a motion, citing Rule 7001(3). We conclude the bankruptcy court should have determined the interests of the timeshare owners before authorizing the sale and, for that reason, reverse the auction order and remand.
STATEMENT OF FACTS
Parties
Silver Beach, LLC (" Silver Beach"), is a limited liability company, organized under the laws of the state of Nevada, and the debtor in a chapter 11 case filed on April 24, 2008.
Robert Hey, Cheryl Labosco, Michael Panaggio, and Al Schmidt (" timeshare owners") are the owners of timeshare units created by virtue of a declaration of timeshare plan affecting Florida beachfront property, the principal asset of Silver Beach.
Property
Silver Beach owns 2.06 acres of vacant land (" Property"), abutting the Atlantic Ocean and currently zoned for tourism-related uses. Title to the Property is clouded by the interests of timeshare owners, a Declaration of Timeshare Plan, a Declaration of Condominium, a Recreational Facilities Agreement, and miscellaneous covenants, conditions and restrictions.
In 1997, Silver Beach Villas, Inc. (" SB Villas"), a corporation formed by Robert Hey, purchased the Property. At the time, there was a two story motel on the Property. SB Villas intended to develop the Property for timeshare and condominium use. After acquiring the Property, SB Villas filed the necessary documents, including condominium and timeshare plan declarations, and began selling timeshare units. The corporation also started construction and placed a steel frame over the motel so that third and fourth floors could be added. Before framing started, in February of 2003, SB Villas filed a petition for chapter 11 relief. Tammac Financial Corporation (" Tammac"), SB Villas' real estate lender, successfully moved the court for dismissal of the case. In October of 2003, SB Villas refiled chapter 11 but the case eventually was converted to chapter 7 and closed as a no asset case. During the pendency of the second case, Tammac obtained relief from the automatic stay, foreclosed upon the Property, and purchased the Property at the foreclosure sale.
In January of 2005, Silver Beach purchased the Property from Tammac, with the intention of developing the Property into condominium units. Silver Beach's project likewise was unsuccessful. The contractor retained for the project gutted the interior of the motel but failed to advance the project beyond that stage. Eventually the condition of the project deteriorated and the City of Daytona Beach ordered Silver Beach to demolish its improvements, reducing the Property to vacant land.
After its condominium project failed, Silver Beach attempted to sell the Property to prospective developers, including Mr. Hey, the owner of an adjacent timeshare resort. These efforts were unsuccessful, largely due to the cloud upon the title created by the interests of the timeshare owners and other encumbrances related to SB Villas' aborted timeshare project. Silver Beach also blames current market conditions for its inability to sell the Property. Eventually Silver Beach filed a petition for relief under chapter 11.
The Motion for Approval of Sale and Auction Procedure
Some seven months after the debtor filed its petition for relief, it sought approval of sale and auction procedures for the sale of the Property. The sales motion was carefully planned and supported by several declarations that provided the court with relevant information regarding the Property. The requested order would have authorized a sale of the Property, free and clear of all interests, including the interests of timeshare owners. The Property was to be sold to the highest bidder at an auction conducted in open court. The debtor cited sections 363(b) and (f) as authority for the sale. The auction order provided creditors with liens secured by the Property could credit bid up to the amount of the secured debt. The order established $6, 800, 000.00 as the minimum opening bid and further stated that Atlantic Northstar, LLC (" Atlantic Northstar"), the debtor's secured real estate lender, had agreed to accept $6, 507, 575.00 in satisfaction of its debt, if no bid exceeded the amount of the minimum bid. The order further provided for the distribution of proceeds to pay priority tax claims, administrative claims, trade debt claims, and a carve out of $100, 000.00 for the holders of timeshare units. In the event that the successful bid exceeded the minimum bid, the holders of timeshare units would receive an additional payment, calculated at 5% of the amount exceeding the minimum bid.
The Timeshare Owners' Response
In response to the motion, four of the approximately 150 scheduled timeshare owners and an entity identified as the Silver Beach Club Association, Inc. (" objecting parties"), objected. Their objection to the sale was " an analysis of admitted facts which raise legitimate concerns about the good faith of the debtor in its bankruptcy filing and proposed property sale, and a suggestion of other unknown facts, not revealed in the debtor's motion . . . ." The objection was not supported by affidavit or declaration. Essentially the objection was based upon an admitted fact: Silver Beach and Atlantic Northstar are affiliates of Bridge Capital USVI (" Bridge Capital"), a Virgin Islands Limited Liability Company; and a representation: Silver Beach Club Association, Inc., had been negotiating to purchase the Property and was offering an amount in excess of the minimum bid price. In their view, the sole purpose of the bankruptcy was to enable the debtor to sell the Property free and clear of the interests of the timeshare owners, providing additional leverage to the debtor in its negotiations with Silver Beach Club Association, Inc. Additionally the objecting parties questioned the amount of the debt claimed by Atlantic Northstar. They asserted the Property was purchased from Tammac for cash and any secured real estate debt likely related to the debtor's aborted condominium project. In their view, $8, 146, 283.00 seemed excessive for a construction project that resulted in vacant ground.
Also, they questioned the need for the bankruptcy because there was no foreclosure. Any foreclosure would have involved the unlikely scenario of one Bridge Capital affiliate foreclosing upon the property of another Bridge Capital affiliate. Moreover, because the legal description associated with the mortgage excepted the timeshare units, the foreclosure would not have dealt with the troublesome timeshare interests. Therefore, the timeshare owners submit, motivation for filing bankruptcy was to eliminate the objecting parties' interest.
The Hearing
After hearing and considering the objecting parties' presentation to the court, the bankruptcy judge concluded that some of the objecting parties' objections were not supported by competent evidence and some objections, such as the amount of the debt owed to Atlantic Northstar, could be resolved at a later time. The court granted the debtor's motion and entered a number of findings of fact, based upon the declarations submitted in support of the order.
Bankruptcy Court's Findings of Fact
In addition to granting the debtor's motion, the court entered a number of findings of fact, based upon the declarations submitted in support of the order. These findings included findings that: the notice of the sale and all supporting documents were properly served upon all interested parties; the sale represents a reasonable exercise of the debtor's business judgment; the debtor is authorized to terminate the condominium, timeshare and master declarations by voting its interest in favor of termination; under applicable nonbankruptcy law, the timeshare owners could be compelled to accept a monetary satisfaction pursuant to a partition action, under Florida law; and the interests of the timeshare owners are in bona fide dispute. On appeal, the timeshare owners do not specifically assign error to any of these findings of fact but in the body of their appellate brief, they implicitly challenge some of the findings of fact.
Issues Raised by the Objecting Parties
The objecting parties' written objection and oral presentation to the trial court did touch upon a number of issues subsequently raised on appeal. For example, in their written objection, they stated:
It should be noted that the debtor (on behalf of Bridge) simply acquired the interest in the property which Tammac acquired through its foreclosure. This interest apparently does not include the title interests owned by numerous timeshare interest holders. ER Exh. " E" ¶ 5 pg. 5.
Here, the objecting parties are asserting that the timeshare owners are fee owners of their interests in the Property and objecting to the proposed sale of their fee interests. The objection also challenges the disposition of the sale's proceeds based upon the fee interests of the timeshare owners. They stated:
...in a proper sale of the property, the timeshare owners would receive a pro rata share of the gross sale price, before payment of the purported mortgage to Atlantic Northstar, LLC, which would have to be paid only from the share of the gross sale price allocated to the debtor. ER Exh. " E" ¶ 6 pg. 5.
And the objection asserts the timeshare owners would be treated differently under state law:
...if the property was sold under state partition laws or other applicable timeshare/condominium dissolution procedures, the timeshare interest holders would receive a pro-rata share of the sale proceeds before (emphasis in original) payment of the mortgage to Atlantic Northstar, LLC, . . . . ER Exh. " E" ¶ 7 pg. 6.
In summary, the objecting parties raised the issues of the nature of their interests in the Property, and how they should be compensated as owners.
At the hearing, counsel for Mr. Hey stated that he wanted to emphasize two matters. The first was the amount of the debt owed to Atlantic Northstar, LLC, and the second was:
There's also a question about what the percentage of the apportionment of the ownership of this property should be to those fee title holders. Those who had a warranty deed filed on this property are owners of the property. And I understand that through the bankruptcy action their interest can't be taken away . . . . ER Exh. " G" pg. 17.
Later, he stated:
We would ask your Honor to hold off on an approval of any sale at this point until those issues are addressed. And once those are addressed, at this time, I think it would be better suited to hold an auction for this property if that's the appropriate way. ER Exh. " G" pgs. 17-18.
In effect, Mr. Hey's attorney asked the court to determine the interests of the timeshare owners before authorizing an auction sale of the property.
ISSUES ON APPEAL
1. What is the interest of a timeshare owner?
2. Should the interests of the timeshare owners have been determined by the bankruptcy court before authorizing the sale?
3. Does section 363(f) authorize sales that extinguish timeshare estates?
4. Was the appropriate procedure for the auction order an adversary proceeding as opposed to a motion?
STANDARD OF REVIEW
This court reviews appeals from orders to sell property of the estate other than in the ordinary course of business pursuant to section 363(b) for abuse of discretion. In re Popp, 323 B.R. at 265. On appeal, bankruptcy courts' findings of fact are reviewed for clear error and conclusions of law are reviewed de novo. Rule 8013. A court abuses its discretion if the court does not apply the correct law or if the court rests its decision on a clearly erroneous finding of material fact. United States v. Sprague, 135 F.3d 1301, 1304 (9th Cir. 1998). The reversal of an order for abuse of discretion requires " a definite and firm conviction that the court committed clear error of judgment in the conclusion it reached upon weighing the relevant factors." Stine v. Flynn (In re Stine), 254 B.R. 244, 248 (9th Cir. BAP 2000) (citing In re Cortez, 191 B.R. 174, 177 (9th Cir. BAP 1995)). " Review under the 'clearly erroneous standard' is significantly deferential; to reverse, the appellate court must have a 'definite and firm conviction that a mistake has been committed.'" In re Bigelow, 271 B.R. 178, 183 (9th Cir. BAP 2001). " [A]n appellate court will not consider issues not properly raised before the [trial] court. Furthermore on appeal, arguments not raised by a party in its opening brief are deemed waived." Price v. Lehtinen (In re Lehtinen), 332 B.R. 404, 410 (9th Cir. BAP 2005), aff'd, 564 F.3d 1052 (9th Cir. 2009) (quoting Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999)).
DISCUSSION
I. What is the interest of a timeshare owner?
This is, of course, a question of Florida state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Harrell, 73 F.3d 218 (9th Cir. 1996). In Florida, the creation and sale of timeshares is regulated by The Florida Vacation Plan and Timesharing Act, which covers sales of timeshare interests and authorizes the creation of either " timeshare estates" or " timeshare licenses." Fla. Stat. § 721.02 (2005). The term " timeshare estates" is defined in Fla. Stat. § 721.05 (34) as " a right to occupy a timeshare unit, coupled with a freehold estate or an estate for years with a future interest in a timeshare property or a specified portion thereof." Significantly, a timeshare estate creates a fee interest in real property. This form of ownership is contrasted with a " timeshare license, " which is essentially the owners' permission to use the property. Fla. Stat. § 721.05 (37).
Here, SB Villas filed a Declaration of Condominium that provided that the condominiums could be subject to the creation of timeshare estates. Then SB Villas filed a Declaration of Timeshare Plan, which dedicated four condominiums to a timeshare plan that provided for the subdivision of the subject condominiums into unit weeks. In other words, the condominium plan provided for a fixed week timeshare allowing the owner to use the unit for a specified week during the year. In this case, the timeshare owners each purchased a timeshare estate, which is a fee interest in the timeshare property. This is why the Property purchased by the debtor from Tammac did not include the time unit weeks sold by SB Villas to the timeshare owners and why the legal description of the Property attached to the debtor's motion states a legal description of the 2.06 acres of property less and except certain specified time unit weeks.
II. Should the interests of the timeshare owners have been determined by the bankruptcy court before authorizing the sale?
The timeshare owners' contentions, made both to the bankruptcy court and to this Panel, are: the debtor does not own our timeshares; because the debtor does not own our timeshares, the timeshares are not property of the bankruptcy estate; and because the timeshares are not property of the bankruptcy estate, the timeshares cannot be sold under authority of section 363(b). The timeshare owners emphasize section 363(b) authorizes the sale of only " property of the estate." According to the debtor, the timeshare owners' contention that the bankruptcy court lacked authority to sell their fee interests contains a faulty premise. The auction order does not authorize the sale of timeshare interests. Rather the auction order authorizes the sale of the Property free and clear of the interests of the timeshare owners.
Only Property of the Estate May Be Sold
Section 363(b)(1) provides that " [t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate...." 11 U.S.C. § 363(b)(1). Implicit within the statutory grant of authority to sell property under section 363(b), is the requirement that the estate actually have an interest in the property to be sold. For that reason, a bankruptcy court may not allow the sale of property as " property of the estate" without first determining whether the debtor in fact owns the property. Moldo v. Clark (In re Clark), 266 B.R. 163, 172 (9th Cir. BAP 2001). In Clark, the debtor filed bankruptcy schedules claiming ownership of assets actually owned by the debtor's trust. The debtor also claimed these assets as exempt property. The trustee disputed the claim of exemption and moved to sell the property free and clear of exemption. The Bankruptcy Appellate Panel reversed the order authorizing the sale and remanded for determination of " the threshold question" regarding whether the property to be sold was property of the estate.
Similarly, the issue before the bankruptcy court in In re Anderson, 377 B.R. 865 (6th Cir. BAP 2007) was the approval of the trustee's settlement of an adversary proceeding. In that lawsuit, the trustee sought to compel the sale of hunting land free and clear of certain nondebtor co-owners' interests. The bankruptcy court refused to approve the settlement because the debtors had exempted their interest in the property. The bankruptcy court considering the motion sua sponte raised the issue of whether the bankruptcy estate had an interest in the property. The court concluded that it did not because the debtor's interest in the property had been properly exempted, and the court declined to approve the settlement. Id . at 868-870. On appeal, the Bankruptcy Appellate Panel reversed the bankruptcy court, ruling that the bankruptcy court erred by refusing to approve the settlement, but recognizing that the bankruptcy court correctly determined that the hunting land was not property of the estate and not subject to disposition under section 363(b). Id . at 877.
In Popp, the trustee sought to sell property " free and clear" of a claim asserted by a secured creditor that disputed the trustee's title to the property. After the bankruptcy court approved the sale, the secured creditor appealed to the Bankruptcy Appellate Panel, arguing that the sale violated the holding in Warnick v. Yassian (In re Rodeo Canon Dev. Corp.), 362 F.3d 603 (9th Cir. 2004) withdrawn and modified by 126 Fed.Appx. 353, 2005 WL 663421 (9th Cir. 2005). In Rodeo Canon, the Ninth Circuit considered a challenge to a sale of real property " free and clear" of an ownership claim that was the subject of a pending adversary proceeding. Reversing the order authorizing the sale, the Ninth Circuit stated section 363(b) does not permit the sale of property that is not " property of the estate" and held the bankruptcy court should not have authorized a sale without first adjudicating the ownership dispute in the pending adversary. Popp, 323 B.R. at 268. After carefully analyzing the Rodeo Canon decision, the Popp court concluded that Rodeo Canon merely established principles of efficient judicial administration. Following the principle established by Rodeo Canon, the Popp court reversed because the bankruptcy court decided that the estate had some ownership interest in the property and authorized the sale, despite the pendency of an adversary proceeding addressing the ownership dispute. Id . at 269-70.
Section 363(b) states the general rule that only " property of the estate" may be sold pursuant to its authority. The single statutory exception to the rule is section 363(h), which authorizes the sale of specified co-owned property. A section 363(f) sale cannot be used to transform property of others into property of the estate. For example, in Nickless v. Aaronson (In re Katz), 341 B.R. 123, 126 (Bankr. D. Mass. 2006), the debtor owned an interest in a non-debtor partnership. The chapter 7 trustee commenced an adversary proceeding seeking, among other things, authority to sell the partnership's assets. The court observed " it is axiomatic that the mere bankruptcy of a partner does not bring the partnership assets within the jurisdiction of the bankruptcy court. A debtor's interest in a partnership is an asset of the debtor's estate under 11 U.S.C. § 541; the assets of the partnership are not." Katz, 341 B.R. at 128. Observing that the trustee was " seeking to accomplish indirectly what he cannot do directly[, ]" the court denied the trustee request for authority to sell the partnership property under authority of section 105(a). Id . at 133-34.
Before the bankruptcy court may authorize a sale under authority of section 363(b)(1), the court must determine whether the estate actually has an interest in the property to be sold. While there is no question that the Property is property of the estate, there are unresolved questions regarding whether the Silver Beach bankruptcy estate includes the timeshare owners' deeded fee interests and whether a section 363(f) sale is being used to sell non-estate property. In this case, the bankruptcy court approved the sale of the Property free and clear of the timeshare owners' interests, without first addressing their contention that the effect of the auction order was to sell nonestate property. Significantly the bankruptcy court's findings of fact and conclusions of law do not address this issue.
In view of our holding that the interests of the timeshare owners should have been determined by the bankruptcy court before authorizing the sale, we do not reach the remaining issues on appeal. The order authorizing the auction sale of the debtor's Florida beachfront property free and clear of timeshare interests is REVERSED and the matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion.