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In re Hemsley

United States Bankruptcy Appellate Panel of the Ninth Circuit
Dec 17, 2007
BAP CC-07-1161-MkKuPa (B.A.P. 9th Cir. Dec. 17, 2007)

Opinion


In re: SHERMAN ALEXANDER HEMSLEY, Debtor. HELEN RYAN FRAZER, Chapter 7 Trustee, Appellant, v. DAVID PULLMAN; STRUCTURED ASSET SALES, LLC, Appellees BAP No. CC-07-1161-MkKuPa United States Bankruptcy Appellate Panel of the Ninth CircuitDecember 17, 2007

NOT FOR PUBLICATION

Argued and Submitted at Pasadena, California: November 29, 2007

Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA-02-13025-BB, Adv. No. LA-06-01575-BB. Honorable Sheri Bluebond, Bankruptcy Judge, Presiding.

Before: Markell, Kurtz[ and Pappas, Bankruptcy Judges.

Hon. Frank Kurtz, Chief Bankruptcy Judge for the Eastern District of Washington, sitting by designation.

MEMORANDUM

This is an appeal of the bankruptcy court's finding that Helen Frazer (the " Trustee") was not entitled to damages, fees, or punitive damages, despite a previous holding that David Pullman (" Pullman") and Structured Asset Sales, LLC (" SAS") (collectively " Appellees") along with William Little (" Little") attempted to, and did, control the sales price of certain television residuals otherwise due to the debtor, Sherman Hemsley (" Hemsley"), in violation of section 363(n).

Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 as enacted and promulgated prior to the effective date (October 17, 2005) of the relevant provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.

The bankruptcy court's order is AFFIRMED.

I. FACTS

On February 1, 2002, Hemsley, of " All in the Family" and " The Jefferson's" fame, filed a voluntary chapter 7 petition. Helen Frazer was appointed as trustee.

Hemsley was entitled to residuals from not only his performance in the role of George Jefferson but from a number of other performances as well. The Trustee disposed of certain, though unspecified, residuals in settlement of a dispute with Sony Pictures Entertainment, Inc. (" Sony"). The Trustee advertised the remaining residuals (" Residuals") for sale at public auction on an " as-is" basis without representations or warranty as to value. The Trustee required only a $4,000 deposit to bid.

At the auction, held on April 27, 2005, participation was active until bidding reached the $70,000 range. Thereafter, a two-way bidding war ensued, which Pullman ultimately won with a bid of $215,000, outbidding Little's final bid of $214,000. On May 9, 2005, the bankruptcy court approved the sale to Pullman. On May 15, 2005, Pullman defaulted, forfeiting his $4,000 deposit but incurring no other damages.

After the auction but before defaulting on his agreement to purchase the Residuals, Pullman negotiated an agreement with Little. Under this agreement, Pullman and Little would share the cost of default and Little would attempt to negotiate a private purchase of the Residuals with the Trustee (" Bid Agreement"). The parties did not execute their collusive agreement, however, until after Little had reached agreement with the Trustee to purchase the Residuals at a price of $85,000. After notice and a hearing, the court entered an Order Approving Sales of Residuals After Default by the Highest Bidder on July 6, 2005. Little paid the purchase money to the Trustee.

The Trustee learned of the Bid Agreement after Little filed a complaint seeking rescission of the Bid Agreement in Los Angeles County Superior Court. Thereafter, she filed an adversary proceeding against Pullman, SAS, and Little for entering into a collusive agreement in violation of section 363(n). The Trustee reached, and on October 24, 2006, the bankruptcy court approved, a settlement with Little to dismiss the claims against him in return for a payment of an additional $85,000. At this point the Trustee had collected $170,000 with respect to the Residuals.

The bankruptcy court dismissed the adversary against Little after ruling on the damages issue.

On December 13, 2006, the bankruptcy court entered an order, which held that Pullman and Little violated section 363(n). It did require, however, an evidentiary hearing concerning the Trustee's claims for recovery of damages and fees.

On March 22, 2007, the bankruptcy court expanded on its previous finding that section 363(n) was violated, holding that the Bid Agreement was " a collusive agreement, the intent of which was to control the bidding, that actually resulted in controlling the bidding." Hr'g Transcript at 226:9-12. The court, however, also found that the Trustee had not met her burden of proof as to the value of the Residuals and therefore was not entitled to damages. Because she was not entitled to recover damages, the court found that she was also not entitled to an award of costs, attorneys' fees, or expenses. Finally, the bankruptcy court found that the defendants did not enter the Bid Agreement with willful disregard of the statute and therefore, the Trustee was not entitled to an award of punitive damages. The Trustee appeals.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 157(b)(2)(A) and (O). We have jurisdiction pursuant to 28 U.S.C. § § 158(a)(1) and (b).

III. ISSUES

1) Whether the bankruptcy court erred in finding that the Residuals' value did not exceed the collusive sales price, and therefore, that the Trustee was not entitled to an award of damages.

2) Whether the bankruptcy court erred in not awarding costs, attorneys' fees, or expenses to the Trustee because the Trustee did not recover damages.

3) Whether the bankruptcy court erred in not awarding punitive damages on a finding that the collusive agreement was not made in willful disregard of section 363(n).

IV. STANDARDS OF REVIEW

" We review the bankruptcy court's conclusions of law and questions of statutory interpretation de novo, and factual findings for clear error." Village Nurseries v. Gould (In re Baldwin Builders), 232 B.R. 406, 410 (9th Cir. B.A.P. 1999) (citations omitted). A factual finding is clearly erroneous if the appellate court, after reviewing the record has a firm and definite conviction that a mistake has been committed. Wall St. Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. B.A.P. 2006).

V. DISCUSSION

At issue in this appeal is the Trustee's right, in light of the bankruptcy court's earlier separate holding that the Bid Agreement violated section 363(n), to damages, and to costs, attorneys' fees, or expenses, and to punitive damages. Section 363(n) provides that, when a collusive agreement controls the sales price, the trustee has two options: she may avoid the sale or she may recover damages. In addition, under certain circumstances the statute allows a trustee to recover costs, attorneys' fees, expenses of avoidance or recovery, and punitive damages.

The Trustee did not seek to avoid the sale in this case.

Section 363(n) provides in full that:

1) DAMAGES

A trustee may recover damages from a party to a collusive agreement in an amount by which the value of the property sold exceeds the price at which such sale was consummated. 11 U.S.C. § 363(n).

The collusive price at which Little bought the Residuals was $85,000, leaving the question for the bankruptcy court of whether the Residuals had a value in excess of that collusive sales price. The bankruptcy court considered three " theories" put forward by the Trustee to establish that the Residuals were worth more than $85,000: the sales price at auction established value; Pullman's conduct after default was an admission of value established at the auction; and Pullman's expert appraisal with adjustments by the Trustee established value. Ultimately the court found that, despite this evidence, the Trustee did not, as a factual matter, meet her burden of proof that the Residuals' value exceeded $85,000.

Although the record is not entirely clear as to whether the bankruptcy court considered the sales price at auction as evidence, both parties at hearing conceded that it did. After considering it, however, the court discounted the $215,000 bid because it found that while a sales price at auction may generally constitute evidence of value, it was not persuasive evidence in this case.

The bankruptcy court based its conclusion on the fact that there was a question in the bidders' and the Trustee's minds as to whether the settlement with Sony removed the receivables due for Hemsley's role as George Jefferson (" Jefferson Residuals") from the estate. The inclusion of the Jefferson Residuals would have made the Residuals significantly more valuable. Uncertainty of what the asset was, however, was offset by the relatively low cost of liquidated damages in the form of the $4,000 deposit. Therefore although the Residuals were sold " as is, " the court found that the bid price was not indicative of actual value.

The court also considered, but rejected, the Trustee's two other theories as to value: that Pullman's conduct was an admission of value and that appraisal by Pullman's expert could establish value with proper adjustments.

As to Pullman's conduct, the bankruptcy court rejected the Trustee's assertion that Pullman evidenced a willingness to pay his bid price of $215,000 by not backing out of the deal until after having reached agreement with Little. The court agreed that Pullman and Little had reached a deal in principle if not a binding deal, prior to the actual default. The bankruptcy court, however, believed Pullman's conduct was better interpreted as an issue of timing rather than evidence of intent going to value. It reached this conclusion on the basis that Pullman incurred additional costs of hiring an attorney to formalize the agreement prior to the default.

As to the expert valuation, the bankruptcy court agreed that the Trustee had done an effective job refuting the assumptions used by Pullman's expert. It found, however, that without the aid of her own expert as to what the proper assumptions were, mere assertions by the Trustee were not persuasive evidence as to value. The court did not find an exact value based on the expert's testimony. Rather, it found on balance that the Trustee simply did not meet her burden of proof as to value against expert testimony that was otherwise credible and plausible.

We give deference to the court with respect to factual findings and particular deference to findings of fact based on credibility. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); U.S. v. Hovsepian, 422 F.3d 883, 885 (9th Cir. 2005); Hansen v. Moore (In re Hansen), 368 B.R. 868, 875 (9th Cir. B.A.P. 2007). See also Rule 8013. We cannot reverse simply because we might have decided the case differently. Anderson, 470 U.S. at 573. The bankruptcy court's findings have a reasonable basis in the evidence. Therefore, the bankruptcy court did not clearly err in deciding that the Trustee did not meet her burden to prove that the value exceeded the collusive sales price, and, thus, she was not entitled to damages.

2) FEES

A trustee may avoid a collusive sale or recover damages and " may recover any costs, attorneys' fees, or expenses incurred in avoiding such sale or recovering such amount." 11 U.S.C. § 363(n).

By the plain language of the statute, the Trustee's recovery of costs, attorneys' fees, and expenses is not absolute, but is conditioned on either avoiding the sale or recovering some amount in damages. Because the Trustee neither avoided the sale nor was entitled to recover damages against either Pullman or SAS, the bankruptcy court concluded she is not entitled to an award of costs, attorneys' fees, or expenses. We agree with the bankruptcy court and conclude that it did not err by declining to award the Trustee any costs, attorneys' fees, or expenses.

3) PUNITIVE DAMAGES

A court may grant judgment to the trustee for punitive damages only if a collusive agreement is entered in willful disregard of the statute. 11.U.S.C. § 363(n). In order to establish a " willful" violation of a statute, the defendant must act with knowledge that his conduct was unlawful. McLaughlin v. Richland Shoe Co., 486 U.S. 128, 108 S.Ct. 1677, 100 L.Ed.2d 115 (1988) (adopting standard of willfulness under the Age Discrimination Act as adopted in Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 105 S.Ct. 613, 83 L.Ed.2d 523 (1985) under the Fair Labor Standards Act). See Farmers Ins. Group v. Compos (In re Compos), 768 F.2d 1155, (1985) (finding " willful" as used in bankruptcy code to mean " deliberate or intentional").

In evaluating willful disregard of the statute, the bankruptcy court considered correspondence between Pullman and Little, the Bid Agreement, Pullman's statement that he had never bid in a bankruptcy sale, testimony regarding assignment of the Residuals to Pullman, and the Pullman/Little litigation.

The court found that, after Little entered into the agreement with the Trustee for private sale of the Residuals, Pullman had requested Little to instruct the Trustee to assign the residuals directly to Pullman. It found this, along with the fact that the parties had taken their dispute to a public forum, to be persuasive evidence that Pullman did not know he was violating section 363(n) when he entered into the Bid Agreement with Little.

There is no other evidence in the record to support a finding that Pullman willfully disregarded section 363(n). Therefore, the bankruptcy court did not clearly err in not awarding punitive damages.

VI. CONCLUSION

Giving deference to the bankruptcy court's findings of the facts, as it must, the panel AFFIRMS the bankruptcy court's order.

The trustee may avoid a sale under this section if the sale price was controlled by an agreement among potential bidders at such sale, or may recover from a party to such agreement any amount by which the value of the property sold exceeds the price at which such sale was consummated, and may recover any costs, attorneys' fees, or expenses incurred in avoiding such sale or recovering such amount. In addition to any recovery under the preceding sentence, the court may grant judgment for punitive damages in favor of the estate and against any such party that entered into such an agreement in willful disregard of this subsection.


Summaries of

In re Hemsley

United States Bankruptcy Appellate Panel of the Ninth Circuit
Dec 17, 2007
BAP CC-07-1161-MkKuPa (B.A.P. 9th Cir. Dec. 17, 2007)
Case details for

In re Hemsley

Case Details

Full title:In re: SHERMAN ALEXANDER HEMSLEY, Debtor. v. DAVID PULLMAN; STRUCTURED…

Court:United States Bankruptcy Appellate Panel of the Ninth Circuit

Date published: Dec 17, 2007

Citations

BAP CC-07-1161-MkKuPa (B.A.P. 9th Cir. Dec. 17, 2007)