Opinion
No. 01-11027-GAO
August 12, 2002
MEMORANDUM AND ORDER
Cummings Properties, LLC ("Cummings") instituted this action against Heidelberg Print Finance Americas, Inc. ("Heidelberg"), to challenge the validity of Heidelberg's purchase of a printing press from a bankrupt debtor. Both parties have moved for summary judgment. In its motion, Heidelberg argues that this case should be dismissed because Cummings was obliged to raise any claims to the press in the bankruptcy proceeding and may not now bring a collateral action attacking the bankruptcy court's approval of the sale. Cummings, on the other hand, argues that it is entitled to judgment because the bankruptcy proceedings were conducted improperly and because its interest in the press is superior to Heidelberg's interest. For the reasons discussed below, Heidelberg's motion for summary judgment is granted and Cummings's motion is denied.
A. Summary of Facts
The following facts are not disputed: Cummings owns and leases commercial property in Woburn, Massachusetts. In 1999, Aurora Graphics, Inc. ("Aurora") entered into a five-year lease for space in Cummings' property. The lease provided that at the time of termination, Aurora was under an obligation to remove all of its goods and effects from the leased premises, and to surrender to Cummings:
all fixtures and equipment connected therewith, and all alterations, additions and improvements made to or upon the leased premises, whether completed by LESSEE, LESSOR or others, including but not limited to . . . equipment which ha[s] been bolted, welded, nailed, screwed, glued, or otherwise attached to any wall, floor, ceiling, roof, pavement or ground, or which ha[s] been directly wired to any portion of the electrical system or which ha[s] been plumbed to the water supply, drainage or venting systems serving the leased premises.
Suny Aff., Ex. A, Commercial Lease, ¶ 27.
In the fall of 1999, Aurora purchased a large printing press from Heidelberg for $1,860,000 and installed it at its Woburn location. Heidelberg retained a security interest in the press. In order to install the press at the premises Aurora leased from Cummings, alterations had to be made on the property. Cummings regards the press as a "fixture" and claims that it was entitled to retain the press after Aurora vacated its premises, in accordance with the lease. Heidelberg disputes that the press was a fixture which Cummings was entitled to retain.
In April 2000, Aurora filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the District of New Hampshire. Cummings was aware of the bankruptcy, and attorneys for Cummings and Aurora's Trustee had some discussions over the next month, the details of which are disputed.
On June 1, 2000, Aurora's Trustee filed a motion in the bankruptcy court for permission to sell the press free and clear of all liens, claims, and encumbrances pursuant to 11 U.S.C. § 363(f). On the same day, the attorney for the Trustee sent out a "Notice of Intended Sale" to several of Aurora's creditors announcing that the Trustee intended to sell the press. Cummings was not on the service list for either the motion or the notice. A hearing on the motion was held as scheduled on June 19. At the hearing, the Trustee and Heidelberg negotiated a stipulation pursuant to which Heidelberg agreed to purchase the press for $1.75 million, $1.6 million of which was "paid" in the form of a credit against Aurora's existing debt to Heidelberg. Heidelberg also promised to indemnify the Trustee and the Estate for "any and all damages that it may hereafter cause to the Debtor's business premises located in Woburn," but further stated that "[n]othing herein shall be construed as creating any obligation to return the leased premises to its original condition or repair the premises to the extent they may have been altered by the installation of the Heidelberg Press." Def.'s Mem. in Supp. of Summ. J., Ex. M, Stipulation, § E. In return, the Trustee promised to abandon the estate's interest in a Heidelberg two-color press which Aurora also owned, so that Heidelberg could repossess it. A written stipulation setting forth these terms was filed with the bankruptcy court on June 23. On June 27, the bankruptcy judge entered an order approving the sale. The order was served on parties listed on the bankruptcy court's service list, which did not include Cummings.
On June 21, the Trustee also filed a "Motion for Approval of Abandonment of Certain Property and Real Estate." The motion begins by outlining the Trustee's efforts to sell the press, but makes no mention of its pending sale to Heidelberg. In this motion, the Trustee asked the bankruptcy judge for approval to abandon "all furniture, furnishings, fixtures, equipment, machinery, inventory, supplies, and other tangible personal property of the Debtor located at Portsmouth, New Hampshire and Woburn, Massachusetts business locations of the Debtor. . . ." Id. Ex. K, Mot. for Approval of Abandonment, ¶ 22. Cummings was served with a copy of this motion and was notified that a hearing on the motion was scheduled for June 27. At the hearing, which Cummings did not attend, the motion for abandonment of property was withdrawn by the Trustee. The same day, whether actually in the course of the hearing does not appear, the bankruptcy judge signed an order authorizing the sale of the press to Heidelberg in accordance with the Trustee's stipulation with Heidelberg.
Heidelberg thereafter promptly took steps to remove the press from the building owned by Cummings. Through its attorneys, Cummings voiced some objections to the removal to Heidelberg's attorneys, but otherwise took no affirmative steps to try to stop it.
On July 31, 2000, Cummings' attorney wrote to Heidelberg's attorney, asserting that Heidelberg's possession of the press was "wrongful" because the press was a "fixture" under the lease between Cummings and Aurora and had become Cummings' property at the termination of the lease. On August 17, Heidelberg's attorney responded disputing Cummings' claim and further stating that any rights Cummings might have had had been extinguished by the bankruptcy judge's order authorizing the sale of the press to Heidelberg "free and clear of all liens, claims and encumbrances." About a month later, Cummings' lawyer wrote back that the August 17 letter was the first notice Cummings had received of the bankruptcy judge's sale order. Cummings asserted the position that since the order had been entered without notice to it or an opportunity to be heard, "Cummings Properties' rights are in no way affected by the language . . . in the Bankruptcy Court's order."
On April 13, 2001, Cummings filed a complaint against Heidelberg in the Massachusetts Superior Court for wrongful conversion and for damages pursuant to Mass. Gen. Laws ch. 106, § 9-313(8). Heidelberg removed the case to this Court in June 2001.
B. Cummings' Obligation to Assert Its Claims to the Press in the Bankruptcy Proceeding
When a trustee sells an asset of the debtor other than in the ordinary course of business, the sale must be preceded by adequate notice and possibly by a hearing. See 11 U.S.C. § 363(b)(1). Bankruptcy Rule 2002(a) further provides that all "parties in interest" are entitled to written notice twenty days before "a proposed use, sale, or lease of property of the estate other than in the ordinary course of business." Fed.R.Bankr.P. Rule 2002(a)(2), 11 U.S.C. The rule expressly states that "parties in interest" includes "all creditors." See also In re Hutchinson, 5 F.3d 750, 756 (4th Cir. 1993) ("parties in interest" generally includes "all persons whose pecuniary interests are directly affected by the bankruptcy proceedings") (citation omitted). If a party in interest files an objection to the sale, a hearing must be set. Fed.R.Bankr.P. Rule 6004(e), 11 U.S.C. See also 10 Collier on Bankruptcy § 6004.01 at 6004-4 ("a hearing is not required unless one is requested by a party in interest"). When a bankruptcy judge approves an asset sale, the order is final, and any dissatisfied creditor may appeal the order to the district court. See 28 U.S.C. § 158(a).
A court may rescind an asset sale if interested parties were not properly notified. As one bankruptcy judge has explained, "Ample authority exists for the principle that sales within the scope of § 363(b)(1), of which no proper notice was provided, may be set aside. . . . [E]lementary principles of due process of law require that [a creditor] receive notice before it may be deprived of its interest in the Debtor's property." In re Fernwood Markets, 73 B.R. 616, 619-20 (Bankr. E.D. Pa. 1987). See also, In re Ex-Cel Concrete Co., Inc., 178 B.R. 198 (9th Cir. BAP 1995) (finding that inadequate notice rendered asset sale void). In this vein, the First Circuit has held that a bankruptcy judge acted appropriately in setting aside a sale for which notice was not sent to the attorney of one of the creditors. See M.R.R. Traders, Inc. v. Cave Atlantique, Inc., 788 F.2d 816 (1st Cir. 1986).
For present purposes, it may be assumed that Cummings did not receive proper notice of the motion to approve the sale of the press or of the bankruptcy court's order approving the sale and, purportedly, cutting off Cummings' rights in the press. Nevertheless, Cummings was obliged, once it had learned of the order and sale, to seek a remedy from the bankruptcy court which had entered the order. See Spartan Mills v. Bank of Am. of Ill., 112 F.3d 1251, 1256 (4th Cir. 1997) (if creditor believed that bankruptcy court's sale order was improper, "its remedy was to seek reconsideration from the bankruptcy court itself or to appeal to the district court"); In re Met-L-Wood Corp., 861 F.2d 1012, 1018 (7th Cir. 1988) (after time for appeal from order confirming asset sale had lapsed, "the validity of the sale was established, even against nonparties to the sale proceeding" and Rule 60(b) was the only remaining recourse); Lindsey v. Ipock, 732 F.2d 619, 622 (8th Cir. 1984) (once a creditor is apprized of sale order "and fail[s] to timely appeal, he [is] obligated to obey these orders even if they were in error"). See also 10 Collier on Bankruptcy § 6004.02[4] at 6004-10. By failing to assert its objections to the sale in the bankruptcy proceedings, the principles of res judicata bar Cummings from asserting those objections in this suit. See Katchen v. Landy, 382 U.S. 323, 334 (1966) ("The normal rules of res judicata and collateral estoppel apply to the decisions of bankruptcy courts."); Fed. Deposit Ins. Co. v. Shearson-American Express, Inc., 996 F.2d 493, 498 (1st Cir. 1993) ("Orders, judgments and decrees of the bankruptcy court from which an appeal is not timely taken are final, even if erroneous" and res judicata bars later attack).
Cummings presents several arguments as to why the principles of res judicata should not prevent this action. First, Cummings argues that because it did not receive notice of the sale hearing or the sale order, it was deprived "full and fair opportunity to litigate its claims" in the bankruptcy proceeding so that holding Cummings bound by the bankruptcy court's decision would be a violation of due process. But while Cummings may not have had the opportunity to challenge the sale order before it entered, it did have the opportunity to move, pursuant to Fed.R.Civ.P. 60(b) (made applicable by Fed.R.Bankr.P. Rule 9024), for relief from the final order approving the sale of the press. Indeed, claims that an order should be set aside for inadequate notice are not uncommon in bankruptcy practice. See In re Times Sales Fin. Corp., 445 F.2d 385, 386-87 (3d Cir. 1971) (upholding bankruptcy referee's decision to set aside the confirmation of an asset sale because original bidder was not notified of sale hearing); In re Levoy, 182 B.R. 827, 836 (9th Cir. BAP 1995) (affirming denial of motion to vacate based in part on claim of insufficient notice); In re Fernwood Mkts., Inc., 73 B.R. 616, 620-21 (Bankr.E.D.Pa. 1987) (finding that creditors who were not notified of asset sale would not be bound by an affirmance of the sale). Cummings opted to forgo this avenue of relief.
While it is true that after a valid asset sale, a bankruptcy court loses jurisdiction over the assets, this does not mean that the bankruptcy court cannot re-examine the propriety of the sale. Again, the cases just noted demonstrate the continuing availability of relief from the bankruptcy court or from an appeals court for creditors who believe a sale of assets was conducted improperly. See, e.g., Fernwood Mkts., 73 B.R. at 621-22 (giving creditor option to cancel sale and return all parties to status quo prior to sale).
Cummings also does not qualify for equitable relief from the rules of res judicata. Such equitable relief is only available if Cummings could show that binding it by the bankruptcy court's judgment would be "manifestly unconscionable." Pickford v. Talbott, 225 U.S. 651, 657 (1912). See also Walsh v. Int'l Longshoremen's Ass'n, Local 799, 630 F.2d 864, 875 (1st Cir. 1980) ("a court is not bound to give res judicata effect to a previous judgment if an inequitable situation would thereby result") (emphasis added). Here, equitable relief is not warranted because the omission of notice to Cummings was not so egregious that it would be unconscionable to enforce the bankruptcy court's approval of the sale of the press. Cf., Parker v. Califano, 644 F.2d 1199, 1203 (6th Cir. 1981) (res judicata does not apply where party was not mentally capable of understanding first action). Cummings' predicament was contributed to not only by its general inattention to the course of the bankruptcy case, but by its particular inaction in the face of an opportunity to bring the issue to the attention of the bankruptcy judge promptly after it became apparent that Cummings was aggrieved by a deficiency in the procedure that led to the order.
Finally, Cummings' contention that Rule 60(b) allows it to seek relief from the bankruptcy court's judgment in an "independent action" is mistaken. The text of Rule 60(b) reads, in part, "This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding. . . ." However, this phrase in Rule 60(b) does not give blanket authorization to a party to bring a separate, independent action in the place of a motion for relief from judgment under Rule 60. Instead, this passage simply "reserves whatever power federal courts had prior to the adoption of Rule 60 to relieve a party of a judgment by means of an independent action according to traditional principles of equity." Moore Lucas, Moore's Federal Practice, § 60.80 at 60-219 (3d ed. 1997). See also Treadaway v. Acad. of Mot. Picture Arts and Sciences, 783 F.2d 1418, 1420 (9th Cir. 1986) ("The 'saving clause' of Fed.R.Civ.P. 60(b), while neither extending nor limiting jurisdiction, does allow the continuation of whatever power the court would have had to entertain an independent action if the rule had not been adopted. This power is one that is rooted in tradition and governed by general equitable principles.") (citations and internal quotations omitted). Resort must first be made to the opportunities for correction presented by Rule 60(b). See In re Met-L-Wood Corp., 861 F.2d at 1018 (holding that "confirmed sales — which are final judicial orders — can be set aside only under Rule 60(b)").
C. Conclusion
Cummings lost its opportunity to object to the sale of Aurora's printing press when it did not raise those objections in the bankruptcy proceeding. As a result, this action is barred. Heidelberg's motion for summary judgment is GRANTED and Cummings' motion for summary judgment is DENIED. The complaint is DISMISSED.
It is SO ORDERED.