Unpublished Disposition, 902 F.2d 40 (9th Cir. 1987)

MEMORANDUM^* 

The question presented in this case is whether the bankruptcy court properly denied Farmers Bank's motion for relief from the automatic stay under 11 U.S.C. § 362(d) (2).

BACKGROUND

In June 1986, when the debtor in a Chapter 7 bankruptcy, Ronald Stanhope, was indebted to Farmers State Bank of Worden in the amount of $591,000 in principal and accrued interest, the bankruptcy court granted the Bank's request for relief from the automatic stay under 11 U.S.C. 362(d) (2). In its order, the court authorized the Bank to liquidate property "in a commercially reasonable manner as that term is utilized in the provisions of the Montana Uniform Commercial Code."

In September 1986, a sale of Stanhope's oil properties was conducted pursuant to the bankruptcy court's order. The bankruptcy trustee, Charles Hingle, was notified orally of the sale, and notice was published in three newspapers and journals prior to the sale. The Bank did not give Stanhope notice of the sale.

Among the assets purchased by John Lawrence, president of the Bank, was 50% of the stock of S & L Energy, Inc. for $19,500. Only the Bank bid against him. Lawrence owned the other 50% of the stock at the time of the sale.

Because the amount of proceeds generated by the sale was insufficient to satisfy Stanhope's outstanding indebtedness, the Bank filed a second motion for relief from the automatic stay to foreclose on other real and personal property. During oral argument on this motion on January 15, 1987, the court denied the motion as to personal property. The court then heard testimony regarding the commercial reasonableness of the September 1986 sales of oil properties. It allowed the parties to file additional briefs on this issue.

In March 1987, the bankruptcy court denied the Bank's motion for relief from the automatic stay. It also ordered the Bank to extinguish its liens against the collateral contained in the motion for relief. The district court affirmed the bankruptcy court's order. The Bank appeals.

DISCUSSION

We have jurisdiction of appeals from final judgments of the district court reviewing final orders of the bankruptcy court. 28 U.S.C. § 158(d). The denial of a motion for relief from an automatic stay is considered a final order. In re Cimarron Investors, 848 F.2d 974, 975 (9th Cir. 1988).

We review de novo the district court's decision. In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503, 1505 (9th Cir. 1987). We review the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. Id.

II. COMMERCIAL REASONABLENESS OF SEPTEMBER 1986 SALE

The Bank argues that the bankruptcy court erred in denying its motion for relief from the automatic stay under 11 U.S.C. § 362(d) (2), which provides:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay--

(2) with respect to a stay of an act against property under subsection (a) of this section, if--

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

The bankruptcy court found that the September 1986 sale of S & L stock was commercially unreasonable under Montana law. The Bank was therefore unable to establish that Stanhope did not have equity in the remaining property, and the court denied its motion for relief from the stay.

As a preliminary matter, the Bank argues that the bankruptcy court failed to provide notice that the January 15 hearing would concern itself with the issue of commercial reasonableness. This argument lacks merit. The record indicates that Stanhope, in a November 1986 request for a continuance of the Sec. 362 hearing, informed the Bank and the court that he intended to challenge the commercial reasonableness of the September 1986 sale in arguing against the Bank's motion for relief from the stay.

Moreover, the Bankruptcy Code places on the party requesting relief from the stay the burden of proving that there is no equity in the property. 11 U.S.C. § 362(g) (1). The Bank was on notice that it would be required to show at the January 1987 hearing that the September 1986 sale was commercially reasonable.

The bankruptcy court offered three bases for concluding that the sale of S & L stock was commercially unreasonable under the Montana version of the Uniform Commercial Code, which provides in relevant part:

Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms, but every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable. Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale ... shall be sent by the secured party to the debtor if he has not signed after default a statement renouncing or modifying his right to notification of sale.

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Mont.Code Ann. Sec. 30-9-504(3) (a) (emphasis added). We consider in turn each of the bankruptcy court's bases.

It is undisputed that Stanhope did not receive notice of the September 1986 sale. The Bank argues that oral notice to the bankruptcy trustee was sufficient under Montana law. We disagree.

Section 30-9-504(3) (a) requires the secured party to provide notice of the time and place of a public sale to the "debtor." The U.C.C. defines "debtor" as:

the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper. When the debtor and the owner of the collateral are not the same person, the term "debtor" means the owner of the collateral in any provision of the chapter dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires.

Mont.Code Ann. Sec. 30-9-105(d).

The Bank argues that the bankruptcy trustee, not the debtor, is the "owner of the collateral." It relies on In re Frye, 9 U.C.C.Rep.Serv. 913 (Bankr.S.D. Ohio 1970), where the court held that a bankruptcy trustee was the "owner of the collateral," and therefore a "debtor" entitled to notice under the U.C.C. Id. at 919.

The fact that the bankruptcy trustee is a debtor, however, does not mean that Stanhope was not also a debtor. The term "debtor" may include both the obligor and the owner of the collateral "where the context so requires." Mont.Code Ann. Sec. 30-9-105(d). This is such a case.

The purpose of the notice requirement is to give debtors "sufficient time to take appropriate steps to protect their interests by taking part in the sale or other disposition if they so desire." Mont.Code Ann. Sec. 30-9-504, Comment 5, quoted in Wippert v. Blackfeet Tribe, 215 Mont. 85, 695 P.2d 461, 464 (1985). " [I]t is inspired by the usually forlorn hope that the debtor if he is notified, will either acquire enough money to redeem the collateral or send his friends to bid for it." J. White & R. Summers, Uniform Commercial Code Sec. 25-9, at 1214 (3d ed. 1988).

Although Stanhope would not have been able to bid for the property, he had a substantial interest in being notified of the sale. The sale might have had an impact on the Bank's lien against his homestead, and he would have been entitled to receive the excess of sales proceeds over the amount of the debt. Stanhope was entitled to notice of the time and place of the sale. Failure to give it rendered the sale commercially unreasonable. See Bank of Sheridan v. Devers, 217 Mont. 173, 702 P.2d 1388, 1390 (1985). The bankruptcy court correctly applied the notice requirements of the Montana U.C.C.

B. Adequacy of Property Descriptions in the Advertisements

The bankruptcy court also found that the sale was commercially unreasonable because the advertisement announcing the sale in September 1986 did not sufficiently describe the collateral being sold. " [A] public sale will be commercially unreasonable if the creditor fails to describe the nature of the property to be sold adequately." J. White & R. Summers, supra, Sec. 25-13, at 1230.

Specifically, the court found the advertisement deficient because it referred to S & L as a "stripper well operation," without making any reference to the corporation's oil reserves or previous production levels, which had exceeded stripper well criteria. Moreover, the advertisement failed to disclose S & L's royalty interest under an oil lease. Finally, the court found that other information about S & L, such as legal descriptions of property owned, surface ownership, leases in force, production status, pumping and casing equipment, and power sources were not disclosed in the advertisement, and such information was not disclosed even after a specific inquiry.

The Bank argues that the content of the advertisement was adequate because, as a secured creditor, it did not have actual knowledge of additional information; any speculation regarding oil reserves and other details of the S & L operation would therefore violate Montana securities regulations, Mont.Code 30-10-301, et seq. This argument ignores the fact that the other 50% owner of S & L was John Lawrence, the president of the Bank, and that he was shown in the advertisement as the person to contact regarding the sale. The Bank may not now argue that it had no knowledge of the assets of S & L.

The bankruptcy court's conclusion that the advertisement was inadequate, and that the sale was therefore commercially unreasonable, was not clearly erroneous.

The bankruptcy court found that the price paid by Lawrence for the S & L stock, $19,500, was grossly below its true value, so that the sale was commercially unreasonable. If found that the minimum value of Stanhope's 50% share of the stock was $60,000. Under Montana law, "a large discrepancy in price can be considered within the parameters of section 30-9-504(3), MCA." Dulan v. Montana Nat'l Bank, 203 Mont. 177, 661 P.2d 28, 32 (1983). The court's finding that the sales price was too low was not clearly erroneous.

D. Application of Mont.Code Ann. Sec. 30-9-507(2)

The Bank argues that the bankruptcy court erred by failing to find that the sale was commercially reasonable under Mont.Code Ann. Sec. 30-9-507(2), which provides in relevant part:

A disposition which has been approved in any judicial proceeding or by any bona fide creditors' committee or representative of creditors shall conclusively be deemed to be commercially reasonable, but this sentence does not indicate that any such approval must be obtained in any case nor does it indicate that any disposition not so approved is not commercially reasonable.

Because the bankruptcy trustee indicated that he consented to the sale in the conveyancing documents, and because the trustee is a "representative of creditors," the Bank insists that it is entitled to a conclusive presumption that the sale was commercially reasonable.

We reject this argument. In its order granting the Bank's motion for relief from the automatic stay in June 1986, the bankruptcy court required that the dispositions "be accomplished in a commercially reasonable manner" under the Montana U.C.C. Implicit in this order is that the bankruptcy court retained jurisdiction to determine "commercial reasonableness" of the sale if it became an issue. In fact, the court found that the sale was commercially unreasonable. We refuse to adopt a construction of 11 U.S.C. § 362(d) (2) and Mont.Code Ann. Sec. 30-9-507(2) which deprives the bankruptcy court of jurisdiction to determine if the creditor complied with its order in allowing relief from an automatic stay.

The Bank failed to establish that it had no equity in the remaining collateral to support its motion for relief from the automatic stay under 11 U.S.C. § 362(d) (2). "Equity" is the excess of the property value over the total encumbrances against the property. Stewart v. Gurley, 745 F.2d 1194, 1195 (9th Cir. 1984). The bankruptcy court properly held that the Bank did not meet its burden to establish the total amount of liens against the remaining property because the September 1986 sale of S & L was commercially unreasonable. It is possible that, if the sale had been commercially reasonable, Stanhope would have had equity in the remaining collateral. We affirm the bankruptcy court's denial of the Bank's motion for relief from the automatic stay.

Having found that the sale was commercially unreasonable, the court went on to order that "the Bank ... file appropriate documents showing that its lien against the collateral contained in the motion for relief from stay has been satisfied and paid in full." It based this order on Montana case law which precludes a secured creditor who violates the notice and commercial reasonableness provisions of Article 9 from obtaining a deficiency judgment against the debtor. See Westmont Tractor Co. v. Continental I, Inc., 224 Mont. 516, 731 P.2d 327, 331 (1986); Wippert, 695 P.2d at 465.

The Bank conceded at oral argument that under Montana law, if the sale was commercially unreasonable, it was correct for the bankruptcy court to require that all liens be extinguished. We also affirm this part of the bankruptcy court's order.

AFFIRMED.