Memorandum of Decision Re: Rights of Guarantors

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re COMBS LOGGING CO., INC.,                                       No. 1-87-00286      Debtor. ___________________________/ COMBS LOGGING CO., INC., HENRY COMBS and LINDA COMBS,      Plaintiffs,    v.                                                                                      A.P. No. 1-89-0174 U.S. BANK OF CALIFORNIA,      Defendant. ______________________________/
Memorandum of Decision
     Debtor Combs Logging Co., Inc., is a corporation wholly owned by plaintiffs Henry and Linda Combs. In 1986, Combs Logging Co. borrowed $300,000.00 from defendant Bank of Lolita (now known as U.S. Bank of California), secured by the corporation's equipment. Henry and Linda gave the bank their personal guarantee.      Combs Logging filed a voluntary Chapter 11 petition in 1987. After its failure to consummate a plan of reorganization, the case was converted to Chapter 7 and J. Taylor Haley was appointed trustee.      When the Trustee began to liquidate the estate, she was contacted by a representative of the Bank regarding the equipment. Since the Trustee claimed the right pursuant to section 506(c) of the Bankruptcy Code to reimbursement for some expenses incurred in preserving the equipment, and since the landlord of the debtor's business premises claimed lien rights in the equipment, the Bank consented to a sale of the equipment free and clear of its lien, with the lien attaching to the proceeds. The Trustee noticed the sale to creditors and obtained a court order approving an auction sale. The sale has now been completed and the Trustee is holding the proceeds.      In this adversary proceeding, Henry and Linda seek to have the court declare that they have been absolved from liability under their guarantee because they did not receive notice of the sale by the Trustee and, they allege, the sale was not conducted in accordance with the requirements of section 9504(3) of the California Commercial Code. The court finds their position meritless because the sale was not a commercial code sale. Section 9504(3) of the California Commercial Code does not apply to this matter at all, because the sale was conducted by the trustee in bankruptcy, not the secured party. All of the courts which have dealt with the issue, including a California appellate court whose decision is binding in this matter, have ruled that section 9504(3) does not apply to sales by receivers and trustees. Security Pacific National Bank v. Geernaert (1988) 199 Cal.App.3d 1425, 1432-33 (state court receiver); Couch v. Borg-Warner Acceptance Corp. (Fla.1989) 543 So.2d 370 (bankruptcy trustee); Sands v. Citizens & Southern National Bank (Ga.1978) 247 S.E.2d 544 (state court reciever). In Geernaert the court held:
         The sale was conducted by an independent, court-          appointed receiver, not the secured party. The bank          as secured party was, therefore, exempted from no-          tifyiing the debtor of the sale of the almond crop under          section 9504 because it did not conduct the sale.          Furthermore, California Uniform Commercial Code section          9507, subdivision (2), holds that a disposition of          collateral approved in any judicial proceeding "shall          conclusively be deemed commercially reasonable. . . ."
     The same reasoning clearly applies to sales by bankruptcy trustees.      Even if a bankruptcy trustee can be deemed to be the agent of the secured creditor, which does not seem possible in California in light of Geernaert, the undisputed facts do not support such a finding here. The mere fact that a sale conducted by a bankruptcy trustee ultimately fails to benefit the unsecured creditors does not turn the trustee into the agent of the secured creditor. United States v. Harris (D.Maine 1985) 54 B.R. 614, 617. For instance, in Executive Bank of Fort Lauderdale v. Tighe (1981) 54 N.Y.2d 330, 445 N.Y.S.2d 425, 429 N.E.2d 1054, the trustee was held not to be the agent of the secured creditor because the lien was disputed. It is clear if a trustee in bankruptcy can be deemed the agent of the secured creditor for commercial code purposes, it is only when there is absolutely no legitimate bankruptcy purpose for the sale.      The undisputed facts in this case are that there were at least two sound bankruptcy reasons for the sale to be conducted by the Trustee. First, the landlord of the debtor's premises claimed a lien against the collateral superior to that of the Bank; to the extent such a lien was found to be valid, a potential priority claim against the estate might be reduced. Second, the Trustee claimed a right to reimbursement pursuant to section 506(c) of the Bankruptcy Code for expenses incurred in protecting the collateral. Either reason is enough to establish a legitimate bankruptcy purpose for the sale. Specific statutory authorization for a sale of collateral with the secured creditor's consent is found in section 363(f)(2) of the Code; consent given pursuant to this section does not ipso facto turn the trustee into the agent of the secured creditor.      The Bank's motion for summary judgment will accordingly be granted. Plaintiffs will take nothing by their complaint, which will be dismissed with prejudice. The Bank shall recover its costs of suit.      Counsel for the Bank shall submit an appropriate form of judgment.
Dated: February 21, 1990                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy