IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
FOODSOURCE, INC., No. 1-84-00869
HAROLD H. KETTEL, et al.,
v. A.P. No. 1-88-0058
CHARLES DUCK, Trustee,
v. A.P. No. 1-88-0064
CHARLES DUCK, Trustee,
Memorandum of Decision
Prior to the commencement of bankruptcy proceedings, debtor Foodsource Sales Corporation
and its sister corporation, Foodsource Inc., were in the business of manufacturing and selling to
investors whole or fractional interests in large refrigerated containers used for international
shipping of perishables. The terms of the sales to investors called for a down payment and a
long-term note for the balance of the purchase price secured by the investor's interest in the
container. The investors did not take actual possession of their containers; the debtor put them
into service, applying the revenue they generated to the note payments. The investors were
promised very favorable income tax benefits.
During the bankruptcy proceedings, the containers have been sold by the Trustee with the
rights of the parties preserved. By this adversary proceeding, some investors are seeking
turnover of the proceeds to them. The Trustee has responded to the complaints with a motion
to dismiss on the grounds that the complaint violates the automatic stay and that the complaints
fail to state facts upon which relief can be granted.
The Complaint Itself as a Violation of the Stay
The Trustee's first argument is that this entire adversary proceeding is void as a violation of
the automatic stay. The Court has difficulty with this argument, as sustaining it would merely
delay a determination of the parties' rights in a bankruptcy which is already more than four years
28 U.S.C. section 959(a) does allow some suits against bankruptcy trustees without leave of
court. However, that statute is not applicable where the plaintiff seeks possession of property
from the trustee. Securities & Exchange Commission v. Lincoln Thrift Assn.
(9th Cir.1977) 557
F.2d 1274, 1277n.1. Thus, it is clear that this action could not be commenced in a different
forum. That is not to say, however, that the action cannot be commenced at all without prior
leave of court.
The issue raised here by the Trustee is whether prior leave must be sought when the action
seeking possession of property from the trustee is brought in the same court which appointed the
trustee and approves his acts. At least one court has held that leave need not be obtained in such
cases because where the court entertains the suit it is the equivalent of granting leave to bring
it. Ambrose v. Brown
(1914) 42 App.D.C. 25. Bankruptcy courts frequently hear suits against
trustees in cases pending before the court without first deciding if the suit is properly brought.
See, e.g., In re Ault
(Bkrtcy.E.D.Tenn.1980) 6 B.R. 58. This court disagrees somewhat with the
rule in Ambrose v. Brown
, and has expressed the opinion that a lawsuit brought in bankruptcy
court may be a violation of the automatic stay if there is no basis under the Code for the action.
In re Hodges
(Bkrtcy.N.D.Cal.1988) 83 B.R. 25, 26. Nonetheless, this adversary proceeding
appears properly brought. Actions disputing whether property is property of the estate are
not clearly inconsistent with the Bankruptcy Code, and indeed are contemplated by section
541(a) of the Code and, in Chapter 7 cases, section 725. The Court therefore feels that it is
appropriate to hear and resolve the issues and accordingly rules that to the extent the automatic
stay applies at all and has not been previously modified it will be modified to permit the litigation
nunc pro tunc
, except as limited below.
Revocation of Acceptance
The investors' first argument is that they have revoked their acceptance of the containers and
therefore have a statutory lien on them pursuant to section 2711(3) of the California Commercial
Code. While the Court does not find the pleading of this claim to be itself a violation of the
automatic stay, it does appear that because of the automatic stay the complaint fails to state facts
upon which relief can be granted.
Commercial Code section 2711(3) provides that when a buyer justifiably revokes acceptance
of goods, he has a security interest in goods in his possession or control to secure any payments
made. Section 2608 provides that acceptance can be revoked if the goods did not conform to
the contract, so long as the revocation occurred within a reasonable time. That section further
provides that a revocation is not effective until the buyer notifies the seller of it.
There are serious factual problems with the investor's revocation claim. It is problematical
whether the grounds stated in the complaint, misrepresentations as to tax benefits, are the sort
of grounds which make delivered goods nonconforming. Assuming they are, the investors must
still prove that they have given notice of revocation, that the notice was given within a
reasonable time after acceptance (section 2608(2)), and that upon the giving of the notice the
containers were in their possession or control (section 2711(3)). The latter two issues are factual
and not the proper subject for summary adjudication. However, the complaint seems to be
legally insufficient as to the first issue, whether notice has been given.
The only thing the investors allege as notice of the exercise of their right of revocation is a
page attached to their proof of claim filed in the bankruptcy proceedings alleging a right of
rescission. The investors claim that this is the equivalent of revocation of acceptance, and that
its postpetition exercise is permitted by section 546(b) of the Bankruptcy Code. The Court has
trouble with this argument.
Without deciding whether the page attached to the claim amounts to a notice of revocation
notwithstanding the failure to mention this right, it is clear that section 546(b) does not validate
the exercise of the right. That section only comes into effect when seizure or commencement
of an action is required. Commercial Code section 2608(2) requires only notice, not seizure or
the commencement of an action. Accordingly, any postpetition assertion of the right to revoke
acceptance cannot be based on section 546(b).
It seems clear that any attempt to give notice of revocation after the commencement of the
bankruptcy is void due to the automatic stay. Section 362(a)(4) of the Bankruptcy Code stays
any act to create a lien against property of the estate; the giving of notice of revocation has the
effect of returning goods to the estate and impressing a lien upon them, and as such violates the
stay. Moreover, such an act probably violates sections 362(a)(3), (6), and (7) as well. The
whole purpose of the automatic stay is to preserve the status quo and avoid piecemeal
enforcement of rights against the estate. As such, it should be liberally interpreted in favor of
the debtor and its estate. In re Computer Communications, Inc.
(9th Cir.1987) 824 F.2d 725.
The investors must understand that while this Court has determined that the mere bringing
of this adversary proceeding did not violate the automatic stay, they cannot use this proceeding
to finesse the issue of whether the stay should be modified to allow them to give notice of
revocation. Such a determination must of necessity take into consideration factors involving not
just the rights of the investors, but the rights of all creditors of the estate. One of the principal
goals of bankruptcy courts is to insure the equitable distribution of a debtor's estate among all
its creditors. In re Adams Plywood, Inc.
(Bkrtcy.W.D.Tenn.1985) 48 B.R. 719, 721, and cases
cited therein. For this reason, acts which may be perfectly lawful and proper if done prior to
bankruptcy may become inequitable and rightly prohibited after bankruptcy, if to allow the act
would give some creditors an unfair advantage over other creditors of equal priority. See, e.g.,
In re Bruce Farley Corp.
(9th Cir.1980) 612 F.2d 1197, 1201.
Extent of the Trustee's Lien
The Court fails to see the problem with the remainder of the investors' complaint, which
merely seeks to establish the validity and extent of the estate's lien in their containers. The Court
has no intention of fixing the amount of the investor's unsecured claims, or allowing the
investors to exercise a setoff without relief from the stay. However, the trustee must either
establish that he has valid lien rights in the proceeds of the sale of the containers or, to the extent
he cannot establish valid lien rights or otherwise avoid the investor interests, he must turn over
the proceeds to the investors. To the extent that the Trustee bases his lien rights on the investor
notes (as opposed to any equitable lien resulting from the costs of maintaining and selling the
containers), the investors may show that the notes are unenforceable.
For the foregoing reasons, the investors' claim based on a theory that they have revoked
acceptance will be dismissed, without prejudice to amendment of the complaint to allege
prepetition exercise of the right or postpetition exercise by leave of court. Any request for such
leave shall be made in the base case, not this adversary proceeding, and shall address the effect
that the granting of such leave would have on the other creditors of the estate. The remainder
of the Trustee's motion will be denied.
Counsel for the investors shall prepare an appropriate order, which counsel for the Trustee
shall approve as to form.
Dated: October 22, 1988 __________________________