In re: Kvn Corporation, Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: July 11, 2014
• Docket: NC-13-1318-JuKuD
• Status: Unpublished

Opinion

FILED JUL 11 2014 1 NO FO PUBL A IO T R IC T N SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-13-1318-JuKuD ) 6 KVN CORPORATION, INC., ) Bk. No. 13-10477 ) 7 Debtor. ) ______________________________) 8 ) M E M O R A N D U M* LINDA S. GREEN, Chapter 7 ) 9 Trustee, ) ) 10 Appellant. ) ______________________________) 11 Submitted Without Oral Argument on July 11, 2014** 12 Filed - July 11, 2014 13 Appeal from the United States Bankruptcy Court 14 for the Northern District of California 15 Honorable Alan Jaroslovsky, Bankruptcy Judge, Presiding _________________________ 16 Appearances: Jean Barnier, Esq., of MacConaghy & Barnier, PLC, 17 on brief for appellant Linda S. Green, Chapter 7 Trustee. 18 ________________________ 19 Before: JURY, KURTZ, and DUNN, Bankruptcy Judges. 20 21 22 23 24 * This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 26 See 9th Cir. BAP Rule 8013-1. 27 ** On June 18, 2014, this Panel entered an order determining that this appeal was suitable for submission without oral 28 argument. 1 Linda S. Green, chapter 71 trustee (Trustee) in the 2 bankruptcy estate of KVN Corporation, Inc. (KVN or debtor), filed 3 a motion seeking approval of a stipulation between Trustee and 4 Wilshire State Bank (Bank) which contemplated a sale of the 5 Bank’s fully encumbered property in exchange for a carve out from 6 the lien proceeds paid to the bankruptcy estate. The bankruptcy 7 court denied the motion and Trustee’s later filed motion for 8 reconsideration. This appeal followed. For the reasons 9 discussed below, we REVERSE and REMAND this matter with 10 instructions to the bankruptcy court to enter an order granting 11 Trustee’s motion. 12 I. FACTS 13 The essential facts are few and undisputed. KVN owned a 14 sporting goods store. KVN was indebted to the Bank under the 15 terms of a note in the original principal sum of $915,000. The 16 note was secured by KVN’s real property and by substantially all 17 of its business assets. 18 On March 8, 2013, KVN filed its chapter 7 petition and Green 19 was appointed chapter 7 trustee. In Schedule A, debtor listed 20 inventory including “liquor, gun, ammunition, cleaning kits, and 21 fishing reels” with a value of $28,950. Debtor failed to reflect 22 the Bank’s security interest in the inventory, but listed the 23 Bank as a secured creditor against its real property in Schedule 24 D. At the time of the filing, debtor owed the Bank approximately 25 $309,569. In Schedule F, debtor listed unsecured claims in the 26 1 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure.

- 2 - 1 amount of $107,565. After the filing, Trustee removed rifles and 2 guns from debtor’s store and placed them in a gun storage locker 3 at the cost of $25 per day. Trustee employed an auctioneer to 4 conduct a public sale of these assets, which would likely bring 5 $10,000. After reviewing public records, Trustee learned that 6 the Bank held a perfected UCC-1 on all of debtor’s inventory, 7 including the firearms. Trustee contacted the Bank and informed 8 it that the firearms had been removed for safekeeping and that 9 the Bank could retrieve them. 10 In late April 2013, the Bank contacted Trustee and requested 11 her assistance in selling the firearms through the auctioneer she 12 had employed. The Bank agreed that it would pay for the storage 13 costs and split the net proceeds with the bankruptcy estate. 14 Trustee agreed based on her belief that the transaction would net 15 between $4,200 to $4,400 for the benefit of unsecured creditors. 16 Trustee and the Bank entered into a stipulation setting forth 17 these terms. 18 Trustee subsequently filed a motion seeking approval of the 19 stipulation from the bankruptcy court. At the May 10, 2013 20 hearing, the bankruptcy court denied Trustee’s motion. 21 Initially, the court made reference to Charles Duck, a former 22 trustee in the Northern District of California, who “had a habit 23 of making deals with secured creditors even though there was no 24 equity he would sell the — he would liquidate the asset and have 25 various types of arrangements for sharing the proceeds. And I 26 27 28

- 3 - 1 put a stop to that many years ago.”2 The court further opined: 2 [T]he role of a chapter 7 trustee is to closely examine the secured creditor’s security interest and defeat it, 3 if the trustee can. And, if not, turn the asset over to the secured creditor. It is a slippery slope, to my 4 mind, when the debtor and the secured creditor start making deals. I do not believe it’s the appropriate 5 role of a chapter 7 trustee to liquidate fully- encumbered assets. 6 7 Counsel for Trustee and the Bank both emphasized that there 8 was full disclosure, everything was above board, and there would 9 be a return to the unsecured creditors. The Bank’s counsel 10 further explained that the auctioneer hired by Trustee had the 11 expertise to sell the firearms in a lawful manner which caused it 12 to agree to release its lien on fifty percent of the proceeds. 13 The bankruptcy court responded: “I have no problem if your client 14 wants to waive its security, and the trustee can liquidate it in 15 the ordinary course. I just have a problem with the sharing 16 arrangement.” The court opined that “arrangements like this are 17 dangerous because they can lead to improper activity.” The court 18 concluded: “So in this particular case I do not believe that the 19 benefits to the estate outweigh my concerns for the proper role 20 of the trustee and the bankruptcy system.” On May 15, 2013, the 21 bankruptcy court entered the order denying approval of the 22 stipulation. 23 Trustee moved for reconsideration. Trustee argued that 24 there was nothing in the bankruptcy code which prevented her from 25 2 Charles Duck is a former bankruptcy trustee who was 26 convicted for embezzling more than $1.9 million from various bankruptcy estates in late 1989. See Dickinson v. Duck 27 (In re Duck), 122 B.R. 403, 404 (Bankr. N.D. Cal. 1990). The bankruptcy court made clear that it was not equating Ms. Green 28 with Mr. Duck.

- 4 - 1 entering into agreements with secured creditors or that stated a 2 chapter 7 trustee’s proper role was to liquidate only unsecured 3 assets. Trustee further asserted that there was nothing in the 4 agreement between her and the Bank which suggested the parties 5 were acting in an improper manner. Trustee noted that § 506(c) 6 provided authority that administrative expenses could be paid 7 from the sale of secured assets even if there was no benefit to 8 unsecured creditors and when the secured creditor caused or 9 consented to the expense. See Compton Impressions, Ltd. v. Queen 10 City Bank N.A. (In re Compton Impressions), 217 F.3d 1256 (9th 11 Cir. 2000). 12 On June 14, 2013, the bankruptcy court heard the matter and 13 took it under advisement. Two days later, the bankruptcy court 14 issued its Memorandum of Decision and denied Trustee’s motion for 15 reconsideration. The bankruptcy court opined that arrangements 16 between trustees and secured creditors raised a presumption of 17 impropriety and found that Trustee had not rebutted that 18 presumption. On June 17, 2013, the court entered the order 19 denying Trustee’s motion for reconsideration. Trustee timely 20 appealed. 21 II. JURISDICTION 22 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 23 §§ 1334 and 157(b)(2)(A), (N) and (O). We have jurisdiction 24 under 28 U.S.C. § 158. 25 III. ISSUE 26 Whether the bankruptcy court abused its discretion by 27 denying approval of the stipulation between Trustee and the Bank 28 which contemplated a sale of the Bank’s fully encumbered property

- 5 - 1 in exchange for a carve out from the lien proceeds to the 2 bankruptcy estate. 3 IV. STANDARD OF REVIEW 4 The bankruptcy court’s decision denying approval of the 5 stipulation between Trustee and the Bank is reviewed for abuse of 6 discretion. A & A Sign Co. v. Maughan, 419 F.2d 1152, 1155 (9th 7 Cir. 1969). A bankruptcy court abuses its discretion when it 8 applies the incorrect legal rule or its application of the 9 correct legal rule is “(1) illogical, (2) implausible, or 10 (3) without support in inferences that may be drawn from the 11 facts in the record.” United States v. Loew, 593 F.3d 1136, 1139 12 (9th Cir. 2010). 13 V. DISCUSSION 14 A. The General Rule Is That The Sale Of Fully Encumbered Property Is Prohibited. 15 16 We begin with an overview of the chapter 7 trustee’s duties 17 under § 704 and his or her power to sell under § 363. Under 18 § 704(a)(1), a chapter 7 trustee has the duty to “collect and 19 reduce to money the property of the estate for which such trustee 20 serves . . . .” To fulfill this duty, the trustee’s “primary job 21 is to marshal and sell the assets so that those assets can be 22 distributed to the estate’s creditors.” U.S. Tr. v. Joseph (In 23 re Joseph), 208 B.R. 55, 60 (9th Cir. BAP 1997). Indeed, a core 24 power of a bankruptcy trustee under § 363(b) is the right to sell 25 “property of the estate” for the benefit of a debtor’s creditors. 26 See § 363(b)(1) (“The trustee, after notice and a hearing, may 27 use, sell, or lease, other than in the ordinary course of 28 business, property of the estate. . . .”). Under § 363(f)(2), a

- 6 - 1 bankruptcy trustee may sell property of the estate free and clear 2 of a lien or other interest where the holder of the lien or 3 interest consents. 4 It is universally recognized, however, that the sale of a 5 fully encumbered asset is generally prohibited. Carey v. Pauline 6 (In re Pauline), 119 B.R. 727, 728 (9th Cir. BAP 1990); In re 7 Scimeca Found., Inc., 497 B.R. 753, 781 (Bankr. E.D. Pa. 2013) 8 (“It is generally recognized that a chapter 7 trustee should not 9 liquidate fully encumbered assets, for such action yields no 10 benefit to unsecured creditors.”) (citing Morgan v. K.C. Mach. & 11 Tool Co. (In re K.C. Mach. & Tool Co.), 816 F.2d 238, 245–46 (6th 12 Cir.1987)); In re Covington, 368 B.R. 38, 41 (Bankr. E.D. Cal. 13 2006) (“[W]hen an asset is fully encumbered by a lien, it is 14 considered improper for a chapter 7 trustee to liquidate the 15 asset.”); In re Feinstein Family P’ship, 247 B.R. 502, 507 16 (Bankr. M.D. Fla. 2000) (“Clearly, the Code never contemplated 17 that a Chapter 7 trustee should act as a liquidating agent for 18 secured creditors who should liquidate their own collateral.”); 19 In re Preston Lumber Corp., 199 B.R. 415, 416 (Bankr. N.D. Cal. 20 1996) (actual conflict of interest arises when the trustee sees 21 he can make more money for himself by liquidating collateral for 22 a secured creditor than he can by asserting a claim against the 23 secured creditor on behalf of the estate); In re Tobin, 202 B.R. 24 339, 340 (Bankr. D.R.I. 1996) (“The mission of the Chapter 7 25 trustee is also to enhance the debtor’s estate for the benefit of 26 unsecured creditors.”). 27 The prohibition against the sale of fully encumbered 28 property is also embedded in the official Handbook for Chapter 7

- 7 - 1 Trustees in several places: 2 Generally, a trustee should not sell property subject to a security interest unless the sale generates funds 3 for the benefit of unsecured creditors. A secured creditor can protect its own interests in the 4 collateral subject to the security interest. 5 U.S. DOJ Exec. Office for U.S. Trs., Handbook for Chapter 7 6 Trustees at 4–16 (2012) (hereinafter, Handbook). The Handbook 7 further provides: 8 A chapter 7 case must be administered to maximize and expedite dividends to creditors. A trustee shall not 9 administer an estate or an asset in an estate where the proceeds of liquidation will primarily benefit the 10 trustee or the professionals, or unduly delay the resolution of the case. The trustee must be guided by 11 this fundamental principle when acting as trustee. Accordingly, the trustee must consider whether 12 sufficient funds will be generated to make a meaningful distribution to unsecured creditors, including 13 unsecured priority creditors, before administering a case as an asset case. 28 U.S.C. § 586. 14 Id. at 4-1. Finally, 15 [i]n asset cases, when the property is fully encumbered 16 and of nominal value to the estate, the trustee must immediately abandon the asset and contact the secured 17 creditor immediately so that the secured creditor can obtain insurance or otherwise protect its own interest 18 in the property. [§§] 554, 704. 19 Id. at 4-7. Taken together, the above-referenced authorities 20 stand for the proposition that sales of fully encumbered assets 21 are generally improper. In that instance, the trustee’s proper 22 function is to abandon the property, not administer it, because 23 the sale would yield no benefit to unsecured creditors. 24 In fact, “‘the principle of abandonment was developed . . . 25 to protect the bankruptcy estate from the various costs and 26 burdens of having to administer property which could not 27 conceivably benefit unsecured creditors of the estate.’” 28 In re Pauline, 119 B.R. at 728; see also In re K.C. Mach. & Tool

- 8 - 1 Co., 816 F.2d at 246 (“[I]n enacting § 554, Congress was aware of 2 the claim that formerly some trustees took burdensome or 3 valueless property into the estate and sold it in order to 4 increase their commissions.”). However, “[a]bandonment should 5 not be ordered where the benefit of administering the asset 6 exceeds the cost of doing so. . . . Absent an attempt by the 7 trustee to churn property worthless to the estate just to 8 increase fees, abandonment should very rarely be ordered.” 9 In re K.C. Mach. & Tool Co., 816 F.2d at 246; see also Vu v. 10 Kendall (In re Vu), 245 B.R. 644, 647–48 (9th Cir. BAP 2000). 11 B. There Is No Per Se Rule That Bans Carve-Out Agreements. 12 Despite the general rule prohibiting the sale of fully 13 encumbered property, chapter 7 trustees may seek to justify the 14 sale through a negotiated carve-out agreement with the secured 15 creditor. A carve-out agreement is generally understood to be 16 “an agreement by a party secured by all or some of the assets of 17 the estate to allow some portion of its lien proceeds to be paid 18 to others, i.e., to carve out its lien position.” Costa v. 19 Robotic Vision Sys., Inc. (In re Robotic Vision Sys., Inc.), 20 367 B.R. 232, 240 n.23 (1st Cir. BAP 2007); see also In re 21 Besset, 2012 WL 6554706, at *5 n.5 (9th Cir. BAP 2012). There is 22 no per se rule that bans this type of contractual arrangement: 23 “[C]reditors are generally free to do whatever they wish with the 24 bankruptcy dividends they receive, including to share them with 25 other creditors.” Official Unsecured Creditors Comm. v. Stern 26 27 28

- 9 - 1 (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313 (1st Cir. 1992).3 2 The Handbook also provides some guidance on carve-out 3 agreements in the context of a sale: 4 A trustee may sell assets only if the sale will result in a meaningful distribution to creditors. In 5 evaluating whether an asset has equity, the trustee must determine whether there are valid liens against 6 the asset and whether the value of the asset exceeds the liens. The trustee may seek a ‘carve-out’ from a 7 secured creditor and sell the property at issue if the ‘carve-out’ will result in a meaningful distribution to 8 creditors. . . . If the sale will not result in a meaningful distribution to creditors, the trustee must 9 abandon the asset. 10 Handbook at 4–14. 11 C. The Genesis Of The Bankruptcy Court’s “Presumption Of Impropriety” Is Based On Past Abuses Of Carve-Out 12 Agreements Such As This. 13 Although there is no per se ban on carve-out agreements, 14 agreements such as the one before us have been reviewed under a 15 standard of heightened scrutiny due to past abuses. One court 16 noted: 17 It is not rare that trustees of Chapter 7 estates are approached by secured creditors who seek the trustee’s 18 help to liquidate fully encumbered collateral. They realize that before the trustee is willing to go along 19 with the proposition the secured creditor must put a little sweetener in the deal by agreeing to pay 20 sufficient sums to compensate the trustee and to pay other costs of administration. The more sophisticated 21 trustee may demand that the secured creditor throw in a pittance to pay a meaningless dividend to unsecured 22 creditors, making the arrangement more palatable to the court. The proposition is very attractive from the 23 secured creditor’s point of view and economically sound because it may stave off a possible attempt by the 24 trustee to seek to surcharge the collateral and, most importantly, save the potentially expensive cost of a 25 foreclosure suit. The offered deal is also attractive to the trustee because it assures that he or she will 26 27 3 The SPM court also held that the bankruptcy court had no authority to control how the secured creditor disposed of the 28 proceeds once it received them. Id. at 1313.

- 10 - 1 earn a commission in an otherwise no asset case and may seek a commission based on the gross sales price and 2 not on the net distributed to parties of interest. 3 In re Feinstein Family P’ship, 247 B.R. at 507; see also 4 In re Pauline, 119 B.R. at 728 (“Some of the early cases 5 condemned this particular practice [,] . . . and decried the 6 practice of selling burdensome or valueless property simply to 7 obtain a fund for their own administrative expenses.”) (citing 8 Standard Brass Corp. v. Farmers Nat’l Bank, 388 F.2d 86 (7th Cir. 9 1967); Miller v. Klein (In re Miller), 95 F.2d 441 (7th Cir. 10 1938); and Seaboard Nat’l Bank v. Rogers Milk Prods. Co., 21 F.2d 11 414 (2d Cir. 1927)). Against this historical backdrop, coupled 12 with the bankruptcy court’s first-hand experience with Mr. Duck, 13 there is support for the bankruptcy court’s conclusion that a 14 presumption of impropriety arises under these circumstances. 15 We do not agree with Trustee’s argument that the literal 16 text of §§ 704(a)(1), 506(c), and 363(f)(2) “compels the 17 conclusion that the ‘presumption of impropriety’ suggested by the 18 bankruptcy court . . . was error.” The issue presented in this 19 appeal is not simply a matter of interpreting any of these 20 statutes where the “plain language” applies. If this were the 21 case, we could ignore the well-settled case law, including our 22 own, that espouses the proposition that a sale of fully 23 encumbered property is generally inappropriate because there is 24 no benefit to unsecured creditors. We would also undermine the 25 guidance provided to chapter 7 trustees in the Handbook, which 26 Trustee fails even to mention in this appeal. 27 Further, in our view, § 506(c) does not apply under these 28 circumstances. Substantively, the elements that Trustee must

- 11 - 1 prove for a § 506(c) claim are different from those needed to 2 justify a sale of fully encumbered property in connection with a 3 carve-out agreement. See In re Cascade Hydraulics and Util. 4 Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987) (under § 506(c) 5 the trustee must show that the expenses incurred were reasonable, 6 necessary, and beneficial to the secured creditor and to satisfy 7 the benefit part of the test, the trustee must “establish in 8 quantifiable terms that [she] expended funds directly to protect 9 and preserve the collateral.”); compare In re Bunn-Rodemann, 10 491 B.R. 132 (Bankr. E.D. Cal. 2013) (finding “incentive payment” 11 arrangement between secured creditor and trustee for sale of 12 fully encumbered real property “consistent” with § 506(c)). 13 Of course, the presumption of impropriety is a rebuttable 14 one. To rebut the presumption, the case law directs the 15 following inquiry: Has the trustee fulfilled his or her basic 16 duties? Is there a benefit to the estate; i.e., prospects for a 17 meaningful distribution to unsecured creditors? Have the terms 18 of the carve-out agreement been fully disclosed to the bankruptcy 19 court? If the answer to these questions is in the affirmative, 20 then the presumption of impropriety can be overcome, as it is in 21 this case. 22 First, the record shows that Trustee fulfilled her basic 23 duties. She examined the Bank’s asserted security interest 24 against the firearms and found its lien valid. See Handbook at 25 4-5. She then informed the Bank where the firearms were so it 26 could retrieve its collateral. See Handbook at 4-7. The Bank 27 subsequently approached Trustee to conduct the sale. Second, 28 Trustee fully disclosed the terms of the carve-out agreement to

- 12 - 1 the bankruptcy court and the creditor body, which is contrary to 2 any inference of a secret side deal between Trustee and the Bank. 3 Next, Trustee demonstrated that the lien proceeds would provide a 4 benefit to the unsecured creditors. Due to the benefit, as more 5 fully discussed below, we cannot infer that Trustee was 6 administering the asset for primarily her own benefit. See 7 Handbook at 4-1. In short, none of these undisputed facts 8 suggest any type of abuse by Trustee. 9 The undisputed facts also show that the carve out from 10 one-half of the lien proceeds takes this case out of the 11 generally recognized rule that abandonment of fully encumbered 12 property is appropriate because no unsecured creditor could 13 benefit from a sale. At first blush, $5,000 from the lien 14 proceeds does not seem like much of a benefit. However, even if 15 the net recovery (i.e., recovery after all costs associated with 16 obtaining the recovery) is a small dollar amount, it is still a 17 benefit to the unsecured creditors in this case. Here, Trustee 18 previously sold an unencumbered liquor license for approximately 19 $103,000 and added to that amount will be the proceeds from the 20 carve out.4 Accordingly, the proceeds from the sale of the 21 firearms will contribute to what already appears to be a 22 “meaningful distribution” to unsecured creditors. 23 Under these circumstances, the Bank’s agreement to the carve 24 out essentially operates as an assignment of equity in the 25 firearms for the benefit of the unsecured creditors, thus 26 27 4 We take judicial notice of Dkt. No. 56 in the underlying bankruptcy case pursuant to Atwood v. Chase Manhattan Mortg. Co. 28 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

- 13 - 1 justifying Trustee’s action in selling the fully encumbered 2 property rather than abandoning it. “Absent an attempt by the 3 trustee to churn property worthless to the estate just to 4 increase fees, abandonment should very rarely be ordered.” 5 In re Vu, 245 B.R. at 647–48. 6 In sum, the bankruptcy court’s conclusion that Trustee 7 failed to rebut the presumption of impropriety is illogical and 8 without support in inferences that may be drawn from the facts in 9 the record. See Loew, 593 F.3d at 1139. The record demonstrates 10 that Trustee fulfilled her basic duties, unsecured creditors will 11 benefit, and the terms of the carve-out agreement were fully 12 disclosed. Because the presumption of impropriety was rebutted, 13 the bankruptcy court abused its discretion in denying Trustee’s 14 motion seeking approval of the stipulation. 15 D. The Case Law Cited By The Bankruptcy Court In Support Of Its Decision Is Distinguishable. 16 17 The bankruptcy court cited In re Pauline, In re Preston 18 Lumber, and In re Covington in support of its decision denying 19 approval of the stipulation. Collectively, these cases stand for 20 the proposition that overencumbered property generally should be 21 abandoned, not administered, because there is no benefit to 22 unsecured creditors. As noted above, most courts recognize this 23 general rule. Furthermore, in each case, the court found the 24 trustee’s actions inappropriate under the circumstances of the 25 case. However, none of these cases support the bankruptcy 26 court’s decision in this case. 27 In Pauline, the chapter 7 trustee decided to abandon the 28 debtor’s home and then reversed his decision, stating his

- 14 - 1 intention to sell it. The debtor moved to compel the trustee to 2 abandon the property. After considering the motion, the 3 bankruptcy court required the trustee to find a buyer for the 4 debtor’s home within 60 days at a price sufficient to satisfy all 5 liens on the home plus the allowed amount of the debtor’s 6 homestead exemption, in the absence of which the debtor’s home 7 would be deemed abandoned. In re Pauline, 119 B.R. at 728. On 8 appeal, the Panel affirmed the bankruptcy court’s decision in 9 part, because (1) the IRS did not ask the trustee to sell the 10 property for the IRS’ benefit, and (2) the trustee apparently had 11 “engaged in . . . conduct designed to enhance the size of his 12 bank account rather than the size of the funds available for the 13 debtor’s unsecured creditors . . . .” Id. at 728. Unlike in 14 Pauline, the Bank here supports Trustee’s sale due to the 15 auctioneer’s expertise in selling the firearms in a lawful manner 16 and, as discussed above, a sale will benefit unsecured creditors, 17 not just increase the fees paid to Trustee.5 18 The holding in In re Preston Lumber Corp. also does not 19 drive the outcome in this case. There, the secured creditor, 20 Sumitomo Bank and the debtor’s industrial lessor had a dispute as 21 to the priority of their lien rights in fully encumbered sawmill 22 equipment and rolling stock. Sumitomo convinced the chapter 7 23 trustee to sell the assets free and clear of liens, in exchange 24 for a pre-fixed commission for the trustee and $35,000 fee for 25 26 5 Whether or not Trustee will be awarded fees from the eventual sale of the firearms was not at issue before the 27 bankruptcy court nor is it relevant to our analysis in this appeal. The bankruptcy court may consider the appropriate fee at 28 a hearing on compensation.

- 15 - 1 the trustee’s attorney. The bankruptcy court found the 2 arrangement “highly improper” on the grounds that (1) there was 3 no resulting benefit to the estate and (2) the trustee and his 4 counsel were motivated by personal gain. In re Preston Lumber 5 Corp., 199 B.R. at 416-17. The case is distinguishable on its 6 face because, as discussed above, there is no evidence here that 7 Trustee was motivated by personal gain and there likely is a 8 resulting benefit to unsecured creditors arising out of the sale. 9 Lastly, In re Covington, 368 B.R. 38, is inapposite. 10 Because the debtor in Covington owed a domestic support 11 obligation, the trustee argued that § 522(c)(1) required the 12 disallowance of the debtor’s exemption in a bank deposit and an 13 automobile to permit those assets to be liquidated and the 14 proceeds paid to the holder of the domestic support obligation 15 claim. The bankruptcy court rejected this argument, noting that 16 “§ 522(c)(1) does not provide for the disallowance of an 17 exemption. Rather, it provides that property exempted by the 18 debtor is nonetheless liable for a domestic support obligation. 19 Disallowance of the exemption is not a predicate to the 20 enforcement of a domestic support obligation.” Id. at 40–41. 21 The court also denied the trustee’s request to sell the assets 22 because (1) the property was removed from the bankruptcy estate 23 since it was exempt and thus there was no property of the estate 24 to administer and (2) although the assets were not fully 25 encumbered, the trustee sought to sell the assets for the benefit 26 of one creditor rather than for unsecured creditors generally. 27 Id. at 41. “Given that the Madera County Child Support 28 Department is collecting the claim for the benefit of the claim

- 16 - 1 holder, it is clear that the assistance of the trustee, which 2 would come at a price, is unnecessary. By enforcing the domestic 3 support obligation in state court, the trustee's administrative 4 expenses will be avoided.” Id. Unlike Covington, the asset here 5 is not exempt and Trustee is liquidating the asset for the 6 general unsecured creditor body. 7 VI. CONCLUSION 8 For the reasons stated, we REVERSE and REMAND this matter 9 with instructions to the bankruptcy court to enter an order 10 granting Trustee’s motion. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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