The opinion of the court was delivered by: POLLACK
This is a petition to review a sale made on order of a Referee in Bankruptcy.
Prior to adjudication as a bankrupt and during proceedings pending against it under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., Zsa Zsa Limited (the debtor and presently the bankrupt) made a settlement with certain of its secured creditors, which recognized the security interest of those creditors in property of the debtor. The settlement was approved by the Referee administering the Chapter XI proceedings. Following this approval, the creditors sold the collateral at a judicially approved sale intended to liquidate the secured debt. That sale was unsuccessfully attacked before the Referee by a trustee in bankruptcy who was appointed after the settlement with the creditors but before the sale. The trustee contended that the sale was improperly conducted.
For the reasons shown hereafter, the objections to the sale are overruled and the order approving it is confirmed.
The settlement between Zsa Zsa and its secured creditors during the Chapter XI proceedings came before Judge Tenney on a petition to review the same. The settlement and the interests which emerged therefrom were upheld on the review. Judge Tenney traced the background as follows.
Zsa Zsa, Ltd. was in the cosmetics and allied products business. On September 23, 1970, it petitioned for a Chapter XI arrangement. First National City Bank (FNCB), at that time, held a security interest obtained July 23, 1970 covering all the personal property, inventory, and accounts receivable of the debtor; this interest secured advances to be made by FNCB to the debtor of the lesser of $450,000 or of an amount equalling 70% of the debtor's accounts receivable, taken at face value. Elmer and Donald Slavik and George Millay ("Slavik and Millay" hereinafter) [the present respondents], who controlled the debtor, were guarantors of this loan; however, a collateral agreement was entered simultaneously between the debtor and Slavik and Millay, under which the debtor was to indemnify Slavik and Millay for any payments made under their guarantee.
When the agreements were made, the debtor had already borrowed $65,000 from FNCB; in the summer of 1970, debtor borrowed an additional $225,000.
In October, 1970, Slavik and Millay entered into an agreement with McBrides Industries ("McBrides"), under which McBrides was to assume management control of the debtor; this agreement looked towards a merger between Zsa Zsa and McBrides, following the former's discharge from Chapter XI.
In December, 1970, FNCB went against Slavik and Millay, as guarantors, when the debtor failed to comply with the loan agreement. Slavik and Millay paid a remaining balance of $253,981.86, plus interest of $5,795. FNCB simultaneously assigned debtor's notes and FNCB's security interest to Slavik and Millay.
On June 11, 1971, Slavik and Millay moved in the arrangement proceedings for a foreclosure on the debtor's assets, pursuant to the assigned security interest. The debtor and the secured creditors agreed to a settlement which the referee approved on October 28, 1971. A reopening sought by a general creditor was denied and the settlement was reaffirmed on December 3, 1971. In the settlement Zsa Zsa recognized the security interest of Slavik and Millay in the amount of $300,000. As previously stated, the settlement was upheld by Judge Tenney on a review of the Referee's approval. A Trustee in bankruptcy was appointed on February 2, 1972 when Zsa Zsa was adjudicated a bankrupt. While the petition for review of the settlement made during the Chapter XI proceedings was pending, the sale now in question was made, viz., in March, 1972.
The validity of the sale in question depends on whether the facts and circumstances of the sale establish that it was held in a commercially reasonable manner. N.Y.U.C.C. § 9-504(3). A review thereof shows that the instant sale satisfies this standard.
The conditions for the sale were molded in a series of communications between the secured creditors' counsel and the trustee and in an adversary hearing held before the Referee on March 6, 1972. Originally, the creditors had planned a private sale of the collateral upon written bids at the offices of their counsel. However, creditors' counsel, in order to minimize ...