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In re Russo

May 20, 1985


Appeal from order of Eugene H. Nickerson, Judge, affirming order of Bankruptcy Judge Manuel J. Price setting aside a sale at public auction on the ground that the purchaser, as a former trustee of the bankrupt's estate, was disqualified from bidding and acquiring an asset of the estate even though he no longer was a trustee of the estate. HELD, that former fiduciary status of the purchaser was not a per se disqualification from acquiring an asset of the estate after termination of his trusteeship. Reversed.

Kaufman and Van Graafeiland, Circuit Judges, and Pollack, Senior District Judge.*fn*

Author: Pollack

POLLACK, Senior District Judge:

The history of this controversy is somewhat unusual.

Reuben E. Gross obtained a judgment on October 24, 1977 against Lucio F. Russo for attorney's fees arising from services he had rendered to Russo in a defamation case. Prior to the time that the judgment was obtained, but found to be in contemplation thereof, Russo and his wife transferred and conveyed all their rights, title and interest in a piece of real estate on Staten Island, which they owned as tenants by the entirety, to Mrs. Russo alone. Avery Gross, acting as attorney for his father, Reuben, was unsuccessful in subjecting the Staten Island property to the judgment because of the transfer of title mentioned. Gross commenced proceedings in state court to set aside the conveyance of the property as fraudulent, but those proceedings were abruptly halted and stayed as a result of the filing of a voluntary petition in bankruptcy by Russo on January 5, 1978.

On January 19, 1978, Reuben E. Gross filed for his proof of claim as an unsecured creditor in the bankruptcy, and at the first meeting of creditors, at which he was the only creditor present, he elected his son, Avery, to serve as trustee.

Later in 1978, Reuben E. Gross died. His will provided that his son Avery, serve as primary executor of his estate and named him as a direct and residuary legatee. One of the assets of the Gross Estate, was, of course, the judgment of the Gross against Russo.

As Russo's trustee in bankruptcy, Avery Gross instituted proceedings to set aside the transfer of the Staten Island realty to Mrs. Russo, and was successful in obtaining a ruling from the Bankruptcy Court that the conveyance was "null and void as against the trustee," and that the interest therefore had passed to the bankrupt's estate. The Bankruptcy Judge ordered that Mrs. Russo reconvey the Staten Island property to Lucio F. Russo and herself and that the tenancy by the entirety be thus restored. The deed was ultimately delivered in or about August 1981.

In the meantime, on June 15, 1981, Russo had initiated a proceeding in Bankruptcy Court demanding that Gross be removed as trustee because of his conflicting interests -- as executor of his father's estate, as principal residuary legatee of that estate, and as trustee of Russo in bankruptcy. As a result, Gross was removed as bankruptcy trustee. John S. Pereira was appointed on March 25 1982 as successor trustee in bankruptcy to administer Russo's estate.

Thereafter, Mrs. Russo offered Pereira $2,500 for the survivorship interest in the Staten Island property. Pereira applied to the court to conduct a hearing on the offer to see if higher or better offers might be obtained. Notice of sale was sent to all creditors, and a sale was conducted by the Bankruptcy Judge at which only Mrs. Russo and Avery Gross were present to bid. During that proceeding, Mrs. Russo's attorney urged that Avery Gross be disqualified from bidding since he had previously been the trustee who had been removed for cause. The Judge allowed the bidding to proceed, but granted the request to maintain the status quo with regard to any transfer of the realty interest and granted permission to make a motion to vacate the sale and to declare Gross disqualified from bidding for the property.

The highest bid, of $27,500 was made by Gross. Mrs. Russo made the next highest bid, of $27,000. Gross became the purchaser and made the deposit on account of the price. An order was signed on September 17, 1982 by Conrad B. Duberstein, Bankruptcy Judge, acting for Judge Price, confirming the sale to Avery Gross.

On September 10, 1982, Mrs. Russo had made a motion returnable before the Bankruptcy Judge to declare the sale to Gross void; to approve her offer to buy the interest for $2,500 or to declare Avery Gross and the Gross Estate disqualified from bidding at any subsequent auction; and to stay any transfer of title pending a decision on the motion. At the hearing on the motion to set aside the sale, Gross testified that he had bid for the property interest on behalf of his father's estate. The trustee took no position on Gross's qualification to bid, but contended that if Gross were disqualified from bidding on the property as a matter of law, the Court should approve the bid made on behalf of Mrs. Russo at the auction, in the sum of $27,000.

The Bankruptcy Judge phrased the matter before him as follows:

"The only issue to be decided here is whether Gross should be disqualified for having been the former trustee in ...

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