In re Stemwedel

          OPINION AND ORDER AFFIRMING BANKRUPTCY COURT

          Marcia S. Krieger, Senior United States District Judge

         THIS MATTER comes before the Court for determination of the Appellant’s (“Mr. Stemwedel”) appeal from the Bankruptcy Court’s September 27, 2018 Order Granting Motion for Determination Regarding Disposition of Estate Asset. This Court has considered Mr. Stemwedel’s opening brief (# 19), the Appellee’s (“Peak”) response brief (# 23), and Mr. Stemwedel’s reply (# 24), as well as the contents of the record in the Bankruptcy Court (# 7).

         FACTS

         This appeal arises from a convoluted combination of a sale of property of a Mr. Stemwedel’s bankruptcy estate and an arbitration arising out of a state court action.

         Prior to 2011, Mr. Stemwedel served as corporate counsel to Peak, a real estate developer. Mr. Stemwedel’s compensation was payable on a partially-contingent basis, 15% of the net fees that Peak received upon the completion of certain projects. In or about 2011,Mr. Stemwedel was terminated by Peak, but several projects that he had been involved with remained pending. Thus, he expected to receive compensation as those remaining projects were completed.

         In 2011, Mr. Stemwedel^[1] filed a voluntary Chapter 7 petition. He claimed a 75% wage exemption for the yet-to-be-paid contingent fees. This left the Estate with ownership of the remaining 25% of the unpaid fees (“the 25% interest”).

         In July 2014, Mr. Stemwedel offered to buy the Estate’s 25% interest in the unpaid compensation for roughly $11,000. The Trustee moved for approval of that sale, and Peak responded with a counter-offer of roughly $16,000. The Trustee then sent creditors a notice of a sale that described the 25% interest to be sold and bidding procedures to be used but did not expressly state that the sale would be free and clear of liens. By November 2014, no alternative bids had been received, and consequently the Trustee sold the 25% interest to Peak for $16,000. Peak and the Trustee closed on the sale, and the Trustee moved for its approval. For unknown reasons, the proposed order submitted by the Trustee and issued by the Bankruptcy Court stated that the sale was free and clear of liens and encumbrances. No. immediate objection was raised to the sale or the Bankruptcy Court’s Order.

         Several months later, Mr. Stemwedel asked the Bankruptcy Court to correct the sale order as to the sale being free and clear of encumbrances. In the intervening time, Mr. Stemwedel had commenced an action against Peak in state court, seeking to collect the compensation still owed to him under the contingent fee arrangement. Peak had apparently contended that Mr. Stemwedel’s claims were subject to certain offsets of payments that Peak had advanced to him, and the parties disagreed as to how – or even if – those offsets would affect the 25% interest that Peak had acquired from the bankruptcy estate. In June 2015, after hearing argument from the parties, the Bankruptcy Court found that “free and clear” language was not included in the notice, and thus its inclusion in the Order was improper. The Bankruptcy Court indicated an intention “to rescind the sale order on the basis of this and let the Trustee re-auction it.”

         However, it does not appear that Peak, Mr. Stemwedel, or the Trustee took any further action to do so. Instead, the Trustee filed her Final Accounting that showed that the Estate had been fully administered. The accounting reflected, among other things, that the $16,000 paid by Peak for the 25% interest had been fully distributed to creditors. Neither Peak nor Mr. Stemwedel objected to the Trustee’s report, and the Bankruptcy Court closed the case.^[2]

         Mr. Stemwedel’s state court action continued, and in 2017, the parties agreed to arbitration. The arbitration panel determined that Mr. Stemwedel was entitled to a total of $1,219,297 in unpaid compensation from Peak. The parties had requested that the arbitration panel also resolve the dispute over the 25% interest – Peak had argued that the arbitrator should reduce the amount Peak owed to Mr. Stemwedel by 25% to reflect Peak’s purchase of the 25% interest in the Bankruptcy Court. The arbitration panel refused to address the 25% interest, deferring to the Bankruptcy Court. It stated: “[b]ecause the Bankruptcy Court vacated its earlier order which approved this sale to Peak, the Panel holds that Stemwedel is entitled to the full [contingent fee]”; “[i]f Peak believes its purchase of Stemwedel’s interest survives [the Bankruptcy Court’s] Order vacating the sale, then Peak must take this issue up with the Trustee in Bankruptcy Court.”

         Peak then returned to Bankruptcy Court requesting clarification of the ownership of the 25% interest – i.e. whether that share was owned by Peak, Mr. Stemwedel, or the Trustee, and whether Peak is entitled to a refund of the $!6,000 it initially paid to acquire that interest. After reopening the case and hearing argument, on September 27, 2018, the Bankruptcy Court issued as thorough and highly detailed decision.

         The Bankruptcy Court ruled that the Trustee had validly sold the 25% interest to Peak. Specifically, the Court found: (i) when an asset sale occurs without proper notice, the Bankruptcy Court has a variety of options as to how to address the issue^[3]; (ii) the Court’s goal in setting aside the sale in 2015 was “to protect any party whose interests might be affected by a ‘free and clear’ sale” that was not actually free and clear; (iii) that the Trustee had received Peak’s $16,000 payment for the 25% interest and had distributed that sum to Mr. Stemwedel’s creditors and that it would be “inequitable, if not practically impossible” to retrieve those sums from the creditors; (v) that neither party had timely objected to the Trustee’s failure to re-notice the 25% interest for sale in 2015; and (vi) that, ultimately, “the most equitable thing the Court can do is leave the parties were they are” – that is, with the 25% interest in the hands of Peak. The Court also addressed the effect of the arbitration award, rejecting Mr. Stemwedel’s argument that the arbitration panel’s finding that Peak’s purchase of the 25% interest was vacated by the Bankruptcy Court should be given collateral estoppel effect. After expressing some doubt as to whether the arbitrator had the jurisdiction to construe its order, the Court ultimately held that the doctrine of collateral estoppel did not apply in any event because the arbitration finding as to the effectiveness of the sale of the 25% interest was, tentative, not final.

         Mr. Stemwedel appeals from the Bankruptcy Court’s September 2018 Order. Mr. Stemwedel raises two issues: (i) did the Bankruptcy Court err in upholding the sale of the 25% interest to Peak because the parties’ misunderstandings about what was being sold in 2014 resulted in a distorted bidding process; and (ii) did the Bankruptcy Court err in not giving the arbitrator’s ruling collateral estoppel effect.

         A. ...