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United States Court of Appeals for the First Circuit
July 2, 1998, Decided
[*19] ROSENN, Circuit Judge. This appeal, arising out of a unique set of facts, raises an important question pertaining to a bankruptcy court's discretion in authorizing a trustee in a Chapter 11 reorganization to sell the primary asset of the debtor without first resolving allegations of fraud committed by the prospective purchaser and its principals. The fraud is alleged to have been committed by the purchaser and the debtor's former counsel in the acquisition of a mortgage against the asset. The debtor's asset comprised a group of old mill buildings which the debtor leased to retail, commercial, and light industrial tenants. Because the principals of the debtor, a partnership that filed the petition [**2] for Chapter 11 reorganization, were in prison, the bankruptcy court appointed a trustee for the estate.
The Trustee, who had brought an adversary proceeding with the approval of the debtor, to set aside the mortgage on the property acquired by assignment from the original mortgagee allegedly by prepetition fraud, concluded that it would be in the best interests of the bankrupt estate to accept an offer to purchase the property from the mortgagee and settle the adversary proceeding to set aside the mortgage on it. The bankruptcy court, over the vigorous objection of the debtor, approved the sale and settlement. The debtor timely appealed to the district court which affirmed. The debtor thereupon appealed to this court. We also affirm.
Bruce and Andrew Jeremiah are the partners of the debtor, the Silver Spring Center, a Rhode Island general partnership. The Silver Spring Center (the "Center"), 2 owned a 500,000-square-foot former textile factory complex consisting of approximately 18 buildings located in Providence, Rhode Island. Its business essentially was to lease space in this complex to retail, commercial, and light industrial tenants. The Jeremiahs previously had been tenants [**3] in the Center for 30 years and had owned it for approximately the past 14 years.
In 1988, the Jeremiahs engaged attorney Z. Hershel Smith to represent them in a dispute they were having with the Center's prior mortgagee, the New Bedford Institution for Savings ("The Bank"). Upon Smith's recommendation, the Center filed a Chapter 11 bankruptcy petition. While Smith was representing the Center in the bankruptcy proceedings, it developed that he also was representing some of its creditors. Due to this conflict of interests, his mismanagement of the Center's funds, and a request of the then Chapter 11 trustee, the Jeremiahs discharged Smith. With the assistance of new counsel, they negotiated the dismissal of the reorganization petition in June 1991. Smith has since been disbarred, convicted of fraud and embezzlement of clients' funds, and sentenced to 10 years imprisonment.
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148 F.3d 17 *; 1998 U.S. App. LEXIS 16261 **; Bankr. L. Rep. (CCH) P77,776; 32 Bankr. Ct. Dec. 1075
BRUCE JEREMIAH, ANDREW JEREMIAH, AS GENERAL PARTNERS OF SILVER SPRING CENTER, Plaintiffs, Appellants, v. ANDREW RICHARDSON, R.S.S. REALTY TRUST, INC., ETC., ET AL., Defendants, Appellees.
Prior History: [**1] APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Ronald R. Lagueux, U.S. District Judge.
bankruptcy court, mortgage, adversary proceedings, approve, best interest, proposed sale, real estate tax, credible, liens, good faith purchaser, court's discretion, unsecured creditor, reorganization, prepetition, mortgagee, factors, notice, funds
Bankruptcy Law, Judicial Review, Standards of Review, Abuse of Discretion, Civil Procedure, Appeals, De Novo Review, Administrative Powers, Estate Property Lease, Sale & Use, General Overview, Procedural Matters, Bankruptcy, Conversion & Dismissal, Reorganizations