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Court Grants In Part Trustee's Motion To Enjoin Auction Sale Of Equipment Allegedly Belonging To The Debtors

Shubert v. Premier Paper Prods, LLC (In re American Tissue Inc.), Case No. 01-10370 (KG), Adv. No. 06-50929 (KG) (Bankr. D. Del. Dec. 4, 2006) (Judge Kevin Gross)

This dispute concerned numerous items of machinery and equipment which the Chapter 7 Trustee alleged belonged to the debtors but were in possession of the defendants. In this ruling, the Bankruptcy Court extended an ex parte temporary restraining order into a preliminary injunction, but with added limitations based on the evidence. The court allowed the planned auction to go forward, but escrowed the sale proceeds from the items to which it was shown the debtors might have title.

In the original motion filed by the Trustee, Trustee sought to enjoin a planned auction from taking place at all, and sought a replevin of certain equipment and machinery. Two of the defendants maintained that the machinery and equipment belonged to them, while the third defendant was the auctioneer hired by the first two defendants to set up the auction of the property. The auctioneer had advanced $300,000 in expenses for purposes of setting up the auction sale. The principal of the two defendants claiming ownership of the property was the son of the former CEO of the debtors. After the conversion of the case from the original Chapter 11 to a Chapter 7, the former CEO was convicted of criminal fraud.

The Court allowed the auction to proceed and ruled that, as to the items of property which the Trustee was likely to prove were owned by the debtor, the proceeds from the sale of those items should be placed in escrow.

After evidence was presented, the parties agreed that one “bucket” of auction items was not the subject of the complaint at all, and the sale of those items at auction was not contested. As to a second “bucket” of items of equipment and machinery, the parties ultimately agreed that the items were the subject of the complaint; that title to those items was less than certain; and that those items could be auctioned, provided that minimum reserve selling prices be set with the Trustee’s approval and the sale proceeds placed in escrow. As to a third “bucket,” the auction could go forward, without input from the Trustee on minimum prices, and the proceeds placed in escrow.

One item which the Trustee was seeking to enjoin from the sale was an item with a serial number. The Court found that that item had been sold, after the bankruptcy filing, in a sale approved by the bankruptcy court, and the Trustee did not present adequate grounds that the sale should be invalidated. As a result, the auction of that item could go forward and its proceeds could be released to the defendants.