                                                         FILED
                                                          JUL 11 2014
 1                         NO FO PUBL A IO
                             T R     IC T N
                                                      SUSAN M. SPRAUL, CLERK
 2                                                      U.S. BKCY. APP. PANEL
                                                        OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    NC-13-1318-JuKuD
                                   )
 6   KVN CORPORATION, INC.,        )      Bk. No.    13-10477
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )      M E M O R A N D U M*
     LINDA S. GREEN, Chapter 7     )
 9   Trustee,                      )
                                   )
10                  Appellant.     )
     ______________________________)
11
               Submitted Without Oral Argument on July 11, 2014**
12
                             Filed - July 11, 2014
13
                Appeal from the United States Bankruptcy Court
14                  for the Northern District of California
15        Honorable Alan Jaroslovsky, Bankruptcy Judge, Presiding
                         _________________________
16
     Appearances:     Jean Barnier, Esq., of MacConaghy & Barnier, PLC,
17                    on brief for appellant Linda S. Green, Chapter 7
                      Trustee.
18                          ________________________
19   Before:    JURY, KURTZ, and DUNN, Bankruptcy Judges.
20
21
22
23
24
          *
            This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
26   See 9th Cir. BAP Rule 8013-1.
27        **
            On June 18, 2014, this Panel entered an order determining
     that this appeal was suitable for submission without oral
28   argument.
 1        Linda S. Green, chapter 71 trustee (Trustee) in the
 2   bankruptcy estate of KVN Corporation, Inc. (KVN or debtor), filed
 3   a motion seeking approval of a stipulation between Trustee and
 4   Wilshire State Bank (Bank) which contemplated a sale of the
 5   Bank’s fully encumbered property in exchange for a carve out from
 6   the lien proceeds paid to the bankruptcy estate.     The bankruptcy
 7   court denied the motion and Trustee’s later filed motion for
 8   reconsideration.    This appeal followed.   For the reasons
 9   discussed below, we REVERSE and REMAND this matter with
10   instructions to the bankruptcy court to enter an order granting
11   Trustee’s motion.
12                                 I.   FACTS
13        The essential facts are few and undisputed.     KVN owned a
14   sporting goods store.    KVN was indebted to the Bank under the
15   terms of a note in the original principal sum of $915,000.     The
16   note was secured by KVN’s real property and by substantially all
17   of its business assets.
18        On March 8, 2013, KVN filed its chapter 7 petition and Green
19   was appointed chapter 7 trustee.    In Schedule A, debtor listed
20   inventory including “liquor, gun, ammunition, cleaning kits, and
21   fishing reels” with a value of $28,950.     Debtor failed to reflect
22   the Bank’s security interest in the inventory, but listed the
23   Bank as a secured creditor against its real property in Schedule
24   D.   At the time of the filing, debtor owed the Bank approximately
25   $309,569.   In Schedule F, debtor listed unsecured claims in the
26
          1
            Unless otherwise indicated, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure.

                                     - 2 -
 1   amount of $107,565.   After the filing, Trustee removed rifles and
 2   guns from debtor’s store and placed them in a gun storage locker
 3   at the cost of $25 per day.   Trustee employed an auctioneer to
 4   conduct a public sale of these assets, which would likely bring
 5   $10,000.   After reviewing public records, Trustee learned that
 6   the Bank held a perfected UCC-1 on all of debtor’s inventory,
 7   including the firearms.   Trustee contacted the Bank and informed
 8   it that the firearms had been removed for safekeeping and that
 9   the Bank could retrieve them.
10        In late April 2013, the Bank contacted Trustee and requested
11   her assistance in selling the firearms through the auctioneer she
12   had employed.   The Bank agreed that it would pay for the storage
13   costs and split the net proceeds with the bankruptcy estate.
14   Trustee agreed based on her belief that the transaction would net
15   between $4,200 to $4,400 for the benefit of unsecured creditors.
16   Trustee and the Bank entered into a stipulation setting forth
17   these terms.
18        Trustee subsequently filed a motion seeking approval of the
19   stipulation from the bankruptcy court.   At the May 10, 2013
20   hearing, the bankruptcy court denied Trustee’s motion.
21   Initially, the court made reference to Charles Duck, a former
22   trustee in the Northern District of California, who “had a habit
23   of making deals with secured creditors even though there was no
24   equity he would sell the — he would liquidate the asset and have
25   various types of arrangements for sharing the proceeds.   And I
26
27
28

                                     - 3 -
 1   put a stop to that many years ago.”2   The court further opined:
 2        [T]he role of a chapter 7 trustee is to closely examine
          the secured creditor’s security interest and defeat it,
 3        if the trustee can. And, if not, turn the asset over
          to the secured creditor. It is a slippery slope, to my
 4        mind, when the debtor and the secured creditor start
          making deals. I do not believe it’s the appropriate
 5        role of a chapter 7 trustee to liquidate fully-
          encumbered assets.
 6
 7        Counsel for Trustee and the Bank both emphasized that there
 8   was full disclosure, everything was above board, and there would
 9   be a return to the unsecured creditors.   The Bank’s counsel
10   further explained that the auctioneer hired by Trustee had the
11   expertise to sell the firearms in a lawful manner which caused it
12   to agree to release its lien on fifty percent of the proceeds.
13   The bankruptcy court responded: “I have no problem if your client
14   wants to waive its security, and the trustee can liquidate it in
15   the ordinary course.   I just have a problem with the sharing
16   arrangement.”   The court opined that “arrangements like this are
17   dangerous because they can lead to improper activity.”   The court
18   concluded:   “So in this particular case I do not believe that the
19   benefits to the estate outweigh my concerns for the proper role
20   of the trustee and the bankruptcy system.”   On May 15, 2013, the
21   bankruptcy court entered the order denying approval of the
22   stipulation.
23        Trustee moved for reconsideration.   Trustee argued that
24   there was nothing in the bankruptcy code which prevented her from
25
          2
            Charles Duck is a former bankruptcy trustee who was
26   convicted for embezzling more than $1.9 million from various
     bankruptcy estates in late 1989. See Dickinson v. Duck
27   (In re Duck), 122 B.R. 403, 404 (Bankr. N.D. Cal. 1990). The
     bankruptcy court made clear that it was not equating Ms. Green
28   with Mr. Duck.

                                    - 4 -
 1   entering into agreements with secured creditors or that stated a
 2   chapter 7 trustee’s proper role was to liquidate only unsecured
 3   assets.   Trustee further asserted that there was nothing in the
 4   agreement between her and the Bank which suggested the parties
 5   were acting in an improper manner.        Trustee noted that § 506(c)
 6   provided authority that administrative expenses could be paid
 7   from the sale of secured assets even if there was no benefit to
 8   unsecured creditors and when the secured creditor caused or
 9   consented to the expense.      See Compton Impressions, Ltd. v. Queen
10   City Bank N.A. (In re Compton Impressions), 217 F.3d 1256 (9th
11   Cir. 2000).
12        On June 14, 2013, the bankruptcy court heard the matter and
13   took it under advisement.      Two days later, the bankruptcy court
14   issued its Memorandum of Decision and denied Trustee’s motion for
15   reconsideration.   The bankruptcy court opined that arrangements
16   between trustees and secured creditors raised a presumption of
17   impropriety and found that Trustee had not rebutted that
18   presumption.   On June 17, 2013, the court entered the order
19   denying Trustee’s motion for reconsideration.          Trustee timely
20   appealed.
21                            II.    JURISDICTION
22        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
23   §§ 1334 and 157(b)(2)(A), (N) and (O).        We have jurisdiction
24   under 28 U.S.C. § 158.
25                                  III.   ISSUE
26        Whether the bankruptcy court abused its discretion by
27   denying approval of the stipulation between Trustee and the Bank
28   which contemplated a sale of the Bank’s fully encumbered property

                                       - 5 -
 1   in exchange for a carve out from the lien proceeds to the
 2   bankruptcy estate.
 3                           IV.   STANDARD OF REVIEW
 4        The bankruptcy court’s decision denying approval of the
 5   stipulation between Trustee and the Bank is reviewed for abuse of
 6   discretion.   A & A Sign Co. v. Maughan, 419 F.2d 1152, 1155 (9th
 7   Cir. 1969).   A bankruptcy court abuses its discretion when it
 8   applies the incorrect legal rule or its application of the
 9   correct legal rule is “(1) illogical, (2) implausible, or
10   (3) without support in inferences that may be drawn from the
11   facts in the record.”    United States v. Loew, 593 F.3d 1136, 1139
12   (9th Cir. 2010).
13                                 V.   DISCUSSION
14   A.   The General Rule Is That The Sale Of Fully Encumbered
          Property Is Prohibited.
15
16        We begin with an overview of the chapter 7 trustee’s duties
17   under § 704 and his or her power to sell under § 363.        Under
18   § 704(a)(1), a chapter 7 trustee has the duty to “collect and
19   reduce to money the property of the estate for which such trustee
20   serves . . . .”    To fulfill this duty, the trustee’s “primary job
21   is to marshal and sell the assets so that those assets can be
22   distributed to the estate’s creditors.”         U.S. Tr. v. Joseph (In
23   re Joseph), 208 B.R. 55, 60 (9th Cir. BAP 1997).        Indeed, a core
24   power of a bankruptcy trustee under § 363(b) is the right to sell
25   “property of the estate” for the benefit of a debtor’s creditors.
26   See § 363(b)(1) (“The trustee, after notice and a hearing, may
27   use, sell, or lease, other than in the ordinary course of
28   business, property of the estate. . . .”).        Under § 363(f)(2), a

                                        - 6 -
 1   bankruptcy trustee may sell property of the estate free and clear
 2   of a lien or other interest where the holder of the lien or
 3   interest consents.
 4        It is universally recognized, however, that the sale of a
 5   fully encumbered asset is generally prohibited.   Carey v. Pauline
 6   (In re Pauline), 119 B.R. 727, 728 (9th Cir. BAP 1990); In re
 7   Scimeca Found., Inc., 497 B.R. 753, 781 (Bankr. E.D. Pa. 2013)
 8   (“It is generally recognized that a chapter 7 trustee should not
 9   liquidate fully encumbered assets, for such action yields no
10   benefit to unsecured creditors.”) (citing Morgan v. K.C. Mach. &
11   Tool Co. (In re K.C. Mach. & Tool Co.), 816 F.2d 238, 245–46 (6th
12   Cir.1987)); In re Covington, 368 B.R. 38, 41 (Bankr. E.D. Cal.
13   2006) (“[W]hen an asset is fully encumbered by a lien, it is
14   considered improper for a chapter 7 trustee to liquidate the
15   asset.”); In re Feinstein Family P’ship, 247 B.R. 502, 507
16   (Bankr. M.D. Fla. 2000) (“Clearly, the Code never contemplated
17   that a Chapter 7 trustee should act as a liquidating agent for
18   secured creditors who should liquidate their own collateral.”);
19   In re Preston Lumber Corp., 199 B.R. 415, 416 (Bankr. N.D. Cal.
20   1996) (actual conflict of interest arises when the trustee sees
21   he can make more money for himself by liquidating collateral for
22   a secured creditor than he can by asserting a claim against the
23   secured creditor on behalf of the estate); In re Tobin, 202 B.R.
24   339, 340 (Bankr. D.R.I. 1996) (“The mission of the Chapter 7
25   trustee is also to enhance the debtor’s estate for the benefit of
26   unsecured creditors.”).
27        The prohibition against the sale of fully encumbered
28   property is also embedded in the official Handbook for Chapter 7

                                   - 7 -
 1   Trustees in several places:
 2        Generally, a trustee should not sell property subject
          to a security interest unless the sale generates funds
 3        for the benefit of unsecured creditors. A secured
          creditor can protect its own interests in the
 4        collateral subject to the security interest.
 5   U.S. DOJ Exec. Office for U.S. Trs., Handbook for Chapter 7
 6   Trustees at 4–16 (2012) (hereinafter, Handbook).   The Handbook
 7   further provides:
 8        A chapter 7 case must be administered to maximize and
          expedite dividends to creditors. A trustee shall not
 9        administer an estate or an asset in an estate where the
          proceeds of liquidation will primarily benefit the
10        trustee or the professionals, or unduly delay the
          resolution of the case. The trustee must be guided by
11        this fundamental principle when acting as trustee.
          Accordingly, the trustee must consider whether
12        sufficient funds will be generated to make a meaningful
          distribution to unsecured creditors, including
13        unsecured priority creditors, before administering a
          case as an asset case. 28 U.S.C. § 586.
14
     Id. at 4-1.   Finally,
15
          [i]n asset cases, when the property is fully encumbered
16        and of nominal value to the estate, the trustee must
          immediately abandon the asset and contact the secured
17        creditor immediately so that the secured creditor can
          obtain insurance or otherwise protect its own interest
18        in the property. [§§] 554, 704.
19   Id. at 4-7.   Taken together, the above-referenced authorities
20   stand for the proposition that sales of fully encumbered assets
21   are generally improper.   In that instance, the trustee’s proper
22   function is to abandon the property, not administer it, because
23   the sale would yield no benefit to unsecured creditors.
24        In fact, “‘the principle of abandonment was developed . . .
25   to protect the bankruptcy estate from the various costs and
26   burdens of having to administer property which could not
27   conceivably benefit unsecured creditors of the estate.’”
28   In re Pauline, 119 B.R. at 728; see also In re K.C. Mach. & Tool

                                    - 8 -
 1   Co., 816 F.2d at 246 (“[I]n enacting § 554, Congress was aware of
 2   the claim that formerly some trustees took burdensome or
 3   valueless property into the estate and sold it in order to
 4   increase their commissions.”).    However, “[a]bandonment should
 5   not be ordered where the benefit of administering the asset
 6   exceeds the cost of doing so. . . .      Absent an attempt by the
 7   trustee to churn property worthless to the estate just to
 8   increase fees, abandonment should very rarely be ordered.”
 9   In re K.C. Mach. & Tool Co., 816 F.2d at 246; see also Vu v.
10   Kendall (In re Vu), 245 B.R. 644, 647–48 (9th Cir. BAP 2000).
11   B.   There Is No Per Se Rule That Bans Carve-Out Agreements.
12        Despite the general rule prohibiting the sale of fully
13   encumbered property, chapter 7 trustees may seek to justify the
14   sale through a negotiated carve-out agreement with the secured
15   creditor.   A carve-out agreement is generally understood to be
16   “an agreement by a party secured by all or some of the assets of
17   the estate to allow some portion of its lien proceeds to be paid
18   to others, i.e., to carve out its lien position.”      Costa v.
19   Robotic Vision Sys., Inc. (In re Robotic Vision Sys., Inc.),
20   367 B.R. 232, 240 n.23 (1st Cir. BAP 2007); see also In re
21   Besset, 2012 WL 6554706, at *5 n.5 (9th Cir. BAP 2012).      There is
22   no per se rule that bans this type of contractual arrangement:
23   “[C]reditors are generally free to do whatever they wish with the
24   bankruptcy dividends they receive, including to share them with
25   other creditors.”   Official Unsecured Creditors Comm. v. Stern
26
27
28

                                      - 9 -
 1   (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313 (1st Cir. 1992).3
 2        The Handbook also provides some guidance on carve-out
 3   agreements in the context of a sale:
 4        A trustee may sell assets only if the sale will result
          in a meaningful distribution to creditors. In
 5        evaluating whether an asset has equity, the trustee
          must determine whether there are valid liens against
 6        the asset and whether the value of the asset exceeds
          the liens. The trustee may seek a ‘carve-out’ from a
 7        secured creditor and sell the property at issue if the
          ‘carve-out’ will result in a meaningful distribution to
 8        creditors. . . . If the sale will not result in a
          meaningful distribution to creditors, the trustee must
 9        abandon the asset.
10   Handbook at 4–14.
11   C.   The Genesis Of The Bankruptcy Court’s “Presumption Of
          Impropriety” Is Based On Past Abuses Of Carve-Out
12        Agreements Such As This.
13        Although there is no per se ban on carve-out agreements,
14   agreements such as the one before us have been reviewed under a
15   standard of heightened scrutiny due to past abuses.   One court
16   noted:
17        It is not rare that trustees of Chapter 7 estates are
          approached by secured creditors who seek the trustee’s
18        help to liquidate fully encumbered collateral. They
          realize that before the trustee is willing to go along
19        with the proposition the secured creditor must put a
          little sweetener in the deal by agreeing to pay
20        sufficient sums to compensate the trustee and to pay
          other costs of administration. The more sophisticated
21        trustee may demand that the secured creditor throw in a
          pittance to pay a meaningless dividend to unsecured
22        creditors, making the arrangement more palatable to the
          court. The proposition is very attractive from the
23        secured creditor’s point of view and economically sound
          because it may stave off a possible attempt by the
24        trustee to seek to surcharge the collateral and, most
          importantly, save the potentially expensive cost of a
25        foreclosure suit. The offered deal is also attractive
          to the trustee because it assures that he or she will
26
27        3
            The SPM court also held that the bankruptcy court had no
     authority to control how the secured creditor disposed of the
28   proceeds once it received them. Id. at 1313.

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 1        earn a commission in an otherwise no asset case and may
          seek a commission based on the gross sales price and
 2        not on the net distributed to parties of interest.
 3   In re Feinstein Family P’ship, 247 B.R. at 507; see also
 4   In re Pauline, 119 B.R. at 728 (“Some of the early cases
 5   condemned this particular practice [,] . . . and decried the
 6   practice of selling burdensome or valueless property simply to
 7   obtain a fund for their own administrative expenses.”) (citing
 8   Standard Brass Corp. v. Farmers Nat’l Bank, 388 F.2d 86 (7th Cir.
 9   1967); Miller v. Klein (In re Miller), 95 F.2d 441 (7th Cir.
10   1938); and Seaboard Nat’l Bank v. Rogers Milk Prods. Co., 21 F.2d
11   414 (2d Cir. 1927)).   Against this historical backdrop, coupled
12   with the bankruptcy court’s first-hand experience with Mr. Duck,
13   there is support for the bankruptcy court’s conclusion that a
14   presumption of impropriety arises under these circumstances.
15        We do not agree with Trustee’s argument that the literal
16   text of §§ 704(a)(1), 506(c), and 363(f)(2) “compels the
17   conclusion that the ‘presumption of impropriety’ suggested by the
18   bankruptcy court . . . was error.”     The issue presented in this
19   appeal is not simply a matter of interpreting any of these
20   statutes where the “plain language” applies.    If this were the
21   case, we could ignore the well-settled case law, including our
22   own, that espouses the proposition that a sale of fully
23   encumbered property is generally inappropriate because there is
24   no benefit to unsecured creditors.     We would also undermine the
25   guidance provided to chapter 7 trustees in the Handbook, which
26   Trustee fails even to mention in this appeal.
27        Further, in our view, § 506(c) does not apply under these
28   circumstances.   Substantively, the elements that Trustee must

                                   - 11 -
 1   prove for a § 506(c) claim are different from those needed to
 2   justify a sale of fully encumbered property in connection with a
 3   carve-out agreement.    See In re Cascade Hydraulics and Util.
 4   Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987) (under § 506(c)
 5   the trustee must show that the expenses incurred were reasonable,
 6   necessary, and beneficial to the secured creditor and to satisfy
 7   the benefit part of the test, the trustee must “establish in
 8   quantifiable terms that [she] expended funds directly to protect
 9   and preserve the collateral.”); compare In re Bunn-Rodemann,
10   491 B.R. 132 (Bankr. E.D. Cal. 2013) (finding “incentive payment”
11   arrangement between secured creditor and trustee for sale of
12   fully encumbered real property “consistent” with § 506(c)).
13          Of course, the presumption of impropriety is a rebuttable
14   one.    To rebut the presumption, the case law directs the
15   following inquiry:    Has the trustee fulfilled his or her basic
16   duties?    Is there a benefit to the estate; i.e., prospects for a
17   meaningful distribution to unsecured creditors?    Have the terms
18   of the carve-out agreement been fully disclosed to the bankruptcy
19   court?    If the answer to these questions is in the affirmative,
20   then the presumption of impropriety can be overcome, as it is in
21   this case.
22          First, the record shows that Trustee fulfilled her basic
23   duties.    She examined the Bank’s asserted security interest
24   against the firearms and found its lien valid.    See Handbook at
25   4-5.    She then informed the Bank where the firearms were so it
26   could retrieve its collateral.    See Handbook at 4-7.   The Bank
27   subsequently approached Trustee to conduct the sale.     Second,
28   Trustee fully disclosed the terms of the carve-out agreement to

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 1   the bankruptcy court and the creditor body, which is contrary to
 2   any inference of a secret side deal between Trustee and the Bank.
 3   Next, Trustee demonstrated that the lien proceeds would provide a
 4   benefit to the unsecured creditors.    Due to the benefit, as more
 5   fully discussed below, we cannot infer that Trustee was
 6   administering the asset for primarily her own benefit.    See
 7   Handbook at 4-1.   In short, none of these undisputed facts
 8   suggest any type of abuse by Trustee.
 9        The undisputed facts also show that the carve out from
10   one-half of the lien proceeds takes this case out of the
11   generally recognized rule that abandonment of fully encumbered
12   property is appropriate because no unsecured creditor could
13   benefit from a sale.   At first blush, $5,000 from the lien
14   proceeds does not seem like much of a benefit.   However, even if
15   the net recovery (i.e., recovery after all costs associated with
16   obtaining the recovery) is a small dollar amount, it is still a
17   benefit to the unsecured creditors in this case.    Here, Trustee
18   previously sold an unencumbered liquor license for approximately
19   $103,000 and added to that amount will be the proceeds from the
20   carve out.4   Accordingly, the proceeds from the sale of the
21   firearms will contribute to what already appears to be a
22   “meaningful distribution” to unsecured creditors.
23        Under these circumstances, the Bank’s agreement to the carve
24   out essentially operates as an assignment of equity in the
25   firearms for the benefit of the unsecured creditors, thus
26
27        4
            We take judicial notice of Dkt. No. 56 in the underlying
     bankruptcy case pursuant to Atwood v. Chase Manhattan Mortg. Co.
28   (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

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 1   justifying Trustee’s action in selling the fully encumbered
 2   property rather than abandoning it.      “Absent an attempt by the
 3   trustee to churn property worthless to the estate just to
 4   increase fees, abandonment should very rarely be ordered.”
 5   In re Vu, 245 B.R. at 647–48.
 6        In sum, the bankruptcy court’s conclusion that Trustee
 7   failed to rebut the presumption of impropriety is illogical and
 8   without support in inferences that may be drawn from the facts in
 9   the record.   See Loew, 593 F.3d at 1139.     The record demonstrates
10   that Trustee fulfilled her basic duties, unsecured creditors will
11   benefit, and the terms of the carve-out agreement were fully
12   disclosed.    Because the presumption of impropriety was rebutted,
13   the bankruptcy court abused its discretion in denying Trustee’s
14   motion seeking approval of the stipulation.
15   D.   The Case Law Cited By The Bankruptcy Court In Support Of
          Its Decision Is Distinguishable.
16
17        The bankruptcy court cited In re Pauline, In re Preston
18   Lumber, and In re Covington in support of its decision denying
19   approval of the stipulation.    Collectively, these cases stand for
20   the proposition that overencumbered property generally should be
21   abandoned, not administered, because there is no benefit to
22   unsecured creditors.   As noted above, most courts recognize this
23   general rule.   Furthermore, in each case, the court found the
24   trustee’s actions inappropriate under the circumstances of the
25   case.   However, none of these cases support the bankruptcy
26   court’s decision in this case.
27        In Pauline, the chapter 7 trustee decided to abandon the
28   debtor’s home and then reversed his decision, stating his

                                     - 14 -
 1   intention to sell it.   The debtor moved to compel the trustee to
 2   abandon the property.   After considering the motion, the
 3   bankruptcy court required the trustee to find a buyer for the
 4   debtor’s home within 60 days at a price sufficient to satisfy all
 5   liens on the home plus the allowed amount of the debtor’s
 6   homestead exemption, in the absence of which the debtor’s home
 7   would be deemed abandoned.   In re Pauline, 119 B.R. at 728.   On
 8   appeal, the Panel affirmed the bankruptcy court’s decision in
 9   part, because (1) the IRS did not ask the trustee to sell the
10   property for the IRS’ benefit, and (2) the trustee apparently had
11   “engaged in . . . conduct designed to enhance the size of his
12   bank account rather than the size of the funds available for the
13   debtor’s unsecured creditors . . . .”   Id. at 728.   Unlike in
14   Pauline, the Bank here supports Trustee’s sale due to the
15   auctioneer’s expertise in selling the firearms in a lawful manner
16   and, as discussed above, a sale will benefit unsecured creditors,
17   not just increase the fees paid to Trustee.5
18        The holding in In re Preston Lumber Corp. also does not
19   drive the outcome in this case.   There, the secured creditor,
20   Sumitomo Bank and the debtor’s industrial lessor had a dispute as
21   to the priority of their lien rights in fully encumbered sawmill
22   equipment and rolling stock.   Sumitomo convinced the chapter 7
23   trustee to sell the assets free and clear of liens, in exchange
24   for a pre-fixed commission for the trustee and $35,000 fee for
25
26        5
            Whether or not Trustee will be awarded fees from the
     eventual sale of the firearms was not at issue before the
27   bankruptcy court nor is it relevant to our analysis in this
     appeal. The bankruptcy court may consider the appropriate fee at
28   a hearing on compensation.

                                    - 15 -
 1   the trustee’s attorney.   The bankruptcy court found the
 2   arrangement “highly improper” on the grounds that (1) there was
 3   no resulting benefit to the estate and (2) the trustee and his
 4   counsel were motivated by personal gain.   In re Preston Lumber
 5   Corp., 199 B.R. at 416-17.   The case is distinguishable on its
 6   face because, as discussed above, there is no evidence here that
 7   Trustee was motivated by personal gain and there likely is a
 8   resulting benefit to unsecured creditors arising out of the sale.
 9        Lastly, In re Covington, 368 B.R. 38, is inapposite.
10   Because the debtor in Covington owed a domestic support
11   obligation, the trustee argued that § 522(c)(1) required the
12   disallowance of the debtor’s exemption in a bank deposit and an
13   automobile to permit those assets to be liquidated and the
14   proceeds paid to the holder of the domestic support obligation
15   claim.   The bankruptcy court rejected this argument, noting that
16   “§ 522(c)(1) does not provide for the disallowance of an
17   exemption.   Rather, it provides that property exempted by the
18   debtor is nonetheless liable for a domestic support obligation.
19   Disallowance of the exemption is not a predicate to the
20   enforcement of a domestic support obligation.”   Id. at 40–41.
21   The court also denied the trustee’s request to sell the assets
22   because (1) the property was removed from the bankruptcy estate
23   since it was exempt and thus there was no property of the estate
24   to administer and (2) although the assets were not fully
25   encumbered, the trustee sought to sell the assets for the benefit
26   of one creditor rather than for unsecured creditors generally.
27   Id. at 41.   “Given that the Madera County Child Support
28   Department is collecting the claim for the benefit of the claim

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 1   holder, it is clear that the assistance of the trustee, which
 2   would come at a price, is unnecessary.   By enforcing the domestic
 3   support obligation in state court, the trustee's administrative
 4   expenses will be avoided.”   Id.   Unlike Covington, the asset here
 5   is not exempt and Trustee is liquidating the asset for the
 6   general unsecured creditor body.
 7                            VI.   CONCLUSION
 8        For the reasons stated, we REVERSE and REMAND this matter
 9   with instructions to the bankruptcy court to enter an order
10   granting Trustee’s motion.
11
12
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14
15
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28

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