Latvian Shipping Co. v. Baltic Shipping Co.

United States Court of Appeals,

Fifth Circuit.

No. 96-30064.

LATVIAN SHIPPING COMPANY; Naviomar S A de CV; Cerescorp
Incorporated; Ceres Gulf Incorporated, Plaintiffs-Appellees,

and

F & S International, Inc.; Crescent Towing & Salvage Company,
Inc.; Cooper/T Smith Stevedoring Company, Inc.; Vitalij Balashov,
Intervenor Plaintiffs-Appellees,

v.

BALTIC SHIPPING COMPANY, Defendant-Appellee,

v.

ARE SHIPPING LIMITED; Movant-Appellant.

NAVIOMAR S A de CV, Plaintiff,

v.

BALTIC SHIPPING COMPANY, in personam, et al., Defendants,

Baltic Shipping Company, in personam, Defendant.

CERES GULF INC., et al., Plaintiffs,

v.

The M/V SVERDLOVSK, INC., rem, et al., Defendants.

Baltic Shipping Company, et al., Plaintiff.

1
 ST. JAMES STEVEDORING CO., Plaintiff,

v.

F & S INTERNATIONAL, INC., et al., Defendants.

Nov. 13, 1996.

Appeal from the United States District Court for the Middle
District of Louisiana.

Before WISDOM, JONES and WIENER, Circuit Judges.

WIENER, Circuit Judge:

Appellant ARE Shipping Limited (ARE) appeals the district

court's order denying confirmation of the original judicial sale of

the M/V SVERDLOVSK (the vessel). The district court denied

confirmation of the sale and ordered a resale, stating as its

reason the inadequacy of the sale price as compared to the third

party claims. At issue is (1) whether the district court abused

its discretion by failing to apply the proper standard in denying

confirmation of the original sale and (2) whether the sale price of

$3.7 million was so "grossly inadequate" as to "shock the

conscience," thereby justifying denial of confirmation. Concluding

that the district court failed to apply the proper standard and

finding that the $3.7 million sale price is not so grossly

inadequate as to shock the conscience, we reverse the district

court's denial of confirmation of the original sale, and remand for

confirmation of the sale to ARE for $3.7 million.

I.

FACTS AND PROCEEDINGS

The uncontroverted facts are as follows: The vessel M/V

SVERDLOVSK was owned and operated by the debtor, Baltic Shipping

2
Company (Baltic). It was seized by Plaintiff-Appellee Latvian

Shipping Company (Latvian) under a writ of foreign attachment.1

The district court ordered the vessel sold at public auction, and

notice of the sale was duly published. Prior to the auction,

bidders were not allowed to inspect the vessel completely: None of

the ballast tanks could be opened or inspected, and the cargo

hatches, cargo gear, ballast system, and main propulsion system

could not be opened for inspection or demonstrated to be at all

operational. During the course of the bidding, there were

fifty-one overbids from five different registered bidders. When

bidding ceased, the U.S. Marshal adjudicated the vessel to ARE, the

highest bidder, for $3,700,000.00.

After the auction, four parties—Baltic, St. James

Stevedoring, Inc. (St. James), Vulcano Shipping Ltd. (Vulcano), and

Sedgwick Marine & Cargo Ltd. (Sedgwick), none of which had bid at

the auction—filed objections to confirmation of the sale, alleging

the inadequacy of ARE's bid. Only Vulcano offered an upset bid,2

and it was for $4,700,000.00.

ARE timely filed a motion to confirm the sale, and one day

later the district court denied ARE's motion and ordered that a new

1
Baltic has numerous creditors, many of whom intervened. A
majority of the claims asserted do not arise out of maritime liens
against the vessel but are directed against Baltic and its assets.

2
An upset bid is a bid filed following the first judicial sale
and exceeding the highest bid offered at that sale. Usually the
upset bid is filed before the hearing to confirm the sale. Munro
Drydock, Inc. v. M/V HERON, 467 F.Supp. 513, 514 n. 2
(D.Mass.1979).

3
auction be held ten days hence. ARE timely filed a notice of

appeal before the second auction. Four registered bidders,

including ARE, participated in the second auction, overbidding one

another twenty-six times before ARE was again adjudicated the

vessel as the highest bidder, this time for $5,250,000.00. Shortly

thereafter, ARE timely filed a motion to confirm the second sale,

but with full reservation of its rights to appeal the district

court's earlier order that had denied confirmation of the first

sale. Within days, the district court confirmed the second sale,

reserving to ARE its rights to appeal.

II.

ANALYSIS

A. STANDARD OF REVIEW

We review the district court's refusal to confirm the sale of

the vessel for an abuse of discretion.3 We will not find an abuse

of discretion unless the district court's factual findings are

clearly erroneous or incorrect legal standards were applied.4

B. DID THE DISTRICT COURT APPLY THE CORRECT STANDARD?

Until confirmation, an auction sale in admiralty may be set

3
Puget Sound Production Credit Assn. v. Oil Screw Johnny A,
819 F.2d 242, 244 (9th Cir.1987); Ghezzi v. Foss Launch & Tug Co.,
321 F.2d 421, 425 (9th Cir.1963). See also First National Bank v.
M/V LIGHTNING POWER, 776 F.2d 1258, 1261 (5th Cir.1985) ("Upon
being petitioned to confirm the sale, the district court has
discretion to decide whether or not the bid was egregiously
inadequate....")
4
Puget Sound, 819 F.2d at 244 (citing SEC v. Carter Hawley
Hale Stores, Inc., 760 F.2d 945, 947 (9th Cir.1985)); McGary v.
Scott, 27 F.3d 181, 183 (5th Cir.1994) ("A court abuses its
discretion when it bases its decision on an erroneous legal
conclusion or on a clearly erroneous finding of fact.").

4
aside at any time, but extreme caution should be used in such

actions.5 The grounds recognized as justifying setting aside such

a sale include fraud, collusion, and gross inadequacy of price.6

Absent fraud or collusion, the highest bid at a judicial sale

should not ordinarily be rejected, yet the court does have power to

do so if the price is so grossly inadequate as to shock the

conscience.7 We have adopted by analogy the gross inadequacy

standard applied in the context of bankruptcy sales:

[G]ross inadequacy is said to exist when—apart from situations
involving fraud or unfairness ...—there is a substantial
disparity between the highest bid and the appraisal or fair
market value, and "there is a reasonable degree of probability
that a substantially better price will be obtained by a
resale.'8

Additionally, courts have denied confirmation when the upset

bid substantially exceeds the sale price.9 Upon being petitioned

to confirm the sale, the district court has discretion to decide

whether the bid was egregiously inadequate and, in so doing, should

consider whether the rights of third persons would be adversely

affected by confirmation.10

5
Wong Shing v. M/V MARDINA TRADER, 564 F.2d 1183, 1188 (5th
Cir.1977) (citing Ghezzi v. Foss Launch & Tug Co., 321 F.2d 421
(9th Cir.1963)).
6
Wong Shing, 564 F.2d at 1188 (citing 2 C.J.S. Admiralty § 247
(1972)).
7
LIGHTNING POWER, 776 F.2d at 1261.
8
Id. at 1261 (emphasis added) (citing 4B J. Moore & L. King,
Collier on Bankruptcy ¶ 70.-98[17] at 1192 (14th ed.1978)).
9
Wong Shing, 564 F.2d at 1189.
10
LIGHTNING POWER, 776 F.2d at 1261.

5
 Here the district court refused to confirm the first sale of

the vessel and ordered another sale in light of the "inadequacy of

the price as compared to the third-party claims against the

vessel."11 The district court made no finding that ARE's bid of

$3.7 million was grossly inadequate or that a substantial disparity

existed between the sale price of $3.7 million and the upset bid of

$4.7 million. Of particular relevance to the district court was

the increase in creditor satisfaction, to the tune of $1 million,

that would occur should the $4.7 million bid materialize and be

confirmed. The court expressed the belief that its duty was to

guarantee enough money to satisfy more of the outstanding claims

and that a sale price of $4.7 million would provide $1 million more

to the creditors. The court recognized, however, that even the

$4.7 million bid would not satisfy all of the outstanding claims

against Baltic.

Thus the district court based its denial of confirmation

solely on the satisfaction of creditors' claims rather than on a

gross inadequacy of the sale price or on a substantial disparity

between the sale price and the upset bid. In doing so, the court

failed to apply the proper standard for denying confirmation of the

sale.

C. WAS THE $3.7 MILLION SALE PRICE GROSSLY INADEQUATE?

As the district court failed to apply the correct standard in

denying confirmation of the sale, we review the question of gross

11
As there was no fraud or collusion in the instant case, only
a finding of gross inadequacy of price would justify denial of
confirmation.

6
inadequacy of the sale price de novo.12 When we do, we are

convinced that the $3.7 million sale price is not grossly

inadequate and thus does not shock the conscience.

First, the sale price is not nearly as egregiously

insufficient as those found to be grossly inadequate by other

courts when denying confirmation. For example, in First National

Bank v. M/V LIGHTNING POWER,13 we denied confirmation of a sale of

a vessel, valued at more than $500,000.00, for $5000.00—a mere 1%

of the fair market value. In Ghezzi v. Foss Launch & Tug Co.,14 the

Ninth Circuit remanded for reconsideration of confirmation of the

sale when there was evidence that the fair market value of the

vessel was more than 100% greater than the sale price and that the

upset bid was more than 75% greater than the sale price.

Prior decisions of this court bolster the conclusion that we

reach today. In Wong Shing v. M/V MARDINA TRADER,15 we upheld

confirmation of a sale of a vessel for $610,000.00 even though it

had been purchased for $1,533,000.00 and insured for $2,000,000.00.

We found no gross inadequacy of price, as there was no reliable

evidence of either fair market value or an upset bid. In Jefferson

12
See Delta Steamship Lines, Inc. v. Avondale Shipyards, Inc.,
747 F.2d 995, 1000 (5th Cir.1984) ("[F]indings of fact by the trial
court in admiralty cases are subject to the clearly erroneous rule.
However, when essentially based on an incorrect legal principle ...
clearly erroneous does not apply and we disregard any such possible
findings.") (citations omitted).
13
776 F.2d 1258 (5th Cir.1985).
14
321 F.2d 421 (9th Cir.1963).
15
564 F.2d 1183 (5th Cir.1977).

7
Bank & Trust Co. v. Van Niman,16 we remanded to the district court,

which was of the opinion that it did not have the power to set

aside the sale regardless of the inadequacy of the sale price, to

determine whether the $500.00 sale price was grossly inadequate as

compared to the fair market value. In so doing we speculated that

the vessel's fair market value was likely far in excess of $500.00,

as the vessel had been given as security three years earlier for a

$200,000.00 loan on which $185,000.00 was still due. If the fair

market value were $200,000.00, or even $100,000.00, we noted, the

sale price would have been only 0.25%, or 0.5%, respectively, of

the fair market value.

In the instant case, the district court determined that the

value of the vessel was unknown, given that estimated values of

$8.7 and $7.0 million for the vessel were unreliable and no presale

appraisal had been made. Wong Sing indicates that when there is no

reliable evidence of the value of the vessel, the sale price cannot

be found to be grossly inadequate. Even if the fair market value

of the M/V SVERDLOVSK were $8.7 million, the $3.7 million sale

price would represent 42.5% of the fair market value, a percentage

of fair market value much greater than those represented by the

sale prices in Van Niman (0.25% or 0.5%) and LIGHTNING POWER (1%).

Second, there is not a substantial disparity between the $3.7

million sale price and the $4.7 million upset bid. The district

court itself conceded that the increase in bid from $3.7 million to

$4.7 million was "proportionally ... not that big." Furthermore,

16
722 F.2d 251 (5th Cir.1984).

8
the instant case is distinguishable from the cases in which there

was a substantial disparity between the upset bid and the sale

price, as each of those cases denied confirmation when the upset

bid exceeded the sale price by more than 50%.17 Here, the $4.7

million upset bid is only 27% greater than the $3.7 million sale

price, whereas the upset bid was 29 times greater than the sale

price in LIGHTNING POWER, 75% greater than the sale price in

Ghezzi, 55% greater than the sale price in Tramp, more than five

times greater than the sale price in Munro, and 53% greater than

the sale price in American Tramp.

Finally, the need to preserve the sanctity of the judicial

auction process and to uphold public confidence in judicial sales

further supports reversal of the district court. The highest

bidder at a fairly conducted judicial sale should be able to take

advantage of a bargain and become owner of the thing adjudicated.18

Delinquent bidders should not be allowed to lie low during the

original auction and then collaterally attack the high bidder, who

for the first sale had expended considerable time, effort, and

resources in preparing for the auction, attending it, and devoting

17
See Munro Drydock, Inc. v. M/V HERON, 585 F.2d 13 (1st
Cir.1978) (denying confirmation when the $50,000.00 upset bid was
more than five times greater than the $7,500.00 sale price); Tramp
Oil & Marine Ltd. v. Adriatic Tankers Shipping Co., 914 F.Supp. 527
(S.D.Fla.1996) (denying confirmation when the upset bid was 55%
higher than the sale price); American Tramp Shipping & Dev. Corp.
v. Coal Export Corp., 276 F.2d 570 (4th Cir.1960) (ordering resale
when the $115,000.00 upset bid was 53% greater than the $75,000.00
sale price).
18
See LIGHTNING POWER, 776 F.2d at 1261 (citing Munro Drydock,
Inc. v. M/V HERON, 585 F.2d 13, 14 (1st Cir.1978)); Wong Shing,
564 F.2d at 1189.

9
its assets to securing the bid.

III.

CONCLUSION

The district court's refusal to confirm the original auction

sale for the wrong reasons was the kind of error that constitutes

abuse of discretion and calls for plenary review on appeal. As the

disparity between the high bid of $3.7 million and the proposed

upset bid of $4.7 million reflected neither a gross inadequacy nor

a bid so low as to shock the conscience, we must reverse the

district court and remand with instructions to confirm the sale to

ARE on its original high bid of $3.7 million. So ordered.

REVERSED and REMANDED with instructions.

10