## Facts

- Florence Chi-Feng Huang and her mother, Sheila Chen Huang, filed separate Chapter 11 cases; a Chapter 11 trustee was appointed for both estates.
- The estates’ principal asset was the Caroline Apartments in Menlo Park, California, owned jointly by the debtors.
- The parties stipulated the property value was $2.4 million, with approximately $320,000 equity after secured liens.
- Prepetition, the debtors contracted to sell the property to Robert L. Pierce for $1.9 million; Pierce had not taken possession and had paid no purchase price as of the bankruptcy filings.
- Pierce sought relief from the automatic stay to continue a state-court specific performance action; the trustee moved to reject the sale contract as an executory contract under 11 U.S.C. § 365.
- The bankruptcy court denied rejection and granted stay relief, reasoning rejection would violate “fair dealing” and would improperly benefit the debtors rather than creditors; it treated the estates as solvent while excluding certain unsecured claims (friends/family) from the solvency analysis without an evidentiary hearing.

## Issues

1. What legal standard governs a Chapter 11 trustee’s motion to reject an executory contract under 11 U.S.C. § 365.
2. Whether the bankruptcy court erred by denying rejection based on equitable “fair dealing” and perceived debtor benefit rather than benefit to the estate and creditors.
3. Whether the bankruptcy court erred in treating the estates as solvent while disregarding unsecured claims without a hearing, where solvency affected the rejection analysis and stay relief.

## Decision

- The Bankruptcy Appellate Panel reversed the order denying the trustee’s motion to reject and remanded for reconsideration under the correct standard.
- The Panel held the bankruptcy court applied an incorrect test by grounding its ruling in fairness to the purchaser and who would be the “primary beneficiaries,” rather than evaluating whether rejection would benefit the estate under a business-judgment framework.
- The Panel directed reconsideration that accounts for the economic effect on the estates and all creditors, including unsecured claims previously excluded without evidentiary development.
- Because the stay relief ruling was tied to the erroneous rejection analysis, it was implicated by the reversal and remand.

## Legal Principles

- A motion to reject an executory contract under 11 U.S.C. § 365 is generally evaluated under a business-judgment standard.
- The central inquiry is whether rejection is advantageous to the estate and its creditors; courts should not deny rejection based on generalized equitable notions of “fair dealing” toward the non-debtor counterparty.
- When solvency is material to assessing creditor benefit from rejection, a court may not exclude categories of claims from the solvency analysis without an evidentiary basis and appropriate process.
- Courts should defer to the trustee’s reasonable business judgment unless rejection would clearly harm the estate.

## Conclusion

The appellate panel required the bankruptcy court to reassess rejection of a real-estate sale contract using a business-judgment analysis centered on the estate’s and creditors’ economic interests, and to address solvency and claim treatment on an evidentiary footing rather than on fairness-based considerations favoring the purchaser.


Robertson v. Pierce (In re Chi-Feng Huang), 23 B.R. 798 (B.A.P. 9th Cir. 1982)