Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: October 16, 2008
Appeal from the United States Bankruptcy Court for the District of Montana. Bk. No. 05-61714. Honorable Ralph B. Kirscher, Chief Bankruptcy Judge, Presiding.
Before: MONTALI, DUNN and HOLLOWELL, Bankruptcy Judges.
MEMORANDUM
A creditor filed a proof of claim in the total amount of $5,587,997.76, with the secured amount listed at $4,573,239, 78, and the value of its collateral listed as " unknown." Two weeks later, the chapter 7 trustee moved to abandon the estate's interest in the collateral, stating that the debtor had estimated the value at $50,000.00. The creditor never filed an amended proof of claim indicating the amount of its unsecured deficiency. Almost two years later, the trustee filed her notice of final report and distribution, proposing to pay unsecured creditors a dividend of 5.65 percent. The trustee did not propose to make any distribution to the creditor, and instead treated the creditor as a holder of an allowed secured claim in the amount of $5,587,997.76.
The creditor objected to the proposed distribution, arguing that the balance of its claim over $50,000 (the value placed on its collateral by trustee in the motion to abandon) should have been treated as unsecured and paid accordingly. The trustee argued that because the creditor never filed an amended proof of claim reflecting the full amount of its unsecured deficiency claim, the creditor should not receive any payment as an unsecured creditor. The bankruptcy court overruled the creditor's objection and approved the trustee's final report and proposed distribution.
The creditor appealed, but did not obtain a stay pending appeal. Trustee has made the distributions as proposed and approved, and contends that the appeal is therefore moot. We DISMISS the appeal as equitably moot. Even if the appeal were not equitably moot, we would affirm on the merits.
I. FACTS
Lawrence D. Wright (" Debtor") and his now-deceased wife filed a chapter 7 petition on June 29, 2005. Appellee Darcy M. Crum (" Trustee") was appointed as the chapter 7 trustee. In Schedule A, Debtor listed certain condominium units in St. Marie, Montana (the " Property"), describing the value as " unknown." In Schedule F, Debtor listed appellant Olympic Coast Investment (" OCI") as an unsecured creditor with a claim in the amount of $4,573,239.78.
OCI filed a timely proof of claim on June 1, 2006, asserting a total claim in the amount of $5,587,997.76, and a secured claim in the amount of $4,573,239.78. While OCI did not describe the property securing its claim with any particularity, the proof of claim stated that the collateral was " real estate" with an " unknown" value and that the claim arose from a judgment. OCI has never amended its proof of claim.
On June 16, 2006, Trustee filed a notice of her intent to abandon the Property, noting that OCI had asserted a secured claim in the amount of $4,573,239.78 against the Property. Trustee stated that the value of the Property was " unknown (possibly $1,000 per unit)." In her " reason for abandonment, " Trustee stated that " Debtor has estimated the value of each unit at $1,000.00, $50,000 for all 50 units. Debtor has owned these units since 1999 and has been unable to market them. The debt secured by the units exceeds their marketable value." No one objected to the abandonment.
On May 19, 2008, Trustee filed her Notice of Final Report and Proposed Distribution. Trustee proposed to pay $43,021.29 to the holders of eighteen unsecured claims. The disbursements to the unsecured creditors varied in amount from $6.72 to $38,408.60. Trustee did not list OCI as an unsecured creditor and therefore did not propose to pay anything to OCI.
OCI objected to the proposed distribution, arguing that Trustee had " admitted" that the value of the Property was only $50,000 in her notice of intent to abandon. According to OCI, the balance of its claim in excess of $50,000 was unsecured; OCI asserted that the unsecured amount was $4,523,239.78, even though subtracting $50,000 from the total amount of the claim ($5,587,997.76) would equal $5,537,997.76. OCI argued that it was entitled to in pari passu payment on its unsecured claim pursuant to 11 U.S.C. § 726(a).
Even though the total amount shown in OCI's proof of claim exceeded the secured amount by more than $1 million ($5,587,997.76 minus 4, 573, 239, 78), OCI never argued before the bankruptcy court or us that the proof of claim on its face reflected an unsecured claim of at least $1 million. Rather, OCI continues to assert that its general unsecured claim is $4,523,239.78. See page 6 of OCI's Opening Brief. Responding to our query at oral argument, OCI's counsel stated that OCI was simply pursuing the difference between $50,000 and its secured claim ($4,573,239.78). Because OCI did not argue that the face of the proof of claim itself reflected an unsecured deficiency of approximately $1 million, that argument is waived. Golden v. Chicago Title Ins. Co. (In re Choo), 273 B.R. 608, 613 (9th Cir. BAP 2002) (issues not raised at the trial court will not be considered for the first time on appeal; arguments not specifically and distinctly made in an appellant's opening brief are waived).
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
Trustee responded that OCI never filed a proof of claim specifying the amount of its unsecured claim as required by local rule and that a trustee should not be required to estimate the amount of an unsecured claim. In its reply, OCI contended that no authority required it to amend its claim to estimate the unsecured portion. OCI further contended (correctly) that the local rule requiring undersecured creditors to file proofs of claim stating or estimating the unsecured amounts of claims was inapplicable to holders of nonconsensual judgment liens.
At the hearing on OCI's objection to Trustee's final report and proposed distribution, the court held that " the proof of claim that's filed is filed as a secured claim for the full amount, including interest" and that " it's certainly not the trustee's responsibility to pursue a bifurcation of a claim of a secured creditor." On June 20, 2008, the bankruptcy court entered an order overruling OCI's objection to the final report, approving Trustee's final report and proposed distribution, and authorizing Trustee to make the final distribution.
On June 26, 2008, OCI filed a timely notice of appeal. OCI named Trustee (and her counsel) as the only other parties to the appeal, although it served its notice of appeal on those unsecured creditors receiving payments under Trustee's proposed distribution. On July 8, 2008, OCI served on Trustee and the unsecured creditors a " Response to Trustee's Designation of Additional Issues on Appeal" stating that " distribution of cash does not moot an appeal. The funds can be ordered disgorged from the creditors to whom the Trustee paid the distribution." (Emphasis in original).
OCI never sought a stay pending appeal. Trustee has made the disbursements proposed in the final report approved by the court.
Trustee has not stated when the payments were made and has not provided any evidence of such payments apart from a statement on page 2 of her brief. OCI, however, does not dispute that the payments have been made, and acknowledged at oral argument that the payments were made before it sent its notice to unsecured creditors that their payments could be ordered disgorged.
II. ISSUES
1. Did the trustee's distribution to creditors render this appeal moot?
2. Did the bankruptcy court err in approving the trustee's final report and final distribution?
III. STANDARD OF REVIEW
We review findings of fact for clear error and issues of law de novo. Litton Loan Serv'g, LP v. Garvida (In re Garvida), 347 B.R. 697, 703 (9th Cir. BAP 2006). Application of basic rules of procedure and construction of the Bankruptcy Code present questions of law that we review de novo. Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002). Mootness is a question of law that we review de novo. Suter v. Goedert, 504 F.3d 982, 985 (9th Cir. 2007).
IV. DISCUSSION
A. Jurisdiction
We lack jurisdiction over appeals that are moot. Baker & Drake, Inc. v. Pub. Serv. Comm'n of Nev. (In re Baker & Drake, Inc.), 35 F.3d 1348, 1351 (9th Cir. 1994). Trustee contends that this appeal is moot, as OCI did not seek a stay of the order approving the final account and Trustee has already made the proposed distributions to creditors who are not parties to this appeal.
As the Ninth Circuit noted in Focus Media, Inc. v. Natl. Broad. Co. Inc. (In re Focus Media, Inc.), 378 F.3d 916, 922-23 (9th Cir. 2004), bankruptcy appeals may become moot in one of two ways. First, events may occur that make it impossible for the appellate court to fashion effective relief. Focus Media, 378 F.3d at 922. Alternatively, an appeal may become equitably moot when the " '[a]ppellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court, ' thus 'permitt[ing] such a comprehensive change of circumstances to occur as to render it inequitable . . . to consider the merits of the appeal.'" Id . at 923 (alterations in original) (quoting Tron v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir. 1981)). Equitable mootness occurs " 'when an appellant neglect[s] to obtain a stay pending appeal and the rights of third parties have intervened." Arnold & Baker Farms v. U.S. (In re Arnold & Baker Farms), 85 F.3d 1415, 1419-20 (9th Cir. 1996) (quoting Spirtos v. Moreno (In re Spirtos), 992 F.2d 1004, 1006 (9th Cir. 1993)).
This type of appeal is constitutionally moot. Church of Scientology of Cal. v. U.S., 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992). The Seventh Circuit has succinctly described the difference between constitutional mootness and equitable mootness: constitutional mootness is characterized by an " inability to alter the outcome" while equitable mootness involves an " unwillingness to alter the outcome." Matter of UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994).
In this case, OCI never sought a stay of the distribution to other creditors. Even though a failure to obtain a stay does not necessarily render an appeal moot, " it is obligatory upon [an] appellant . . . to pursue with diligence all available remedies to obtain a stay of execution of the objectionable order (even to the extent of applying to the Circuit Justice for relief . . .) if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from." Roberts Farms, 652 F.2d at 799.
Here, OCI's decision not to seek a stay permitted distributions to be made to other creditors who are not parties to this appeal. We have noted that disbursement of funds in such circumstances may moot an appeal. Lobel & Opera v. U.S. Trustee (In re Auto Parts Club, Inc.), 211 B.R. 29, 33 (9th Cir. BAP 1997) (" [t]he disbursement of funds pending appeal may moot the appeal" although that appeal was not moot because appellant had been required to disgorge the funds that had then been distributed to other creditors and " [t]urnabout is fair play"); Credit Alliance Corp. v. Dunning-Ray Ins. Co. (In re Blumer), 66 B.R. 109, 113 (9th Cir. BAP 1986) (effective relief is impossible and appeal is moot " if funds have been disbursed to persons who are not parties to the appeal"); cf. Beatty v. Traub (In re Beatty), 162 B.R. 853, 856 (9th Cir. BAP 1994) (" in the absence of any transfers of property or disbursements of funds, we do not find that the actions of a trustee in administering the Chapter 7 estate constitute a sufficient change of circumstances to render this appeal moot) (emphasis added), overruled on other grounds in Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 2008 WL 4330558 (9th Cir., Sept. 24, 2008).
In an unpublished non-precedential decision, the Ninth Circuit held an appeal of an order approving a trustee's final report was mooted by disbursements to other creditors. Schafler v. Spear (In re Schafler), 280 Fed.Appx. 648 (9th Cir. 2008) (" because disbursement under the final report was not stayed and all disbursements were made to entities that were not party to the appeal, the BAP properly concluded that any challenge to the final report was moot"). Although the unpublished decision is not binding, we cite it for its persuasive value. See Fed. R. App. P. 32.1 and 9th Cir. Rule 36-3(b) (allowing courts to cite to unpublished decisions issued after January 1, 2007).
In a remarkably similar case, a chapter 7 debtor appealed a final order approving a trustee's final report and proposed distribution. Carr v. King (In re Carr), 321 B.R. 702 (E.D. Va. 2005). The debtor did not seek a stay pending appeal and the trustee made the approved disbursements, including a distribution to a non-party creditor. The court found that the appeal was constitutionally and equitably moot.
The Carr court noted that the principle of equitable mootness " applies with particular force when 'a party, seeking a return to the status quo ante, sits idly by and permits intervening events to extinguish old rights and create new ones.'" Id . at 706, quoting Mac Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002). In deciding whether the appeal was equitably moot, the court considered four factors:
(1) whether the appellant sought and obtained a stay;
(2) whether the . . . equitable relief ordered has been substantially consummated;
(3) the extent to which the relief requested on appeal would affect the success of the . . . other equitable relief granted; and
(4) the extent to which the relief requested on appeal would affect the interests of third parties.
Carr, 321 B.R. at 707. Here, as in Carr, the first, second and fourth factors weigh in favor of dismissing the appeal as equitably moot. OCI did not seek a stay, the distributions proposed in the final report have been completed, and reversal would adversely affect the rights of non-parties to this appeal, who would have to disgorge payments received.
OCI cites Ninth Circuit cases acknowledging that disbursement of funds, in and of itself, does not preclude effective relief because Trustee could seek disgorgement of the funds paid. See, e.g., U.S. v. Arkison (In re Cascade Roads, Inc.), 34 F.3d 756, 761 (9th Cir. 1994); Salomon v. Logan (In re Int'l Environ. Dynamics, Inc.), 718 F.2d 322, 325-26 (9th Cir. 1983) (where funds have been disbursed to a party to the appeal, the appellate court has the ability to " fashion effective relief by remanding with instructions to the bankruptcy court to order the return of erroneously disbursed funds."). We agree; we could fashion effective relief and the appeal is therefore not constitutionally moot. It is, however, equitably moot, as OCI did not take the simple steps to seek a stay of the appeal and prevent the intervention of the rights of third parties. OCI's inaction permitted " such a comprehensive change of circumstances to occur as to render it inequitable . . . to consider the merits of the appeal.'" Focus Media, 378 F.3d at 923 (alterations in original).
Unlike in Cascade Roads and International Environmental Dynamics, the trustee here has actually made disbursements to creditors who are not parties to this appeal; the rights of third parties have intervened. In Cascade Roads, the government paid a claims court judgment to the trustee, but notified the trustee that it would seek to recover any judgment proceeds that he had distributed if it were successful in its appeal of the judgment. Cascade Roads, 34 F.3d at 761. The trustee, who was a party to the appeal, retained the proceeds and did not distribute them to creditors. Id . at n.4. The Ninth Circuit could therefore " fashion effective relief by ordering the trustee to return the judgment." Id . In International Environmental Dynamics, unlike here, the creditor who received the distribution was a party to the appeal, so effective relief was possible. Int'l Environ. Dynamics, 718 F.2d at 325-26.
OCI's purported warning to creditors of a possible disgorgement if it prevailed on appeal is not sufficient to defeat equitable mootness. The warning was interjected into a response to a designation of issues on appeal; the creditors were not parties to the appeal. OCI acknowledged at oral argument that the warning was not given before the distribution.
For the foregoing reasons, we believe the appeal is equitably moot and therefore will DISMISS it. Even if the appeal were not moot, we would affirm on the merits for the reasons set forth in the next section.
B. The Merits
The parties did not cite any cases directly on point, but we found and adopt the persuasive analysis of other courts holding that a trustee does not have to make distributions to an undersecured creditor who did not amend its claim to assert or estimate the unsecured portion.
In In re Padget, 119 B.R. 793 (Bankr. D. Colo. 1990), an undersecured creditor filed a secured claim in the debtor's chapter 7 case. The creditor never supplemented or amended its claim to reflect the unsecured deficiency amount. The trustee issued his final report treating the claim as secured and excluding the creditor from the list of unsecured creditors receiving distributions. After the final report was approved and the distributions made, the creditor sought reconsideration, arguing that " (1) after it timely filed its proof of claim in the case, denoted as a secured claim, it did not need to file an amended or supplemental proof of claim to reflect its subsequent status as an unsecured, or undersecured, creditor and, (2) before distribution of estate proceeds, the [t]rustee is responsible for examining and ascertaining the legal status of each claimant in the estate and properly distributing the estate's proceeds to all creditors with unsecured and undersecured claims." Id . at 794. Both arguments are similar to those advanced by OCI here.
Like OCI here, the creditor's position was predicated on section 506(a); the creditor contended that as a matter of law, its claim was bifurcated into secured and unsecured portions and the trustee must therefore treat the claim as unsecured. Id.
The Padget court framed the issue as follows: " must a trustee pay an undersecured creditor from proceeds of the estate when the creditor filed a proof of claim as a secured creditor?" Id . The court answered " no":
For the reasons set forth in this Opinion, the Court concludes that a creditor filing a proof of claim denoted a secured claim shall be treated as a creditor with only a secured claim by the trustee for purposes of distribution of estate assets. A creditor with an undersecured or unsecured claim, or a creditor with a secured claim that devolves into an undersecured or unsecured claim, must timely file an amended, or supplemental, proof of claim - or otherwise provide legally sufficient notice of same to the trustee - in order to be treated as an unsecured creditor of the estate and receive a pro rata distribution of estate proceeds.
Id . at 795 (emphasis in original).
In support of its holding, the Padget court first observed that Rule 3002(a) requires an unsecured creditor to file a proof of claim in order for the claim to be allowed and paid. The court also noted that under section 502(a), the creditor's statement of the amount and character of its claim is presumptively valid and deemed allowed in the absence of an objection. The creditor could not change the status of its claim after allowance unless it filed a timely amendment or supplemental claim.
Section 501(a) provides that a creditor " may" file a proof of claim. The legislative comments to subsection (a) note that it is permissive only and does not require filing of a claim. Nonetheless, the comments provide that the Bankruptcy Rules and " practice under the law" will guide creditors as to the necessity of filing a claim. " In general, however, unless a claim is listed in a chapter 9 or chapter 11 case and allowed as a result of the list, a proof of claim will be a prerequisite to allowance for unsecured claims, including priority claims and the unsecured portion of a claim asserted by the holder of a lien." Hist. and Stat. Notes Accompanying 1978 Revisions (emphasis added).
Like the creditor in Padget, OCI argues that Trustee is obligated to allow the unsecured amount of OCI's claim, particularly when Trustee filed a notice of abandonment acknowledging that the secured debt on the Property exceeded the value of the Property. The Padget court, not persuaded by a similar argument, held that a trustee is not required to either pay the unsecured portion of the creditor's claim or else object to the creditor's secured claim. A " trustee should not, and is not charged with the obligation to, examine a claim with a purpose and view to increasing the claim or improving a claimant's status over that asserted by other creditors." Id . at 799.
It is not a trustee's duty to protect individual creditors against the consequences of failing to file a claim, filing a late claim, filing an insufficient claim, or failing to properly assert a deficiency claim. It is a trustee's principal duty to object to unsubstantiated, excessive, or unallowable claims.
Id .
Citing Padget, the Tenth Circuit Court of Appeals also held that a creditor who filed a timely secured proof of claim must amend its claim to assert the unsecured, undersecured portion or move for valuation of its collateral. Agricredit Corp. v. Harrison (In re Harrison), 987 F.2d 677, 680 (10th Cir. 1993). The Tenth Circuit acknowledged that under section 506, the creditor's claim was unsecured to the extent that the amount exceeded the value of the property. That, in and of itself, did not require the trustee to provide for payment of the unsecured portion absent an amendment by the creditor to its secured proof of claim or the filing of a motion to value the security. Id .
Montana's Local Rule 3001-1 is consistent with these decisions:
An undersecured claim which requires an allowance for a deficiency resulting from the enforcement of a security agreement, shall be accompanied by excerpts of the security and perfection documents that are directly germane to establishing the claim, by a summary of the remaining principal balance of the debt, together with the amount of accrued unpaid interest claimed, and the total amount alleged due, as well as a description of the security, and if repossession has occurred, the date of repossession or seizure, whether the sale was public or private, the date of sale, sale price, person to whom sold, the date notice of the sale was given to the debtor and to the trustee, and an itemization of the credit allowed toward the original debt. If repossession has not occurred, the estimated time for the proposed method of liquidating the security must be given. The creditor must file a proof of claim stating the dollar amount of the claim which is unsecured (or a good faith estimate, with details providing the basis for such estimate).
Local Rule 3001-1 of the Bankruptcy Court for the District of Montana (emphasis added). OCI contends that Montana Local Rule 3001-1 is inapplicable because its security interest did not arise out of a security agreement but out of a judgment. OCI is correct; technically the rule does apply only to undersecured deficiency claims " resulting from the enforcement of a security agreement." Nonetheless, the principles set forth in Padget and presumably underlying the local rule are consistent with the bankruptcy court's conclusion here that any undersecured creditor should file a claim for the unsecured portion of its claim (or a valuation motion) in order to participate in any distribution to unsecured creditors.
At oral argument, Trustee stated and OCI agreed that Trustee had encouraged OCI to amend its claim but OCI refused. Had OCI simply amended its claim to assert such a deficiency, the amendment could have related back to its original proof of claim and been deemed timely. In re Spurling, 391 B.R. 783 (Bankr.E.D.Tenn. 2008) (unsecured deficiency claims filed after bar date related back to filing of original secured proof of claim; because trustee did not show any inequity in allowing creditors to amend the secured claims, the court overruled the trustee's objection to the claims).
While Padget and Harrison are not binding on the panel, their reasoning is sound and persuasive. If we had not opted to dismiss this appeal as equitably moot, we would affirm the bankruptcy court's holding that " it's certainly not the trustee's responsibility to pursue a bifurcation of a claim of a secured creditor."
V. CONCLUSION
For the foregoing reasons, we DISMISS this appeal as equitably moot.