Opinion
NOT FOR PUBLICATION
Submitted Without Oral Argument at Seattle, Washington, January 21, 2011
Appeal from the United States Bankruptcy Court for the Western District of Washington. Bk. No. 09-16841. Honorable Samuel J. Steiner, Bankruptcy Judge, Presiding.
Jerome Shulkin of Shulkin Hutton, Inc., P.S. on brief for Appellants.
Christine M. Tobin of Bush, Strout & Kornfeld on brief for Appellee James F. Rigby, Chapter 7 Trustee.
Thomas A. Buford III on brief for Appellee United States Trustee.
Before: HOLLOWELL, JURY, and MARKELL, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Appellants Anthony Petrarca and Art Mazzola (Petrarca and Mazzola) appeal the bankruptcy court's order that resolved a disputed chapter 7 trustee election by determining that an insufficient percentage of creditors' claims requested the election. The appellants' only challenge on appeal is to the bankruptcy court's ruling that undersecured creditors were eligible to vote the unsecured portions of their claims. Because the outcome of the election would be the same even if the undersecured creditors were excluded from the calculations, we DISMISS the appeal as moot.
I. FACTS
Michael Mastro (the Debtor) is a large real estate developer and investor. An involuntary chapter 7 bankruptcy petition was filed against him on July 10, 2009, by three of his secured creditors. The Debtor consented to the petition on August 20, 2009. On August 21, 2009, James Rigby was selected to serve as the interim chapter 7 trustee (the Trustee).
Many of the Debtor's creditors, mostly banks, held real property as collateral and were undersecured (the Undersecured Creditors). Mastro's bankruptcy schedules show he had over $240,000,000.00 of unsecured debt and over $100,000,000.00 of undersecured debt. Petrarca and Mazzola are part of a group of unsecured creditors consisting of friends and family of Mastro who invested money with him (the F& F Group) and who are collectively represented by Mr. Jerome Shulkin and his co-counsel Mr. Dominick V. Driano (collectively, Shulkin).
The § 341 meeting of creditors was held on October 25, 2009. At the meeting, Shulkin requested the election of a permanent chapter 7 trustee pursuant to § 702(a). He proposed to elect Mr. Brian Ward (Ward). The § 341 meeting was continued to October 28, 2009. At the continued meeting, the trustee election was held. Shulkin proffered 80 proxies from the F& F Group holding over $45,500,000.00 in unsecured claims casting votes for Ward (the Proxies).
The United States Trustee (UST) presided over the election. Shulkin and the Trustee reserved their rights to object to the requests for the election and to the ballots cast.
On November 6, 2009, the UST filed a report of disputed election (the Election Report). The Election Report presented the UST's tabulations of the requests made and votes cast. He determined that the required 20% in creditors' claims needed to call for an election under § 702(b) was not met, and even if it had been met, there were not enough votes cast to replace the Trustee with Ward.
The UST calculated the pool of eligible claims as $180,717,663.32, which was based on two hundred proofs of unsecured claims that were not objected to and that were filed in the bankruptcy case prior to the date of the § 341 meeting. The UST included in the calculation of eligible claims the unsecured portions of the Undersecured Creditors' claims, totaling $51,498,544.39. With the Undersecured Creditors' claims included, $36,143,532.66 in claims had to vote in order to meet the 20% threshold of § 702(b).
All of the submitted votes amounted to 33.7% of allowable unsecured claims. However, in calculating the requests and votes, the UST determined that the Proxies ($45,532,262.91) had been improperly solicited and, therefore, the UST did not include them in the final total. With the Proxies excluded (and several other adjustments that have not been challenged), only $18,934,153.89 in eligible unsecured claims requested an election, falling well short of the $36,143,532.66 needed to satisfy § 702(b).
On November 16 and 19, 2009, Shulkin filed motions for the resolution of the disputed election and objections to the Election Report on behalf of several of the F& F Group, but not on behalf of Petrarca and Mazzola. Shulkin contended that the UST's calculation of the universe of claims was not accurate. He made numerous objections to specific claims, asserted the Proxies were valid, and argued that the Undersecured Creditors' claims could not be included as eligible claims because the unsecured interests were not liquidated or fixed. Shulkin asserted that the correct universe of claims totaled $81,820,669.90, and that $53,041,841.68 made the request for an election of trustee, overwhelmingly choosing Ward.
The objection to the Election Report was filed on behalf of the Italian Club, Inc., Zacri, Inc., Lucille Schweitzer, Lisa Schweitzer, and the Italian Community Hall. It did not purport to file an objection for the entire " ad hoc" Friends and Family Group.
Other parties objected to the Election Report as well. On December 1, 2009, the Trustee filed a memorandum regarding the disputed election. The Trustee contended the Proxies were improperly solicited and were correctly disqualified, resulting in insufficient votes to call and hold an election. The Trustee also contended that the Undersecured Creditors were allowed to vote the unsecured portion of their proofs of claim when the value of their collateral was listed in the Debtor's schedules or established by submitted appraisals or tax assessments. The Trustee asserted that the interests of the Undersecured Creditors with regard to the unsecured portion of their claims was the same as the interests of the unsecured creditors, and therefore, were not materially adverse to the other unsecured creditors.
On December 5, 2009, the bankruptcy court held a hearing to resolve the election. At the hearing the bankruptcy court determined that the solicitation of the Proxies was improper and disqualified them. Accordingly, the bankruptcy court ruled that the amount of the claims voted by the proxy holders could not be counted in whether 20% of the eligible claims requested the election. The bankruptcy court also determined that the Undersecured Creditors were entitled to vote the unsecured portion of their proofs of claim provided that the value of their collateral had been previously listed in the Debtor's schedules or demonstrated by submitted appraisals or assessments. Finally, the bankruptcy court found that the Undersecured Creditors did not have an interest materially adverse to the other unsecured creditors because they shared an interest in maximizing distributions, and thus held eligible claims pursuant to § 702(a).
Based on its rulings regarding the Proxies and the allowance of the votes by the Undersecured Creditors, the bankruptcy court found that there was an insufficient number of eligible claims to request an election under § 702(b). It affirmed the Election Report and entered an Order Re: Disputed Trustee Election (Election Order) on January 15, 2010, naming the Trustee as the permanent bankruptcy trustee. Petrarca and Mazzola timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(A). We address our jurisdiction under 28 U.S.C. § 158 below.
III. ISSUES
1. Do we have jurisdiction of the appeal?
2. If we have jurisdiction, did the bankruptcy court err in entering the Election Order?
3. Is the appeal frivolous?
On February 19, 2010, Petrarca and Mazzola filed a designation of the record and statement of issues on appeal. They assigned error to the bankruptcy court's ruling regarding the disqualification of the Proxies as well as its ruling regarding the Undersecured Creditors' eligibility to be included in the threshold necessary to call for an election and to cast votes. However, in their Opening Brief on appeal, Petrarca and Mazzola stated that they have abandoned the challenge to the bankruptcy court's ruling regarding the Proxies.
IV. STANDARDS OF REVIEW
Our jurisdiction is a question of law that we address de novo. Menk v. Lapaglia (In re Menk), 241 B.R. 896, 903 (9th Cir. BAP 1999). Additionally, standing is a jurisdictional issue, which is reviewed de novo. Caudill v. N.C. Mach., Inc. (In re Am. Eagle Mfg., Inc.), 231 B.R. 320, 327 (9th Cir. BAP 1999).
The bankruptcy court's conclusions of law regarding disputed trustee elections are reviewed de novo, and its findings of fact are reviewed for clear error. Berg v. Esposito (In re Oxborrow), 104 B.R. 356, 360 (E.D. Wash. 1989), aff'd, 913 F.2d 751 (9th Cir. 1990); In re Am. Eagle Mfg., Inc. 231 B.R. at 328. A bankruptcy court's calculation of whether the 20% requesting and voting requirements of § 702 have been met is reviewed for an abuse of discretion. Id . (citing In re Oxborrow, 913 F.2d at 754).
De novo review requires that we consider a matter anew, as if it had not been heard before, and as if no decision had been rendered previously. B-Real, LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 229 (9th Cir. BAP 2008). A bankruptcy court abuses its discretion when it applies the incorrect legal rule or its application of the correct legal rule is " (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record." United States v. Loew, 593 F.3d 1136, 1139 (9th Cir. 2010) (quoting United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc)); see also Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 577, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). Likewise, a bankruptcy court's factual finding is clearly erroneous if it is illogical, implausible, or without support in the record. United States v. Hinkson, 585 F.3d at 1262.
V. DISCUSSION
A. Trustee Elections
Section 702 sets forth the process for electing a permanent trustee in a chapter 7 bankruptcy proceeding. In order to be eligible to vote for a trustee, a creditor must hold an allowable, fixed, liquidated, and unsecured claim, must not hold an interest materially adverse to other eligible creditors, and must not be an insider. 11 U.S.C. § 702(a). Under § 702(b), an election is not valid unless creditors holding 20% of the eligible claims request an election. A candidate is elected trustee if creditors holding 20% of the eligible claims actually vote and a majority of such claims is voted for the candidate. 11 U.S.C. § 702(c).
Rule 2003 charges the UST with presiding over the election and filing a report of the election with the bankruptcy court. Rule 2003(b), (d). If a party disputes the election and files a motion with the bankruptcy court, the bankruptcy court will resolve the dispute. Rule 2003(d).
B. Jurisdictional Issues
1. Standing
The Trustee and UST argue that because Petrarca and Mazzola did not file objections to the Election Report or participate in the hearing to resolve the disputed election, they do not have standing to appeal the Election Order.
The Ninth Circuit has adopted the " person aggrieved" test for determining whether a party has appellate standing. J.P. Morgan Inv. Mgmt., Inc. v. United States Trustee (In re Martech USA, Inc.), 188 B.R. 847, 850 (9th Cir. BAP 1995) (citing Fondiller v. Robertson (Matter of Fondiller), 707 F.2d 441, 442 (9th Cir. 1983)). The test limits appellate standing to " those persons who are directly and adversely affected pecuniarily by an order of the bankruptcy court." Matter of Fondiller, 707 F.2d at 442.
The Ninth Circuit has held that a party's attendance and objection at the bankruptcy court proceedings " should usually" be prerequisites to fulfilling the " person aggrieved" standard to appeal an order from that proceeding, unless the party received insufficient notice. Brady v. Andrew (In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1335 (9th Cir. 1985); see also Weston v. Mann (In re Weston), 18 F.3d 860, 864 (10th Cir. 1994) (creditors lacked standing to appeal bankruptcy court's order resolving trustee election because they did not participate in resolution of disputed election). The rationale to support the holding was a desire to promote economy and efficiency in the bankruptcy system. In re Commercial W. Fin. Corp., 761 F.2d at 1334-35. Attendance and objection in the bankruptcy court as a standing requirement ensures that " the bankruptcy court is made aware of all available evidence and objections when making its determination . . . and prevent[s] a party in interest from 'lying in the weeds' during bankruptcy court proceedings . . . only to appeal and generate additional unnecessary proceedings." White v. Virginia (In re Urban Broadcasting Corp.), 304 B.R. 263, 272 (E.D. Va. 2004) (concluding participation and objection were required for standing), aff'd on other grounds, 401 F.3d 236, 244 (4th Cir. 2005) (non-participation is an issue of waiver not standing).
In this case, there is no dispute that the Appellants received notice of the UST's Election Report and the hearing to resolve the disputed election. Furthermore, the Appellants' same arguments concerning the eligibility of the Undersecured Creditors' claims and the validity of the Proxies were presented to the bankruptcy court for determination by other parties, including those from the F& F Group. Therefore, allowing Petrarca and Mazzola to appeal the Election Order does not impede judicial economy. Therefore, our analysis must focus on whether Petrarca and Mazzola are directly and adversely affected pecuniarily by the Election Order.
This panel has determined that:
[i]n choosing to enact Code Section 702, the statute allowing creditors to vote for a Chapter 7 trustee, Congress must have concluded that the choice of a trustee could materially affect the creditors of the estate. Parties who make the effort to attend the meeting of creditors and vote for a trustee should be allowed to appeal an order resolving a disputed election.
In re Martech USA, Inc., 188 B.R. at 850. Accordingly, the Election Order affects Petrarca and Mazzola directly and pecuniarily. Because Petrarca and Mazzola, through their attorney, attended and requested a trustee vote, we conclude that they have standing to appeal the Election Order even though they did not file their own objections to the Election Report before the bankruptcy court.
2. Mootness
The UST and the Trustee also assert that by abandoning their challenge to the disqualification of the proxy votes, Petrarca and Mazzola have mooted their appeal. We agree.
Petrarca and Mazzola have not made any argument on appeal challenging the bankruptcy court's adoption of the UST's figures and calculations beyond asserting that the Undersecured Creditors' claims were ineligible to be included in a call (or vote) for a trustee election. The UST calculated the pool of eligible creditors' claims as $180,717,663.32. If the Undersecured Creditors' claims are excluded, the amount of eligible claims is reduced to $129,219,118.93. Twenty percent of that amount is $25,843,823.79. Only $18,934,153, 89 in eligible claims requested an election, falling short of the 20% threshold amount. Furthermore, even when the Undersecured Creditors votes are removed, the Trustee still received more votes than Ward.
The UST calculated that the Trustee received $109,119,623.36 in votes. If the $51,498,544.39 held by the Undersecured Creditors is subtracted from the voting total, the Trustee received $57,621,078.97 to Ward's $8,239,101.50.
Constitutional mootness is derived from Article III of the U.S. Constitution, which provides that the exercise of judicial power depends on the existence of a case or controversy. DeFunis v. Odegaard, 416 U.S. 312, 316, 94 S.Ct. 1704, 40 L.Ed.2d 164 (1974); Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 33 (9th Cir. BAP 2008). The doctrine of constitutional mootness is a recognition of Article III's prohibition against federal courts issuing advisory opinions. Church of Scientology of Cal. v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1980) (" It has long been settled that a federal court has no authority to give opinions upon moot questions or abstract propositions, or to declare principles or rules of law which cannot affect the matter in issue in the case before it.") (internal citations omitted).
The mootness doctrine applies when events occur during the pendency of the appeal that make it impossible for the appellate court to grant effective relief. Id . The determining issue is " whether there exists a 'present controversy as to which effective relief can be granted.'" People of Village of Gambell v. Babbitt, 999 F.2d 403, 406 (9th Cir. 1993) (quoting N.W. Envtl. Def. Ctr. v. Gordon, 849 F.2d 1241, 1244 (9th Cir. 1988)). If no effective relief is possible, we must dismiss for lack of jurisdiction. United States v. Arkison (In re Cascade Rds., Inc.), 34 F.3d 756, 759 (9th Cir. 1994).
Petrarca and Mazzola confined the appeal to the singular issue of whether the bankruptcy court erred in finding that the Undersecured Creditors held eligible claims entitling them to request and vote in the trustee election. The numbers in the Election Report indicate that Undersecured Creditors' claims did not affect the outcome of the election. See, e.g., Am. W. Airlines, Inc. v. Nat'l Mediation Bd., 119 F.3d 772, 777 (9th Cir. 1997) (election outcome unchanged even if disputed votes discounted, therefore plaintiff's injury not traceable to the decision to include the votes). Therefore, even if we were to reverse the bankruptcy court's determination that the Undersecured Creditors were eligible to use the unsecured portion of their claims to participate in the election, the Trustee would remain the permanent trustee for the Debtor's bankruptcy case. As a result, there is no case or controversy as to which we can provide effective relief. Id . Any determination we would make regarding this issue would be wholly advisory and beyond our jurisdiction.
C. Frivolous Appeal
In his response brief on appeal, the Trustee requested that the BAP enter an order to show cause why sanctions should not be imposed on Petrarca and Mazzola for filing a frivolous and deficient appeal. The Trustee did not file a separate motion requesting sanctions.
The Trustee contends the appeal is deficient because Petrarca and Mazzola failed to file excerpts of record pursuant to Rule 8009(b). That is not the case. Petrarca and Mazzola filed excerpts that provided an adequate record on April 14, 2010. The Trustee filed an appellate brief and its own excerpts of record on May 26 and 27, 2010, which was wholly duplicative of the record supplied by Petrarca and Mazzola.
We have the authority to impose sanctions under Rule 8020 when an appeal is frivolous. " An appeal is considered frivolous in this circuit when the result is obvious or the appellant's arguments of error are wholly without merit." See Taylor v. Sentry Life Ins. Co., 729 F.2d 652, 656 (9th Cir. 1984) (internal citations omitted) (applying Fed. R. App. P. 38). The imposition of sanctions against litigants for a frivolous appeal is a matter for our discretion. George v. City of Morro Bay (In re George), 144 Fed.Appx. 636, 637 (9th Cir. 2005). We decline to impose sanctions under Rule 8020 because at the time Petrarca and Mazzola filed their appeal, it was not wholly without merit.
Rule 8020 mirrors the language of Federal Rule of Appellate Procedure. It provides that if we " determine[ ] that an appeal from an order, judgment, or decree of a bankruptcy judge is frivolous, [we] may, after a separately filed motion or notice from the district court or bankruptcy appellate panel and reasonable opportunity to respond, award just damages and single or double costs to the appellee."
VI. CONCLUSION
Because we cannot provide effective relief to Petrarca and Mazzola if we were to reverse the bankruptcy court's ruling regarding the eligibility of the Undersecured Creditors' claims for purposes of § 702(b), we DISMISS the appeal as moot.