Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: June 21, 2007
Appeals from the United States Bankruptcy Court for the Central District of California. Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding. Bk. No. LA 04-10052-TD.
Before: KLEIN, PAPPAS and ALLEY, [ Bankruptcy Judges.
Hon. Frank R. Alley, U.S. Bankruptcy Judge for the District of Oregon, sitting by designation.
MEMORANDUM
In these two appeals that are being addressed in a single decision, debtor Stephen Law and Lili Lin, appeal from two orders entered in favor of the chapter 7 trustee. The first appeal (CC-06-1427) is from an order approving a compromise between the trustee and two judgment creditors. The second appeal (CC-06-1379) is from an order granting a motion to sell real property. The bankruptcy court authorized the trustee to distribute proceeds from the sale of real property to creditors pursuant to the settlement agreement complained about in CC-06-1427, and to the estate pursuant to an earlier order that avoided and recovered a deed of trust in favor of the trustee. Finding no error, we AFFIRM both orders.
FACTS
Stephen Law filed a chapter 7 case in January 2004 in which he scheduled and claimed as exempt a residence in Hacienda Heights, California. Alfred Siegel is the case trustee.
The residence was scheduled as having a value of $363,348.00 subject to two voluntary liens. The first is a note and deed of trust on a conventional mortgage recorded in 1988 on which $147,156.52 was owed at the time of filing. Second, a 1999 note and deed of trust debt (" Note and DOT") scheduled at $156,929.04 in favor of Lili Lin was listed on Schedule D as " Lin's Mortgage & Associates, 114 Shan Xan Jui Rd, Guangzhou, PR China." There were also two judgment liens of $131,821.74 (" Li Lien") and $3,750.00. The Li Lien arose from a state court judgment entered in favor of Cau-Min Li on October 14, 1999. We have no explanation how, or whether, the original 1 $168,000 note amount was paid down or the scheduled amount of $156,929.04 was an error. The discrepancy, however, is not material to our analysis of the issues before us.
The trustee challenged the Lili Lin lien by filing Adversary Proceeding No. 04-1969 to avoid the grant of the lien conferred by the Note and DOT on a fraudulent transfer theory by way of California Civil Code § 3439.04(a) and the " strong arm" power under 11 U.S.C. § 544(b).
In the complaint, the trustee alleged that the $168,000 promissory note to Lili Lin, dated June 24, 1999, and recorded on or about June 28, 1999, and the attendant deed of trust were fictitious, fraudulent, and intended to diminish the equity in the property.
We have no explanation how, or whether, the original $168,000 note amount was paid down or the scheduled amount of $156,929.04 was an error. The discrepancy, however, is not material to our analysis of the issues before us.
Subsequent to our decision, the trustee both appealed our decision to the Ninth Circuit, and filed a complaint in the bankruptcy court against Lili Lin of China for declaratory relief (Adversary Proceeding No. 07-01102).
The trustee obtained a default judgment in the adversary proceeding on August 31, 2004, which was vacated on October 21, 2004, after a person claiming to be the real Lili Lin (" Lili Lin of China") filed a Motion to Set Aside Default and Default Judgment through counsel.
In April 2005, a different Lili Lin from Artesia, California (" Lili Lin of Artesia"), filed an answer in the adversary proceeding and a stipulation for judgment that purported to resolve all the differences between the trustee and Lili Lin of Artesia with respect to the adversary proceeding.
Lili Lin of Artesia executed a declaration stating that she knows the debtor and did not loan him money as set forth in the Note and DOT. She further declared that the debtor gave her a copy of the Note and DOT in 1999, but never explained to her why he gave her the documents. She also stated that she did not reside in China and she did not sign a declaration in support of the motion to set aside the default judgment.
The trustee filed a Motion to Approve Compromise with Lili Lin of Artesia. Lili Lin of China filed an opposition to the compromise arguing that she had not settled with the trustee.
A hearing on the compromise was held on May 18, 2005. The trustee appeared through counsel, the debtor appeared pro se, and attorney Peter Chow appeared on behalf of Lili Lin of China.
The court ruled that Lili Lin of China lacked standing to oppose the compromise motion. The court noted that Lili Lin of China had never actually appeared in court in person and had not furnished evidence to the court that she was the lienor. In contrast, there was Lili Lin of Artesia evidence that she had been involved in the grant of the lien in 1999.
The court determined that the evidence proffered by the trustee was sufficient to grant the compromise motion and that approval of the stipulated judgment in favor of the trustee was fair and equitable, and in the best interests of the estate. The stipulated judgment provided that the transfer to Lili Lin of Artesia was avoided under § 544(b), and California Civil Code § 3439.04(a). The interests of Lili Lin of Artesia in the Note and DOT were deemed recovered by the trustee under § 550(a) and preserved for the benefit of the estate under § 551.
On May 31, 2005, Lili Lin of China, acting pro se, filed an answer to the trustee's adversary complaint, together with a Motion for Reconsideration of the order approving the compromise between the trustee and Lili Lin of Artesia.
A hearing on the Motion for Reconsideration was held on July 6, 2005. Neither Lili Lin of China nor the debtor appeared at the hearing. On July 12, 2005, the court denied the motion. Lili Lin of China appealed (BAP No. CC-05-1303). On appeal, we affirmed the order approving the compromise between the trustee and Lili Lin of Artesia. Lin v. Siegel, BAP No. CC- 05-1303-KMoB (filed 12/29/06). However, because Lili Lin of China's status as a lienholder was not conclusively determined by the compromise order, we held it to be incumbent upon the trustee to obtain an appropriate judicial determination eliminating her interest.1 Id.
In the meantime, on July 8, 2005, the trustee filed a Motion for Turnover of the property pursuant to 11 U.S.C. § 542 on the premise that there was equity in the property for the benefit of the estate.
A hearing was held on August 3, 2005, and the motion was granted on August 10, 2005, over the debtor's opposition.
On January 9, 2006, the trustee filed a Motion to Sell the property free and clear of liens, interests, and encumbrances pursuant to 11 U.S.C. § § 363(f) & (m). Debtor opposed the motion, which was heard by the court on February 1, 2006.
At the hearing on the sale motion, an auction was conducted. The property was sold to the high bidder for $680,000, which was approximately $165,000 more than the sum of all liens listed on Schedule D plus the debtor's homestead exemption.
The order granting the sale motion was entered on February 22, 2006. Escrow on the sale closed on March 9, 2006. The court ruled that the purchaser of the property was a buyer in " good faith" within the meaning of 11 U.S.C. § 363(m), and was entitled to the protections afforded by that section.
When he filed the sale motion, the trustee also filed a Motion to Surcharge in which he sought to surcharge the debtor's $75,000 homestead exemption by $75,000 because the debtor " engaged in exceptional circumstances of misconduct" by " willfully and knowingly attempt[ing] to defraud his creditors by removing equity from the property."
On February 24, 2006, the debtor and Lili Lin of China filed a Motion for Reconsideration of the sale order. In the alternative, they sought a stay of the sale order pending appeal.
On March 22, 2006, the court held a combined hearing on the reconsideration motion and the continued surcharge motion. The court granted the trustee's motion to surcharge the entire $75,000 exemption. The court also denied the debtor's motion to reconsider the sale order and his oral motion for stay pending appeal.
The debtor appealed the turnover, sale and surcharge orders (BAP Nos. CC-05-1344, CC-06-1195 and CC-06-1180). On appeal, the turnover and sale orders were dismissed as moot. Law v. Siegel, BAP Nos. CC- 05-1344-KMoB and CC-05-1195-KMoB (filed 12/29/06). The order surcharging the debtor's $75,000 homestead exemption by $75,000 was reversed. Law v. Siegel, BAP No. CC- 06-1180-KMoB (filed 12/29/06).
On July 21, 2006, the trustee filed a motion to approve a compromise between the trustee and judgment creditors Cau-Min Li and Michael Goudi dba United Judgment Enforcement (" Judgment Creditors"). Pursuant to the settlement, the parties agreed that the trustee would pay the Judgment Creditors $120,000 in full and final satisfaction of two judgment liens recorded against the debtor's residence (one being the Li Lien), and two proofs of claim.
Goudi is an assignee of the debt owed to Li.
The details of the two judgment liens and two proofs of claim are as follows:
The settlement allowed the trustee to pay all timely filed allowed unsecured proofs of claim in full. The appellants opposed the motion to compromise.
A hearing on the compromise was held on August 16, 2006. The court overruled the appellants' objection and approved the compromise as fair and equitable, and in the best interests of the estate. The appellants filed a motion for reconsideration that was denied on October 17, 2006. The appellants appealed (CC-06-1427).
Soon after entry of the compromise order, the trustee filed a continued motion to sell in an effort to pay the Judgment Creditors in accordance with the court approved compromise agreement. The trustee sought to pay (from the proceeds that he sequestered from the sale of the debtor's residence) the deed of trust recovered by the trustee from Lili Lin of Artesia ($280,813.17), a judgment lien of Andrew Schucker Special Administrator of the Estate of Robert M. Schucker ($2,500), and the $120,000 settlement amount owed to the Judgment Creditors pursuant to the court approved compromise. The appellants opposed the motion.
A hearing took place on October 11, 2006. On October 23, 2006, the court entered an order overruling the appellants' objection and granting the motion, ruling that the trustee may disburse the sale proceeds to the Judgment Creditors pursuant to the court approved compromise, and to the trustee pursuant to the recovered deed of trust. All remaining sale proceeds after disbursement were to remain property of the estate pursuant to 11 U.S.C. § 541.
The appellants timely appealed (CC-06-1379).
On November 9, 2006, we issued an order staying the continued sale order pending appeal. On December 29, 2006, we issued an order modifying our previous order that stated the stay of the continued sale order automatically terminates upon the earlier of: (1) the judicial determination of Lili Lin of China's lienholder status, or (2) the disposition of the debtor's appeal of the continued sale order (CC-06-1379). As noted, trustee filed an adversary proceeding against Lili Lin of China seeking a judicial determination eliminating her interest as a lienholder (CC-07-01102). The adversary proceeding is currently pending.
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUES
(1) Whether the bankruptcy court abused its discretion when it approved a compromise between the trustee and the Judgment Creditors.
(2) Whether the bankruptcy court erred when it granted the trustee's continued motion to sell real property.
STANDARD OF REVIEW
The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004). We accept findings of fact made by the bankruptcy court unless these findings leave us with the definite and firm conviction that a mistake has been committed. Id.
We review an order approving a compromise of a controversy for an abuse of discretion. Debbie Reynolds Hotel & Casino, Inc. v. Calstar Corp., Inc. (In re Debbie Reynolds Hotel & Casino, Inc.), 255 F.3d 1061, 1065 (9th Cir. 2001). An abuse of discretion may be based on an incorrect legal standard, or a clearly erroneous view of the facts, or a ruling that leaves the reviewing court with a definite and firm conviction that there has been a clear error of judgment. SEC v. Coldicutt, 258 F.3d 939, 941 (9th Cir. 2001); Ho v. Dowell (In re Ho), 274 B.R. 867, 871 (9th Cir. BAP 2002).
DISCUSSION
I
Order approving compromise (BAP No. CC-06-1427)
The appellants first argue that because the proof of claim filed by Li (that the bankruptcy court allowed in the amount of $188,330.05) is the subject of a separate appeal pending before us (CC-06-1390), it was improper for the trustee to include that claim as part of his settlement with the Judgment Creditors.
The trustee argues that because the bankruptcy court overruled the appellants' objection and allowed Li's claim, it remains valid unless we determine otherwise in appeal CC-06-1390. If we reverse the bankruptcy court, the trustee contends that the settlement agreement will no longer remain valid and he will not make any payments to the Judgment Creditors in accordance therewith.
We are issuing our decision in CC-06-1390 concurrently with the disposition of these two appeals. In CC-06-1390, we affirm the court's dismissal of the debtor's attack on Li's proof of claim, which had previously been allowed by a final order, in the amount of $188,330.05. Thus, the inclusion of the Li proof of claim in the settlement agreement was correct.
Pursuant to the settlement agreement between the trustee and the Judgment Creditors, the trustee was to pay $120,000 to the Judgment Creditors in full and final satisfaction of their allowed claim of $188,330.05. The Judgment Creditors also agreed to waive their right to pursue any and all remaining amounts due on account of the judgment liens and proofs of claim against the estate.
A compromise, which must be in the best interests of the estate, is scrutinized under the legal standard of whether it is " fair and equitable, " taking into account: (a) probability of success in litigation; (b) collectability; (c) complexity, expense, inconvenience, and delay attendant to continued litigation; and (d) the interests of creditors. Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1381 (9th Cir. 1986); Simantob v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 290 (9th Cir. BAP 2005).
The trustee contends that because the Judgment Creditors agreed to reduce their claims in the case by approximately $70,000, it allowed the trustee to pay all timely filed allowed unsecured claims in full. The trustee also argues that the settlement would allow him fully to administer the estate and close it, which would bring on-going litigation in the bankruptcy case to an end.
The appellants' arguments do not persuade us that the bankruptcy court abused its discretion when it approved the compromise between the trustee and Judgment Creditors as fair and equitable. Hence, the order approving the compromise is affirmed.
II
Continued sale order (BAP No. CC-06-1379)
Subsequent to the court approved compromise between the trustee and Judgment Creditors, the court also approved the trustee's continued motion to sell that authorized the trustee to distribute the sale proceeds. The court authorized the trustee to distribute $120,000 to the Judgment Creditors pursuant to the compromise order and approximately $281,000 to the trustee from the recovered deed of trust from Lili Lin of Artesia.
On November 9, 2006, we issued an order staying the continued sale order pending this appeal. On December 29, 2006, we modified our order to provide that the stay automatically terminates upon the earlier of (1) the disposition of this appeal, or (2) the judicial determination of Lili Lin of China's lienholder status.
The trustee's adversary proceeding against Lili Lin of China is currently pending. In February 2007, the trustee filed a motion to suspend prosecution of the current appeals (CC-06-1379 and CC-06-1427). The trustee argued that if the bankruptcy court determines that Lili Lin of China has a valid interest in the sale proceeds, he would not seek to enforce the compromise order or the continued sale order. Conversely, the trustee argued that if the bankruptcy court determined that Lili Lin of China has no interest in the sale proceeds, then he would seek to enforce the two orders. On March 20, 2007, we denied the trustee's motion to suspend prosecution of these appeals.
Because our disposition of appeal number CC-06-1379 automatically terminates the stay of the continued sale order, and because we are affirming the compromise order (CC-06-1427), and we previously affirmed the trustee's recovery of the deed of trust from Lili Lin of Artesia, we see no reason why the trustee should be precluded from obtaining orders consistent with our earlier dispositions. The trustee could seek to enforce (or not enforce) the compromise order and the continued sale order following the determination of Lili Lin of China's interest.
Thus, the bankruptcy court did not err when it found that the trustee could distribute the sale proceeds to the Judgment Creditors and to the estate.
CONCLUSION
Since the appellants did not demonstrate how the bankruptcy court abused its discretion when it granted the motion to approve the compromise between the trustee and the Judgment Creditors, and because we conclude that the compromise is fair and equitable, and in the best interests of creditors, we AFFIRM the compromise order.
Since the purpose of the continued sale order was to distribute proceeds from the sale of the residence to the Judgment Creditors pursuant to the court approved compromise, and to the estate pursuant to the deed of trust recovered from Lili Lin of Artesia (and previously affirmed by us on appeal), we find no error by the bankruptcy court and further AFFIRM the sale order.
(1) judgment lien recorded July 31, 1996 as instrument number 96-1231138 in the negotiated reduced amount of $2,500; (2) judgment lien recorded January 6, 2000 as instrument number 00-0023003 in the amount of $131,821.74; (3) unsecured proof of claim in the amount of $188,555.05 timely filed in the Bankruptcy Case, designated by the Clerk of the Court as claim number 1; and (4) unsecured proof of claim in the amount of $3,686.00 tardily filed in the Bankruptcy Case, designated by the Clerk of the Court as claim number 5.