Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: September 21, 2007
Appeal from the United States Bankruptcy Court for the Central District of California. Hon. Vincent P. Zurzolo, Chief Bankruptcy Judge, Presiding. Bk. No. LA 99-49349 VZ.
Before: KLEIN, MONTALI and DUNN, Bankruptcy Judges.
MEMORANDUM
This appeal is from an order denying a request for allowance and payment of an administrative expense with respect to a dispute that is not yet finally resolved. Appellants filed the request for payment of their administrative expense under the Supreme Court's doctrine established in Reading v. Brown, 391 U.S. 471, 483-84, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), under which damages for trustee torts have administrative status. Appellants allege that the sale of real property by the former chapter 7 trustee was tortious and obtained by fraud and fraud on the court, and that at least half of the property sold was not property of the bankruptcy estate.
We AFFIRM because a settlement agreement that included a release of all known and unknown claims between Beverly Rodeo and the estate remains binding. Morever, the court order approving the real property sale is the subject of continuing litigation, but, for the time being, remains in effect, thereby negating appellants' underlying premise that the sale was wrongful.
(9th Cir. BAP July 14, 2006). These past memoranda decisions also provide additional background leading up to this appeal. Some facts are taken directly from our memoranda decisions in Beverly Rodeo Dev. Corp. v. Liberty Mut. Ins. Co. (In re Rodeo Canon Dev. Corp.), BAP Nos. CC- 04-1169 & 1509-BMoR (9th Cir. BAP Aug. 5, 2005), and Beverly Rodeo Dev. Corp. v. Chadorchi, et al. (In re Rodeo Canon Dev. Corp.), BAP No. CC- 06-1074-KPaB
Rodeo Canon Development Corporation (" debtor" or " Rodeo Canon") filed this chapter 11 case in 1999. Upon conversion to chapter 7, Robert D. Pryce became the trustee.
The debtor held record title to an office building at 9615 Brighton Way, Beverly Hills, California (" Brighton Way Property"), that was valued at $14,000,000 on the original petition.
The building was operated by the 9615 Brighton Way Partnership, a general partnership formed in 1990 to operate the property in which the co-general partners were the debtor Rodeo Canon and appellant Beverly Rodeo Development Corporation (" Beverly Rodeo"). Appellant Fred Yassian is the president and sole shareholder of Beverly Rodeo. The general partnership was still in existence when the chapter 11 was filed.
The primary bone of contention throughout this case has been the assertion that, although Rodeo Canon held record title, Beverly Rodeo actually owned a fifty percent interest in the Brighton Way Property.
At an auction held on March 22, 2001, Pryce obtained approval from the bankruptcy court to sell the Brighton Way Property to the Chadorchi Trust. The court's order was entered on April 4, 2001, and the sale closed soon after.
The sale was infected by crime. Pryce was later convicted of a federal crime that implicated the sale by way of a kickback scheme in which the purchaser is alleged to have participated. Pryce is now serving time in federal prison.
The validity of the sale has been the subject of litigation ever since. While there is pending litigation in the bankruptcy court regarding the validity of the sale, Beverly Rodeo's most recent attempt to void or vacate the order authorizing the sale has so far been unsuccessful. Accordingly, the sale has not been unwound and the sale order remains valid. There is, however, some possibility that the appellants' quest may eventually bear fruit.
Yassian, et al. v. Pryce, Adv. No. LA 03-02072 VZ, filed on Feb. 12, 2007.
At the hearing on February 20, 2007, the bankruptcy court also heard Beverly Rodeo's and Yassian's Motion to: (1) Hold Void or Vacate Sale Order Entered on April 4, 2001; and (2) Avoid Sale, filed on October 4, 2006 (the " Sale Avoidance Motion"). The Sale Avoidance Motion alleged that the sale order was void for want of subject matter jurisdiction and that the sale order should be vacated because of fraud on the court. The motion was denied.
Prior to the sale, in January 2001, Pryce filed an adversary proceeding for turnover of distributions made by Rodeo Canon and Beverly Rodeo to various entities (Adv. No. LA-01-01014-VZ). Beverly Rodeo and Yassian filed counterclaims, asserting an ownership interest in the Brighton Way Property.
Beverly Rodeo and Pryce reached a settlement, memorialized by a Settlement Deal Term Sheet (" SDTS"), and approved by the court on June 19, 2002. The SDTS included a release between Beverly Rodeo and the trustee of all known and unknown claims in connection with the Brighton Way Property. As will be seen, in 2005, the court rejected an agreement to rescind the SDTS. Thus, the SDTS and release remain in effect.
Paragraph 18 of the SDTS provides as follows:
A stipulated judgment, entered on July 11, 2002, dismissed most of Pryce's claims and Beverly Rodeo's counterclaims against the estate with prejudice.
Subsequent to the sale and approval of the release, Pryce resigned as trustee, and, as already noted, was later convicted of federal crimes, related (inter alia) to his duties as bankruptcy trustee in the administration of this case. Appellee Robert Goodrich was appointed as successor trustee on April 8, 2003.
Pryce's sale and misdeeds spawned numerous adversary and contested proceedings, including disputes regarding ownership of the Brighton Way Property and whether the sale was valid. According to the appellants, the complicated circumstances were compounded by the authorization of the sale before the court resolved a dispute regarding whether the debtor owned more than half of the asset.
The current appeal is entangled with at least two adversary proceedings and one other contested matter. Two of those three matters are presently on appeal before the district court (those appeals were briefly before this Court in early March 2007 as BAP Nos. CC-07-1079 and CC-07-1080). And, the other matter is at the pleading stage before the bankruptcy court, following remand by the Panel (BAP Nos. CC-07-1169 & 1509).
On March 25, 2005, Beverly Rodeo filed a request for approval of an administrative expense (" Request"). The Request alleges that Pryce, while acting as the chapter 7 trustee of the estate, wrongfully and tortiously harmed Beverly Rodeo by fraudulently inducing the court to authorize sale of the Brighton Way Property. The Request further alleges that approval of the sale was obtained by fraud on the court, since the court would have no authority to permit the sale if the Brighton Way Property was not property of the estate. Beverly Rodeo asserted that it has suffered damages of no less than $18.1 million.
This amount apparently is comprised of damages of $15.5 million created by losses attributable to the loss of the Brighton Way Property allegedly valued currently at approximately $19 million; damages resulting from the loss of cash flow generated by the Brighton Way Property in an amount not less than $1.6 million; and " additional consequential and incidental damages not yet fully quantified, but known to exceed" $1 million.
No immediate action was taken by Beverly Rodeo to schedule its request for payment of administrative expense for hearing. In the interim, Goodrich filed a motion requesting approval of an agreement between Goodrich and Beverly Rodeo and Yassian to rescind the SDTS. However, on September 6, 2005, the court denied the trustee's motion requesting approval of the agreement to rescind the SDTS. Thus, the release remains in effect.
On November 20, 2006, almost nineteen months after Beverly Rodeo first filed its Request, Goodrich filed an opposition to Beverly Rodeo's request for approval and payment of the administrative expense. Goodrich argued that the Request should be denied for three reasons: (1) the estate had derived judicial immunity for the sale of the Brighton Way Property; (2) Beverly Rodeo waived any right to such a demand under the terms of the SDTS; and (3) Beverly Rodeo suffered no damages because the Brighton Way Property was sold for more than fair market value. Goodrich later set a hearing for February 20, 2007.
Beverly Rodeo filed a reply to Goodrich's opposition to the Request on February 6, 2007, accusing Goodrich of pursuing a litigation tactic to " protect" interim fee applications. Beverly Rodeo reiterated that it suffered harm in the wrongful disposition of its property interests as a result of the wrongful sale of the Brighton Way Property. Beverly Rodeo also argued that derived judicial immunity does not apply because derived judicial immunity operates to insulate a person from liability for acts committed within or in excess of his jurisdiction, and is irrelevant to requests for administrative expense payments against an estate. Furthermore, Beverly Rodeo contended that Goodrich's opposition created a contested matter that should be treated as an adversary proceeding, especially in light of the significant overlap of issues pending in Adv. No. LA 03-02072-VZ, which directly attacks the sale order (among numerous claims).
After oral arguments were heard on February 20, 2007, the court denied the appellants' request for payment of the administrative expense. It criticized Beverly Rodeo and Yassian for not satisfying the " burden of going forward" to provide notice and hearing in seeking allowance of their Request in a timely fashion, and then it proceeded to decide the Request on the merits. The court concluded that the appellants did not meet the " burden of persuasion" or " burden of proof" to submit admissible evidence showing: (1) a basis for the Request to be categorized as an administrative expense claim; (2) causation (the expense was created by the estate or fiduciary of the estate); and (3) the amount of the claim. The court also denied the Request on two independent grounds: (1) that the release, which waived all claims between the appellants and the estate, was enforceable, and (2) that it was possible that derived judicial immunity protected the estate.
The court entered its order denying Beverly Rodeo's Request for Approval and Payment of Chapter 7 Administrative Expense Claim on February 27, 2007.
Beverly Rodeo timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUE
Whether it was error to deny the appellants' request for approval and payment of an administrative expense.
STANDARDS OF REVIEW
Denial of a request for payment of an administrative expense is reviewed for abuse of discretion. Gonzalez v. Gottlieb (In re Metro Fulfillment, Inc.), 294 B.R. 306, 309 (9th Cir. BAP 2003). A trial court abuses discretion if it bases its decision on an erroneous view of the law or a clearly erroneously view of the facts. Id . Under the abuse of discretion standard, the Panel may also reverse if it has a definite and firm conviction that the trial court committed a clear error of judgment. Tennant v. Rojas (In re Tennant), 318 B.R. 860, 866 (9th Cir. BAP 2004).
The court's determination that a waiver of claims against the estate existed in the SDTS agreement between the appellants and Pryce is an interpretation of contract question that is reviewed de novo. In re Beverly Hills Bancorp, 752 F.2d 1334, 1338 (9th Cir. 1984).
DISCUSSION
Section 503(a) of the Bankruptcy Code authorizes an administrative expense award to be obtained by making a " request for payment of an administrative expense." 11 U.S.C. § 503(a). After notice and a hearing, an administrative expense is allowed for " the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A).
The Code provides:
The Code states in pertinent part:
The Request in this instance is based on the Supreme Court's Reading Doctrine, which recognized administrative priority status under what is now 11 U.S.C. § 507(a)(2) for damage awards resulting from the tortious or wrongful conduct of a trustee during his administration of the estate. See Reading, 391 U.S. at 483-84 (Bankruptcy Act); Texas Comptroller of Pub. Accountants v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1071 (9th Cir. 1998). See also Oregon v. Witcosky (In re Allen Care Ctrs.), 96 F.3d 1328, 1331 (9th Cir. 1996) (Reading Doctrine applies to " post-petition tort-like conduct"); Metro Fulfillment, 294 B.R. at 310 (Reading survived enactment of the Code); Brutoco Eng'g & Constr. Co., Inc. v. Dennis Ponte, Inc. (In re Dennis Ponte, Inc.), 61 B.R. 296, 298 (9th Cir. BAP 1986) (damages for post-petition tort become an administrative expense under 11 U.S.C. § 503(b)(1)(A)).
Besides unsecured claims for domestic support obligations, administrative expense claims allowed under § 503(b) have higher priority in distribution over all other types of claims. See 11 U.S.C. § 507(a)(2).
In denying appellants' Request, the court ruled that the release in the SDTS, which included a release of all known and unknown claims between Beverly Rodeo and the estate, bound the appellants to a waiver of any claims they had against the estate. We perceive no error.
While we affirm the court's decision in denying the Request, we question the viability of the procedure used in resolving this matter at a hearing with respect to which there does not appear to have been adequate notice to the appellants that they were to provide evidence at that time, as anticipated by Federal Rule of Bankruptcy Procedure 9014(e). Although the court recognized that the Request and trustee's opposition was a contested matter subject to Federal Rule of Bankruptcy Procedure 9014 which requires that contested material facts be resolved in the same manner as the trial of an adversary proceeding, the court did not provide " procedures that enable parties to ascertain at a reasonable time before any scheduled hearing whether the hearing will be an evidentiary hearing at which witnesses may testify." Fed.R.Bankr.P. 9014(d) and (e).
Although Beverly Rodeo argues that the SDTS cannot be relied upon because the release itself is being contested in a pending lawsuit and that it is inappropriate for Goodrich to rely on the settlement when he had previously asked the court to approve his agreement to rescind the SDTS (which the court denied), the SDTS nevertheless remains effective and the release provisions are enforceable. The SDTS is a binding agreement that released all known and unknown claims between Beverly Rodeo and the estate.
Yassian v. Pryce (In re Rodeo Canon Dev. Corp.), Bk. No. LA 99-49349 VZ, filed Feb. 12, 2007.
The appellants also argue that Goodrich's reliance on the release is a defense to which Goodrich is unable to show there is no material question of fact regarding enforceability. Goodrich responds that the appellants are attempting to alter the burden of proof when appellants are the moving party.
We agree with the court that the appellants are not presently entitled to an administrative expense award in light of the enforceability of the release provided by the SDTS. However, we emphasize that the correctness in denying the Request is a temporal result of the current status of the case and other pending proceedings. We are mindful that Pryce has been convicted of federal crimes in connection with the sale of the Brighton Way Property. It is conceivable in the future that the sale may be undone or adjusted.
Accordingly, the court's denial of Beverly Rodeo's Request is without prejudice to a future request for payment of the administrative expense. If the sale were to be unwound, then the appellants would be entitled to ask the bankruptcy court to revisit the administrative expense question. Federal Rule of Civil Procedure 60(b)(5), as incorporated by Federal Rule of Bankruptcy Procedure 9024, is designed to relieve the appellants of the order denying the administrative expense claim if the sale order is vacated. However, the sale is valid for the moment, and Beverly Rodeo's Request cannot be sustained.
Federal Rule of Civil Procedure 60(b)(5) provides:
Thus, the bankruptcy court did not err in denying Beverly Rodeo's Request for payment of its administrative expense.
We do not find it necessary to discuss the issue of whether the estate was protected by derived judicial immunity of the trustee, since the enforceability of the release and sale order renders the court's judgment correct.
CONCLUSION
The court correctly denied the Request because the release attendant to the settlement agreement remains effective. We recognize that subsequent litigation may alter the present landscape. If and when that occurs, the administrative expense question may be revisited. For the present, however, we agree that the court was not in error to disallow Beverly Rodeo's Request. We AFFIRM.
18 Upon court approval of this Agreement and for good and valuable consideration, except for rights and obligations established, contemplated or preserved herein, Beverly [Rodeo] and the Trustee, and their respective agents, employees, and insurers, release each other from all claims, including all tax claims or obligations under United States Bankruptcy Code § 505(b) and causes of action in connection with the Brighton Way Property, whether known or unknown. It is the intention of the parties hereto that by executing the foregoing release it shall be effective as complete and absolute mutual bar to all claims, demands, and causes of action relating to any and all claims by and between Beverly [Rodeo] and the Trustee in connection with the Brighton Way Property, except claims and rights identified and preserved herein, including the pending appeal. In furtherance of this intention, the parties hereby waive any and all rights and benefits conferred upon the parties pursuant to California Civil Code § 1542, which provides: " A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Trustee's Mot. for Order Approving the Settlement Deal Term Sheet, Ex. A, at 8-9 (emphasis added; capitalization in original).
An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.
After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including . . . the actual and necessary costs and expenses of preserving the estate . . . .
The procedural error, however, was harmless. The result of denying the Request is correct because the appellants cannot satisfy their burden of proof due to the continuing vitality of the release in the SDTS. See Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1094 (9th Cir. 1995) (burden of proving administrative expense claim on claimant). Even if a briefing schedule had been set and a formal evidentiary hearing held under Rule 9014(d), the appellants would still be unable to establish fundamental premises of their Request that the sale was wrong and that they suffered damages as a result, so long as the order approving the SDTS remains enforceable.
Thus, even though the contested matter was not handled in strict accord with Rule 9014(d) and (e), the court was correct that appellants had no evidentiary proof from which to award an administrative expense at this stage of the litigation.
[T]he court may relieve a party from a final judgment, order, or proceeding . . . [if] a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application.