Opinion
No. 2:08-cv-00680-MCE.
December 1, 2008
MEMORANDUM AND ORDER
In June of 2006, Betsey Warren Lebbos ("Debtor") filed for bankruptcy. Linda Schuette ("Trustee") was appointed as Trustee of the Debtor's case, 06-22225-D-7, and subsequently hired Michael Daquisto as counsel for the estate. At the time of her filing, the Debtor failed to disclose or exempt from the bankruptcy estate her interest as plaintiff in an existing civil rights lawsuit ("Lawsuit") being litigated by Joseph Giovanazzi. Upon discovery of that litigation, the Trustee negotiated a settlement with the defendant, the County of Santa Clara, and moved for court approval to compromise the Debtor's interest in the Lawsuit.
On January 16, 2008, at a hearing on the matter, the Court denied the Trustee's Motion without prejudice on the grounds that it should properly have been briefed as a motion for approval of a "hybrid" transaction encompassing both a sale and a compromise. The Trustee subsequently renewed her motion as directed and, after a second hearing on March 12, 2008, the bankruptcy court approved the Trustee's sale/compromise of the Lawsuit in the amount of $6,400. Presently before the Court is the Debtor's appeal of the bankruptcy court's refusal to continue the second hearing and its decision on the merits of the transaction. For the following reasons, that court's decision is affirmed.
Because oral argument would not be of material assistance, this matter was deemed suitable for decision without oral argument. E.D. Local Rule 78-230(h).
STANDARD
District courts have jurisdiction to hear appeals from final orders of bankruptcy judges within the same judicial district.See 28 U.S.C. § 158(a). "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed.R.Bankr.Pro. 8013. "Conclusions of law are subject to de novo review." In re Bialac, 712 F.2d 426, 429 (9th Cir. 1983). In addition, the court's approval of a sale/compromise is reviewed for an abuse of discretion. In re Debbie Reynolds Hotel Casino, Inc., 255 F.3d 1061, 1065 (9th Cir. 2001); In re 240 North Brand Partners, Ltd., 200 B.R. 653, 656 (9th Cir. BAP 1996). The abuse of discretion standard allows for reversal only if the appellate court has a "definite and firm conviction" that the bankruptcy court "committed a clear error of judgment in the conclusion it reached." Ditto v. McCurdy, 510 F.3d 1070, 1079 (9th Cir. 2007) (internal quotations and citations omitted.)ANALYSIS
I. THE DEBTOR'S Lawsuit AUTOMATICALLY BECAME PART OF THE BANKRUPTCY ESTATE UPON FILING OF THE BANKRUPTCY PETITION
As a threshold matter, the Debtor claims that the bankruptcy judge erred by determining, absent formal measures, that the Lawsuit was part of the bankruptcy estate. She is incorrect.
"An `estate' is created when a bankruptcy petition is filed."In re Wu, 173 B.R. 411, 413 (9th Cir. BAP 1994). The bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "The Bankruptcy Code and Rules `impose upon the bankruptcy debtors an express, affirmative duty to disclose all assets, including contingent and unliquidated claims.'" Hamilton v. State Farm Fire Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001), quoting In re Coastal Plains, 179 F.3d 197, 207-208 (5th Cir. 1999) (emphasis in original).
"The debtor's duty to disclose potential claims as assets does not end when the debtor files schedules, but instead continues for the duration of the bankruptcy proceeding." Id.
The Debtor initiated her Lawsuit in March of 2002, and filed her petition for bankruptcy in June of 2006. Thus, her interest in the Lawsuit was in existence, and automatically became part of the bankruptcy estate, at the time she filed her bankruptcy petition.
The Debtor cites to no applicable law, nor has this Court found any, standing for the proposition that assets concealed from the trustee, inadvertently or not, may be added to the estate only through some formal process. Thus, the bankruptcy court was correct in determining that the Debtor's interest in the Lawsuit was an asset of the bankruptcy estate.
The Court is aware that the Debtor now denies having ever filed the bankruptcy petition. This Court has previously addressed her argument, repeated here for convenience:
Lebbos asserts that her signature on the bankruptcy petition was forged, and thus it should be dismissed. The bankruptcy court held that regardless of whether or not Lebbos signed her bankruptcy petition, her actions and statements evidenced her intent to file and to receive the benefits of bankruptcy, and thus she is bound by the petition. The bankruptcy judge notes that the Ninth Circuit Bankruptcy Appellate Panel ("BAP") dealt with a debtor seeking dismissal of her bankruptcy petition on the basis of forged signatures in In re Mendez, 367 B.R. 109 (9th Cir. BAP 2007). The BAP noted that "the real question in this case is whether the Debtor intended to file for protection under chapter 7 of the Bankruptcy Code. . . ." Id. at 120 (emphasis added). The BAP found that the debtor appeared at bankruptcy hearings and received required credit counseling, and never contested the validity of her petition. Id. at 119.
In the instant case, Lebbos similarly participated in the bankruptcy case, including her production of exhibits, her request to the judges of the Santa Clara County Superior Court comply with the stay request, and her statement in a brief that she filed bankruptcy. Therefore, as held by the bankruptcy court, Lebbos' actions and statements show that she intended to be bound by her bankruptcy petition.
Order Denying Appellant's Ex Parte Request to Certify Appeal to the Ninth Circuit, 7:8-8:3 (E.D. Cal. September 28, 2008) ("Order Denying Request to Certify Appeal").
II. THE BANKRUPTCY JUDGE'S DECISION NOT TO CONTINUE THE SECOND HEARING WAS PROPER
The Debtor argues that she, her creditors, and the attorney litigating the Lawsuit, Mr. Giovanazzi, received improper notice or no notice of the Trustee's second Motion for approval of the proposed sale/compromise.
A. The Bankruptcy Court Properly Determined That the Trustee's Inclusion of the Prior Hearing Date in the Body of the Second Motion Was Harmless Error.
The record shows that the Trustee committed a technical error in her second motion by modifying the first motion for later use instead of drafting the filing anew. Apparently, she changed the date only in the caption, rather than in the body of the document. The Debtor relies on that oversight as an error capable of supporting reversal. Nevertheless, as the bankruptcy court noted, it was obvious that the date in the body, January 16, was not applicable as it had already passed at the time the second motion was filed.
Moreover, the Debtor was clearly aware of the correct date because she was able to draft and file a "Motion to Continue March 12, 2008, Motion to Approve Compromise." Thus, that court properly determined that the incorrect date constituted harmless error.
B. The Bankruptcy Court Did Not Err in Determining That The Debtor Received Actual Notice of the Second Hearing.
The Debtor next argues that she was not formally served with the second motion and instead received notice via an internet search. However, the Debtor provides no evidence capable of convincing this Court that the bankruptcy court's contrary determination was clearly erroneous.
In reaching its decision, the bankruptcy court relied on the proof of service indicating the Debtor was in fact served with the second motion and that service was had at the correct address. Moreover, that court reasoned that its decision was supported by the Debtor's ability to prepare and submit a ten-page opposition brief, in conjunction with a nine-page declaration, prior to the March 12 hearing. Additionally, that court noted that the issues before it remained virtually unchanged from January to March and that it was clear from the record that the Trustee at all times had every intention of renewing her motion. Finally, the bankruptcy court determined that the request for a continuance was simply part and parcel of the dilatory tactics in which the Debtor had engaged throughout the bankruptcy proceedings.
Thus, in light of the ample evidence relied upon by the bankruptcy court, this Court cannot say that its determination was clearly erroneous.
C. The Bankruptcy Court Properly Determined That the Appropriate Third Parties Received the Required Notice.
Finally, the Debtor argues that her creditors and the attorney handling her Lawsuit were legally entitled to formal notice of the sale/compromise, and that no such notice was forthcoming. In its September 30, 2008 Order Denying Request to Certify Appeal, this Court found otherwise.
Again for convenience, the Court repeats its recent argument here:
Bankruptcy cases may have a wider breadth of parties in interest than typical civil litigation. In re Mariner Post-Acute Network, Inc., 267 B.R. 46, 53 (Bankr.D.Del. 2001) (noting that in bankruptcy cases, certain matters may affect employees, vendors, landlords, parties to contracts, and other parties). However, this wider breadth does not translate into a notification requirement above and beyond Rule 9019(a). As noted by the bankruptcy judge during the approval hearing for the sale/compromise, Schuette was not required to notify Giovanazzi. He was not listed as a creditor in the parent bankruptcy case, had not filed a proof of claim, and had not requested special notice. Further, Giovanazzi filed a declaration opposing the sale/compromise, and thus not only was he notified, he had time to prepare and present his views on the sale/compromise, which were considered by the bankruptcy court. Therefore, even though Schuette was not required to notify Giovanazzi, his declaration shows that he was aware of the sale/compromise. Rule 9019(a) is clear regarding the notice requirements in the event of a sale/compromise of a pending lawsuit in a bankruptcy proceeding, and thus Lebbos' first proposed question of law is moot.
Lebbos further asserts that the trustee failed to notify each creditor in the parent bankruptcy case. If true, this failure would be a violation of Rule 9019(a), as it requires notification of a compromise to all creditors. See Fed.R.Bankr.P. 9019(a). Lebbos attached to this Ex Parte Request a declaration from Mr. Paul Deavenport stating that he is a creditor, and did not receive notice of the sale/compromise of the civil rights lawsuit. However, Lebbos herself stated in a sworn declaration that listing Mr. Deavenport as a creditor was a mistake, and that he is not a creditor. The bankruptcy judge notes that Mr. Deavenport is only a creditor when it is convenient for Lebbos. The creditors received notice of the sale/compromise, and no creditor objected, including the alleged creditor Mr. Deavenport.
Order Denying Request to Certify Appeal, 4:14-5:20.
Accordingly, the bankruptcy court's decision denying the Debtor's Motion to Continue the March 12 hearing is affirmed.
III. THE BANKRUPTCY COURT DID NOT ABUSE ITS DISCRETION WHEN IT APPROVED THE SALE/COMPROMISE OF THE Lawsuit
The Debtor argues that the Trustee and estate counsel were incompetent to sell/compromise the Lawsuit and that the approval of the sale/compromise was improper. The Court addresses each argument in turn.
A. The Bankruptcy Court Did Not Err When it Determined The Trustee and Counsel for the Estate Were Competent To Sell/Compromise the Lawsuit.
The Debtor argues that the bankruptcy court erred in allowing the Trustee's "rural Northern California Bankruptcy attorney" to compromise or sell the Lawsuit.
Appellants Opening Brief, 3:26-4:6. In keeping with this argument, the Debtor appears to claim that it was erroneous to discontinue retention of Mr. Giovanazzi. Id., 4:19-23. The Debtor's argument boils down to a desperate attack on the Trustee and her attorney by which the Debtor claims it was erroneous to determine that "a non-lawyer rural trustee and her rural Bankruptcy attorney who were not authorized to take over any lawsuit may evaluate and settle and sell to the opposing party a Los Angeles County federal civil rights jury lawsuit without any knowledge of the case, witnesses, evidence, status, trial work, federal civil rights cases, federal law, jury work, or Los Angeles courts." Id., 6:20-26.
Despite her assertions, "[c]ompromises are a normal part of the process of reorganization. In administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims as to which there are substantial and reasonable doubts. At the same time, however, it is essential that every important determination in reorganization proceedings receive the informed, independent judgment of the bankruptcy court." Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (internal quotations and citations omitted).
A trustee and her counsel play a fundamental role in the sale/compromise process. "Among the trustee's duties is the obligation to collect and reduce to money the property of the estate. The property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case, including the debtor's causes of action."
Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th Cir. 2005) (internal quotations and citations omitted). Thus, subject to judicial approval, the Trustee is tasked with liquidating estate property, including, in the instant case, the estate's interest in the Lawsuit.
The Court is aware of the Debtor's contention that the Trustee engaged in the unauthorized practice of law by signing a settlement agreement on behalf of the bankruptcy estate. Moreover, the Debtor claims that the estate's counsel also committed said crime because he is not "licensed to practice law in the Central District," which is the district in which the Lawsuit is being litigated. The Debtor thus admits that the Trustee, as the representative of the bankruptcy estate, was represented by counsel and then fails to provide any evidence that such representation was invalid.
Additionally, the bankruptcy court correctly noted that the Trustee signed the settlement agreement as the representative of the estate. She signed the agreement because she was a party to it. On the basis of that observation, the bankruptcy court concluded that the Debtor's argument was ill-founded and frivolous. This Court agrees.
Though the Trustee is required by law to reduce the assets of the estate to cash, the Debtor claims that the Trustee and Trustee's counsel were incompetent to do so because the Lawsuit involves issues outside of the realm of their bankruptcy expertise. A trustee is required to be "an individual that is competent to perform the duties of trustee and . . . resides or has an office in the judicial district within which the case is pending, or in any judicial district adjacent to such district." 11 U.S.C. § 321(a)(1). "A trustee is the `legal representative' and `fiduciary' of the estate." In re AFI Holding, Inc., 355 B.R. 139, 147 (9th Cir. BAP 2006). Thus, a trustee and bankruptcy counsel are appointed based on their competency to represent the bankruptcy estate, not for their expertise in other areas of the law.
Nonetheless, trustees are statutorily authorized to sell a myriad of assets. Specifically, "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b)(1). Nothing in the Code indicates that a trustee must be especially knowledgeable in a particular area in order to sell or compromise an asset. However, the Debtor proceeds to argue that, in the instant case, in order to act competently as a bankruptcy trustee in selling/compromising the estate's interest in the pending Lawsuit, the Trustee and her counsel need also be competent to litigate the underlying claim.
The Debtor has no authority for such a proposition and her argument ignores both the fact that the Trustee could quite possibly be competent to value Plaintiff's interest in the lawsuit without actually having the present expertise to litigate that case and the fact that the Trustee's agreed-upon settlement was subject to judicial approval. The Debtor's conclusory allegations of incompetence cannot support a reversal. The requirement of independent judicial review provides a system of checks and balances meant to ensure the protection of the creditors.
The Court notes that the Debtor's assertion here flies in the face of her later statements in which she argues that the Lawsuit is "not complex" and involves merely a "simple assault and battery case." Appellant's Opening Brief, 44:1. Instead of advocating one position, she blithely advocates every position, employing a strategy as vacuous as it is unsuccessful. The bankruptcy court was correct in refusing to allow the Debtor to have her cake and eat it too.
That system was put to use here when the bankruptcy court conducted its review of the sale/compromise and determined it to be fair and equitable and within the sound discretion of the Trustee. Accordingly, on the record submitted, this Court is unable to say that the bankruptcy court's decision to approve the sale/compromise was anything other than proper.
B. Valuation of the Sale/Compromise
Nevertheless, the Debtor challenges the bankruptcy court's judgment arguing that there were no sound business reasons for the sale, it was not fair and equitable or in the best interests of the estate, and it was irrational, arbitrary, capricious and too vague. She also claims that, despite the extensive analysis in which the bankruptcy court engaged in reaching its decision, it abused its discretion.
"[T]he disposition by way of `compromise' of a claim that is an asset of the estate is the equivalent of a sale of the intangible property represented by the claim, which transaction simultaneously implicates the `sale' provisions under [11 U.S.C.] section 363 as implemented by [Federal Rules of Bankruptcy Procedure,] Rule 6004 and the `compromise' procedure of [Federal Rules of Bankruptcy Procedure,] Rule 9019(a)." In re MickeyThompson, 292 B.R. 415, 421 (9th Cir. BAP 2003). "Whether to impose formal sale procedures is ultimately a matter of discretion that depends upon the dynamics of the particular situation." Id. at 422. In the instant case, the bankruptcy judge analyzed the subject transaction as both a compromise and a sale.
"On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct." Fed.R.Bankr.Proc., Rule 9019(a). "The bankruptcy court has great latitude in approving compromise agreements. However, the court's discretion is not unlimited. The court may approve a compromise only if it is fair and equitable. Moreover, in passing on the proposed compromise, the court must consider: (a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises." In re Woodson, 839 F.2d 610, 620 (9th Cir. 1988) (internal citations and quotations omitted).
Additionally, section 363(b) provides that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b)(1). "The court's obligation in § 363(b) sales is to assure that optimal value is realized by the estate under the circumstances. The requirement of a notice and hearing operates to provide both a means of objecting and a method for attracting interest by potential purchasers. Ordinarily, the position of the trustee is afforded deference, particularly where business judgment is entailed in the analysis or where there is no objection.
Nevertheless, particularly in the face of opposition by creditors, the requirement of court approval means that the responsibility ultimately is the court's." In re Lahijani, 325 B.R. 282, 288-289 (9th Cir. BAP 2005).
As a threshold matter, the bankruptcy court noted that the only opposition to the motion to approve the sale/compromise was filed by the Debtor. Though the creditors received notice of the motion, none appeared in opposition. Moreover, that court found it indicative of the accuracy of the valuation of the proposed sale that no individuals or entities sought to over-bid.
Again, the Court is cognizant of Plaintiff's contention that one alleged creditor, Mr. Deavenport, did not file an opposition because he did not receive notice of the second hearing. This argument was disposed of above. For clarity, this Court reiterates that the bankruptcy court's reasoning was proper. That court determined Mr. Deavenport was a creditor only as it suited the Debtor. Coupled with Mr. Deavenport's failure to oppose the second motion, the court gave little weight to his first opposition in reaching its decision. There is no error.
In its further analysis of the requisite factors, the bankruptcy court then determined that the likelihood of the Lawsuit's success was minimal insomuch as it depended largely on the Debtor's credibility and cooperation. The court observed that, depending on the convenience of particular arguments to her relative positions, the Debtor referred to the Lawsuit both as a complex civil rights case requiring expert valuation and as a simple assault and battery case. Similarly, the bankruptcy court found that, based on the Debtor's needs at any given time, she either expressed concern that the $6400 settlement would not make its way to unsecured creditors or, to the contrary, asserted that no creditors even existed because all claims were disputed.
Based on her fickle regard for consistency, the bankruptcy court found the Debtor's credibility lacking.
Additionally, that court found the Debtor's inability to bring the Lawsuit to fruition in over six years to be a predictor of likely future success, and noted that the Debtor herself would likely bring complexity to even a simple case. Moreover, while the prospective ability to recover from the defendant presented a neutral factor, the cost of litigation was likely to be high.
Finally, in considering the paramount interest of the creditors, as stated above, the Court remained unconvinced by the single opposition submitted to the first motion. While the Debtor places great emphasis on the fact that the proceeds of the sale/compromise will likely go to the administrative costs of the Trustee and estate counsel rather than to creditors, the bankruptcy court determined that the receipt of funds would be a positive step toward rendering the estate administratively solvent, ultimately benefitting everyone. Based on its inquiry into all prescribed factors, that court found the settlement to be fair and equitable and the sale to be the product of sound business decisions.
Not surprisingly, the Debtor disagrees with the bankruptcy court's analysis and makes the unsupported assertion that it was irresponsible to accept $6400 to settle a lawsuit she values at between seven million and twenty million dollars.
Additionally, she dismisses any emphasis on her lack of credibility as irrelevant to the success of the Lawsuit in Los Angeles courts because "[e]ven Rodney King obtained over a million dollars in Los Angeles, so credibility is not an issue that determines success before a Los Angeles County jury." Appellant's Opening Brief, 41:27-42:2. Her arguments are nothing short of frivolous.
Accordingly, this Court finds that the bankruptcy court properly engaged in extensive factual analysis and properly applied the controlling law. There is simply no evidence supporting a "definite and firm conviction," that the bankruptcy court "committed a clear error of judgment in the conclusion it reached." The decision of the bankruptcy court is affirmed.
IV. THE SALE/COMPROMISE WAS NOT BARRED BY RES JUDICATA
The crux of the Debtor's next argument is that the bankruptcy court's approval of the sale/compromise was precluded by principles of res judicata because that court had denied the Trustee's original January motion for settlement approval. The Debtor's argument ignores basic black-letter law.
"The doctrine of res judicata bars a party from bringing a claim if a court of competent jurisdiction has rendered final judgment on the merits of the claim in a previous action involving the same parties or their privies." In re International Nutronics, Inc., 28 F.3d 965, 969 (9th Cir. 1994).
The Trustee's first motion was denied without prejudice. Record, K-94:15-16. Such a denial is not a final judgment. Therefore, the court's later decision was not precluded by its January ruling.
V. THERE IS NO EVIDENCE THE BANKRUPTCY JUDGE WAS BIASED
Finally, the Debtor makes the incendiary accusation that the bankruptcy judge was biased and acted as her opponent in approving the sale/compromise of the Lawsuit. Despite making such inflammatory statements in her appeal, the record is devoid of support for her conclusion. Thus, this Court rejects the Debtor's argument as lacking any basis in law or fact.
CONCLUSION
The Court notes for the record that the Debtor's appeal is embarrassingly inadequate both in its presentation of the facts and its failure to accurately apply the law. As a former attorney, the Debtor is aware that conclusory allegations of wrongdoing, especially in the face of a record only capable of supporting contrary conclusions, cannot substitute for the legal and factual merits requisite to a viable appeal.
In the future, the Debtor is advised to give greater consideration to what she files with the court before consuming the limited and valuable resources of the federal courts. The decision of the bankruptcy court is AFFIRMED.
IT IS SO ORDERED.