In re: CYNTHIA ANN McCLENNY ( 2018 )

FILED
MAR 06 2018
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. CC-17-1155-TaFS
)
6 CYNTHIA ANN McCLENNY, ) Bk. No. 9:16-bk-10556
)
7 Debtor. )
______________________________)
8 )
CYNTHIA ANN McCLENNY, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
STEPHEN McCLENNY; )
12 SANDRA McBETH, Trustee, )
)
13 Appellees. )
______________________________)
14
Argued and Submitted on February 22, 2018
15 at Pasadena, California
16 Filed – March 6, 2018
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Peter H. Carroll, Bankruptcy Judge, Presiding
19
20 Appearances: Susan A. Hemb of Hemb Law Group argued for
appellant; William Charles Beall of Beall &
21 Burkhardt argued for appellee Sandra McBeth,
Trustee.
22
23 Before: TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges.
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8024-1(c)(2).
1 INTRODUCTION
2 After two years of apparently acrimonious divorce
3 proceedings, Cynthia Ann McClenny filed a bankruptcy petition.
4 Her former husband, Stephan McClenny, resided in the marital
5 home and ran a veterinary business from the property; but Debtor
6 appropriately scheduled an interest in the marital homestead as
7 an asset of her estate. Her chapter 71 trustee then sought to
8 sell the estate’s interest to Dr. McClenny; the trustee also
9 wanted to settle all ownership disputes with him. The
10 bankruptcy court granted the trustee’s sale and compromise
11 motion and found that Dr. McClenny was a § 363(m) good faith
12 purchaser.
13 Although Debtor did not obtain a stay pending appeal, she
14 challenges the bankruptcy court’s § 363(m) finding and attacks
15 the sale. She does not, however, show that the bankruptcy court
16 clearly erred or abused its discretion.
17 Accordingly, we AFFIRM.
18 FACTS
19 In 2014, Debtor filed a petition for dissolution of her
20 marriage with Dr. McClenny in the San Luis Obispo Superior
21 Court; the superior court entered a judgment of dissolution in
22 December of 2016.
23
24
25
26 1
Unless otherwise indicated, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
All “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure.
2
1 Earlier in 2016, Debtor had filed a chapter 7 petition.2
2 On her Schedule A/B, she listed a fee simple interest in real
3 property in San Miguel, California (the “Property”), valued it
4 at $650,000, and characterized it as community property. She
5 also identified Wells Fargo Home Mortgage as the holder of a
6 $400,000 secured claim against the Property.
7 Sandra McBeth was appointed as the chapter 7 trustee. She
8 filed a notice designating the case as an asset case and
9 established a claims bar date.
10 The Trustee liquidates the Property. The Trustee took a
11 natural interest in the Property; it was the only scheduled
12 asset with equity. She initially sought permission to sell the
13 Property to Dr. McClenny for $100,000. Debtor opposed, and the
14 bankruptcy court denied the motion without prejudice.
15 The Trustee followed with a second motion. First, she
16 sought to sell the estate’s fractional interest in the Property
17 to Dr. McClenny for $130,000, subject to overbid. Dr. McClenny
18 agreed to acquire title subject to existing liens; the Trustee
19 estimated these at $409,018. The motion also sought approval of
20 a resolution of the disputes between Dr. McClenny and the estate
21 regarding percentage ownership of the Property, as he asserted a
22 separate property interest in it, contrary to Debtor’s schedules
23 and claims. The points and authorities supporting the motion
24 reported that total claims filed against the estate totaled less
25
26 2
We exercise our discretion to take judicial notice of
27 documents electronically filed in the underlying bankruptcy
case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),
28 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
3
1 than $50,000 and that this sale would allow payment in full of
2 all claims.
3 The Trustee’s declaration provided evidence of her due
4 diligence in connection with the sale and compromise. She did
5 not employ a real estate professional to market the Property,
6 but she had a broker evaluate the prospects for its sale. The
7 broker opined that the Property could sell for about $700,000,
8 but only if it were vacant.
9 And, in the absence of a settlement, vacancy would
10 necessarily require that the estate undertake the potentially
11 complex and difficult process of involuntarily ousting
12 Dr. McClenny from possession. Further, maximization of recovery
13 absent a settlement might require victory in other potentially
14 costly litigation. The Trustee also observed that Debtor filed
15 numerous documents describing Dr. McClenny as violent and
16 dangerous; she did not adopt these statements as true, but she
17 accepted that there was potentially unusual risk in contesting
18 the situation with Dr. McClenny. The record supports the
19 Trustee’s evaluation; Dr. McClenny had a significant ownership
20 interest in the Property, it was both his home and his place of
21 business, he was in sole possession as of the petition date, and
22 he was reported to be difficult to deal with.
23 Debtor again opposed. Initially, she merely questioned the
24 bankruptcy court’s jurisdiction over the Property. Later, she
25 filed supplemental opposition papers and raised a host of new
26 arguments. And the day before the hearing, Debtor filed a
27 request for judicial notice of one of our opinions, Brace v.
28 Brace (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017). The
4
1 Trustee responded with a motion to strike the supplemental
2 papers.
3 At the hearing, the bankruptcy court recognized that the
4 new motion contained additional information, that the Trustee
5 had obtained an additional $30,000 in value, and that the sale
6 was subject to the first trust deed. It overruled Debtor’s
7 jurisdictional argument and explained correctly that, when a
8 bankruptcy petition is filed after a dissolution petition but
9 before the final disposition of the community property, both the
10 community property and Debtor’s separate property are within the
11 bankruptcy court’s jurisdiction. While it stated that this was
12 the only basis for timely objection, there is nothing in the
13 record evidencing that it granted the Trustee’s motion to strike
14 Debtor’s other late-filed objections. Finally, it noted the
15 absence of any dispute that the estate was receiving fair market
16 value.
17 The bankruptcy court then approved the sale and compromise;
18 it found that the estate was receiving fair value for its
19 interest in the Property, that the sale was a proper exercise of
20 the Trustee’s business judgment, and that the compromise was
21 fair and equitable and in the best interests of the estate. In
22 addition, it found that Dr. McClenny was a § 363(m) good faith
23 purchaser.
24 The bankruptcy court entered an order consistent with these
25 conclusions (the “Order”).3
26
27 3
The bankruptcy court also entered an amended order that
28 included the legal description of the Property.
5
1 Debtor timely appealed.
2 Post-appeal events. Debtor did not seek a stay pending
3 appeal from the bankruptcy court. Instead, in response to the
4 Trustee’s motion to dismiss the appeal as moot, Debtor sought a
5 stay pending appeal from the BAP. The Panel denied the
6 Trustee’s motion to dismiss without prejudice and also denied
7 Debtor’s request for a stay pending appeal.
8 JURISDICTION
9 The bankruptcy court had jurisdiction under 28 U.S.C.
10 §§ 1334 and 157(b)(2)(N). We have jurisdiction under 28 U.S.C.
11 § 158.
12 ISSUES
13 Is the appeal statutorily moot under § 363(m)?
14 Did the bankruptcy court abuse its discretion in granting
15 the motion to sell and approving the settlement?
16 STANDARDS OF REVIEW
17 We review mootness de novo. Wilson v. Lynch, 835 F.3d
18 1083, 1091 (9th Cir. 2016). But we review a § 363(m) “good
19 faith” finding for clear error. Thomas v. Namba (In re Thomas),
20 287 B.R. 782, 785 (9th Cir. BAP 2002).
21 We review § 363 sale orders for an abuse of discretion.
22 Fitzgerald v. Ninn Worx Sr, Inc. (In re Fitzgerald), 428 B.R.
23 872, 880 (9th Cir. BAP 2010). And we likewise review the
24 bankruptcy court’s approval of a settlement for an abuse of
25 discretion. Martin v. Kane (In re A & C Props.), 784 F.2d 1377,
26 1380 (9th Cir. 1986).
27 A bankruptcy court abuses its discretion if it applies the
28 wrong legal standard, misapplies the correct legal standard, or
6
1 makes factual findings that are illogical, implausible, or
2 without support in inferences that may be drawn from the facts
3 in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,
4 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v.
5 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
6 DISCUSSION
7 Debtor profoundly misunderstands what happened in the
8 bankruptcy court. As a result, her arguments lack merit. In
9 particular, and fatally, she fails to adequately challenge the
10 bankruptcy court’s finding that Dr. McClenny was a good faith
11 purchaser under § 363(m). Affirmance is required.
12 A. Debtor waived her jurisdictional arguments on appeal.
13 Before the bankruptcy court, Debtor’s timely opposition was
14 limited to an attack on the bankruptcy court’s jurisdiction over
15 the Property, its sale, and the compromise of the disputes with
16 Dr. McClenny as to title. We agree with the bankruptcy court
17 that the argument is meritless.4 And, in any event, Debtor did
18 not preserve this argument on appeal; we do not consider it
19 further. See Padgett v. Wright, 587 F.3d 983, 986 n.2 (9th Cir.
20 2009) (per curiam) (appellate courts “will not ordinarily
21 consider matters on appeal that are not specifically and
22 distinctly raised and argued in appellant’s opening brief”).
23 The Trustee argues that this is the only determination we
24
4
25 For “purposes of § 541(a)(2), all community property not
yet divided by a state court at the time of the bankruptcy
26 filing is property of the bankruptcy estate.” Dumas v. Mantle
27 (In re Mantle), 153 F.3d 1082, 1085 (9th Cir. 1998). Cf. Keller
v. Keller (In re Keller), 185 B.R. 796, 800-801 (9th Cir. BAP
28 1995).
7
1 need to make on appeal. But, in oral argument, she acknowledged
2 her position’s vulnerabilities; Debtor raised a number of
3 untimely arguments, the Trustee moved to strike them, but the
4 bankruptcy court did not rule on this motion. In an abundance
5 of caution, we address Debtor’s additional arguments.
6 B. Debtor waived objection to approval of the settlement
7 on appeal.
8 The bankruptcy court approved a joint sale of the Property
9 and settlement of the percentage of ownership dispute between
10 the estate and Dr. McClenny. This combination was proper. See
11 Adeli v. Barclay (In re Berkeley Del. Court, LLC), 834 F.3d
12 1036, 1040 (9th Cir. 2016).
13 Rule 9019 allows the bankruptcy court to approve a
14 compromise or settlement, and it has great latitude in approving
15 compromises; it may approve a compromise if it is fair and
16 equitable. Fed. R. Bankr. P. 9019(a); Woodson v. Fireman’s Fund
17 Ins. Co. (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1998)
18 (citing In re A & C Props., 784 F.2d at 1381). The bankruptcy
19 court considers four factors when determining whether a
20 compromise is fair and equitable. In re A & C Props., 784 F.2d
21 at 1381. Here, the bankruptcy court considered those four
22 factors and found the compromise fair and equitable.
23 Debtor does not directly argue in her opening brief that
24 the bankruptcy court abused its discretion in approving the
25 settlement. She never discusses the A & C factors. She thus
26 waived any dispute as to these matters. See Padgett, 587 F.3d
27 at 986 n.2. And if she intends her arguments in connection with
28 the sale to somehow relate to the settlement, they lack merit as
8
1 discussed below.
2 C. The appeal is statutorily moot.
3 The Trustee argues that the appeal is statutorily moot
4 under § 363(m).
5 Section 363 authorizes a trustee to sell property of the
6 estate. In § 363(b) sale motions, the bankruptcy court’s
7 obligation “is to assure that optimal value is realized by the
8 estate under the circumstances.” Simantob v. Claims Prosecutor,
9 LLC (In re Lahijani), 325 B.R. 282, 288 (9th Cir. BAP 2005).
10 Here, the bankruptcy court approved the sale under § 363(b) and
11 found that the estate was receiving fair value for the estate’s
12 interest in the Property.
13 Under § 363(m), when a “sale of assets is made to a good
14 faith purchaser, it may not be modified or set aside unless the
15 sale was stayed pending appeal.” Paulman v. Gateway Venture
16 Partners III, LP (In re Filtercorp, Inc.), 163 F.3d 570, 576
17 (9th Cir. 1998); 11 U.S.C. § 363(m).5 An “[a]bsence of good
18 faith is ‘typically shown by fraud, collusion between the
19 purchaser and other bidders or the trustee, or an attempt to
20 take grossly unfair advantage of other bidders.’”
21 In re Berkeley Del. Court, LLC, 834 F.3d at 1041 (quoting
22 In re Filtercorp, Inc., 163 F.3d 570, 577 (9th Cir. 1998)). And
23 the relevant focus of inquiry is good faith during the course of
24 the sale proceedings. Cmty. Thrift & Loan v. Suchy
25
26 5
Recent Ninth Circuit caselaw clarifies that § 363(m) may
27 apply to both standard § 363 sales and to sales of claims under
a Rule 9019 settlement. In re Berkeley Del. Court, LLC,
28 834 F.3d at 1039-40.
9
1 (In re Suchy), 786 F.2d 900, 902 (9th Cir. 1985).
2 We start with the obvious. The bankruptcy court found that
3 Dr. McClenny purchased the Property in good faith; the Order was
4 not stayed. Statutory mootness facially exists on these facts.
5 But the statutory mootness argument has a potential
6 vulnerability. Debtor attacks the good faith finding itself on
7 appeal. If we reverse on this point, the examination of the
8 sale itself could proceed. See Ferrari of N. Am., Inc. v. Sims
9 (In re R.B.B., Inc.), 211 F.3d 475, 480 (9th Cir. 2000). Here,
10 however, Debtor advances neither evidence nor argument that
11 adequately challenges the § 363(m) good faith determination.
12 Debtor’s arguments are difficult to follow — and in some
13 cases an argument allegedly focused on good faith is more aptly
14 cabined as a direct attack on the sale. As a result, we briefly
15 address all arguments regarding the good faith finding and the
16 sale without differentiating as to their focus. All lack merit.
17 ! Debtor confuses the standards required for good faith
18 purchaser for value status under nonbankruptcy law with
19 those required for a § 363(m) good faith finding. She is
20 correct that to be a good faith purchaser for value, taking
21 title free of liens and adverse claims to the property, one
22 must both purchase in good faith and without knowledge of
23 liens; but Dr. McClenny’s obvious knowledge of the liens
24 against the Property is irrelevant under § 363(m). He is
25 not attempting to take title free of the liens – this sale
26 is expressly subject to any and all existing liens whether
27 he knows about them or not.
28 ! Alleged misdeeds during the dissolution process are not
10
1 relevant in the § 363(m) good faith context. Dr. McClenny
2 can be a good faith buyer vis a vis the bankruptcy estate
3 and the Trustee even if his relationship with Debtor is
4 acrimonious; Debtor’s remedy is to seek orders and liens
5 from the family court as opposed to thwarting a sale that
6 maximizes value for her estate.
7 ! The Trustee did not collude with Dr. McClenny and gift him
8 “$562,000 of estate funds by applying them to the
9 satisfaction of the first position mortgage obligation
10 . . . .” The Trustee sold the Property subject to the
11 first trust deed. Dr. McClenny remains obligated on this
12 debt; sales proceeds were not used to reduce this secured
13 obligation.
14 ! The fact that the Trustee and Dr. McClenny signed the sale
15 contract before bankruptcy court approval is of no moment.
16 The agreement was “expressly subject to Bankruptcy Court
17 approval in the Bankruptcy Proceeding.” This is standard
18 practice rather than cause for reversal; if an overbidder
19 emerged, the agreement would have been without force or
20 effect because the bankruptcy court would not have approved
21 it.
22 ! Debtor’s broad assertion that evidence existed to show the
23 “Trustee’s dereliction of her fiduciary duties owed to the
24 estate and to the creditors” and sufficed as justification
25 for appeal falls short. She questions the Trustee’s
26 decision to liquidate the Property and not any of Debtor’s
27 other assets. But this decision was entirely consistent
28 with the Trustee’s statutory obligation to liquidate the
11
1 estate expeditiously. 11 U.S.C. § 704(1). And embedded in
2 this duty is the requirement to maximize the value of
3 estate assets. See United States v. Sims (In re Feiler),
4 218 F.3d 948, 952 (9th Cir. 2000). Here, the Trustee
5 decided to promptly liquidate the Property that Debtor on
6 appeal describes as “the last equity-holding asset.” The
7 Trustee reasonably anticipated that proceeds would be
8 sufficient to pay all claims against the estate, and the
9 sale and compromise avoided costs of litigation and sale.
10 In doing so, the Trustee exercised her business judgment,
11 and the bankruptcy court’s approval of this decision was
12 not erroneous.
13 ! Debtor erroneously asserts that In re Brace controls the
14 decision here and required the bankruptcy court “to
15 consider and apply California family law statutes and case
16 law mandating the equal division of marital property and
17 minimizing [Debtor]’s financial distress . . . .” So far
18 as we can tell, her argument is a variation of her general
19 complaint that the Trustee liquidated the estate’s interest
20 in the Property first; she asserts that the Trustee should
21 have valued the entire community estate and resolved all
22 community property equalization issues at a trial. We
23 disagree. Debtor’s misguided request that the bankruptcy
24 court resolve the pending marital dissolution disputes is
25 not appropriate. In re Brace applies in bankruptcy
26 disputes involving the characterization of marital
27 property. 566 B.R. at 19. So In re Brace would apply if
28 the Trustee decided to litigate the appropriate
12
1 characterization of the Property. Here, the Trustee
2 elected to settle any disputes about Dr. McClenny’s
3 separate property interest in the Property.
4 ! The sale will not impede Debtor’s right to future liens
5 from the family court; she failed to establish, or even
6 argue, that she had an existing lien at the time of sale.
7 But nothing in the bankruptcy court’s decision bars her
8 from family court relief.
9 ! Debtor wrongly argues that the sale price was too low based
10 on a homestead exemption that the bankruptcy court found
11 improper in a final and unappealed order. The homestead,
12 however, even if capable of assertion, would never reduce
13 the purchase price; it merely impacts distribution of
14 proceeds. And, in attacking the sale price, she never
15 addresses the fact that the sale was subject to overbid but
16 no overbidders materialized. This argument is unavailing.6
17 ! The bankruptcy court did not commit “structural” error by
18 granting “the sale order as between co-owners, without an
19 adversary proceeding” as allegedly required by Rule
20
6
21 We also note that, as the bankruptcy court found, the
estate received fair value. The estate received $130,000. If
22 the Trustee sold the Property to a third party for $700,000, any
recovery would be reduced by approximately $409,018, the amount
23 secured by the first trust deed. Further, the sale price would
24 certainly be reduced by the other costs the Trustee avoided by
selling directly to Dr. McClenny: sale costs (marketing,
25 broker’s fee, etc.); costs of litigation over the parties’
ownership claims; and costs of litigation to evict Dr. McClenny
26 and obtain possession. The estate claimed at most a 50%
27 interest in the property. So instead of recovering less than
$128,000.00 ($700,000.00 less $409,000.00 less 5% costs of sale
28 or $35,000.00 divided by two), the Trustee recovered $130,000.
13
1 7001(3). Debtor wrongly believes that this was a § 363(h)7
2 sale of Dr. McClenny’s interest in the Property. In fact,
3 the Trustee sought to sell the estate’s fractionalized
4 interest in the Property to the co-owner, Dr. McClenny.
5 Thus, neither § 363(h) nor Rule 7001(3) (which states that
6 a § 363(h) sale requires an adversary proceeding) were
7 implicated.
8 ! Debtor’s claim that Dr. McClenny’s debts to her are
9 priority claims under §§ 504 and 721 and thus that
10 creditors are not likely to be paid from the sale proceeds
11 is nonsensical. Debts owed to Debtor are estate assets;
12 the Trustee will not pay them. And Debtor does not have a
13 right to a priority payment over her estate’s creditors.
14 ! Debtor’s expressed concern at oral argument that the Order
15 will have preclusive effect in the dissolution proceedings
16 is difficult to square with reality. The bankruptcy court
17 necessarily decided that the sale was for reasonable value
18 and that the compromise was fair and reasonable. The
19 bankruptcy court did not have to decide what Debtor’s and
20 Dr. McClenny’s relative property interests in the Property
21 were.8 Nor did the bankruptcy court have to decide if
22
23 7
Section 363(h) allows the trustee to sell both the
24 estate’s interest and the interest of certain co-owners.
8
25 In fact, that is one point of a Rule 9019 compromise
motion: the “purpose of a compromise agreement is to allow the
26 trustee and the creditors to avoid the expenses and burdens
27 associated with litigating sharply contested and dubious
claims.” In re A & C Props., 784 F.2d at 1380–81. The law
28 (continued...)
14
1 Debtor had any liens arising out of family law court
2 matters, much less if they attached or remain attached to
3 the Property. And the bankruptcy court certainly did not
4 decide any California law based marital dissolution issue.
5 ! Debtor erroneously contends that the Trustee should have
6 brought her motion under § 363(d), not § 363(b).
7 Section 363(d) applies when the debtor in bankruptcy is a
8 type of trust. Here, Debtor is a person and it is
9 irrelevant that a marital (family) trust holds title to the
10 Property; Debtor’s interest in this trust was an asset of
11 the estate that the Trustee could sell.9
12 In sum, Debtor has not shown that the bankruptcy court
13 clearly erred when it found that Dr. McClenny was a good faith
14 purchaser under § 363(m).10 Accordingly, we AFFIRM the
15 bankruptcy court’s § 363(m) finding and, as a result, “the sale
16 may not be modified or set aside on appeal unless it was stayed
17 pending appeal.” In re Berkeley Del. Court, LLC, 834 F.3d at
18 1041. It was not stayed. So what remains of the appeal is
19 moot. Id.
20
21
8
(...continued)
22 “favors compromise and not litigation for its own sake . . . .”
23 Id. at 1381.
9
24 In any event, she also failed to raise this argument
before the bankruptcy court; she thus waived it on appeal.
25 Samson v. W. Capital Partners, LLC (In re Blixseth), 684 F.3d
865, 872 n.12 (9th Cir. 2012) (appellate court may decline to
26
address argument not raised before bankruptcy court).
27 10
Debtor also requests attorney’s fees and costs on
28 appeal. Given our affirmance, we deny this request.
15
1 CONCLUSION
2 Based on the foregoing, we AFFIRM.
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