FILED
OCT 18 2022
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-22-1055-TSG
SOUTHERN CALIFORNIA RESEARCH,
LLC; DARRELL MAAG, Bk. No. 9:22-bk-10022-DS
Debtors.
SOUTHWESTERN RESEARCH, INC.,
Appellant,
v. MEMORANDUM*
SOUTHERN CALIFORNIA RESEARCH,
LLC; DARRELL MAAG,
Appellees.
Appeal from the United States Bankruptcy Court
for the Central District of California
Deborah J. Saltzman, Bankruptcy Judge, Presiding
Before: TAYLOR, SPRAKER, and GAN, Bankruptcy Judges.
INTRODUCTION
Almost immediately after initiation of these chapter 11 1 cases,
appellant Southwestern Research, Inc. (“Southwestern”) filed a motion
*
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 8024-1.
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal
Rules of Bankruptcy Procedure.
seeking either conversion to chapter 7 or appointment of a chapter 11
trustee. It relied not on postpetition conduct but on prepetition actions,
alleged bad faith, and allegations that reorganization was an impossibility.
The bankruptcy court denied the motion.
Southwestern appealed. Its principal concern was the bankruptcy
court’s alleged failure to rely on prepetition misconduct in its ruling.
We determine that the order on appeal is not final; thus, we lack
jurisdiction and must dismiss absent a determination that an interlocutory
appeal is appropriate. As we are confident that the bankruptcy court found
the evidence of prepetition conduct insufficient in isolation – not irrelevant
or inappropriate for consideration in connection with a similar motion filed
later in this case – interlocutory appeal is not warranted.
As a result, we DISMISS this appeal for lack of jurisdiction.
FACTS
Prepetition Southwestern obtained substantial default judgments
against Debtors Darrell Maag and Southern California Research LLC
(“SCR”) (collectively the “Debtors”). The default judgments followed
terminating sanctions and included punitive damage awards and
imposition of an equitable lien on real property owned by Mr. Maag. The
trial court findings included a determination of negligent and intentional
breach of fiduciary duty by Debtors.
Debtors appealed, failed to provide a bond, and faced aggressive
collection activities. Chapter 11 petitions followed, and, according to
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Southwestern, fraudulent transfers and preferential payments to insiders
occurred pre-bankruptcy.
Approximately three weeks after the petition date, Southwestern
filed its motion seeking conversion of Debtors’ cases to chapter 7 or
appointment of a chapter 11 trustee (the “Motion”). Southwestern argued
that: (1) both cases were “essentially single-creditor cases which were filed
in bad faith [as a litigation tactic] to obtain a [stay pending appeal];” (2)
Mr. Magg’s prepetiton misconduct in the state court litigation was cause to
convert both cases; (3) SCR is not profitable and has no reorganization in
prospect; (4) since Southwestern will never agree to any plan, Debtors
cannot confirm a plan; and (5) Mr. Maag’s prepetition conduct establishes
that he will not comply with his fiduciary duties. It also noted that these
assertions justified appointment of a chapter 11 trustee.
The Debtors argued that the Motion was premature and alleged: (1)
the need for a breathing spell given aggressive collection efforts and the
impact of the pandemic; (2) their financial inability to obtain the required
$40 million appellate bond; (3) the lack of negative postpetition SCR cash
flow or a decline in asset value; and (4) the irrelevance of Debtors’
prepetition conduct.
At the hearing, the bankruptcy court discussed the relevant § 1112(b)
factors and the various cases cited by both sides and denied the Motion.
The bankruptcy court commented:
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....we are at the beginning of these Chapter 11 cases, I
don’t see that the factors weigh in support of a finding of bad
faith. You know, these aren’t single-asset cases. You know, how
these factors are applicable here. We don’t have a lack of
employees. You know, certainly there are issues of conduct by
Mr. Maag, but that alone, I think, does not support a finding of
bad faith that would justify a conversion or appointment of a
trustee at this stage, certainly without any record as to
postpetition conduct.
This isn’t a new debtor syndrome case and I don’t see that
this is a -- you know, a leap of foreclosure type of situation that
the case law would use in its definition of bad faith here. So I
don’t [think] the record supports the finding of bad faith, but I
don’t think prepetition conduct would be a basis for granting
this relief and I don’t think that appointment of a trustee would
be appropriate here either.
Southwestern timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under
28 U.S.C. §§ 1334 and
157(b)(2)(A). Subject to the discussion below, we have jurisdiction under
28 U.S.C. § 158.
ISSUES
Is the order on appeal, which denies conversion or appointment of a
trustee (the “Order”), final?
If the Order is interlocutory, is leave to appeal appropriate?
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DISCUSSION
A. The Order is not final.
Debtors assert that the Order is not final and that this appeal must be
dismissed. We agree.
Finality is a requirement for bankruptcy appellate jurisdiction.
Phillips v. Gilman (In re Gilman),
887 F.3d 956, 961 (9th Cir. 2018). Typically,
it exists when the decision on appeal ends a dispute on the merits and
leaves nothing for the trial court to do but execute the judgment. Gugliuzza
v. FTC (In re Gugliuzza),
852 F.3d 884, 890 (9th Cir. 2017) (citations omitted).
But a determination of finality in the often convoluted decisional path of
bankruptcy proceedings isn’t always easy. Thus, the Ninth Circuit
recognizes that some interim determinations during the course of a
bankruptcy case are sufficiently final to allow appellate review, and it uses
a “pragmatic or flexible” approach to make finality decisions. See Dunkley
v. Rega Props., Ltd. (In re Rega Props., Ltd.),
894 F.2d 1136, 1138 (9th Cir.
1990). Thus, finality requires that a decision: (1) fully and finally determine
the discrete issue or issues it presented; and (2) resolve discrete issues
seriously affecting substantive rights. See Eden Place, LLC v. Perl (in re Perl),
811 F.3d 1120, 1126 (9th Cir. 2016). Put another way, an order is final and
appealable if it “alters the status quo and fixes the rights and obligations of
the parties . . . [or] alters the legal relationships among the parties.” Ocwen
Loan Servicing LLC, v. Marino (In re Marino),
949 F.3d 483, 487 (9th Cir. 2020)
(internal citation omitted).
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Southwestern argues that Ritzen Group, Inc. v. Jackson Masonry, LLC,
140 S. Ct. 582, 587 (2020), requires a determination that this order is final.
We disagree. Ritzen involved an order denying stay relief to allow litigation
to proceed in state court. The Supreme Court found that this order
substantially affected the rights of the parties because it determined on a
final basis where the litigation would proceed. The Supreme Court cited
Bullard v. Blue Hills Bank,
575 U.S. 496, 501 (2015), and noted that orders in
bankruptcy cases qualify as final when they definitively dispose of discrete
disputes within the overarching case. Ritzen
140 S. Ct. at 586. Thus, the
decision was final because it was anterior to, and separate from, the
underlying merits determination, decided a critical issue, and was
incapable of later revisitation by the federal courts through appellate
review or otherwise.
Id. at 589. The analysis in Ritzen does not support that
the Order is final.
Here, the Motion did not begin a discreet proceeding before and
apart from the bankruptcy cases. And it did not end the litigation on the
merits and leave nothing for the court to do but execute the judgment. The
Debtors’ bankruptcy cases will proceed, and § 1112(b) will continue to
apply. Indeed, Southwestern’s counsel admitted at oral argument that it
could file a second motion to convert the cases at any time; conversion or
appointment of a trustee are not foreclosed by the Order.
Further, the Order does not seriously affect any parties’ substantive
rights. Southwestern remains a creditor with all of its rights including the
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right to seek conversion or appointment of a chapter 11 trustee in the
future. Nothing about the Motion’s denial permanently alters the status
quo in the cases or fixes or changes any rights or obligations of the parties.
The impact on rights seen in Ritzen is not extant here.
Our determination on finality is also consistent with the Ninth
Circuit’s analogous determination that denial of a motion to dismiss a
chapter 9 case as an alleged bad faith filing was not final. See Silver Sage
Partners v. City of Desert Hot Springs (In re City of Desert Hot Springs),
339
F.3d 782 (9th Cir. 2003). There, the Ninth Circuit emphasized: “the denial of
Silver Sage’s initial objection to the bankruptcy does not resolve the issue
of bad faith in such a way that the bankruptcy court may not later dismiss
the petition.”
Id. at 790.
Southwestern asserts that the order is final because it must now
participate in the Debtors’ ongoing cases and incur the cost of doing so. But
as the Ninth Circuit noted in Desert Hot Springs, the requirement of
participation in the bankruptcy process is not the type of damage that
supports a finality determination; creditors are always subject to the risk
that debtors will file for bankruptcy.
Id. at 791.
Finally, Southwestern asserts that the Order seriously affects its
substantive rights because: “the [D]ebtors’ extensive prepetition bad faith
conduct has been rendered irrelevant and may not be considered by the
bankruptcy court.” The record does not support this conclusion; the
bankruptcy court specifically noted that Mr. Maag’s prepetition conduct
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was concerning but that it was not sufficient by itself to establish bad faith
at this early time in the cases. And Debtors conceded at oral argument that
prepetition conduct may be considered if Southwestern files another
motion to dismiss.
Here the Order is not final.
B. Interlocutory appeal is not appropriate.
Southwestern also requests that the Panel grant leave to appeal if the
Order is interlocutory. We decline this request.
The Panel may consider a timely notice of appeal to be a motion for
leave to appeal. Rule 8003(c); Belli v. Tempkin, (In re Belli),
268 B.R. 851, 858
(9th Cir. BAP 2001). Such leave is appropriate where: (1) there is a
controlling question of law; (2) as to which a substantial ground for a
difference of opinion exists; and (3) an immediate appeal could materially
advance the ultimate termination of the litigation. See Arizona v. Ideal Basic
Indus. (In re Cement Antitr. Litig),
673 F.2d 1020, 1026 (9th Cir. 1981); see also,
Travers v. Dragul (In re Travers),
202 B.R. 624, 626 (9th Cir. BAP 1996). The
Panel may also consider whether denying leave to appeal will result in
wasted litigation and expense. See, e.g., Roderick v. Levy (In re Roderick
Timber Co.),
185 B.R. 601, 604 (9th Cir. BAP 1995). But, leave for appellate
review of an interlocutory order is granted sparingly, under exceptional
circumstances. See, Lear Siegler, Inc. v. Adkins,
330 F.2d 595, 598 (9th Cir.
1964).
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Southwestern argues that the controlling question of law is whether
the bankruptcy court can consider prepetition misconduct as grounds for
conversion or appointment of a trustee. But as noted, we conclude that the
bankruptcy court did not rule as Southwestern fears. Instead, it noted
Mr. Maag’s conduct, considered other factors supporting denial of the
Motion, and determined that it would not convert the cases or appoint a
trustee based on that conduct alone. The record does not support that the
bankruptcy court erroneously concluded that prepetition conduct is
irrelevant. So, no issue supporting interlocutory review exists.
Nor has Southwestern explained what the substantial ground for
difference of opinion might be. Debtors’ counsel conceded at oral argument
that prepetition conduct could be considered by the bankruptcy court in
determining a later motion to convert or appoint a trustee.
Finally interlocutory appeal will not necessarily materially advance
the cases. It won’t do so if Southwestern loses on appeal. And during the
pendency of any appeal, Southwestern may bring a later successful motion
to convert or appoint a trustee or the Debtors may confirm plans. In either
case, the appeal becomes a nullity.
Interlocutory appeal is not appropriate here.
CONCLUSION
Based on the foregoing, this appeal is DISMISSED.
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