FILED
OCT 15 2014
1 NO FO PUBL A IO
T R IC T N
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP Nos. CC-14-1102-DTaSp
) CC-14-1103-DTaSp
6 MORRY WAKSBERG, M.D., ) (Related Appeals)
MORRY WAKSBERG, M.D., INC., )
7 ) Bk. Nos. 06-16096-BB
Debtors. ) 06-16101-BB
8 ______________________________)
)
9 THE BANKRUPTCY LAW FIRM, PC, )
)
10 Appellant, )
)
11 v. ) M E M O R A N D U M1
)
12 ALFRED H. SIEGEL, Chapter 7 )
Trustee; MORRY WAKSBERG, MD; )
13 IDA WAKSBERG, )
)
14 Appellees. )
______________________________)
15
Argued and Submitted on September 18, 2014
16 at Pasadena, California
17 Filed - October 15, 2014
18 Appeals from the United States Bankruptcy Court
for the Central District of California
19
Honorable Sheri Bluebond, Bankruptcy Judge, Presiding
20
21 Appearances: Kathleen P. March of The Bankruptcy Law Firm,
P.C., argued for Appellant The Bankruptcy Law
22 Firm, P.C.; Byron Moldo of Ervin, Cohen & Jessup
LLP and Daniel A. Lev of SulmeyerKupetz, APC
23 argued for Appellee Alfred H. Siegel, Chapter 7
Trustee.
24
25
26 1
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 8013-1.
1 Before: DUNN, TAYLOR, and SPRAKER,2 Bankruptcy Judges.
2
3 Years after the related chapter 113 cases of an
4 ophthalmologist, Morry Waksberg, M.D., and his corporation, Morry
5 Waksberg, M.D., Inc. ("Corporation"), were converted to
6 chapter 7, the bankruptcy court approved the chapter 7 trustee's
7 motion to consolidate the cases for distribution purposes. The
8 bankruptcy court also approved a settlement which allowed, inter
9 alia, substantial personal exemptions to Dr. Waksberg that he
10 first claimed more than two years after filing his personal
11 bankruptcy case. But for the consolidation, Dr. Waksberg’s
12 personal case apparently would not have sufficient funds to
13 implement the settlement and pay his allowed personal exemptions.
14 The approval of consolidation and the settlement together would
15 deplete the funds of the Corporation's case, such that Appellant,
16 the holder of an unpaid chapter 11 administrative claim in the
17 Corporation's case, no longer would be paid its approved fees in
18 full.4 Hence, these appeals. We AFFIRM the bankruptcy court’s
19 order (“Compromise Order”) approving the settlement, as amply
20 supported by the record before us. However, we VACATE the order
21
22
2
The Honorable Gary A. Spraker, Chief Bankruptcy Judge
23 for the District of Alaska, sitting by designation.
24 3
Unless otherwise indicated, all chapter and section
25 references are to the federal Bankruptcy Code, 11 U.S.C.
§§ 101-1532, and all “Rule” references are to the Federal Rules
26 of Bankruptcy Procedure, Rules 1001-9037.
27 4
We granted a stay to preserve the status quo pending
28 disposition of the related appeals.
-2-
1 granting substantive consolidation, as inconsistent with the
2 standard adopted by the Ninth Circuit in Alexander v. Compton
3 (In re Bonham),
229 F.3d 750 (9th Cir. 2000), in the face of
4 substantial opposition from an interested party, and REMAND to
5 the bankruptcy court for further proceedings.
6 I. FACTUAL BACKGROUND
7 The appeals pending before the Panel have their genesis in
8 disputes that arose more than 20 years ago.5 In 2005,
9 Dr. Waksberg and the Corporation entered into a settlement
10 agreement ("Transamerica Settlement Agreement") with Transamerica
11 Insurance Company ("Transamerica"). The Transamerica Settlement
12 Agreement resolved litigation which Dr. Waksberg and the
13 Corporation had filed in 1992 against Transamerica, alleging
14 claims for defamation. The settlement with Transamerica was in
15 the amount of $11 million. Dr. Waksberg and the Corporation also
16 settled litigation pending against the law firm of Skadden, Arps,
17 Slate, Meagher & Flom, LLP ("Skadden Arps Settlement") for the
18 amount of $2.6 million.6
19
20 5
One piece of the litigation is the subject of a
DC Circuit Court of Appeals decision in 1997; this decision
21
contains background facts relating to the underlying dispute only
22 tangentially relevant to this disposition. See United States v.
Waksberg, 112 F.3d 1225 (D.C. Cir. 1997). In essence, it appears
23 that Dr. Waksberg’s patients were improperly informed in the mid-
24 to late 1980s that he no longer could participate in the Medicare
reimbursement program. Transamerica was the federal government’s
25 agent at the time.
26 6
Dr. Waksberg and the Corporation filed a state court
27 action against Skadden Arps, previously their counsel in the
Transamerica litigation, seeking damages for legal malpractice,
28 continue...
-3-
1 On November 21, 2006, Dr. Waksberg and the Corporation each
2 filed voluntary petitions for relief under Chapter 11 of the
3 Bankruptcy Code. The cases were converted from chapter 11 to
4 chapter 7 on May 24, 2007. Alfred H. Siegel (“Trustee”) was
5 appointed trustee in both chapter 7 cases. Funds from the
6 Transamerica Settlement7 and the Skadden Arps Settlement8
7 constitute essentially all of the assets of the bankruptcy
8 estates.
9 1. Allocation of the Settlement Proceeds Pursuant to the
Settlement Agreements
10
11 Paragraph 6.a. of the Transamerica Settlement Agreement
12 provides:
13 In full settlement of all claims covered herein, and
subject to all other terms of this Agreement,
14 Transamerica agrees to pay plaintiffs the amount of
Eleven Million Dollars and No Cents ($11,000,000.00).
15 The total consideration of eleven million dollars
($11,000,000.00) shall be promptly paid and disbursed
16 by Transamerica, in the form of seven separate checks
(or six separate checks and one wire transfer) as
17
18 6
...continue
19 breach of fiduciary duty, fraud and deceit, nondisclosure, breach
of contract, conversion, replevin, injunction, invasion of
20 privacy, constructive trust, equitable accounting, and unjust
21 enrichment.
7
22 On November 1, 2006, the remaining proceeds of the
Transamerica Settlement Agreement (then in the amount of
23 $9,450,000 plus accrued interest) were interpleaded by
24 Transamerica into the California state court ("Interpleader
Action") in light of the numerous lien claims being asserted by
25 professionals in the litigation. Dr. Waksberg appears to have
had a volatile relationship with a series of attorneys.
26
8
27 In 2006, approximately $1 million was turned over to
the law firm of Hoge, Fenton, Jones & Appel, Inc., and thereafter
28 turned over to the Trustee in June of 2007.
-4-
1 provided herein.
2 Paragraph 7 of the Transamerica Settlement Agreement sets
3 forth the specifics of how the six checks were to be issued:
4 - $600,000 payable to the Corporation as compensation
for lost earnings (corporate earnings for medical fees
5 not earned)
6 - $2,280,000 payable to the Corporation as compensation
for lost earnings (corporate earnings for medical fees
7 not earned)
8 - $2,750,000 payable to the Corporation as compensation
for loss of corporate medical practice and related
9 corporate Goodwill
10 - $1 million payable to Dr. Waksberg as compensation
for personal injuries which had a physical
11 manifestation
12 - $3 million payable to Dr. Waksberg as compensation
for loss of personal name and reputation (Goodwill) in
13 medical and related fields of business
14 - $420,000 payable to the Corporation as compensation
for lost earnings (corporate earnings for medical fees
15 not earned)
16 Finally, paragraph 6.c. of the Transamerica Settlement
17 Agreement provides for the payment of $950,000 to the
18 Corporation, either by check or by wire transfer, as compensation
19 for lost earnings (corporate earnings for medical fees not
20 earned).
21 It appears that similar allocations between Dr. Waksberg and
22 the Corporation were made in the Skadden Arps Settlement
23 Agreement. "The amount of $472,727.28 shall be allocated to
24 settlement of claims seeking compensation for personal injuries
25 to [Dr. Waksberg] which had a physical manifestation."9
26
9
27 This quotation was taken from the proposed settlement
of the Exemption Objection. No copy of the Skadden Arps
28 continue...
-5-
1 2. The Law Firm's Claim for Unpaid Fees
2 An Official Committee of Unsecured Creditors ("Committee")
3 was appointed in the Corporation's chapter 11 case. An order
4 authorizing the employment of the Bankruptcy Law Firm, PC ("Law
5 Firm"), was entered on May 1, 2007.
6 On September 27, 2007, the bankruptcy court entered an order
7 granting compensation ("Fee Award"), on an interim basis, to the
8 Law Firm in the amount of $69,350.17 in fees and $3,606.40 in
9 expenses for services provided in the Corporation's chapter 11
10 case. The Fee Award thereafter was approved on a final basis by
11 the court's order entered September 23, 2008. The bankruptcy
12 court authorized the payment of 50% of the Fee Award on March 30,
13 2009, from funds being held in the Interpleader Action. It is
14 undisputed that the Law Firm received the 50% payment and that
15 the remaining amount owed is $36,478.
16 3. Dr. Waksberg's Exemption Claims
17 In his personal case, Dr. Waksberg filed his original
18 Schedule B (personal property schedule) on December 21, 2006. He
19 included therein a contingent claim on account of litigation,
20 also identified in Item 4 of his Statement of Financial Affairs.
21 Schedule B stated that the current value of Dr. Waksberg's
22 interest in the litigation was $0.00. As other personal property
23 in which he claimed an interest, Dr. Waksberg included the
24 Transamerica Settlement funds held in the Interpleader Action.
25 Dr. Waksberg asserted the value of his interest in the
26
27 9
...continue
28 Settlement Agreement is in the record.
-6-
1 Transamerica Settlement proceeds was $3,538,245.60. He also
2 scheduled settlement funds held in a Wells Fargo trust account
3 and asserted the value of his interest in those funds was
4 $437,250.07.10 However, Dr. Waksberg did not claim an exemption
5 in any of the foregoing personal property assets in his
6 Schedule C (property claimed as exempt), also filed on
7 December 21, 2006. Neither did Dr. Waksberg assert an exemption
8 claim in these assets when he amended his Schedules B and C on
9 two occasions: on March 26, 2007 and on May 14, 2007.
10 On November 24, 2008, Dr. Waksberg filed an amended
11 Schedule C in which, for the first time, he claimed an exemption
12 in (a) a personal injury claim, asserting $20,725 as exempt, and
13 (b) loss of future income, asserting $3,600,000 as exempt.
14 Another amended Schedule C was filed on December 3, 2008. It is
15 unclear why this December 3 amendment was made, as it appears to
16
17
10
The Law Firm did not include in the record a copy of
18 the Corporation’s original or amended Schedule B. We have
19 retrieved these documents from the bankruptcy court’s electronic
docket and take judicial notice of them. See O’Rourke v.
20 Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58
(9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co.
21 (In re Atwood),
293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
22 The Corporation filed its original Schedule B on
December 21, 2006 (docket no. 18). It then filed an amended
23 Schedule B on March 26, 2007 (docket no. 109) and then another
amended Schedule B on May 14, 2007 (docket no. 167). The
24
original and amended B schedules appear to contain the same
25 information.
The Corporation listed the proceeds from two cash
26 settlements. One was in the amount of $6,290,214.39, located in
27 the registry of the Los Angeles Superior Court. These settlement
proceeds were designated “interplead funds.” The other was in
28 the amount of $765,187.62, located in a Wells Fargo account.
-7-
1 contain identical claims of exemption as the November 28
2 amendment.
3 On December 29, 2008, the Trustee objected to the new claims
4 of exemption ("Exemption Objection"). In the Exemption
5 Objection, the Trustee pointed out that the averments of
6 Dr. Waksberg's complaint against Transamerica alleged conduct by
7 Transamerica which directly interfered with, and damaged, his
8 professional reputation and interfered with prospective business
9 opportunities. The Trustee asserted that such allegations are
10 pecuniary in nature and do not give rise to a personal injury
11 claim. The Trustee further asserted that the late claims of
12 exemption were prejudicial to the creditors of Dr. Waksberg's
13 estate. Although Dr. Waksberg appears to have made a verbal
14 claim to the exemptions beginning from the time when the case
15 converted to chapter 7, he failed to assert the exemption claims
16 formally, notwithstanding the Trustee's ongoing position,
17 communicated to Dr. Waksberg, that no exemption claim was
18 appropriate. In the interim, the Trustee settled virtually all
19 secured claims against the Transamerica funds before Dr. Waksberg
20 claimed exemptions in those funds in his amended schedules.
21 Finally, the Trustee suggested that Dr. Waksberg already had
22 received $1.55 million from the Transamerica settlement funds
23 before the bankruptcy cases were filed.
24 In his opposition filed on February 9, 2009, Dr. Waksberg
25 asserted that the Transamerica Settlement Agreement allocated
26 $1 million for his personal injuries for which there was a
27 physical manifestation, and $3 million for his future earnings.
28 Dr. Waksberg further asserted that the $1.55 million prepetition
-8-
1 distributions were paid to the Corporation, not to him. Finally,
2 he asserted that the Trustee was on notice from the beginning of
3 the chapter 7 case of his claim of exemptions, and that the
4 Trustee failed to articulate how paying the exemptions now rather
5 than at the beginning of the case would cause prejudice to the
6 unsecured creditors, where there was not enough money to pay
7 general unsecured claims in the first instance, citing Arnold v.
8 Gil (In re Arnold), 252 B.R. 778, 787 (9th Cir. BAP 2000).
9 In his reply, the Trustee reiterated that the settlement
10 agreements and underlying complaints show no funds were allocated
11 to Dr. Waksberg for "loss of future earnings"; rather, the
12 allocations were for "loss of personal name and reputation,"
13 which did not entitle Dr. Waksberg to claim an exemption based on
14 CCP § 703.140(b)(11)(E), as asserted in the most recent
15 iterations of Dr. Waksberg's Schedule C.
16 4. Ida Waksberg's Claims
17 On March 16, 2007, Ida Waksberg, Dr. Waksberg’s mother,
18 filed proof of claim number 33-1 in the Corporation’s bankruptcy
19 case and claim number 49-1 in Dr. Waksberg’s case (hereinafter
20 jointly the “Ida Claim”). The Ida Claim was filed in the amount
21 of $587,000 plus interest. The Ida Claim represented the amount
22 Ida allegedly loaned to both Dr. Waksberg and the Corporation
23 between 1987 and 2006. The Ida Claim expressly reserved the
24 right to file an amendment, after an accounting had been
25 completed, to allocate the Ida Claim between the two cases.
26 The Ida Claim was filed as secured, and it stated that Ida
27 believed the claim was secured by "certain collateral" to be
28 identified in the amended claim to be filed.
-9-
1 On December 23, 2011, the Trustee filed a motion ("Ida Claim
2 Objection") to disallow Ida's claim in the Corporation's case.
3 In the Ida Claim Objection, the Trustee alleged that Ida's claim
4 constituted a false claim against the Corporation's bankruptcy
5 estate. In the four-and-one-half years since she filed her
6 claim, Ida never amended the claim, nor provided any supporting
7 evidence to substantiate the Corporation's liability, attachment
8 or perfection of her security interest, or the specific amount of
9 her claim.
10 5. The Trustee's Compromise of Dr. Waksberg's Exemption
Claims and Ida Waksberg's Claims
11
12 Following numerous continuances, the Exemption Objection
13 finally was scheduled to be heard on March 27, 2014. A
14 settlement was negotiated and documented by an agreement
15 (“Compromise Agreement”). On February 7, 2014, the Trustee filed
16 the motion to approve the Compromise Agreement (“Compromise
17 Motion”) to resolve the Exemption Objection. Although the
18 caption of the Compromise Motion specifically identified only the
19 November 24, 2008 amended Schedule C and the December 3, 2008
20 amended Schedule C as the matters that were being compromised,
21 the body of the Compromise Motion contained the following
22 catch-all: "and all of the claims of [Dr. Waksberg] and Ida
23 Waksberg against the estate, including, but not limited to, the
24 two secured claims filed by Ida Waksberg on March 16, 2007
25 against [Dr. Waksberg and the Corporation's] Estates, each in the
26 amount of $587,000." Through the Compromise Motion, the Trustee
27 proposed to pay Dr. Waksberg and Ida Waksberg, jointly, the total
28
-10-
1 sum of $1.6 million.11
2 Dr. Waksberg contested nearly every action of the Trustee
3 throughout the pendency of the chapter 7 cases. Prior to
4 entering into the Transamerica Settlement Agreement and the
5 Skadden Arps Settlement Agreement, Dr. Waksberg and the
6 Corporation filed malpractice actions against no fewer than three
7 of the law firms that had represented them in the ongoing
8 litigation. After the Trustee was appointed, he negotiated
9 resolutions of these law firms’ competing claims to the
10 settlement proceeds. Dr. Waksberg and the Corporation not only
11 opposed the settlements, but also appealed the orders that
12 approved them.
13 Additionally, many professional applications for
14 compensation were filed and approved in the bankruptcy cases.
15 Again, Dr. Waksberg and the Corporation not only opposed approval
16 of the compensation to these professionals, but also appealed the
17 orders that approved their compensation.
18 In total, Dr. Waksberg filed 13 appeals from bankruptcy
19 court orders to the United States District Court for the Central
20 District of California. Each of those appeals ultimately was
21 dismissed either by the District Court or at Dr. Waksberg's
22 request.
23 After the bankruptcy cases were converted to chapter 7,
24
11
25 Attached as Exhibit A to the Compromise Motion is the
Compromise Agreement between Dr. Waksberg and Ida Waksberg on the
26 one hand, and the Trustee (on behalf of both estates) on the
27 other. The Compromise Agreement sets out in detail the
significant litigation that had taken place to date in the
28 bankruptcy cases, a brief summary of which we include here.
-11-
1 Dr. Waksberg and the Corporation filed litigation in state court
2 against various professionals, alleging causes of action for
3 fraud, negligence, breach of fiduciary duty, breach of contract,
4 etc. The Trustee removed the state court litigation to the
5 bankruptcy court and ultimately resolved all of the asserted
6 claims.
7 Two efforts were made to resolve globally the Exemption
8 Objection, the Ida Claim and other disputes between Dr. Waksberg
9 and the Trustee through the use of mediation conducted by retired
10 bankruptcy judges. Although the first mediation achieved a
11 resolution, Dr. Waksberg later withdrew his agreement.
12 Ultimately, the Compromise Agreement was finalized and
13 presented to the bankruptcy court for approval.12
14 6. Substantive Consolidation Motion
15 Five days after filing the Compromise Motion, the Trustee
16 filed a motion (“Consolidation Motion”) seeking to consolidate
17 the two bankruptcy estates substantively. The Trustee asserted
18 in the Consolidation Motion that by consolidating the two
19 bankruptcy cases, "any uncertainty regarding allocation of the
20 Transamerica settlement proceeds will be eliminated." Further,
21 the Trustee alleged that the assets and the liabilities of each
22 bankruptcy estate were "virtually identical."
23 In his declaration in support of the Compromise Motion, the
24
12
25 Notably, the Compromise Agreement explicitly provides
that, after the compromise is approved, with limited exceptions,
26 Dr. Waksberg and Ida no longer have standing to oppose the
27 Trustee’s actions in the bankruptcy cases. This language is not
unlike vexatious litigant orders we have on occasion seen
28 trustees request.
-12-
1 Trustee stated he had determined that the assets of the two
2 debtors were substantially commingled and intertwined. He
3 further stated that between them, the debtors had commingled and
4 transferred funds with no apparent corporate formalities or
5 repayment schedule such that it was impossible to determine
6 whether one debtor might be a creditor of the other. He asserted
7 that the Transamerica settlement proceeds were awarded "jointly
8 and severally" to the two debtors. He emphasized that the
9 related cases "share an unusual element where the majority of
10 their respective Bankruptcy Estates consist of the litigation
11 award recoveries that are joint and several as between the
12 Debtors."
13 The Trustee averred that the schedules and statements of
14 financial affairs in the two cases reflected that the Schedule D
15 and F creditors were "virtually identical." He reported that all
16 of the secured claims of attorneys listed on the D schedules of
17 both cases had been resolved through the entry of court orders,
18 each of which provided for partial payment by the Trustee, with
19 the balance allowed as an unsecured claim in both the individual
20 and corporate cases.
21 To conclude his declaration, the Trustee restated that he
22 had entered a tentative settlement with Dr. Waksberg that would
23 resolve the Exemption Objection, and that granting the
24 Consolidation Motion would eliminate any uncertainty regarding
25 allocation of the Transamerica settlement proceeds. Therefore,
26 approving the Compromise Motion and the Consolidation Motion
27 would facilitate the case closing process.
28
-13-
1 7. The Law Firm’s Opposition
2 In a single document, the Law Firm opposed both the
3 Consolidation Motion and the Compromise Motion. As to the
4 Consolidation Motion, the Law Firm asserted that substantive
5 consolidation of the cases was contrary to case law, and was
6 prejudicial to the Law Firm’s right to be paid the balance of its
7 allowed chapter 11 administrative expense claim. The Law Firm
8 opposed the Compromise Motion only to the extent that the trustee
9 intended to reach assets of the Corporation to fund payment to
10 Dr. Waksberg on his claim of personal exemption. The Declaration
11 of Kathleen P. March in support of the opposition includes the
12 following primary assertions: she was advised by the Trustee’s
13 counsel that (1) assets of the Corporation were necessary to fund
14 the Compromise Agreement; and (2) substantive consolidation would
15 render the two cases administratively insolvent past the
16 chapter 7 professionals level.
17 The Law Firm pointed out that the Trustee bore the burden of
18 proving that substantive consolidation is allowable under the
19 circumstances. The Law Firm asserted that it would be contrary
20 to law to consolidate the cases substantively to enable the
21 Trustee to reach corporate assets, otherwise available to
22 claimants against the Corporation, to pay a personal exemption to
23 Dr. Waksberg. The Law Firm contended that the Consolidation
24 Motion contained no evidence establishing that creditors did not
25 rely on the separateness of Dr. Waksberg and the Corporation in
26 extending credit. Nor did the Trustee establish that there was
27 sufficient entanglement of the two debtors’ financial affairs
28 that the time and expense necessary to unscramble them threatened
-14-
1 the realization of net assets to all creditors. The Law Firm
2 asserted that, to the extent there was any commingling, it was
3 done postpetition by the Trustee himself in the payment of
4 attorneys fees. The Law Firm posited that simple math would
5 enable the Trustee to allocate those attorneys fees between the
6 estates.
7 Finally, The Law Firm asserted that, if the bankruptcy court
8 was inclined to approve the Consolidation Motion, equity required
9 a “carve out” for its previously approved fees.
10 The Trustee responded to the Law Firm’s opposition, pointing
11 out that the Law Firm did not oppose the Compromise Motion on any
12 grounds set forth in Martin v. Kane (In re A & C Props.),
13 784 F.2d 1377 (9th Cir. 1986). Rather, the sole opposition was
14 that there would not be funds to implement the Compromise Order
15 absent improper consolidation of the cases.
16 The Trustee argued that if the Law Firm were to prevail in
17 its opposition to the Compromise Motion, he would be forced to
18 litigate the Exemption Objection. In the absence of
19 consolidation, previously paid chapter 11 administrative
20 expenses, and possibly some previously paid chapter 7
21 administrative expenses, in Dr. Waksberg's case would need to be
22 disgorged. Further, there were no funds in Dr. Waksberg's
23 individual case to fund the Exemption Objection litigation. In
24 addition, the Compromise Agreement settled the Ida Claim,
25 asserted as secured against the Corporation in the amount of
26 $587,000. The Trustee pointed out that Dr. Waksberg filed a
27 claim against the Corporation in the amount of $3,857,244, and
28 consolidation would eliminate claims between the two estates for
-15-
1 the benefit of all of the creditors.
2 The Trustee further asserted that he was not bound by the
3 allocation between the Corporation and Dr. Waksberg as set forth
4 in the Transamerica and Skadden Arps settlement agreements. As
5 a consequence, the Law Firm’s attempt to allocate 7/11 of the
6 total settlement funds to the Corporation was not dispositive in
7 a determination as to the funds belonging to each estate.
8 8. The Bankruptcy Court’s Rulings
9 The bankruptcy court heard arguments on the Compromise
10 Motion and the Consolidation Motion on March 5, 2014. In
11 addressing the Law Firm’s contention that the Trustee had not
12 adequately established that creditors did not look to one of the
13 debtors in extending credit, the bankruptcy court made the
14 following findings relevant to the Consolidation Motion:
15 We do have a substantial overlap. We've got 48 of the
80 creditors in the individual case are the same
16 creditors as in the corporate case. The bulk of the
parties that we've dealt with, that’s anybody that's
17 ever come into this court, dealt with the debtor and
the corporation indistinguishable.
18
I do think that this is a case that as of the petition
19 date was an appropriate case for substantive
consolidation.
20
21 Tr. of March 5, 2014 H’rng at 34:8-16.
22 The bankruptcy court also focused on the manner in which the
23 Trustee’s settlements with all of the attorneys who had asserted
24 liens against the litigation settlement proceeds had been paid.
25 Specifically, each of the disputed attorney liens was resolved
26 by: (1) a partial payment from the funds in the Interpleader
27 Action, without an allocation as to which debtor was paying the
28 lien claim; and (2) an unsecured claim allowed in both cases.
-16-
1 The bankruptcy court also noted that the Law Firm’s
2 objection to the Compromise Motion related only to the intended
3 use of the Corporation’s assets to fund the Compromise Agreement,
4 not to approval of the terms of the Compromise Agreement itself.
5 However, at the Hearing, The Law Firm’s counsel asserted that the
6 Compromise Motion only was noticed in Dr. Waksberg’s individual
7 case and not in the Corporation’s case. The Trustee’s counsel
8 responded that he believed all creditors in both cases had been
9 provided with notice of the Compromise Motion. No evidence on
10 this point was introduced at the Hearing.
11 The bankruptcy court granted the Consolidation Motion as
12 well as the Compromise Motion. These appeals followed.
13 II. JURISDICTION
14 The bankruptcy court had jurisdiction under 28 U.S.C.
15 §§ 1334 and 157(b)(2)(A), (B) and (O). We have jurisdiction under
16
28 U.S.C. § 158.
17 III. ISSUES
18 Whether the bankruptcy court abused its discretion when it
19 approved the Compromise Agreement.
20 Whether the bankruptcy court erred when it entered the
21 Consolidation Order.
22 IV. STANDARDS OF REVIEW
23 A bankruptcy court’s decision to approve a compromise
24 settlement is reviewed for abuse of discretion. Martin v. Kane
25 (In re A & C Props.),
784 F.2d 1377, 1380 (9th Cir.), cert.
26 denied,
479 U.S. 854 (1986); Goodwin v. Mickey Thompson
27 Entertainment Group, Inc. (In re Mickey Thompson Entertainment
28 Group, Inc.),
292 B.R. 415, 420 (9th Cir. BAP 2003). A
-17-
1 bankruptcy court abuses its discretion if it applies an incorrect
2 legal standard or misapplies the correct legal standard, or if
3 its fact findings are illogical, implausible or without support
4 from evidence in the record. TrafficSchool.com v. Edriver Inc.,
5
653 F.3d 820, 832 (9th Cir. 2011).
6 A substantive consolidation decision presents a mixed
7 question of law and fact that we review de novo. In re Bonham,
8
229 F.3d at 763. A mixed question exists when the relevant facts
9 are established, the legal standard is clear, and the issue is
10 whether the facts satisfy the legal standard. Wechsler v. Macke
11 Int’l Trade, Inc. (In re Macke Int’l Trade, Inc.),
370 B.R. 236,
12 245 (9th Cir. BAP 2007).
13 De novo review requires that we consider a matter anew, as
14 if no decision had been made previously. United States v.
15 Silverman,
861 F.2d 571, 576 (9th Cir. 1988); B-Real, LLC v.
16 Chaussee (In re Chaussee),
399 B.R. 225, 229 (9th Cir. BAP 2008).
17 We may affirm the decision of the bankruptcy court on any
18 basis supported by the record. Shanks v. Dressel,
540 F.3d 1082,
19 1086 (9th Cir. 2008).
20 V. DISCUSSION
21 A. Introduction
22 Unfortunately, this case represents an unhappy tribute to
23 the ability of a difficult and litigious debtor to turn a
24 bankruptcy case into a morass from which no objectively desirable
25 outcomes are possible. Faced with this mess, the bankruptcy
26 court followed the lead of the Trustee in seeking to cut losses
27 and end the pain of metastasizing litigation. We conclude in
28 these circumstances that the bankruptcy court did not abuse its
-18-
1 discretion in approving the Compromise Agreement, consistent with
2 the Ninth Circuit’s A & C Props. standards, but we also conclude
3 that it was inappropriate for the bankruptcy court to approve
4 substantive consolidation under In re Bonham over the material
5 substantive objections of an interested party. Our reasoning
6 follows:
7 B. Approval of the Compromise Agreement
8 Rule 9019(a) authorizes the bankruptcy court to approve a
9 compromise or settlement on motion of the chapter 7 trustee after
10 notice and a hearing. The bankruptcy court must inquire into all
11 “factors relevant to a full and fair assessment of the wisdom of
12 the proposed compromise.” Protective Comm. For Indep.
13 Stockholders of TMT Trailer Ferry, Inc. v. Anderson,
390 U.S.
14 414, 424 (1968). In other words, in order to approve a
15 compromise settlement, the bankruptcy court “must find that the
16 compromise is fair and equitable.” In re A & C Props.,
784 F.2d
17 at 1381. And the Trustee, as the party advocating approval of
18 the compromise, bears “the burden of persuading the bankruptcy
19 court that the compromise is fair and equitable and should be
20 approved.”
Id. However, bankruptcy courts have broad discretion
21 in considering approval of proposed settlements because they are
22 “uniquely situated to consider the equities and reasonableness
23 [of such settlements] . . . .” United States v. Alaska Nat’l
24 Bank (In re Walsh Constr., Inc.),
669 F.2d 1325, 1328 (9th Cir.
25 1982). “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.”
28 In re A & C Props.,
784 F.2d at 1380.
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1 In determining whether the standards for approval of a
2 compromise settlement have been met, the bankruptcy court must
3 consider the following four factors:
4 (a) The probability of success in the litigation;
(b) the difficulties, if any, to be encountered in the
5 matter of collection; (c) the complexity of the
litigation involved, and the expense, inconvenience and
6 delay necessarily attending it; [and] (d) the paramount
interest of the creditors and a proper deference to
7 their reasonable views in the premises.
8
Id., citing Flight Transp. Corp. Securities Litigation,
790 F.2d
9 1128, 1135 (8th Cir. 1984), cert. denied,
105 S. Ct. 1169 (1985).
10 See Marlow v. Zamora (In re Marlow),
2011 WL 3299024 (9th Cir.
11 BAP Feb. 1, 2011) (unpublished).
12 In this case, the Trustee addressed all four factors at
13 length in the Memorandum of Points and Authorities filed in
14 support of the Compromise Motion, supported by the Trustee’s
15 declaration. With respect to the probability of success in
16 litigation, the Trustee and his counsel focused on Dr. Waksberg’s
17 exemption claims. The two primary issues to be determined were
18 1) whether Dr. Waksberg was entitled to any exemptions at all,
19 and 2) if so, the amount of exemptions that should be allowed.
20 In light of the bankruptcy court’s determination that the
21 lateness of Dr’s Waksberg’s making the subject exemption claims
22 was not dispositive, the parties had focused on the present value
23 of “subsistence” versus “lifestyle maintenance” for Dr. Waksberg
24 and his aged and infirm mother. In his amended Schedule C,
25 Dr. Waksberg had claimed $3,600,000 as exempt but subsequently
26 had sought much more–between $4,223,543 and $4,631,402 after
27 taxes. The upper end of Dr. Waksberg’s exemption claims exceeded
28 the balance of funds the bankruptcy estates had on hand. The
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1 Trustee’s experts had opinions supporting amounts varying from
2 $170,190 to $776,143. However, the Trustee could not assume that
3 the bankruptcy court would agree with his experts and discount
4 entirely the expert testimony that Dr. Waksberg was prepared to
5 offer. The settlement amount of $1,600,000 was more than
6 $2,000,000 less than Dr. Waksberg had claimed in his most
7 recently amended Schedule C and well more than $3,000,000 less
8 than Dr. Waksberg’s high end claims.
9 Wrapped up in the settlement was resolution of Ida
10 Waksberg’s alleged secured claims against both Dr. Waksberg
11 individually and the Corporation. We note that the record
12 reflects that Ida Waksberg never produced any documentation that
13 her claims ever attached or were perfected. However, at oral
14 argument, counsel for the Trustee noted that Ida Waksberg,
15 age 98, had been a feisty presence in some of the proceedings
16 before the bankruptcy court. The settlement amount appears to
17 represent a compromise amount primarily (if not entirely)
18 relating to the risks associated with litigating Dr. Waksberg’s
19 exemption claims. As to Ida Waksberg’s claims, the Trustee
20 appears to have agreed to give her the sleeves off his vest. If
21 the Trustee needed to provide that the settlement amount was
22 payable jointly to Dr. Waksberg and his mother to reach the
23 Compromise Agreement and thus clothe the nakedness of the absence
24 of any documents to evidence Ida Waksberg’s alleged secured
25 claims without incurring additional settlement costs, we conclude
26 that so agreeing was a reasonable exercise of the Trustee’s
27 business judgment.
28 With respect to potential difficulties in collection, the
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1 Trustee admitted that since he was in possession of the balance
2 of funds from the Transamerica Settlement and the Skadden Arps
3 Settlement, he was not really concerned with collection issues.
4 However, he noted that in the event the bankruptcy court awarded
5 Dr. Waksberg more than the balance of funds held by the
6 bankruptcy estates, such a determination could have costly
7 adverse implications for creditors and other parties that already
8 had received distributions from the estates.
9 With regard to the complexity of open litigation issues and
10 the expense, inconvenience and delay necessarily attending their
11 resolution, the Trustee noted that prosecution to date of his
12 objections to Dr. Waksberg’s exemption claims and Ida Waksberg’s
13 claims already had been very time consuming and extremely costly.
14 Resolving those objections through the evidentiary process would
15 further deplete estate assets and potentially clog the bankruptcy
16 court’s docket “for months and perhaps years to come,” not even
17 considering appeals (of which, to date, Dr. Waksberg had filed
18 many). The settlement would avoid those potentially very
19 expensive, adverse results.
20 Finally, as to the interests of creditors, the Trustee
21 argued that approving the Compromise Motion would “avoid further
22 administrative expenses and . . . facilitate the closure of this
23 case.” At the Hearing, counsel for the Trustee noted that no
24 prepetition creditor had filed an objection to the Compromise
25 Motion.
26 In its opposition to the Compromise Motion, the Law Firm did
27 not contest the Trustee’s showing as to satisfaction of the
28 In re A & C Props. standards but merely argued that it was not
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1 proper to pay Dr. Waksberg’s personal exemption claims out of
2 Corporation assets, an argument we address in discussing the
3 Consolidation Motion. At the Hearing, the Law Firm further
4 asserted that the Compromise Motion had not been noticed in the
5 Corporation’s case, without submitting any supporting evidence.
6 In response, counsel for the Trustee stated, “Notwithstanding
7 Ms. March’s comments, I believe that notice was provided to all
8 creditors in both cases.”
9 The bankruptcy court ultimately concluded that the Trustee
10 had satisfied all relevant requirements for approval of the
11 Compromise Agreement and approved the settlement. On the record
12 before us, we perceive no abuse of discretion by the bankruptcy
13 court in approving the Compromise Motion.
14 C. Substantive Consolidation
15 Approval of the Consolidation Motion is another matter. It
16 is undisputed that the bankruptcy court’s power to order
17 substantive consolidation is part of its general equitable
18 authority. “[C]onsistent with its historical roots, the power of
19 substantive consolidation derives from the bankruptcy court’s
20 general equity powers as expressed in section 105 of the
21 Bankruptcy Code.” In re Bonham,
229 F.3d at 764. However, as
22 recognized by the Ninth Circuit in In re Bonham, “[t]he primary
23 purpose of substantive consolidation ‘is to ensure the equitable
24 treatment of all creditors.’”
Id., quoting Union Savings Bank v.
25 Augie/Restivo Baking Co. Ltd. (In re Augie/Restivo Baking Co.
26 Ltd.),
860 F.2d 515, 518 (2d Cir. 1988).
27 There is no dispute that approval of the Consolidation
28 Motion coupled with approval of the Compromise Agreement will
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1 result in no distribution to creditors in either Dr. Waksberg’s
2 individual case or the Corporation’s case. Accordingly, in
3 effect, the dispute before us is among Dr. Waksberg and
4 administrative claimants only. If the Consolidation Order is
5 affirmed, under the approved Compromise Agreement, Dr. Waksberg
6 and his mother will receive the settlement amount, and chapter 7
7 administrative claimants will have their allowed claims paid in
8 part, but chapter 11 administrative claimants with lower
9 priorities, such as the Law Firm, will receive nothing.
10 Substantive consolidation cases tend to be fact specific
11 (see In re Bonham,
229 F.3d at 764), but it is very unusual to be
12 considering substantive consolidation where creditors will see no
13 direct financial benefit from the consolidation. In
14 In re Bonham, the Ninth Circuit adopted the two-factor Second
15 Circuit test to determine whether substantive consolidation is
16 appropriate:
17 (1) whether creditors dealt with the [subject] entities
as a single economic unit and did not rely on their
18 separate identity in extending credit; or (2) whether
the affairs of the debtor are so entangled that
19 consolidation will benefit all creditors.
20 In re Bonham,
229 F.3d at 766, quoting Reider v. FDIC
21 (In re Reider),
31 F.3d 1102, 1108 (11th Cir. 1994), in turn
22 citing In re Augie/Restivo Baking Co. Ltd.,
860 F.2d at 518.
23 Since, as noted above, the creditors will receive nothing
24 from substantive consolidation in terms of distributions, we do
25 not see how the second factor in the Bonham test is satisfied.
26 As to the first factor, while many creditors in the two
27 bankruptcy cases are the same (48 based on the math as discussed
28 by the Law Firm’s counsel and the bankruptcy court at the
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1 hearing), the creditor bodies are not coextensive.13 The
2 bankruptcy court ultimately found that, “[t]he bulk of the
3 parties that we’ve dealt with, that anybody that’s ever come into
4 this Court, dealt with [Dr. Waksberg] and the [Corporation]
5 indistinguishably.” So, the first Bonham factor arguably
6 supported substantive consolidation.
7 However, as noted in Bonham,
229 F.3d at 767, substantive
8 consolidation is a remedy to be used “sparingly,” and if it
9 cannot be applied equitably, should not be applied at all. The
10 Law Firm did not rely on Dr. Waksberg’s credit in seeking
11 employment as counsel to the Committee in the Corporation’s
12 chapter 11 case. As so employed, it had no right to make a call
13 on the assets of Dr. Waksberg’s individual estate to pay its
14 allowed fees. Yet, if the estates are substantively
15 consolidated, the Law Firm will not receive the balance of its
16 finally approved fee award (which, in the absence of substantive
17 consolidation, would be paid) in order to allow for payment of
18 Dr. Waksberg’s compromise exemption claim in part out of
19 Corporation assets that otherwise would not be subject to
20 Dr. Waksberg’s personal exemption claims as a matter of law.
21 That result is not equitable and does not support substantive
22 consolidation in this case in the face of the Law Firm’s
23 opposition.
24
25
13
At the Hearing, the Law Firm’s counsel reported after
26 reviewing the claims registers that 32 proofs of claim filed in
27 Dr. Waksberg’s individual case were not duplicated in the
Corporation’s case, and 16 proofs of claim filed in the
28 Corporation’s case were not also filed in the individual case.
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1 VI. CONCLUSION
2 For the foregoing reasons, we AFFIRM the bankruptcy court’s
3 approval of the Compromise Motion, but VACATE the Consolidation
4 Order and REMAND to the bankruptcy court for further proceedings.
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