In re: RALPH DEAN ISOM and PAULA ISOM I & S FARMS, a General Partnership ( 2020 )

FILED
APR 22 2020
NOT FOR PUBLICATION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. ID-19-1198-BGL
RALPH DEAN ISOM and PAULA ISOM; Bk. No. 4:15-bk-40763
I & S FARMS, A General Partnership,
Debtors.
RALPH DEAN ISOM; PAULA ISOM; I & S
FARMS, A General Partnership,
Appellants,
v. MEMORANDUM*
R. SAM HOPKINS, Chapter 7 Trustee;
BRAD HALL & ASSOCIATES, INC.;
FARMS, LLC,
Appellees.
Argued and Submitted on February 27, 2020
at Pasadena, California
Filed – April 22, 2020
*
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.
Appeal from the United States Bankruptcy Court
for the District of Idaho
Honorable Joseph M. Meier, Chief Bankruptcy Judge, Presiding
Appearances: Brent T. Robinson of Robinson & Associates argued for
appellants Ralph Dean Isom, Paula Isom, and I & S Farms;
James Alphonse Spinner of Service, Spinner & Gray argued
for appellee R. Sam Hopkins, Chapter 7 Trustee; Robert J.
Maynes of Maynes Taggart PLLC argued for appellees Brad
Hall & Associates, Inc., and Farms, LLC.
Before: BRAND, GAN and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Appellants Ralph Dean Isom, Paula Isom, and I & S Farms (collectively
"Isoms") appeal an order approving a compromise between the chapter 71
trustee and co-appellees Brad Hall and Associates, Inc. and Farms, LLC
(together "Hall"). The Isoms also appeal the order denying reconsideration of
the compromise order. Appellees argue that we lack jurisdiction over the
compromise order, because the Isoms included only the reconsideration
order in their initial notice of appeal. Appellees also argue that the appeal is
equitably moot, because the settlement has been substantially consummated
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule" references are to the Federal Rules of
Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil
Procedure.
2
and would be extremely difficult to unwind.
We conclude that we have jurisdiction over the compromise order, and
that the appeal is not equitably moot. We further conclude that the
bankruptcy court did not abuse its discretion in approving the compromise.
Accordingly, we AFFIRM.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Prepetition events
Prior to their bankruptcy filing, the Isoms owned and operated a farm
in Idaho (the "Farm"). The Farm was encumbered by two mortgages securing
two promissory notes in favor of Rabo Agrifinance. The Rabo liens also
covered all water rights associated with the Farm, including what is known
as the Palisades Water Shares, and all irrigation equipment and fixtures upon
the Farm.
The Isoms defaulted on the Rabo loans. In June 2014, Rabo obtained a
judicial foreclosure judgment. Shortly thereafter, Rabo assigned to Hall the
mortgages, the promissory notes and the foreclosure judgment in exchange
for $5.95 million. Around this same time and in an apparent attempt to avoid
foreclosure, the Isoms sought a loan using the Farm as collateral. At that time,
the Farm appraised for $11.4 million. The loan was never funded due to the
clouded title issues.
In September 2014, the Isoms and Hall entered into a deed-in-lieu of
foreclosure agreement, whereby the Isoms delivered deeds for the Farm to
3
Hall and Hall released all claims against the Isoms based upon the Rabo loans
and foreclosure judgment. The Isoms also conveyed to Hall all water rights,
including the Palisades Water Shares, any appurtenances thereto, and all
irrigation equipment and fixtures upon the Farm.
A few days later, Hall entered into a lease agreement with the Isoms for
the Farm. The lease included an option for the Isoms to purchase the Farm
back from Hall. Ultimately, the Isoms defaulted on the lease and were unable
to exercise the option.
The Isoms also owned a rental house and a 10-acre parcel with a shop.
In 2015, PacifiCorp obtained a default judgment against the Isoms for
$406,698.23. PacifiCorp's judgment lien fully encumbered the rental house
and the 10-acre parcel. During the Isoms' bankruptcy case, Hall purchased
PacifiCorp's judgment lien claim as well as other third-party unsecured
claims totaling nearly $900,000.
B. Postpetition events
The Isoms filed a chapter 11 bankruptcy case on July 31, 2015. I & S
Farms filed a chapter 11 case fourteen months later. The cases were
consolidated in April 2017.
While in chapter 11, the Isoms filed an adversary proceeding against
Hall, seeking to avoid the transfer of the Farm by the deed-in-lieu of
foreclosure under § 548 and Idaho Code §§ 55-913 and 55-914. The Isoms
maintained that the transfer was constructively fraudulent: (1) they received
4
less than reasonably equivalent value — the Farm was valued at $11.4 million
at the time of the deed-in-lieu and the transfer to Hall satisfied approximately
$6.5 million in debt; and (2) as a result of the transfer, they became insolvent.
When the Isoms' consolidated case was converted to chapter 7,2 R. Sam
Hopkins was appointed as the trustee ("Trustee"). He continued to prosecute
the avoidance action against Hall.
1. Settlement with Hall
Trustee and Hall ultimately reached a settlement of the avoidance
action. Per the terms of the settlement agreement:
• Hall would subordinate all unsecured claims ($892,297.84) and
administrative claims ($70,469.19) filed and acquired during the
bankruptcy, to all other allowed administrative, priority, and unsecured
claims;
• Hall would pay Trustee $300,000, which together with current funds in
the estate would pay all other unsecured and priority claims;
• Trustee would dismiss the adversary proceeding against Hall with
prejudice;
• Trustee would assign to Hall the right to pursue and recover potential
assets of the estate, including Aladdin's Flowers, LLC — a flower shop
allegedly co-owned by Mr. Isom and his sister;
• Trustee would acknowledge Hall's secured judgment liens on the rental
house and 10-acre parcel; and
2
The Isoms were ultimately denied a discharge under § 727(a)(6)(A).
5
• the parties would release all claims between them.
2. The motion to compromise
Trustee then moved for approval of the settlement. He argued that it
was fair and equitable and more favorable than a possible sale of the Farm, if
recovered from Hall after potentially lengthy and costly litigation.
The Isoms objected to the settlement, arguing that it was not fair and
equitable. Hall was receiving $13 million in assets (the $12 million Farm,
Palisades Water Shares worth $400,000, the rental house and 10-acre parcel
worth $200,000, irrigation handlines worth $355,000 and air tubes worth
$20,000) in exchange for only $6.75 million (the $6.2 million foreclosure
judgment, $250,000 Hall paid to KeyBank to release a secured lien on the
Farm, and $300,000 cash). The Isoms argued that Trustee owed them a
fiduciary duty as beneficiaries of the residual of the bankruptcy estate, and he
was not considering their best interest in the settlement.
As to the merits of the avoidance claims, the Isoms argued that Trustee
had not conducted a solvency analysis. The Isoms claimed that they were
rendered insolvent after the deed-in-lieu, with a negative net worth of
$540,000. The transfer also left them with an unreasonably small capital, and
they were unable to pay their debts as they came due.
Several months later, after the parties conducted more discovery, the
bankruptcy court held a five-day evidentiary hearing on the settlement.
Several witnesses testified including Mr. Isom, Trustee, and accountants for
6
the Isoms and Trustee. The parties presented competing evidence regarding
the value of the Farm and whether a sale would result in a surplus. In
addition, Trustee testified that it would be difficult to prove the Isoms'
insolvency if the avoidance action were pursued. They had been less than
forthcoming with information about their assets, and some assets were never
turned over despite a turnover order. Further, their bankruptcy schedules
contained many errors, and Trustee had little confidence in what few
financial records he was able to get from them.3
3. The bankruptcy court's ruling on the compromise motion
On May 28, 2019, the bankruptcy court entered an oral ruling and
written order approving the compromise ("Compromise Order"). In
reviewing the four factors under Martin v. Kane (In re A & C Properties), 784
F.2d 1377 (9th Cir. 1986), the court found that it was fair and equitable, that
Trustee had exercised his reasonable business judgment, and that the
settlement fell above the lowest point in the range of reasonableness.
The Isoms timely filed a motion to alter or amend the Compromise
Order, which the bankruptcy court denied on July 24, 2019 ("Reconsideration
Order"). The Isoms filed a notice of appeal on August 5, 2019. Only the
Reconsideration Order was attached to the notice. They then filed an
amended notice of appeal on August 21, 2019, to include the Compromise
3
Mr. Isom testified that many of his legal papers, including closing documents
for the Isoms' various properties, were in a safe that was stolen and thrown in a ditch.
Mr. Isom also testified that he personally set fire to boxes of papers in his driveway.
7
Order.
C. Post-appeal events
The Isoms unsuccessfully moved for a stay pending appeal before the
bankruptcy court and the BAP. Appellees then moved to dismiss the appeal
for two reasons: (1) an appeal of the Compromise Order was untimely
because it was not attached to the Isoms' initial notice of appeal; and (2) even
if the appeal of the Compromise Order was timely, it was equitably moot.
The motions panel denied the motion to dismiss. It deferred consideration of
the timeliness issue to the merits panel. It further determined that appellees
had not met their burden of establishing mootness, but left that issue open for
the merits panel to consider.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (N). Subject to our discussion below, we have jurisdiction
under 28 U.S.C. § 158.
III. ISSUES
1. Do we have jurisdiction to review the Compromise Order?
2. Is the appeal equitably moot?
3. Did the bankruptcy court abuse its discretion in approving the
compromise?
4. Did the bankruptcy court abuse its discretion in denying the motion
to alter or amend?
8
IV. STANDARDS OF REVIEW
We examine our own jurisdiction, including questions of mootness, de
novo. Ellis v. Yu (In re Ellis), 523 B.R. 673, 677 (9th Cir. BAP 2014).
We review the bankruptcy court's decision to approve a compromise
for an abuse of discretion. Goodwin v. Mickey Thompson Entm't Grp., Inc. (In re
Mickey Thompson Entm't Grp., Inc.), 292 B.R. 415, 420 (9th Cir. BAP 2003).
Likewise, we review the bankruptcy court's denial of a motion to alter or
amend judgment under Civil Rule 59(e) for abuse of discretion. Ocwen Loan
Serv., LLC v. Marino (In re Marino), 577 B.R. 772, 781 (9th Cir. BAP 2017).
A bankruptcy court abuses its discretion if it applies the wrong legal
standard, or misapplies the correct legal standard, or if it makes factual
findings that are illogical, implausible, or without support in inferences that
may be drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver
Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc)).
V. DISCUSSION
A. We have jurisdiction to review the Compromise Order.
Trustee and Hall argue that we lack jurisdiction to consider the
Compromise Order because the initial notice of appeal attached only the
Reconsideration Order, and the amended notice of appeal, which now
included the Compromise Order, was filed long after the 14-day appeal
period for that order had run. As a result, Trustee and Hall argue that the
9
scope of the appeal is limited to the Reconsideration Order.
Rule 8002 provides that, if a party timely moves to alter or amend a
judgment under Rule 9023, then the 14-day deadline under Rule 8002 for
filing an appeal runs from entry of the order disposing of the last such motion
outstanding. If the motion is timely under Rule 9023, we have jurisdiction to
review both the underlying order and the order denying reconsideration.
Tennant v. Rojas (In re Tennant), 318 B.R. 860, 866 n.5 (9th Cir. BAP 2004)
(distinguishing between appeal of an order denying a Rule 9024 motion and
appeal of a timely Rule 9023 motion). Here, the motion to alter or amend was
filed within 14 days after entry of the Compromise Order, and the initial
notice of appeal was filed within 14 days after entry of the Reconsideration
Order. We thus have jurisdiction to review the Compromise Order.
As for the Isoms' failure to attach the Compromise Order in the initial
notice of appeal, Rule 8003(a)(3)(B) requires attachment of the appealed
order. Although there is no controlling authority interpreting the scope of
Rule 8003, the U.S. Supreme Court and the Ninth Circuit Court of Appeals
have set forth general principles regarding the interpretation of Federal Rule
of Appellate Procedure 3(c)(1),4 which is similar to Rule 8003(a)(3)(B). See
Smith v. Barry, 502 U.S. 244, 248 (1992); Le v. Astrue, 558 F.3d 1019, 1021-22
(9th Cir. 2009). Although the dictates of FRAP 3 are jurisdictional in nature,
4
FRAP 3(c)(1)(B) requires that a notice of appeal "designate the judgment, order,
or part thereof being appealed."
10
"[c]ourts will liberally construe the requirements of [FRAP] 3" when
determining compliance. See Smith, 502 U.S. at 248.
When a party seeks to argue the merits of an underlying order that does
not appear on the notice of appeal, the reviewing court will generally
consider (1) whether the intent to appeal a specific judgment is fairly inferred
and (2) whether the appellee will be prejudiced by the mistake. Lolli v. Cty. of
Orange, 351 F.3d 410, 414 (9th Cir. 2003) (interpreting FRAP 3). When
examining both factors, courts should consider "'whether the affected party
had notice of the issue on appeal and, second, whether the party had an
opportunity to fully brief the issue.'" Le, 558 F.3d at 1022 (quoting Meehan v.
Cty. of L.A., 856 F.2d 102, 105 (9th Cir. 1988)). "'Where the appellee has argued
the merits fully in its brief, it has not been prejudiced by the appellant's
failure to designate specifically an order which is subject to appeal.'" Id. at
1025 (quoting Lockman Found. v. Evangelical All. Mission, 930 F.2d 764, 772 (9th
Cir. 1991)).
First, the Isoms' intent to appeal the Compromise Order can be fairly
inferred. The initial notice of appeal filed on August 5, 2019, states: "The
primary issues on appeal include, but are not limited to: 1. The Court erred
in granting Trustee's Motion to Approve Compromise . . . ." The Isoms' intent
to appeal the Compromise Order is also clear upon review of their opening
brief, which focuses entirely on the errors they assert the bankruptcy court
made in approving the settlement. Leaving aside any timeliness issue, the
11
Isoms' amended notice of appeal, which included the Compromise Order,
further demonstrates their intent to appeal it. Thus, because the Isoms' intent
to appeal the Compromise Order was clear, it gave Trustee and Hall notice of
the issue on appeal. Second, there is no prejudice to Trustee and Hall if we
review the Compromise Order. Both parties had a full opportunity to, and
did, address the order in their appellate briefs.
Accordingly, we conclude that this appeal encompasses both the
Compromise Order and the Reconsideration Order. We now turn our focus to
the appellees' second argument challenging our jurisdiction, that the appeal is
equitably moot.
B. The appeal is not equitably moot.
Trustee and Hall argue that the appeal is equitably moot because the
Isoms failed to seek a stay in a timely manner or obtain one and, as a result,
the settlement has been substantially consummated and would be extremely
difficult to unwind.
We may dismiss an appeal if we deem it equitably moot. Clear Channel
Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 33-35 (9th Cir. BAP 2008).
Equitable mootness is "a judge-made abstention doctrine unrelated to the
constitutional prohibition against hearing moot appeals." Rev Op Grp. v. ML
Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1214 (9th Cir. 2014). "Equitable
mootness occurs when a comprehensive change of circumstances has
occurred so as to render it inequitable for this court to consider the merits of
12
the appeal. The question is whether the case presents transactions that are so
complex or difficult to unwind that the doctrine of equitable mootness would
apply." Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation
Co.), 677 F.3d 869, 880 (9th Cir. 2012). In other words, "[e]quitable mootness
concerns whether changes to the status quo following the order being
appealed make it impractical or inequitable to unscramble the eggs." Castaic
Partners II, LLC v. Daca–Castaic, LLC (In re Castaic Partners II, LLC), 823 F.3d
966, 968 (9th Cir. 2016).
The Ninth Circuit follows a four-step process to determine whether an
appeal is equitably moot:
We will look first at whether a stay was sought, for absent that a
party has not fully pursued its rights. If a stay was sought and not
gained, we then will look to whether substantial consummation of
the plan has occurred. Next, we will look to the effect a remedy
may have on third parties not before the court. Finally, we will look
at whether the bankruptcy court can fashion effective and equitable
relief without completely knocking the props out from under the
plan and thereby creating an uncontrollable situation for the
bankruptcy court.
In re Thorpe Insulation Co., 677 F.3d at 881. Applying this four-factor test, we
conclude that the appeal of the Compromise Order is not equitably moot.
The Isoms sought, but were unsuccessful at obtaining, a stay of the
Compromise Order from both the bankruptcy court and the BAP. Trustee and
Hall fault the Isoms for not seeking a stay in a more timely manner, waiting
over ten weeks after the Compromise Order was entered. It appears that the
13
delay was due to the Isoms waiting for resolution of their motion to alter or
amend the Compromise Order. Once it was denied, they promptly sought a
stay from the bankruptcy court. And when the court denied the request, the
Isoms promptly sought a stay from the BAP. Under the circumstances, we
believe that the Isoms were diligent in their efforts and did not sit on their
rights. The "failure to obtain a stay does not require a conclusion of equitable
mootness where parties use due diligence in seeking the stay." Id. Thus, this
factor does not weigh in favor of finding the appeal equitably moot.
We next consider whether substantial consummation of the settlement
has occurred. Although Thorpe focused on plan consummation, we think the
general principles apply to any equitable mootness analysis. See Yang Jin Co.
v. Miller (In re Kong), BAP No. CC-15-1371-KiTaL, 2016 WL 3267588, at *6 (9th
Cir. BAP June 6, 2016) (applying Thorpe to a Rule 9019 settlement); Bonnett v.
Gillespie (In re Irish Pub-Arrowhead, LLC), BAP No. AZ-13-1024-PaKuD, 2014
WL 486955, at *5 (9th Cir. BAP Feb. 6, 2014) (applying Thorpe to a § 363(f) sale
order). Trustee and Hall maintain that the settlement has been substantially
consummated: Hall paid Trustee the $300,000; Trustee transferred deeds for
the rental house and 10-acre parcel to Hall; Trustee transferred and assigned
personal property to Hall; Hall paid a backlog of property taxes owed and
spent significant funds cleaning up and repairing the real estate; Mr. Isom has
been evicted from the 10-acre parcel; Hall leased the farm ground for 2019
and is negotiating a lease for the 2020 growing season; Hall entered into buy-
14
sell agreements for two of the homes, and the sale of the rental house closed
in September 2019. Although the bankruptcy court recently dismissed the
avoidance action against Hall with prejudice, it was only dismissed due to the
settlement and Trustee's and Hall's stipulation. Were we to reverse the
Compromise Order, the adversary proceeding could be revived. In addition,
Trustee has not distributed any of the $300,000 to unsecured creditors.
At best, this factor is neutral. However, even if it weighs in favor of
mootness, we are still required to look at the third and fourth prongs of the
equitable mootness test. Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.),
771 F.3d 623, 629 (9th Cir. 2014) (substantial consummation does not, by itself,
render an appeal moot, and the appellate court must still consider whether,
despite substantial consummation, it can fashion effective relief).
The third and fourth Thorpe factors require us to consider the effects of
any available remedy on third parties not before the court and whether such
remedy would create a difficult and essentially unmanageable situation for
the bankruptcy court. As to the third factor, "the question is not whether it is
possible to alter a plan such that no third party interests are affected, but
whether it is possible to do so in a way that does not affect third party
interests to such an extent that the change is inequitable." In re Thorpe
Insulation Co., 677 F.3d at 882. In considering the fourth factor, where the
court can grant some relief, even if such relief is incomplete, the appeal is not
equitably moot. Id. at 883. We conclude that both of these factors weigh
15
against a finding of equitable mootness.
Because Trustee has not distributed the settlement funds to unsecured
creditors, the only third party possibly affected that is not before us is the
party to whom Hall sold the rental house. The rental house was subject to
liens that Hall acquired from PacifiCorp and was completely underwater.
Instead of Hall having to foreclose, Trustee transferred to Hall the deed for
the property. Hall has not revealed the identity of the third-party purchaser,
or its relationship, if any, to Hall. It is also not clear whether the sale of the
other home has closed or if Hall has entered into a farming lease with anyone
for the 2020 growing season. Thus, the absence of any specifics from Hall
about the purchaser of the rental house or any other potential purchaser(s)
and lessee(s) makes us question whether relief cannot be afforded.
At bottom, Trustee and Hall have not shown that the bankruptcy court
could not fashion any effective relief without unduly or inequitably
impacting third parties. At the heart of the settlement was the dismissal of the
avoidance action against Hall that sought to avoid the deed-in-lieu and
recover the Farm for the estate. If we were to reverse the Compromise Order
and Trustee were ordered to pursue the litigation and prevailed, the value of
the Farm could be recovered, even if the property itself could not. Even a
partial remedy is sufficient to prevent a case from being moot. Calderon v.
Moore, 518 U.S. 149, 150 (1996).
16
C. The bankruptcy court did not abuse its discretion in approving the
compromise.
1. Governing law
Rule 9019 provides that, "[o]n motion by the trustee and after notice and
a hearing, the court may approve a compromise or settlement." The court
may approve a compromise or settlement only when it is "fair and equitable."
In re A & C Props., 784 F.2d at 1381. The settlement should be in the best
interests of the estate and "reasonable, given the particular circumstances of
the case." Id. And while a court generally gives deference to a trustee's
business judgment in deciding whether to settle a matter, the trustee "has the
burden of persuading the bankruptcy court that the compromise is fair and
equitable and should be approved." Id. "Because the bankruptcy judge is
uniquely situated to consider the equities and reasonableness of a particular
compromise, approval or denial of a compromise will not be disturbed on
appeal absent a clear abuse of discretion." United States v. Alaska Nat'l Bank of
the N. (In re Walsh Constr., Inc.), 669 F.2d 1325, 1328 (9th Cir. 1982).
When deciding the "fairness, reasonableness and adequacy" of a
proposed settlement agreement, the bankruptcy 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; [and] (d) the
paramount interest of the creditors and a proper deference to their
reasonable views in the premises.
17
In re A & C Props., 784 F.2d at 1381. No one factor is dispositive; the "factors
should be considered as a whole to determine whether the settlement
compares favorably with the expected rewards of litigation." Greif & Co. v.
Shapiro (In re W. Funding, Inc.), 550 B.R. 841, 851 (9th Cir. BAP 2016). "When
assessing a compromise, courts need not rule on disputed facts and questions
of law, but rather only canvass the issues. A mini trial on the merits is not
required." Burton v. Ulrich (In re Schmitt), 215 B.R. 417, 423 (9th Cir. BAP
1997).
2. Analysis
The bankruptcy court thoroughly reviewed the evidence and made
detailed findings with respect to each A & C Properties factor.
For the first factor—probability of success in the litigation—the court
found that it was neutral. In reviewing the elements for avoiding a transfer
under § 548(a)(1)(B) and similar Idaho Code §§ 55-913 and 55-914, the court
determined that it was unclear whether the Isoms received reasonably
equivalent value for the deed-in-lieu given the lease and purchase option.
Insolvency was even more hotly contested by the parties, and the evidence of
the Isoms' insolvency after the deed-in-lieu was "muddied at best." Because of
this, the court determined that it was unclear whether Trustee would succeed
in showing that the Isoms were insolvent or left with an unreasonably small
capital after the deed-in-lieu.
For the second factor—difficulty in collection—the court found that it
18
weighed against the settlement. The Farm could be brought back into the
estate and sold by Trustee for cash.
For the third factor—complexity, expense, inconvenience and delay of
litigation—the court found that it weighed in favor of the settlement. Besides
the complex issues of reasonably equivalent value and insolvency, there was
also: (1) the likelihood that Hall would appeal any avoidance judgment and
the interest that would accumulate on the foreclosure judgment while that
appeal was pending; (2) the need to resolve any issues pertaining to lenders
that now held mortgages against the Farm; (3) the need to market and sell the
Farm, which could take months and require the estate to bear costs of sale of
up to 5%; (4) the need to determine proper figures for the tax basis and net
operating loss ("NOL") once the Farm sold; (5) the issue of Hall's claims
coming back into play if the deed-in-lieu was avoided and the litigation that
may result in resolving some or all of those claims; and (6) the fact that any
non-prevailing party could appeal any final order on the above issues causing
further delay in the administration of the estate.
Lastly, the court found that the fourth factor—paramount interest of
creditors—weighed in favor of the settlement. The court noted that under the
terms of the settlement agreement, administrative claims and non-Hall
creditors would be paid in full, and Hall's subordinated claims could be paid,
at least in part, with any funds remaining. Furthermore, if the settlement
were not approved, it was not clear when or how much creditors would
19
receive on their claims. Even if the Isoms were correct that they would fare
better with Trustee pursuing the avoidance action and selling the Farm, they
were not a creditor. Thus, the court concluded that it did not have to consider
their interests under A & C Properties.5
The Isoms assign several errors by the bankruptcy court in approving
the settlement, many of which go to the court's findings of fact and their
disagreement with how it weighed the evidence. We address their arguments
in turn.
First, the Isoms argue that the bankruptcy court erred in finding that
5
We do make one observation about the bankruptcy court's ruling that the
debtor's interest is not something that must be considered under the fourth A & C
Properties factor in approving a settlement. While that may be "technically" true, where
there are surplus funds, the trustee also owes a fiduciary duty to the debtor. See Wisdom
v. Gugino, 649 F. App'x 583, 584 (9th Cir. 2016) ("When a debtor retains an interest in
estate assets — either by properly claiming exemptions or because surplus property
will remain in the estate after all creditors have been compensated — the trustee
owes a fiduciary duty to the debtor as well.") (emphasis added); Stoll v. Quintanar (In
re Stoll), 252 B.R. 492, 495 n.4 (9th Cir. BAP 2000) ("When as in this case an estate will
have a surplus that will be returned to the debtor after all of the creditors have been
paid in full, the debtor has an economic interest in the estate that is similar to that held
by the creditors who will be paid from the estate.").
Because this was potentially a surplus case, the bankruptcy court was required to
also consider the Isoms' best interest in approving the settlement. Despite its statement
to the contrary, the court did engage in that analysis and concluded that settlement as
opposed to litigation was in their best interest. It found that the existence of a seven-
figure payoff to the Isoms was speculative and not a legitimate basis upon which to
reject the settlement. The court noted, while it might be fair and equitable to reject a
settlement if a competing path would result in a clear benefit to the debtor, this was not
that case. We perceive no error here.
20
Trustee exercised due diligence and complied with the business judgment
rule. For example, they argue that Trustee failed to ascertain the full value of
the Farm and to investigate potential offers for the sale of the property. They
argue that Trustee failed to follow up on an offer from Riverbend to purchase
the Farm for $13 million. As the bankruptcy court noted, Riverbend's letter
expressing interest in purchasing the Farm was merely a non-binding letter of
intent, not an actual offer accompanied with earnest funds. Further, contrary
to the Isoms' assertion, Trustee testified that he did follow up on the letter,
but Riverbend, who is a neighbor of the Isoms and possibly an insider, never
responded. On that same note, the Isoms also complain that Trustee's costs of
sale figure of 5% was pure speculation and unsupported, especially when
Riverbend was interested in purchasing the Farm in a private sale without a
broker. Again, the bankruptcy court believed that costs of sale of "up to 5%"
was plausible considering that the Riverbend letter was not an actual offer.
These findings are not so illogical or implausible as to constitute clear error.
Next, the Isoms argue that Trustee failed to investigate the Farm's tax
basis and whether or not there was an NOL. These two issues were hotly
contested by the parties. In its discretion, the court chose to give more
credence to Trustee's asserted NOL and tax basis analysis. As the court
correctly noted, this was not a mini trial on the merits of the avoidance action.
That the Farm's tax basis in particular was so heavily contested only showed
the court that Trustee would have to invest further time and resources to
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determine the proper amount in the event of a sale. In any case, the issues of
sales price, the amount of a broker commission, tax basis and NOL were just
some of the many factors for the court to consider in deciding if the proposed
settlement was fair and reasonable and in the best interest of the estate.
The Isoms also argue that the bankruptcy court erred by considering
only balance-sheet insolvency under § 548(a)(1)(B)(ii)(I) and ignoring the
other factors in § 548(a)(1)(B)(ii)(II) and (III) to determine that Trustee would
not be successful in avoiding the deed-in-lieu. The bankruptcy court did
consider the other factors in § 548(a)(1)(B)(ii)(II) and (III). After finding that
evidence of the Isoms' insolvency was "muddied at best," the court found that
it was "unclear" whether Trustee could establish their insolvency, or that they
were left with an unreasonably small capital after the deed-in-lieu. While the
court did not specifically discuss (III)—that the Isoms were unable to pay
their debts as they came due—the Isoms do not explain how this would
change the outcome. What matters here is that the court found that the issue
of their solvency was not clear, would be vigorously contested, and this fact
added to the complexity of the litigation and the expense, delay and
inconvenience necessarily attending it.
Next, the Isoms argue that the bankruptcy court's concern about
accruing interest on Hall's secured debt if the settlement was not approved
was misplaced. They maintain that under § 550(e)(1), rents Hall received
during the pendency of the case are profits that would offset any accruing
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interest that would accumulate while the case and any appeals were pending.
The court concluded that rents Hall received likely exceeded any
improvements or expenses incurred and therefore precluded a § 550(e)(1)
claim. However, that did not resolve the issue that if Hall's secured claim was
revived, interest was accruing at over $1 million per year, the parties had
already been litigating for four years, and interest would continue to accrue
on the debt during the pendency of an appeal. In essence, the interest accrual
would wipe out any potential surplus gained from litigation if Trustee
prevailed. The Isoms apparently disagree. In any event, the court did not
need to determine this legal issue for purposes of approving a settlement
under Rule 9019. It was sufficient that the court recognized that the issue of
accrued interest added to the complexity, expense, inconvenience and delay
of litigation.
The Isoms next argue that the bankruptcy court erred by not
considering the fraudulent conveyance implications of the deed-in-lieu under
the Idaho state law statutes, namely Idaho Code §§ 55-901 through 55-909.
The court did not need to consider these statutes, because they apply to actual
fraudulent transfers of either real or personal property. The Isoms did not
plead any facts to support a claim for actual fraud as required by Civil Rule 9,
nor did they present any evidence of actual fraud at the evidentiary hearing
on the settlement. The Isoms cannot use this appeal as an attempt to amend
their complaint, which is now under Trustee's control.
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Lastly, the Isoms argue that the bankruptcy court erred by failing to
consider the standards for the sale of an estate asset under § 363(b). While this
argument has some facial appeal because there was a sale component to
the compromise, we disagree that the court did not consider this in its
analysis.
Because "the 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," a Rule 9019 compromise can "simultaneously
implicate[] the sale provisions under section 363 as implemented by Rule
6004 and the compromise procedure of Rule 9019(a)." In re Mickey Thompson
Entm't Grp., Inc., 292 B.R. at 421. "When confronted with a motion to approve
a settlement under Rule 9019(a), a bankruptcy court is obliged to consider, as
part of the fair and equitable analysis, whether any property of the estate that
would be disposed of in connection with the settlement might draw a higher
price through a competitive process and be the proper subject of a section 363
sale." Id. at 421-22. Whether to impose formal sale procedures, however, is
ultimately a matter of discretion that depends on the dynamics of the
particular situation. Id. at 422. See also Adeli v. Barclay (In re Berkeley Del. Ct.,
LLC), 834 F.3d 1036, 1040 (9th Cir. 2016). In other words, the court need not
implement bidding procedures and an auction if the case does not call for it.
Sterling v. Green (In re Esterlina Vineyards & Winery, LLC), BAP No. NC-16-
1428-TaBS, 2018 WL 1354331, at *4 (9th Cir. BAP Mar. 13, 2018).
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The Isoms argue that the bankruptcy court erred by failing to analyze
whether any property of the estate that was being disposed of in the
settlement—i.e., the "millions of dollars in equity" in the Farm—might draw a
higher price through a competitive process and be the proper subject of a sale
under § 363(b). While the Isoms continue to focus on the value of the Farm as
their gauge, the real issue here is what was the value of the avoidance action
claim against Hall, the estate's disputed interest in Aladdin's Flowers, and the
other purported estate assets that were subject to an ownership claim or lien
by Hall—the Palisades Water Shares, the irrigation handlines and the air
tubes. The motion to compromise was served on all creditors. The only
opposition was filed by the Isoms. They did not make an offer to purchase the
avoidance action claim, or the disputed interest in Aladdin's Flowers, or the
other purported assets. There were no other bids.
This is not a situation like Mickey Thompson, where there was a
competing higher bid and a trustee who thought that an auction might be
beneficial but felt he was contractually bound by the proposed settlement
agreement. And, unlike Mickey Thompson, there were actual "compromise"
aspects to the settlement agreement; it was not merely a sale of an estate asset
to the settling party disguised as a compromise. 292 B.R. at 420-21. While the
bankruptcy court did not make any specific § 363(b) findings, it did find as
part of its "fair and equitable" analysis under A & C Properties that the
complexity of the litigation and the difficulty with prevailing on the
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avoidance action claim was created by the Isoms, who only amended
schedules to list assets after they were discovered by Trustee, failed to turn
over assets under a court order, and intentionally destroyed business records
by setting them on fire. The court also carefully analyzed the value to the
estate of each of the other assets that were transferred to Hall. It found that
each was the source of continuing litigation and heavily disputed, including
Aladdin's Flowers, where the amount of Mr. Isom's ownership interest in the
entity was in dispute. Therefore, given the record, there is no basis to believe
that an auction would have resulted in more value for the estate.
Despite the Isoms' arguments to the contrary, we conclude that the
record amply supports the bankruptcy court's decision to approve the
compromise.
D. The Isoms have waived their appeal of the Reconsideration Order.
Even though the Isoms appealed the Reconsideration Order, they did
not provide any argument on the issue in their opening brief. Accordingly, it
has been waived. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) ("[O]n
appeal, arguments not raised by a party in its opening brief are deemed
waived."). However, even if we had reviewed the matter, we would have
found no abuse of discretion by the bankruptcy court in denying the motion
to alter or amend. The motion was essentially a rehash of the issues that had
been fully briefed, litigated, and considered by the court in approving the
compromise.
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VI. CONCLUSION
For the reasons stated above, we AFFIRM the Compromise Order and
we AFFIRM the Reconsideration Order.
27