Hyun Um v. Spokane Rock I, LLC ( 2018 )


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  •                     FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    HYUN J. UM; THOMAS W. PRICE;                    No. 16-35753
    PATRICIA A. PRICE,
    Appellants,                 D.C. No.
    3:15-cv-05787-
    v.                              BHS
    SPOKANE ROCK I, LLC,
    Appellee.         OPINION
    Appeal from the United States District Court
    for the Western District of Washington
    Benjamin H. Settle, District Judge, Presiding
    Argued and Submitted May 17, 2018
    Seattle, Washington
    Filed September 14, 2018
    Before: Marsha S. Berzon and Andrew D. Hurwitz, Circuit
    Judges, and Raymond J. Dearie, * District Judge.
    Opinion by Judge Hurwitz
    *
    The Honorable Raymond J. Dearie, United States District Judge
    for the Eastern District of New York, sitting by designation.
    2                     UM V. SPOKANE ROCK
    SUMMARY **
    Bankruptcy
    The panel affirmed the district court’s affirmance of the
    bankruptcy court’s summary judgment denying discharge,
    under 11 U.S.C. § 1141(d)(3), of two individual Chapter 11
    debtors’ debt arising from a state-court judgment for fraud
    and misrepresentation.
    The panel affirmed, albeit on somewhat different
    grounds, the district court and bankruptcy court’s conclusion
    that the debtors, co-founders of several real-estate
    management companies, were not entitled to discharge of
    the debt. The panel concluded that the Chapter 11 plan
    provided for the liquidation of all or substantially all of the
    property of the bankruptcy estate under § 1141(d)(3)(A).
    The panel also concluded that the debtors did not engage in
    business after consummation of the Chapter 11 plan, under
    § 1141(d)(3)(B), because they were simply employees in
    businesses owned or operated by others. The panel held that,
    assuming § 1141(d)(3) does not require that the debtor
    engage in a pre-petition business, the statute is not satisfied
    by mere employment in someone else’s business after
    consummation of a Chapter 11 plan.
    **
    This summary constitutes no part of the opinion of the court. It
    has been prepared by court staff for the convenience of the reader.
    UM V. SPOKANE ROCK                      3
    COUNSEL
    J. Todd Tracy (argued) and Steven J. Reilly, The Tracy Law
    Group PLLC, Seattle, Washington, for Defendants-
    Appellants.
    Charles R. Ekberg (argued), Ryan P. McBride, and Laura
    Marquez-Garrett, Lane Powell PC, Seattle, Washington, for
    Plaintiff-Appellee.
    OPINION
    HURWITZ, Circuit Judge:
    Confirmation of a Chapter 11 plan of reorganization
    generally discharges a petitioner from pre-confirmation
    debts. 11 U.S.C. § 1141(d)(1)(A). But, under 11 U.S.C.
    § 1141(d)(3), a debt is not discharged if:
    (A) the plan provides for the liquidation of all
    or substantially all of the property of the
    estate;
    (B) the debtor does not engage in business
    after consummation of the plan; and
    (C) the debtor would be denied a discharge
    under section 727(a) of [the Bankruptcy
    Code] if the case were a case under chapter 7
    [of the Bankruptcy Code].
    The central issue in this case is whether two individual
    Chapter 11 debtors engaged in business after consummation
    of a Chapter 11 plan. The bankruptcy court held that they did
    4                  UM V. SPOKANE ROCK
    not and were therefore not entitled to discharge a debt arising
    out of a state-court judgment for fraud and
    misrepresentation; the district court agreed. So do we, albeit
    on somewhat different grounds than those relied upon by the
    bankruptcy and district courts, and we therefore affirm.
    I. Background
    Hyun Um and Thomas Price (“Debtors”) co-founded
    several real-estate management companies. They filed
    separate petitions in 2010 seeking reorganization under
    Chapter 11 of the Bankruptcy Code; the petitions were later
    consolidated. The bankruptcy court eventually approved the
    Trustee’s First Amended Disclosure Statement (“Disclosure
    Statement”) and First Amended Plan of Reorganization (“the
    Plan”), which provided for the sale of all of the Debtors’
    nonexempt individual assets and those of their jointly-owned
    business entities.
    Before the Chapter 11 filings, Spokane Rock, LLC had
    obtained a state-court judgment against the Debtors for fraud
    and misrepresentation. Spokane Rock filed an adversary
    complaint in bankruptcy court, alleging that its claims
    arising out of the judgment were nondischargeable pursuant
    to 11 U.S.C. § 523(a)(3) because the Debtors had failed to
    provide it with notice of the bankruptcy proceedings and had
    fraudulently concealed Spokane Rock’s claim. After the
    adversary complaint was dismissed as untimely, Spokane
    Rock filed a second complaint seeking to deny a discharge,
    this time invoking 11 U.S.C. § 1141(d)(3).
    The bankruptcy court granted summary judgment to
    Spokane Rock and denied a discharge of the Spokane Rock
    debt. Spokane Rock I, LLC v. Um (In re Um), Ch. 11 Case
    Nos. 10-46731, 10-46732, Adv. No. 14-04311, 
    2015 WL 6684504
    , at *9 (Bankr. W.D. Wash., Sept. 30, 2015)
    UM V. SPOKANE ROCK                              5
    (“Bankr. Op.”). 1 The Debtors appealed to the district court.
    They conceded that they would not have been entitled to a
    discharge of the Spokane Rock debt had they sought relief
    under Chapter 7, and that § 1141(d)(3)(C) was therefore
    satisfied. But the Debtors argued that the other two
    requirements for denying a discharge under § 1141(d)(3)
    were not met, because (a) the Chapter 11 plan did not call
    for liquidation of all or substantially all of the property of the
    estate, and (b) they continued to engage in business after
    consummation of the plan: Um by finding employment with
    Radiance Capital Financial, LLC, and Price by finding
    employment with the Plan Administrator, who was
    liquidating the Debtors’ assets.
    The district court affirmed the bankruptcy court’s
    summary judgment. We review that decision de novo. See
    Suncrest Healthcare Ctr. LLC v. Omega Healthcare Inv’rs,
    Inc. (In re Raintree Healthcare Corp.), 
    431 F.3d 685
    , 687
    (9th Cir. 2005).
    II. Discussion
    A. 11 U.S.C. § 1141(d)(3)(A)
    The Debtors first contend that they are entitled to a
    discharge because the approved Plan did not provide for “the
    liquidation of all or substantially all of the property of the
    estate.” 11 U.S.C. § 1141(d)(3)(A). The bankruptcy and
    district courts correctly rejected that argument. The Plan is
    explicitly termed “a liquidation Plan,” under which the
    1
    The Chapter 11 petitions were filed on behalf of the Debtors and
    their spouses. The bankruptcy court also granted summary judgment
    against Ms. Price but denied summary judgment against Ms. Um. Bankr.
    Op., 
    2015 WL 6684504
    , at *9. The parties then stipulated to dismissal of
    the claims against Ms. Um.
    6                     UM V. SPOKANE ROCK
    Administrator “shall be solely responsible for . . . liquidating
    or otherwise reducing the Estate’s Assets to Cash.” Bankr.
    Op., 
    2015 WL 6684504
    , at *2. As the bankruptcy court
    noted, under the Plan, “the Debtors do not retain any of the
    estate assets other than those exempted.” 
    Id. at *4.
    The Debtors nonetheless contend that the Plan does not
    satisfy § 1141(d)(3)(A) because it does not provide for the
    sale of their membership interests in various limited liability
    corporations (“LLCs”). But, as the bankruptcy court
    correctly observed, the Plan expressly notes that these
    membership interests will be worthless after consummation
    of the Plan, because all of the assets of the LLCs will have
    been sold to third parties. 
    Id. at *3–4.
    2 The Debtors provided
    no evidence to rebut the Trustee’s conclusion that the
    membership interests will be worthless after the
    confirmation of the Plan.
    2
    The Debtors cite a 2014 statement by the Trustee that he was
    analyzing the operating statements of each of the entities at issue to
    understand their valuations, and suggest that the membership interests
    might again have value in the future. However, the Trustee subsequently
    concluded that the membership interests were worthless. See Disclosure
    Statement (noting that “Debtors’ membership interest in Prium is
    worthless”; “the effect of the Prium Companies, LLC bankruptcy
    effectively makes PPM unsaleable and worthless on a going forward
    basis”; and “the Trustee anticipates that he will have liquidated all the
    real property owned by QHFH and its subsidiaries by or shortly
    following the Effective Date”).
    The bankruptcy court also correctly rejected the Debtors’ argument
    that “their pledge of post-petition income negates a finding that” this
    Plan provided for liquidation, because the payment is expected only to
    “the extent necessary for execution of the Plan.” Bankr. Op., 
    2015 WL 6684504
    , at *5.
    UM V. SPOKANE ROCK                        7
    Nor does the Trustee’s management of the assets of the
    subsidiary LLCs pending their sale render the Plan anything
    other than a liquidation. As the bankruptcy court aptly noted,
    this feature is in “the very nature of a complex chapter 11
    liquidation,” 
    id. at *5,
    which the Ninth Circuit Bankruptcy
    Appellate Panel has observed is designed to allow the debtor
    “the ability to plan for an orderly divestiture of the assets
    over time,” U.S. Internal Revenue Serv. v. Deer Park, Inc.
    (In re Deer Park, Inc.), 
    136 B.R. 815
    , 818 (B.A.P. 9th Cir.
    1992), aff’d, 
    10 F.3d 1478
    (9th Cir. 1993). We therefore
    agree with the bankruptcy court’s determination that the Plan
    satisfies the liquidation requirement of § 1141(d)(3)(A).
    B. 11 U.S.C. § 1141(d)(3)(B)
    Chapter 11 was originally designed to deal with
    corporate debtors. See Toibb v. Radloff, 
    501 U.S. 157
    , 162–
    63 (1991). Indeed, the Supreme Court did not clarify until
    1991 that an individual consumer debtor could seek Chapter
    11 reorganization. 
    Id. at 160–61.
    The application of the “engage in business” requirement
    of § 1141(d)(3)(B) to corporate debtors is therefore
    relatively straightforward. As the district court noted, “it is
    easy to conclude that a business entity will not engage in
    business post bankruptcy when its assets are liquidated and
    the entity is dissolved.” Spokane Rock I, LLC v. Um, Ch. 11
    Case No. C15-5787-BHS, Adv. No. 14-4311-PBS, 
    2016 WL 7714141
    , at *3 (W.D. Wash. Aug. 18, 2016) (“District Court
    Opinion”); see also Williams v. U.S. Bancorp, No. CV-06-
    197-LRS, 
    2008 WL 4279409
    , at *4 (E.D. Wash. Sept. 12,
    2008) (“Thus, a corporation that does not continue in
    business after plan confirmation does not receive a
    discharge.”); Teamsters Pension Tr. Fund of Phila. &
    Vicinity v. Malone Realty Co., 
    82 B.R. 346
    , 349 (E.D. Pa.
    1988) (holding that a corporation “that is both liquidating
    8                  UM V. SPOKANE ROCK
    and discontinuing its business does not receive a discharge
    when its plan is confirmed”).
    How to apply § 1141(d)(3)(B) to an individual debtor is
    a less clear-cut inquiry, because the individual debtor
    continues in existence after consummation of the plan. The
    bankruptcy court concluded that the Debtors did not engage
    in business after consummation of the Plan for purposes of
    § 1141(d)(3)(B) because they would “no longer engage in
    their prepetition business, which was to manage specific
    LLCs and their properties.” Bankr. Op., 
    2015 WL 6684504
    ,
    at *7. The court noted that the legislative history describes
    § 1141(d)(3)(B) as applying “if the business, if any, of the
    debtor does not continue.” 
    Id. at *5
    (quoting H.R. Rep. No.
    95-595, at 418 (1977), reprinted in 1978 U.S.C.C.A.N.
    5963, 6375). The bankruptcy court thus read the provision
    as referring “to the continuation of a debtor’s prepetition
    business,” and found that requirement not satisfied “by the
    temporary part-time employment of Mr. Price by the Plan
    Administrator or the employment of Mr. Um by an unrelated
    party.” 
    Id. at *7
    (citation omitted). In so holding, the
    bankruptcy court also relied on the unpublished decision of
    the only other circuit court to have considered this issue,
    which interpreted § 1141(d)(3)(B) as referring to a debtor’s
    pre-petition business. See Grausz v. Sampson (In re Grausz),
    63 F. App’x 647, 650 (4th Cir. 2003) (per curiam)
    (concluding that a doctor who went on to work “as a
    consultant for a business unrelated to the entities at issue in
    the bankruptcy” did not engage in business for purposes of
    § 1141(d)(3)(B), because the statute “does not refer to basic
    employment by an individual debtor but to the continuation
    of a pre-petition business” (emphasis omitted)); see also
    Suarez v. Suarez (In re Suarez), Ch. 11 Case No. 91-20276,
    Adv. No. 92-2009, 
    2007 WL 7024926
    , at *3 (Bankr. S.D.
    Ga. Feb. 8, 2007) (finding that a liquidating Chapter 11
    UM V. SPOKANE ROCK                          9
    debtor was engaged in business because he continued his
    preexisting medical practice after consummation of the
    reorganization plan). The district court agreed with this
    interpretation of § 1141(d)(3)(B). See Dist. Ct. Op., 
    2016 WL 7714141
    , at *3–4.
    Whatever the merits of the reading of § 1141(d)(3)(B) by
    the bankruptcy and district courts, we need not determine
    today whether the statutory prohibition on discharge is
    triggered only when an individual debtor continues a pre-
    petition business after consummation of a Chapter 11 plan.
    The Debtors in this case fail to satisfy the second prong of
    the statute because they did not engage in any business
    during the relevant period. They were simply employees in
    businesses owned or operated by others—and Price a part-
    time employee at that. 3
    The Debtors argue that all employees necessarily
    “engage” in some respect in the business of their employers.
    But no court has ever read § 1141(d)(3)(B) as being satisfied
    by mere employment. See In re Owens, 
    207 B.R. 520
    , 526
    n.1 (Bankr. E.D. Ky. 1996) (denying a discharge because
    “the individual debtor has not continued in business but
    rather is now an employee”). Nor did the drafters of the
    Bankruptcy Rules contemplate that the phrase “in business”
    included mere employment. The Statement of Financial
    Affairs form that Price and Um filed with their petition for
    bankruptcy protection provides as follows:
    An individual debtor is “in business” for the
    purpose of this form if the debtor is or has
    been, within six years immediately preceding
    3
    We assume without deciding that the Trustee’s activities in
    liquidating the assets of the estates qualifies as a “business.”
    10                 UM V. SPOKANE ROCK
    the filing of this bankruptcy case, any of the
    following: an officer, director, managing
    executive, or owner of 5 percent or more of
    the voting or equity securities of a
    corporation; a partner, other than a limited
    partner, of a partnership; a sole proprietor or
    self-employed full-time or part-time.
    An individual debtor also may be “in
    business” for the purpose of this form if the
    debtor engages in a trade, business, or other
    activity, other than as an employee, to
    supplement income from the debtor’s
    primary employment.
    Fed. R. Bankr. P. Official Form 7 (2010) (emphasis added).
    This definition comports with our common
    understanding of what it means to “engage in business.” See
    Williams v. Taylor, 
    529 U.S. 420
    , 431 (2000) (“We give the
    words of a statute their ‘ordinary, contemporary, common
    meaning,’ absent an indication Congress intended them to
    bear some different import.” (quoting Walters v. Metro.
    Educ. Enters., Inc., 
    519 U.S. 202
    , 207 (1997) (quotation
    marks omitted))). One would not ordinarily refer to cashiers
    employed by a grocery store as engaging in the grocery
    business; rather, it is more natural to consider those workers
    as being employed by a grocery business.
    More importantly, the phrase “engage in business” in
    § 1141(d)(3)(B) must be read in “the broader context of the
    statute as a whole.” Robinson v. Shell Oil Co., 
    519 U.S. 337
    ,
    341 (1997); see also El Paso Props. Corp. v. Gonzalez (In
    re Furr’s Supermarkets, Inc.), 
    283 B.R. 60
    , 69 (B.A.P. 10th
    Cir. 2002) (concluding that provisions of the Bankruptcy
    UM V. SPOKANE ROCK                     11
    Code must be read “in context with the whole Bankruptcy
    Code and not in isolation”); United Food & Commercial
    Workers Union, Local 211 v. Family Snacks, Inc. (In re
    Family Snacks, Inc.), 
    257 B.R. 884
    , 899–900 (B.A.P. 8th
    Cir. 2001) (collecting cases). Reading § 1141(d)(3)(B) to
    include mere employment would create severe dislocations
    in the broader statutory scheme.
    As the Debtors concede, had they filed for protection
    under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 727(a)
    would have barred the discharge of the fraud judgment
    obtained by Spokane Rock. Interpreting § 1141(d)(3)(B) to
    allow a liquidating Chapter 11 debtor to obtain a discharge
    for debts incurred by fraud simply by accepting employment
    after plan consummation would effectively vitiate § 727(a).
    Knowing that any debts incurred through fraud would be
    discharged if they obtained any type of employment after
    plan consummation, debtors who intended to liquidate their
    assets would always choose Chapter 11 over Chapter 7. Put
    differently, a Chapter 7 debtor would be significantly
    disadvantaged relative to an identically situated Chapter 11
    debtor. The former would continue to be responsible for
    fraudulently incurred debts after liquidating the property of
    the estate and accepting employment, while the latter would
    not. Therefore, whatever the precise boundaries of the phrase
    “engages in business” in § 1141(d)(3)(B) may be, it cannot
    be interpreted to include mere employment in an enterprise
    owned and operated by others without creating anomalies in
    the Bankruptcy Code as a whole. See Kathleen K. Coghlan,
    Bankruptcy, in 28 Washington Practice Series § 9.117
    (2017) (noting that § 1141(d)(3) “prevents an individual
    debtor from making an ‘end run’ around § 727 by filing a
    liquidating Chapter 11”); C. Richard McQueen & Jack F.
    Williams, Tax Aspects of Bankruptcy. Law § 1:57 (3d ed.
    2018) (“These limitations are necessary so that an individual
    12                   UM V. SPOKANE ROCK
    debtor may not employ a Chapter 11 liquidation plan to
    evade the objections to discharge embodied in Bankruptcy
    Code §§ 523(a) and 727(a).”).
    We hold that, assuming that § 1141(d)(3)(B) does not
    require that the debtor engage in a pre-petition business, it is
    not satisfied by mere employment in someone else’s
    business after consummation of a Chapter 11 plan. The
    Debtors are not entitled to a discharge of the Spokane Rock
    debt.
    III.      Conclusion
    We AFFIRM the judgment of the district court.