Reid and Hellyer, Apc v. Richard Laski , 896 F.3d 1109 ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE WRIGHTWOOD GUEST RANCH, No. 16-56856
LLC,
Debtor, D.C. No.
5:16-cv-01768-
MWF
REID AND HELLYER, APC,
Appellant,
v.
RICHARD J. LASKI, Chapter 11
Trustee; ARENT FOX, LLP,
Appellees.
IN RE WRIGHTWOOD GUEST RANCH, No. 16-56869
LLC,
Debtor, D.C. No.
5:16-cv-01768-
MWF
WALTER WILHELM BAUER, a
Professional Corporation,
Appellant, OPINION
v.
2 IN RE WRIGHTWOOD GUEST RANCH
RICHARD J. LASKI, Chapter 11
Trustee; ARENT FOX, LLP,
Appellees.
Appeal from the United States District Court
for the Central District of California
Michael W. Fitzgerald, District Judge, Presiding
Argued and Submitted April 13, 2018
Pasadena, California
Filed July 25, 2018
Before: John M. Rogers, * Jay S. Bybee,
and Paul J. Watford, Circuit Judges.
Opinion by Judge Rogers
*
The Honorable John M. Rogers, United States Circuit Judge
for the U.S. Court of Appeals for the Sixth Circuit, sitting by designation.
IN RE WRIGHTWOOD GUEST RANCH 3
SUMMARY **
Bankruptcy
The panel affirmed the district court’s judgment in two
law firms’ appeals from the bankruptcy court’s order
approving a settlement of an involuntary Chapter 11
bankruptcy.
The panel held that the firms, representing the debtor and
the unsecured creditors’ committee, forfeited their objection
to the settlement agreement because: (1) neither firm, on its
own behalf, explicitly objected to the settlement or entered
an appearance at the settlement hearing; and (2) the record
evidence that the bankruptcy court and trustee understood
the firms to be implicitly objecting was not clear enough to
overcome those failures. Assuming without deciding that
the law firms’ challenge should consequently be reviewed
for plain error, rather than dismissed without reaching the
merits, the panel concluded that the bankruptcy court did not
err in approving the settlement agreement.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
4 IN RE WRIGHTWOOD GUEST RANCH
COUNSEL
Scott Talkov (argued) and Douglas A. Plazak, Reid &
Hellyer APC, Riverside, California; Riley C. Walter and
Matthew P. Bunting, Walter Wilhelm Law Group, Fresno,
California; for Appellant.
Moriah Douglas Flahaut (argued) and Aram Ordubegian,
Arent Fox LLP, Los Angeles, California, for Appellees.
OPINION
ROGERS, Circuit Judge:
This consolidated bankruptcy appeal concerns a
challenge, by two law firms who below represented the
debtor and unsecured creditors’ committee, respectively, to
a court-approved settlement of an involuntary Chapter 11
bankruptcy. The question before us is whether the law firms
forfeited their objection to the bankruptcy court’s order
approving that settlement. The answer in turn depends on
whether the firms objected to the settlement and appeared at
the hearing concerning it on their own behalves, or only on
behalf of their clients. Because neither firm, on its own
behalf, explicitly objected to the settlement or entered an
appearance, and because the record evidence that the
bankruptcy court and trustee understood the firms to be
implicitly objecting is not clear enough to overcome those
failures, the firms forfeited their objection to the settlement
agreement. Assuming without deciding that their challenge
should consequently be reviewed for plain-error, rather than
dismissed without our reaching the merits, we find that the
bankruptcy court did not err in approving the settlement
agreement. We therefore affirm the district court.
IN RE WRIGHTWOOD GUEST RANCH 5
In August of 2015, creditors filed an involuntary-
bankruptcy petition against the debtor, Wrightwood Guest
Ranch, LLC, under Chapter 11 of the bankruptcy code.
Richard Laski, here the appellee, was appointed trustee.
GreenLake Real Estate Fund, LLC, which is not party to
these appeals, submitted a valid $9.6-million-dollar claim
secured by the estate’s principal asset, a 300-acre piece of
real property. After some time, it became clear to Laski that
selling that property to a third-party was unlikely, but Laski
eventually reached an agreement with GreenLake under
which it would purchase the property through an affiliated
entity. Laski and GreenLake agreed to settlement terms,
which depended on the proposed sale, and moved for
approval of that settlement in the bankruptcy court.
Under the settlement terms, an affiliated entity would
submit an $8.5-million stalking-horse bid on the property,
and GreenLake would agree to limit its secured claim to that
amount. More relevant to this appeal, GreenLake agreed to
carve out $150,000 from its proceeds to cover expenses and
pay the unsecured creditors, and another $350,000 to pay
trustee Laski and his professionals. The latter sum was a
surcharge under 11 U.S.C. § 506(c), which allows a trustee
to “recover from property securing an allowed secured claim
the reasonable, necessary costs and expenses of preserving,
or disposing of, such property to the extent of any benefit to
the holder of such claim . . . .”
Some parties were not satisfied. Under the settlement,
unsecured claims would be paid pennies on the dollar, and
some creditors believed that the property was worth much
more than the agreed-upon price. The settlement was a
windfall for Laski and GreenLake, these claimants protested,
in which the former got a generous payday while the latter
got the property at a below-market price, all at the expense
6 IN RE WRIGHTWOOD GUEST RANCH
of the unsecured creditors and the administrative claimants
like Reid & Hellyer (R&H) and Walter Wilhelm Bauer
(WWB), the two law firms who bring this appeal. R&H
represented the Official Committee of Unsecured Creditors
(the creditors’ committee), and WWB represented the
debtor.
The creditors’ committee and Richard and July Hallett
(who operated, and were also unsecured creditors of, debtor-
company Wrightwood) each filed written objections to
Laski’s motion for approval of the settlement. Nobody filed
a written objection on behalf of R&H or WWB, or any other
administrative claimant for that matter. The bankruptcy
court held a hearing on the sale and settlement on July 19,
2016. Douglas Plazak of R&H entered an appearance on
behalf of the creditors’ committee, and Holly Estes of WWB
appeared telephonically on behalf of the debtor. Neither
R&H nor WWB stated that it was appearing on its own
behalf, nor was such an appearance entered on the record.
After holding a hearing, the bankruptcy court granted the
sale motion and approved the settlement in accordance with
Federal Rule of Bankruptcy 9019.
R&H filed an appeal of the settlement order to the district
court, and moved to withdraw as counsel for the creditors’
committee, but the bankruptcy court denied the withdrawal
motion. WWB appealed the settlement order about a week
later. Neither party sought a stay, and so the sale progressed:
the bankruptcy court entered a sale order on August 30,
which was not appealed, and the sale of the property closed
on September 9, 2016.
The district court consolidated the two firms’ appeals.
Laski filed a motion to dismiss the appeals, arguing that
R&H and WWB lacked standing to appeal because neither
had, in its own capacity, objected to the settlement or
IN RE WRIGHTWOOD GUEST RANCH 7
appeared at the hearing regarding it. He also argued that the
appeals were equitably moot because neither party had
moved below to stay the sale, which had progressed such
that unwinding it would be inequitable.
The district court agreed and dismissed the appeals.
With respect to the standing issue, the district court
concluded that, under Ninth Circuit precedent, parties
generally must have objected and attended the hearing below
to have appellate standing. The court followed the Seventh
Circuit’s decision in In re Ray, 597 F.3d 871 (7th Cir. 2010),
which held that a law firm did not have standing to appeal a
decision of the bankruptcy court when the firm had appeared
below only on behalf of its client. The district court held in
the alternative that the law firms’ failure to seek a stay made
their appeals equitably moot.
The law firms now appeal, arguing that, despite their
failures to explicitly object below, the bankruptcy court was
aware of their positions and clearly understood that they
intended to object on their own behalves, and also that their
failures to seek a stay do not render their appeals equitably
moot.
The crucial issue in this case is whether the law firms
forfeited their objection to the bankruptcy court’s settlement
order given that neither firm, in its own capacity, objected to
the settlement or attended the hearing concerning it. We
have previously stated in dicta that attendance and objection
were necessary preconditions to a party satisfying the
“person aggrieved standard” and thus having standing to
appeal an order of the bankruptcy court. Brady v. Andrew
(In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1335 (9th
Cir. 1985). But recently, in Harkey v. Grobstein (In re Point
Center Fin., Inc.), we clarified that attendance and objection
are not prudential standing requirements in bankruptcy
8 IN RE WRIGHTWOOD GUEST RANCH
cases, but rather relate to whether a party has waived or
forfeited its right to appeal a given order of the bankruptcy
court. 890 F.3d 1188, 1193 (9th Cir. 2018).
Under Point Center, then, the law firms’ failing to appear
and object does not defeat their standing to bring this appeal.
Our solution in Point Center was to remand for the district
court to determine in the first instance whether the appellants
there had forfeited those claims and whether the bankruptcy
court had committed plain error. Id. at 1194. That is our
usual practice: “When a district court improperly dismisses
a bankruptcy appeal without reaching the merits, we
generally reverse the district court’s dismissal and remand
for the district court’s consideration of the appeal in the first
instance.” Mastro v. Rigby, 764 F.3d 1090, 1097 (9th Cir.
2014).
But remand is not mandatory, nor is it advisable here.
Unlike in Mastro, where “[n]othing in the record concerning
Linda’s appeal ma[de] it an exception to this general rule,”
id., the unusual situation here is that district court, as well
the parties’ briefing and oral argument on appeal, squarely
addressed the attendance and objection requirement but
referred to it as a rule of standing rather than waiver or
forfeiture. The record is therefore sufficient for us to decide
the issues now presented. Moreover, we are “in as good a
position as the district court” to determine whether the law
firms have forfeited their objections to the settlement
agreement, given that both we and the district court review
orders of the bankruptcy court in an appellate capacity. See
Kasdan, Simonds, McIntyre, Epstein & Martin v. World
Savings & Loan Ass’n (In re Emery), 317 F.3d 1064, 1069
(9th Cir. 2003). Further, we can affirm the district court’s
dismissal “on any basis supported by the record even if the
district court did not rely on that basis.” Shaw v. Cal. Dep’t
IN RE WRIGHTWOOD GUEST RANCH 9
of Alcoholic Beverage Control, 788 F.2d 600, 603 (9th Cir.
1986) (citing United States v. County of Humboldt, 628 F.2d
549, 551 (9th Cir. 1980)). Such affirmance, on a factually
related but legally distinct alternative ground, is warranted
in this case.
The law firms have forfeited their claims regarding the
propriety of the settlement order because neither firm
attended the hearing or objected to the settlement in its own
capacity. Although the record shows that the bankruptcy
court harbored concern about how administrative claimants
like the law firms would be paid under the settlement, it does
not follow that the court understood that each firm intended
to object on its own behalf. They therefore have not
preserved those rights.
The record lacks any clear indication that either WWB
or R&H meant to object on its own behalf. Neither firm
explicitly stated at the July 19 hearing that it was appearing
on its own behalf. Holly Estes of WWB twice stated that she
was appearing “on behalf of the debtor, Wrightwood Guest
Ranch.” Similarly, Doug Plazak of R&H stated that his
appearance was on behalf of the creditors’ committee:
“Doug Plazak, Reid & Hellyer, for the Creditors’
Committee.” Moreover, Plazak opened his remarks by
stating, “It’s almost difficult to know where to begin with
what the Committee finds flawed with the proposed
compromise . . . .” Finally, neither firm filed a written
objection to the settlement or announced at the hearing that
it meant to object on its own behalf. Unlike in Point Center,
where the appellants explicitly informed the bankruptcy
court about their positions, albeit in a tardy manner, 890 F.3d
at 1190–91, 93, here neither law firm ever said that it
intended to pursue its own interests. Forfeiture therefore
applies because the law firms did not timely assert their
10 IN RE WRIGHTWOOD GUEST RANCH
rights to object to the settlement agreement. See Hamer v.
Neighborhood Hous. Servs. of Chi., 138 S. Ct. 13, 17 (2017)
(“The terms waiver and forfeiture—though often used
interchangeably by jurists and litigants—are not
synonymous. Forfeiture is the failure to make the timely
assertion of a right; waiver is the intentional relinquishment
or abandonment of a known right.” (internal quotation marks
and alterations omitted)).
The facts discussed above further demonstrate why the
remand we ordered in Point Center is not warranted here. In
Point Center, we held that, although the appellants had not
affirmatively waived their claims, “the question of
forfeiture” remained “open,” so we remanded for the district
court to make that determination in the first instance.
890 F.3d at 1193. But here, the law firms’ total failure to
inform the bankruptcy court that they intended to pursue
their own interests closes the remedial door that Point Center
left “open.” Id. There, although the appellants did not file a
written objection or attend the hearing, they quickly realized
the error and “filed a motion to reconsider with the
bankruptcy court before it had issued a written order on the
motion,” which the bankruptcy court considered and rejected
on the merits. Id. Nothing like that happened in this case;
indeed, the bankruptcy court apparently did not receive
formal notice of the law firms’ positions until each firm filed
its notice of appeal. Unlike in Point Center, these facts make
clear that the law firms have not preserved their objection.
The law firms urge us to excuse the attendance and
objection requirement because, despite their failures to enter
an appearance or object on the record, the bankruptcy court
understood that they intended to object to the settlement. To
be sure, both firms did make the kind of arguments that an
administrative creditor would make. Holy Estes of WWB
IN RE WRIGHTWOOD GUEST RANCH 11
argued that the $350,000 payment was not a surcharge and
should instead be paid to the estate to be distributed in
accordance with priority rules. WWB highlights the
following excerpts from the hearing transcript as
establishing its intent to object on its own behalf:
[M]y argument, Your Honor, would just be
that the $500,000 that is part of the settlement
agreement that Greenlake has stated they
really don’t care what happens to it that that
really is just a gift to the estate and that that
gift is for the benefit of the estate and it
becomes unencumbered property to the estate
. . . and . . . should be readily distributed
within the confines of the Bankruptcy Code.”
....
. . . [T]he Trustee should not be allowed
to reorganize the estate in some fundamental
fashion that would allow for distributions
outside of the normal distribution scheme and
bankruptcy. And I think the distributions . . .
of $350,000 to the other administrative
claimants who should be on par with the
remaining administrative claimants in this
case would be unjust and outside of . . . what
should be taking place in a bankruptcy
setting.
Doug Plazak of R&H also repeatedly discussed the
compensation of administrative claimants. R&H points to
the following statements by Mr. Plazak as showing its intent
to object on its own behalf:
12 IN RE WRIGHTWOOD GUEST RANCH
I would like to point out the fact . . . and get
it on the record that . . . the Chapter 11
Trustee has a fiduciary duty to both the
professionals, which would include my
office, would include debtor’s counsel and
also the unsecureds, that it has a duty of
loyalty to not put its self-interest in front of
any of its other fiduciaries, that there are
several cases that talk about this inherent
conflict that they have.
. . . [W]hat I thought was the most
accurate was a case called In Re: Resource
Technology, 365 B.R. 435 (446) where it
talks exactly about this inherent conflict that
a trustee and trustee’s counsel have when it
seeks to structure a deal where it has—for a
surcharge—to receive a surcharge in
exchange for foregoing—or allowing a
secured creditor to go forward when they
otherwise would have potentially a
foreclosure.
Mr. Plazak also argued that “[o]ne of the principal duties of
the Chapter 11 Trustee is the duty of loyalty. He has got a
fiduciary duty to the estate which comprises . . .
administrative professionals. And the duty of loyalty is that
you cannot act in your own self-interest.”
Moreover, statements by the bankruptcy court and
trustee’s counsel show that both understood that the
settlement posed a problem with respect to administrative-
claimant compensation. The bankruptcy court at one point
said the following about administrative-claimant
compensation:
IN RE WRIGHTWOOD GUEST RANCH 13
I wondered, if I were committee counsel I
would be saying, gosh, if Judge Clarkson
does what they want me to do and take away
the earmark of the surcharge [to the Trustee
of $350,000], and take away the earmark of
the 150,000 [to the unsecured creditors],
there might be more that is going to go to the
administrative side [for creditors’ committee
counsel] and less to the unsecured creditors
than what the deal has now set out.
The court asked at least three times how the creditor’s
committee professionals would be paid. The court also
noted that “Committee counsels aren’t going to get
anything,” and that “from their point of view it seems like a
raw deal.”
Trustee counsel discussed administrative compensation
at length with the court, responding to many of the inquiries
just mentioned. In addition, trustee counsel explained that
creditors’ committee counsel could “share in that
350 [thousand-dollar surcharge] [if] he files an application
and shows that he benefitted the collateral somehow. . . .”
Trustee counsel later returned to the issue and highlighted
the potential conflict of interest it presented, saying that
“apparently the committee wants a foreclosure, which if we
are [to] talk about duty of loyalty and inherent conflicts,
that’s it right there.” To that the court responded, “Well, he
is willing to roll the dice.” To which trustee counsel
responded, “It’s not that. He’s willing to roll the dice because
he supposedly is not getting paid now. So he is putting his
[interests above his client’s]—you know, so the whole
inherent conflict issue, Your Honor, you should set [the
committee’s objection] aside.”
14 IN RE WRIGHTWOOD GUEST RANCH
At bottom, although this contextual evidence might
suggest that the bankruptcy court and trustee were aware that
the law firms had concerns about the settlement, that does
not mean that the court and trustee understood that the law
firms were formally objecting to the settlement on their own
behalves. Indeed, Estes and Plazak affirmatively stated that
they were appearing on behalf of their clients, and there was
no explicit statement that otherwise indicated that the law
firms intended to appear or object on their own behalves.
The contextual evidence on which the law firms rely is
simply not enough to undo what the record makes clear: the
law firms were at the hearing and objecting on behalf of their
clients.
This conclusion is particularly strong with respect to
Reid & Hellyer. As made clear in a later court document,
the bankruptcy court apparently did not consider that firm to
have objected on its own behalf. The bankruptcy court
noted, in its order rejecting R&H’s motion to withdraw as
counsel, that “Reid & Hellyer never opposed the settlement
motion in their own capacity as administrative claimants.”
What is more, if R&H were representing both itself and the
creditors’ committee at the hearing, there is a good chance
that it would have created a conflict of interest. The
settlement earmarked money for the unsecured creditors
represented by R&H but left nothing for the firm or any other
non-trustee administrative claimant. If the settlement were
overturned, then R&H as an administrative claimant would
have priority over the unsecured creditors represented by the
firm. See Ray, 597 F.3d at 876. Thus, R&H’s incentives for
opposing the settlement were different from those of its
client, the creditors’ committee. Like the district court, we
“doubt[] that Reid & Hellyer would have intentionally and
knowingly caused a conflict of interest between the firm and
its client by appearing and objecting on the firm’s behalf at
IN RE WRIGHTWOOD GUEST RANCH 15
the hearing,” and therefore we agree that “[t]he more logical
conclusion is that the firm appeared on behalf of only its
client at the hearing before the bankruptcy court.”
With respect to WWB, its position as debtor’s counsel
does not excuse its failure to make its position clear on the
record. WWB argues that Estes’s statements at the
bankruptcy hearing must have been objections on WWB’s
behalf because “a debtor has no right to object in a non-
surplus case.” That is because the debtor necessarily has no
pecuniary interest when there will be nothing left over after
paying all claims and expenses, and the bankruptcy court
here had already mentioned the possibility that the case
would be “administratively insolvent.” WWB submits that
“the reason that no one had any question as to [its right to
object] is because they understood that it was Debtor’s
counsel, not Debtor, objecting to the settlement.” However,
the trustee’s and the bankruptcy court’s failures to question
the debtor’s objecting at the hearing—which may well have
been inadvertent—were not tacit concessions that they
understood WWB to be objecting on its own behalf, thereby
excusing WWB’s own failure to make its appearance and
objection clear on the record. If Estes’s appearance and
objection were meant to be on WWB’s behalf, she should
have said so, rather than stating (twice) that she was
appearing “on behalf of the debtor, Wrightwood Guest
Ranch.”
When it comes to the attendance and objection
requirement, the dispositive question is whether there is any
evidence in the bankruptcy-court record that an attorney
entered an appearance on behalf of the would-be appellant,
objected to the relevant order on behalf of the would-be
appellant, or otherwise informed the bankruptcy court that
he or she was representing the interests of the would-be
16 IN RE WRIGHTWOOD GUEST RANCH
appellant. See id. at 875–76. When a party has not objected
to an order in writing and the record contains no explicit
indication that a party meant to object, a party has normally
failed to preserve its objection to that order. Requiring
parties to make their objections clear on the record is not an
onerous burden, and it is one that ensures that the bankruptcy
court is squarely presented with the facts and legal
arguments necessary to reach a reasoned decision
considering the interests of all affected parties. See id. at
876. Whether we refer to the attendance and objection
requirement as one of “standing,” or now as one of
“forfeiture,” it serves the same interests of economy,
efficiency, and notice that are crucial to the orderly
functioning of the bankruptcy system. See Commercial,
761 F.2d at 1335.
Finally, having determined that the law firms failed to
preserve their objection to the settlement agreement, we will
assume without deciding that we should review the
bankruptcy court’s approval of the agreement for plain error
rather than dismiss the case without reaching the merits, as
we would have done under the old cases referring to
attendance and objection as matters of appellate standing.
See Point Center, 890 F.3d at 1194 (remanding to the district
court to decide “whether Appellants forfeited their
opposition to the Assumption Motion and, if so, whether the
bankruptcy court’s granting of the Motion should be
reviewed for plain error”). We reverse on plain-error review
“only in extraordinary cases . . . where the integrity or
fundamental fairness of the proceedings . . . is called into
serious question.” Bird v. Glacier Elec. Coop., Inc.,
255 F.3d 1136, 1148 (9th Cir. 2001). Such reversal must be
“necessary to prevent a miscarriage of justice.” Draper v.
Rosario, 836 F.3d 1072, 1084–85 (9th Cir. 2016) (quoting
Hemmings v. Tidyman’s Inc., 285 F.3d 1174, 1193 (9th Cir.
IN RE WRIGHTWOOD GUEST RANCH 17
2002)). This is no such case. The complained-of error here
is the bankruptcy court’s approving the settlement
agreement containing the disputed 506(c) surcharge.
However, our published decision in Debbie Reynolds Hotel
& Casino, Inc v. Calstar Corp. (In re Debbie Reynolds Hotel
& Casino, Inc.), authorizes the very kind of agreed-to
surcharge that the law firms now dispute. 255 F.3d 1061,
1067–68 (9th Cir. 2001). Moreover, the bankruptcy court
reasonably concluded that the trustee tried and failed to sell
the property at market, and that the settlement would prevent
litigation and benefit both the unsecured and senior secured
creditors. Settlements should be “in the best interests of the
estate,” CAM/RPC Elecs. v. Robertson (In re MGS Mktg.),
111 B.R. 264, 266–67 (9th Cir. BAP 1990) (citing Sandoz v.
Bennett (In re Emerald Oil Co.), 807 F.2d 1234, 1239 (5th
Cir. 1987), and “reasonable, given the particular
circumstances of the case,” Martin v. Kane (In re A & C
Props.), 784 F.2d 1377, 1381 (9th Cir. 1986). In addition,
the compromise must be “fair and equitable.” Id. On plain-
error review, we cannot say that the settlement reflected such
a grossly impermissible balance of the interests of the
various stakeholders involved in this bankruptcy, such that
it constitutes a “miscarriage of justice” warranting our
reversal.
Accordingly, we need not address the district court’s
alternative holding that these appeals are equitably moot.
The judgment of the district court is AFFIRMED. 1
1
Appellants’ motions to take judicial notice, filed February 13,
2017, March 23, 2017, and March 27, 2017, are DENIED.