(BK) In Re: SlideBelts, Inc. ( 2024 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 PARSONS BEHLE AND LATIMER, et No. 2:21-cv-02254-DAD al., 12 Appeal from the United States Bankruptcy Appellants-Defendants, Court for the Eastern District of California, 13 Fredrick E. Clement, Bankruptcy Judge v. 14 Bankruptcy Petition No. 19-25064-A-11 SLIDEBELTS, INC., 15 Adversary Proceeding No. 21-02052-A Appellee-Plaintiff. 16 ORDER REVERSING BANKRUPTCY COURT’S ORDER DENYING 17 DEFENDANTS’ MOTION TO DISMISS 18 19 This matter is before the court on appeal by appellants-defendants Parsons Behle and 20 Latimer and Advanced CFO (collectively, “appellants”) from a November 20, 2021 order by the 21 U.S. Bankruptcy Court for the Eastern District of California denying appellants’ motion to 22 dismiss the complaint filed by appellee-plaintiff Slidebelts, Inc. (“appellee”) initiating an 23 adversary proceeding arising in appellee’s first of two Chapter 11 bankruptcy cases. After 24 reviewing the briefing filed in connection with this appeal, on August 27, 2024, the court held 25 oral argument, with attorney Brian Rothschild appearing on behalf of appellants and attorney 26 Stephen Reynolds appearing on behalf of appellee. For the reasons explained below, the court 27 will reverse the November 20, 2021 order, grant appellants’ motion to dismiss, and remand this 28 matter to the bankruptcy court to dismiss and close the adversary proceeding. 1 BACKGROUND 2 This appeal arises from an adversary proceeding related to the first of two Chapter 11 3 bankruptcy cases brought by Slidebelts, Inc. (the “Debtor” or “appellee”), which was filed on 4 August 12, 2019, No. 19-25064, Bankr. E.D. Cal., (“Slidebelts I”). See Slidebelts, Inc. v. Parsons 5 Behle and Latimer, et al., No. 21-02052 (Bankr. E.D. Cal. 2021) (the “Adversary Proceeding”). 6 The Debtor filed the complaint initiating the Adversary Proceeding on July 16, 2021 against three 7 defendants: (1) Parsons, Behle, and Latimer (“Parsons”), the Debtor’s former court-approved 8 bankruptcy counsel; (2) Advanced CFO, the Debtor’s former financial advisor; and (3) Knobbe 9 Martens Olson & Bear.1 (See Doc. No. 20-10.) In its complaint, the Debtor seeks to recover 10 certain amounts of the attorneys’ fees and expenses that the bankruptcy court had approved and 11 that the Debtor had already paid, because those amounts exceeded what would have been their 12 respective pro rata shares of the fees to be paid to administrative professionals in Slidebelts I. 13 (Id.) Specifically, Parsons was paid $116,029.10 in total,2 which the Debtor asserts is $41,130.92 14 in excess of its pro rata share of distributions to administrative claimants. (Id. at ¶¶ 3, 5, 8.) 15 Advanced CFO was paid $11,969.25, which the Debtor asserts is $7,296.89 in excess of its pro 16 rata share. (Id. at ¶¶ 3, 6, 8.) 17 The court notes that Debtor’s complaint is titled “Complaint for Turnover of Fees and 18 Expenses and for Authority to Make Equalizing Payments,” but the brief 8-paragraph complaint 19 filed by Debtor does not clearly identify any particular cause of action. (See Doc. No. 20-10.) 20 The complaint seeks relief as follows: 21 Debtor requests that this Court enter an order requiring the repayment of funds by Parsons Behle & Latimer in the amount of 22 $41,130.92, Advanced CFO in the amount of $7,296.89 and Knobbe, Martens, Olson & Bear LLP in the amount of $2,487.93. 23 24 1 Plaintiff voluntarily dismissed defendant Knobbe Martens Olson & Bear on August 19, 2021. (Adversary Proceeding, Doc. No. 9.) 25 2 On December 13, 2019, Parsons’s first request for fees and expenses was approved by the 26 bankruptcy court, which authorized and directed the Debtor to pay Parsons $54,951.74. (Doc. 27 No. 20-6 at 2.) On May 19, 2020, Parsons’s second request was approved by the bankruptcy court, which authorized and directed the Debtor to pay Parsons $60,708.00 in fees and $2,286.86 28 in expenses. (Slidebelts I, Doc. No. 320.) 1 Plaintiff requests that the fees be paid to Mr. David Sousa the Subchapter V Trustee in Case No. 20-24098-A-11 [Slidebelts II] 2 and that those funds be distributed pro rata to the allowed administrative claim holders in Case No. 19-25064-A-11 3 [Slidebelts I]. 4 [Debtor] respectfully requests a judgment compelling Defendants to make equalizing payments as described above and authorizing 5 Subchapter V Trustee, David Sousa to distribute funds received to allow for equalizing payments between the administrative priority 6 creditors in Case No. 19-25064-A-11 [Slidebelts I] and for such other and further relief as this court deems proper. 7 8 (Id. at 3.) 9 The Debtor also alleges in the complaint that its adversary proceeding “seeks to 10 implement” an order issued by the bankruptcy court in Slidebelts I on June 30, 2020, in which, 11 according to the Debtor, the bankruptcy court “require[d] that allowed administrative priority 12 claims be paid pro rata.” (Id. at ¶ 4.) The Debtor did not include in its complaint the text of the 13 bankruptcy court’s June 30, 2020 order, which stated: 14 Upon further reflection, the court modifies its rulings on the debtor’s motion to dismiss and debtor’s counsel’s application for 15 compensation: 16 1. debtor’s motion to dismiss the chapter 11 case is granted, and the case is hereby dismissed; 17 2. as to Parsons Behle & Latimer’s (“the firm”) motion for 18 additional compensation and request to finalize all interim application for compensation and reimbursement, it is hereby 19 ordered that the application is granted to the extent provided herein: 20 A. the firm’s first interim application for compensation and reimbursement in the amounts of $46,847.50 and $8,104.24, 21 respectively, are approved on a final basis; 22 B. the firm’s second interim application for compensation and reimbursement in the amounts of $60,708.00 and 23 $2,286.86, respectively, are approved on a final basis; 24 C. the firm’s third and final application for compensation and reimbursement in the amounts of $67,753.50 and 25 $6,167.81, respectively, are approved on a final basis; 26 D. all other requests for compensation and expenses are disapproved; 27 3. debtor shall not make further payment of administrative 28 expenses, 11 U.S.C. §§ 503(b), 507(a)(2), to any claimant 1 (including its counsel) and Parsons Behle & Latimer shall not apply retainer, if any, held to such approved administrative expenses, 2 except as provided herein; 3 4. not later than July 13, 2020, any professional holding an administrative claim, 11 U.S.C. §§ 503(b), 507(a)(2), shall file and 4 serve such final applications for approval as are required by the code and/or rules, noticed under LBR 9014-1(f)(2) and shall set the 5 matter for hearing on August 3, 2020, at 1:30 p.m.; opposition be filed not later than July 27, 2020; reply is waived; 6 5. not later than August 10, 2020, the debtor shall simultaneously 7 pay all professionals holding an approved administrative claim under 11 U.S.C. § 503(b): 8 A. in full, i.e., the entire amount of compensation and 9 expenses approved by the court or if payment in full is not possible, shall pay such claims pro-rata, In re Cochise 10 College Park, Inc., 703 F.2d 1339, 1356 fn. 22 (9th Cir. 1983) (insolvent estates pay administrative claims pro-rata); 11 In re Lazar, 83 F.3d 306, 308-09 (9th Cir. 1996); Czyzewski v. Jevic Corp., 137 S. Ct. 973, 983-85 (2017) (dismissal of 12 chapter 11 may not be used to order bankruptcy code priorities with the consent of the affected party); 13 B. file a declaration specifying in detail compliance with 14 paragraph 5(A) hereof; 15 6. the status conference is continued to August 17, 2020, at 1:30 p.m.; 16 7. the Clerk of the Court shall not close this case without further 17 order of this court; and 18 8. the court retains jurisdiction over applications for, as well as payment of, administrative claims and to enforce the terms of this 19 order. 20 (Doc. No. 20-7 at 2.) 21 On August 25, 2020, the Debtor filed its second bankruptcy case, a Chapter 11 Subchapter 22 V petition: In re Slidebelts, No. 20-24098, Bankr. E.D. Cal. (“Slidebelts II”). On October 4, 23 2021, the bankruptcy court issued an order confirming the Debtor’s third amended plan of 24 reorganization under Chapter 11 Subchapter V. (Slidebelts II, Doc. Nos. 353, 355.) That 25 confirmed plan, which included a redline addendum dated July 16, 2021, required the Debtor to 26 pursue recovery of the fees it had already paid to Parsons and Advanced CFO in excess of their 27 pro rata share. (Slidebelts II, Doc. Nos. 355 at 46–50.) Accordingly, the Debtor initiated this 28 adversary proceeding by filing its complaint on July 16, 2021, and the confirmed plan explicitly 1 states that: “Debtor shall prosecute this Complaint to judgment or settlement, which if settled, 2 will require court approval. Failure to pursue this Complaint shall be considered a material 3 default under the Plan.”3 (Doc. No. 20-12 at 48.) 4 On October 13, 2021, appellants filed a motion to dismiss the adversary proceeding 5 complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), as made applicable by Rule 7012 6 of the Federal Rules of Bankruptcy Procedure. (Adversary Proceeding, Doc. No. 15.) In that 7 motion, defendants asserted several bases for dismissal: 8 (1) The Debtor has not suffered an injury in fact and, therefore, lacks standing. It is undisputed that the Defendants neither injured 9 the Debtor nor owe any debt to the Debtor: to the contrary, the Debtor owes Parsons Behle $75,838.81. 10 (2) Unlike in a case converted to chapter 7, the Court lost 11 jurisdiction over the Debtor’s assets and causes of action in the First Case [Slidebelts I] when the Debtor filed the second petition for 12 relief, Case No. 2020-24098 (the “Second Case”) [Slidebelts II]. 13 (3) Even in a chapter 7 case converted from chapter 11 that is administratively insolvent, disgorgement is not an available remedy 14 as a matter of law. 15 (4) The Court’s June 30 Order did not order disgorgement, but rather, ordered the Debtor not to make further distributions. Both 16 Debtor and Defendants have complied with that Order, and, even if they had not, the Order does not provide a cause of action for 17 failure to obey nor does it give the Debtor a claim against Defendants. 18 (5) The Complaint fails to state a claim for turnover under section 19 542 because turnover requires an undisputed account owed to the debtor or identifiable property of the debtor not subject to dispute 20 or setoff, neither of which is the situation here. 21 (Id. at 5.) Although the Debtor filed an opposition to the motion to dismiss, it did not address 22 these asserted bases for dismissal. Rather, the Debtor merely states that the bankruptcy court in 23 Slidebelts I “retained jurisdiction to allow for a pro rata distribution of estate resources among the 24 holder of allowed priority fees and expenses” and “[t]he present action is designed to accomplish 25 that end.” (Adversary Proceeding, Doc. No. 17 at 2.) The Debtor further stated that “[t]he 26 3 The plaintiff-debtor, through its new counsel Stephen Reynolds, and defendants Parsons and 27 Advanced CFO repeatedly reached settlements of the adversary proceeding, but the bankruptcy court denied their motions for court approval of their settlement, with the most recent denial 28 occurring on May 31, 2023. (Adversary Proceeding, Doc. Nos. 402, 409, 411, 421, 422, 439.) 1 current complaint is a creature of the June 30, 2020 dismissal order and the Court’s Memorandum 2 filed July 6, 2020,” which denied the Debtor’s request for the bankruptcy court to modify its June 3 30, 2020 order. (Id.; Adversary Proceeding, Doc. Nos. 418, 419.) 4 On November 16, 2021, the bankruptcy court heard argument on defendants’ motion to 5 dismiss, orally denied the motion, and issued twelve pages of “civil minutes” explaining the 6 court’s reasoning, which were entered on the docket on November 19, 2021. (Doc. No. 3-4.) The 7 next day, on November 20, 2021, the bankruptcy court issued an order denying the motion to 8 dismiss, which was entered on the docket on November 22, 2021. (Doc. No. 3-5.) 9 On December 6, 2021, appellants-defendants filed the notice of bankruptcy appeal 10 initiating the appeal before this district court of the bankruptcy court’s November 20, 2021 order 11 denying their motion to dismiss. (Doc. No. 1.) On February 16, 2022, appellants filed a motion 12 for leave to file the interlocutory appeal, which appellee did not oppose, and which the court 13 granted on May 13, 2022.4 (Doc. Nos. 3, 8, 9.) 14 After some delay due to the parties’ settlement efforts, the certificate of record and 15 briefing schedule were issued on October 13, 2023. (Doc. No. 19.) On December 28, 2023, 16 appellants filed their opening brief. (Doc. No. 20.) On January 29, 2024, appellee filed a two- 17 page responding brief. (Doc. No. 21.) On April 1, 2024, appellants filed a notice of readiness for 18 oral argument. (Doc. No. 22.) As noted, the court held oral argument on this appeal on August 19 27, 2018, and the matter was submitted for decision. (Doc. No. 25.) 20 STANDARD OF REVIEW 21 “[T]he district court functions as an appellate court in reviewing a bankruptcy decision 22 and applies the same standards of review as a federal court of appeals.” Vitalich v. All. Bancorp, 23 No. 16-cv-06231-BLF, 2017 WL 4224679, at *2 (N.D. Cal. Sept. 22, 2017) (quoting In re 24 Crystal Props., Ltd., L.P., 268 F.3d 743, 755 (9th Cir. 2001)). “A bankruptcy court’s conclusions 25 of law are reviewed de novo and findings of fact are reviewed for clear error.” In re Sui, No. 12- 26 cv-01501-MWF, 2013 WL 12471956, at *2 (C.D. Cal. Apr. 18, 2013) (citing In re Int’l 27 28 4 On August 25, 2022, this case was reassigned to the undersigned. (Doc. No. 10.) 1 Fibercom, Inc., 503 F.3d 933, 940 (9th Cir. 2007)). Orders ruling on motions to dismiss brought 2 pursuant to Rule 12(b)(6) are reviewed de novo. In re Sui, 2013 WL 12471956, at *2 (“An order 3 denying a motion to dismiss is reviewed de novo.”); Vitalich, 2017 WL 4224679, at *2 (“A 4 dismissal for failure to state a claim under Rule 12(b)(6) is reviewed de novo.”). Even in a 5 bankruptcy appeal, “[w]ith respect to a motion to dismiss under Rule 12(b)(6), the Court follows 6 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 7 (2009).” In re Sui, 2013 WL 12471956, at *2. 8 The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal 9 sufficiency of the complaint. N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 10 1983). “Dismissal can be based on the lack of a cognizable legal theory or the absence of 11 sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 12 F.2d 696, 699 (9th Cir. 1990). A plaintiff is required to allege “enough facts to state a claim to 13 relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A claim has facial plausibility 14 when the plaintiff pleads factual content that allows the court to draw the reasonable inference 15 that the defendant is liable for the misconduct alleged.” Ashcroft, 556 U.S. at 678. 16 DISCUSSION 17 As a preliminary matter, the court notes that the bankruptcy court’s November 16, 2021 18 civil minutes correctly outlined the legal standard that applies to motions to dismiss brought 19 pursuant to Rule 12(b)(6), including that courts “take[] notice of the elements of the claim to be 20 stated.” (Doc. No. 3-4 at 11–13.) However, the bankruptcy court did not adhere to that legal 21 standard in analyzing the Debtor’s complaint and concluding that the Debtor sufficiently “states 22 at least two plausible theories of recovery against defendants.” (Id. at 12.) The bankruptcy court 23 did not identify the elements of those two purported claims nor explain how the allegations in the 24 Debtor’s complaint, if proven, would satisfy those elements. 25 First, the bankruptcy court briefly quotes the Ninth Circuit’s decision in In re Cochise 26 College Park, Inc., 703 F.2d 1339 (9th Cir. 1983), which cites the Fifth Circuit’s decision in 27 Thomas Corp. v. Nicholas, 221 F.2d 286 (5th Cir. 1955), regarding the right of a trustee or debtor 28 in possession to recover overpayments. (Id. at 12.) Without specifying what the cause of action 1 is, the bankruptcy court concluded that there is a “cause of action recognized by Thomas Corp. 2 and Cochise Park,” and “[t]hat alone is a sufficient basis to deny defendants’ motion.” (Id. at 12.) 3 However, as appellants emphasize in their opening brief (Doc. No. 20 at 31–34), Cochise Park is 4 inapposite and does not recognize a cause of action as suggested by the bankruptcy court. In 5 Cochise Park, the bankruptcy trustee was found personally liable for unjustly enriching himself 6 by collecting loan payments from homebuyers, even though the funds from those promissory 7 notes were not part of the bankruptcy estate. In re Cochise, 703 F.2d 1344–46. Importantly for 8 purposes of the present appeal, there are no allegations of any unjust enrichment by appellants or 9 allegations that appellants received the funds through wrongful conduct. Further, in its June 30, 10 2020 order, the bankruptcy court did not order appellants to disgorge or repay any of the amounts 11 that the court had already approved and that the Debtor had already paid. In short, the bankruptcy 12 court’s reliance on Cochise Park is unavailing because the bankruptcy court did not identify any 13 specific claim or cause of action stemming from the decision in Cochise Park nor identify the 14 requisite elements of such a claim. 15 Second, the bankruptcy court quoted 11 U.S.C. § 542 (the statute providing for turnover 16 of estate property by third parties) and an excerpt from a practice guide regarding limitations to 17 § 542, and concluded that the Debtor had sufficiently stated a cognizable claim for turnover. 18 (Doc. No. 3-4 at 13.) The bankruptcy court reasoned that a claim for turnover was sufficiently 19 stated because “[a]s of August 25, 2020, the date Slidebelts II was filed, the debtor’s rights to 20 recover payment were fixed,” and by that date, “all applications for compensation had been heard 21 and, therefore, the amount necessary to equalize payment to administrative claimants was subject 22 to mathematical computation.” (Id.) But the bankruptcy court omitted reference to the 23 subsequent history in Slidebelts I, including that on September 4, 2020, creditor Brinkman 24 Portillo Ronk, APC (“Brinkman”) had filed a motion requesting that the bankruptcy court 25 reconsider its order on Brinkman’s fee application, which the court granted on December 10, 26 2020, awarding approximately $14,000 more in fees than it had awarded on August 20, 2020. 27 (Slidebelts I, Doc. Nos. 479, 488, 490, 527.) This modification to the amount awarded to 28 Brinkman necessarily impacted the pro rata distribution calculations. Thus, contrary to the 1 bankruptcy court’s conclusion, the amount allegedly due to be turned over was not fixed as of 2 August 25, 2020. Moreover, “turnover proceedings involve return of undisputed funds.” In re 3 Gurga, 176 B.R. 196, 199 (B.A.P. 9th Cir. 1994). In its complaint, the Debtor seeks an order 4 from the court requiring appellants to turnover funds that were awarded and paid for fees and 5 expenses—but those funds are not undisputed property of the bankruptcy estate. For these 6 reasons, despite being titled “Complaint for Turnover of Fees and Expenses,” the Debtor’s 7 complaint does not state a cognizable claim for turnover. 8 In sum, neither of the two purported causes of action are sufficiently stated in the Debtor’s 9 complaint. 10 In addition, the bankruptcy court’s November 16, 2021 civil minutes summarized the 11 defendants’ motion to dismiss as advancing the argument that the June 30, 2020 order “does not 12 create any right to recover from [defendants].” (Doc. No. 3-4 at 7.) The bankruptcy court stated 13 that it disagreed with this argument, emphasizing that courts have authority to construe their own 14 orders, and the June 30, 2020 order “described the end result; it made no effort to specify the 15 mechanism by which that result was obtained. But if necessary to achieve parity in treatment of 16 administrative creditors, [debtor] Slidebelts’ adversary proceeding to recover those overages was 17 well within the terms of this court’s order.” (Id.) While the undersigned acknowledges a court’s 18 authority to interpret its own orders entered in a case, that principle does not provide authority for 19 a court to create a cause of action where none exists to be pursued in a different case. This is true 20 even if the relief sought by that cause of action in a new proceeding could have been ordered by 21 the court in the original proceeding or is consistent with what the court had intended to order in 22 the original proceeding. Moreover, the fact that a confirmed plan of reorganization reserves a 23 cause of action or requires the debtor to file a complaint asserting a particular claim does not 24 mean that such a cause of action exists. Here, it is clear that no such cause of action exists, and 25 consequently no cognizable claim has been alleged in the Debtor’s complaint. 26 For all of these reasons, the undersigned concludes that the bankruptcy court erred in 27 denying appellants-defendants’ motion to dismiss the Debtor’s complaint in the Adversary 28 Proceeding. Accordingly, the court will grant appellants-defendants’ motion to dismiss due to 1 | appellee-plaintiff’s failure to state a cognizable claim.* The court also finds that under these 2 | circumstances, the granting of leave to amend would be futile. Notably, at oral argument, 3 | appellee’s counsel confirmed that leave to amend was not requested and would indeed be futile. 4 CONCLUSION 5 Accordingly: 6 1. The bankruptcy court’s order dated November 20, 2021 denying appellants- 7 defendants’ motion to dismiss is reversed; 8 2. Appellants-defendants’ motion to dismiss appellee-plaintiff’s complaint in the 9 Adversary Proceeding, No. 21-02052, is granted; 10 3. The case is remanded to the bankruptcy court with instructions to dismiss and 11 close the Adversary Proceeding, No. 21-02052, due to plaintiff's failure to state a 12 cognizable claim for relief; and 13 4. The Clerk of the Court is directed to enter judgment in favor of appellants and 14 close this case. 15 IT IS SO ORDERED. | Dated: _ August 30, 2024 Da A. 2, eyel 17 DALE A. DROZD ig UNITED STATES DISTRICT JUDGE 19 20 21 22 23 24 25 26 27 |_| — > Because the court’s conclusion in this regard disposes of the appeal in its entirety, the court 28 | does not reach the appellants’ other arguments. 10