In re: Christopher E. Galloway and Rhonda A. Galloway

FILED
AUG 27 2014
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. AZ-13-1085-PaKiTa
)
6 CHRISTOPHER E. GALLOWAY and ) Bankr. No. 12-05758
RHONDA A. GALLOWAY, )
7 )
Debtors. )
8 ______________________________)
)
9 CHRISTOPHER E. GALLOWAY; )
RHONDA A. GALLOWAY, )
10 )
Appellants, )
11 )
v. ) M E M O R A N D U M1
12 )
JILL H. FORD, Chapter 7 )
13 Trustee; GARY D. PURCELL, )
)
14 Appellees. )
______________________________)
15
Submitted Without Argument on July 25, 20142
16
Filed - August 27, 2014
17
Appeal from the United States Bankruptcy Court
18 for the District of Arizona
19 Honorable George B. Nielsen, Bankruptcy Judge, Presiding
20
Appearances: Christopher E. Galloway and Rhonda A. Galloway,
21 pro se, on brief; Dawn M. Maguire and John P.
22
23 1
This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
24
have (see Fed. R. App. P. 32.1), it has no precedential value.
25 See 9th Cir. BAP Rule 8013-1.
26 2
By order entered on April 4, 2014, and after notice to
27 the parties and a review of the briefs and record, the Panel
unanimously determined oral argument was not needed. Fed. R.
28 Bankr. P. 8012.
1 Carter of Allen, Sala & Bayne, PLC on brief for
Jill H. Ford, Chapter 7 Trustee.
2
3 Before: PAPPAS, KIRSCHER, and TAYLOR, Bankruptcy Judges.
4
5 Chapter 73 debtors Christopher E. Galloway (“Christopher”)
6 and Rhonda A. Galloway (“Rhonda” and, together, “Debtors”)4
7 appeal an order of the bankruptcy court which denied Debtors’
8 motion to dismiss the chapter 7 case, denied Debtors’ motion to
9 abandon property, and granted the motion of trustee Jill H. Ford
10 (“Trustee”) to approve a compromise. We AFFIRM the provisions in
11 the order denying dismissal and denying abandonment, VACATE the
12 provision in the order approving the compromise, and REMAND this
13 matter to the bankruptcy court for further proceedings.
14 FACTS
15 The dispute in this appeal centers on a malpractice lawsuit
16 Debtors had prosecuted in Maricopa County Superior Court (the
17 “Superior Court”) since 2007 against physician Appellee Gary D.
18 Purcell, M.D. (“Purcell”) arising out of procedures performed on
19 Christopher (the “Malpractice Action”). In that action, the
20 Superior Court ordered Debtors to file an affidavit pursuant to
21
22
23
3
24 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101 – 1532,
25 all Rule references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001–9037, and all Civil Rule references are to
26 the Federal Rules of Civil Procedure 1–86.
27 4
We refer to Debtors by first name for convenience and
28 clarity; no disrespect is intended.
-2-
1 Ariz. Rev. Stat. (“A.R.S.”) § 12-26025 concerning the need for
2 expert witness testimony. When Debtors failed to file that
3 affidavit, Purcell moved to dismiss, and the Superior Court
4 dismissed the Malpractice Action in April 4, 2008.
5 Over two years later, Debtors filed a Motion to Refile and
6 Appeal Judgment Due to Attorney Misrepresentation (the “Refile/
7 Appeal Motion”). At a hearing, the Superior Court denied the
8 Refile/Appeal Motion, but allowed Debtors to file an Arizona
9 Rules of Court 60(c)6 Motion for Relief from the Order of
10 Dismissal. Debtors filed such a motion, but at the hearing, the
11 Superior Court denied the motion. On February 29, 2012, Debtors
12 appealed the denial of their Refile/Appeal Motion to the Arizona
13 Court of Appeals (the “State Appeal”).
14 Debtors filed a chapter 7 bankruptcy petition on March 21,
15 2012. They did not disclose the existence of the Malpractice
16 Action or the pending State Appeal in their petition, schedules,
17 or statement of financial affairs.
18 Trustee filed a no-asset report in the bankruptcy case on
19 June 13, 2012. When Purcell apparently notified the Arizona
20 Court of Appeals that Debtors had filed a bankruptcy petition,
21
22
5
“[A.R.S.] § 12-2602. Preliminary expert opinion
23 testimony; certification. If a claim against a licensed
24 professional is asserted in a civil action, the claimant or the
claimant's attorney shall certify in a written statement that is
25 filed and served with the claim whether or not expert opinion
testimony is necessary to prove the licensed professional's
26 standard of care or liability for the claim.”
27 6
With minor variations, Arizona Rule of Court 60(c) is
28 identical to Civil Rule 60(b).
-3-
1 the court stayed the State Appeal. Debtors then informed Trustee
2 of the stay of the State Appeal on July 2, 2012, and, on the same
3 day, Trustee withdrew her no-asset report.
4 On July 9, 2012, Debtors, acting pro se, filed a motion to
5 dismiss the bankruptcy case (the “First Dismissal Motion”).
6 Debtors argued that they had filed for bankruptcy relief with the
7 understanding that the State Appeal had not been acted on by the
8 Arizona Court of Appeals and had no value. After learning that
9 Trustee had engaged an attorney to represent her in connection
10 with the Malpractice Action, Debtors argued that they did not
11 wish to be responsible for compensating an attorney who would not
12 necessarily be acting in their interest. Debtors were also
13 concerned that Trustee’s attorney had offices in the same
14 building as Purcell’s attorney. Summarizing their position, they
15 explained:
16 [Debtors] feel[] that their right to compensation for
said damages and punitive rewards, if any, should take
17 precedence over their current fiscal situation. . . .
they should be afforded their constitutional right to
18 representation of their own choosing in the Appellate
Court, their right to pursue their case if said case is
19 approved via the Appellate Court, and their right to
withdraw from said Bankruptcy proceedings and to
20 refile, if needed, at a later date.
21 Trustee responded, pointing out that Debtors had no absolute
22 right to dismiss a chapter 7 case, and that the Malpractice
23 Action was property of the estate that Debtors failed to disclose
24 in their petition. As to Debtors’ suggestion that Trustee’s and
25 Purcell’s attorneys had offices in the same building, Trustee
26 argued that there was no conflict of interest, because the
27 offices were separate, and the only thing both firms shared was
28 the same address.
-4-
1 The bankruptcy court heard arguments on the First Dismissal
2 Motion on August 31, 2012.7 The court denied the First Dismissal
3 Motion because “[i]t would cause plain legal prejudice to other
4 parties, the Trustee and the beneficiaries of the Trustee, who
5 are the creditors, to close this case without investigating this
6 cause of action.” Hr’g Tr. 17:4-7, August 31, 2012. The order
7 denying the First Dismissal Motion was not appealed.
8 Debtors were granted a discharge on September 24, 2012. The
9 Arizona Court of Appeals, after receipt of notice of the
10 discharge, reactivated the State Appeal on October 5, 2012. The
11 record is not clear regarding the current status of the appeal.
12 Debtors filed a Second Motion to Dismiss (“Second Dismissal
13 Motion”) on December 10, 2012, generally restating their
14 arguments in the First Dismissal Motion. Trustee responded,
15 restating her position, and arguing further that the creditors
16 could be harmed by premature dismissal of the case.
17 Trustee states in her brief in this appeal that, following
18 the denial of the First Dismissal Motion, she “determined that
19 the Appeal would be limited to a nuisance value. As a result,
20 the Trustee negotiated a nuisance settlement with [Purcell].”
21 Trustee Br. at 7. On January 2, 2013, Trustee filed a motion to
22 approve a compromise whereby Purcell would pay the estate $4,000
23
24 7
The parties did not include a transcript of this hearing
25 in the appellate record, but a copy is available in the
bankruptcy court’s docket. Bk. Dkt. No. 109. We have exercised
26 our discretion to review the transcript. O’Rourke v. Seaboard
27 Surety Co. (In re E.R. Fegert), 887 F.2d 955, 957-58 (9th Cir.
1988); Atwood v. Chase Manhattan Mrtg. Co. (In re Atwood),
28 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
-5-
1 to fully settle the claims asserted in the Malpractice Action.
2 In the motion, Trustee reviewed the facts of the Malpractice
3 Action and discussed some of the factors used to weigh the
4 reasonableness of compromises articulated by the Ninth Circuit in
5 Martin v. Kane (In re A&C Props.), 784 F.2d 1377, 1381 (9th Cir.
6 1986). In support of the settlement, Trustee noted that: (1) the
7 Malpractice Action had been dismissed by the state court four
8 years ago for Debtors’ failure to diligently pursue the
9 litigation; (2) Debtors’ proposed expert witness did not meet the
10 qualifications standards required by A.R.S. § 12-2602(c);
11 (3) Debtors had admitted in at least two pleadings in the
12 bankruptcy case that several attorneys have advised them that
13 their State Appeal was a “Hail Mary attempt with little or no
14 chance of success”; (4) there were inconsistencies in Debtors’
15 pleadings as to which of Christopher’s knees was injured, and
16 that a claim for injury to his left knee would, potentially, be
17 barred by the Arizona statute of limitations; and (5) collection
18 of any judgment Debtors might obtain would require authorization
19 from Medicare.
20 Debtors responded to Trustee’s motion on January 8, 2013, in
21 a pleading entitled “Debtors’ Objection to Trustee’s Motion to
22 Approve Settlement and Compromise of Claim and Motion to Compel
23 Abandonment.” In addition to opposing approval of Trustee’s
24 proposed settlement with Purcell, Debtors sought an order deeming
25 the claims against Purcell abandoned under § 554. In Debtors’
26 response, they appear to concede that two of the A&C Props.
27 factors were satisfied: that there was little probability of
28 success in the litigation, and that collection may be difficult.
-6-
1 As to the third and fourth A&C Props. criteria, which focus on
2 the complexities of litigation and the interests of the
3 creditors, Debtors indicated that Trustee had never requested any
4 medical records or information from doctors treating Christopher.
5 Debtors continued to insist that they had the legal right to
6 pursue the State Appeal. Finally, Debtors argued that, if
7 Trustee was correct, the settlement had so little value to the
8 estate and creditors that the bankruptcy court should order the
9 Malpractice Action be abandoned to Debtors.
10 The hearing on Debtors’ Second Dismissal Motion, the
11 Settlement Motion, and Debtors’ Motion for Abandonment, occurred
12 on February 8, 2013. Based solely on the record, and without
13 hearing any testimony or taking other evidence, the bankruptcy
14 court made a number of findings and conclusions concerning the
15 merits of the three motions.
16 The bankruptcy court observed that “Debtors did not
17 understand that they lost control of the Malpractice Action when
18 they filed the bankruptcy petition. Giving up control over this
19 litigation is one of the bargained for things that they have to
20 do in order to get a bankruptcy discharge.” Hr’g Tr. 2:24-25,
21 3:22-24, February 8, 2013.
22 The bankruptcy court concluded that the settlement sum,
23 $4,000, was significant under the circumstances, and that while
24 “[t]rustees can choose to abandon assets that have no value for
25 the bankruptcy estate . . . [i]t’s frivolous to suggest to
26 abandon an asset that’s worth $4,000. Because, you know, that’s
27 a lot of money in my neighborhood.” Hr’g Tr. 5:10-16.
28 The bankruptcy court acknowledged Trustee’s argument that
-7-
1 there was “nothing in the estate” to fund retention of a medical
2 malpractice attorney and other litigation expenses, and it
3 observed that Debtors had conceded that they had not been able to
4 attract a competent attorney on a contingency basis.
5 The bankruptcy court also determined that Debtors had not
6 cooperated with Trustee’s investigations about the Malpractice
7 Action. A colloquy occurred with Rhonda on this topic:
8 THE COURT: You’re obligated to cooperate with the
Trustee.
9
RHONDA: We have tried.
10
THE COURT: No, no, no, no. You didn’t try to
11 cooperate. . . . You wanted to do what you wanted to
do. That’s not the same thing as cooperating. . . .
12
RHONDA: What we want to do was we wanted to be involved
13 enough to where we could tell them that what they’re
doing is wrong when they’re doing something wrong.
14
15 Hr’g Tr. 9:3-15.8
16 The bankruptcy court inquired whether Debtors wanted to
17 purchase the Malpractice Action from the bankruptcy estate for
18 more than $4,000; Debtors declined. The court concluded:
19 I am not going to dismiss your case because you don’t
have the absolute right to dismiss your case. I’m not
20
21 8
At the bankruptcy court hearing, Debtors were adamant
22 that Trustee’s efforts to settle the Malpractice Action were
inappropriate. The bankruptcy judge displayed significant
23 patience in the face of Debtors’ passionate and, at times, less
than courteous oral advocacy. While the court took pains to
24
attempt to explain the various aspects of the law and procedure
25 implicated by these motions to them, Debtors repeatedly
interrupted the bankruptcy judge and declined to acknowledge
26 these explanations. For example, at one point Christopher
27 referred to the proceedings as “a joke” and, later, he threatened
to sue the bankruptcy judge. Hr’g Tr. 11:18; 16:22. Debtors’
28 attitude and comments were not helpful to their cause.
-8-
1 going to let you walk off with this medical
mal[practice] case . . . until you can provide . . . a
2 better alternative than you getting it for free. . . .
I’m going to approve the settlement agreement because
3 it’s the best that the Trustee can do right now. . . .
I’m going to deny [the Motion to Abandon] because I
4 can’t find that something that’s worth $4,000 should be
abandoned from a bankruptcy estate.
5
6 Hr’g Tr. 16:2-5, 19, 19:18-21.
7 The bankruptcy court entered an order denying Debtors’
8 Second Dismissal Motion and the Motion for Abandonment, and
9 granting the Settlement Motion, on February 8, 2013. Debtors
10 filed a timely appeal.
11 JURISDICTION
12 The bankruptcy court had jurisdiction under 28 U.S.C.
13 §§ 1334 and 157(b)(2)(A). The Panel has jurisdiction under
14 28 U.S.C. § 158.915 ISSUES
16 Whether the bankruptcy court abused its discretion by
17 denying Debtors’ motion to dismiss.
18 Whether the bankruptcy court abused its discretion by
19 denying Debtors’ motion to abandon.
20 Whether the bankruptcy court abused its discretion by
21 approving the Settlement Agreement.
22
23 9
Generally, an order denying a motion to dismiss a
bankruptcy case is interlocutory. Krishnamurthy v. Nimmagadda
24
(In re Krishnamurthy), 209 B.R. 714, 718 (9th Cir. BAP 1997).
25 However, in this case, because our consideration of the
bankruptcy court’s refusal to dismiss the case is intertwined
26 with its ruling on the other motions, we exercise our discretion
27 to treat Debtors’ notice of appeal concerning denial of the
Second Dismissal Motion as a motion for leave to appeal, which
28 request is GRANTED. Id.; Rule 8003(c).
-9-
1 STANDARDS OF REVIEW
2 We review the denial of a debtor’s motion to dismiss a
3 voluntary chapter 7 case for abuse of discretion. Bartee v.
4 Ainsworth (In re Bartee), 317 B.R. 362, 365 (9th Cir. BAP 2004).
5 The bankruptcy court’s decision to grant or deny abandonment
6 of property is reviewed for abuse of discretion. Viet Vu v.
7 Kendall (In re Viet Vu), 245 B.R. 644, 647 (9th Cir. BAP 2000).
8 The bankruptcy court's decision to approve a compromise or
9 settlement agreement is reviewed for abuse of discretion. Debbie
10 Reynolds Hotel & Casino, Inc. v. Calstar Corp., Inc.
11 (In re Debbie Reynolds Hotel & Casino, Inc.), 255 F.3d 1061, 1065
12 (9th Cir. 2001).
13 A bankruptcy court abuses its discretion if it bases a
14 decision on an incorrect legal rule, or if its application of the
15 law was illogical, implausible, or without support in inferences
16 that may be drawn from the facts in the record. United States v.
17 Hinkson, 585 F.3d 1247, 1261-63 (9th Cir. 2009) (en banc).
18 DISCUSSION
19 I.
20 The Malpractice Action is property of the estate.
21 Throughout the bankruptcy case and this appeal, Debtors have
22 seemingly refused to acknowledge that their right to pursue the
23 Malpractice Action became property of the estate when they filed
24 their bankruptcy petition. We therefore begin by noting that any
25 argument premised on Debtors’ belief that they hold some sort of
26 superior interest in the Malpractice Action to that of the
27 bankruptcy estate, whether legal, equitable, or otherwise, is
28 flatly contrary to law.
-10-
1 Under § 541(a), property of a bankruptcy estate includes
2 "all legal or equitable interests of the debtor in property as of
3 the commencement of the case, . . . wherever located and by
4 whomever held." The language of § 541(a) in this respect is not
5 ambiguous — all means all: “Congress intended a broad range of
6 property to be included in the estate. . . . The statutory
7 language reflects this scope of the estate . . . . The House and
8 Senate reports on the Bankruptcy Code indicate that § 541(a)(1)’s
9 scope is broad.” United States v. Whiting Pools, 462 U.S. 198,
10 204 (1983); Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001).
11 That legislative history explains:
12 The scope of this paragraph [§ 541(a)(1)] is broad. It
includes all kinds of property, including tangible or
13 intangible property, causes of action (see Bankruptcy
Act § 70a(6)), and all other forms of property
14 currently specified in section 70a of the Bankruptcy
Act.
15
16 H.R. Rep. No. 95-595, p. 367 (1977); S. Rep. No. 95-989, p. 82
17 (1978) (emphasis added).
18 As the legislative history indicates, property of the estate
19 includes causes of action of the debtor that accrue before the
20 petition. Canatella v. Towers (In re Alcala), 918 F.2d 99, 102
21 (9th Cir. 1990) (explaining that causes of action that accrue
22 before the chapter 7 petition is filed are property of the
23 estate); see also Celotex Corp. v. Edwards, 514 U.S. 300, 307 n.5
24 (1995) (causes of action owned by the debtor become property of
25 the estate pursuant to § 541). In Arizona, a cause of action for
26 medical malpractice accrues when the patient suffers harm.
27 De Boer v. Brown, 673 P.2d 912, 914-15 (Ariz. 1983); see also
28 Seltzer v. Paul Revere Life Ins. Co., 688 F.3d 966, 971 (9th Cir.
-11-
1 2012) (same, discussing Arizona malpractice law). Here, the
2 Malpractice Action accrued when Christopher was allegedly injured
3 by Purcell, which occurred at some time before 2007 when the
4 Malpractice Action was filed. Because Debtors’ claims against
5 Purcell unquestionably arose and were not terminated before they
6 filed the bankruptcy petition, under § 541(a), their rights to
7 recover any damages from Purcell became property of the
8 bankruptcy estate when they filed their bankruptcy petition.
9 During this litigation, Debtors have at times characterized
10 the legal status of the Malpractice Action as “uncertain” at the
11 time of filing the petition to justify their exclusion of the
12 Malpractice Action from their bankruptcy schedules. However, any
13 assertion by Debtors that their rights to pursue the claims
14 against Purcell had lapsed or been suspended is disingenuous.
15 Indeed, only three weeks before the filing of the bankruptcy
16 petition, Debtors filed the State Appeal in the Arizona Court of
17 Appeals. Simply put, any rights Debtors hold in the Malpractice
18 Action are property of the bankruptcy estate.
19 II.
20 The bankruptcy court did not abuse its discretion
by denying Debtors’ Second Dismissal Motion.
21
22 Dismissal of a chapter 7 case is governed by § 707(a): “The
23 court may dismiss a case under this chapter only after notice and
24 a hearing and only for cause[.]” In re Bartee, 317 B.R. at 365.
25 Debtors do not have an absolute right to dismiss their voluntary
26 chapter 7 case. Id. Like any interested party, under § 707(a),
27 a debtor must prove by a preponderance of the evidence that
28 “cause” exists to justify dismissal of a chapter 7 case.
-12-
1 In re Leach, 130 B.R. 855, 856 (9th Cir. BAP 1991). Further,
2 dismissal should only be granted if there will be no harm to
3 creditors. In re Bartee, 317 B.R. at 365; Gill v. Hall
4 (In re Hall), 15 B.R. 913, 917 (9th Cir. BAP 1981)(citing
5 Schroeder v. Int’l Airport Inn P’ship, 517 F.2d 510, 512 (9th
6 Cir. 1975)).
7 Debtors’ arguments for dismissal are based on their
8 understanding that, by dismissing the case, the Malpractice
9 Action would revert to them so they could proceed under their own
10 authority to prosecute that action. By successfully prosecuting
11 that action, Debtors argue, they would have sufficient funds to
12 pay their creditors in full. But, as discussed below, whether
13 Debtors or Trustee could obtain a substantial recovery by
14 prosecuting the Malpractice Action is a matter of high
15 speculation. A debtor’s speculative ability to repay creditors
16 outside bankruptcy is not cause for dismissal. Turpen v. Eide
17 (In re Turpen), 244 B.R. 431, 434-35 (8th Cir. BAP 2000).
18 The bankruptcy court did not err when it concluded that
19 Debtors did not show by a preponderance of the evidence that good
20 cause existed for dismissal of the chapter 7 case. Moreover, the
21 bankruptcy court found that dismissal may harm the creditors
22 because they would lose the value associated with Trustee’s
23 proposed settlement of the Malpractice Action, $4,000. We find
24 no error in this finding. Because the bankruptcy court applied
25 the correct law in resolving the Second Dismissal Motion, and its
26 application of the law to these facts was not illogical,
27 implausible, or without support in inferences that may be drawn
28 from the facts in the record, we conclude that the bankruptcy
-13-
1 court did not abuse its discretion by denying Debtors’ Second
2 Dismissal Motion.
3 III.
4 The bankruptcy court did not abuse its discretion by
denying Debtors’ Motion to Abandon the Malpractice Action.
5
Section 554(b) provides that "on request of a party in
6
interest and after notice and a hearing, the court may order the
7
trustee to abandon any property of the estate that is burdensome
8
to the estate or that is of inconsequential value and benefit to
9
the estate." § 554(b).10 In order to grant a motion to abandon
10
property, the bankruptcy court must find either that: (1) the
11
property is burdensome to the estate or (2) of inconsequential
12
value and inconsequential benefit to the estate. In re Viet Vu,
13
245 B.R. at 647. As one court noted, "an order compelling
14
abandonment is the exception, not the rule. Abandonment should
15
only be compelled in order to help the creditors by assuring some
16
17
10
At the hearing, the bankruptcy court asked the parties
18 whether the creditors in the bankruptcy case had been given
19 proper notice of Debtors’ request that the Malpractice Action be
abandoned. Hr’g Tr. 5:18-20; 19:9-17. See Rules 6007(b)
20 (requiring that a request for abandonment be made via motion);
Ariz. Local Bankruptcy Rule 6007-1(c)(5) (requiring that a motion
21 for abandonment be served on the parties listed in Rule 6007(a),
22 which dictates that notice be given to “all creditors”).
Trustee’s counsel was uncertain; Christopher volunteered that
23 they had been noticed. We have reviewed the bankruptcy court’s
docket, and there is no certificate of service or other
24
indication that creditors were notified. Of course, if the
25 creditors did not receive notice of Debtors’ request for
abandonment, this procedural deficiency would require denial of
26 the motion. However, we elect to address Debtors’ motion on the
27 merits, and because we conclude that the bankruptcy court
properly denied it, any notice issue concerning the motion is
28 immaterial.
-14-
1 benefit in the administration of each asset . . . . Absent an
2 attempt by the trustee to churn property worthless to the estate
3 just to increase fees, abandonment should rarely be ordered."
4 Morgan v. K.C. Mach. & Tool Co. (In re K.C. Mach. & Tool Co.),
5 816 F.2d 238, 246 (6th Cir. 1987). And in evaluating a proposal
6 to abandon property, it is the interests of the estate and the
7 creditors that have primary consideration, not the interests of
8 the debtor. Johnston v. Webster (In re Johnson), 49 F.3d 538,
9 541 (9th Cir. 1995) (noting that the debtor is not mentioned in
10 § 554).
11 Here, the Malpractice Action was not burdensome to the
12 estate because Trustee had a settlement offer in hand to dispose
13 of the asset. In re Viet Vu, 245 B.R. at 647 (explaining that an
14 offer to buy an asset can show that it is not burdensome).
15 Therefore, to compel abandonment of the Malpractice Action,
16 Debtors were required to establish that it was of inconsequential
17 value and benefit to the estate. Id. Debtors had the burden to
18 present a prima facie case, which could be rebutted by evidence
19 that the Malpractice Action had some value and benefit. Prime
20 Lending II, LLC v. Buerge (In re Buerge), 2014 Bankr. LEXIS 1264,
21 at *28 (10th Cir. BAP 2014).
22 Debtors’ Motion to Abandon was nested within their
23 opposition to Trustee’s Settlement Motion; Debtors’ arguments on
24 abandonment are inextricably linked with their opposition
25 arguments. Besides general complaints of ill treatment by
26 Trustee and the bankruptcy court, and assertions that Debtors
27 could obtain a better result if they were prosecuting the State
28 Appeal, the only relevant argument Debtors pose concerning
-15-
1 abandonment is that unsecured creditors would receive only
2 pennies on the dollar from the $4,000 settlement payment.
3 However, Debtors provided no clear analysis or evidence to
4 support this contention, or to substantiate their assertion that
5 many of the creditors’ claims have in fact been otherwise paid or
6 were duplicates. Although it was their burden, and while the
7 settlement amount is indeed modest, Debtors did not show that the
8 $4,000 offered in settlement of the Malpractice Action is of
9 inconsequential value and benefit to the estate and the
10 creditors. Because Debtors did not prove that the Malpractice
11 Action was of inconsequential value and benefit to the estate,
12 the bankruptcy court did not abuse its discretion when it denied
13 the Debtors’ Motion for Abandonment.
14 IV.
15 The bankruptcy court abused its discretion
in approving the Settlement Agreement.
16
17 The bankruptcy court is vested with considerable discretion
18 in approving a bankruptcy estate or trustee’s proposed
19 compromises and settlements. Woodson v. Fireman's Fund Ins. Co.
20 (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1988). However, to
21 approve a compromise, the bankruptcy court must be satisfied that
22 its terms are "fair, reasonable and equitable." Martin v. Kane
23 (In re A & C Props.), 784 F.2d 1377, 1382 (9th Cir. 1986). In
24 assessing the reasonableness of a compromise, the Ninth Circuit
25 requires that the bankruptcy court evaluate:
26 (a) The probability of success in the litigation;
(b) the difficulties, if any, to be encountered in the
27 matter of collection; (c) the complexity of the
litigation involved, and the expense, inconvenience and
28 delay necessarily attending it; (d) the paramount
-16-
1 interest of the creditors and a proper deference to
their reasonable views in the premises.
2
3 Id. at 1382. Trustee, as the party seeking approval of the
4 compromise, bears the burden of proving to the bankruptcy court
5 that a proposed compromise is fair and reasonable in light of
6 these four criteria. Id.7 As we discuss below, while Trustee met her burden of showing
8 that the first three A&C Props. criteria were satisfied, Trustee
9 seemingly ignored the fourth criterion. There is also nothing in
10 the record to show that the creditors’ interests were given
11 proper consideration by the bankruptcy court.
12 A. Probability of Success in the Litigation. According to
13 Trustee, the Malpractice Claim was effectively dismissed by the
14 Superior Court in 2008. Debtors did not file the required
15 affidavit concerning their proposed expert witness and,
16 apparently, their witness did not meet the professional
17 requirements to offer expert testimony in Arizona. There were
18 also discrepancies in Debtors’ pleadings respecting which of
19 Christopher’s knees was injured and when. There is also a
20 possible statute of limitations defense to Debtors’ claims in the
21 Malpractice Action, in that some or all of Christopher’s injuries
22 may have been suffered, or at least affected, before the events
23 alleged in the Malpractice Action.
24 Moreover, Debtors admitted that they had consulted with
25 several attorneys who told them that they had little chance of
26 success in the Malpractice Action. Additionally, in Debtors’
27 opposition to the Settlement Motion, they seem to agree with
28 Trustee that there was little probability of success in the
-17-
1 litigation, by arguing that their dim prospects for success were
2 a proper basis to grant an abandonment of the Malpractice Action.
3 The bankruptcy court considered this prong of A&C Props. and
4 concluded:
5 Now, the experienced trustee attorney looked at this
medical malpractice case and looked at your inability
6 to be represented by a medical malpractice attorney,
even one who would take this case on a contingency and
7 said doesn’t look like there’s much there.
8 Hr’g Tr. 7:12-16.
9 On this record, the bankruptcy court could reasonably
10 conclude that continued pursuit of the Malpractice Action by
11 Trustee would be fruitless or, at most, that the prospects for
12 success in the Malpractice Action were speculative.
13 B. The difficulties, if any, to be encountered in the
14 matter of collection. Trustee argued that, even if successful,
15 it would be difficult to collect the judgment because of the
16 implications in the case of the Medicare Secondary Pay Act.
17 Trustee suggests, without contradiction from Debtors, that a
18 settlement at this late date and time would require additional
19 authority from Medicare, which apparently had provided
20 significant benefits to Debtors, in order to secure the release
21 of any recovered funds to Debtors as the injured party.
22 Regarding this prong, Debtors again acknowledged in their
23 opposition to the settlement that “collection would be burdensome
24 to the estate and expensive to prosecute” as part of their
25 argument for abandonment.
26 Based on these facts, the bankruptcy court could reasonably
27 conclude that collection of any recovery in the Malpractice
28 Action could be problematic.
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1 C. The complexity of the litigation involved, and the
2 expense, inconvenience and delay necessarily attending it. In
3 the Settlement Motion, and during the hearing, Trustee described
4 the long and difficult process involved in litigating a medical
5 malpractice claim in state court. Trustee concluded that it
6 would be prohibitively expensive to litigate the Malpractice
7 Action, would require extensive medical record requests, multiple
8 depositions, and the assistance of expensive expert witnesses.
9 Absent the availability of competent litigation counsel willing
10 to “front” such costs for a contingent fee, Trustee concluded
11 that this factor compelled a settlement.
12 Debtors’ opposition to the Settlement Motion repeated their
13 complaints that Trustee had not consulted them or obtained their
14 records. Of course, even if correct, this contention does not
15 address the question of the complexity of the litigation.
16 The bankruptcy court discussed the complexity of the
17 litigation, observing that:
18 In a medical malpractice case the important thing is
can you prove by the requisite standard of proof in the
19 state of Arizona that the medical professional
committed medical malpractice.
20
21 Hr’g Tr. 10:20-22. The court also noted the research that would
22 be required by Trustee to develop a case, acknowledged that
23 Trustee’s attorney was likely not qualified in medical
24 malpractice litigation, and observed that engagement of a
25 specialist attorney would likely be required, concluding “that
26 doesn’t seem to be [financially possible].” Hr’g Tr. 11:14.
27 All things considered, the bankruptcy court could reasonably
28 conclude from these facts that, absent a willing contingent-fee
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1 litigation attorney, which neither Debtors nor Trustee had
2 enlisted, prosecuting the Malpractice Action would be complex and
3 prohibitively expensive.
4 D. The interests of the creditors. Section 704(a)(1)
5 requires a chapter 7 trustee to “collect and reduce to money the
6 property of the estate for which such trustee serves . . . .” We
7 recently observed that the trustee’s “primary job” is to convert
8 estate property to money “so that those assets can be distributed
9 to the estate’s creditors.” In re KVN Corp., ___ B.R. ___, 2014
10 WL 3738655, at *3 (9th Cir. BAP July 29, 2014) (citing U.S. Tr.
11 v. Joseph (In re Joseph), 208 B.R. 55, 60 (9th Cir. BAP 1997)).
12 As explained in the handbook provided to chapter 7 trustees by
13 the U.S. Trustee program,
14 A chapter 7 case must be administered to maximize and
expedite dividends to creditors. A trustee shall not
15 administer an estate or an asset in an estate where
the proceeds of liquidation will primarily benefit the
16 trustee or the professionals, or unduly delay the
resolution of the case. The trustee must be guided by
17 this fundamental principle when acting as trustee.
Accordingly, the trustee must consider whether
18 sufficient funds will be generated to make a
meaningful distribution to unsecured creditors,
19 including unsecured priority creditors, before
administering a case as an asset case. 28 U.S.C.
20 § 586.
21 In re KVN Corp., at *4 (citing U.S. DOJ Exec. Office for U.S.
22 Trs., Handbook for Chapter 7 Trustees at 4–16 (2012) (emphasis
23 added)). Whether the trustee’s liquidation of an asset will
24 result in a “meaningful distribution” to creditors is a question
25 of fact. Id., at *4.11
26
11
27 Of course, the compensation and expenses of the trustee
and her professionals are administrative expenses and, as such,
28 continue...
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1 In reviewing a bankruptcy court’s decision concerning a
2 proposed compromise by the estate, we are guided by the lessons
3 in the case law. First, bankruptcy law traditionally favors
4 compromise, and not litigation for its own sake. Blair v.
5 Peterson (In re Blair), 538 F.2d 849, 851 (9th Cir. 1976).
6 Second, the bankruptcy court should usually give deference to a
7 trustee's exercise of business judgment. Goodwin v. Mickey
8 Thompson Entm't Grp., Inc. (In re Mickey Thompson Entm't Grp.,
9 Inc.), 292 B.R. 415, 420 (9th Cir. BAP 2003). And third, while
10 the interests and views of the creditors must be considered, they
11 are not controlling. In re A&C Props., 784 F.2d at 1382 (citing
12 In re The Gen. Store of Beverly Hills, 11 B.R. 539, 541 (9th Cir.
13 BAP 1981)). In applying these principles in this appeal, we
14 observe: (1) denial of Trustee’s Settlement Motion does not
15 necessarily mean that the bankruptcy estate will continue to
16 litigate the Malpractice Action; (2) while the bankruptcy court
17 and we should defer to Trustee’s exercise of business judgment,
18 we may not abdicate our duty of requiring compliance with the
19 law; and (3) while the creditors’ interests will not always
20 dictate the propriety of compromise decisions, they certainly
21
22
11
...continue
23 are entitled to priority of payment. §§ 503(b); 507(a)(2). As a
result, there conceivably could be cases where the distribution
24
of estate funds solely to pay the professional fees of the
25 trustee and her counsel is, in the words of the handbook,
“meaningful.” For example, meaningful benefit other than payment
26 may accrue to creditors. But where there is no evidence of
27 monetary benefit to non-administrative creditors, we cannot infer
such benefit, and appropriate findings of creditor benefit based
28 on admissible evidence and clear analysis are critical.
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1 must be considered by the bankruptcy court.
2 As explained above, primarily based upon the undisputed
3 facts, Trustee satisfied the burden of persuading the bankruptcy
4 court as to the first three A&C Props. factors. However, while
5 we have scoured the record to find any relevant evidence, Trustee
6 simply made no showing, and the bankruptcy court made no
7 finding,12 as to the impact of the proposed settlement on the
8 interests of the unsecured creditors. While we will defer to a
9 trustee’s good judgment, and to the exercise of discretion by the
10 bankruptcy court, we can not affirm the bankruptcy court’s
11 decision to approve what Trustee concedes is a settlement for
12 “nuisance value,” without knowing how, or if, creditors will
13 benefit from that settlement.
14 On this sparse record, it seems likely that the $4,000 in
15 settlement funds will be consumed in paying Trustee’s commission
16 and the fees and costs of Trustee’s counsel.13 The Settlement
17
18 12
The lack of fact findings by the bankruptcy court is not
19 always fatal to its decision. See Commercial Paper Holders v.
Hine (Matter of Beverly Hills Bancorp), 752 F.2d 1334, 1338 (9th
20 Cir. 1984) (“Although remand generally is required for findings
of fact, remand is not necessary when the trial court fails to
21
make such findings and the facts in the record are undisputed.”).
22 However, the facts needed to understand whether creditors are
benefitted by the proposed settlement are not otherwise found in
23 the record.
24 13
Recall, before turning her attention to the Malpractice
25 Action, Trustee had filed a no-asset report in this bankruptcy
case. Neither the appellate record, nor the bankruptcy court’s
26 docket, contains any information to show that Trustee has been
27 able to liquidate any other assets that may be available to
distribute to creditors, such that using the $4,000 to pay
28 continue...
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1 Motion is conspicuously silent concerning how the settlement will
2 impact the creditors. And while creditors were given notice of
3 Trustee’s proposed compromise of the Malpractice Action, no
4 creditors responded to either oppose or support the settlement.
5 Moreover, Trustee’s counsel made no reference to the creditors’
6 interests at the hearing. At the hearing, Debtors addressed this
7 point, and the bankruptcy court seemed to acknowledge that the
8 $4,000 in settlement funds would be used to pay administrative
9 expenses:
10 RHONDA: The only people that would be paid out of that
$4,000 is [Trustee] and [Trustee’s Counsel].
11
THE COURT: Well, that’s true.
12
13 Hr’g Tr. 6:16-18.
14 Presumably because Trustee did not address how the proposed
15 settlement would impact the interests of the unsecured creditors,
16 the bankruptcy court made no finding concerning the fourth A&C
17 Props. criterion. Although the case law does not require the
18 bankruptcy court to afford preclusive weight to the interests and
19 views of the unsecured creditors, Ninth Circuit precedent does
20 mandate that the creditors interests be considered in deciding
21 whether to approve a compromise. That did not occur here, and we
22 are therefore compelled to conclude that the bankruptcy court did
23 not properly apply the law and, thus, abused its discretion when
24 it granted Trustee’s Settlement Motion. A remand is necessary to
25 allow Trustee, and the bankruptcy court, to consider this
26
13
27 ...continue
administrative expenses will inure to the benefit of unsecured
28 claimants.
-23-
1 important factor.
2 CONCLUSION
3 We AFFIRM those provisions of the bankruptcy court’s order
4 denying Debtors’ Second Motion to Dismiss the bankruptcy case,
5 and denying Debtors’ Motion for Abandonment. However, we VACATE
6 the bankruptcy court’s decision to grant Trustee’s Settlement
7 Motion and approve the compromise of the Malpractice Action, and
8 REMAND this matter to the bankruptcy court for further
9 proceedings consistent with this decision.14
10
11
12
13
14
15
16
17
18
19
20
21
22
23
14
We do not think it inconsistent both to affirm the
24
bankruptcy court’s decision to deny abandonment of the
25 Malpractice Action, and to vacate the court’s decision to approve
the settlement. As explained above, Debtors failed to satisfy
26 their burden of proving abandonment was proper, and Trustee
27 failed to satisfy her burden of showing the compromise was fair,
reasonable and equitable according to the factors established in
28 binding precedent.
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