In re: Sawtelle Partners, LLC

FILED
JUL 1 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-18-1032-TaLS
SAWTELLE PARTNERS, LLC, Bk. No. 2:16-bk-21234-BR
Debtor.
SATELLITE CAPITAL, LLC,
Appellant,
v. MEMORANDUM*
EMACIATION CAPITAL, LLC; SAWTELLE
PARTNERS, LLC; ETHAN MARGALITH; PETER
J. MASTAN, CHAPTER 7 TRUSTEE,
Appellee.
Argued and Submitted on May, 23, 2018
at Pasadena, California
Filed – July 1, 2019
Appeal from the United States Bankruptcy Court
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
for the Central District of California
Honorable Barry Russell, Bankruptcy Judge, Presiding
Appearances: David Shemano of ShemanoLaw argued for appellant
Satellite Capital, LLC; Ronald N. Richards of the Law
Offices of Ronald Richards & Associates, APC argued for
appellee Emaciation Capital, LLC.
Before: TAYLOR, LAFFERTY, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Chapter 111 Trustee Peter J. Mastan entered into a settlement (the
“Settlement Agreement”) with Emaciation Capital, LLC (“Emaciation”), a
party asserting a senior lien against real property owned by debtor
Sawtelle Partners, LLC. The Settlement Agreement resolved all of the
estate’s claims against Emaciation and all of Emaciation’s claims against its
real property collateral and the bankruptcy estate. Pursuant to the
Settlement Agreement, Emaciation made a payment of $108,000, the
Trustee agreed to transfer title to the property to Emaciation or its assignee,
and Emaciation agreed that its secured claim would be “deemed
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2
disallowed” or withdrawn with prejudice. The Settlement Agreement
expressly provided that the agreement regarding the secured claim would
not have issue preclusive effect. The bankruptcy court approved the
settlement over opposition that focused on the amount of payment and the
value of the property. The bankruptcy court found that the settlement was
in the best interest of the estate and authorized the Trustee to consummate
the transaction.
Both the Settlement Agreement and the order approving the
Settlement Agreement were silent as to the continued efficacy of the
Emaciation lien. As a result, once the settlement dust settled, the junior lien
holder, Satellite Capital, LLC (“Satellite”), filed a state court action seeking
to quiet title to the real property. The state court complaint contained three
causes of action; two claimed that the Settlement Agreement rendered the
Emaciation lien invalid. The third sought a declaratory judgment based on
a state law theory.
Pandemonium followed. Emaciation engaged in a full-throated
defense. It removed the quiet title action to the bankruptcy court and
sought judgment in its favor. But it also sought relief through a Civil
Rule 60 motion and requested either that the settlement order be expunged
or that it be modified to make clear that lien avoidance did not result.
The Trustee opposed the Civil Rule 60 motion and focused largely on
the effort to expunge the settlement. Satellite also opposed, arguing that
3
Civil Rule 60 relief was not appropriate. At the hearing, the bankruptcy
court chose to “clarify” its prior order approving the settlement. It
provided no Civil Rule 60-specific basis for its ruling.
Later, the bankruptcy court also granted relief in favor of Emaciation
in the withdrawn adversary proceeding. The record suggests that it relied
largely on its previous “clarification” of the order approving the Settlement
Agreement.
Because the bankruptcy court failed to identify the correct legal
standard and because none of Emaciation’s suggested legal bases justify
reconsideration, we REVERSE.
FACTS
In April 2016, Debtor filed a chapter 11 petition. Its sole asset was real
property located on Sawtelle Boulevard in Los Angeles (the “Property”)
which it valued at $9,000,000. In November 2016, Peter Masten was
appointed as the chapter 11 trustee.
Emaciation and Satellite entered the case postpetition. Satellite
acquired an interest in a junior trust deed and claim scheduled at about
$3,100,000. Emaciation acquired an interest in a senior trust deed and claim
scheduled at about $9,300,000. The Emaciation debt was owed by Debtor,
Starving Students (an affiliate of Debtor), and their common owner, Ethan
Margalith, and apparently arose out of a refinancing.
The Trustee initially tried to sell the Property; those efforts faltered.
4
He eventually objected to Emaciation’s claim on various theories and
argued that there was a potential fraudulent transfer claim.
Satellite joined in the attack on Emaciation. It emphasized that
Emaciation refused to provide a payoff and sought disallowance of
postpetition interest and fees.
Emaciation fought back; it sought stay relief, alleging that the
Property was worth $12,200,000, that it had a $12,000,000 secured claim,
and that relief was warranted under § 362(d)(1), (d)(2)(A), and (d)(3). After
argument, the bankruptcy court continued the hearing on Emaciation’s
stay relief motion so it could be heard alongside the claim objection.
The Trustee and Emaciation then agreed to settle their disputes, and
the Trustee filed a motion to approve the Settlement Agreement. He
described the material terms of the compromise as: Emaciation paying
$108,000 to settle the fraudulent transfer claim; the Trustee assigning to
Emaciation or its assignee the estate’s interest in the Property; Emaciation’s
claim being deemed disallowed; and the parties providing mutual releases.
The Trustee attached the Settlement Agreement. The recitals state
that the Parties “desire to fully, finally and forever settle their disputes
regarding the Sawtelle Property, including the Emaciation Lien and
Objection to Claim, and release any and all claims that they may have, now
or in the future, against each other relating in any way to the Bankruptcy
Case, Emaciation Lien, Fraudulent Transfer Claim, and allegations
5
contained in, or that could have been alleged in the Stay Relief Motion or
Objection to Claim, except as specifically set forth in this Agreement.”
Satellite, in what it claims was an intentional decision, did not object
to the settlement approval motion. But the Debtor and Mr. Margalith did;
Debtor argued that the Trustee’s marketing efforts were not sufficient and
that the relevant factors for approval of the settlement were not met. The
Trustee, in reply, asserted that his marketing efforts were extensive, that
interest in the Property was significant, but that the offers were not
sufficient to cover the as-asserted secured claims.
At a hearing, the bankruptcy court approved the settlement over
Debtor and Mr. Margalith’s objection; it then entered the Trustee’s
proposed order (the “Settlement Order”).
The Settlement Order states, as relevant here:
1. Adequate notice of the Motion and the hearing on
the Motion was provided to all interested parties;
2. All opposition to the Motion is overruled;
3. The Motion is granted in its entirety;
4. The Agreement, being in the best interests of the
estate, is hereby approved and the Trustee is authorized to
execute the Agreement and consummate the transactions
contemplated by the Agreement;
5. The Trustee is authorized to settle the fraudulent
transfer claim against Emaciation for an immediate payment of
$108,000 on the terms set forth in the Agreement;
6. The Trustee is authorized to assign the Estate’s
interest in the Property to Emaciation or Satellite Down, LLC,
6
as Emaciation’s assignee, on the terms set forth in the
Agreement; [and]
7. The Trustee is authorized to execute any and all
documents necessary to effectuate the settlement[.]
The Settlement Order was not appealed.
Once the Settlement Order became final, Satellite promptly brought a
state court quiet title action concerning the Property. It alleged, in part, that
because Emaciation’s secured claim was disallowed through the claims
allowance process by the Settlement Agreement, Satellite was entitled to a
declaration that the first trust deed was extinguished and void under
§ 506(d) and that Satellite’s trust deed was the senior, and only, lien on the
Property.
In November 2017, Emaciation removed the quiet title action to the
bankruptcy court. It also brought an action against the Trustee and Satellite
seeking rescission of the Settlement Agreement.
That same month, the case converted to chapter 7; the Trustee
remained in place.
Emaciation’s Civil Rule 60(b) motion. In December 2017, Emaciation
filed its Civil Rule 60(b) motion. It argued that clarification or vacatur of
the Settlement Order was appropriate under Civil Rule 60(b)(1) and (b)(6).
As to Civil Rule 60(b)(1), it argued that the quiet title action was an unfair
surprise because it could not have anticipated that Satellite would raise the
arguments it did. In a footnote, it argued that Civil Rule 60(b)(6)’s catch-all
7
provision also might apply.
In opposition, Satellite argued that Emaciation cited no caselaw
supporting its assertion that Civil Rule 60(b) relief was appropriate in these
circumstances. It conceded that Emaciation could raise merits-based
arguments in the quiet title action, but it contended that the reconsideration
motion should be denied. The Trustee also opposed, arguing that
Emaciation had not shown cause to vacate the Settlement Order or to
rescind the Settlement Agreement.
In its reply, Emaciation clarified that it sought clarification of the
Settlement Order; it clarified in a footnote that it was not seeking Civil
Rule 60(a) relief.
At the hearing, when asked, the Trustee’s counsel indicated that the
Trustee was likely indifferent about the continued existence of the lien.
Hr’g Tr. (Jan. 19, 2018) at 7:8–19, 8: (“Well, I don’t know if the Trustee had
an intent other than to take the money . . . . Well . . . yes, I think it very well
could be [unusual if Emaciation voluntarily gave up its lien], your honor,
but I think as we pointed out, we didn’t have an opposition to what they
were saying. What we were saying is we -- our intent -- we didn’t have an
intent one way or the other. We just did the deal. Whatever their intent,
their intent was.”). The bankruptcy judge then granted the motion.
On January 19, 2018, the bankruptcy court entered its order (the
“Modification Order”). It read:
8
The Court . . . has determined that the [Settlement Order]
. . . shall be modified to reflect the understanding and intent of
the Court when it approved the Compromise which is the
subject of the [Settlement Order] and the instant Motion.
As the Court stated on the record on January 9, 2018:
. . . I will prepare – modify my order to
say what I thought what was
happening, namely, that any waiver of
the claim against the estate was only a
claim of any deficiency after the
foreclosure. . . . It would have been
idiotic for the other side to basically be
giving up their claim because they can’t
foreclose if you don’t have an
underlying claim. . . . [t]he order is
going to be modified to say that —
which was my understanding of what
was going on that they’re waiving any
claims against the estate that that would
be only after they foreclosed in the
terms of any deficiency. That’s what the
intent of my order was.
Accordingly, the Motion is HEREBY GRANTED and the
[Settlement Order] is HEREBY MODIFIED to clarify that
Emaciation Capital, LLC only released its claim against the
estate, not its first priority lien against the [Property], and the
waiver of any claim by Emaciation Capital, LLC against the
estate, as contemplated by the subject Compromise, is limited
to any deficiency that may exist after foreclosure of the subject
real property.
9
Satellite timely filed its notice of appeal.
Related events. A few related events provide some context to this
appeal.
First, the Trustee also appealed the Modification Order. He
eventually entered into a second settlement agreement with Emaciation. It
provided that Emaciation would have a $28,931.03 administrative claim,
that Emaciation would dismiss the Trustee from its adversary proceeding
and, in exchange, the Trustee would dismiss his cross-appeal. The Trustee
also “acknowledged” that the “Parties” never intended to impair
Emaciation’s lien. The bankruptcy court approved the settlement
agreement by order. The Trustee then dismissed his cross-appeal.
Second, in Satellite’s quiet title action, the bankruptcy court denied
Satellite’s motion to remand or grant a temporary restraining order,
expunged Satellite’s lis pendens, denied Satellite’s motion for
reconsideration, granted Emaciation’s motion to dismiss the quiet title
action, and granted Emaciation’s motion for attorney’s fees. Satellite
appealed, and Emaciation elected to have the District Court handle the
appeal. The District Court has stayed its appeal pending our decision.
Third, Emaciation foreclosed on and later sold the Property.2
2
As a motions panel, we previously denied Emaciation’s motion to dismiss,
which was based on the Property’s sale and Satellite’s non-opposition to the initial
settlement motion. Although we are not bound by that decision, we see no reason to
(continued...)
10
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and
§ 157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.3ISSUES
Did the bankruptcy court abuse its discretion in granting the
reconsideration motion?
STANDARD OF REVIEW
We review for an abuse of discretion a bankruptcy court’s decision to
grant or deny a reconsideration motion. Weiner v. Perry, Settles & Lawson,
Inc. (In re Weiner), 161 F.3d 1216, 1217 (9th Cir. 1998); Tennant v. Rojas (In re
Tennant), 318 B.R. 860, 866 (9th Cir. BAP 2004).
There are two steps involved in an abuse of discretion review.
United States v. Hinkson, 585 F.3d 1247 (9th Cir. 2009) (en banc). The “first
step of our abuse of discretion test is to determine de novo whether the trial
court identified the correct legal rule to apply to the relief requested.” Id. at
1261–62. If the trial court failed to do so, it abused its discretion. Id. at 1262.
2
(...continued)
revisit it.
3
In an unauthorized, post-argument brief, Emaciation for the first time argues
that we lack jurisdiction because the Modification Order is not final. It notes that final
orders end litigation on the merits, Civil Rule 60 orders “vacating or reconsidering”
judgments without more are interlocutory, and the parties are still litigating in the
District Court appeal. Emaciation is wrong. The Modification Order ended the litigation
in the bankruptcy case; it did not vacate the Settlement Order or require any further
proceedings related to it. And federal judgments are final even when on appeal.
11
The “second step . . . is to determine whether the trial court’s application of
the correct legal standard was (1) illogical, (2) implausible, or (3) without
support in inferences that may be drawn from the facts in the record.” Id.(internal quotation marks omitted).
DISCUSSION
Underlying this appeal is a dispute between Emaciation and Satellite
about what the Settlement Agreement means. And the parties sought
resolution in a variety of ways. Satellite filed a quiet title action; Emaciation
sought reconsideration, dismissal of the quiet title action, and rescission of
the Settlement Agreement. Emaciation prevailed in the first two methods,
and Satellite has appealed the relevant orders.
In this appeal, we have jurisdiction only over the reconsideration
order because Emaciation opted to have the District Court hear the appeal
from the order dismissing the quiet title action. This constrains our range of
appellate movement. For instance, assuming the bankruptcy court correctly
dismissed the quiet title action on the merits (i.e., by interpreting the
Settlement Agreement in accordance with state law), then any error in
granting the reconsideration motion (i.e., by rewriting the Settlement
Agreement) would be harmless.4 But we lack the ability to so determine;
4
Before oral argument, we issued an order directing the parties to come
prepared to discuss at oral argument the practical consequences of the bifurcated appeal.
BAP Dkt. 39. Both parties took this as an invitation to submit additional papers. Under
(continued...)
12
thus, we proceed to the merits.
A. The bankruptcy court abused its discretion when it entered
the Modification Order.
In the Modification Order, the bankruptcy court concluded that the
Settlement Order “shall be modified to reflect the understanding and intent
of the Court when it approved the Compromise . . . .” The bankruptcy
court never identified the source of its authority. Even Emaciation concedes
this on appeal. Appellee’s Answering Br. at 49 (“The fact that Judge Russell
did not state on the record the statutory basis for his ruling is irrelevant . . .
.”). As noted above, a failure to identify the correct legal standard amounts
to an abuse of discretion.
Given the motion’s context, identifying the legal standard is
important. The bankruptcy court granted the Trustee’s motion to approve a
settlement agreement under Rule 9019. That rule provides: “On motion by
the trustee and after notice and a hearing, the court may approve a
4
(...continued)
the auspices of Federal Rule of Appellate Procedure (“FRAP”) 28(j), Satellite submitted
a copy of the District Court’s order staying the District Court appeal pending resolution
of this appeal. Emaciation, also ostensibly under FRAP 28(j), filed another reply.
To start, the Panel did not invite additional papers. It invited discussion at oral
argument. Second, Federal Rule of Appellate Procedure 28(j) does not even apply;
Rule 8014 governs. That said, Rule 8014(f) is analogous to FRAP 28(j). Third,
Rule 8014(f) states that the body of the submission must not exceed 350 words.
Emaciation’s argumentative paper exceeds this. Accordingly, we strike Emaciation’s
filing at BAP Dkt. 41. We also strike Emaciation’s filing at BAP Dkt. 46; it does not refer
to any pertinent or significant authority.
13
compromise or settlement.” Fed. R. Bankr. P. 9019(a). When deciding
whether to grant a motion to approve a settlement, the bankruptcy court
has considerable latitude. Woodson v. Fireman's Fund Ins. Co. (In re
Woodson), 839 F.2d 610, 620 (9th Cir. 1998). But that discretion “is not
unlimited.” Id. A compromise must be “fair and equitable.” Id. The four
relevant factors in accessing fairness and equity are: “(a) The probability of
success in the litigation; (b) the difficulties, if any, to be encountered in the
matter of collection; (c) the complexity of the litigation involved, and the
expense, inconvenience and delay necessarily attending it; (d) the
paramount interest of the creditors and a proper deference to their
reasonable views in the premises.” Martin v. Kane (In re A & C Props.),
784 F.2d 1377, 1381 (9th Cir. 1986). The analysis focuses on the fairness and
equity from the perspective of the bankruptcy estate.
Emaciation sought reconsideration or vacatur of the order granting
the Trustee’s motion approving the settlement. Emaciation did not discuss
the A & C Properties factors; it also did not argue that the bankruptcy court
erred in granting the motion or should have denied the motion instead.
Instead, Emaciation sought an interpretation of the Settlement Agreement.
When it granted the reconsideration motion, the bankruptcy court neither
stated that granting the motion was error nor discussed the A & C
Properties factors.
As a result, we confront a “reconsideration” decision that is far afield
14
from the initial decision to “approve or disapprove” the Settlement
Agreement. Viewing Emaciation’s reconsideration request through the lens
of the A & C Properties factors confirms this. Emaciation sought clarification
that the Settlement Agreement did not extinguish its lien on the Property;
but given the Trustee’s agreement to quitclaim the Property to Emaciation
or its assignee and to settle the claim objection in exchange for $108,000 and
the disallowance of Emaciation’s claim against the estate, the Trustee and
estate would be indifferent as to whether Emaciation’s lien still
encumbered the Property or was extinguished. The Trustee’s counsel, at
the hearing on Emaciation’s motion, clearly expressed this indifference.
Emaciation requested clarification, then, about a non-essential and
irrelevant component of the deal from the Trustee or estate’s perspective.
More importantly, this clarification did not affect the propriety of the
bankruptcy court’s initial evaluation of the relevant A & C Properties
factors. Approval or disapproval of the Settlement Agreement did not turn
on the lien’s extinguishment.
On appeal, Satellite contends that the bankruptcy court
impermissibly altered the Settlement Agreement. Emaciation seems to
concede alteration, but it argues that bankruptcy courts may do so on
reconsideration. Put differently, Emaciation supposes that an ability to
modify an order approving a settlement agreement also allows
modification of the underlying settlement agreement.
15
We disagree. A settlement agreement and a bankruptcy court’s order
granting a motion to approve a settlement agreement are different.
In Kokkonen v. Guardian Life Insurance Company of America, 511 U.S.
375, 376–79 (1994), the Supreme Court considered whether a district court
had ancillary jurisdiction to enforce a settlement agreement that resulted in
dismissal of a federal lawsuit. No, it concluded. Id. at 382. When
considering the component of ancillary jurisdiction that allows a court to
vindicate its own orders, the Supreme Court stated: “The judge’s mere
awareness and approval of the terms of the settlement agreement do not
suffice to make them part of his [or her] order.” Id. at 381.5
In Sea Hawks Seafood, Inc. v. State of Alaska (In re Valdez Fisheries
Development Association, Inc.), 439 F.3d 545, 546 (9th Cir. 2006), the
Ninth Circuit considered whether a bankruptcy court, having approved a
5
In Kokkonen, the Supreme Court suggested a way for litigants to avoid its
holding:
The situation would be quite different if the parties’ obligation to comply
with the terms of the settlement agreement had been made part of the
order of dismissal—either by separate provision (such as a provision
“retaining jurisdiction” over the settlement agreement) or by
incorporating the terms of the settlement agreement in the order. In that
event, a breach of the agreement would be a violation of the order, and
ancillary jurisdiction to enforce the agreement would therefore exist. That,
however, was not the case here.
511 U.S. at 381. Here, the Settlement Order did not retain jurisdiction over the
Settlement Agreement or incorporate the terms of the Settlement Agreement.
16
settlement agreement, had jurisdiction to interpret that settlement
agreement in an adversary proceeding filed after case closure and
dismissal. In concluding that the bankruptcy court did not have such
jurisdiction, the Ninth Circuit addressed the State of Alaska’s attempts to
distinguish Kokkonen. First, the State of Alaska argued “that Kokkonen does
not apply because the settlement agreement here required and received the
bankruptcy court’s approval.” Id. at 549. Not so, the Ninth Circuit held,
relying on the above-quoted language from Kokkonen. Id. (quoting
Kokkonen, 511 U.S. at 381). Next, the State of Alaska contended that
Kokkonen involved enforcing a settlement agreement while it sought
interpretation of a settlement agreement. The Ninth Circuit again
disagreed: “So far as the application of the Kokkonen principle is concerned,
we find no relevant difference between a proceeding to enforce a
settlement agreement and one to interpret it.” Id. at 550.
Emaciation thus improperly conflates the Settlement Order and the
Settlement Agreement. They are different. As a result, an ability to modify
the Settlement Order does not necessarily allow the bankruptcy court to
modify the Settlement Agreement.
That said, Emaciation rightly observes that we may affirm for any
reason in the record, COM–1 Info, Inc. v. Wolkowitz (In re Maximus
Computers, Inc.), 278 B.R. 189, 194 (9th Cir. BAP 2002), and that we may
ignore harmless error. The question, then, is whether any of Emaciation’s
17
proffered justifications for the Modification Order warrant affirmance.
They do not.
B. Emaciation does not provide a sufficient legal justification for
the Modification Order.
Civil Rule 60(b). On appeal, Emaciation argues that it was entitled to
relief under Civil Rule 60(b). We disagree. In its appellate responsive brief,
Emaciation refers generally to Civil Rule 60(b)(1) and (b)(6), but it never
distinctly states the theory it relies on or discusses the relevant legal
standard for either; instead, it expounds on how it “demonstrated” in its
underlying motion that it could not anticipate what Satellite would do.
Appellee’s Answering Brief at 50–52. We read this as Emaciation reifying
its underlying Civil Rule 60(b)(1) argument.
Civil Rule 60(b), applied in bankruptcy proceedings by Rule 9024,
provides: “On motion and just terms, the court may relieve a party . . . from
a . . . order . . . for the following reasons: (1) mistake, inadvertence, surprise,
or excusable neglect . . . .” Fed. R. Civ. P. 60(b). Emaciation sought to use
the “surprise” prong. It was surprised, it contends, because it could not
have anticipated that Satellite would interpret the Settlement Agreement as
it did and then bring a state court action based on that interpretation.
But a failure to anticipate the actions of a third party does not qualify
as “surprise” under Civil Rule 60(b)(1). To start, Emaciation cites no
caselaw discussing either the “surprise” prong or establishing that a party’s
18
failure to foresee how a third party may interpret an agreement or
judgment qualifies as Civil Rule 60(b)(1) “surprise”. And Satellite, to its
credit, cites authority where courts have rejected this proposition.6 But
Satellite’s authority is out of circuit, and thus we acknowledge that it is
persuasive but not binding.
But Emaciation also advances no argument that supports its reliance
on Civil Rule 60(b)(1) and its conception of “surprise.” Part of Emaciation’s
conundrum in the Civil Rule 60(b)(1) context is that it, understandably,
refuses to concede that Satellite’s position is correct. Emaciation signed the
Settlement Agreement based on its understanding of the agreement’s legal
effect; Satellite had a different take and brought suit. If Emaciation’s
interpretation is right and it prevails, then reconsideration was
unwarranted. But if Satellite’s interpretation is correct, then Emaciation’s
misapprehension of the Settlement Agreement is not a surprise so much as
it is a mistake.
And the Ninth Circuit has held that Civil Rule 60(b)(1)’s mistake
6
White v. New Hampshire Dep’t of Employment Sec., 679 F.2d 283, 286 (1st Cir. 1982)
(“Finally, NHDES seeks review of the district court's refusal to vacate the decree under
Fed. R. Civ. P. 60(b)(1), which provides inter alia for relief from judgment on the ground
of ‘surprise.’ NHDES argues that it was surprised by the motion for attorneys’ fees,
believing that entry of the consent decree (which did not mention fees) ended the
litigation. The court’s conclusion that plaintiff did not waive his right to seek fees, see
note 2, supra, goes far toward rebutting NHDES’s claim of unfair surprise. Moreover,
the court could reasonably have concluded that such surprise as there might have been
did not rise to a level which would justify vacating the decree itself.”).
19
prong does not apply to this type of mistake, whether committed by a
party or its counsel:
We agree that Rule 60(b)(1) is not intended to remedy the
effects of a litigation decision that a party later comes to regret
through subsequently-gained knowledge that corrects the
erroneous legal advice of counsel. For purposes of subsection
(b)(1), parties should be bound by and accountable for the
deliberate actions of themselves and their chosen counsel.
Latshaw v. Trainer Wortham & Co., 452 F.3d 1097, 1101 (9th Cir. 2006).
Further, Latshaw favorably quotes United States v. Bank of New York, 14 F.3d
756, 759 (2d Cir. 1994): “When a party makes a deliberate, strategic choice
to settle, she cannot be relieved of such a choice merely because her
assessment of the consequences was incorrect.” Id. at 1101.
As a result, we conclude that to the extent the bankruptcy court
granted Emaciation’s motion based on Civil Rule 60(b)(1) and “surprise”, it
abused its discretion.
Emaciation also argued in its underlying reconsideration motion that
Civil Rule 60(b)(6) justified relief. But it does not raise this argument in its
answering appellate brief. This works a waiver. United States v. Dreyer,
804 F.3d 1266, 1277 (9th Cir. 2015) (en banc) (“Generally, an appellee
waives any argument it fails to raise in its answering brief.”). And this is
not an exceptional case where we will exercise our discretion to consider a
waived issue. Cf. id. at 1277–78.
In sum, we conclude that the bankruptcy court erred to the extent it
20
granted the motion based on Civil Rule 60(b)(1)—the only Civil Rule 60
section that Emaciation relies on.
Civil Rule 60(a). Satellite argues on appeal that Civil Rule 60(a) does
not justify the order. But Emaciation never argued in its underlying motion
that Civil Rule 60(a) relief was appropriate. To the contrary, it clarified in
its underlying reply papers that it was not seeking relief under Civil Rule
60(a), a point it reiterates on appeal. Appellee’s Answering Br. at 35
(“Therefore, the entire line of cases cited for the proposition that Rule 60(a)
cannot be used to modify or alter a settlement agreement is entirely
irrelevant to this appeal since Rule 60(a) did not form the basis of
Emaciation’s request. Nor did the Bankruptcy Court state that its ruling
was based on the type of mistake or error codified in Rule 60(a).”). Since
Emaciation has intentionally relinquished any reliance on Civil Rule 60(a),
we discuss it no more.
Inherent authority. Emaciation argues that bankruptcy courts have
the authority to modify previously-approved settlement agreements under
their inherent authority and § 105. As courts of equity, Emaciation
contends, bankruptcy courts may reconsider, modify, or vacate their
previous orders independent of Civil Rule 60. Emaciation relies on three
cases. None support affirming the Modification Order.
We first consider Black Farmers Discrimination Litigation, 950 F. Supp.
2d 196 (D.D.C. 2013). Emaciation argues that it stands for the proposition
21
that Civil Rule 60(b) allows courts to modify or clarify underlying
settlement agreements. This case, however, is readily distinguishable. First,
it concerns a consent decree, and the parties seeking modification wanted
to augment the procedures laid out in the underlying order. Id. at 197–200. It
thus did not concern a Rule 9019 settlement agreement approved by a
bankruptcy court that did not incorporate the terms of the settlement
agreement into the order. Second, in any event, the district court in that
case denied the Civil Rule 60 motion because the plaintiffs failed to show
cause under Civil Rule 60(b)(5); accordingly, the district court declined to
“disregard[] the terms of the carefully negotiated Settlement Agreement
. . . .” Id. at 201.7 Having already concluded that Emaciation has not shown
sufficient cause for Civil Rule 60(b) relief, we see no need to consider this
case further. In short, Black Farmers Discrimination Litigation is a Civil
Rule 60 case, not an inherent authority case.
We consider the next two cases—A & A Sign Co. v. Maughan, 419 F.2d
1152 (9th Cir. 1969) and Dye v. Sachs (In re Flashcom), BAP No.
7
Id. (“Because the plaintiffs are seeking to alter terms that were bargained for by
the parties and inscribed in the Settlement Agreement, in the absence of significantly
changed circumstances, their motion cannot be granted without the consent of the
defendant.”). See also Rufo v. Inmates of Suffolk Cty. Jail, 502 U.S. 367, 378 (1992) (“There is
no suggestion in these cases that a consent decree is not subject to Rule 60(b). A consent
decree no doubt embodies an agreement of the parties and thus in some respects is
contractual in nature. But it is an agreement that the parties desire and expect will be
reflected in, and be enforceable as, a judicial decree that is subject to the rules generally
applicable to other judgments and decrees.”).
22
CC–13–1311–KuDaKi, 2014 WL 4923073 (9th Cir. BAP Oct. 1, 2014)
—together.
In Maughan, a Bankruptcy Act case, a trustee entered into a stipulated
settlement agreement that was approved. 419 F.2d at 1154. Later, the
trustee filed a motion to correct the stipulation, which was granted. Id. On
appeal, the Ninth Circuit held: “In the exercise of its inherent equitable
powers, the bankruptcy court has authority to modify or vacate its own
interlocutory orders.” Id. at 1155 (citing School Dist. No. 5 v. Lundgren,
259 F.2d 101 (9th Cir. 1958)). In a footnote to this text, it rejected the
trustee’s reliance on Civil Rule 60(b) because that rule “applies only to final
orders and judgments.” Id. at 1155 n.2. Because the approval order was
interlocutory, the decision to vacate the “prior order approving the
stipulation fell well within the discretionary authority committed to the
court.” Id. at 1155.
Having concluded that the bankruptcy court could vacate its
interlocutory order approving the settlement, the Ninth Circuit then held
that the bankruptcy court erred in modifying the agreement. Id. First, it
affirmed that a bankruptcy court “in exercise of its equitable powers can set
aside a stipulation entirely if the interests of justice so require and if the
parties can be restored to the positions they occupied before they entered
the stipulation.” Id. Despite that power, however, the bankruptcy court
“cannot remove a material part of the stipulation over the objection of one
23
of the parties to it and enforce the rest of the agreement.” Id. Second, the
Ninth Circuit noted that the order “could have been sustained had there
been findings supported by substantial evidence warranting reformation of
the stipulation.” Id. at 1156.
In In re Flashcom, two parties entered into a global settlement
agreement and received bankruptcy court approval of that agreement. Id.
at *2. Some six years later, one of the parties sought entry, by the
bankruptcy court, of a $9,000,000 stipulated judgment provided for by the
settlement agreement because the other party allegedly failed to make an
either $50,000 or $62,500 final installment payment after already paying
$750,000. The bankruptcy court declined to enforce the settlement
agreement and enter the stipulated judgment; it held that entry of the
stipulated judgment amounted to an unenforceable penalty.
We affirmed this determination on appeal. Initially, we clarified that
Civil Rule 60(b) was not applicable and that the bankruptcy court had
considerable discretion because the stipulated judgment had not been
entered and thus was not final. Id. at *6. Instead, we considered Maughan
and other Ninth Circuit decisions holding that bankruptcy courts have
inherent power to modify previously entered orders. Id. at *7–9. This
modification power, we noted, was subject to some limitations. Id. at *8.
First, the bankruptcy court may not modify an order if a party has
detrimentally relied on the part of the order subject to modification. Id.
24
Second, the bankruptcy court may not modify an order over the objection
of the adverse party “by excising one provision of the parties’ stipulation
but leaving the rest of the parties’ stipulation in tact [sic].” Id. This second
limitation, we noted, was subject to its own equitable exception: the party
seeking to invoke the anti-modification provision must have acted
equitably. Id. Neither limitation, we found, was present. Id. at *8–9. We also
agreed that entry of the stipulated judgment would amount to an
unenforceable penalty under California law and, as a result, principles of
state contract law supported the deviation. Id. at *9.
From these cases, Emaciation supposes that bankruptcy courts have
the inherent authority to modify settlement agreements even after the
bankruptcy court approves them. But they are distinguishable. To start,
neither case involves a final order; one concerns an interlocutory order
(Maughan) and the other addresses entry of a proposed stipulated
judgment (In re Flashcom).
Second, Emaciation overlooks that these cases apply state contract
law. In Maughan, the Ninth Circuit noted that the settlement agreement
could have been modified if there had been sufficient findings supporting
contract reformation. 419 F.2d at 1156. And as just noted, in In re Flashcom,
we declined enforcement in part because the original contract contained an
unenforceable penalty. In re Flashcom, 2014 WL 4923073, at *9. In the
present case, the bankruptcy court did not consider application of state
25
contract law; nor does Emaciation argue on appeal that application of state
contract law justifies the order.
Third, both Maughan and In re Flashcom considered the
antimodification limitations on the bankruptcy court’s inherent powers. In
Maughan, modification was improper because it would be over a party’s
objection; in In re Flashcom, although a party objected, we concluded that
the objecting party’s own inequitable conduct instigated the dispute. Here,
the bankruptcy court approved the modification over the Trustee and
Satellite’s objections. We acknowledge that the Trustee has since settled his
appeal from the Modification Order. But the Trustee’s later entry into a
further contract with Emaciation to clarify the earlier contract does not
justify the bankruptcy court’s entry, under its inherent power, of the
Modification Order over the Trustee’s initial objection. As a result, this case
is closer to Maughan, where modification was inappropriate, than it is to
In re Flashcom, where we held that a court approved settlement that
included a penalty was unenforceable under state law.
As a result, we are not persuaded that affirmance is warranted based
on the bankruptcy court’s inherent power. Because Emaciation provides no
other justification for the Modification Order, we conclude that the
bankruptcy court abused its discretion in granting Emaciation’s Civil Rule
60(b)(1) motion.
***
26
In sum, we conclude that the bankruptcy court erred when it granted
Emaciation’s reconsideration motion. It failed to identify a legal standard,
and Emaciation fails to otherwise justify the order on appeal. But, returning
to a point mentioned earlier, we emphasize that we do not decide the
merits of the underlying dispute: how to interpret the Settlement
Agreement. Emaciation may well be correct that the Settlement Agreement
did not extinguish its lien. But that is a decision that should be made in the
adversary proceeding. With this decision, we conclude only that
Emaciation could not short-circuit the process by way of a reconsideration
motion. To reiterate, to the extent the Settlement Agreement is properly
interpreted as Emaciation requests in the quiet title action, any error in the
bankruptcy court’s decision on reconsideration would be harmless.
CONCLUSION
Based on the foregoing, we REVERSE.
27