Hyun Um v. Spokane Rock I, LLC

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