Kirkland v. Rund (In Re EPD Investment Co.)

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN THE MATTER OF EPD No. 14-55740
INVESTMENT COMPANY, LLC, and
JERROLD S. PRESSMAN, D.C.
Debtors. No. 2:13-cv-
09023-SJO
POSHOW ANN KIRKLAND,
individually and as Trustee of the
Bright Conscience Trust Dated
September 9, 2009,
Appellant,
v.
JASON M. RUND, Chapter 7 Trustee;
JOHN C. KIRKLAND, an individual,
Appellees.
2 IN THE MATTER OF EPD INVESTMENT CO.
IN THE MATTER OF EPD No. 14-56478
INVESTMENT COMPANY, LLC, and
JERROLD S. PRESSMAN, D.C. No.
Debtors. 2:13-cv-08768-
SJO
JOHN C. KIRKLAND, an individual,
Appellant, OPINION
v.
JASON M. RUND, Chapter 7 Trustee,
Appellee.
Appeals from the United States District Court
for the Central District of California
S. James Otero, District Judge, Presiding
Argued and Submitted
April 8, 2016—Pasadena, California
Filed May 9, 2016
Before: Barry G. Silverman and Susan P. Graber, Circuit
Judges, and Jennifer A. Dorsey,* District Judge.
Opinion by Judge Silverman
*
The Honorable Jennifer A. Dorsey, United States District Judge for the
District of Nevada, sitting by designation.
IN THE MATTER OF EPD INVESTMENT CO. 3
SUMMARY**
Bankruptcy / Arbitration
The panel affirmed the district court’s decision affirming
the bankruptcy court’s denial of a motion to compel
arbitration in a bankruptcy trustee’s adversary proceeding
seeking avoidance of fraudulent transfers.
The panel held that the bankruptcy trustee’s fraudulent
conveyance, subordination, and disallowance causes of action
were core proceedings, thereby giving the bankruptcy court
discretion to weigh the competing bankruptcy and arbitration
interests at stake. The bankruptcy court properly determined
that the arbitration provisions at issue conflicted with the
Bankruptcy Code purposes of having bankruptcy law issues
decided by bankruptcy courts; of centralizing resolution of
bankruptcy disputes; and of protecting parties from piecemeal
litigation. Accordingly, the bankruptcy court did not abuse
its discretion in denying the motion to compel arbitration.
The panel rejected the argument that the trustee’s
fraudulent transfer claims were the constitutional equivalent
of non-core claims because the defendant had requested a
jury trial and had not consented to one before the bankruptcy
court.
The panel also agreed with the district court that the
bankruptcy trustee was not bound by the arbitration
agreements for purposes of the fraudulent transfer claims.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 IN THE MATTER OF EPD INVESTMENT CO.
COUNSEL
David M. Axelrad, Steven S. Fleischman, and John F. Querio
(argued), Horovitz & Levy LLP, Encino, California, for
Appellants Poshow Ann Kirkland, individually and as Trustee
of the Bright Conscience Trust dated September 9, 2009, and
John C. Kirkland.
Jeffrey I. Golden, Weiland Golden Smiley Wang Ekvall &
Strok LLP, Costa Mesa, California, for Appellant John C.
Kirkland.
Steven T. Gubner, Corey R. Weber (argued), and Michael W.
Davis, Ezra Brutzkus Gubner, Woodland Hills, California, for
Appellee Jason M. Rund, Chapter 7 Trustee.
OPINION
SILVERMAN, Circuit Judge:
At issue in this appeal is whether a bankruptcy court erred
in denying a motion to compel arbitration. We hold that it
had discretion to decide the motion and that it did not abuse
its discretion in denying it. We therefore affirm.
Plaintiff Jason Rund is the Chapter 7 Trustee for the
estates of both EPD Investment Co. (“EPD”) and Jerrold S.
Pressman, whose separately filed bankruptcy cases have been
substantively consolidated. Defendant John Kirkland is an
attorney who acted as counsel for Pressman and EPD.
Defendant Poshow Ann Kirkland is John’s wife and the
trustee of the Bright Conscience Trust, to which John
assigned interests he held in the debtors.
IN THE MATTER OF EPD INVESTMENT CO. 5
In October 2012, the Trustee filed an adversary
proceeding against John and Poshow (as trustee of the trust),
seeking to disallow the trust’s proofs of claim, and to avoid
fraudulent transfers under federal and state law. The Trustee
subsequently filed the operative second amended complaint,
in which he alleges, among other things, that: (1) EPD
operated as a Ponzi scheme and, in mid-2009, stopped
making payments to all but a few favored creditors; (2) while
acting as counsel for EPD and Pressman, John invested or
lent at least $150,000 to EPD; (3) after EPD stopped making
payments to creditors, John transferred his interests in EPD
to his family trust (the Bright Conscience Trust) and/or his
wife as trustee; (4) the trust in turn filed a financing statement
against all assets of EPD and Pressman; (5) John knew about
the Ponzi scheme and knew that filing the financing statement
was a fraudulent conveyance; and (6) John arranged for
Pressman, through EPD, to make John’s monthly mortgage
payments to his lender while John was aware of the Ponzi
scheme.
John moved the bankruptcy court to compel arbitration of
the adversary proceeding. He argued that he had numerous
agreements with EPD and Pressman, each of which included
broad arbitration clauses requiring binding private arbitration,
and that the Trustee’s causes of action fell within the scope of
those clauses. He also argued that the Trustee’s claims
against him were disguised non-core matters; however, he
acknowledged that the Trustee’s fraudulent transfer claims
were statutorily core matters under 28 U.S.C. § 157(b)(2)(H).
Notably, John made no argument to the bankruptcy court that,
pursuant to some of the agreements, an arbitrator must decide
issues of arbitrability. Poshow later joined the motion to
compel.
6 IN THE MATTER OF EPD INVESTMENT CO.
The Trustee raised various arguments in opposition;
however, he did not argue to the bankruptcy court that he was
not bound by the pre-petition agreements signed by the
debtors.
The bankruptcy court denied John’s motion to compel
arbitration. The bankruptcy court ruled that the Trustee’s
causes of action were core matters. Applying our decision in
Continental Insurance Co. v. Thorpe Insulation Co. (In re
Thorpe Insulation Co.), 671 F.3d 1011, 1021 (9th Cir. 2012),
the bankruptcy court further ruled that allowing arbitration
would conflict with the underlying purposes of the
Bankruptcy Code. The bankruptcy court’s decision
specifically noted that: (1) the Trustee did not challenge the
applicability of the arbitration provisions to the claims cited
in the complaint; and (2) John acknowledged that claims to
recover fraudulent transfers could be characterized as core
proceedings.
After the bankruptcy court ruled, John and Poshow
appealed the bankruptcy court’s decision to the district court,
and John moved the bankruptcy court to issue a stay pending
appeal.
While his stay motion was pending, John answered the
complaint. He demanded a jury trial and argued that the
bankruptcy court lacked jurisdiction to adjudicate the
Trustee’s claims against John because he had neither filed a
proof of claim nor consented to jurisdiction. Cognizant that
this development might affect the analysis of whether to
compel arbitration, the bankruptcy court granted John a stay
pending appeal.
IN THE MATTER OF EPD INVESTMENT CO. 7
The district court affirmed the bankruptcy court. It also
addressed for the first time new arguments: (1) from the
Trustee, that the arbitration agreements were not enforceable
against him; and (2) from John, that his answer transformed
the adversary proceeding into a constitutionally non-core
matter, which could alter the bankruptcy court’s Thorpe
Insulation analysis.
The district court determined that the Trustee was not
bound to arbitrate the fraudulent conveyance claims, because
he was asserting claims that either belonged to the estate’s
creditors or would benefit them, and no creditor had been a
party to the arbitration agreement.
The district court further determined that arbitration of the
subordination and disallowance claims would conflict with
the underlying purposes of the Bankruptcy Code, because
resolution of those causes of action would require factual
findings closely linked to the Trustee’s administration of the
estate.
John and Poshow timely appeal.
Jurisdiction
We have jurisdiction to review the bankruptcy court’s
order denying the motion to compel arbitration, 9 U.S.C.
§ 16(a)(1)(C), as well as the district court’s orders affirming
the bankruptcy court, 28 U.S.C. §§ 158, 1291.
Standard of Review
Generally, we review a bankruptcy court’s decision
independently and without deference to the district court’s
8 IN THE MATTER OF EPD INVESTMENT CO.
decision. Decker v. Tramiel (In re JTS Corp.), 617 F.3d
1102, 1109 (9th Cir. 2010). This court reviews a bankruptcy
court’s findings of fact for clear error and its conclusions of
law de novo. Id.“[I]n a core [bankruptcy] proceeding . . . . a bankruptcy
court has discretion to decline to enforce an otherwise
applicable arbitration provision only if arbitration would
conflict with the underlying purposes of the Bankruptcy
Code.” In re Thorpe Insulation Co., 671 F.3d at 1021. We
review de novo whether a bankruptcy court, as a matter of
law, has discretion to deny a motion to compel arbitration.
Id. at 1019–20. If we conclude that the bankruptcy court had
discretion, we then review the exercise of discretion only for
abuse of discretion. Id. at 1020. “When a bankruptcy court
considers conflicting policies . . . , we acknowledge its
exercise of discretion and defer to its determinations that
arbitration will jeopardize a core bankruptcy proceeding.”
Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1131 (9th Cir.
2012).1
1
The Eber court wrote that we generally review motions to compel
arbitration de novo, explaining that factual findings are reviewed for clear
error and legal conclusions de novo. 687 F.3d at 1126. The Eber court
went on to acknowledge that we defer to a bankruptcy court’s exercise of
discretion when the bankruptcy court determines that arbitration will
jeopardize a core bankruptcy proceeding. Id. at 1131. We perceive no
conflict between the standards of review announced in Thorpe and Eber
that would affect the outcome in this case because, under both Thorpe and
Eber: (1) questions of law contained in a motion to compel arbitration are
reviewed de novo; and (2) the bankruptcy court is entitled to discretion
when deciding whether arbitration would conflict with a core bankruptcy
proceeding.
IN THE MATTER OF EPD INVESTMENT CO. 9
The Bankruptcy Court Did Not Abuse Its Discretion
In this case, the bankruptcy court did not abuse its
discretion in denying the Kirklands’ motion to compel
arbitration. In re Eber, 687 F.3d at 1131; In re Thorpe
Insulation Co., 671 F.3d at 1020–21.
On de novo review, we agree with the bankruptcy court
that the Trustee’s fraudulent conveyance, subordination, and
disallowance causes of action were core proceedings, thereby
giving the bankruptcy court discretion to weigh the
competing bankruptcy and arbitration interests at stake. See
28 U.S.C. § 157(b)(2)(B), (H); see also In re Thorpe
Insulation Co., 671 F.3d at 1021. The bankruptcy court
properly applied Thorpe Insulation to determine that the
arbitration provisions at issue conflicted with Bankruptcy
Code purposes of having bankruptcy law issues decided by
bankruptcy courts; of centralizing resolution of bankruptcy
disputes; and of protecting parties from piecemeal litigation.
See In re Thorpe Insulation Co., 671 F.3d at 1022–23.
The bankruptcy court’s Thorpe Insulation analysis was
supported by the record extant at the time the bankruptcy
court ruled because the bankruptcy court had supervised the
debtors’ cases for nearly three years, during which the
Trustee filed more than 100 other adversary proceedings with
the bankruptcy court.
Stern v. Marshall and Its Progeny Are Inapplicable
John now argues that the Trustee’s fraudulent conveyance
claims against John are “the constitutional equivalent of non-
core claims” because John has requested a jury trial and has
10 IN THE MATTER OF EPD INVESTMENT CO.
not consented to one before the bankruptcy court.2 John
argues that, under the Supreme Court’s decisions in Stern v.
Marshall, 564 U.S. 462 (2011), and Executive Benefits
Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014), the
fraudulent conveyance claims against him must now be
treated as non-core, which means that the bankruptcy court
necessarily lacked discretion to deny his motion to compel
arbitration. We disagree.
As an initial matter, John did not file his answer until
after the bankruptcy court had denied his motion to compel.
As a result, the bankruptcy court has never had an
opportunity to determine in the first instance whether the
fraudulent conveyance claims remain a core proceeding in
light of the answer. See Exec. Benefits Ins. Agency, 134 S.
Ct. at 2171 (“It is the bankruptcy court’s responsibility to
determine whether each claim before it is core or non-core.”).
In this case, though, that doesn’t matter because John’s
answer did not take the Trustee’s fraudulent conveyance
causes of action outside the analytical paradigm that this
court established in Thorpe Insulation.
The Trustee’s fraudulent conveyance claims against John
remain statutorily core, see Exec. Benefits Ins. Agency v.
Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553,
565 (9th Cir. 2012), aff’d, Exec. Benefits Ins. Agency, 134 S.
Ct. 2165, meaning that Congress has identified that type of
claim as one that historically fell within the scope of the
2
Poshow filed a proof of claim on behalf of the trust and has,
accordingly, consented to bankruptcy court jurisdiction. See Wellness
Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1949 (2015) (bankruptcy
courts may decide Stern claims submitted to them by consent).
IN THE MATTER OF EPD INVESTMENT CO. 11
bankruptcy court’s power. See Exec. Benefits Ins. Agency,
134 S. Ct. at 2171 n.7. Stern and its progeny simply
recognize that sometimes the bankruptcy court’s statutory
authority to decide a core matter must give way when that
interest conflicts with a non-creditor’s constitutional right to
entry of a final judgment by an Article III adjudicator. See id.
at 2172 (“Stern made clear that some claims labeled by
Congress as ‘core’ may not be adjudicated by a bankruptcy
court in the manner designated by § 157(b).”); In re
Bellingham Ins. Agency, 702 F.3d at 566 (“Only the power to
enter final judgment is abrogated.”). Stern does not affect the
statutory designation of matters as core for the purpose of
determining whether the bankruptcy court has discretion to
deny arbitration because that decision is not itself a final
judgment.
In short, while we agree with John that his answer might
affect the bankruptcy court’s ultimate weighing of competing
bankruptcy and arbitration policies, we disagree that, as a
matter of law, the answer stripped the bankruptcy court of
discretion to perform that weighing in the first place. The
Trustee’s fraudulent conveyance claim retains its statutory
“core” label. As we have explained, when deciding motions
to compel arbitration, nothing more is required.
Other Arguments
We briefly consider other arguments raised by the parties.
Enforceability and the “Otherwise Applicable Arbitration
Provision”
The Trustee argues that the arbitration agreements do not
apply to him because his claims fall outside the scope of the
12 IN THE MATTER OF EPD INVESTMENT CO.
agreements. However, the Trustee did not make this
argument to the bankruptcy court, even though John argued
there that the Trustee’s causes of action fell within the scope
of John’s prior contractual relationship with the debtors.
Accordingly, we have no factual findings from which to
evaluate whether the agreements are “otherwise applicable.”
The Trustee’s failure to present this argument to the
bankruptcy court does not affect our ability to reject it here.
The bankruptcy court assumed that the agreements were
enforceable against the Trustee, and declined to compel
arbitration for other reasons, which we affirm. The district
court held that the Trustee was not bound by the agreements.
We agree.
The Trustee brought fraudulent transfer claims under
11 U.S.C. §§ 544 and 548, and California Civil Code section
3439.04. John asserts that all of these claims are subject to
the arbitration agreements that he signed with the debtors.
But, under § 544, the Trustee is empowered only to bring
claims that might be brought “by a creditor holding an
unsecured claim.” 11 U.S.C. § 554(b)(1). And California
Civil Code section 3439.04(a)(1) permits a creditor to bring
a claim for fraudulent transfer that a debtor made with intent
to hinder, delay, or defraud a creditor of the debtor. For the
purpose of these claims, the Trustee stands in the shoes of the
creditors, not the debtors. Only the parties to an arbitration
agreement are bound by it. Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985). The
creditors did not sign the arbitration clauses at issue here. As
a result, arbitration agreements signed by the debtors cannot
apply to claims under § 544 or California Civil Code section
3439.04. See Allegaert v. Perot, 548 F.2d 432 (2d Cir. 1977)
IN THE MATTER OF EPD INVESTMENT CO. 13
(so holding). As to these claims, then, the court had no
discretion to allow arbitration.
Arbitrability
The Kirklands argue that the plain language of some of
the arbitration agreements requires an arbitrator to decide
whether the Trustee’s claims are arbitrable. This argument
was not presented to the bankruptcy court, and the record
discloses no exceptional circumstances for not having raised
the issue below. Int’l Union of Bricklayers & Allied
Craftsman Local Union No. 20 v. Martin Jaska, Inc.,
752 F.2d 1401, 1404 (9th Cir. 1985) (holding that we do not
review an issue not raised below unless necessary to prevent
manifest injustice; proponent must show exceptional
circumstances why the issue was not raised below).
Accordingly, this issue was waived.
AFFIRMED.