UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
February 1, 2011
CARY E. MARLOW,
DEBTOR. CARY E. MARLOW, APPELLANT,
NANCY HOFFMEIER ZAMORA, TRUSTEE, APPELLEE.
Appeal from the United States Bankruptcy Court for the Central District of California Honorable Kathleen Thompson, Bankruptcy Judge, Presiding Bk. No. SV-09-23891-KT
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Submitted Without Oral Argument on January 21, 2011*fn2
Filed - February 1, 2011
Before: PAPPAS, DUNN and KIRSCHER, Bankruptcy Judges.
Chapter 7*fn3 debtor Cary E. Marlow ("Marlow") appeals the bankruptcy court's order granting a motion by chapter 7 trustee Nancy Hoffmeier Zamora ("Trustee") to approve a settlement agreement between Trustee and Jennifer King ("King"). We AFFIRM.
In September 2006, Marlow and King orally agreed that Marlow would be general contractor in a project to improve King's real property in Studio City, California. Between September 2006 and October 2007, Marlow performed services on this project for which he billed King in excess of $700,000, and received payments in excess of $550,000. When a dispute arose between the parties, on March 4, 2009, Marlow sued King for breach of contract in Los Angeles County Superior Court, Marlow v. King, case no. LC081209 (the "State Court Action"), alleging that King had failed to pay Marlow the balance of $132,616.23 for his services. King filed a cross-complaint against Marlow for $400,000 to $500,000 in damages.*fn4
1 On October 23, 2009, Marlow filed a chapter 7 bankruptcy 2 petition. In his Schedule B, he listed his lawsuit against King, 3 stating his claim as $132,616.24, with a cross-complaint for 4 $400,000--$500,000, having a net current value of $0.00. He did 5 not claim an exemption in the lawsuit on his Schedule C. Nancy 6 Hoffmeier Zamora was appointed chapter 7 trustee.
7 Shortly after the filing of the petition, Trustee and King's 8 counsel negotiated a Compromise by which King agreed to pay 9 $10,000 to Trustee in exchange for Trustee's release of any and 10 all further claims against King, together with Trustee's agreement 11 that the bankruptcy court could grant King relief from automatic 12 stay to pursue any insurance or bond which may cover King's claims 13 against Marlow in the State Court Action ("the Compromise").
14 Trustee's Motion for Order Approving Compromise was filed in 15 the bankruptcy court on January 12, 2010, accompanied by a 16 memorandum of points and authorities in which Trustee evaluated 17 the Compromise under the criteria in Martin v. Kane (In re A&C 18 Props.), 784 F.2d 1377, 1381 (9th Cir. 1986).
19 Marlow filed an Opposition on January 26, 2010, arguing that 20 the claim against King in the State Court Action was not complex; 21 it would not be expensive to pursue; and its value greatly 22 exceeded the amount paid by King to Trustee in the Compromise.
In 23 addition, Marlow's counsel indicated his willingness to continue 24 advocating Marlow's claim in the State Court Action on a 25 contingency basis.
26 Trustee replied to Marlow's Opposition on February 9, 2010. 27 Trustee argued that Marlow's claim in the State Court Proceeding 28 was oral, that Marlow had grossly overvalued the claim and 1 underestimated the estate's exposure to King's claims, and that it 2 would be very expensive for Trustee to prosecute the State Court 3 Action.
4 On February 11, 2010, Marlow requested that an evidentiary 5 hearing be held on Trustee's compromise motion.
6 The bankruptcy court conducted a hearing on Trustee's motion 7 on February 16, 2010; a transcript is included in the record.
8 Marlow and Trustee were represented by counsel who were heard. 9 Trustee argued in favor of the Compromise. In response to 10 the bankruptcy court's indication that it would treat the 11 Compromise also as a sale of estate assets, Trustee suggested that 12 the hearing be continued so Marlow and his attorney could 13 consider whether to submit an overbid. Hr'g Tr. 6:10-11 14 (February 16, 2010). Marlow's counsel agreed. Hr'g Tr. 6:25-7:1. 15 The court denied the request for evidentiary hearing. Hr'g Tr. 16 8:12-17.
17 Neither Marlow nor his attorney attended the continued 18 hearing on March 9, 2010. The bankruptcy court entered its order 19 approving the compromise on March 23, 2010. The order provided in 20 relevant part that the court had read and considered all of the 21 pleadings, declarations, and exhibits containing evidence 22 submitted by the parties, as well as arguments of counsel; that 23 Trustee's motion would be granted and the compromise with King 24 approved; and that King would be granted relief from stay to 25 "pursue any insurance or bond claim King may be able to recover 26 based on her cross-complaint in the State Court Case." 27 Marlow filed a timely notice of appeal on April 5, 2010.
2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A). We have jurisdiction pursuant to 4 28 U.S.C. § 158.
6 1. Whether Marlow has standing to appeal the settlement agreement.
2. Whether the bankruptcy court abused its discretion in 8 granting Trustee's motion to approve the Settlement Agreement.
3. Whether the bankruptcy abused its discretion in
declining to conduct an evidentiary hearing.
STANDARDS OF REVIEW
Federal courts have an independent obligation to examine 13 their own jurisdiction, and standing "is perhaps the most 14 important of [the jurisdictional] doctrines." FW/PBS, Inc. v. 15 City of Dallas, 493 U.S. 215, 231 (1990). We examine our 16 jurisdiction de novo. Wiersma v. D.H. Kruse Grain & Milling 17 (In re Wiersma), 324 B.R. 92, 110 (9th Cir. BAP 2005).
18 A bankruptcy court's decision to approve a settlement is 19 reviewed for abuse of discretion. Goodwin v. Mickey Thompson 20 Entm't Group, Inc. (In re Mickey Thompson Entm't Group, Inc.), 21 292 B.R. 415, 420 (9th Cir. BAP 2003). Likewise, a bankruptcy 22 court's decision whether to hold an evidentiary hearing is 23 reviewed for abuse of discretion. Zurich Am. Ins. Co. v. Int'l 24 Fibercom (In re Int'l Fibercom), 503 F.3d 933, 940 (9th Cir 2007).
25 In applying an abuse of discretion test, we first "determine de 26 novo whether the [bankruptcy] court identified the correct legal 27 rule to apply to the relief requested." United States v. Hinkson, 28 585 F.3d 1247, 1262 (9th Cir. 2009). If the bankruptcy court 1 identified the correct legal rule, we then determine whether its 2 "application of the correct legal standard [to the facts] was 3 (1) illogical, (2)implausible, or (3) without support in 4 inferences that may be drawn from the facts in the record." Id.
5 (internal quotation marks omitted). If the bankruptcy court did 6 not identify the correct legal rule, or its application of the 7 correct legal standard to the facts was illogical, implausible, or 8 without support in inferences that may be drawn from the facts in 9 the record, then the bankruptcy court has abused its discretion. 10 Id.
13 Marlow lacks standing to appeal the order approving the Compromise. 14 Bankruptcy appellate standing is limited to those persons who 15 can demonstrate that they are directly and adversely affected 16 pecuniarily by an order of the bankruptcy court. Robinson v. 17 Fondiller (In re Fondiller), 707 F.2d 441, 442-43 (9th Cir. 1983).
A party asserting standing must demonstrate that the bankruptcy 19 court's order either diminishes his property, increases his 20 burdens, or detrimentally affects his rights. Id. at 442. It is 21 well-established that a chapter 7 debtor ordinarily lacks standing to challenge orders affecting the assets of the estate 23 unless there is likely to be a surplus after bankruptcy. Duckor 24 Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 25 774, 778 (9th Cir. 1999).
In her brief, Trustee states that this is not a surplus case, or in other words, after distribution of funds by Trustee to the 1 creditors filing claims, there will be no funds to return to 2 Marlow. Trustee's Op. Br. at 9; see § 726(a)(1)-(6) (prescribing 3 the order of distribution of property of the bankruptcy estate).
4 Marlow does not challenge this conclusion in his reply brief. 5 Rather, he argues that he has standing based on his status as the 6 sole shareholder of his corporation, the Marlow Company, Inc.: 7 Not only will debtor incur expenses in defending this action, the relief from stay places the debtor in the 8 disadvantageous position of having to defend himself and the corporation against the cross-complaint without the 9 substantive advantage of having an affirmative claim against the defendant/cross-complainant. As such, his 10 odds of success are diminished.
11 Marlow's Reply Br. at 2. 12 Appellate standing cannot be asserted derivatively; an 13 appellant must have standing in his own right. "The Art. III 14 judicial power exists only to redress or otherwise to protect 15 against injury to the complaining party, even though the court's 16 judgment may benefit others collaterally. A federal court's 17 jurisdiction therefore can be invoked only when the plaintiff 18 himself has suffered 'some threatened or actual injury resulting 19 from the putatively illegal action . . . .'" Warth v. Seldin, 20 422 U.S 490, 499 (1975), quoting Linda R.S. v. Richard D., 21 410 U.S. 614, 617 (1973); Tippett v. Umpqua Shopping Ctr., Inc. 22 (In re Umpqua Shopping Ctr., Inc.), 111 B.R. 303, 305 (9th Cir. 23 BAP 1990) (appellant cannot rest its claim to relief on legal 24 rights or interests of others). Marlow cannot claim standing to 25 appeal on the basis of harm to his corporation, a separate legal 26 entity.
27 Marlow, individually, is not adversely affected by the 28 Compromise. His liability to King, if any, is discharged in his 1 bankruptcy case, and the relief from stay granted under the 2 compromise was limited to allowing King to "pursue any insurance 3 or bond claim King may be able to recover." Marlow asserts that 4 "either a loss or settlement of the case would likely leave the 5 Debtor either uninsurable or facing increased insurance premiums.
6 Either outcome would result in a diminished capacity for him to 7 make a living." Marlow's Reply Br. at 3. But even if Marlow has 8 some future financial exposure to King arising from his ownership 9 of the corporation, a potential or future liability is not 10 adequate to support appellate standing. The direct and adverse 11 pecuniary effect required to confer appellate standing must be 12 immediate. In re Fondiller, 707 F.2d at 443 (appellate standing 13 requires "direct and immediate impact on appellant's pecuniary 14 interests"); SEC v. Sec. Nw, Inc., 573 F.2d 622, 626 (9th Cir. 15 1978) (appellant's interest "is remote and consequential rather 16 than direct and immediate; he thus lacks standing to maintain the 17 appeal.").
18 If this is an insolvent estate, and Marlow has offered 19 nothing to show that it is solvent, Marlow has not suffered a 20 direct, immediate adverse effect on his pecuniary interests as a 21 result of the approval of the compromise. He may not assert 22 standing through his separate corporation. At most, his standing 23 is derivative, consequential and remote. We therefore conclude 24 that he does not have standing to appeal the order approving the 25 Compromise.
2 The bankruptcy court did not abuse its discretion in approving the Compromise.
Even were we to decide that Marlow had standing to appeal, 4 the record in this case adequately supports the decision of the 5 bankruptcy court to approve the Compromise.
Rule 9019(a), governing compromises, provides that, On motion by the trustee and after a hearing 8 on notice to creditors, the debtor and indenture trustees as provided in Rule 2002(a) 9 and to such other entities as the court may designate, the court may approve a compromise 10 or settlement.
11 Rule 9019(a). The bankruptcy court is required to conduct an 12 inquiry into all "factors relevant to a full and fair assessment 13 of the wisdom of the proposed compromise." Protective Comm. for 14 Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 15 390 U.S. 414, 424 (1968). The criteria for this inquiry are as 16 follows:
17 In determining the fairness, reasonableness and adequacy of a proposed settlement agreement, the 18 court must consider: (a) probability of success in the litigation, (b) the difficulties, if any, 19 to be encountered in the matter of collection, (c) the complexity of the litigation involved, 20 and the expense, inconvenience and delay necessarily attending it; [and] (d) the 21 paramount interest of creditors and a proper deference to their reasonable views in the 22 premises.
23 In re A&C Props., 784 F.2d at 1381; see also Woodson v. Fireman's 24 Fund Ins. Co. (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1988) 25 (repeating factors). The bankruptcy court has wide latitude and 26 considerable discretion in evaluating a proposed settlement 27 because the bankruptcy judge "is uniquely situated to consider the 28 equities and reasonableness." United States v. Alaska Nat'l Bank 1 (In re Walsh Construction, Inc.), 669 F.2d 1325, 1328 (9th Cir. 2 1982).
3 Marlow argues extensively that the bankruptcy court neglected 4 to properly analyze the A&C Props. criteria in approving the 5 Compromise. Instead, according to Marlow, the bankruptcy court 6 "viewed the issue as a bidding contest" and relied exclusively on 7 the opinions of Trustee. We disagree.
8 First, the bankruptcy court was correct as a matter of law in 9 treating Trustee's proposed settlement with King not only as a 10 compromise under Rule 9019, but also as a sale of the bankruptcy 11 estate's claim against King under § 363. As we have held, when 12 confronted with a motion to approve a settlement under Rule 13 9019(a), "a bankruptcy court is obliged to consider, as part of 14 the 'fair and equitable' analysis, whether any property of the 15 estate that would be disposed of in connection with the settlement 16 might draw a higher price through a competitive process and be the 17 proper subject of a section 363 sale." In re Mickey Thompson 18 Entm't Group, Inc., 292 B.R. at 421-22; see also Simantob v. 19 Claims Prosecutor (In re Lahijani), 325 B.R. 282, 289 (9th Cir. 20 BAP 2005). To accommodate that the Compromise effectively "sold" 21 the bankruptcy estate's claims against King, the bankruptcy court 22 properly continued the hearing to allow Marlow an opportunity to 23 submit a bid for that claim at a later date. In this fashion, the 24 bankruptcy court adopted an appropriate competitive process to 25 determine whether a "higher price" could be obtained for the claim 26 against King.
27 Second, the bankruptcy court did not rely "exclusively" on 28 Trustee's opinions about the value of the estate's claim against 1 King, or the desirability of pursuing that claim. To support his 2 argument, Marlow cites to the hearing transcript, where the 3 bankruptcy court stated:
4 Well, I think the Trustee has accurately stated the legal issue that the threshold the Trustee has to meet 5 in order to be a good faith proponent of this settlement -- that there does seem to be significant risk of 6 litigation.
7 Hr'g Tr. 6:12-14.
Fairly interpreted, in this comment, the bankruptcy court did 9 not rely "exclusively" on the Trustee's opinion. It was a finding 10 that Trustee had carried her burden on the first, and arguably 11 most important, of the A&C Props. criteria: the probability of 12 success in the litigation.
13 Marlow contends that the bankruptcy court did not 14 "independently" consider and analyze each of the A&C Props. 15 criteria. Presumably Marlow means that the bankruptcy court did 16 not make four specific findings on the record that each criterion 17 had been satisfied. However, neither the Ninth Circuit nor this 18 Panel has ever required slavish devotion to form over substance in 19 this regard. Indeed, the court in A&C Props. addressed a concern 20 that a bankruptcy court had not made specific findings in 21 approving a compromise, and gave the following instructions:
22 Appellate review is made more difficult by the lower court's failure to write an opinion explaining why it 23 deemed the compromise to be fair, reasonable and adequate. (Citation omitted.) However, where the record 24 supports approval of the compromise, the bankruptcy court should be affirmed.
In re A&C Props., 784 F.2d at 1383. In short, the A&C Props. criteria are binding criteria that the bankruptcy court must take into consideration in its analysis of a compromise. Our function as an appellate tribunal is to examine the record in light of the A&C Props. criteria to see if it supports approval of the compromise. This approach to review of orders approving compromises is consistent with the general rule that we may affirm the bankruptcy court on any basis supported in the record. United States v. Hemmen, 51 F.3d 883, 891 (9th Cir. 1995); Leavitt v. Soto (In re Leavitt), 209 B.R. 935, 940 (9th Cir. BAP 1997).
Before we examine the four criteria, we note that the bankruptcy court acknowledged that it had "read and considered" all of the parties' submissions and arguments regarding the Compromise. In other words, the bankruptcy court reviewed Trustee's motion, arguments and evidence in light of Marlow's objections, arguments and evidence, and conducted two hearings on the Compromise, before deciding to approve the Compromise. In general, then, the record suggests that the bankruptcy court gave full and fair consideration to both sides of this contest, and was fully aware of both parties' positions on the A&C Props. criteria.
Probability of success in the litigation. The bankruptcy court made a specific finding on the record that there was significant risk to the bankruptcy estate in prosecuting the State Court Action. Hr'g Tr. 6:22-23. Trustee brought to the court's attention a number of problems with Marlow's claim against King, including that the claim was based on an oral contract for home improvement services, which arguably violates Cal. Bus. & Prof. Code § 7159.5;*fn5 that Marlow had made conflicting sworn statements valuing the claim at $132,000 and at $94,520; and that Marlow had standing problems in the state court, because at least some of the bills and liens were issued in the name of his corporation, rather than in his individual name. Trustee also noted that, even if the bankruptcy estate recovered against King, there was a likelihood of extended appeals, the outcome of which would also be difficult to predict.
In neither the bankruptcy court nor in this appeal does Marlow adequately address these potential problems with his claim against King. Rather, his principal concern has been that Trustee did not contact his lawyer to obtain his opinion concerning the likelihood of success, and that his lawyer would be willing to represent Marlow on a contingency basis.*fn6
The bankruptcy court was presented with specific problems in the litigation by Trustee and unspecific opinions by Marlow. For example, Trustee pointed out that the amount sought in King's cross-complaint was more than four times the value placed on his claim by Marlow. Trustee stated that, based upon her review, it appeared that the services rendered by Marlow to King were contractor, who is licensed or subject to be licensed pursuant to 1 substandard and had required King to expend significant amounts of 2 money to remedy Marlow's errors. Trustee was concerned that even 3 one-fourth of the damages sought in King's cross-complaint would 4 offset the maximum amount of any recovery for the bankruptcy 5 estate. The record supports a conclusion that, even if Marlow 6 succeeded in recovering funds from King, there was a significant 7 chance that he would not collect because of King's possible 8 recovery on the cross-claim.
9 Complexity of the litigation involved, and the expense, 10 inconvenience and delay necessarily attending it. Trustee and 11 Marlow submitted conflicting views on the complexity of the 12 litigation. Trustee reviewed the particulars of the residential 13 construction problems, noting that the issues were fact-intensive 14 likely requiring expert analysis and testimony. Marlow countered, 15 without particulars, that, in his opinion, the State Court Action 16 was a "run-of-the-mill" construction case. Trustee also reminded 17 the bankruptcy court of the adverse impact of extended appeals in 18 the State Court Action. Marlow did not address this concern. 19 On this factor, the record supports approval of the 20 Compromise.
21 Difficulties, if any, to be encountered in the matter of 22 collection. No significant evidence concerning this factor was 23 submitted by the parties to the bankruptcy court, nor was it 24 discussed by the court in rendering its decision. We therefore 25 assume this factor does not impact whether the compromise should 26 be approved.
27 The paramount interest of creditors and a proper deference to 28 their reasonable views in the premises. The bankruptcy court's 1 docket shows that all creditors were served with notice of 2 Trustee's Motion Approving Compromise. Only one creditor, 3 Marlow's attorney, filed an objection. Since Marlow's attorney 4 did not join in this appeal, and there were no other objections 5 from creditors, and the other A&C Props. criteria suggest 6 considerable risk to the interests of the creditors, we conclude 7 that the record supports approval of the Compromise as being in 8 the paramount interest of creditors.
9 To be sure, our court of appeals has never indicated that all 10 four of the A&C Props. factors must support approval of a 11 settlement or compromise. In re A&C Props., 784 F.2d at 1382 12 ("While creditors' objections to a compromise must be afforded due 13 deference, such objections are not controlling"). Instead, it 14 need only appear that the bankruptcy court considered the 15 appropriate factors and gave them appropriate weight. 16 We conclude that, on balance, there is sufficient support in 17 the record for approval of the Compromise according to the A&C 18 Props. criteria. We therefore decline to hold that the bankruptcy 19 court abused its discretion in approving the Compromise.
The bankruptcy court did not abuse its discretion in declining to conduct an evidentiary hearing. 22 Marlow challenges the bankruptcy court's rejection of his 23 request for an evidentiary hearing concerning the Compromise. In 24 his brief, Marlow identifies four issues which he argues should 25 have been considered at such a hearing:
1. Whether Marlow violated Cal. Bus. & Prof. Code § 7159 by 27 engaging in home repair services without a written contract?
1 2. Whether the true value of Marlow's claim was overstated?
2 3. Whether Marlow had standing in the State Court Action?
3 4. Whether the value of King's claim in the
Of course, issues 1 and 3 involve questions of law; 6 evidentiary hearings are not needed to determine such issues. 7 Rule 9014(d). Hebbring v. United States Tr., 463 F.3d 902, 908 8 (9th Cir. 2006) ("The bankruptcy court was not required to hold an 9 evidentiary hearing because there were no disputed issues of 10 material fact. See Bankr. R. 9014(d).").
11 Moreover, issues 2 and 4 represent the ultimate questions 12 pending in the State Court Action, i.e., whether Marlow or King 13 should recover from the other, and if so, how much. It is well 14 established that in assessing a compromise, a bankruptcy court 15 need not rule on disputed facts and questions of law, but rather 16 only need canvass the issues. Burton v. Ulrich (In re Schmitt), 17 215 B.R. 417, 423 (9th Cir. BAP 1997). In other words, "[a] mini 18 trial on the merits is not required." Id. By requesting an 19 evidentiary hearing to address issues 2 and 4, Marlow is 20 effectively asking that the bankruptcy court conduct a mini-trial, 21 if not a full-blown trial, on the merits of the parties' 22 respective claims. Since sufficient undisputed facts were 23 submitted by the parties to enable it to apply the proper legal 24 criteria, the bankruptcy court did not abuse its discretion in 25 denying Marlow's request for an evidentiary hearing.
27 We DISMISS Marlow's appeal for lack of standing. However, 28 were we to consider the merits of the appeal, we would affirm the decision of the bankruptcy court.