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In Re: Leonard O. Wallace and Pamela J. Wallace

March 30, 2011

IN RE: LEONARD O. WALLACE AND PAMELA J. WALLACE,
DEBTORS-IN-POSSESSION.



The opinion of the court was delivered by: Honorable B. Lynn Winmill Chief U. S. District Judge

ORDER

INTRODUCTION

The Court has before an appeal by Debtors-in-Possession, Leonard and Pamela Wallace ("Debtors"). For the reasons explained below, the Court will affirm the Bankruptcy Court's dismissal of the case.

FACTUAL BACKGROUND

Through negotiations with Norman Hayes, Leonard Wallace agreed to fund development of a patented identification bolus for cattle and other livestock in exchange for an ownership interest in the company purporting to own the patent, MagTrac Bolus, LLC ("MagTrac"). Wallace provided funding over a period of time and acquired a substantial interest in MagTrac. However, the relationship between Wallace and Hayes deteriorated, and Wallace initiated a lawsuit against Hayes, MagTrac, and the remaining members of MagTrac in Montana state court. The dispute went to arbitration in Wyoming.

The arbitrator found that both Hayes and Wallace breached their fiduciary duties toward MagTrac and its members. The arbitrator determined judgment would be entered against Wallace in favor of MagTrac for $2,500,000.00 based in large part on the arbitrator's finding that Wallace attempted to market the identification bolus patent individually and not on behalf of MagTrac. The arbitrator also determined that Wallace would be entitled to judgment against Hayes for various other amounts.

Wallace requested the arbitration award be modified, arguing that issues concerning ownership of the bolus patent, which were not disclosed during the arbitration process, constituted fraud by Hayes. The arbitrator initially stayed its proceedings pending litigation in Wyoming state court over the ownership of the bolus patent. However, prior to the resolution of that litigation, the arbitrator lifted its stay and entered supplemental findings and conclusions affirming its earlier award. Wallace appealed the arbitrator's award, but the Montana courts affirmed the decision.

MagTrac recorded its judgment in California where Debtors own several industrial/commercial rental properties. MagTrac then assigned its judgment against Wallace to the Hayes Creditors. The Hayes Creditors levied on the rents from Debtors' California properties and had the California court appoint a receiver to collect the rents and market those properties for sale in order to satisfy their judgment. The Hayes Creditors also recorded their judgment in Idaho and Washington.

PROCEDURAL BACKGROUND

On May 14, 2009, Debtors filed a joint voluntary chapter 11 petition. The Hayes filed a Motion to Dismiss on September 17, 2009. The United States Trustee joined in the Hayes' Motion to Dismiss on November 23,2009. On December 1, 2009, the Bankruptcy Court granted the Hayes' Motion to Dismiss. The Bankruptcy Court entered its Memorandum Decision on January 26, 2010. It entered an Order Granting the Motion to Dismiss on February 1, 2010. Debtors filed a Notice of Appeal on February 16, 2010. The appeal was transferred to this Court after a party filed a timely object to disposition by the Bankruptcy Appellate Panel. The appeal is now fully briefed.

LEGAL STANDARD

A Bankruptcy Court's findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 128, 1283 (9th Cir. 1996); see also In re Consolidated Pioneer Mortgage Entities, 264 F.3d 803, 806 (9th Cir. 2001). The decision to convert a case to Chapter 7 under Section 1112 is within the bankruptcy court's discretion. In re Consolidated Pioneer Mortgage Entities, 264 F.3d at 806. "Such a decision will be reversed only if based on an erroneous conclusion of law or when the record contains no evidence on which [the bankruptcy court] rationally could have based that decision." Id. at 806-07 (Internal quotation and citation omitted).

ANALYSIS

Debtors list several grounds for appeal. However, they seem to focus on only three issues: (1) loss or diminution of the estate; (2) gross mismanagement; and (3) unusual circumstances and other considerations. Their other arguments seem wholly without legal analysis or ...


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