FILED
MAR 21 2012
1
SUSAN M SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5
In re: ) BAP No. CC-11-1186-HPePa
6 )
DEATH ROW RECORDS, INC., ) Bk. No. 06-11205
7 )
Debtor. ) Adv. No. 10-02574
8 _____________________________ )
)
9 JOHN CHIANG, CONTROLLER FOR )
THE STATE OF CALIFORNIA, )
10 )
Appellant, )
11 )
v. ) M E M O R A N D U M1
12 )
R. TODD NEILSON, Chapter 7 )
13 Trustee, )
)
14 Appellee. )
______________________________)
15
Argued and Submitted on November 16, 2011
16 at Pasadena, California
17 Filed - March 21, 2012
18 Appeal from the United States Bankruptcy Court
for the Central District of California
19
Honorable Vincent P. Zurzolo, Bankruptcy Judge, Presiding
20
21 Appearances: Hiren M. Patel, Deputy Attorney General, argued
for the Appellant. Uzzi O. Raanan of Danning,
22 Gill, Diamond & Kollitz, LLP, argued for the
Appellee.
23
24
25
26 1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1 Before: HOLLOWELL, PAPPAS and PERRIS2, Bankruptcy Judges.
2 I. INTRODUCTION
3 In this interlocutory appeal, the California State
4 Controller (“Controller”) seeks the reversal of an order
5 certifying a nationwide class of chapter 73 trustees who did,
6 could have, or might in the future make a claim for their
7 respective debtor’s funds that escheated to the State of
8 California prepetition. For the reasons given below, we REVERSE
9 the bankruptcy court’s certification of the class action and
10 REMAND the matter to the bankruptcy court to issue a
11 certification order solely under Civil Rules 23(a) and 23(b)(2),
12 and which narrows the scope of the certified class action by
13 eliminating claims for interest damages and claims for willful
14 violation of the automatic stay.
15 II. FACTS
16 A. The Bankruptcy Case
17 In April 2006, Death Row Records, Inc. (“DRR”) and Marion
18 “Suge” Knight, Jr. (“Knight”) each filed voluntary petitions for
19 relief under chapter 11. In July 2006, appellee R. Todd Neilson
20 (“Neilson”) was appointed the chapter 11 trustee for the DRR
21 estate. In January 2009, the Knight estate was consolidated with
22 the DRR estate (the consolidated estates comprise the “Debtor”),
23
2
24 Hon. Elizabeth L. Perris, United States Bankruptcy Judge
for the District of Oregon, sitting by designation.
25
3
Unless otherwise indicated, all chapter and section
26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
27 All Rule references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. Federal Rules of Civil Procedure are
28 referred to as “Civil Rules.”
-2-
1 with Neilson acting as the chapter 11 trustee. In November 2009,
2 the Debtor’s case was converted to chapter 7. Neilson was
3 appointed the chapter 7 trustee (“Trustee”).
4 B. Trustee’s Escheat Claim
5 In March 2009, the Trustee filed a claim with the Controller
6 on behalf of the Debtor seeking a return of the Debtor’s money
7 that had escheated to the State of California (“California”)
8 under California’s Unclaimed Property Law (the “UPL”), Cal. Civ.
9 Proc. Code (“CCP”) § 1500, et. seq. On May 26, 2010, the
10 Controller’s office issued a letter to the Trustee (“Letter”),
11 which granted in part and denied in part the Trustee’s claim.
12 The Letter explained that the Controller denied thirteen of the
13 sixteen claims asserted by the Trustee on the basis that it was
14 “the long-standing position of this office that once unclaimed
15 property has escheated to California, it is not subject to claims
16 by bankruptcy trustees claiming on behalf of a bankruptcy estate
17 or debtor.”
18 The Letter explained that because thirteen of the accounts
19 had escheated before the bankruptcy petitions were filed, legal
20 and equitable title to the accounts vested in California. The
21 Letter acknowledged that the former owner of the accounts could
22 divest California of title by filing a verified claim under the
23 procedures set forth in the UPL, but until such a claim was
24 filed, verified and approved, “such property would not be
25 belonging or owed to such property or entity (debtor).” The
26 Letter stated that because that procedure had not occurred
27 prepetition, “the property is not part of bankruptcy estate as
28 defined in 11 U.S.C. § 541.”
-3-
1 The Letter continued:
2 In addition, a trustee acts on behalf of the bankruptcy
estate, not the debtor. For purposes of claiming
3 escheated property, “owner” means the person who had
legal right to property prior to its escheat
4 (California Code of Civil Procedures Section 1540;
subdivision (d)). Once the property vests in the State
5 of California, only the former owner can claim the
property. As a result, it does not appear that the
6 bankruptcy estate, or its trustee, had a legal right to
the property before it escheated to the State of
7 California. Consequently, because title to the
property sought vested in the State of California, and
8 is not, therefore, property of the debtor, these funds
held by the state under the Unclaimed Property Law are
9 not subject to a claim by a bankruptcy trustee.
10 The total amount of the claims denied was $10,166.44.
11 C. The Class Action
12 On August 25, 2010, the Trustee filed a complaint commencing
13 a class action against the Controller:
14 (1) for turnover of the class members’ and the Debtor’s
15 property and for an accounting pursuant to § 543;
16 (2) for turnover of property under § 542;
17 (3) for wrongful denial of claims under CCP § 1540;
18 (4) to avoid and recover unjust enrichment;
19 (5) for willful violation of the automatic stay;
20 (6) for declaratory relief seeking a determination that
21 debtors’ property that escheats to California prepetition is
22 property of the class members’ respective bankruptcy estates
23 subject to the exclusive control of the debtors’ respective
24 bankruptcy estates’ trustees; and,
25 (7) for injunctive relief enjoining the Controller from
26 continuing to deny claims made by bankruptcy trustees on behalf
27 of their estates.
28
-4-
1 The complaint sought turnover under § 542 and/or § 543 of
2 the amount of escheated funds plus interest and actual damages on
3 the stay violation claim, including costs and attorneys’ fees
4 incurred in bringing the class action. The Trustee filed and
5 served a First Amended Complaint (the “Class Action”) on
6 September 8, 2010, asserting the identical claims for relief.
7 D. Controller’s Motion To Dismiss
8 On October 29, 2010, the Controller filed a Motion to
9 Dismiss under Rules 7012 and 7019 (“MTD”), asserting that the
10 Eleventh Amendment barred the Class Action, the bankruptcy court
11 lacked jurisdiction under 28 U.S.C. §§ 1334 and 157, and the
12 Trustee lacked authority under the Bankruptcy Code to file the
13 Class Action.
14 On January 3, 2011, the bankruptcy court issued an order
15 (“Dismissal Order”) that dismissed the Trustee’s CCP § 1540 and
16 unjust enrichment claims. In its Dismissal Order, the bankruptcy
17 court denied the balance of the MTD because the bankruptcy court
18 determined it had jurisdiction over the claims alleging
19 violations of the Bankruptcy Code.
20 The Controller did not seek leave to appeal the Dismissal
21 Order. On February 24, 2011, the Controller filed an answer
22 denying all the Trustee’s allegations. The Controller asserted
23 lack of subject matter jurisdiction as an affirmative defense on
24 the grounds of: sovereign immunity, lack of jurisdiction under
25 28 U.S.C. §§ 1334 and 157, mootness, and that the Class Action
26 was not a core proceeding. The Controller also asserted as an
27 affirmative defense that the Trustee could not satisfy Civil
28 Rule 23 requirements for class certification (made applicable in
-5-
1 bankruptcy adversary proceedings by Rule 7023) and lacked
2 standing to act as the class representative.
3 E. Class Certification
4 In December 2010, the Trustee filed a motion for: (1) class
5 certification; (2) appointment of the Trustee as the class
6 representative; (3) permanent appointment of class counsel; and
7 (4) approval of the form of class notice (the “Certification
8 Motion”). The Controller filed an opposition (“Opposition”).
9 The Opposition challenged class certification under Civil
10 Rule 23, the definition of the class (“Class”), and the
11 definition of the Class claims (“Claims”). The Controller did
12 not, however, raise sovereign immunity or other subject matter
13 jurisdiction challenges previously raised in the MTD.
14 At a March 10, 2011 hearing on the Certification Motion, the
15 bankruptcy court granted the motion and made oral findings
16 concerning the elements of Civil Rule 23(a) and (b) finding that:
17 (1) numerosity was satisfied because the number of chapter 7
18 trustees in California and nationwide would be difficult to
19 manage absent a class action;
20 (2) commonality was satisfied because the Claims bear the
21 same or sufficient number of characteristics in common, so “that
22 it makes sense” to have them litigated in a Class Action;
23 (3) typicality of injury was satisfied by the Letter, which
24 referred to the long standing position of the Controller that
25 trustees could not make claims for debtors’ escheated property;
26 and,
27
28
-6-
1 (4) adequacy of representation was met because there is no
2 conflict of interest between the Debtor’s interest and the Class’
3 interest in having the Trustee pursue the Class Action.
4 The bankruptcy court also found that the issues were clearly
5 defined as required by Civil Rule 23(b) because it was a narrow
6 class where common questions of law and fact predominate.
7 On April 8, 2011, the bankruptcy court issued an order
8 (“Class Certification Order”) certifying the Class Action and
9 appointing the Trustee as Class representative. The Class
10 Certification Order also appointed Class counsel and approved the
11 form of the Class Action notice, which included an “opt out”
12 provision that would permit members to elect to be excluded from
13 the Class.
14 The Class Certification Order defined the Class as:
15 all bankruptcy trustees who previously filed, could
have filed, or will file in the future, claims with the
16 State of California on behalf of the bankruptcy estates
of debtors whose property escheated to the State of
17 California prior to the filing of the bankruptcy
petitions commencing their respective bankruptcy cases,
18 and which claims were rejected by the Controller on the
grounds that such [escheated] property is not property
19 of the bankruptcy estates . . . and/or that the
trustees lack authority to file bankruptcy claims under
20 CCP Section 1540.
21 F. Controller’s Motion For Leave To Appeal
22 On April 21, 2011, the Controller filed a Motion For Leave
23 to Appeal the Class Certification Order and a Notice of Appeal.
24 On April 26, 2011, a BAP panel (“Panel”) issued a briefing order.
25 In its brief, the Controller argued that appeal should be
26 permitted so that the Class Certification Order, as well as the
27 sovereign immunity and 28 U.S.C. § 1334 jurisdictional arguments
28 raised in the MTD, could be reviewed. The Trustee’s opposition
7
1 argued that the Controller had waived his sovereign immunity
2 argument by not seeking to appeal the MTD. On June 15, 2011, the
3 Panel issued an order granting leave to appeal. That order is
4 silent on the scope of the appeal. On September 1, 2011, the
5 Panel issued an order granting a Stay Pending Appeal.
6 III. JURISDICTION
7 The Controller challenges the bankruptcy court’s subject
8 matter jurisdiction. To the extent that the challenge is not
9 sustained, the bankruptcy court had jurisdiction under 28 U.S.C.
10 §§ 1334(a) and 157(a), (b)(1) and (B)(2)(A), (B), (G) and (O).
11 We have jurisdiction under 28 U.S.C. § 158(a)(3) and the Panel’s
12 June 15, 2011 order granting leave to appeal.
13 IV. ISSUES
14 1. Did the bankruptcy court have subject matter
15 jurisdiction over the Class Action?4
16 2. Did the bankruptcy court err in certifying the Class?
17 V. STANDARD OF REVIEW
18 We review findings of fact for clear error and issues of law
19 de novo. Litton Loan Serv’g, LP v. Garvida (In re Garvida),
20 347 B.R. 697, 703 (9th Cir. BAP 2006). A bankruptcy court’s
21 determination of its subject matter jurisdiction is reviewed de
22
23 4
Only the Class Certification Order is at issue in this
interlocutory appeal. The Controller did not raise the sovereign
24
immunity and 28 U.S.C. §§ 1334 and 157 subject matter
25 jurisdiction arguments in the Opposition to the Certification
Motion. Because we have the discretion to address purely legal
26 issues prerequisite to the Class Certification Order, we address
27 the bankruptcy court’s subject matter jurisdiction in this
Memorandum. See, e.g., Pac. Exp. v. United Airlines, Inc.,
28 959 F.2d 814, 819 (9th Cir. 1992).
8
1 novo. Sea Hawk Seafoods, Inc. v. Alaska (In re Valdez Fisheries
2 Dev. Ass’n, Inc.), 439 F.3d 545, 547 (9th Cir. 2006). The
3 existence of sovereign immunity is a question of law reviewed de
4 novo. Del Campo v. Kennedy, 517 F.3d 1070, 1075 (9th Cir. 2008);
5 Emp’t Dev. Dep’t. of Cal. v. Joseph (In re HPA Assocs.), 191 B.R.
6 167, 171 (9th Cir. BAP 1995). We review issues of standing de
7 novo. La Asociacion de Trabajadores de Lake Forest v. City of
8 Lake Forest, 624 F.3d 1083, 1087 (9th Cir. 2010).
9 We review an order on class certification under Civil
10 Rule 23 for an abuse of discretion. Vinole v. Countrywide Home
11 Loans, Inc., 571 F.3d 935, 939 (9th Cir. 2009). As the Ninth
12 Circuit noted, appellate review is limited:
13 to whether the [court] correctly selected and applied
[Civil] Rule 23's criteria. An abuse of discretion
14 occurs when the [court], in making a discretionary
ruling, relies upon an improper factor, omits
15 consideration of a factor entitled to substantial
weight, or mulls the correct mix of factors but makes a
16 clear error of judgment in assaying them.
17 Id. (citing Parra v. Bashas’, Inc., 536 F.3d 975, 977-78 (9th
18 Cir. 2008). To the extent that a ruling on a Civil Rule 23
19 requirement is supported by a finding of fact, that finding is
20 reviewed for clear error. Wolin v. Jaguar Land Rover N. Am.,
21 LLC, 617 F.3d 1168, 1171-72 (9th Cir. 2010). A factual finding
22 is clearly erroneous if it is illogical, implausible, or without
23 support in inferences that can be drawn from the facts in the
24 record. United States v. Hinkson, 585 F.3d 1247, 1262-63 (9th
25 Cir. 2009) (en banc).
26
27
28
9
1 VI. DISCUSSION
2 I. Subject Matter Jurisdiction
3 A. Sovereign Immunity
4 Under the Eleventh Amendment, “[t]he Judicial Power of the
5 United States shall not be construed to extend to any suit in law
6 or equity, commenced or prosecuted against one of the United
7 States by citizens of another state or by citizens or subjects of
8 any foreign state.” U.S. Const. amend. XI. Generally speaking,
9 the doctrine of sovereign immunity precludes a federal court from
10 hearing a private person’s suit against a State, state agencies
11 and state officials, acting in their official capacities. Va.
12 Office for Prot. and Advocacy v. Stewart, - U.S. - , 131 S.Ct.
13 1632, 1637-38 (2011); Peirick v. Ind. Univ.-Purdue Univ.
14 Indianapolis Athletics Dep’t., 510 F.3d 681, 695 (7th Cir. 2007).
15 The Controller contends that the Eleventh Amendment deprives
16 the bankruptcy court of jurisdiction over the Class Action
17 because it implicates the State’s “core” sovereign interest in
18 establishing and administering the process for dealing with
19 escheated property. In order to evaluate that assertion, we
20 begin with a brief overview of exceptions to sovereign immunity
21 in bankruptcy proceedings.
22 1. Exceptions To Sovereign Immunity In Bankruptcy
Proceedings
23
24 There are three generally recognized exceptions to a State’s
25 sovereign immunity in a bankruptcy case. The first, and best
26 settled theory, is that by filing a claim, a State waives its
27 sovereign immunity with respect to its claim. Gardner v. New
28 Jersey, 329 U.S. 565, 573-74 (1947). Second, Congress may
10
1 abrogate a State’s immunity if it: (1) unequivocally expresses
2 its intent to do so; and (2) acts pursuant to a valid exercise of
3 its powers. Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 55
4 (1996). Third, in ratifying the U.S. Constitution, which
5 included authorizing Congress to enact uniform laws on the
6 subject of bankruptcies, the States acquiesced to a limited
7 subordination of their sovereign immunity to the federal courts
8 in the bankruptcy arena. Cent. Va. Cmty. Coll. v. Katz, 546 U.S.
9 356, 362-63 (2006).
10 Here, the second and third exceptions are at issue. We
11 briefly review each in turn.
12 a) Congressional Abrogation Under § 106(a)
13 In 1994, Congress passed § 106(a) in an effort to abrogate
14 the sovereign immunity of all governmental units with respect to
15 specifically enumerated sections of the Bankruptcy Code,
16 including sections regarding turnover of assets (§§ 542, 543) and
17 the automatic stay (§ 362). However, the validity of § 106(a)
18 was called into serious doubt by the Supreme Court’s decision in
19 Seminole Tribe. 517 U.S. at 59. In Seminole Tribe, the Supreme
20 Court overturned Pennsylvania v. Union Gas Co., 491 U.S. 1
21 (1989), and rejected the contention that Congress could abrogate
22 a States’ sovereign immunity under its Article I powers,
23 specifically, the Indian Commerce Clause. Id. at 66.
24 The Bankruptcy Clause (U.S. Const. art. I, § 8, cl. 4) of
25 the U.S. Constitution is also an Article I power. After Seminole
26 Tribe, a number of courts of appeal, including the Ninth Circuit,
27 relied on Seminole Tribe to hold that § 106(a) was not a valid
28 abrogation of the States’ Eleventh Amendment immunity. See,
11
1 e.g., Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d
2 1111 (9th Cir. 2000).
3 The Sixth Circuit, however, came to a different result in
4 Hood v. Tenn. Student Assistance Corp., 319 F.3d 755 (6th Cir.
5 2003) aff’d, Tennessee Student Assistance Corp. v. Hood, 541 U.S.
6 440 (2004). The Sixth Circuit’s decision in Hood was based on
7 two rationales. The first was that the States waived their
8 sovereign immunity when they collectively agreed in the plan of
9 the Constitutional Convention to allow uniform federal power in
10 the area of bankruptcy. Id. at 752. The second part of the
11 Sixth Circuit’s analysis was that the adversary proceeding at
12 issue, a student loan undue hardship discharge complaint, was not
13 a traditional lawsuit in which the state was forced to defend
14 itself against an accusation of wrongdoing. Instead, the
15 adversary proceeding simply allowed the “adjudication of
16 interests claimed in a res.” Id. at 768. The State could
17 determine if it wanted to assert an interest in the res or it
18 could decline to do so. Under this analysis, the bankruptcy
19 court’s jurisdiction extended only to the res and not directly
20 against the State. Id.
21 The Supreme Court granted certiorari in Hood, but did not
22 decide if Congress had authority under the Bankruptcy Clause to
23 abrogate States’ sovereign immunity in § 106(a). Rather, the
24 Supreme Court held that an adversary proceeding intended to
25 determine if a student loan could be discharged was an in rem
26 proceeding that did not require the bankruptcy court to assert in
27 personam jurisdiction over the State, and consequently, did not
28 impact the State’s sovereign immunity. Id. at 453.
12
1 b) Waiver By Ratification
2 In 2006, the Supreme Court again examined the issue of
3 States’ sovereign immunity in bankruptcy proceedings. In Katz,
4 the bankruptcy trustee of a bookstore business brought an
5 avoidance and preference action against four state colleges.
6 546 U.S. 356. Instead of deciding if § 106(a) was a valid
7 abrogation of the States’ sovereign immunity, the Court phrased
8 the issue as follows:
9 The relevant question is not whether Congress has
“abrogated” States’ immunity in proceedings to recover
10 preferential transfers. See 11 U.S.C. § 106(a). The
question, rather, is whether Congress’ determination that
11 States should be amenable to such proceedings is within the
scope of its powers to enact “Laws on the subject of
12 Bankruptcies.”
13 Id. at 379.
14 Katz held that “[i]n ratifying the Bankruptcy Clause, the
15 States acquiesced in a subordination of whatever sovereign
16 immunity they might otherwise have asserted in proceedings
17 necessary to effectuate the in rem jurisdiction of the bankruptcy
18 courts.” Id. at 378. While bankruptcy jurisdiction is
19 understood as principally being in rem, the jurisdiction of the
20 court’s adjudicating rights in a bankruptcy estate includes “the
21 power to issue compulsory orders to facilitate the administration
22 and distribution of the res.” Id. at 362. Therefore, a federal
23 court exercising bankruptcy in rem jurisdiction could also issue
24 ancillary orders in furtherance of that jurisdiction. Id. at
25 371. Katz recognized that an order mandating a turnover of
26 property “although ancillary to and in furtherance of the court’s
27 in rem jurisdiction, might itself involve in personam process.”
28 Id. at 372. Therefore, to the extent that the exercise of
13
1 bankruptcy ancillary jurisdiction implicated the States’
2 sovereign immunity, the States agreed in the plan of convention
3 not to assert that immunity. Id. at 373, 378.
4 Katz did not define the range of proceedings that would
5 qualify as an ancillary proceeding and fall within the States’
6 waiver of sovereign immunity. However, it provided some guidance
7 by setting out three critical in rem functions of bankruptcy
8 courts: (1) the exercise of exclusive jurisdiction over all of
9 the debtor’s property; (2) the equitable distribution of that
10 property among the debtor’s creditors; and (3) the ultimate
11 discharge that gives the debtor a “fresh start.” Id. at 363-64.
12 2. Sovereign Immunity Does Not Apply To The Class
Action’s Turnover Claims Even If It Interferes
13 With The State’s Procedures For Administering
Escheated Property
14
15 We now turn to the Controller’s sovereign immunity
16 challenges to the Class Action. We begin with a review of the
17 California statutory scheme for dealing with unclaimed property
18 in order to decide if California’s sovereign interest is
19 implicated by the Class Action.
20 Escheat is a procedure for dealing with unclaimed property
21 with roots in feudal law. In common law, if a tenant of real
22 property died without heirs, the land escheated to the lord of
23 the fee, but as feudal titles do not exist in the United States,
24 it is the State, by virtue of its sovereignty, which steps into
25 the place of the feudal lord, to take title to escheated
26 property. See Taylor v. Westly, 402 F.3d 924, 926 (9th Cir.
27 2005).
28
14
1 California’s escheat procedures are governed by the UPL.
2 The law has two purposes: (1) “to protect unknown owners by
3 locating them and restoring their property to them”; and (2) “to
4 give the [S]tate, rather than the holders of unclaimed property
5 the benefit of the use of it, most of which experience shows will
6 never be claimed.” Harris v. Westley, 116 Cal. App. 4th 214, 219
7 (Cal. Ct. App. 2004); Fong v. Westly, 117 Cal. App. 4th 841, 844
8 (Cal. Ct. App. 2004).
9 The UPL distinguishes between “escheat” and “permanent
10 escheat.” CCP § 1300(c) and (d). Where property has not
11 permanently escheated, title vests in California; but, the title
12 is defeasible and meant to be temporary until a claim by the
13 owner is made pursuant to the UPL. Morris v. Chiang, 163 Cal.
14 App. 4th 753, 757 (Cal. Ct. App. 2008). Owners5 of property that
15 the Controller holds, but that have not permanently escheated to
16 California, may claim and receive their property back, but
17 interest is not payable on a claim for escheated funds. Id. at
18 756; CCP § 1540(c). The UPL provides that if a claimant is
19 dissatisfied with the Controller’s determination not to return
20 escheated property, the claimant may seek judicial review of the
21 denial in California state court. CCP § 1352(c).
22 To the extent funds held by the Controller have not
23 permanently escheated to the State, the Eleventh Amendment does
24
25
5
An owner is defined as “the person who had legal right to
26 the property prior to its escheat, his or her heirs, his or her
27 legal representative, or a public administrator acting pursuant
to authority granted in Sections 7660 and 7661 of the Probate
28 Code.” CCP § 1540(d).
15
1 not bar the Class Action because it seeks a return of the Class
2 members’ — not California’s — property. Suever v. Connell,
3 439 F.3d 1142, 1146-47 (9th Cir. 2006); see also Taylor, 402 F.3d
4 at 933.
5 The Controller does not, however, argue that the Class
6 Action is improper because it seeks California’s funds. Instead,
7 he argues that the Class Action improperly interferes with
8 California’s core interest in administering the UPL. Unlike the
9 plaintiffs in Suever and Taylor, where claims were not initially
10 filed with the Controller, here, the Trustee did file a claim
11 with the Controller. Therefore, according to the Controller,
12 California’s “core” interest in having appeals of denied claims
13 heard in California state court bars the Class Action.
14 Furthermore, because the Class definition includes trustees whose
15 claims were rejected because of a determination that they “lacked
16 authority” to file claims under CCP § 1540, the Controller
17 asserts that the Class Action improperly seeks to interfere with
18 his administration of California law.
19 However, the Controller ignores a critical fact. The reason
20 why the Class members do not have authority to file claims under
21 CCP § 1540 is because of the Controller’s determination that
22 debtors’ escheated funds are not bankruptcy estate property. The
23 Class Action, therefore, challenges the Controller’s application
24 of federal law, not the UPL.
25 Nevertheless, the Controller asserts that any challenge to
26 the Controller’s alleged policy, even if the policy is based on
27 an interpretation of federal bankruptcy law, must be brought in
28
16
1 California state court pursuant to § 106(a)(4).6 Whatever the
2 scope of Congressional abrogation may be under § 106(a) after
3 Hood and Katz, the provisions of § 106(a), which exempt States
4 from federal bankruptcy law remain viable. 2 COLLIER ON
5 BANKRUPTCY ¶ 106.03 (Alan N. Resnick & Henry J. Sommer eds., 16th
6 ed. 2011). Thus, according to the Controller, § 106(a)(4)
7 requires that denials of trustees’ claims to escheated property
8 be heard exclusively in a California state court.
9 Section 106(a)(4)’s scope, however, is limited to the
10 enforcement of orders against a State. It does not require that
11 state procedures be followed to obtain that order. If
12 jurisdiction is proper, an order may be obtained against a State
13 in federal court. Once the order is obtained, § 106(a)(4)
14 requires that it be enforced, consistent with applicable state
15 law.
16 The Controller contends that because the Trustee made a
17 claim under the UPL, he acknowledged that he was bound to comply
18 with the UPL’s requirements regarding that claim. As a result,
19 the Controller contends that the Trustee’s only recourse, if he
20 was unhappy with the Controller’s decision, was to file an action
21 in California state court. If the Controller’s rejection of the
22 Debtor’s claims was based on state law, the Controller’s argument
23 might be persuasive. However, once a dispute arises about
24
6
25 Section 106(a)(4) provides: “The enforcement of any such
order, process, or judgment against any governmental unit shall
26 be consistent with appropriate nonbankruptcy law applicable to
27 such governmental unit and, in the case of a money judgment
against the United States, shall be paid as if it is a judgment
28 rendered by a district court of the United States.”
17
1 whether property is property of a bankruptcy estate, exclusive
2 jurisdiction to resolve that question lies with the federal
3 courts. 28 U.S.C. § 1334(e); In re Wash. Mut., Inc., 461 B.R.
4 200, 217 (Bankr. D. Del. 2011); Brown v. Fox Broad. Co., (In re
5 Cox), 433 B.R. 911, 919 (Bankr. N.D. Ga. 2010); In re Roman
6 Catholic Archbishop of Portland in Or., 335 B.R. 842, 850-51
7 (Bankr. D. Or. 2005). Because the Class Action is limited to
8 members whose claims are denied because of the purported
9 determination that such funds are not bankruptcy estate property,
10 jurisdiction is proper in the bankruptcy court.
11 In his reply brief, the Controller asserts that if
12 bankruptcy courts have exclusive jurisdiction over estate
13 property, there is no need for the Class Action because the Class
14 members can file turnover actions in their individual bankruptcy
15 cases. This argument is meritless. Just because individual
16 trustees may file turnover actions in their cases, does not mean
17 that a class action is not appropriate. Here, each claim of
18 individual trustees is quite small — making it difficult for the
19 trustees to obtain adequate legal representation. A class action
20 permits the trustees to spread litigation costs and, therefore,
21 it may be the most efficient way for trustees to adjudicate their
22 claims.
23 The Controller also argues that Suever and Taylor are not
24 applicable because the holdings in those cases require a showing
25 that in refusing to return escheated property, the Controller has
26 committed ultra vires or unconstitutional acts. See Suever,
27 439 F.3d at 1147. According to the Controller, the determination
28 that debtors’ escheated funds are not property of their
18
1 bankruptcy estates is, at most, a legal error, not an “ultra
2 vires” act. However, wrongfully exercising power over estate
3 property is not just a legal error, it’s a violation of federal
4 law and, therefore, beyond the powers granted to the Controller
5 under the UPL. Accordingly, if the Class Action allegations are
6 true, the Controller’s action would constitute an ultra vires
7 act.7
8 To the extent turnover claims of the Class Action do not
9 seek anything more than turnover of debtors’ escheated property,
10 the Eleventh Amendment does not bar the Claims. Id. Moreover,
11 to the extent that California has a sovereign interest in having
12 the UPL’s procedures followed, that interest was waived regarding
13 determinations of what constitutes bankruptcy estate property
14 when California ratified the Constitution. Katz 546 U.S. at 373,
15 378.
16 3. The Class Action’s Assertion Of In Personam
Jurisdiction Over The Controller Is Not Proper
17
18 a) Turnover Claims
19 The Controller asserts that bankruptcy in rem jurisdiction,
20 as explained in Katz and Hood, is limited to adjudicating claims
21 of specific property of individual bankruptcy estates and that
22 because the Class Action seeks an injunction to overturn an
23 alleged policy of the Controller, it improperly invokes the in
24 personam jurisdiction of federal courts over a state officer.
25 In Katz, however, the Supreme Court held that bankruptcy
26
7
27 We do not need to decide whether the Class Actions’
allegations are true, only that it alleges actions which would be
28 ultra vires. See Taylor, 402 F.3d at 934.
19
1 jurisdiction could properly be asserted over ancillary
2 proceedings, including in personam proceedings to the extent
3 necessary to effectuate jurisdiction over the res. Id. at 1004.
4 Accordingly, the exercise of ancillary in personam jurisdiction
5 over a state officer, if necessary to effectuate a turnover of
6 estate assets, is permitted because the States agreed in the plan
7 of convention not to assert that immunity. Id. at 373. The
8 result is not any different because the in personam jurisdiction
9 is being asserted in a class action. The compensatory purpose of
10 class actions, which permit litigation and compensation of small
11 claims that would otherwise not be pursued, is as important
12 inside bankruptcy as outside. In re Am. Reserve Corp., 840 F.2d
13 487, 492 (7th Cir. 1988); Aiello v. Providian Fin. Corp., Inc.
14 (In re Aiello), 231 B.R. 693, 712 (Bankr. N.D. Ill. 1999).
15 b) Stay Violation Claims
16 The automatic stay is the mechanism which protects the core
17 bankruptcy functions of exercising jurisdiction over estate
18 property, equitably distributing estate property and protecting a
19 debtor’s discharge. The stay “facilitates the orderly
20 administration and distribution of the estate by ‘protect[ing]
21 the bankruptcy estate from being eaten away by creditors’
22 lawsuits and seizures of property before the trustee has had a
23 chance to marshal the estate’s assets and distribute them equally
24 among the creditors.’” Fla. Dep’t of Revenue v. Diaz (In re
25 Diaz), 647 F.3d 1073, 1085 (11th Cir. 2011) quoting Martin-
26 Trigona v. Champion Fed. Sav. & Loan Ass’n, 892 F.2d 575, 577
27 (7th Cir. 1989). If a proceeding’s purpose is to facilitate the
28 in rem function of bankruptcy jurisdiction by assuring that the
20
1 automatic stay is honored, then it falls within the “consent by
2 ratification” exception to sovereign immunity. Id. at 1085-86
3 (determining that there will generally be bankruptcy jurisdiction
4 over contempt motions against States for stay violations); see
5 also In re Griffin, 415 B.R. 64, 71 (Bankr. N.D.N.Y. 2009)
6 (bankruptcy jurisdiction over emotional distress damages for stay
7 violation).
8 The Controller cites In re Diaz as authority for the
9 proposition that there is no waiver of sovereign immunity for
10 stay violation claims after a debtor’s discharge is issued. In
11 In re Diaz, a chapter 13 debtor sued the Departments of Revenue
12 and Social Services for damages as a result of an alleged stay
13 violation when they attempted to collect a child support
14 obligation. The debtor brought suit after the chapter 13 plan
15 had been completed and the estate assets had been fully
16 distributed. As a result, the court found that there was no
17 longer any in rem function of the bankruptcy court because the
18 estate had been fully distributed. 647 F.3d at 1086.
19 In re Diaz does not, however, stand for the broad
20 proposition that there cannot be an exercise of ancillary
21 jurisdiction for stay violations after a debtor receives a
22 discharge. Such a result would be inconsistent with § 362(a)’s
23 protection of estates’– as well as debtors’– property. 11 U.S.C.
24 § 362(a)(2), (3) and (4); Little Pat, Inc. v. Conter (In re
25 Soll), 181 B.R. 433, 444 (Bankr. D. Ariz. 1995) (“The automatic
26 stay protects not only debtors, but also property of the
27 estate.”). It is also inconsistent with § 362(c)(1), which
28 maintains the stay until such property is “no longer estate
21
1 property.” Estate property remains protected by the automatic
2 stay until it is divested from the estate by exemption,
3 abandonment, sale and, if properly scheduled, by the closing of
4 the case under § 554(c).
5 c) Damages8
6 The Class Action seeks interest on the Class members’
7 escheated property from the time a claim is denied by the
8 Controller until paid. The UPL, however, does not allow a
9 recovery of interest on returned escheated funds. CCP § 1540(c).
10 The Class Action cannot provide more relief to the Class than is
11 otherwise available to other claimants under the UPL. Therefore,
12 § 106(a)(4) applies and requires that any turnover order be
13 consistent with the UPL, which limits recovery solely to the
14 amount of the escheated funds.
15 The Controller argues that § 106(a)(4) should also apply to
16 any damages arising out of the stay violation claims because the
17 UPL does not provide for damages for violations of § 362(a).
18 However, the UPL is not the law at issue in considering stay
19 violations. Stay violations are governed by the Bankruptcy Code.
20 The Controller’s position would allow governmental units to
21 violate the stay with impunity because there would likely never
22 be a state law that authorizes damages for such violations. As a
23 result, bankruptcy courts would be unable to enforce their
24
8
25 The Class Action seeks actual damages in the form of
interest on the turnover claims and actual damages and sanctions
26 on the stay violation claims. However, in his Answering Brief
27 and at oral argument, the Trustee asserted that he is seeking
damages solely for the costs and attorneys’ fees incurred in
28 prosecuting the Class Action.
22
1 jurisdiction over estate property and debtors’ discharges. See,
2 e.g., Fla. Dep’t. of Revenue v. Omine (In re Omine), 485 F.3d
3 1305, 1314 (11th Cir. 2007), opinion withdrawn due to settlement,
4 2007 WL 6813797 (June 26, 2007)(“The bankruptcy court’s ancillary
5 order to enforce an automatic stay, which is one of the
6 fundamental debtor protections provided by the bankruptcy laws,
7 operates free and clear of the Florida DOR’s claim of sovereign
8 immunity.”).
9 In summary, the Claims for interest on escheated property
10 are barred by sovereign immunity, but the damage claims for stay
11 violation are not.
12 B. Jurisdiction Under 28 U.S.C. §§ 1334(a) And 157
13 In addition to seeking dismissal under Civil Rule 12 for
14 lack of subject matter jurisdiction because of sovereign
15 immunity, the Controller also sought dismissal under 28 U.S.C.
16 §§ 1334 and 157. On appeal, the Controller’s only mention of
17 this argument appears in a footnote asserting that the Class
18 Action “is not really an action that arises under §§ 543 [sic],
19 543 or 362, so the bankruptcy court lacked authority to assert
20 jurisdiction under 28 U.S.C. §§ 1334 and 157." The Controller
21 does not further explain that statement; nevertheless, we will do
22 our best to address it.
23 The Claims are based on § 105 (contempt), § 362 (violations
24 of the stay); and § 542 (turnover of estate property). Such
25 claims arise under the Bankruptcy Code and, therefore, the
26 district court has jurisdiction over the Claims pursuant to
27
28
23
1 28 U.S.C. § 1334(b).9 As explained below, the Claims are also
2 “core” proceedings under 28 U.S.C. § 157(b)(2) and, accordingly,
3 bankruptcy courts may enter final judgment in such proceedings
4 subject to any constitutional limitations on the powers of
5 Article I courts under Stern v. Marshall, – U.S. – ,
6 131 S.Ct. 2594 (2011).
7 The Class Action seeks turnover of estate property. Before
8 turnover can be required, there must be a determination that the
9 property is estate property. The Ninth Circuit has distinguished
10 actions seeking to obtain property owed to a debtor from actions
11 seeking to obtain property of a debtor. See, e.g., John Hancock
12 Mut. Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1165
13 (9th Cir. 1990). With respect to the latter, “an action to
14 obtain property of the estate would necessarily involve a
15 determination regarding ‘the nature and extent of property of the
16 estate,’ the action would also be a matter ‘concerning the
17 administration of the estate’ and, therefore, a core proceeding.”
18 Id. (citing 28 U.S.C. § 157(b)(2)(A)).
19 A determination of whether there has been a stay violation
20 is also a core proceeding. Johnson v. Smith (In re Johnson),
21 575 F.3d 1079, 1083 (10th Cir. 2009). Exercise of civil contempt
22
23 9
Section 1334(b) provides in relevant part:
24
(b) Except as provided in subsection (e)(2), and
25 notwithstanding any Act of Congress that confers
exclusive jurisdiction on a court or courts other than
26 the district courts, the district courts shall have
27 original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or
28 related to cases under title 11.
24
1 powers under § 105(a), if based on a core matter such as
2 enforcement of the automatic stay, is also a core matter.
3 Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d
4 444, 448 (10th Cir. 1990).
5 Accordingly, the bankruptcy court did not err in determining
6 that it had subject matter jurisdiction over the Class Action
7 under 28 U.S.C. §§ 1334 and 157.
8 C. Nationwide Scope Of The Class Action
9 The Controller argues that even if the bankruptcy court has
10 jurisdiction over the Debtor’s escheat claims, that jurisdiction
11 cannot be extended to assert jurisdiction over other bankruptcy
12 estates. According to the Controller, a bankruptcy court’s
13 jurisdiction is strictly limited to the cases filed in its court
14 and may not be extended to cases in other districts.
15 Questions regarding the territorial scope of a bankruptcy
16 court's jurisdiction must begin with an analysis of district
17 court jurisdiction from which it is derived. Under 28 U.S.C.
18 §§ 1334(a) and (b), district courts have jurisdiction over all
19 bankruptcy cases, and over all civil proceedings “arising under
20 title 11, or arising in or related to cases under title 11.”
21 Pursuant to 28 U.S.C. §§ 1334, 157, and 151, district courts may
22 assign their bankruptcy jurisdiction to bankruptcy courts.10
23 Accordingly, with the exception of personal injury tort claims
24 (28 U.S.C. § 157(b)(5)), bankruptcy courts have authority to
25
26
10
27 This is subject to any constitutional limits on the
authority of Article I judges. See generally Stern v. Marshall,
28 131 S.Ct. 2594 (2011).
25
1 adjudicate all matters that fall within the district court's
2 bankruptcy jurisdiction.
3 The Controller asserts, however, that the reference in
4 28 U.S.C. § 1334(e)11 to “a case” limits bankruptcy jurisdiction
5 to the district court where the case is filed – the so-called
6 “home court.” But, federal bankruptcy jurisdiction is not that
7 narrow. See Noletto v. NationsBanc Mortg. Corp. (In re Noletto),
8 244 B.R. 845, 851-852 (Bankr. S.D. Ala. 2000) holding that “home
9 court” interpretation of 28 U.S.C. § 1334(e) rendered the venue
10 provisions of 28 U.S.C. § 1409 meaningless. The Noletto court
11 concluded that only in rem claims against estate property were
12 limited to the “home court.” Id. at 856; see also Cano v. GMAC
13 Mortg. Corp. (In re Cano), 410 B.R. 506, 550-51 (Bankr. S.D. Tex.
14 2009) (“Nothing within [28 U.S.C] §§ 1334 or 157 ties bankruptcy
15 jurisdiction over debtor adversary proceedings to the location of
16 the debtor’s bankruptcy case.”).
17 Here, the Class Action seeks a determination that the
18 escheated funds are property of the Class members’ bankruptcy
19 estates subject to turnover and an injunction against continued
20 denial of claims based on the Controller’s allegedly improper
21 policy. A request for a determination that the Class members
22 have a right to a turnover of property – debtors’ escheated funds
23 – is not the same as the determination that the Class members
24
25
11
28 U.S.C. § 1334(e) provides, in relevant part, “The
26 district court in which a case under Title 11 is commenced or is
27 pending shall have exclusive jurisdiction: (1) of all the
property, wherever located, of the debtor as of the commencement
28 of such case, and (2) of property of the estate.”
26
1 have a right to a specific amount of escheated funds.12
2 Therefore, the turnover, declaratory and injunctive relief claims
3 are not solely in rem claims, and the nationwide scope of the
4 Class Action as to those claims is proper.
5 However, the nationwide jurisdiction over the Class Action
6 stay violation claims is not appropriate because § 362(k)
7 provides relief only to individuals. Damages suffered as a
8 result of stay violations are not suffered by trustees as
9 individuals, but as the representatives of the bankruptcy estate.
10 Havelock v. Taxel (In re Pace), 67 F.3d 187, 193 (9th Cir. 1995).
11 The only way a trustee can recover damages for stay violations is
12 by bringing an action under § 105(a) for civil contempt. Knupfer
13 v. Lindblade (In re Dyer), 322 F.3d 1178, 1189-90 (9th Cir.
14 2003).
15 Civil contempt proceedings must be brought by a motion in
16 the court where the bankruptcy case is pending. Barrientos v.
17 Wells Fargo Bank, N.A., 633 F.3d 1186, 1190 (9th Cir. 2011)
18 (“[C]ontempt proceedings brought by the trustee . . . are
19 contested matters that must be brought by motion in the
20 bankruptcy case under Rule 9014.”) (emphasis added).13
21 Accordingly, the bankruptcy court lacks subject matter
22
23
24 12
To the extent that the Trustee seeks turnover of a
25 specific amount, his claim is limited to the approximately
$10,000 allegedly due in the Debtor’s case.
26
13
27 Barrientos involved an alleged violation of a discharge
injunction, but the holding of the case, which is based on
28 Rule 9020, applies to any motion for contempt.
27
1 jurisdiction over the stay violation claims in cases pending in
2 other bankruptcy courts.
3 In summary, the Class Action may not seek interest on the
4 Class member’s claims for escheated property and the bankruptcy
5 court lacks jurisdiction over stay violation claims in cases not
6 filed in its own court. We reject the balance of the
7 Controller’s jurisdictional challenges to the Class Action.
8 II. Class Certification
9 A. Article III Standing
10 We turn, now, to the Controller’s challenge to the Class
11 Certification Order. We begin with the Controller’s arguments
12 that the Trustee and Class members lack standing under
13 Article III of the U.S. Constitution.
14 Article III standing requires that the party invoking the
15 court’s authority demonstrate that he personally suffered actual
16 or threatened injury in fact, that the injury be a result of
17 defendant’s action, and that the injury be redressable by
18 judicial decision. Valley Forge Christian Coll. v. Am. United
19 for Separation of Church and State, Inc., 454 U.S. 464, 471-72
20 (1982).
21 1. Trustee’s Standing
22 The Controller asserts that the Trustee lacks standing
23 because the Class Action is allegedly being pursued solely for
24 the benefit of bankruptcy trustees in other bankruptcy cases.14
25
26
14
Even though the Controller did not raise this argument
27 before the bankruptcy court, because Article III standing is a
28 jurisdictional requirement that cannot be waived, it may be
considered as part of this appeal. See United States v. Hayes,
515 U.S. 737, 742 (1995).
28
1 In support of his argument, the Controller cites cases that stand
2 for the proposition that a bankruptcy trustee may not prosecute
3 class actions solely for the benefit of third-party creditors
4 where the only recovery for the bankruptcy estate is an
5 administrative claim for the trustee’s expenses. Williams v.
6 Cal. 1st Bank, 859 F.2d 664, 667 (9th Cir. 1988); In re Wash.
7 Group, Inc., 476 F.Supp. 246, 252 (M.D.N.C. 1979).
8 The Trustee counters that the Class Action will benefit the
9 Debtor because the Trustee has negotiated a fee agreement that
10 caps attorneys’ fees at $5,000, thereby assuring a minimum
11 recovery of approximately $5,000 for the Debtor’s creditors. The
12 Trustee argues that should he separately pursue the Debtor’s
13 claims, the cost of the litigation would far exceed the amount of
14 the claims. Therefore, the Trustee argues that pursuing the
15 Class Action is consistent with his fiduciary duty to the
16 Debtor’s creditors and that it is being pursued for the benefit
17 of those creditors as well as the Class.
18 The cases cited by the Controller are distinguishable
19 because here, the Class Action is being prosecuted for the
20 benefit of the Debtor’s estate as well as the Class. The
21 Trustee, therefore, meets the Article III requirement of
22 demonstrating that he has an injury, which can be redressed by a
23 favorable decision in the Class Action.
24 2. Class Members’ Standing
25 The Controller challenges the inclusion of future claimants
26 in the Class because future claimants have not yet filed claims
27 with the Controller and, therefore, by definition, cannot have
28 been injured by the Controller’s alleged policy. However, when a
29
1 class action challenges a policy of the defendant, inclusion of
2 future claimants is appropriate. Apilado v. N. Am. Gay Amateur
3 Athletic Alliance, 792 F.Supp.2d 1151, 1164 (W.D. Wash. 2011)
4 (citing Armstrong v. Davis, 275 F.3d 849, 865 (9th Cir. 2001)
5 cert. denied, 537 U.S. 812 (2002)); Davis v. Astrue, 250 F.R.D.
6 476, 485 (N.D. Cal. 2008);.
7 The Controller also asserts that future members of the Class
8 will not be affected by the Controller’s actions because if
9 bankruptcy courts have exclusive jurisdiction over estate
10 property, claims for escheated property can be filed in the
11 bankruptcy court where the Class members’ cases are pending.
12 This assertion lacks merit. Bankruptcy courts have exclusive and
13 final jurisdiction to determine if property is property of a
14 bankruptcy estate. Once that determination is made, it does not
15 follow that the federal court is the proper tribunal in which to
16 adjudicate state law issues related to estate property.
17 Finally, the Controller challenges the inclusion in the
18 Class of trustees who could have but did not file claims with the
19 Controller. We agree with the Controller that the Class may not
20 include trustees in pending and prior cases who did not actually
21 file a claim with the Controller. See, e.g., Serena v. Mock,
22 547 F.3d 1051, 1054 (9th Cir. 2008); Madsen v. Boise State Univ.,
23 976 F.2d 1219, 1220 (9th Cir. 1992) (“[A] plaintiff lacks
24 standing to challenge a rule or policy to which he has not
25 submitted himself by actually applying for the desired
26 benefit.”). Accordingly, the Class may not properly include
27
28
30
1 trustees who could have but did not file claims with the
2 Controller.15
3 B. Statute Of Limitations
4 The Controller contends that the Class certification is
5 improper because the Class could potentially include claims that
6 might be barred by the statute of limitations. However, the
7 Controller failed to raise the statute of limitations argument
8 before the bankruptcy court, in the MTD, in the answer to the
9 Class Action, or in the Opposition. Because a statute of
10 limitations defense is an affirmative defense, it cannot be
11 considered for the first time on appeal. Roberts v. Coll. of the
12 Desert, 870 F.2d 1411, 1414 (9th Cir. 1988).
13 C. Class Certification Under Civil Rule 2316
14 Historically, class actions were used in English chancery
15 courts for resolving disputes where joinder of all parties was
16
15
17 Trustees who failed to file claims in the past may,
however, still be members of the Class as future claimants.
18
16
19 Because we have determined that the bankruptcy court
cannot assert jurisdiction over the stay violation claims of the
20 Class Action under 28 U.S.C. § 1334(e), we do not address the
stay violation claims in our Civil Rule 23 analysis. We note,
21 however, that a number of courts have refused to certify class
22 actions for stay and/or discharge violations because the element
of damages would require a detailed examination of the facts
23 surrounding each class member’s claim, thereby making it
impossible for the class to meet the commonality requirements of
24
Civil Rule 23(a)(2). See In re Aiello, 231 B.R. at 712 (too many
25 variations in claims for actual damages under § 362(h) to meet
commonality requirements); Walls v. Wells Fargo Bank, N.A. (In re
26 Walls), 262 B.R. 519, 529 (Bankr. E.D. Cal. 2001) (extent of
27 damages will depend not just on the class-wide behavior of the
defendant but on the extent of damages to each individual
28 debtor).
31
1 not possible. Civil Rule 23 is based on that practice. It
2 authorizes class actions in the interest of judicial economy and
3 efficiency. One of the primary purposes of Civil Rule 23 is to
4 spread litigation costs and afford individual claimants with
5 small claims access to judicial relief that would otherwise be
6 economically unavailable to them. In re Aiello, 231 B.R. at 709.
7 While the trial court has broad discretion to certify a
8 class, its discretion must be exercised within the framework of
9 Civil Rule 23. Zinser v. Accufix Research Inst., Inc., 253 F.3d
10 1180, 1192-93 (9th Cir. 2001). Class certification involves a
11 two-part analysis. First, the movant must demonstrate that the
12 proposed class satisfies the requirements of Civil Rule 23(a)
13 that:
14 (1) the members of the proposed class be so numerous that
15 joinder of all claims would be impracticable;
16 (2) there be questions of law or fact common to the class;
17 (3) the claims or defenses of the representative parties
18 must be typical of the claims or defenses of absent class
19 members; and
20 (4) the representative parties must fairly and adequately
21 protect the interest of the class.
22 If a movant meets the requirements of Civil Rule 23(a), then
23 at least one of the three subsections of Civil Rule 23(b) must
24 also be met before a class action may proceed.
25 1. Civil Rule 23(a)
26 a) Numerosity
27 The bankruptcy court found that the Class Action satisfies
28 the numerosity requirement because the number of potential Class
32
1 members – trustees throughout the United States – is large. The
2 Controller does not challenge that finding on appeal.
3 b) Commonality
4 Commonality focuses on the relationship of common facts and
5 legal issues among class members, but:
6 All questions of fact and law need not be common to
satisfy [Civil Rule 23(a)(2)]. The existence of shared
7 legal issues with divergent factual predicates is
sufficient, as is a common core of salient facts
8 coupled with disparate legal remedies within the class.
9 Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9th Cir. 1998).
10 The Trustee contends that the commonality requirement has been
11 met because Class membership includes numerous common factual
12 elements, including that all Class members are trustees with an
13 existing or potential claim to escheated funds that would be
14 rejected by the Controller. The common legal issues include
15 whether debtors’ interest in escheated funds is property of their
16 bankruptcy estates, and, whether trustees in such cases have
17 standing to file claims for the escheated funds.
18 The Controller counters that the Class Action would require
19 the bankruptcy court to determine the amount due to each
20 individual trustee, and therefore, when such individualized
21 determinations are required, the commonality standard of Civil
22 Rule 23(a)(2) cannot be met.17 However, the Trustee asserts that
23
24 17
The Trustee argues that, because the Controller did not
25 make this argument before the bankruptcy court, we should not
consider it for the first time on appeal. In conducting the
26 Civil Rule 23 analysis, the bankruptcy court necessarily made
27 findings of fact which normally should not be reviewed for the
first time on appeal. El Paso v. Am. W. Airlines, Inc. (In re Am
28 (continued...)
33
1 the Class Certification Order does not require individual
2 determination of specific amounts due to each Class member.
3 Rather, it defines the Class in terms of whether its members are
4 “entitled” to turnover and an accounting of debtors’ escheated
5 funds under § 542 and § 543. “Entitle” means “to furnish with
6 proper grounds for seeking or claiming something.” BLACK’S LAW
7 DICTIONARY 532 (6th ed. 1990). To the extent that the Class
8 Action requests a determination that Class members have a right
9 to escheated funds that have been withheld solely on the grounds
10 that the funds are not estate property (but not a determination
11 of the amount due to each Class member), then certification is
12 proper.
13 c) Typicality
14 Civil Rule 23(a)(3) requires that the claims of the class
15 representative be typical of the class claims. In examining
16 typicality, courts consider “‘whether other members have the same
17 or similar injury, whether the action is based on conduct which
18 is not unique to the named plaintiffs, and whether other class
19 members have been injured by the same course of conduct.’”
20 Kanawi v. Bechtel Corp., 254 F.R.D. 102, 110 (N.D. Cal. 2008)
21
17
22 (...continued)
W. Airlines, Inc.), 217 F.3d 1161, 1165 (9th Cir. 2000) (Absent
23 exceptional circumstances, we generally will not consider
arguments raised for the first time on appeal, although we have
24
discretion to do so.). However, when the issue is one of law and
25 either does not depend on the factual record, or the record has
been fully developed, we may address the argument. Marx v. Loral
26 Corp., 87 F.3d 1049, 1055 (9th Cir. 1996). Here, the record is
27 fully developed regarding the facts relevant to the commonality
determination and, therefore, we exercise our discretion to
28 review it.
34
1 citing Hanon v. DataProducts Corp., 976 F.2d 497, 508 (9th Cir.
2 1992). The bankruptcy court found that the Letter describing the
3 Controller’s “long standing position” of rejecting trustee claims
4 met the typicality requirement.
5 The Controller contends that the typicality requirement has
6 not been met because the Class includes members who have not yet
7 filed claims with the Controller. However, where the challenged
8 conduct is a policy or practice that affects all class members,
9 the injuries of the class representative and that of the class
10 members need not be identical. Typicality is met if the class
11 representative and members suffer identical injuries as a result
12 of the alleged wrongful policy. See Armstrong v. Davis, 275 F.3d
13 at 868-69. Here, the Trustee and the Class members all suffer
14 the same injury: the denial or potential denial of their claim by
15 the Controller based on the Controller’s stated position that the
16 funds are not property of the bankruptcy estate.
17 d) Adequacy Of Representation
18 Finally, Civil Rule 23(a)(4) requires a determination that
19 the class representative will adequately protect the interests of
20 the class. In determining whether the interests of a class will
21 be adequately represented, the court must determine that the
22 class representative does not have an interest antagonistic to
23 the class; and, that the class counsel must be qualified,
24 experienced and able to conduct the litigation. James W. Moore
25 et al., 5 MOORE’S FEDERAL PRACTICE § 23.25([3][a]) (3d ed. 2007).
26 The Controller argues that the Trustee cannot satisfy Civil
27 Rule 23(a)(4) because there is an inherent conflict of interest
28 between the Trustee’s fiduciary duty to the bankruptcy estate and
35
1 his role as Class representative. A potential for conflict
2 between a bankruptcy trustee’s fiduciary obligations to
3 efficiently and quickly administer a bankruptcy estate and to act
4 as a class representative has long been recognized. See Dechert
5 v. Cadle Co., 333 F.3d 801, 802-03 (7th Cir. 2003); Centrue Bank
6 v. Samson (In re Thompson), 2010 WL 4065421 *2-3 (S.D. Ill. Oct.
7 15, 2010). However, there is no per se rule barring a bankruptcy
8 trustee from serving as a class representative. Dechert
9 recognized that there could be situations where only a fiduciary
10 could act as a class representative. 333 F.3d at 803.
11 Here, as the bankruptcy court noted: “Who else but a
12 bankruptcy trustee can assert that the Controller is improperly
13 denying payment of claims to bankruptcy trustees?” Thus, because
14 the Debtor is affected by the same alleged improper conduct as
15 the Class, the bankruptcy court found that no conflict would be
16 suffered by the Debtor by having the Trustee pursue the Class
17 Action. We see nothing illogical about the bankruptcy court’s
18 determination and, accordingly, find no abuse of discretion with
19 respect to its determination that the Trustee could act as Class
20 representative.
21 2. Civil Rule 23(b)
22 Once the requirements of Civil Rule 23(a) are met, at least
23 one of the requirements of Civil Rule 23(b) must also be
24 satisfied before a class can be certified. Civil Rule 23(b)
25 classifications are written in the alternative. In this case,
26 the bankruptcy court certified the Class under Civil Rule
27 23(b)(1)(A), (b)(2) and (b)(3).
28
36
1 Civil Rule 23(b)(1)(A) is appropriate if prosecuting
2 separate actions would create a risk of inconsistent results that
3 would establish incompatible standards of conduct for the party
4 opposing the class or absent class members. Even though the
5 Certification Order certified the Class under Civil
6 Rule 23(b)(1), the bankruptcy court did not make a specific
7 finding that separate actions would create a risk of inconsistent
8 results or incompatible standards of conduct for the Controller.
9 It is unlikely that such a finding could be made.
10 The Ninth Circuit has adopted a conservative view of Civil
11 Rule 23(b)(1), which requires that either: (1) “rulings in
12 separate actions would subject [a] defendant to incompatible
13 judgments requiring inconsistent conduct to comply with the
14 judgment; or (2) a ruling in the first of a series of separate
15 actions will ‘inescapably alter the substance of the rights of
16 others having similar claims.’” Mateo v. M/S Kiso, 805 F.Supp.
17 761, 772 (N.D. Cal. 1991) quoting McDonnell Douglas Corp. v. U.S.
18 Dist. Ct. of Cal., 523 F.2d 1083, 1086 (9th Cir. 1975). Neither
19 of these two conditions is met by the Class Action. If the Class
20 is not certified, it is not clear that the Controller will be
21 subject to multiple individual actions or incompatible judgments.
22 In fact, if the Trustee were to prevail on the Debtor’s claims,
23 California’s law of issue preclusion would likely prevent the
24 Controller from denying other trustees’ claims for debtors’
25 escheated property.18
26
18
27 Under California law, the party asserting issue
preclusion has the burden of establishing the following
28 (continued...)
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1 If, however, the Trustee pursues an action solely in
2 Debtor’s case against the Controller and fails, that result would
3 not bind other bankruptcy estates because those estates are not
4 in privity with the Debtor. Accordingly, a ruling against the
5 Trustee will not “inescapably” alter the rights of other trustees
6 having similar claims. Id. at 773. Consequently, the bankruptcy
7 court abused its discretion in certifying the Class under Civil
8 Rule 23(b)(1).
9 Civil Rule 23(b)(2) provides for Class certification when
10 “the party opposing the class has acted or refused to act on
11 grounds generally applicable to the class, thereby making
12 appropriate final injunctive relief or corresponding declaratory
13 relief with respect to the class as a whole.” Zinser, 253 F.3d
14 at 1195. Here, while the bankruptcy court made no specific
15 findings, it did find that the Letter demonstrated a commonality
16
17 18
(...continued)
18 “threshold” requirements:
(1) the issue sought to be precluded must be identical to
19
that decided in a former proceeding;
20 (2) the issue must have been actually litigated in the
21 former proceeding;
(3) it must have been necessarily decided in the former
22
proceeding;
23 (4) the decision in the former proceeding must be final and
24 on the merits; and,
(5) the party against whom preclusion is sought must be the
25
same as, or in privity with, the party to the former
26 proceeding.
27 Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
2001); Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez),
28 367 B.R. 99, 104 (9th Cir. BAP 2007).
38
1 of claims, which is consistent with the findings required under
2 Civil Rule 23(b)(2). Under the Controller’s policy, all
3 bankruptcy trustees are denied the right to make a claim for
4 debtors’ escheated funds for the same reason — the Controller’s
5 determination that such funds are not estate property.
6 Certification of a class under Civil Rule 23(b)(2) is
7 appropriate only where the primary relief sought is declaratory
8 or injunctive relief, not monetary. Id. The Controller asserts
9 that the bankruptcy court’s certification under Civil Rule
10 23(b)(2) was error because the Class Action seeks monetary relief
11 for the amount of each estate’s escheated funds. However, at
12 oral argument and in his brief, the Trustee asserted that the
13 only damages being sought are for attorneys’ fees incurred in
14 bringing the Class Action. Assuming that is the case, then the
15 damages being sought are merely incidental to the primary claims
16 for injunctive and declaratory relief. Daly v. Harris,
17 209 F.R.D. 180, 192 (D. Haw. 2002).19 As a result, the
18 bankruptcy court did not err in certifying the Class under Civil
19 Rule § 23(b)(2).
20 Finally, certification under Civil Rule 23(b)(3) is
21 appropriate when individualized damage claims are being sought.
22 However, the Trustee admits that the only damages being sought
23
19
However, absent some type of damages claim, the Trustee
24
may be unable to recover attorneys’ fees for prosecuting the
25 Class Action because Civil Rule 23(h) limits an award of
attorneys’ fees to circumstances where such a recovery is
26 authorized by law. Here, we have determined that the Class
27 Action may not seek damages in the form of interest on the
escheated funds and that the bankruptcy court lacks jurisdiction
28 over Class members’ stay violation claims.
39
1 are not individualized, but are limited to the costs and fees
2 incurred in prosecuting the Class Action. Accordingly, Civil
3 Rule 23(b)(3) is inapplicable to the Class Action.
4 In summary, we find that the bankruptcy court did not abuse
5 its discretion in certifying the Class under Civil Rule 23(a) and
6 Civil Rule 23(b)(2). However, the bankruptcy court did err in
7 certifying the Class under Civil Rule 23(b)(1)(A) and (b)(3).
8 VII. CONCLUSION
9 Based on the foregoing reasons, we determine that the claims
10 for interest on escheated funds are barred by sovereign immunity.
11 Under the holding of Katz, California has waived its sovereign
12 immunity claims to the balance of the Claims. The bankruptcy
13 court, however, lacks subject matter jurisdiction over the stay
14 violation claims, which may only be pursued by civil contempt
15 motions filed in each Class member’s cases.
16 Additionally, we determine that the certification of the
17 Class under Civil Rule 23(b)(1) was error. The Trustee has
18 admitted that the Class Action does not seek individualized
19 damages claims and, accordingly, certification of the Class under
20 Civil Rule 23(b)(3) was also error. Although the bankruptcy
21 court did not err in certifying the Class under Civil
22 Rule 23(b)(2), as noted above, unless there is some federal or
23 state law which authorizes recovery of attorneys’ fees for the
24 Claims, such fees are not recoverable under Civil Rule 23(h).
25 Therefore, we REVERSE the Certification Order entry and remand
26 the matter to the bankruptcy court to issue a certification order
27 solely under Civil Rules 23(a) and (b)(2), and which narrows the
28
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1 scope of the Class Action by eliminating claims for interest
2 damages and claims for willful violation of the automatic stay.
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