FILED
FEB 02 2012
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
3
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. CC-11-1375-MkLaPa
)
6 PATRICIA SANTIAGO CHRISTENSEN,) Bk. No. LA 08-10795-SK
)
7 Debtor. ) Adv. No. LA 10-01289-SK
______________________________)
8 )
KATHY DOCKERY, Chapter 13 )
9 Trustee; SAM LESLIE, Former )
Chapter 7 Trustee; GONZALEZ & )
10 ASSOCIATES, P.L.C., )
)
11 Appellants, )
)
12 v. ) MEMORANDUM*
)
13 MARV S. BUSUEGO; REX B. )
CHRISTENSEN; OBOE HEALTH )
14 SERVICES, INC.; NORA A. )
BUSUEGO, )
15 )
Appellees. )
16 ______________________________)
17 Argued and Submitted on January 20, 2012
at Pasadena, California
18
Filed - February 2, 2012
19
Appeal from the United States Bankruptcy Court
20 for the Central District of California
21 Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
22
Appearances: Rosendo Gonzalez of Gonzalez & Associates, PLC
23 argued on behalf of Appellants Kathy Dockery, Sam
Leslie, and Gonzalez & Associates; Michael D.
24 Franco argued on behalf of Appellees Marv Busuego,
Nora Busuego, Rex Christensen and Oboe Health
25 Services, Inc.
26
27 *
This disposition is not appropriate for publication.
28 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8013-1.
1 Before: MARKELL, LAFFERTY** and PAPPAS, Bankruptcy Judges.
2 In this appeal, chapter 131 trustee Kathy Dockery
3 (“Dockery”), former chapter 7 trustee Sam Leslie (“Leslie”) and
4 the law firm that represented both Dockery and Leslie, Gonzalez &
5 Associates (collectively, “Appellants”), appeal from the
6 bankruptcy court’s order: (1) dismissing an adversary proceeding
7 against Debtor’s deceased husband Rex B. Christensen (“Rex”) and
8 others (collectively, the “Defendants”); and (2) dismissing the
9 underlying bankruptcy case. We MODIFY that portion of the order
10 dismissing the adversary proceeding to a dismissal without
11 prejudice and, as modified, AFFIRM the order.
12 FACTS
13 The essential facts are not in dispute. In July 2004,
14 Debtor’s husband Rex acquired legal title to an office building
15 located at 1145 West 6th Street, Los Angeles, California
16 (“Property”). The conveyance was by way of a grant deed (“Grant
17 Deed”) executed by the former owners, Lucas/Sixth Associates.
18 Concurrently with this transaction, Debtor executed an
19 interspousal transfer grant deed (“Interspousal Deed”), conveying
20 to Rex whatever interest she otherwise might have claimed in the
21 Property. Both the Grant Deed and the Interspousal Deed were
22 recorded in the Official Records of Los Angeles County.
23
24 **
Hon. William J. Lafferty, III, U.S. Bankruptcy Judge for
the Northern District of California, sitting by designation.
25
1
26 Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27 all "Rule" references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. All "Civil Rule" references are to
28 the Federal Rules of Civil Procedure.
2
1 Rex passed away in July 2005, but before he passed, in March
2 2005, he conveyed title to the Property to his wholly-owned
3 corporation Oboe Health Services, Inc. (“Oboe”). The transfer
4 was made by quitclaim deed (“Quitclaim Deed”), and was
5 accompanied by an assignment by Rex of all of his shares of Oboe
6 stock to his stepson, and Debtor’s son, Marv Busuego (“Marv”).
7 Marv did not record the Quitclaim Deed until January 13, 2010,
8 after Debtor’s bankruptcy filing.
9 Debtor filed her chapter 7 bankruptcy case on January 21,
10 2008, and she passed away on March 29, 2009, at the age of 81,
11 before her case was closed. Notwithstanding her death and the
12 apparent lack of any substantial assets, the Debtor’s case has
13 had a long and tortured history.
14 The tale begins in March 2008, when the Debtor converted her
15 chapter 7 case to one under chapter 13. The apparent purpose of
16 this conversion was an attempt to save her residence, or at least
17 the equity in it.2
18 Debtor successfully confirmed a chapter 13 plan on
19 December 31, 2008. Before she died in March 2009, Debtor made
20 some plan payments. These stopped after her death. Dockery,
21 however, who did not know of Debtor’s death, used the lack of
22 payments as a basis for a motion to reconvert the case to chapter
23 7. Unaware that Debtor had passed away, the bankruptcy court
24 granted the reconversion motion on October 21, 2009.
25 Leslie was reappointed as chapter 7 trustee shortly after
26
2
27 On her Schedule C listing of property claimed as exempt,
Debtor claimed a homestead exemption in her residence, which
28 Leslie did not oppose.
3
1 reconversion. On December 17, 2009, he filed an application to
2 employ counsel, and the bankruptcy court granted this application
3 on January 22, 2010. Shortly after the employment of counsel, on
4 March 8, 2010, Leslie filed a complaint against the Defendants,
5 consisting of Rex, Oboe, Marv and Marv’s wife Nora Busuego
6 (“Nora”).
7 The claims set forth in the complaint all concerned the
8 Property. After recounting the same history of transfers and
9 conveyances outlined above, Leslie alleged that, prior to her
10 bankruptcy filing, Debtor paid certain costs and expenses
11 associated with the Property (“Payments”). According to Leslie,
12 the Payments constituted both actual and constructively
13 fraudulent transfers.3 Leslie further alleged that the
14 Interspousal Deed also constituted an actual and constructively
15 fraudulent transfer.
16 Leslie next alleged that due to the validity of the
17 fraudulent transfer claim regarding the Interspousal Deed, the
18 January 2010 recordation of the Quitclaim Deed (from Rex to Oboe)
19 constituted a postpetition transfer of estate property in
20 contravention of § 549(a) and a violation of the automatic stay
21 under § 362(a).
22
23
3
In the process of denying Leslie's subsequent summary
24 judgment motion, the bankruptcy court ruled in part that Leslie
presented no evidence whatsoever to support his allegations
25 regarding the existence of the Payments. Leslie did not even
26 mention the Payments in his summary judgment motion. Nor did
Appellants mention the Payments in their opening brief on appeal.
27 Appellants thus have waived any issues in relation to the
Payments. See Golden v. Chicago Title Ins. Co. (In re Choo),
28 273 B.R. 608, 613 (9th Cir. BAP 2002).
4
1 Based on all of the above-referenced alleged transfers,
2 Leslie additionally asserted that he was entitled pursuant to
3 § 550(a) to recover from the Defendants the value of the property
4 transferred. Finally, Leslie alleged that the Debtor’s Payments
5 caused the Debtor to acquire an interest in the Property and that
6 the bankruptcy court should grant Leslie declaratory relief
7 recognizing the Debtor’s interest in the Property.4
8 In the Spring of 2010, the Defendants (except for Rex)
9 answered the Complaint, and Oboe filed a counterclaim against
10 Leslie to quiet title to the Property.5
11 In August 2010, Leslie filed a motion for summary judgment.
12 Leslie asserted in the motion that the undisputed facts
13 established: (1) that Rex and the Debtor acquired the Property in
14 July 2004; (2) that the July 2004 Interspousal Deed constituted a
15 fraudulent transfer of the Debtor’s interest in the Property;
16 (3) that when Rex died intestate, Debtor inherited 50% or 100%
17 ownership of the Property; (4) Leslie and his counsel did not
18 learn of the Debtor’s interest in the Property until January
19 2010; (5) Leslie did not learn of Debtor’s interest in the
20 Property earlier because the Defendants concealed the facts
21 establishing that interest; and (6) at the time Marv recorded the
22 Quitclaim Deed (from Rex to Oboe), the Property was property of
23
24 4
Apparently, Appellants also have abandoned Leslie’s
declaratory relief claim. In addition to not mentioning the
25
Payments, Appellants also have not mentioned anything regarding
26 any interest Debtor acquired in the Property on account of or in
exchange for the Payments. See footnote 3, supra.
27
5
By stipulation between the parties, on June 16, 2010, Marv
28 was substituted in place of Rex.
5
1 the Debtor’s bankruptcy estate. According to Leslie, these facts
2 established Leslie’s entitlement to relief as a matter of law on
3 his first through ninth claims for relief.
4 On October 12, 2010, after the August 31, 2010 discovery
5 cutoff, the Defendants filed their opposition to Leslie’s summary
6 judgment motion. Among other things, the Defendants argued:
7 (1) that Debtor never acquired any interest in the Property, and
8 disclaimed any such interest in the Property by way of the
9 Interspousal Deed; (2) before Rex died, he validly conveyed title
10 to the Property to Oboe by way of the Quitclaim Deed; (3) the
11 fact that the Quitclaim Deed was not recorded until January 2010
12 did not render the Quitclaim Deed ineffective as against Rex or
13 his heirs; (4) Leslie’s fraudulent transfer claims for relief
14 were barred by the § 546(a) statute of limitations, which expired
15 on January 22, 2010;6 and (5) equitable tolling did not apply
16 because Leslie was aware of the relevant facts concerning his
17
6
18 § 546(a) provides:
19 (a) An action or proceeding under section 544, 545,
547, 548, or 553 of this title may not be commenced
20 after the earlier of --
21
(1) the later of --
22
(A) 2 years after the entry of the order for
23 relief; or
24 (B) 1 year after the appointment or election
25 of the first trustee under section 702, 1104,
1163, 1202, or 1302 of this title if such
26 appointment or such election occurs before
the expiration of the period specified in
27 subparagraph (A); or
28
(2) the time the case is closed or dismissed.
6
1 claims in February 2008.
2 With respect to equitable tolling, the Defendants pointed to
3 evidence demonstrating that Leslie was aware in February 2008
4 (about 22 months before the statute of limitations ran) of all of
5 the key facts underlying his fraudulent transfer claims. By
6 February 4, 2008, Leslie had obtained a chain of title search,
7 which reflected, among other things: (1) that Rex was still of
8 record as the holder of legal title; (2) that Rex acquired title
9 by way of the Grant Deed; (3) that, at the time Rex acquired
10 title, Debtor contemporaneously conveyed any interest she
11 otherwise might have acquired in the Property by way of the
12 Interspousal Deed; and (4) that nothing in the chain of title
13 report reflected Rex’s conveyance of the Property to Oboe via the
14 Quitclaim Deed. See Declaration of Brian Watkins (“Watkins
15 Declaration”) at ¶¶ 9 and exs. 34 and 35 thereto.7
16 In addition, Defendants further pointed out that, at the
17 initial meeting of creditors held on February 21, 2008, Leslie,
18 the Debtor and her counsel discussed Rex’s acquisition of the
19 Property in 2004, his conveyance of the Property to Oboe in 2005
20 shortly before his death, ownership of Oboe, the Interspousal
21 Deed, and the unrecorded Quitclaim Deed. At various times during
22 the meeting, Debtor and her counsel identified Marv, or Marv’s
23
7
We did not find the Watkins Declaration in Leslie’s
24 otherwise extensive excerpts of record. Rather, we obtained an
25 electronic copy by accessing the bankruptcy court’s electronic
adversary proceeding docket available on PACER. We can take
26 judicial notice of the filing and contents of the Watkins
Declaration. See Atwood v. Chase Manhattan Mortg. Co. (In re
27 Atwood), 293 B.R. 227, 233 n. 9 (9th Cir. BAP 2003)(citing
O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d
28
955, 957–58 (9th Cir. 1989)).
7
1 wife Nora, or both, as the owners of Oboe. Also at this meeting,
2 Leslie and Debtor’s counsel engaged in a colloquy that both sides
3 have cited as evidence of their respective positions:
4 MR. LESLIE: Did you assert -- did you look into the
property?
5
MR. WATKINS: Yes.
6
MR. LESLIE: And can you tell me what you two uncovered?
7
MR. WATKINS: It was made Rex Christensen's separate
8 property in the summer of '04.
9 MR. LESLIE: All right.
10 MR. WATKINS: It was a business dealing with Mr.
Christensen's [step] son. However, the deed to the
11 company that was owned by the son was unrecorded
because of an error in the transaction. I have given
12 you a copy of the deed in '05, where the property was
transferred from Rex Christensen to the company.
13
MR. LESLIE: I see it went from Patricia -- well,
14 actually, to Rex. I see an unfiled deed dated December
no, March 18th of 2005 --
15
MR. WATKINS: Right.
16
MR. LESLIE: -- to Oboe Health Services, Inc.
17
MR. WATKINS: Ms. Christensen never had an ownership
18 interest in the property. The interspousal deed was
filed during escrow prior to the actual vesting of Rex
19 Christensen, just to make sure that this was recognized
as a separate property transaction.
20
* * *
21
MR. LESLIE: Okay. I am going to need -- because,
22 unfortunately, this isn't a recorded deed.
23 MR. WATKINS: I think it has been recorded. I just don't
have the conformed copy.
24
MR. LESLIE: The [chain] of title doesn't have a
25 (unintelligible) title on it.
26 MR. WATKINS: I know, but it takes a couple of weeks.
We have been working on this nonstop –
27
MR. LESLIE: Yeah, but I can't record post -- I need to
28 get –
8
1 MR. WATKINS: The grant deed -- the interspousal grant
deed was recorded.
2
BY MR. LESLIE: Q. Right. I understand that. I
3 understand that. . . .
4 Transcript of Official Recording of Meeting of Creditors (Feb 21,
5 2008) at 7:5-8:3, 9:8-21.
6 In sum, based on the above-referenced evidence, the
7 Defendants asserted that no one concealed anything from Leslie,
8 nor did anyone mislead him. Rather, Leslie knew in February 2008
9 the factual basis that he later relied upon to assert his
10 fraudulent transfer claims.
11 On October 18, 2010, Leslie filed his response to the
12 Defendants’ opposition to his summary judgment motion. The first
13 half of Leslie’s response is dedicated to the equitable tolling
14 issue. Leslie did not directly confront the Defendants’
15 assertions that he was aware of the basis for his fraudulent
16 transfer claims in February 2008. Instead, Leslie cited to a
17 laundry list of alleged omissions, misstatements and related
18 actions that according to Leslie demonstrated an intent to
19 conceal or mislead, as follows:
20 • Debtor did not disclose in her Schedule B listing of
21 personal property that, when Rex died intestate, she was
22 Rex’s sole heir.
23 • Debtor did not disclose in her Schedule B listing of
24 personal property that she inherited an interest in the
25 Property and in a lease between Rex as lessor and Oboe as
26 lessee (“Rex/Oboe Lease”).
27 • Debtor did not disclose in her Schedule G listing of
28 executory contracts and unexpired leases: (1) the existence
9
1 of contracts concerning her residence in Pasadena or a
2 parcel of property in Las Vegas; or (2) the existence of the
3 Rex/Oboe Lease.
4 • Debtor did not disclose in Question 18 of her Statement of
5 Financial Affairs (“Statement”) that she served as an
6 officer of Oboe within six years of her bankruptcy filing.
7 • Debtor incorrectly testified under oath that everything in
8 her petition, in her schedules and in her Statement was
9 correct.
10 • Even though Debtor’s counsel talked about the July 2004
11 Interspousal Deed at the February 21, 2008 meeting of
12 creditors, Debtor still testified at that meeting that she
13 had not transferred any of her assets in the last four
14 years.
15 • Debtor also should have disclosed, but failed to disclose,
16 Rex’s 2005 transfer of all of his Oboe stock to Marv.
17 • Debtor’s counsel incorrectly stated at the February 21, 2008
18 meeting of creditors that the Quitclaim Deed (from Rex to
19 Oboe) had been recorded.8
20
8
A fair reading of the transcript from the meeting of
21
creditors indicates Debtor’s counsel was merely stating that he
22 thought the Quitclaim Deed had been recently recorded, admittedly
after the filing of Debtor’s bankruptcy. See block quote from
23 Feb. 21, 2008 Transcript, supra. Otherwise, there would not have
been any reason for him to say “it takes a couple of weeks.”
24 Presumably, he meant that it would take a couple of weeks for the
25 newly-recorded deed to show up on a chain of title report. See
id. As it turned out, Debtor’s counsel’s statement was
26 inaccurate regarding the recent recording of the Quitclaim Deed.
But we do not see how this inaccuracy in any way affected the
27 factual basis for any of Debtor’s claims for relief. Even if we
were to assume that Debtor’s counsel meant to represent that the
28
(continued...)
10
1 • In a February 28, 2008 letter from Leslie to Debtor’s
2 counsel following up on the first meeting of creditors,
3 Leslie reiterated his request that the Debtor produce a
4 number of documents as discussed at the meeting, but Debtor
5 never produced them as requested.
6 • Debtor’s counsel, in a letter to Marv dated March 11, 2008,
7 talked about the Trustee’s apparent fraudulent transfer
8 theory and about the need to convert Debtor’s case to
9 chapter 13 (because of a relief from stay motion filed by a
10 creditor holding a first deed of trust against the Debtor’s
11 residence).
12 • Debtor never corrected the misstatements and omissions in
13 her schedules and Statement.
14 • When Leslie’s counsel wrote and called Marv in January 2010
15 to inquire about the Property, Marv finally recorded the
16 Quitclaim Deed.
17 Based on all of the alleged misstatements and omissions,
18 Leslie asserted that he “did not have all the required facts and
19 documentation (as required by Rule 9011 of the Federal Rules of
20 Bankruptcy Procedure) to timely commence the adversary proceeding
21 prior to January 21, 2010.” Response to Defendant’s opposition
22 to summary judgment motion (Oct. 18, 2010) at 15:9-16.
23 At about the same time that the parties were litigating over
24 Leslie’s summary judgment motion, Marv twice moved to vacate the
25
8
26 (...continued)
Quitclaim Deed was recorded before the Debtor’s bankruptcy
27 filing, we still don’t see any connection between such a
misstatement and Leslie’s fraudulent transfer claims, which are
28 based upon the Interspousal Deed and not on the Quitclaim Deed.
11
1 October 21, 2009 order reconverting Debtor’s case from chapter 13
2 to chapter 7. As set forth in the motion to vacate, the
3 bankruptcy court was not made aware before entry of the
4 reconversion order that Debtor had passed away, and in light of
5 the Debtor’s death, her bankruptcy case should not have been
6 reconverted on the basis of delinquent plan payments. Leslie
7 opposed both motions to vacate. The bankruptcy court denied the
8 first motion to vacate without prejudice, and the court
9 ultimately set the hearing on the second motion to vacate for the
10 same date as the summary judgment hearing, on November 1, 2010.
11 Neither of the parties have provided us with the transcript
12 from the November 1, 2010 hearing, nor from the first continued
13 hearing, apparently held on November 3, 2010. Consequently, we
14 don’t know precisely what transpired at either of these hearings.
15 But we do have the transcript from the final hearing on the
16 summary judgment motion and the second motion to vacate, held on
17 December 15, 2010. This transcript, and the supplemental briefs
18 that the parties filed just prior to the final hearing, give us
19 some indication regarding what transpired at the first two
20 hearings. Apparently, at the prior hearings, the bankruptcy
21 court rejected Leslie’s equitable tolling argument, concluded
22 that Leslie’s fraudulent transfer claims were barred by the
23 statute of limitations, and directed the parties to file
24 supplemental briefs regarding Leslie’s claims alleging a
25 postpetition transfer and violation of the stay.
26 At the December 15 hearing, the bankruptcy court ruled that
27 Leslie’s summary judgment motion would be denied. According to
28 the bankruptcy court, Leslie’s summary judgment papers consisted
12
1 of conclusory statements regarding his key allegations, but no
2 evidence to support these allegations. In addition, the
3 bankruptcy court reiterated several times its ruling that the
4 fraudulent transfer claims were barred by the statute of
5 limitations. As for Marv’s second motion to vacate the order
6 reconverting the case from chapter 13 to chapter 7, the
7 bankruptcy court agreed with Marv that reconversion had been
8 inappropriate in light of Debtor’s death and Rule 1016.
9 Accordingly, the bankruptcy court granted the motion to vacate
10 the reconversion order, but warned the Defendants: “That doesn’t
11 mean, you know, the adversary proceeding disappears. I guess it
12 will now be up to the Chapter 13 trustee to determine whether or
13 not she wants to pursue it . . . .” Hr’g Tr. (Dec. 15, 2010) at
14 5:7-10.
15 The bankruptcy court entered orders denying Leslie’s summary
16 judgment motion and granting Marv’s motion to vacate. After
17 that, Dockery was reappointed as chapter 13 trustee, and she
18 sought and obtained authority to retain Leslie’s counsel as her
19 special litigation counsel, so that she could continue to pursue
20 the adversary proceeding. The bankruptcy court’s employment
21 order specified that compensation to pay for counsel’s services
22 would be awarded “only from the proceeds of any assets recovered
23 for the estate by Gonzalez & Associates.”
24 The adversary docket indicates that the adversary proceeding
25 was for the most part dormant during the first half of 2011.
26 However, in the underlying bankruptcy case, Marv filed a motion
27 to dismiss. The operative document, Marv’s second amended motion
28 to dismiss chapter 13 case, was filed on April 26, 2011. In that
13
1 motion, Marv argued that, because Debtor had died, she no longer
2 was eligible for chapter 13. Marv also claimed that Dockery as
3 chapter 13 trustee was not authorized under the Bankruptcy Code
4 to collect and reduce to money property of the estate because the
5 specific provision authorizing chapter 7 trustees to do so,
6 § 704(a)(1), did not apply to chapter 13 trustees, as set forth
7 in § 1302(b)(1).
8 Dockery opposed the motion, contending that she did have
9 authority under the Bankruptcy Code to prosecute the adversary
10 proceeding. She further asserted that she should be allowed to
11 prosecute the adversary proceeding because it was the estate’s
12 only asset and the only way creditors might receive a
13 distribution from the case. Dockery alternately argued that, if
14 the bankruptcy court were inclined to dismiss the case, the
15 payment of all administrative claims should be made a condition
16 to dismissal.
17 While Marv’s dismissal motion was pending, Leslie and his
18 counsel filed applications for compensation for the services they
19 rendered on behalf of the estate. In his fee application, Leslie
20 sought recovery of $24,261.00 in fees. Meanwhile, his counsel
21 sought $110,186.00 in fees and $3,057.57 in expenses. Marv filed
22 an opposition to the fee applications.
23 The hearing on the motion to dismiss and on the fee
24 applications originally was set for May 12, 2011. It was then
25 rescheduled for June 15, 2011 and later continued to June 29,
26 2011, in order to allow the parties to file supplemental briefs
27 regarding what the bankruptcy court had identified as the
28 dispositive issue: whether the estate had any interest in the
14
1 Property.9
2 The bankruptcy court ultimately granted the fee
3 applications, but also granted the dismissal motion. The
4 bankruptcy court declined to condition dismissal of the case upon
5 payment of the awarded fees. Moreover, at the same time it ruled
6 on the fee applications and the case dismissal motion, the
7 bankruptcy court sua sponte dismissed the adversary proceeding.
8 The bankruptcy court issued a lengthy tentative ruling, which it
9 ultimately referenced and relied upon when it issued its final
10 dismissal order. In deciding to dismiss the bankruptcy case, the
11 bankruptcy court reasoned that there was no justification for the
12 bankruptcy case to continue unless the adversary proceeding was
13 viable. After reviewing the papers filed in support of and in
14 opposition to the prior summary judgment motion, and after
15 listening to the audio recordings from the prior summary judgment
16 hearings, Judge Klein essentially adopted Judge Carroll’s prior
17 ruling that Leslie’s fraudulent transfer claims were barred by
18 § 546(a)’s statute of limitations. The bankruptcy court further
19 ruled that, on the undisputed facts, the bankruptcy estate had no
20 interest in the Property, so Leslie’s claims based on § 362(a)
21 and § 549(a) also must fail. Because Leslie’s remaining claims
22 all were predicated on the fraudulent transfer claims or on the
23 § 549(a) claim, the bankruptcy court also rejected the remaining
24
9
From the commencement of the bankruptcy case through the
25 ruling on Leslie’s summary judgment motion, the case and the
26 adversary proceeding were assigned to Judge Ellen Carroll.
However, shortly before the hearings on Marv’s case dismissal
27 motion and the fee applications, both the bankruptcy case and the
adversary proceeding were administratively transferred to Judge
28 Sandra Klein.
15
1 claims. Having determined that the adversary proceeding should
2 be dismissed, the bankruptcy court concluded that the bankruptcy
3 case also should be dismissed.
4 The bankruptcy court entered on July 12, 2011, its order
5 dismissing both the bankruptcy case and the adversary proceeding.
6 Leslie timely appealed.
7 JURISDICTION
8 The bankruptcy court had jurisdiction under 28 U.S.C.
9 §§ 1334 and 157(b)(2)(H) and (O). We have jurisdiction under
10 28 U.S.C. § 158.
11 ISSUES
12 1. Did the bankruptcy court err when it dismissed the
13 bankruptcy case?
14 2. Did the bankruptcy court err when it dismissed the
15 adversary proceeding?
16 STANDARDS OF REVIEW
17 We review the bankruptcy court’s interpretation of statutes
18 and rules as questions of law under the de novo standard of
19 review. Heath v. Am. Express Travel Related Servs. Co. (In re
20 Heath), 331 B.R. 424, 428 (9th Cir. BAP 2005).
21 We review dismissal of a chapter 13 bankruptcy case for
22 abuse of discretion. Ellsworth v. Lifescape Med. Assocs., P.C.
23 (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011). To
24 ascertain whether the bankruptcy court abused its discretion, we
25 apply a two-part test. United States v. Hinkson, 585 F.3d 1247,
26 1261–62 (9th Cir. 2009) (en banc). First we consider de novo
27 whether the bankruptcy court identified the correct law to apply;
28 if the court identified the correct law, we then determine under
16
1 the clearly erroneous standard whether the court’s factual
2 findings, and its application of those findings to the relevant
3 law, were clearly erroneous. Id.
4 We may affirm on any basis supported by the record. Pac.
5 Capital Bancorp, N.A. v. E. Airport Dev., LLC (In re E. Airport
6 Dev., LLC), 443 B.R. 823, 828 (9th Cir. BAP 2011).
7 DISCUSSION
8 A. Dismissal of Bankruptcy Case
9 1. Underlying law and procedure
10 Under § 1307(c), the bankruptcy court may dismiss a
11 bankruptcy case “for cause” if it is in the best interests of the
12 estate and its creditors. While the statute sets forth a
13 nonexhaustive list of examples of “cause,” courts have identified
14 many others. Keith M. Lundin & William H. Brown, Chapter 13
15 Bankruptcy, 4th ed., § 333.1, at ¶ 1 (Section Last Revised Jun.
16 16, 2004). The for-cause determination is fact intensive, and
17 each case tends to turn upon its own facts. Id.
18 In this case, in the process of ruling on Marv’s case
19 dismissal motion, the bankruptcy court determined that the
20 adversary proceeding was meritless, dismissed the adversary
21 proceeding, and ruled that the bankruptcy case also should be
22 dismissed. According to the bankruptcy court, because the
23 adversary proceeding was the only asset of the estate and because
24 it was meritless, there was nothing for the trustee to
25 administer.
26 As a matter of procedure, Appellants initially argue that
27 the bankruptcy court improperly based its case dismissal on a
28 merits disposition of the adversary proceeding that it should not
17
1 have been making in the context of a case dismissal motion. For
2 purposes of this discussion, we will assume that it was improper
3 for the bankruptcy court to fully and finally dispose of the
4 merits of the adversary proceeding in this context.10 Even so,
5 under the circumstances presented here, the bankruptcy court
6 properly could assess the worth of the adversary proceeding as
7 part of its determination of whether the bankruptcy case should
8 be dismissed. It is commonplace for bankruptcy courts to assess
9 the worth of property and claims as part of the performance of
10 their duties. For instance, bankruptcy courts routinely estimate
11 the value of claims against the estate under § 502(c)(1). See,
12 e.g., In re Texans CUSO Ins. Group, LLC, 426 B.R. 194, 204
13 (Bankr. N.D. Tex. 2010); Future Asbestos Claimants v. Asbestos
14 Property Damage Committee (In re Federal-Mogul Global, Inc.),
15 330 B.R. 133, 154-55 (D. Del. 2005); see also First City Beaumont
16 v. Durkay (In re Ford), 967 F.2d 1047, 1049 n.3 (5th Cir. 1992)
17 (explaining that bankruptcy court claim estimation process under
18 § 502(c)(1) is at heart an equitable and discretionary process).
19 Similarly, in the context of determining whether "cause"
20 exists to grant relief from stay under § 362(d)(1), bankruptcy
21 courts routinely assess the value or worth of estate assets.
22 See, e.g., In re BLX Group, Inc., 419 B.R. 457, 469-71 (Bankr. D.
23 Mont. 2009); In re Gibson, 355 B.R. 807, 811-12 (Bankr. E.D. Cal.
24 2006); see also Pistole v. Mellor (In re Mellor), 734 F.2d 1396,
25 1401 (9th Cir. 1984) (in the context of relief from stay motion
26
27
10
We address the propriety of the dismissal of the adversary
28 proceeding infra.
18
1 under § 362(d)(1), assessing the value of debtor's property and
2 holding that equity cushion of 20% constituted adequate
3 protection of secured creditor's interest in property).
4 Simply put, it is not at all unusual or improper for a
5 bankruptcy court, in the context of a contested matter, to assess
6 the value of an asset of the estate. Moreover, it was
7 appropriate, here, for the bankruptcy court to assess the worth
8 of the adversary proceeding in the process of determining whether
9 cause existed to dismiss the Debtor's bankruptcy case under
10 § 1307(c). Appellants have admitted that the adversary
11 proceeding was the only asset of the bankruptcy estate that might
12 lead to a distribution to creditors. Consequently, when the
13 court determined that the adversary proceeding was essentially
14 worthless, it became clear that cause existed to dismiss the
15 bankruptcy case; there was no purpose to proceeding with the case
16 when there were no assets to administer and no potential
17 distribution available to the estate's creditors.
18 Appellants contend that the bankruptcy court nonetheless
19 should have conditioned dismissal on payment of their fees. But
20 this contention makes no sense. Appellants have articulated no
21 viable source from which such fees could have been legally
22 required to be paid as a prerequisite to case dismissal. In
23 support of their position, Appellants primarily rely on Gill v.
24 Hall (In re Hall), 15 B.R. 913, 915 (9th Cir. BAP 1981), but Hall
25 is inapposite. There, the debtor was seeking voluntary dismissal
26 of his chapter 7 case, and the Hall court noted that there was a
27 possibility of a source of assets that might be recoverable and
28 used to pay at least something in partial satisfaction of claims
19
1 against the estate. Id. at 917. Here, by contrast, the Debtor
2 has passed away, and the estate has no reasonable prospect of
3 recovering any assets to pay the Appellants’ fees or any other
4 estate claims.
5 Nor can Appellants credibly contend that they were not given
6 an adequate opportunity to develop the dispositive facts and
7 argue the key issues which the bankruptcy court relied on in
8 concluding that the adversary proceeding essentially was
9 worthless. The parties extensively briefed the application of
10 equitable tolling, whether the Property was property of the
11 Debtor’s bankruptcy estate, and the efficacy/validity of the
12 unrecorded Quitclaim Deed. Furthermore, the bankruptcy court
13 held a number of hearings at which the parties were given the
14 opportunity to orally argue these same points. All of this
15 briefing and argument occurred after the close of discovery in
16 the adversary proceeding, and occurred in contexts in which the
17 parties had every incentive to present their best arguments and
18 to present all of their evidence in support of these arguments.
19 In short, the bankruptcy court properly considered the worth
20 of the adversary proceeding when it dismissed the underlying
21 bankruptcy case.
22 2. Accuracy of bankruptcy court assessment of adversary
23 proceeding
24 Even though we have held, above, that the bankruptcy court
25 properly could assess the worth of the adversary proceeding in
26 the process of ruling on Marv’s case dismissal motion, Appellants
27 also complain that the bankruptcy court’s assessment was wrong.
28 They contend that the bankruptcy court reached the wrong
20
1 conclusion regarding each of the key adversary proceeding issues
2 the court considered: (1) the applicability of equitable tolling,
3 (2) the efficacy/validity of the unrecorded Quitclaim Deed, and
4 (3) whether the Property was property of the estate. We will
5 address each of these issues below.
6 a. Applicability of equitable tolling
7 The doctrine of equitable tolling may be applied to the
8 limitations period set forth in § 546(a). Ernst & Young v.
9 Matsumoto (In re United Ins. Mgmt., Inc.), 14 F.3d 1380, 1384-85
10 (9th Cir. 1994). Under the equitable tolling doctrine, when a
11 litigant “‘remains in ignorance of [a wrong] without any fault or
12 want of diligence or care on his part,’” the limitations period
13 will not run until the wrong is discovered. Id. at 1384
14 (emphasis added) (quoting Lampf, Pleva, Lipkind, Prupis &
15 Petigrow v. Gilbertson, 501 U.S. 350 (1991)). Ordinarily,
16 whether equitable tolling applies in a particular case is a
17 question of fact. In re United Ins. Mgmt., 14 F.3d at 1385.
18 However,
19 when application of equitable tolling turns on the
plaintiff's diligence in discovering a cause of action,
20 courts may hold, as a matter of law, that the doctrine
does not apply. The extent to which a plaintiff used
21 reasonable diligence is tested by an objective
standard. A district court may, therefore, grant a
22 summary judgment motion if the uncontroverted evidence
irrefutably demonstrates that a plaintiff discovered or
23 should have discovered the fraud but failed to file a
timely complaint.
24
25 Id. (emphasis added and internal quotation marks omitted) (citing
26 Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1417 (9th Cir.
27 1987)); see also Gardenhire v. IRS (In re Gardenhire), 209 F.3d
28 1145, 1151-52 (9th Cir. 2000) (expressing doubt as to whether IRS
21
1 successfully could invoke equitable tolling when it knew,
2 thirteen days before the deadline ran, the facts it needed to
3 know in order to timely file a proof of claim).
4 Here, the uncontroverted facts in the record demonstrate
5 that Leslie knew the essentials of his fraudulent transfer claims
6 in February 2008, but he did not commence the adversary
7 proceeding until March 2010. We acknowledge that the March 2008
8 conversion of the case from chapter 7 to chapter 13 was a
9 circumstance beyond Leslie’s control that prevented him from
10 pursuing the fraudulent transfer claims for a substantial period
11 of time. However, the case was reconverted to chapter 7 in
12 October 2009, and Leslie was reappointed as trustee shortly
13 thereafter. Appellants offered no evidence explaining why Leslie
14 could not have timely filed a complaint stating his fraudulent
15 transfer claims between the time of his reappointment and the
16 January 2010 deadline for filing such claims under § 546.11
17 In short, we see no error in the bankruptcy court’s
18 conclusion that equitable tolling would not apply to save the
19 Trustee’s fraudulent transfer claims.
20 b. Property of the estate and the effect of the
21 unrecorded Quitclaim Deed
22 Appellants argued in the bankruptcy court, and on appeal,
23
11
24 In addition to proving reasonable diligence, Appellants
needed to show that “some extraordinary circumstance stood in
25 [their] way and prevented timely filing.” Holland v. Florida,
26 130 S.Ct. 2549, 2562 (2010)(internal quotations omitted) (quoting
Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005)). It is doubtful
27 that Appellants could establish the requisite extraordinary
circumstance given the facts presented here, but in light of our
28 holding on reasonable diligence, we need not reach this issue.
22
1 that Marv’s January 2010 recording of the Quitclaim Deed (from
2 Rex to Oboe) constituted a postpetition transfer of estate
3 property in violation of § 549 and an act against property of the
4 estate in violation of § 362. But Appellants’ argument is
5 founded upon a false premise: that the Property was property of
6 the Debtor’s that became property of her bankruptcy estate when
7 Debtor filed bankruptcy in January 2008. Appellants assert that
8 the Debtor acquired her interest in the property when Rex died in
9 July 2005 without a will. However, that assertion only would be
10 true if we were to ignore the effect of the March 2005 Quitclaim
11 Deed, pursuant to which Rex conveyed the Property to Oboe.
12 In California, an unrecorded deed is effective between the
13 parties to the deed. 5 Harry D. Miller and Marvin B. Starr, CAL.
14 REAL ESTATE § 11:2 & n.14 (3d ed. 2009) (citing numerous cases).
15 Having conveyed the Property to Oboe, Rex had nothing to pass by
16 intestate succession to the Debtor. See Madden v. Alpha Hardware
17 & Supply Co., 274 P.2d 705, 707 (Cal. App. 1954) (holding that
18 decedent cannot pass title in property to his heirs when he had
19 no title in the subject property at the time of his death).
20 But even if Rex somehow could have passed some interest in
21 the Property to the Debtor by intestate succession, that interest
22 still would have been subject to the unrecorded Quitclaim Deed,
23 because an unrecorded deed “is also valid and enforceable against
24 any party who subsequently acquires an interest in the property,
25 who has notice of the prior unrecorded interest, or who has
26 failed to pay a valuable consideration for the interest.” CAL.
27 REAL ESTATE, supra, at § 11:2 (emphasis added). Here, Appellants’
28 contention that Debtor inherited the Property is fundamentally
23
1 inconsistent with any claim that Debtor paid valuable
2 consideration for that interest.
3 Appellants assert that Chase Manhattan Bank v. Taxel (In re
4 Deuel),594 F.3d 1073 (9th Cir. 2010), supports their position.
5 We disagree. Citing Deuel, Appellants claim that, because the
6 Quitclaim Deed was unrecorded at the time of Debtor’s bankruptcy
7 filing, it was ineffective as against Debtor’s bankruptcy
8 trustees, who may claim bona fide purchaser status under § 544.
9 But Deuel is inapposite. The holding in Deuel is premised in
10 part on the fact that the debtor there held legal title to her
11 residence at the time of her bankruptcy filing. Based on that
12 interest, the bankruptcy trustee there could assert the status of
13 a hypothetical bona fide purchaser under § 544(a)(3). On its
14 face, in order to avoid a transfer under § 544(a), the property
15 transferred must have been “property of the debtor” before the
16 transfer.
17 In this case, however, Debtor had no interest in the
18 Property (and never had any interest in the Property). Under
19 California law, Rex held title to the Property as his sole and
20 separate property until he conveyed it in March 2005 to Oboe.
21 Simply put, there was no transfer of Debtor’s property for a
22 hypothetical bona fide purchaser to avoid.
23 Appellants have not disputed that, in order to prevail
24 either on their § 549 claim or on their claims under § 362, the
25 Property must have been property of the Debtor’s or property of
26 the estate. As set forth above, neither the debtor nor the
27 estate had any interest in the Property. Accordingly, these
28 claims lack merit.
24
1 In sum, we perceive no error in the legal conclusions the
2 bankruptcy court relied on when it assessed the worth of the
3 adversary proceeding. Given that the court properly and
4 correctly determined that the adversary proceeding was
5 essentially worthless, it did not err when it dismissed Debtor's
6 bankruptcy case.
7 B. Dismissal of Adversary Proceeding
8 Having decided that the bankruptcy court did not err in
9 dismissing the bankruptcy case, we next consider whether the
10 bankruptcy court properly dismissed the adversary proceeding.
11 Appellants, in essence, contend that it was inappropriate for the
12 court to dismiss the adversary proceeding on the merits when the
13 only matter before the bankruptcy court at the time was Marv’s
14 motion to dismiss the underlying bankruptcy case.
15 We agree that the bankruptcy court should not have finally
16 determined and disposed of the merits of the adversary proceeding
17 in the context of the case dismissal motion. On a number of
18 occasions, we have held that bankruptcy courts should not finally
19 determine issues in contested matters that are properly the
20 subject of adversary proceedings. Cogliano v. Anderson (In re
21 Cogliano), 355 B.R. 792, 804-05 (9th Cir. BAP 2006) (citing
22 cases); see also GMAC Mortgage Corp. Salisbury (In re Loloee),
23 241 B.R. 655, 660 (9th Cir. BAP 1999). The Court of Appeals has
24 reached similar conclusions. See, e.g., Bear v. Coben (In re
25 Golden Plan of Cal., Inc.), 829 F.2d 705, 711-12 (9th Cir. 1986);
26 Brady v. Andrew (In re Commercial W. Fin. Corp.), 761 F.2d 1329,
27 1337-38 (9th Cir. 1985).
28 However, as we mentioned above, we may affirm on any basis
25
1 supported by the record. In re E. Airport Dev., LLC, 443 B.R. at
2 828. And we already have upheld, above, the bankruptcy court’s
3 dismissal of the bankruptcy case. In light of the case
4 dismissal, dismissal of the adversary proceeding also was
5 appropriate. The dismissal of the underlying bankruptcy case
6 ordinarily leads to the dismissal of pending adversary
7 proceedings. See 3 Collier on Bankruptcy ¶ 349.03[2](Alan N.
8 Resnick and Henry J. Sommer eds., 16th ed. 2011). While the
9 court sometimes has discretion to retain jurisdiction over some
10 adversary proceedings, see Carraher v. Morgan Elec., Inc. (In re
11 Carraher), 971 F.2d 327, 328 (9th Cir. 1992), there are other
12 times when the case dismissal leaves the bankruptcy court with no
13 basis for exercising its discretion to retain jurisdiction. See,
14 e.g., Clift v. Gustafson (In re Gustafson), 316 B.R. 753, 758
15 (Bankr. S.D. Ga. 2004); In re Davison, 186 B.R. 741, 742 (Bankr.
16 N.D. Fla. 1995). These cases stand for the proposition that the
17 continued survival of bankruptcy avoidance claims depends on the
18 continued existence of the bankruptcy case. More broadly stated,
19 if any claim for relief depends on the continued existence of the
20 bankruptcy estate and/or the continued service of the bankruptcy
21 trustee, such claim cannot survive the dismissal of the
22 underlying bankruptcy case. See Pauley v. Bank One Colo. Corp.,
23 205 B.R. 272, 275 (D. Colo. 1997) (“The law does not allow the
24 use of discretion when an adversary proceeding depends upon the
25 bankruptcy case for its existence.”); Roma Grp., Inc. v. Michael
26 Anthony Jewelers (In re Roma Grp., Inc.), 137 B.R. 148, 150–51
27 (Bankr. S.D.N.Y. 1992) (holding that debtor's equitable
28 subordination claim ceased to exist with the dismissal of the
26
1 underlying bankruptcy case).
2 This is precisely the situation here. All of Appellants’
3 claims for relief are bankruptcy avoidance and recovery claims,
4 which contemplate the existence of an estate that will benefit
5 from the avoidance and recovery, and the service of a trustee to
6 pursue those claims. In light of the dismissal of the underlying
7 case, there no longer existed the requisite estate and the former
8 trustees no longer had standing to continue to pursue the claims
9 for the benefit of the former estate. See generally § 349(b)
10 (explaining effect of case dismissal on bankruptcy estate).
11 Consequently, we may affirm the bankruptcy court’s dismissal
12 of the adversary proceeding on this alternate basis. On the
13 other hand, a dismissal of the adversary proceeding based on
14 dismissal of the underlying bankruptcy case should not have
15 purported to determine the merits of the adversary proceeding.
16 Accordingly, we hereby MODIFY the bankruptcy court’s dismissal of
17 the adversary proceeding to a dismissal without prejudice. When
18 a court dismisses a lawsuit on jurisdictional or procedural
19 grounds, the court should not determine the merits of the
20 lawsuit. See Wages v. IRS, 915 F.2d 1230, 1234 (9th Cir. 1990)
21 (“A jurisdictional dismissal is not a judgment on the merits.”).
22 CONCLUSION
23 For the reasons set forth above, we MODIFY the dismissal of
24 the adversary proceeding to a dismissal without prejudice and, as
25 modified, AFFIRM the bankruptcy court’s dismissal of both the
26 bankruptcy case and the adversary proceeding.
27
28
27