FILED
APR 2 2021
ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP Nos. OR-20-1110-BKT
CAMBRIDGE LAND COMPANY II, LLC; OR-20-1111-BKT
CAMBRIDGE LAND COMPANY, LLC, (Related Appeals)
Debtors.
Bk. Nos. 3:13-bk-36568-PCM
SANDFORD LANDRESS; CHARLES 3:13-bk-36592-PCM
MARKLEY; GREENE & MARKLEY P.C.,
Appellants,
v. OPINION
CAMBRIDGE LAND COMPANY II, LLC;
CAMBRIDGE LAND COMPANY, LLC;
ALAN N. O'KAIN; VICTORIA E. O'KAIN,
Appellees.
Appeal from the United States Bankruptcy Court
for the District of Oregon
Peter C. McKittrick, Bankruptcy Judge, Presiding
APPEARANCES:
Julie M. Engbloom of Tadjedin Thomas & Engbloom Law Group LLP argued for
appellants Sanford Landress, Charles Markley, and Green & Markley P.C.
Before: BRAND, KLEIN,1 and TAYLOR, Bankruptcy Judges.
Opinion by Judge Brand
Concurrence by Judge Klein
BRAND, Bankruptcy Judge:
1
Hon. Christopher M. Klein, United States Bankruptcy Judge for the Eastern District of
California, sitting by designation.
INTRODUCTION
Appellants appeal orders reopening the debtors' previously dismissed
chapter 112 bankruptcy cases. The cases were reopened for administrative
purposes only to allow the debtors to amend their schedules. Appellants
challenged the orders, not because they should be reversed, but because
appellants believed that the bankruptcy court should have administered the
newly scheduled assets. But appellants were not creditors and were otherwise
not directly and adversely affected pecuniarily by the orders of the bankruptcy
court. Thus, they have no standing to appeal. Further, appellants are mistaken
about the authority of the bankruptcy court to administer assets after the
dismissal of a chapter 11 case. Once the case is dismissed, all assets, scheduled or
unscheduled, revest in the debtor. There is nothing for the bankruptcy court to
administer. Because appellants lack standing to appeal from these orders, we
DISMISS for lack of jurisdiction.3
FACTS
Appellees Alan and Victoria O'Kain are husband and wife. They are both
attorneys and the principals of debtors-appellees Cambridge Land Company,
LLC and Cambridge Land Company II, LLC (the "LLCs"), both now inactive
2
Unless specified otherwise, all chapter and section references are to the Bankruptcy
Code, 11 U.S.C. §§ 101–1532.
3 The motions to dismiss filed by Cambridge Land Company, LLC and Cambridge Land
Company II, LLC are DENIED, because they failed to appear in these appeals and have
waived their right to do so. See BAP Conditional Orders of Waiver entered December 1, 2020.
2
LLCs. Prior to September 2014, the LLCs each owned and operated an apartment
complex (the "Apartment Complexes").
In 2013, the lender for the Apartment Complexes began two foreclosure
proceedings against the LLCs and moved for the appointment of a receiver in
each case. Meanwhile, the O'Kains sought legal advice about filing chapter 11
cases for the LLCs, to save the Apartment Complexes from foreclosure and to
avoid the loss of equity and the possible appointment of receivers. The O'Kains
met with bankruptcy attorneys Charles Markley and Sanford Landress of the law
firm Greene & Markley, PC (the "Malpractice Defendants"). The LLCs entered
into retainer agreements with the Malpractice Defendants. The scope of their
legal work was described as "research and advice concerning feasibility of Ch. 11
Bankruptcy filing."
Ultimately, the Malpractice Defendants advised that chapter 11 bankruptcy
was not feasible for either of the LLCs and recommended that the entities file
chapter 7 cases instead. Rejecting that advice, the O'Kains retained another
bankruptcy attorney to file chapter 11 cases for the LLCs. By that time, the state
court had appointed a receiver in each case.
A. The chapter 11 filings
The LLCs filed chapter 11 bankruptcy cases in October 2013. No legal
malpractice claim against the Malpractice Defendants was disclosed in either of
their schedules.
Later, the bankruptcy court approved the sale of the Apartment
Complexes, which resulted in no payment to unsecured creditors. With the
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Apartment Complexes sold and the LLCs' estates administratively insolvent, the
LLCs moved to dismiss their chapter 11 cases under § 1112(b)(1). No one
objected.
The bankruptcy court entered an Order of Dismissal and Administratively
Closing Case in each of the LLCs' chapter 11 cases. The case dismissal orders,
which appear to be standard orders for the District of Oregon, stated the
following:
This case is dismissed; this case is closed, but only for administrative
purposes; and the court shall retain jurisdiction over any adversary
proceeding pending at the time of closure. . . . The court will not
entertain a motion to reopen this case, or a motion for reconsideration
of this order, unless all unpaid [filing] fees are paid (emphasis added).
B. The state court litigation over the malpractice claim
In 2015, the O'Kains and the LLCs filed a complaint against the Malpractice
Defendants in state court. In short, they alleged that the Malpractice Defendants'
legal advice, to allow the receivership hearings in the LLCs' cases to go forward
and to not file for bankruptcy beforehand, was detrimental and caused them
damages of $1.625 million.
As relevant here, the parties ultimately agreed that the malpractice claim
was a prepetition asset of the LLCs, but they disputed whether it belonged to the
LLCs or their respective bankruptcy estates. The Malpractice Defendants argued
that the undisclosed malpractice claim was still an asset of the LLCs' bankruptcy
estates despite the case dismissals and that the estates were the real party in
interest, not the LLCs. Ultimately, the state court agreed with the parties'
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suggestion to have the bankruptcy court decide whether the malpractice claim
was property of the LLCs' estates, and it ordered that they move to reopen their
chapter 11 cases and schedule the malpractice claim.
C. Motions to reopen the LLCs' bankruptcy cases
The LLCs then moved to reopen their chapter 11 cases. They stated that,
since the case dismissals, they learned of malpractice claims that they or their
principals may have against certain parties related to legal advice rendered
prepetition, that legal action has been commenced on such claims, and that they
had been ordered by the state court to amend their bankruptcy schedules to
include the malpractice claims. The LLCs further stated that no remaining
unsecured creditors existed and that administration of the malpractice claims
would not serve to benefit them, their creditors, or their bankruptcy estates. The
Malpractice Defendants filed a response. 4
The LLCs filed their amended schedules disclosing the malpractice claim.
Notice was served on creditors and parties of interest. No response was filed by
any creditors or the United States Trustee.
After a hearing, the bankruptcy court orally granted the motions to reopen.
The court opined that it could not "reopen" the dismissed chapter 11 cases under
§ 350(b),5 because they were not "closed" under § 350(a).6 However, it would
4
The Malpractice Defendants also removed the malpractice action to the bankruptcy
court, which ordered that it be remanded to the state court. The Malpractice Defendants did
not appeal that order.
5 Section 350(b) provides: "A case may be reopened in the court in which such case was
closed to administer assets, to accord relief to the debtor, or for other cause."
6 Section 350(a) provides: "After an estate is fully administered and the court has
5
reopen the cases for "administrative purposes only," to allow the LLCs to file
amended schedules disclosing the malpractice claim. After entry of written
orders, these timely appeals followed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We discuss our jurisdiction below.
ISSUE
Do the Malpractice Defendants have standing to challenge the orders on
appeal?
STANDARD OF REVIEW
While standing to appeal is generally a legal issue reviewed de novo,
whether an appellant is a "person aggrieved" by the order appealed is a question
of fact we review in the first instance. See Palmdale Hills Prop., LLC v. Lehman Com.
Paper, Inc. (In re Palmdale Hills Prop., LLC), 654 F.3d 868, 873 (9th Cir. 2011).
DISCUSSION
We lack jurisdiction over appeals when the appellant lacks standing. See
Paine v. Dickey (In re Paine), 250 B.R. 99, 104 (9th Cir. BAP 2000). "Standing
represents a jurisdictional requirement which remains open to review at all
stages of the litigation." Nat'l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 255
(1994). We have an independent duty to consider an appellant's standing. Aheong
v. Mellon Mortg. Co. (In re Aheong), 276 B.R. 233, 238 (9th Cir. BAP 2002). As the
appellant, the Malpractice Defendants have an affirmative duty to establish
discharged the trustee, the court shall close the case."
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standing. Hasso v. Mozsgai (In re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th
Cir. BAP 2002) (citing Bennett v. Spear, 520 U.S. 154, 167-68 (1997)).
To have standing to appeal a decision of the bankruptcy court, an appellant
must show that it is a "person aggrieved" who was "directly and adversely
affected pecuniarily by an order of the bankruptcy court[.]" Fondiller v. Robertson
(In re Fondiller), 707 F.2d 441, 442-43 (9th Cir. 1983). A "person aggrieved" is
someone whose interest is directly affected by the bankruptcy court's order,
either by a diminution in property, an increase in the burdens on the property, or
some other detrimental effect on the rights of ownership inherent in the
property. Id.
The Malpractice Defendants have failed to demonstrate standing in these
appeals. They are not creditors of the LLCs; they are the defendants in state court
litigation initiated by the LLCs. The orders reopening the LLCs' chapter 11 cases
for administrative purposes did not diminish the Malpractice Defendants'
property, increase their burdens on any property, or detrimentally affect their
rights of ownership inherent in any property. Put simply, they are not a "person
aggrieved" by those orders. The orders at issue left the Malpractice Defendants to
defend against the malpractice action in state court, and did not prevent them
from asserting any defenses in that action, which they have been capably
asserting since 2015. See Menk v. LaPaglia (In re Menk), 241 B.R. 896, 913-14 (9th
Cir. BAP 1999) ("little happens" in the reopening of a bankruptcy case "that
would give anyone standing to complain about [it].").
7
When questioned about their standing at oral argument, the Malpractice
Defendants expressed their concern about the time and expense that could be
wasted if they continued litigating the malpractice action against what they
argue is the wrong plaintiff. The Malpractice Defendants' fear is based more on
conjecture than fact.
First, the "closing" in these cases was an administrative matter – a mere
closing of the bankruptcy file – as opposed to a statutory closing under § 350(a).
See Goldenberg v. Deutsche Bank Nat'l Tr. Co. (In re Papazov), BAP No. CC-12-1584-
KiClD, 2013 WL 2367802, at *9-10 (9th Cir. BAP May 30, 2013), aff'd, 610 F. App'x
700 (9th Cir. 2015) (citing Armel Laminates, Inc. v. Lomas & Nettleton Co. (In re
Income Prop. Builders, Inc.), 699 F.2d 963, 965 (9th Cir. 1982) (per curiam)); see also
Hashiman v. Danielson (In re Hashiman), BAP No. CC-20-1107-TaLS, 2020 WL
5914605, at *2 (9th Cir. BAP Oct. 5, 2020) (a bankruptcy case can only be reopened
under § 350(b) if it was first closed under § 350(a), rather than dismissed) (citing
Bowman v. Casamata (In re Bowman), 526 B.R. 802, 804 (8th Cir. BAP 2015));
Pavelich v. McCormick, Barstow, Sheppard, Wayte & Carruth LLP (In re Pavelich), 229
B.R. 777, 781 (9th Cir. BAP 1999) ("Reopening a dismissed case is an oxymoron –
since the consolidated cases were dismissed rather than closed, there are no
closed cases to reopen.") (citing In re Income Prop. Builders, Inc., 699 F.2d at 965).
Further, the bankruptcy court's administrative reopening, which is an action
contemplated by the dismissal orders, did not vacate the dismissals, reinstate the
bankruptcy cases, or create any bankruptcy estates to administer. It also did not
8
trigger an automatic stay.7 See In re Menk, 241 B.R. at 914. No one has moved to
vacate the dismissals, and no creditor or the United States Trustee has asked the
bankruptcy court to conduct any further proceedings regarding any alleged
failure of the LLCs to list the malpractice claim on their schedules.
More importantly, when the LLCs' chapter 11 cases were dismissed on
December 30, 2014, all of the estate property revested in them at that time under
§ 349(b)(3), "regardless of whether the property was scheduled." Id. at 912
(emphasis added) (citing § 349); see also Cohen v. Tran (In re Tran), 309 B.R. 330,
334 (9th Cir. BAP 2004), aff'd, 177 F. App'x 754 (9th Cir. 2006) (dismissal under
§ 349(b) is intended to "'undo the bankruptcy case, as far as practicable, and to
restore all property rights to the position in which they were found at the
commencement of the case.'") (citations omitted). A dismissal under § 349(b) is
distinct from a fully administered case. Contrary to the Malpractice Defendants'
argument, § 554(d) 8 has no application after a dismissal. With a dismissal, there
is no estate and there are no assets remaining to be abandoned or administered.
Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 485 (2d Cir. 2014). To the
extent that the LLCs' estates held the malpractice claim against the Malpractice
Defendants, that claim is now owned by the LLCs. But in neither case is the claim
property of a bankruptcy estate. In short, the LLCs are the proper plaintiffs.9
7
Notably, a reopening under § 350(b) would not do any of these things either.
8 Although § 554(d) prescribes that property of the estate that is not abandoned and that
is not administered in the case remains property of the estate, the dismissal of the case under
§ 349 automatically revests all estate property in the prior owners. § 349(b)(3); In re Menk, 241
B.R. at 912.
9 We make no determination as to whether the O'Kains are also owners of this claim.
9
CONCLUSION
Accordingly, because the Malpractice Defendants lack standing to appeal
the orders administratively reopening the LLCs' chapter 11 cases, we must
DISMISS the appeals.
Concurrence begins on next page.
10
KLEIN, Bankruptcy Judge, concurring:
I join the majority decision and write separately to transcend our formal
analysis in the interest of fostering informed communication with state courts by
explaining the distinction between "closing" and "dismissing" a bankruptcy case
in terms that might be helpful in future cases.
This appeal results from the recognition by an Oregon state court that a
prepetition cause of action was omitted from bankruptcy schedules and that
court's assumption that it remains property of the bankruptcy estate that requires
the parties to return to bankruptcy court and amend their schedules. Ordinarily,
that is the prudent course.
The general rule in bankruptcy, dating back to 1905, is that unscheduled
interests in property are not abandoned when a bankruptcy case is "closed," but
rather remain property of the estate indefinitely. First Nat’l Bank v. Lasater, 196
U.S. 115, 119 (1905).
To be precise, when a bankruptcy case has been fully administered, it is
"closed," in consequence of which (unless the court orders otherwise) all property
that has been scheduled is "abandoned to the debtor" but unscheduled property
is neither abandoned nor administered and remains property of the estate,
essentially forever. 11 U.S.C. § 554(c) & (d).
An example of the force of this rule is the reopening in 2009 of a
bankruptcy liquidation case filed in 1936 so that a trustee could be appointed to
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administer an unscheduled interest in real property. In re Dunning Bros., 410 B.R.
877 (Bankr. E.D. Cal. 2009).
From the standpoint of state courts, perhaps the most common occurrence
is when a plaintiff is discovered to have omitted the cause of action from
schedules in a prior bankruptcy case. The consequence is that the plaintiff lacks
authority over the cause of action and is not the real party in interest. Although
defense counsel often fallaciously assert judicial estoppel (i.e., the estoppel of
inconsistent positions), the correct solution is to recognize that the bankruptcy
trustee is the real party in interest as the custodian of all property of the estate.
Thus, state courts are encouraged to send the parties to the bankruptcy court to
clear up the matter.
When an unscheduled asset, such as a prepetition cause of action surfaces,
the bankruptcy court will reopen the case and order a trustee appointed who can
deal with the asset with a view to whether it will lead to a recovery that can be
distributed to creditors. The trustee with either "abandon" the cause of action as
being of inconsequential value and benefit to the estate, or liquidate it by
prosecuting it, settling it, or selling it to the high bidder.
What is different about the situation in this appeal is that the prior cases
under the Bankruptcy Code were "dismissed," rather than "closed." When a case
is dismissed, then (except to the extent the bankruptcy court orders otherwise)
the dismissal "revests the property of the estate in the entity in which such
property was vested immediately before the commencement of the case" under
the Bankruptcy Code. 11 U.S.C. § 349(b)(3).
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Thus, when the bankruptcy judge in this instance was asked to "reopen"
cases that had been dismissed, the judge was presented with the contradiction
that an unscheduled cause of action could not be property of the estate.
Jurisdiction had been retained upon dismissal only with respect to adversary
proceedings actually pending at the time of dismissal in 2014. All other property
of the estate, scheduled and unscheduled, revested upon the dismissals of the
cases; amending schedules would have no legal effect; and there was no
bankruptcy business to which to attend. For that reason, the bankruptcy judge
fashioned a measure of reopening "for administrative purposes," apparently as
an accommodation to the state court's requirement that schedules be amended so
there would be no doubt about the state court's authority.
We do not wish to chill the laudatory instinct of state courts to order
parties to clear up uncertainties about bankruptcy issues – such as property of
the estate or the applicability of the automatic stay – in bankruptcy court,
especially when the validity of activity in the state court is uncertain. Sometimes
the result is that the bankruptcy court rules there is no bankruptcy issue
impeding the state court, which is a helpful and perfectly satisfactory outcome
for the state court.
I understand our ruling, as well as that of the bankruptcy judge, to be that
the statutory revesting upon dismissal means there is no property of the estate in
these cases, regardless of what the schedules may have said in 2013 and
regardless of how they might be amended after the dismissals that occurred in
2014. Since the appellants can point to no consequence that would adversely
13
affect them, it is correct to say that they lack standing. One might also say that
the property of the estate question is moot or that the representations by
appellants lack merit. In any event, the state court now has a formal
determination that amending the schedules after the dismissals of this cases is of
no legal consequence from the standpoint of bankruptcy.
We express no view regarding what, if anything, the Oregon state court
should do in consequence of the omission from the schedules of the prepetition
cause of action.
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