FILED
JUN 17 2022
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK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 No. CC-21-1230-LGT
FARIBORZ ZANJANEE BABAEE; BAP No. CC-21-1231-LGT
MALIHE P. BABAEE, (related appeals)
Debtors.
Bk. No. 8:20-bk-10268-TA
FARIBORZ ZANJANEE BABAEE;
MALIHE P. BABAEE,
Appellants,
v. MEMORANDUM∗
RICHARD A. MARSHACK, Chapter 7
Trustee,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Theodor C. Albert, Chief Bankruptcy Judge, Presiding
Before: LAFFERTY, GAN, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Chapter 71 debtors Fariborz Zanjanee Babaee and Malihe P. Babaee
(“Debtors”) appeal the bankruptcy court’s orders approving the chapter 7
∗ This disposition is not appropriate for publication. 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 8024-1.
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532. “Rule” references are the Federal Rules of
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trustee’s (“Trustee”) motions to (1) sell their Newport Beach residence (the
“Property”) and (2) approve agreements with two junior secured creditors,
under which those creditors would subordinate and transfer to the estate a
portion of their liens. Absent the agreements, the sale would generate no
distribution to unsecured creditors. Debtors argue that the bankruptcy
court lacked authority to approve the motions because the agreements
overrode their statutory exemption rights.
We DISMISS for lack of standing.
FACTS
Debtors filed a joint chapter 7 petition in January 2020. They listed
the Property on Schedule A with a value of $2.9 million. Schedule D listed
four consensual liens and two tax liens on the Property totaling
approximately $2.6 million. Debtors claimed a $175,000 homestead
exemption under California Code of Civil Procedure § 704.730. They also
scheduled nonpriority unsecured claims totaling $430,027.
In April 2020, Trustee filed a Notice of Assets; he then hired a real
estate agent to market the Property. Trustee eventually received an offer to
purchase the Property for $2,860,000. He negotiated agreements with two
secured creditors, Comerica Bank (“Comerica”), the holder of the third
position deed of trust, and Valley Economic Development Center, Inc.
(“VEDC”), 2 the holder of the fourth position deed of trust, to subordinate a
Bankruptcy Procedure.
2 Some of the parties’ papers refer to City National Bank (“CNB”) as a party to
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portion of their liens, transfer the subordinated portions to the estate, and
consent to the sale of the Property free and clear of their liens. Trustee filed
a motion under Rule 9019 to approve those agreements (the “Compromise
Motion”).
The Compromise Motion stated that Schedule D and Trustee’s books
and records reflected that the Property was encumbered by the following
liens:
Shellpoint Mortgage Servicing $1,650,243.80
First Choice Bank $ 150,000.00
Comerica $ 449,325.00
VEDC $ 425,000.00
Internal Revenue Service $ 104,035.00
Orange County Treasurer $ 29,914.00
Judgment lien $ 173,808.00
Total $2,982,082.00
Under the agreements, Comerica agreed to subordinate all but
$410,000 of its claim, and VEDC agreed to subordinate all but $191,000 of
its claim, to the claims of Trustee, his professionals, and general unsecured
creditors. To effectuate this agreement, Comerica and VEDC would
transfer the subordinated portions of their liens to Trustee for the benefit of
the VEDC agreement. CNB is the assignee of the VEDC Liquidating Trust, which was
created pursuant to a confirmed chapter 11 plan in VEDC’s bankruptcy case.
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the estate. Based on Trustee’s calculations, absent the agreements,
unsecured creditors would receive no distribution.
Debtors objected to the Compromise Motion, arguing: (1) there was
no bona fide dispute between Trustee and the settling creditors; (2) the
motion was a circuitous attempt to object to Debtors’ homestead
exemption; and (3) the law disfavors sales of fully encumbered properties.
Shortly thereafter, Trustee filed a motion to sell the Property for
$2,860,000, subject to overbids, free and clear of liens and encumbrances
pursuant to various subsections of § 363 (the “Sale Motion”). Trustee also
requested the sale to be free and clear of Debtors’ homestead exemption
based on § 522(g), such that their exemption would not attach to the
recovered liens resulting from the subordination agreements. 3 In his reply
brief, Trustee estimated the net recovery to the estate at approximately
$293,144.
Debtors filed an omnibus objection in which they strenuously
objected to their homestead exemption not being paid out of the recovered
liens and argued that Trustee and his professionals would be the primary
beneficiaries of the sale, and no funds would go to pay general unsecured
creditors. As such, they argued, the proposed terms constituted an
impermissible surcharge of their homestead exemption. Debtors also
requested the court compel Trustee to abandon the Property.
3
Because we are dismissing this appeal for lack of standing, we need not address
the substance of the requested relief.
4
In reply, Trustee asserted that he was not required to demonstrate a
dispute under Rule 9019, and in any event the agreements could be
approved as stipulations. He disputed that the presumption of impropriety
for overencumbered property sales applied to the contemplated sale, but
even if it did, Trustee had met the standard for overcoming that
presumption. He also disputed that he and his professionals were the
primary financial beneficiaries of the proposed sale. Trustee asserted that
the sale would generate significant funds for unsecured creditors based on
the estimated commissions, counsel fees, and Trustee’s compensation, the
latter two of which could be adjusted, if necessary, to ensure a meaningful
distribution to unsecured creditors.
Trustee, however, did propose a revised distribution scheme under
which Debtors would be paid their exemption after payment of closing
costs and all consensual liens, including the subordinated portion of the
Comerica and VEDC liens. According to Trustee’s calculation, Debtors
could expect to receive $45,962.76 on account of their homestead
exemption.
After hearing argument, the bankruptcy court adopted its tentative
ruling granting both motions, stating that it viewed the Trustee’s efforts as
“entirely proper.” It rejected Debtors’ arguments to the contrary. An
overbidder appeared at the hearing, and, after conducting a brief auction,
the bankruptcy court approved the sale at a price of $2,880,000—$20,000
over the original offer. The order approving the Sale Motion (the “Sale
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Order”) contains a § 363(m) finding that the buyers acted in good faith.
Debtors timely appealed both orders.
After unsuccessfully seeking stays pending appeal from the
bankruptcy court and this Panel, Debtors moved out of the Property. The
sale closed on November 19, 2021. Shortly thereafter, Trustee paid the IRS
$74,649.02, the compromised amount on its claim, as approved by the
bankruptcy court. According to Trustee, he is currently holding
approximately $225,852 of sale proceeds, to be distributed upon further
order of the court. On February 4, 2022, a BAP motions panel denied
Trustee’s motion to dismiss these appeals as moot.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (N). We discuss our jurisdiction below.
ISSUE
Do Debtors 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.” Landress v. Cambridge
Land Co. II, LLC (In re Cambridge Land Co. II, LLC), 626 B.R. 319, 323 (9th Cir.
BAP 2021), appeal filed, No. 21-60028 (9th Cir. 2021) (citing Palmdale Hills
Prop., LLC v. Lehman Com. Paper, Inc. (In re Palmdale Hills Prop., LLC), 654
F.3d 868, 873 (9th Cir. 2011)).
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DISCUSSION
A. Scope of Appeal
Debtors concede that, pursuant to § 363(m), the sale of the Property
cannot be reversed or modified on appeal. 4 Accordingly, this appeal is
limited to the propriety of the bankruptcy court’s approval of the
compromises. The appeal touches on the Sale Order only to the extent the
Sale Order approves the proposed distribution scheme.
B. Debtors lack standing in these appeals.
“A federal court may exercise jurisdiction over a litigant only when
that litigant meets constitutional and prudential standing requirements.”
Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th Cir.
BAP 2011) (citation omitted). Constitutional standing requires an injury in
fact that is caused by or fairly traceable to some conduct, and which the
requested relief will likely redress. Id. (citing Sprint Commc’ns Co., L.P. v.
APCC Servs., Inc., 554 U.S. 269, 273-74 (2008); additional citations omitted).
“The prudential standing doctrine or the ‘person aggrieved test’
provides that ‘[o]nly those persons who are directly and adversely affected
pecuniarily by an order of the bankruptcy court . . . have standing to
4 Section 363(m) provides:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property does not
affect the validity of a sale or lease under such authorization to an entity
that purchased or leased such property in good faith, whether or not such
entity knew of the pendency of the appeal, unless such authorization and
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appeal that order.’” Palmdale Hills Prop. v. Lehman Com. Paper, Inc. (In re
Palmdale Hills Prop., LLC, 654 F.3d 868, 874 (9th Cir. 2011) (quoting Fondiller
v. Robertson (In re Fondiller), 707 F.2d 441, 442 (9th Cir. 1983)). “An order that
diminishes one’s property, increases one’s burdens, or detrimentally affects
one’s rights has a direct and adverse pecuniary effect for bankruptcy
standing purposes.” Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 890 F.3d
1188, 1191 (9th Cir. 2018) (citation omitted).
As the appellants, it is Debtors’ burden to establish 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)). Trustee raised the issue
in his answering brief. In their reply brief, Debtors contended that they
would benefit pecuniarily by reversal of the orders on appeal because
Comerica and VEDC have already released their liens in exchange for the
discounted payoffs. They assume that if the orders are reversed, there will
be funds available to pay their homestead exemption because all the
consensual liens have been released. But they miss two critical points: first,
the value of the Property that was encumbered by the Comerica and VEDC
liens never belonged to Debtors and thus could not be subject to their
homestead exemption; and second, if the orders are reversed, this would
undo the settlement, meaning that Comerica and VEDC would be entitled
to be paid the full amounts owed on their original liens. Based on the final
payoff figures, Comerica would be entitled to an additional $73,518.81, and
such sale or lease were stayed pending appeal.
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VEDC $274,578.19, for a total of $348,097, well over the amount held by
Trustee. 5
At oral argument, Debtors’ counsel argued that his clients were
affected pecuniarily by the orders on appeal because they must relocate.
But Debtors have already conceded that the sale cannot be undone, even if
we were to reverse the order approving the compromise. In other words,
the compromise itself had no impact on Debtors other than to enable the
sale of their overencumbered Property. If anything, the sale benefited
Debtors by relieving them of nearly $3 million in secured debt. And it is yet
to be determined whether or how much Debtors will receive on account of
their homestead exemption, which would also benefit them.
Our resolution of this appeal on standing grounds obviates the need
for the more intensive inquiry normally required in consideration of the
merits—though this is the perhaps rare case in which an understanding of
why Debtors lack standing required a fairly involved examination of the
real world effects of the orders approved by the bankruptcy court and the
consequences of their reversal.
But we pause here for a moment because, on a perhaps more
fundamental level, Debtors’ argument against the transactions initiated by
Trustee and approved by the bankruptcy court reveals what is in essence a
competing standing argument, i.e., that where a chapter 7 debtors’
5
These figures are taken from the final settlement statement filed with the
bankruptcy court on December 7, 2021.
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homestead is apparently overencumbered, the opportunity to realize value
through a creative transaction “belongs” to the debtors, and that value
should invariably flow to them via their resuscitated homestead
exemption.
As an initial matter, this Panel has held that, although there is a
rebuttable presumption of impropriety when a chapter 7 trustee seeks to
sell overencumbered property subject to a carve-out agreement, there is no
per se bar on a trustee’s efforts to realize value for the estate in similar
circumstances, which confirms the Trustee’s ability to structure and
complete transactions like the ones utilized here. See In re KVN Corp., 514
B.R. 1 (9th Cir. BAP 2014).
And, even more importantly, Debtors’ conception of “standing”
under these circumstances would fundamentally alter the role of the
Trustee, who is empowered by the Code to take control of estate assets and
prioritize finding value for creditors. Debtors fail to realize that, once they
filed their chapter 7 case, they gave up their ability, i.e., their standing, to
control their property. That control passed to Trustee, who had a fiduciary
duty to maximize assets of the estate. See Goodwin v. Mickey Thompson Ent.
Grp., Inc. (In re Mickey Thompson Ent. Grp., Inc.), 292 B.R. 415, 421 (9th Cir.
BAP 2003). The trustee’s “primary job is to marshal and sell the assets, so
that those assets can be distributed to the estate’s creditors.” In re KVN
Corp., 514 B.R. at 5 (citation omitted). When they filed their petition and
sought a discharge of their considerable unsecured debt, Debtors took the
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risk that Trustee might sell the Property, and they would be paid their
homestead exemption only to the extent there were proceeds left over after
payment of costs of sale and consensual liens.
In short, Debtors have not met their burden to show either
constitutional or prudential standing. They have not established
constitutional standing by showing that the orders on appeal resulted in an
injury in fact fairly traceable to the compromise, or that reversal of those
orders would redress any injury. As noted, reversal would leave Debtors
with no possibility of a distribution on their homestead exemption. For the
same reasons, they have not established prudential standing, i.e., that they
are directly and adversely affected pecuniarily by the orders on appeal.
Accordingly, these appeals must be dismissed.
CONCLUSION
These appeals are DISMISSED.
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