FILED AUG 07 2018
SUSAN M. SPRAUL, CLERK NOT FOR PUBLICATION U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. HI-17-1255-TaLLs
AMKO FISHING CO, INC., Bk. No. 1:15-bk-00489
Debtor.
H3O COMMUNICATIONS, LLC,
Appellant,
v. MEMORANDUM*
ELIZABETH A. KANE, Chapter 7 Trustee,
Appellee.
Argued and Submitted on June 21, 2018 at Pasadena, CA
Filed – August 7, 2018
Appeal from the United States Bankruptcy Court for the District of Hawaii
Honorable Robert J. Faris, Chief Bankruptcy Judge, Presiding
* 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. Appearances: Shawn Anthony Luiz argued for appellant; Elaine Chow of Klevansky Piper, LLP argued for appellee.
Before: Taylor, Lafferty, and Lastreto,** Bankruptcy Judges.
INTRODUCTION
AMKO Fishing Co., Inc. (“Amko”) operated a fishing business
utilizing its ship, the Deborah Ann, and a Hawaii Longline Limited Entry
Permit (the “Fishing Permit”). At least two companies provided the
Deborah Ann with supplies, H3O Communications, LLC (“H3O”) and
VAK Fisheries, LLC (“VAK”).
At some point, Amko or its principal entered into an agreement with
VAK and transferred the Fishing Permit to VAK. Despite the transfer, the
Deborah Ann continued as the vessel associated with the Fishing Permit.
Thus, Amko continued to fish and retained beneficial use of the Fishing
Permit.
In Amko’s chapter 71case, the chapter 7 trustee abandoned the
Deborah Ann and brought a fraudulent conveyance action against VAK to
** The Hon. René Lastreto II, United States Bankruptcy Judge for the Eastern District of California, sitting by designation. 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure.
2 recover the Fishing Permit or its value. She then settled the lawsuit for a
sum certain (the “Proceeds”) and abandoned the Fishing Permit.
At issue in this appeal is whether H3O holds a claim secured by the
Proceeds as a result of an alleged maritime lien and whether the
bankruptcy judge should have recused. The bankruptcy court decided only
a narrow issue and determined that H3O did not have a maritime lien that
attached to the Proceeds. The bankruptcy judge did not recuse. We
AFFIRM.
FACTS
The bankruptcy court decided a discrete issue and did not make
extensive factual findings. For our purposes, then, the story is gleaned from
the bankruptcy filings.2
Amko filed a chapter 12 petition in April 2015.3 The next month, VAK
sought a “comfort” order confirming that the automatic stay did not apply
to the Fishing Permit because, although it was still assigned to the Deborah
Ann, Debtor’s principal transferred it to VAK in 2012. VAK also sought
stay relief to enforce a maritime lien against the Deborah Ann. The
bankruptcy court eventually denied the motion.
2 We exercise our discretion to take judicial notice of documents electronically filed in the bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 Chapter 12 is reserved for family farmers and fishermen. 11 U.S.C. § 109(f).
3 Debtor later converted to a chapter 7 proceeding, and the chapter 7
trustee, Elizabeth A. Kane, promptly proposed to abandon the Deborah
Ann “with complete longline gear and equipment[.]” Preservation, she
explained, would be burdensome and there was little or no equity in the
property—its scheduled value was $400,000 and possible liens totaled
$324,951.23: the Dojin Shipping Agency for $46,860; H3O for $62,230.23;
and VAK for $215,861.
VAK remained focused on the Fishing Permit. In response to the
notice of abandonment it argued that, because the “Vessel and Fishing
Permit are inextricably linked[,]” the bankruptcy court should clarify that
the Fishing Permit also was abandoned. But the bankruptcy court did not
accommodate this request; it eventually approved abandonment of the
estate’s interests in the Deborah Ann, “with complete longline gear and
equipment . . . .” Its order did not reference the Fishing Permit.
The Trustee eventually brought an adversary proceeding against
VAK, alleging that the Fishing Permit was fraudulently transferred. It
resolved quickly through a proposed settlement agreement where VAK
paid the Trustee $75,000 and the Trustee dismissed the complaint, released
VAK, and agreed that the Fishing Permit would be deemed abandoned.
H3O opposed the settlement, arguing that the price was too low. In reply,
the Trustee emphasized that she was settling the fraudulent transfer claim,
not selling the Fishing Permit. But she agreed to sell it to another buyer for
4 a higher price. Some delay followed, but after the potential buyer withdrew
its offer, the bankruptcy court granted the Trustee’s Rule 9019 motion and
approved the settlement agreement.4
Apparently incentivized by the Proceeds, H3O filed a $47,826.74
proof of claim for “[g]oods and services provided for vessel to operate” and
asserted that it was secured by a maritime lien. As subsequently became
clear, H3O asserted that it had a maritime lien on the Deborah Ann and the
Fishing Permit and, thus, that it was entitled to be repaid from the
Proceeds.
The Trustee objected and sought to reclassify the claim from secured
to general unsecured. She argued that she received money from settling the
fraudulent transfer action, that she abandoned rather than sold the Fishing
Permit, and that the Proceeds were not subject to any maritime lien.
Mid-way through oral argument at the hearing on the claim
objection, H3O’s counsel, apologetically, asked about the bankruptcy
judge’s partiality, noting that the bankruptcy judge had previously worked
in the same firm as the Trustee’s counsel. The bankruptcy judge explained
that he took the bench fifteen years ago but acknowledged that when he
was first appointed he recused himself from all cases involving his former
firm. Then the bankruptcy judge, identifying the correct legal test, found
4 At oral argument, H3O’s counsel wrongly stated that the bankruptcy court interfered with the bidding process. It did not.
5 that no “reasonable person would come to the conclusion that at this point
I’m unable to be fair to both sides.” H3O’s counsel never asked the
bankruptcy judge to recuse.
Eventually, the bankruptcy judge sustained the Trustee’s objection.
He refrained from determining whether H3O had a maritime lien on the
Deborah Ann or the Fishing Permit. He merely found that it did not have a
generalized maritime lien against the estate given abandonment of the
vessel, its equipment, and the Fishing Permit. He then noted that the
Proceeds arose from a settlement, not a sale, and that the abandonment and
release reinforced this point.
The bankruptcy court entered a separate order sustaining the claim
objection, finding that H3O did not have a security interest in the Proceeds
or an otherwise secured claim against the bankruptcy estate.
H3O timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err when it sustained the Trustee’s
objection to H3O’s secured claim?
Did the bankruptcy judge err when he did not recuse?
6 STANDARDS OF REVIEW
In the claim objection context, we review the bankruptcy court’s legal
conclusions de novo and its findings of fact for clear error. Lundell v. Anchor
Const. Specialists, Inc. (In re Lundell), 223 F.3d 1035, 1039 (9th Cir. 2000).
A finding is “clearly erroneous” when “although there is evidence to
support it, the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed.” Anderson
v. City of Bessemer City, 470 U.S. 564, 573 (1985) (quotation marks omitted).
Because H3O did not ask the bankruptcy judge to recuse, we review
this decision for plain error. United States v. Holland, 519 F.3d 909, 911 (9th
Cir. 2008).
We may affirm on any ground supported by the record, regardless of
whether the bankruptcy court relied upon, rejected, or even considered
that ground. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119,
1125 (9th Cir. 2014).
DISCUSSION
The bankruptcy court sustained the Trustee’s objection to H3O’s
claim and reclassified H3O’s secured claim as unsecured. In doing so, it
concluded that H3O’s maritime lien did not extend to either the
bankruptcy estate in its entirety or the Proceeds.
7 A. The bankruptcy court properly reclassified H3O’s claim as unsecured.
We start with a discussion of relevant law.
1. The bankruptcy claim objection process governs and admiralty law is relevant.
The bankruptcy claims process. A creditor asserts a claim in
bankruptcy by filing a proof of claim. 11 U.S.C. § 501(a); Fed. R. Bankr.
P. 3001, 3002. And a properly filed proof of claim “constitute[s] prima facie
evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f).
If a claimant asserts a secured claim, its proof of claim must include
evidence of perfection. Fed. R. Bankr. P. 3001(d).
Once a claim is filed, it is “deemed allowed, unless a party in interest
. . . objects.” 11 U.S.C. § 502(a). And if an interested party objects, the
bankruptcy court, after notice and a hearing, must determine the amount of
such claim and allow it accordingly. 11 U.S.C. § 502(b).
To overcome the presumption of validity, the objector must do more
than formally object. Lundell, 223 F.3d at 1039. Instead, to “defeat the claim,
the objector must come forward with sufficient evidence and ‘show facts
tending to defeat the claim by probative force equal to that of the
allegations of the proofs of claim themselves.’ ” Id. (quoting Wright v. Holm
(In re Holm), 931 F.2d 620, 623 (9th Cir. 1991)).
“If the objector produces sufficient evidence to negate one or more of
the sworn facts in the proof of claim, the burden reverts to the claimant to
8 prove the validity of the claim by a preponderance of the evidence.” Id.
(quoting Ashford v. Consol. Pioneer Mortg. (In re Consol. Pioneer Mortg.), 178
B.R. 222, 226 (9th Cir. BAP 1995)). The ultimate burden of persuasion, thus,
remains with the claimant. Id.
Admiralty law and maritime liens. “[M]aritime liens have
extraordinarily little in common with land liens, including consensual
security interests.” Walsh v. Placedo Shipping Corp. of Liberia (In re Pac.
Caribbean Shipping (U.S.A.), Inc.), 789 F.2d 1406, 1407 (9th Cir. 1986). “Land
liens and maritime liens are ‘two unlike things . . . called by the same
name.’” Id. (quoting G. Gilmore & C. Black, The Law of Admiralty 589 (2d ed.
1975)). See id. (discussing differences).
A “maritime lien is a privileged claim upon maritime property, such
as a vessel, arising out of services rendered to or injuries caused by that
property.” 1 Thomas J. Schoenbaum, Admiralty & Mar. Law § 9-1 (5th ed.).
As the Ninth Circuit explains:
A maritime lien is “one of the most striking peculiarities of Admiralty law, constituting a charge upon ships of a nature unknown alike to common law and equity.” Black's Law Dictionary 943 (8th ed. 2004) (quoting GRIFFITH PRICE, THE LAW OF MARITIME LIENS 1 (1940)). It has been defined as: “(1) a privileged claim, (2) upon maritime property, (3) for service done to it or injury caused by it, (4) accruing from the moment when the claim attaches, (5) traveling with the property unconditionally, (6) enforced by means of an action in rem.” Id. (quoting PRICE at 1). The lien gives the creditor the right to
9 appropriate the vessel, have it sold, and be repaid the debt from the proceeds of the sale. [Equilease Corp. v. M/V Sampson, 793 F.2d 598, 602 (5th Cir. 1986) (en banc).]
Trans-Tec Asia v. M/V Harmony Container, 518 F.3d 1120, 1128 (9th Cir. 2008).
The Ninth Circuit recently considered the intersection of bankruptcy
and admiralty law in Barnes v. Sea Hawaii Rafting, LLC. 889 F.3d 517 (9th
Cir. 2018). There, an injured seaman commenced an in rem proceeding
against a vessel and an in personam action against its owner (a company)
and its principal; he sought to enforce his seaman’s lien against the vessel
for maintenance and cure. Id. at 523–25. Eventually, the company and its
principal filed for bankruptcy. Id. at 526. The bankruptcy court approved
the chapter 7 trustee’s sale of the vessel, free and clear of any liens. Id.
at 532.
Relevant to bankruptcy law, the Ninth Circuit held: first, that the
automatic stay did not apply to the seaman’s effort to enforce his maritime
lien; and second, that the bankruptcy court lacked jurisdiction to adjudicate
the maritime lien because the admiralty court had already obtained
jurisdiction over the vessel. Id. at 532–33. It observed that, even if the
“bankruptcy court had in rem jurisdiction over the [vessel], it is an open
question whether bankruptcy courts have the effective ability to sell a
vessel free and clear of maritime liens.” Id. at 533 (internal quotation marks
omitted). Nevertheless, it pointed to two well-established principles. Id. at
534. “First, a maritime lien accompanies the property into the hands of a
10 bona fide purchaser. It can be executed and divested only by a proceeding
in rem.” Id. (internal quotation marks omitted). And second, a “maritime
lien cannot be extinguished except through the application of admiralty
law.” Id. As a result, there “are good reasons why a bankruptcy court, if it
can release a maritime lien at all, should be required to do so pursuant to
admiralty law.” Id.
2. The bankruptcy court did not err when it sustained the Trustee’s claim objection.
With some legal context, we now return to the bankruptcy court’s
decision. H3O filed a secured claim, which was prima facie evidence of its
validity; the Trustee objected to the secured status and pointed to facts
sufficient to rebut the prima facie validity; so the burden of persuasion as
to H3O’s secured status was on H3O. And the bankruptcy court
determined only that at the time of the decision H3O did not hold a claim
secured by settlement proceeds or other estate assets.
On appeal, H3O relies on a tracing argument intermixed with Code
references. Its argument requires some unpacking: its maritime lien against
the Deborah Ann attaches to appurtenances; the Fishing Permit was an
appurtenance; the Trustee brought a fraudulent transfer action under
Hawaii law to recover the Fishing Permit; the Trustee’s settlement of the
litigation was a recovery and the Trustee, in effect, elected under § 550 to
receive monetary value instead of the return of the Fishing Permit;
11 recovery of a fraudulent transfer claim is estate property under § 541(a)(3);
and “such recovery also remains subject to any security interest that
attached to the original asset.” That security interest, it claims, was its
maritime lien.
We disagree; H3O has not shown that the bankruptcy court erred.
a. The bankruptcy court did not extinguish H3O’s maritime lien.
We start with what the bankruptcy court did not do; it expressly
stated that it was not adjudicating H3O’s maritime lien interest in either the
Deborah Ann or the Fishing Permit. As a result, to the extent H3O had a
maritime lien, the bankruptcy court did not extinguish it. This aligns with
the Ninth Circuit’s recent admonition that a “maritime lien cannot be
extinguished except through the application of admiralty law.” Barnes, 889
F.3d at 534. In the discussion that follows, we assume, without deciding,
that H3O’s underlying position that it had a maritime lien on both the
Deborah Ann and the Fishing Permit is correct.5
The Trustee’s abandonment of these assets also did not alter, affect,
or extinguish H3O’s maritime lien: when a Trustee abandons property, it
leaves the bankruptcy estate subject to any preexisting interests, such as a
5 The Trustee, for her part, asserts that H3O did not have a maritime lien on the Fishing Permit because it was transferred two years before H3O provided services to the Deborah Ann or because the Fishing Permit was not an appurtenance to the Deborah Ann. But the bankruptcy court did not so find; nor will we do so in the first instance on appeal.
12 maritime lien. Assuming the Fishing Permit is an appurtenance of the
Deborah Ann,6 the maritime lien could extend to the Fishing Permit.7 And
this could be true even if VAK owned the Fishing Permit but assigned it to
the Deborah Ann.8 In sum, after abandonment, H3O maintained its in rem
maritime lien rights and the right to institute an action in admiralty to
enforce them.
Finally, the fact that the Trustee settled a fraudulent conveyance
action related to the Fishing Permit does not change this analysis. The
fraudulent conveyance action did not involve the application of maritime
law, and the settlement did not liquidate, diminish, or otherwise impact
H3O’s maritime lien rights. Instead, the Trustee stepped into the shoes of
unsecured creditors when she pursued the fraudulent conveyance action.
So to the extent H3O had an in personam, unsecured claim against Debtor
and could have brought the fraudulent conveyance action outside of
6 H3O concedes in its reply brief that determining whether something is an appurtenance is a fact-specific matter, see Appellant’s Reply Brief at 10, so we would not be able to resolve that question for the first time on appeal. 7 E.g., Bank of Am., NT & SA v. Pengwin, 175 F.3d 1109 (9th Cir. 1999) (affirming an in rem sale of vessel with its fishing permits, but not otherwise engaging with the underlying question). 8 Gowen, Inc. v. F/V Quality One, 244 F.3d 64, 69 (1st Cir. 2001) (“We have assumed, as appellants assert, that the [fishing] permits could in some circumstances be severed from the vessel upon its sale and retained by its old owner. But courts have repeatedly upheld maritime liens upon ‘severable’ equipment, including, surprisingly enough, equipment merely leased to the owner.” (citing cases)).
13 bankruptcy, the settlement limited H3O’s rights. But again, H3O’s
maritime lien rights remain unaffected by the bankruptcy proceeding and
this settlement. Its lien did not attach to the Proceeds, it remained with the
Fishing Permit after abandonment.
b. H3O has not shown how or that its maritime lien entitles it to a preferred position with or priority distribution from the bankruptcy estate.
Even though H3O’s maritime lien rights remain unaffected by the
bankruptcy proceeding, it seeks, through this appeal, to improve its
position by expanding the scope of its maritime lien: it wants a priority
distribution from the Proceeds.
But, because maritime liens are secret liens, the Supreme Court,
nearly a hundred years ago, cautioned against extending them. Piedmont &
George’s Creek Coal Co v. Seaboard Fisheries Co., 254 U.S. 1, 4 (1920) (“The
maritime lien is a secret one. It may operate to the prejudice of prior
mortgagees or of purchasers without notice. It is therefore stricti juris and
will not be extended by construction, analogy or inference.”).
H3O has not shown that it is entitled to improve its position.
The bankruptcy court determined that H3O’s maritime lien did not
extend to the bankruptcy estate in its entirety. This was unquestionably
correct.
Running through H3O’s appellate brief is the assumption that
because it has a maritime lien in the Deborah Ann and the Fishing
14 Permit—a finding the bankruptcy court did not make and that we,
similarly, are agnostic about—it also has a secured interest in the entirety
of Debtor’s bankruptcy estate. But it has cited no authority saying that a
maritime lien extends so expansively. Case law (including case law H3O
cites) is to the contrary. As the Third Circuit wrote, in a slightly different
context:
[T]he law of maritime liens has consistently recognized that a maritime lien attaches only to the specific vessel to which services are provided. See, e.g., 46 U.S.C. § 31342 (2004) (“[A] person providing necessaries to a vessel on the order of the owner or a person authorized by the owner-(1) has a maritime lien on the vessel . . . .”) (emphasis added); Piedmont & Georges Creek Coal Co. v. Seaboard Fisheries Co., 254 U.S. 1, 4, 41 S.Ct. 1, 65 L.Ed. 97 (1920) (“[O]ne vessel of a fleet cannot be made liable under the [Federal Maritime Lien Act] for supplies furnished to the others, even if the supplies are furnished to all upon orders of the owner under a single contract.”); In re Container Applications Int’l, Inc., 233 F.3d 1361, 1365-66 (11th Cir. 2000) (following Piedmont and denying maritime lien because the purported lienholder did not provide necessaries to any particular vessel). The vessel-specific character of maritime liens results from the legal fiction that a vessel receiving services “is considered to be a distinct entity responsible only for its own debts.” Foss Launch & Tug Co. v. Char Ching Shipping U.S.A., Ltd., 808 F.2d 697, 701 (9th Cir. 1987).
PNC Bank Del. v. F/V Miss Laura, 381 F.3d 183, 185–86 (3d Cir. 2004); id. at
187 (“Instead, maritime liens have consistently been limited to the specific
vessel to which services were provided.”).
15 So H3O’s argument that § 541(a)(3) matters is a non-starter.
Section 541(a)(3) simply states that property the trustee recovers under
various Code sections is estate property. As a result, H3O is not entitled to
a generalized secured claim against the estate; it has not persuasively
shown that its in rem maritime lien against a vessel entitles it to a secured
interest in the entire bankruptcy estate, a separate and distinct entity.
H3O’s more specific appellate argument turns on a legal position that
it has not established: its maritime lien extends beyond the vessel or its
appurtenances to proceeds. It cites no case law supporting that premise.
This is not to say H3O cites no legal authority about maritime liens
attaching to proceeds; it does, but only in the context of an in rem action. As
the court in Trans-Tec Asia explains, a maritime lien “gives the creditor the
right to appropriate the vessel, have it sold, and be repaid the debt from the
proceeds of the sale.” 518 F.3d at 1128; see 46 U.S.C. § 31342(a) (granting a
person who provides necessaries to a vessel a maritime lien and allowing
that person to enforce the lien in a civil in rem action). See also In re Muma
Servs., Inc., 322 B.R. 541, 547 (Bankr. D. Del. 2005) (“The Maritime Lien Act
provides that when a vessel is sold in an in rem action by order of a court of
competent jurisdiction the maritime lien claims attach to the proceeds of
the sale in accordance with their priorities.”). But H3O did not bring an in
rem action for sale of the Deborah Ann—or, for that matter, for sale of the
Fishing Permit.
16 And maritime liens do not always attach to proceeds. For instance,
when a vessel is entirely lost, the maritime liens on it are extinguished and
do not attach to insurance proceeds. Walsh v. Tadlock, 104 F.2d 131, 132 (9th
Cir. 1939) (“With the total destruction of the vessel the liens thereon were
of necessity extinguished. These liens did not attach to the proceeds of the
insurance, nor did appellants’ lien on the boat per se entitle them to
participate in the division of the insurance money.” (citations omitted)).9
Put differently, H3O erroneously assumes that maritime liens attach to
proceeds in the same way that liens governed by the UCC do. Walsh, 789
F.2d at 1408 (“[I]n view of the lack of similarity between Article 9
consensual security interests and maritime liens . . . the U.C.C. should not
be interpreted to apply to such liens . . . .”).
So H3O has not carried its burden to prove that it has a secured
interest in the Proceeds. As a result, the bankruptcy court did not err when
9 Compare Bruce A. King, Ships As Property: Maritime Transactions in State and Federal Law, 79 Tul. L. Rev. 1259, 1326 n.337 (2005) (“The attachment of maritime liens to proceeds is a different matter. As discussed above, a maritime lien on unpaid freight does not attach to proceeds after the freight is paid.”), and Robert J. Zapf, Appurtenances: What Are They and Are Fishing Permits Among Them?, 79 Tul. L. Rev. 1339, 1348–49 (2005) (“Indeed, even after freights have been paid over, there is authority that the freights may nonetheless be the subject of a maritime lien. At some point, of course, freights lose their character as such and become part of the general funds of the recipient and thus are no longer subject to a maritime lien. However, the lien attaches as long as the funds can be identified as freights.”), with, Cornish Shipping Ltd. v. Int’l Nederlanden Bank N.V., 53 F.3d 499 (2d Cir. 1995) (“Moreover, we have stated, in an older case involving a different type of lien on freights, that once a lien attaches to such funds, the lien follows the proceeds through all of their traceable transmutations . . . .”).
17 it sustained the Trustee’s objection to H3O’s secured status.
And in any event, the Trustee did not sell the Fishing Permit. Instead,
she brought a fraudulent conveyance action to recover the Fishing Permit
but then settled it.10 So H3O would have to additionally show that its
secured interest encumbered the litigation or the Trustee’s ultimate
settlement recovery. It has not. And we again note that its maritime lien on
the Fishing Permit, if any, remains in place; it did not attach to Proceeds
and H3O is free to exercise lien rights notwithstanding the settlement.
H3O relies (for the first time on appeal) on In re Figearo, 79 B.R. 914
(Bankr. D. Nev. 1987). That case, it argues, held that funds recovered by a
chapter 7 trustee on a fraudulent conveyance action are subject to a
prepetition security interest, notwithstanding § 552(b). It asserts that the
same conclusion should therefore be reached here and that its maritime
lien must be deemed secured by the Proceeds.
We dispense with the easy part: H3O’s maritime lien did not extend
to the fraudulent conveyance litigation. Official Comm. of Unsecured
Creditors v. UMB Bank, N.A. (In re Residential Capital, LLC), 497 B.R. 403, 414
(Bankr. S.D.N.Y. 2013) (“[B]ecause the Debtor does not own the right to
10 On H3O’s read, the Trustee’s settlement pragmatically worked a sale of the Fishing Permit, and thus we must treat it as if it were a § 363 sale of estate property and award it its secured interest. The Trustee disagrees. The bankruptcy court, for its part, interpreted its own order approving the transaction as a settlement and not a sale. That said, to the extent it was a § 363 sale, the sale was subject to any preexisting liens.
18 pursue a fraudulent transfer action in bankruptcy . . ., the Debtor could not
have encumbered or assigned that right prepetition.”). H3O does not argue
this; nor could it reasonably do so, as its own authority establishes that
H3O likely lacked a “proceeds” interest in the Trustee’s fraudulent
conveyance action. In Figearo, the bankruptcy court explained:
The trustee’s right to set aside the transfers, arguably contingent noncash proceeds, is created on the filing of the bankruptcy petition. Further, the trustee is generally the only party in interest with standing to pursue these rights. Although the trustee’s rights are dependent on the nature of the transfer, they are not received upon the sale, exchange, collection or other disposition of collateral or proceeds. Therefore, the trustee’s right to set aside a fraudulent transfer can not be considered proceeds under NRS 104.9306(1).
79 B.R. at 917 (citation omitted). While Figearo involves interpretation of
Nevada’s UCC, it underscores the main point: the Trustee accedes to
general unsecured creditors’ right to bring a fraudulent conveyance action,
which the debtor cannot otherwise encumber.
Instead, H3O focuses on Figearo’s other holding: the trustee’s
recovery of property (or its value) under § 550 is subject to a properly
perfected security interest in that property. Id. at 918 (“Having found that
Haley’s security interest does not attach to the trustee’s right to set aside a
fraudulent transfer but does attach to the recovered property, the court
concludes that the funds held by the trustee as a result of the compromise
of the fraudulent conveyance litigation is subject to Haley’s security
19 interest.”).
H3O states that it found no BAP ruling on the precise issue presented
here or in Figearo; but, it says, other courts have followed Figearo, and we
should do the same. H3O does not, however, address the cases that hold
otherwise. As a different bankruptcy court in this circuit recently noted,
Figearo “is contrary to the weight of authority and has not been followed by
more recent cases.” Rund v. Kirkland (In re EPD Investment Co., LLC), No.
2:12-ap-02424-ER, 2018 WL 947636, at *10 (Bankr. C.D. Cal. Feb. 17, 2018)
(citing cases and 5 Collier on Bankruptcy ¶ 552.02 (16th ed. 2017)). See
Grossman v. Durham Commercial Capital Corp. (In re Connolly Geaney Ablitt &
Willard, P.C.), 585 B.R. 644, 653–54 (Bankr. D. Mass. 2018) (declining to
follow Figearo); In re Residential Capital, LLC, 497 B.R. at 414. So H3O’s
reliance on Figearo is potentially misplaced. But we do not need to resolve
this legal matter because, as noted above, the burden of persuasion was on
H3O; it has failed to carry that burden.
c. This result does not contravene public policy.
Last, H3O argues that the bankruptcy court’s decision was erroneous
because it contravened public policy: the purpose of the trustee’s strong-
arm power is to protect estate assets for the benefit of creditors; here, it
suggests, the Trustee was standing in H3O’s shoes and was supposed to
“protect H3O’s right in the [Fishing] Permit.” Appellant’s Opening Br.
at 28. It continues: “By holding that Trustee’s settlement of the fraudulent
20 transfer claims somehow dissolved H3O’s secured claim rather than
preserving it, the lower court frustrated the purpose of the Trustee’s
powers.” Id.
We disagree. The bankruptcy court did not dissolve or otherwise
extinguish H3O’s maritime lien. So to the extent H3O is correct and its
maritime lien extends to the Fishing Permit, it should be able to pursue the
Fishing Permit or the Deborah Ann or both.
B. The bankruptcy judge did not err by failing to recuse himself.
On appeal, H3O also argues that the bankruptcy judge erred by not
recusing himself under 28 U.S.C. § 455(a). But H3O never asked the
bankruptcy judge to recuse, either by motion or at the hearing. Now,
“[f]ailure to move for recusal at the trial level . . . does not preclude raising
on appeal the issue of recusal under [28 U.S.C.] § 455.” Noli v. C.I.R., 860
F.2d 1521, 1527 (9th Cir. 1988). But if “no motion is made to the judge . . . a
party will bear a greater burden on appeal in demonstrating that the judge
. . . [erred] in failing to grant recusal under section 455.” Id. (internal
quotation marks omitted) (alteration in original).
Under 28 U.S.C. § 455(a), a bankruptcy judge “shall disqualify
himself in any proceeding in which his impartiality might reasonably be
questioned.” 28 U.S.C. § 455(a). It thus “covers circumstances that appear to
create a conflict of interest, whether or not there is actual bias.” Preston v.
United States, 923 F.2d 731 (9th Cir. 1991) (quoting Herrington v. Sonoma
21 County, 834 F.2d 1488, 1502 (9th Cir. 1987)). What’s more, “a judge has as
strong a duty to sit when there is no legitimate reason to recuse as he does
to recuse when the law and facts require.” Clemens v. U.S. Dist. Court for
Cent. Dist. of Cal., 428 F.3d 1175, 1179 (9th Cir. 2005) (internal quotation
marks omitted).
H3O alleges an appearance of impartiality because the Trustee’s
counsel and the bankruptcy judge were once name partners at the same
law firm. H3O also faults the bankruptcy judge for not disclosing the
information. We disagree. We “gauge appearance by considering how the
conduct would be viewed by a reasonable person, not someone
hypersensitive or unduly suspicious.” Blixseth v. Yellowstone Mountain Club,
LLC, 742 F.3d 1215, 1219 (9th Cir. 2014) (internal quotation marks and
citations omitted). This is not a new type of alleged disqualification:
This general standard contained in § 455(a) is not intended to be an invitation for judges to freely disqualify themselves whenever their impartiality is questioned on any ground. Testimony on this issue was given at the hearings before the House Subcommittee on the bill which became the new Section 455 and is reflective of the legislators’ intent:
Prof. Thode. [T]he longer the judge is on the bench, the less the likelihood that the general standard [of Canon 3(c)(1), which became 28 U.S.C. § 455(a)] will require his disqualification because of his former association [as former partner or former associate with a lawyer appearing before him].
22 Hauptmann v. Wilentz, 555 F. Supp. 28, 31 (D.N.J. 1982) (alterations in
original).
Here, the partnership relationship ended fifteen years ago.11 We
conclude that a reasonable person would not view this as creating an
appearance of impropriety. Local 338, RWDSU v. Trade Fair Supermarkets,
455 F. Supp. 2d 143, 144 (E.D.N.Y. 2006) (“There are a number of recusal
cases involving judges’ former law firms, and it is rare that recusal is
granted based only on a question of impartiality because of the judge’s
former affiliation.”).12 So we determine that the bankruptcy judge did not
err, much less commit plain error, by either failing to disclose the former
relationship or by not sua sponte recusing himself.
CONCLUSION
Based on the foregoing, we AFFIRM.
11 The bankruptcy judge, who is in his second 14-year term, stated that for a period of time he recused from all cases involving his former firm. That is a standard practice. See Smith v. Pepsico, Inc., 434 F. Supp. 524, 526 & 526 n.3 (S.D. Fla. 1977) (noting the practice but commenting that “[t]here is a paucity of reported decisions setting forth recusal periods in various districts”). 12 Webb v. White, No. 2:15-CV-00512-DN-PMW, 2015 WL 6395611, at *3 n.42 (D. Utah Oct. 22, 2015) (listing cases where disqualification was not required when the judge’s former partner or law firm appeared: 15 years, 13 years, 6 years, and 3 years later).