In re: CYNTHIA ANN McCLENNY

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 6, 2018
• Docket: CC-17-1155-TaFS
• Status: Unpublished

Opinion

FILED MAR 06 2018 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. CC-17-1155-TaFS ) 6 CYNTHIA ANN McCLENNY, ) Bk. No. 9:16-bk-10556 ) 7 Debtor. ) ______________________________) 8 ) CYNTHIA ANN McCLENNY, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) STEPHEN McCLENNY; ) 12 SANDRA McBETH, Trustee, ) ) 13 Appellees. ) ______________________________) 14 Argued and Submitted on February 22, 2018 15 at Pasadena, California 16 Filed – March 6, 2018 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Peter H. Carroll, Bankruptcy Judge, Presiding 19 20 Appearances: Susan A. Hemb of Hemb Law Group argued for appellant; William Charles Beall of Beall & 21 Burkhardt argued for appellee Sandra McBeth, Trustee. 22 23 Before: TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1(c)(2). 1 INTRODUCTION 2 After two years of apparently acrimonious divorce 3 proceedings, Cynthia Ann McClenny filed a bankruptcy petition. 4 Her former husband, Stephan McClenny, resided in the marital 5 home and ran a veterinary business from the property; but Debtor 6 appropriately scheduled an interest in the marital homestead as 7 an asset of her estate. Her chapter 71 trustee then sought to 8 sell the estate’s interest to Dr. McClenny; the trustee also 9 wanted to settle all ownership disputes with him. The 10 bankruptcy court granted the trustee’s sale and compromise 11 motion and found that Dr. McClenny was a § 363(m) good faith 12 purchaser. 13 Although Debtor did not obtain a stay pending appeal, she 14 challenges the bankruptcy court’s § 363(m) finding and attacks 15 the sale. She does not, however, show that the bankruptcy court 16 clearly erred or abused its discretion. 17 Accordingly, we AFFIRM. 18 FACTS 19 In 2014, Debtor filed a petition for dissolution of her 20 marriage with Dr. McClenny in the San Luis Obispo Superior 21 Court; the superior court entered a judgment of dissolution in 22 December of 2016. 23 24 25 26 1 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure.

2 1 Earlier in 2016, Debtor had filed a chapter 7 petition.2 2 On her Schedule A/B, she listed a fee simple interest in real 3 property in San Miguel, California (the “Property”), valued it 4 at $650,000, and characterized it as community property. She 5 also identified Wells Fargo Home Mortgage as the holder of a 6 $400,000 secured claim against the Property. 7 Sandra McBeth was appointed as the chapter 7 trustee. She 8 filed a notice designating the case as an asset case and 9 established a claims bar date. 10 The Trustee liquidates the Property. The Trustee took a 11 natural interest in the Property; it was the only scheduled 12 asset with equity. She initially sought permission to sell the 13 Property to Dr. McClenny for $100,000. Debtor opposed, and the 14 bankruptcy court denied the motion without prejudice. 15 The Trustee followed with a second motion. First, she 16 sought to sell the estate’s fractional interest in the Property 17 to Dr. McClenny for $130,000, subject to overbid. Dr. McClenny 18 agreed to acquire title subject to existing liens; the Trustee 19 estimated these at $409,018. The motion also sought approval of 20 a resolution of the disputes between Dr. McClenny and the estate 21 regarding percentage ownership of the Property, as he asserted a 22 separate property interest in it, contrary to Debtor’s schedules 23 and claims. The points and authorities supporting the motion 24 reported that total claims filed against the estate totaled less 25 26 2 We exercise our discretion to take judicial notice of 27 documents electronically filed in the underlying bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 28 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

3 1 than $50,000 and that this sale would allow payment in full of 2 all claims. 3 The Trustee’s declaration provided evidence of her due 4 diligence in connection with the sale and compromise. She did 5 not employ a real estate professional to market the Property, 6 but she had a broker evaluate the prospects for its sale. The 7 broker opined that the Property could sell for about $700,000, 8 but only if it were vacant. 9 And, in the absence of a settlement, vacancy would 10 necessarily require that the estate undertake the potentially 11 complex and difficult process of involuntarily ousting 12 Dr. McClenny from possession. Further, maximization of recovery 13 absent a settlement might require victory in other potentially 14 costly litigation. The Trustee also observed that Debtor filed 15 numerous documents describing Dr. McClenny as violent and 16 dangerous; she did not adopt these statements as true, but she 17 accepted that there was potentially unusual risk in contesting 18 the situation with Dr. McClenny. The record supports the 19 Trustee’s evaluation; Dr. McClenny had a significant ownership 20 interest in the Property, it was both his home and his place of 21 business, he was in sole possession as of the petition date, and 22 he was reported to be difficult to deal with. 23 Debtor again opposed. Initially, she merely questioned the 24 bankruptcy court’s jurisdiction over the Property. Later, she 25 filed supplemental opposition papers and raised a host of new 26 arguments. And the day before the hearing, Debtor filed a 27 request for judicial notice of one of our opinions, Brace v. 28 Brace (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017). The

4 1 Trustee responded with a motion to strike the supplemental 2 papers. 3 At the hearing, the bankruptcy court recognized that the 4 new motion contained additional information, that the Trustee 5 had obtained an additional $30,000 in value, and that the sale 6 was subject to the first trust deed. It overruled Debtor’s 7 jurisdictional argument and explained correctly that, when a 8 bankruptcy petition is filed after a dissolution petition but 9 before the final disposition of the community property, both the 10 community property and Debtor’s separate property are within the 11 bankruptcy court’s jurisdiction. While it stated that this was 12 the only basis for timely objection, there is nothing in the 13 record evidencing that it granted the Trustee’s motion to strike 14 Debtor’s other late-filed objections. Finally, it noted the 15 absence of any dispute that the estate was receiving fair market 16 value. 17 The bankruptcy court then approved the sale and compromise; 18 it found that the estate was receiving fair value for its 19 interest in the Property, that the sale was a proper exercise of 20 the Trustee’s business judgment, and that the compromise was 21 fair and equitable and in the best interests of the estate. In 22 addition, it found that Dr. McClenny was a § 363(m) good faith 23 purchaser. 24 The bankruptcy court entered an order consistent with these 25 conclusions (the “Order”).3 26 27 3 The bankruptcy court also entered an amended order that 28 included the legal description of the Property.

5 1 Debtor timely appealed. 2 Post-appeal events. Debtor did not seek a stay pending 3 appeal from the bankruptcy court. Instead, in response to the 4 Trustee’s motion to dismiss the appeal as moot, Debtor sought a 5 stay pending appeal from the BAP. The Panel denied the 6 Trustee’s motion to dismiss without prejudice and also denied 7 Debtor’s request for a stay pending appeal. 8 JURISDICTION 9 The bankruptcy court had jurisdiction under 28 U.S.C. 10 §§ 1334 and 157(b)(2)(N). We have jurisdiction under 28 U.S.C. 11 § 158. 12 ISSUES 13 Is the appeal statutorily moot under § 363(m)? 14 Did the bankruptcy court abuse its discretion in granting 15 the motion to sell and approving the settlement? 16 STANDARDS OF REVIEW 17 We review mootness de novo. Wilson v. Lynch, 835 F.3d 18 1083, 1091 (9th Cir. 2016). But we review a § 363(m) “good 19 faith” finding for clear error. Thomas v. Namba (In re Thomas), 20 287 B.R. 782, 785 (9th Cir. BAP 2002). 21 We review § 363 sale orders for an abuse of discretion. 22 Fitzgerald v. Ninn Worx Sr, Inc. (In re Fitzgerald), 428 B.R. 23 872, 880 (9th Cir. BAP 2010). And we likewise review the 24 bankruptcy court’s approval of a settlement for an abuse of 25 discretion. Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 26 1380 (9th Cir. 1986). 27 A bankruptcy court abuses its discretion if it applies the 28 wrong legal standard, misapplies the correct legal standard, or

6 1 makes factual findings that are illogical, implausible, or 2 without support in inferences that may be drawn from the facts 3 in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 4 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. 5 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)). 6 DISCUSSION 7 Debtor profoundly misunderstands what happened in the 8 bankruptcy court. As a result, her arguments lack merit. In 9 particular, and fatally, she fails to adequately challenge the 10 bankruptcy court’s finding that Dr. McClenny was a good faith 11 purchaser under § 363(m). Affirmance is required. 12 A. Debtor waived her jurisdictional arguments on appeal. 13 Before the bankruptcy court, Debtor’s timely opposition was 14 limited to an attack on the bankruptcy court’s jurisdiction over 15 the Property, its sale, and the compromise of the disputes with 16 Dr. McClenny as to title. We agree with the bankruptcy court 17 that the argument is meritless.4 And, in any event, Debtor did 18 not preserve this argument on appeal; we do not consider it 19 further. See Padgett v. Wright, 587 F.3d 983, 986 n.2 (9th Cir. 20 2009) (per curiam) (appellate courts “will not ordinarily 21 consider matters on appeal that are not specifically and 22 distinctly raised and argued in appellant’s opening brief”). 23 The Trustee argues that this is the only determination we 24 4 25 For “purposes of § 541(a)(2), all community property not yet divided by a state court at the time of the bankruptcy 26 filing is property of the bankruptcy estate.” Dumas v. Mantle 27 (In re Mantle), 153 F.3d 1082, 1085 (9th Cir. 1998). Cf. Keller v. Keller (In re Keller), 185 B.R. 796, 800-801 (9th Cir. BAP 28 1995).

7 1 need to make on appeal. But, in oral argument, she acknowledged 2 her position’s vulnerabilities; Debtor raised a number of 3 untimely arguments, the Trustee moved to strike them, but the 4 bankruptcy court did not rule on this motion. In an abundance 5 of caution, we address Debtor’s additional arguments. 6 B. Debtor waived objection to approval of the settlement 7 on appeal. 8 The bankruptcy court approved a joint sale of the Property 9 and settlement of the percentage of ownership dispute between 10 the estate and Dr. McClenny. This combination was proper. See 11 Adeli v. Barclay (In re Berkeley Del. Court, LLC), 834 F.3d 12 1036, 1040 (9th Cir. 2016). 13 Rule 9019 allows the bankruptcy court to approve a 14 compromise or settlement, and it has great latitude in approving 15 compromises; it may approve a compromise if it is fair and 16 equitable. Fed. R. Bankr. P. 9019(a); Woodson v. Fireman’s Fund 17 Ins. Co. (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1998) 18 (citing In re A & C Props., 784 F.2d at 1381). The bankruptcy 19 court considers four factors when determining whether a 20 compromise is fair and equitable. In re A & C Props., 784 F.2d 21 at 1381. Here, the bankruptcy court considered those four 22 factors and found the compromise fair and equitable. 23 Debtor does not directly argue in her opening brief that 24 the bankruptcy court abused its discretion in approving the 25 settlement. She never discusses the A & C factors. She thus 26 waived any dispute as to these matters. See Padgett, 587 F.3d 27 at 986 n.2. And if she intends her arguments in connection with 28 the sale to somehow relate to the settlement, they lack merit as

8 1 discussed below. 2 C. The appeal is statutorily moot. 3 The Trustee argues that the appeal is statutorily moot 4 under § 363(m). 5 Section 363 authorizes a trustee to sell property of the 6 estate. In § 363(b) sale motions, the bankruptcy court’s 7 obligation “is to assure that optimal value is realized by the 8 estate under the circumstances.” Simantob v. Claims Prosecutor, 9 LLC (In re Lahijani), 325 B.R. 282, 288 (9th Cir. BAP 2005). 10 Here, the bankruptcy court approved the sale under § 363(b) and 11 found that the estate was receiving fair value for the estate’s 12 interest in the Property. 13 Under § 363(m), when a “sale of assets is made to a good 14 faith purchaser, it may not be modified or set aside unless the 15 sale was stayed pending appeal.” Paulman v. Gateway Venture 16 Partners III, LP (In re Filtercorp, Inc.), 163 F.3d 570, 576 17 (9th Cir. 1998); 11 U.S.C. § 363(m).5 An “[a]bsence of good 18 faith is ‘typically shown by fraud, collusion between the 19 purchaser and other bidders or the trustee, or an attempt to 20 take grossly unfair advantage of other bidders.’” 21 In re Berkeley Del. Court, LLC, 834 F.3d at 1041 (quoting 22 In re Filtercorp, Inc., 163 F.3d 570, 577 (9th Cir. 1998)). And 23 the relevant focus of inquiry is good faith during the course of 24 the sale proceedings. Cmty. Thrift & Loan v. Suchy 25 26 5 Recent Ninth Circuit caselaw clarifies that § 363(m) may 27 apply to both standard § 363 sales and to sales of claims under a Rule 9019 settlement. In re Berkeley Del. Court, LLC, 28 834 F.3d at 1039-40.

9 1 (In re Suchy), 786 F.2d 900, 902 (9th Cir. 1985). 2 We start with the obvious. The bankruptcy court found that 3 Dr. McClenny purchased the Property in good faith; the Order was 4 not stayed. Statutory mootness facially exists on these facts. 5 But the statutory mootness argument has a potential 6 vulnerability. Debtor attacks the good faith finding itself on 7 appeal. If we reverse on this point, the examination of the 8 sale itself could proceed. See Ferrari of N. Am., Inc. v. Sims 9 (In re R.B.B., Inc.), 211 F.3d 475, 480 (9th Cir. 2000). Here, 10 however, Debtor advances neither evidence nor argument that 11 adequately challenges the § 363(m) good faith determination. 12 Debtor’s arguments are difficult to follow — and in some 13 cases an argument allegedly focused on good faith is more aptly 14 cabined as a direct attack on the sale. As a result, we briefly 15 address all arguments regarding the good faith finding and the 16 sale without differentiating as to their focus. All lack merit. 17 ! Debtor confuses the standards required for good faith 18 purchaser for value status under nonbankruptcy law with 19 those required for a § 363(m) good faith finding. She is 20 correct that to be a good faith purchaser for value, taking 21 title free of liens and adverse claims to the property, one 22 must both purchase in good faith and without knowledge of 23 liens; but Dr. McClenny’s obvious knowledge of the liens 24 against the Property is irrelevant under § 363(m). He is 25 not attempting to take title free of the liens – this sale 26 is expressly subject to any and all existing liens whether 27 he knows about them or not. 28 ! Alleged misdeeds during the dissolution process are not

10 1 relevant in the § 363(m) good faith context. Dr. McClenny 2 can be a good faith buyer vis a vis the bankruptcy estate 3 and the Trustee even if his relationship with Debtor is 4 acrimonious; Debtor’s remedy is to seek orders and liens 5 from the family court as opposed to thwarting a sale that 6 maximizes value for her estate. 7 ! The Trustee did not collude with Dr. McClenny and gift him 8 “$562,000 of estate funds by applying them to the 9 satisfaction of the first position mortgage obligation 10 . . . .” The Trustee sold the Property subject to the 11 first trust deed. Dr. McClenny remains obligated on this 12 debt; sales proceeds were not used to reduce this secured 13 obligation. 14 ! The fact that the Trustee and Dr. McClenny signed the sale 15 contract before bankruptcy court approval is of no moment. 16 The agreement was “expressly subject to Bankruptcy Court 17 approval in the Bankruptcy Proceeding.” This is standard 18 practice rather than cause for reversal; if an overbidder 19 emerged, the agreement would have been without force or 20 effect because the bankruptcy court would not have approved 21 it. 22 ! Debtor’s broad assertion that evidence existed to show the 23 “Trustee’s dereliction of her fiduciary duties owed to the 24 estate and to the creditors” and sufficed as justification 25 for appeal falls short. She questions the Trustee’s 26 decision to liquidate the Property and not any of Debtor’s 27 other assets. But this decision was entirely consistent 28 with the Trustee’s statutory obligation to liquidate the

11 1 estate expeditiously. 11 U.S.C. § 704(1). And embedded in 2 this duty is the requirement to maximize the value of 3 estate assets. See United States v. Sims (In re Feiler), 4 218 F.3d 948, 952 (9th Cir. 2000). Here, the Trustee 5 decided to promptly liquidate the Property that Debtor on 6 appeal describes as “the last equity-holding asset.” The 7 Trustee reasonably anticipated that proceeds would be 8 sufficient to pay all claims against the estate, and the 9 sale and compromise avoided costs of litigation and sale. 10 In doing so, the Trustee exercised her business judgment, 11 and the bankruptcy court’s approval of this decision was 12 not erroneous. 13 ! Debtor erroneously asserts that In re Brace controls the 14 decision here and required the bankruptcy court “to 15 consider and apply California family law statutes and case 16 law mandating the equal division of marital property and 17 minimizing [Debtor]’s financial distress . . . .” So far 18 as we can tell, her argument is a variation of her general 19 complaint that the Trustee liquidated the estate’s interest 20 in the Property first; she asserts that the Trustee should 21 have valued the entire community estate and resolved all 22 community property equalization issues at a trial. We 23 disagree. Debtor’s misguided request that the bankruptcy 24 court resolve the pending marital dissolution disputes is 25 not appropriate. In re Brace applies in bankruptcy 26 disputes involving the characterization of marital 27 property. 566 B.R. at 19. So In re Brace would apply if 28 the Trustee decided to litigate the appropriate

12 1 characterization of the Property. Here, the Trustee 2 elected to settle any disputes about Dr. McClenny’s 3 separate property interest in the Property. 4 ! The sale will not impede Debtor’s right to future liens 5 from the family court; she failed to establish, or even 6 argue, that she had an existing lien at the time of sale. 7 But nothing in the bankruptcy court’s decision bars her 8 from family court relief. 9 ! Debtor wrongly argues that the sale price was too low based 10 on a homestead exemption that the bankruptcy court found 11 improper in a final and unappealed order. The homestead, 12 however, even if capable of assertion, would never reduce 13 the purchase price; it merely impacts distribution of 14 proceeds. And, in attacking the sale price, she never 15 addresses the fact that the sale was subject to overbid but 16 no overbidders materialized. This argument is unavailing.6 17 ! The bankruptcy court did not commit “structural” error by 18 granting “the sale order as between co-owners, without an 19 adversary proceeding” as allegedly required by Rule 20 6 21 We also note that, as the bankruptcy court found, the estate received fair value. The estate received $130,000. If 22 the Trustee sold the Property to a third party for $700,000, any recovery would be reduced by approximately $409,018, the amount 23 secured by the first trust deed. Further, the sale price would 24 certainly be reduced by the other costs the Trustee avoided by selling directly to Dr. McClenny: sale costs (marketing, 25 broker’s fee, etc.); costs of litigation over the parties’ ownership claims; and costs of litigation to evict Dr. McClenny 26 and obtain possession. The estate claimed at most a 50% 27 interest in the property. So instead of recovering less than $128,000.00 ($700,000.00 less $409,000.00 less 5% costs of sale 28 or $35,000.00 divided by two), the Trustee recovered $130,000.

13 1 7001(3). Debtor wrongly believes that this was a § 363(h)7 2 sale of Dr. McClenny’s interest in the Property. In fact, 3 the Trustee sought to sell the estate’s fractionalized 4 interest in the Property to the co-owner, Dr. McClenny. 5 Thus, neither § 363(h) nor Rule 7001(3) (which states that 6 a § 363(h) sale requires an adversary proceeding) were 7 implicated. 8 ! Debtor’s claim that Dr. McClenny’s debts to her are 9 priority claims under §§ 504 and 721 and thus that 10 creditors are not likely to be paid from the sale proceeds 11 is nonsensical. Debts owed to Debtor are estate assets; 12 the Trustee will not pay them. And Debtor does not have a 13 right to a priority payment over her estate’s creditors. 14 ! Debtor’s expressed concern at oral argument that the Order 15 will have preclusive effect in the dissolution proceedings 16 is difficult to square with reality. The bankruptcy court 17 necessarily decided that the sale was for reasonable value 18 and that the compromise was fair and reasonable. The 19 bankruptcy court did not have to decide what Debtor’s and 20 Dr. McClenny’s relative property interests in the Property 21 were.8 Nor did the bankruptcy court have to decide if 22 23 7 Section 363(h) allows the trustee to sell both the 24 estate’s interest and the interest of certain co-owners. 8 25 In fact, that is one point of a Rule 9019 compromise motion: the “purpose of a compromise agreement is to allow the 26 trustee and the creditors to avoid the expenses and burdens 27 associated with litigating sharply contested and dubious claims.” In re A & C Props., 784 F.2d at 1380–81. The law 28 (continued...)

14 1 Debtor had any liens arising out of family law court 2 matters, much less if they attached or remain attached to 3 the Property. And the bankruptcy court certainly did not 4 decide any California law based marital dissolution issue. 5 ! Debtor erroneously contends that the Trustee should have 6 brought her motion under § 363(d), not § 363(b). 7 Section 363(d) applies when the debtor in bankruptcy is a 8 type of trust. Here, Debtor is a person and it is 9 irrelevant that a marital (family) trust holds title to the 10 Property; Debtor’s interest in this trust was an asset of 11 the estate that the Trustee could sell.9 12 In sum, Debtor has not shown that the bankruptcy court 13 clearly erred when it found that Dr. McClenny was a good faith 14 purchaser under § 363(m).10 Accordingly, we AFFIRM the 15 bankruptcy court’s § 363(m) finding and, as a result, “the sale 16 may not be modified or set aside on appeal unless it was stayed 17 pending appeal.” In re Berkeley Del. Court, LLC, 834 F.3d at 18 1041. It was not stayed. So what remains of the appeal is 19 moot. Id. 20 21 8 (...continued) 22 “favors compromise and not litigation for its own sake . . . .” 23 Id. at 1381. 9 24 In any event, she also failed to raise this argument before the bankruptcy court; she thus waived it on appeal. 25 Samson v. W. Capital Partners, LLC (In re Blixseth), 684 F.3d 865, 872 n.12 (9th Cir. 2012) (appellate court may decline to 26 address argument not raised before bankruptcy court). 27 10 Debtor also requests attorney’s fees and costs on 28 appeal. Given our affirmance, we deny this request.

15 1 CONCLUSION 2 Based on the foregoing, we AFFIRM. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28