In re: Death Row Records, Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 21, 2012
• Docket: CC-11-1186-HPePa
• Status: Unpublished

Opinion

FILED MAR 21 2012 1 SUSAN M SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-11-1186-HPePa 6 ) DEATH ROW RECORDS, INC., ) Bk. No. 06-11205 7 ) Debtor. ) Adv. No. 10-02574 8 _____________________________ ) ) 9 JOHN CHIANG, CONTROLLER FOR ) THE STATE OF CALIFORNIA, ) 10 ) Appellant, ) 11 ) v. ) M E M O R A N D U M1 12 ) R. TODD NEILSON, Chapter 7 ) 13 Trustee, ) ) 14 Appellee. ) ______________________________) 15 Argued and Submitted on November 16, 2011 16 at Pasadena, California 17 Filed - March 21, 2012 18 Appeal from the United States Bankruptcy Court for the Central District of California 19 Honorable Vincent P. Zurzolo, Bankruptcy Judge, Presiding 20 21 Appearances: Hiren M. Patel, Deputy Attorney General, argued for the Appellant. Uzzi O. Raanan of Danning, 22 Gill, Diamond & Kollitz, LLP, argued for the Appellee. 23 24 25 26 1 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 8013-1. 1 Before: HOLLOWELL, PAPPAS and PERRIS2, Bankruptcy Judges. 2 I. INTRODUCTION 3 In this interlocutory appeal, the California State 4 Controller (“Controller”) seeks the reversal of an order 5 certifying a nationwide class of chapter 73 trustees who did, 6 could have, or might in the future make a claim for their 7 respective debtor’s funds that escheated to the State of 8 California prepetition. For the reasons given below, we REVERSE 9 the bankruptcy court’s certification of the class action and 10 REMAND the matter to the bankruptcy court to issue a 11 certification order solely under Civil Rules 23(a) and 23(b)(2), 12 and which narrows the scope of the certified class action by 13 eliminating claims for interest damages and claims for willful 14 violation of the automatic stay. 15 II. FACTS 16 A. The Bankruptcy Case 17 In April 2006, Death Row Records, Inc. (“DRR”) and Marion 18 “Suge” Knight, Jr. (“Knight”) each filed voluntary petitions for 19 relief under chapter 11. In July 2006, appellee R. Todd Neilson 20 (“Neilson”) was appointed the chapter 11 trustee for the DRR 21 estate. In January 2009, the Knight estate was consolidated with 22 the DRR estate (the consolidated estates comprise the “Debtor”), 23 2 24 Hon. Elizabeth L. Perris, United States Bankruptcy Judge for the District of Oregon, sitting by designation. 25 3 Unless otherwise indicated, all chapter and section 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 All Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. Federal Rules of Civil Procedure are 28 referred to as “Civil Rules.”

-2- 1 with Neilson acting as the chapter 11 trustee. In November 2009, 2 the Debtor’s case was converted to chapter 7. Neilson was 3 appointed the chapter 7 trustee (“Trustee”). 4 B. Trustee’s Escheat Claim 5 In March 2009, the Trustee filed a claim with the Controller 6 on behalf of the Debtor seeking a return of the Debtor’s money 7 that had escheated to the State of California (“California”) 8 under California’s Unclaimed Property Law (the “UPL”), Cal. Civ. 9 Proc. Code (“CCP”) § 1500, et. seq. On May 26, 2010, the 10 Controller’s office issued a letter to the Trustee (“Letter”), 11 which granted in part and denied in part the Trustee’s claim. 12 The Letter explained that the Controller denied thirteen of the 13 sixteen claims asserted by the Trustee on the basis that it was 14 “the long-standing position of this office that once unclaimed 15 property has escheated to California, it is not subject to claims 16 by bankruptcy trustees claiming on behalf of a bankruptcy estate 17 or debtor.” 18 The Letter explained that because thirteen of the accounts 19 had escheated before the bankruptcy petitions were filed, legal 20 and equitable title to the accounts vested in California. The 21 Letter acknowledged that the former owner of the accounts could 22 divest California of title by filing a verified claim under the 23 procedures set forth in the UPL, but until such a claim was 24 filed, verified and approved, “such property would not be 25 belonging or owed to such property or entity (debtor).” The 26 Letter stated that because that procedure had not occurred 27 prepetition, “the property is not part of bankruptcy estate as 28 defined in 11 U.S.C. § 541.”

-3- 1 The Letter continued: 2 In addition, a trustee acts on behalf of the bankruptcy estate, not the debtor. For purposes of claiming 3 escheated property, “owner” means the person who had legal right to property prior to its escheat 4 (California Code of Civil Procedures Section 1540; subdivision (d)). Once the property vests in the State 5 of California, only the former owner can claim the property. As a result, it does not appear that the 6 bankruptcy estate, or its trustee, had a legal right to the property before it escheated to the State of 7 California. Consequently, because title to the property sought vested in the State of California, and 8 is not, therefore, property of the debtor, these funds held by the state under the Unclaimed Property Law are 9 not subject to a claim by a bankruptcy trustee. 10 The total amount of the claims denied was $10,166.44. 11 C. The Class Action 12 On August 25, 2010, the Trustee filed a complaint commencing 13 a class action against the Controller: 14 (1) for turnover of the class members’ and the Debtor’s 15 property and for an accounting pursuant to § 543; 16 (2) for turnover of property under § 542; 17 (3) for wrongful denial of claims under CCP § 1540; 18 (4) to avoid and recover unjust enrichment; 19 (5) for willful violation of the automatic stay; 20 (6) for declaratory relief seeking a determination that 21 debtors’ property that escheats to California prepetition is 22 property of the class members’ respective bankruptcy estates 23 subject to the exclusive control of the debtors’ respective 24 bankruptcy estates’ trustees; and, 25 (7) for injunctive relief enjoining the Controller from 26 continuing to deny claims made by bankruptcy trustees on behalf 27 of their estates. 28

-4- 1 The complaint sought turnover under § 542 and/or § 543 of 2 the amount of escheated funds plus interest and actual damages on 3 the stay violation claim, including costs and attorneys’ fees 4 incurred in bringing the class action. The Trustee filed and 5 served a First Amended Complaint (the “Class Action”) on 6 September 8, 2010, asserting the identical claims for relief. 7 D. Controller’s Motion To Dismiss 8 On October 29, 2010, the Controller filed a Motion to 9 Dismiss under Rules 7012 and 7019 (“MTD”), asserting that the 10 Eleventh Amendment barred the Class Action, the bankruptcy court 11 lacked jurisdiction under 28 U.S.C. §§ 1334 and 157, and the 12 Trustee lacked authority under the Bankruptcy Code to file the 13 Class Action. 14 On January 3, 2011, the bankruptcy court issued an order 15 (“Dismissal Order”) that dismissed the Trustee’s CCP § 1540 and 16 unjust enrichment claims. In its Dismissal Order, the bankruptcy 17 court denied the balance of the MTD because the bankruptcy court 18 determined it had jurisdiction over the claims alleging 19 violations of the Bankruptcy Code. 20 The Controller did not seek leave to appeal the Dismissal 21 Order. On February 24, 2011, the Controller filed an answer 22 denying all the Trustee’s allegations. The Controller asserted 23 lack of subject matter jurisdiction as an affirmative defense on 24 the grounds of: sovereign immunity, lack of jurisdiction under 25 28 U.S.C. §§ 1334 and 157, mootness, and that the Class Action 26 was not a core proceeding. The Controller also asserted as an 27 affirmative defense that the Trustee could not satisfy Civil 28 Rule 23 requirements for class certification (made applicable in

-5- 1 bankruptcy adversary proceedings by Rule 7023) and lacked 2 standing to act as the class representative. 3 E. Class Certification 4 In December 2010, the Trustee filed a motion for: (1) class 5 certification; (2) appointment of the Trustee as the class 6 representative; (3) permanent appointment of class counsel; and 7 (4) approval of the form of class notice (the “Certification 8 Motion”). The Controller filed an opposition (“Opposition”). 9 The Opposition challenged class certification under Civil 10 Rule 23, the definition of the class (“Class”), and the 11 definition of the Class claims (“Claims”). The Controller did 12 not, however, raise sovereign immunity or other subject matter 13 jurisdiction challenges previously raised in the MTD. 14 At a March 10, 2011 hearing on the Certification Motion, the 15 bankruptcy court granted the motion and made oral findings 16 concerning the elements of Civil Rule 23(a) and (b) finding that: 17 (1) numerosity was satisfied because the number of chapter 7 18 trustees in California and nationwide would be difficult to 19 manage absent a class action; 20 (2) commonality was satisfied because the Claims bear the 21 same or sufficient number of characteristics in common, so “that 22 it makes sense” to have them litigated in a Class Action; 23 (3) typicality of injury was satisfied by the Letter, which 24 referred to the long standing position of the Controller that 25 trustees could not make claims for debtors’ escheated property; 26 and, 27 28

-6- 1 (4) adequacy of representation was met because there is no 2 conflict of interest between the Debtor’s interest and the Class’ 3 interest in having the Trustee pursue the Class Action. 4 The bankruptcy court also found that the issues were clearly 5 defined as required by Civil Rule 23(b) because it was a narrow 6 class where common questions of law and fact predominate. 7 On April 8, 2011, the bankruptcy court issued an order 8 (“Class Certification Order”) certifying the Class Action and 9 appointing the Trustee as Class representative. The Class 10 Certification Order also appointed Class counsel and approved the 11 form of the Class Action notice, which included an “opt out” 12 provision that would permit members to elect to be excluded from 13 the Class. 14 The Class Certification Order defined the Class as: 15 all bankruptcy trustees who previously filed, could have filed, or will file in the future, claims with the 16 State of California on behalf of the bankruptcy estates of debtors whose property escheated to the State of 17 California prior to the filing of the bankruptcy petitions commencing their respective bankruptcy cases, 18 and which claims were rejected by the Controller on the grounds that such [escheated] property is not property 19 of the bankruptcy estates . . . and/or that the trustees lack authority to file bankruptcy claims under 20 CCP Section 1540. 21 F. Controller’s Motion For Leave To Appeal 22 On April 21, 2011, the Controller filed a Motion For Leave 23 to Appeal the Class Certification Order and a Notice of Appeal. 24 On April 26, 2011, a BAP panel (“Panel”) issued a briefing order. 25 In its brief, the Controller argued that appeal should be 26 permitted so that the Class Certification Order, as well as the 27 sovereign immunity and 28 U.S.C. § 1334 jurisdictional arguments 28 raised in the MTD, could be reviewed. The Trustee’s opposition

7 1 argued that the Controller had waived his sovereign immunity 2 argument by not seeking to appeal the MTD. On June 15, 2011, the 3 Panel issued an order granting leave to appeal. That order is 4 silent on the scope of the appeal. On September 1, 2011, the 5 Panel issued an order granting a Stay Pending Appeal. 6 III. JURISDICTION 7 The Controller challenges the bankruptcy court’s subject 8 matter jurisdiction. To the extent that the challenge is not 9 sustained, the bankruptcy court had jurisdiction under 28 U.S.C. 10 §§ 1334(a) and 157(a), (b)(1) and (B)(2)(A), (B), (G) and (O). 11 We have jurisdiction under 28 U.S.C. § 158(a)(3) and the Panel’s 12 June 15, 2011 order granting leave to appeal. 13 IV. ISSUES 14 1. Did the bankruptcy court have subject matter 15 jurisdiction over the Class Action?4 16 2. Did the bankruptcy court err in certifying the Class? 17 V. STANDARD OF REVIEW 18 We review findings of fact for clear error and issues of law 19 de novo. Litton Loan Serv’g, LP v. Garvida (In re Garvida), 20 347 B.R. 697, 703 (9th Cir. BAP 2006). A bankruptcy court’s 21 determination of its subject matter jurisdiction is reviewed de 22 23 4 Only the Class Certification Order is at issue in this interlocutory appeal. The Controller did not raise the sovereign 24 immunity and 28 U.S.C. §§ 1334 and 157 subject matter 25 jurisdiction arguments in the Opposition to the Certification Motion. Because we have the discretion to address purely legal 26 issues prerequisite to the Class Certification Order, we address 27 the bankruptcy court’s subject matter jurisdiction in this Memorandum. See, e.g., Pac. Exp. v. United Airlines, Inc., 28 959 F.2d 814, 819 (9th Cir. 1992).

8 1 novo. Sea Hawk Seafoods, Inc. v. Alaska (In re Valdez Fisheries 2 Dev. Ass’n, Inc.), 439 F.3d 545, 547 (9th Cir. 2006). The 3 existence of sovereign immunity is a question of law reviewed de 4 novo. Del Campo v. Kennedy, 517 F.3d 1070, 1075 (9th Cir. 2008); 5 Emp’t Dev. Dep’t. of Cal. v. Joseph (In re HPA Assocs.), 191 B.R. 6 167, 171 (9th Cir. BAP 1995). We review issues of standing de 7 novo. La Asociacion de Trabajadores de Lake Forest v. City of 8 Lake Forest, 624 F.3d 1083, 1087 (9th Cir. 2010). 9 We review an order on class certification under Civil 10 Rule 23 for an abuse of discretion. Vinole v. Countrywide Home 11 Loans, Inc., 571 F.3d 935, 939 (9th Cir. 2009). As the Ninth 12 Circuit noted, appellate review is limited: 13 to whether the [court] correctly selected and applied [Civil] Rule 23's criteria. An abuse of discretion 14 occurs when the [court], in making a discretionary ruling, relies upon an improper factor, omits 15 consideration of a factor entitled to substantial weight, or mulls the correct mix of factors but makes a 16 clear error of judgment in assaying them. 17 Id. (citing Parra v. Bashas’, Inc., 536 F.3d 975, 977-78 (9th 18 Cir. 2008). To the extent that a ruling on a Civil Rule 23 19 requirement is supported by a finding of fact, that finding is 20 reviewed for clear error. Wolin v. Jaguar Land Rover N. Am., 21 LLC, 617 F.3d 1168, 1171-72 (9th Cir. 2010). A factual finding 22 is clearly erroneous if it is illogical, implausible, or without 23 support in inferences that can be drawn from the facts in the 24 record. United States v. Hinkson, 585 F.3d 1247, 1262-63 (9th 25 Cir. 2009) (en banc). 26 27 28

9 1 VI. DISCUSSION 2 I. Subject Matter Jurisdiction 3 A. Sovereign Immunity 4 Under the Eleventh Amendment, “[t]he Judicial Power of the 5 United States shall not be construed to extend to any suit in law 6 or equity, commenced or prosecuted against one of the United 7 States by citizens of another state or by citizens or subjects of 8 any foreign state.” U.S. Const. amend. XI. Generally speaking, 9 the doctrine of sovereign immunity precludes a federal court from 10 hearing a private person’s suit against a State, state agencies 11 and state officials, acting in their official capacities. Va. 12 Office for Prot. and Advocacy v. Stewart, - U.S. - , 131 S.Ct. 13 1632, 1637-38 (2011); Peirick v. Ind. Univ.-Purdue Univ. 14 Indianapolis Athletics Dep’t., 510 F.3d 681, 695 (7th Cir. 2007). 15 The Controller contends that the Eleventh Amendment deprives 16 the bankruptcy court of jurisdiction over the Class Action 17 because it implicates the State’s “core” sovereign interest in 18 establishing and administering the process for dealing with 19 escheated property. In order to evaluate that assertion, we 20 begin with a brief overview of exceptions to sovereign immunity 21 in bankruptcy proceedings. 22 1. Exceptions To Sovereign Immunity In Bankruptcy Proceedings 23 24 There are three generally recognized exceptions to a State’s 25 sovereign immunity in a bankruptcy case. The first, and best 26 settled theory, is that by filing a claim, a State waives its 27 sovereign immunity with respect to its claim. Gardner v. New 28 Jersey, 329 U.S. 565, 573-74 (1947). Second, Congress may

10 1 abrogate a State’s immunity if it: (1) unequivocally expresses 2 its intent to do so; and (2) acts pursuant to a valid exercise of 3 its powers. Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 55 4 (1996). Third, in ratifying the U.S. Constitution, which 5 included authorizing Congress to enact uniform laws on the 6 subject of bankruptcies, the States acquiesced to a limited 7 subordination of their sovereign immunity to the federal courts 8 in the bankruptcy arena. Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 9 356, 362-63 (2006). 10 Here, the second and third exceptions are at issue. We 11 briefly review each in turn. 12 a) Congressional Abrogation Under § 106(a) 13 In 1994, Congress passed § 106(a) in an effort to abrogate 14 the sovereign immunity of all governmental units with respect to 15 specifically enumerated sections of the Bankruptcy Code, 16 including sections regarding turnover of assets (§§ 542, 543) and 17 the automatic stay (§ 362). However, the validity of § 106(a) 18 was called into serious doubt by the Supreme Court’s decision in 19 Seminole Tribe. 517 U.S. at 59. In Seminole Tribe, the Supreme 20 Court overturned Pennsylvania v. Union Gas Co., 491 U.S. 1 21 (1989), and rejected the contention that Congress could abrogate 22 a States’ sovereign immunity under its Article I powers, 23 specifically, the Indian Commerce Clause. Id. at 66. 24 The Bankruptcy Clause (U.S. Const. art. I, § 8, cl. 4) of 25 the U.S. Constitution is also an Article I power. After Seminole 26 Tribe, a number of courts of appeal, including the Ninth Circuit, 27 relied on Seminole Tribe to hold that § 106(a) was not a valid 28 abrogation of the States’ Eleventh Amendment immunity. See,

11 1 e.g., Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 2 1111 (9th Cir. 2000). 3 The Sixth Circuit, however, came to a different result in 4 Hood v. Tenn. Student Assistance Corp., 319 F.3d 755 (6th Cir. 5 2003) aff’d, Tennessee Student Assistance Corp. v. Hood, 541 U.S. 6 440 (2004). The Sixth Circuit’s decision in Hood was based on 7 two rationales. The first was that the States waived their 8 sovereign immunity when they collectively agreed in the plan of 9 the Constitutional Convention to allow uniform federal power in 10 the area of bankruptcy. Id. at 752. The second part of the 11 Sixth Circuit’s analysis was that the adversary proceeding at 12 issue, a student loan undue hardship discharge complaint, was not 13 a traditional lawsuit in which the state was forced to defend 14 itself against an accusation of wrongdoing. Instead, the 15 adversary proceeding simply allowed the “adjudication of 16 interests claimed in a res.” Id. at 768. The State could 17 determine if it wanted to assert an interest in the res or it 18 could decline to do so. Under this analysis, the bankruptcy 19 court’s jurisdiction extended only to the res and not directly 20 against the State. Id. 21 The Supreme Court granted certiorari in Hood, but did not 22 decide if Congress had authority under the Bankruptcy Clause to 23 abrogate States’ sovereign immunity in § 106(a). Rather, the 24 Supreme Court held that an adversary proceeding intended to 25 determine if a student loan could be discharged was an in rem 26 proceeding that did not require the bankruptcy court to assert in 27 personam jurisdiction over the State, and consequently, did not 28 impact the State’s sovereign immunity. Id. at 453.

12 1 b) Waiver By Ratification 2 In 2006, the Supreme Court again examined the issue of 3 States’ sovereign immunity in bankruptcy proceedings. In Katz, 4 the bankruptcy trustee of a bookstore business brought an 5 avoidance and preference action against four state colleges. 6 546 U.S. 356. Instead of deciding if § 106(a) was a valid 7 abrogation of the States’ sovereign immunity, the Court phrased 8 the issue as follows: 9 The relevant question is not whether Congress has “abrogated” States’ immunity in proceedings to recover 10 preferential transfers. See 11 U.S.C. § 106(a). The question, rather, is whether Congress’ determination that 11 States should be amenable to such proceedings is within the scope of its powers to enact “Laws on the subject of 12 Bankruptcies.” 13 Id. at 379. 14 Katz held that “[i]n ratifying the Bankruptcy Clause, the 15 States acquiesced in a subordination of whatever sovereign 16 immunity they might otherwise have asserted in proceedings 17 necessary to effectuate the in rem jurisdiction of the bankruptcy 18 courts.” Id. at 378. While bankruptcy jurisdiction is 19 understood as principally being in rem, the jurisdiction of the 20 court’s adjudicating rights in a bankruptcy estate includes “the 21 power to issue compulsory orders to facilitate the administration 22 and distribution of the res.” Id. at 362. Therefore, a federal 23 court exercising bankruptcy in rem jurisdiction could also issue 24 ancillary orders in furtherance of that jurisdiction. Id. at 25 371. Katz recognized that an order mandating a turnover of 26 property “although ancillary to and in furtherance of the court’s 27 in rem jurisdiction, might itself involve in personam process.” 28 Id. at 372. Therefore, to the extent that the exercise of

13 1 bankruptcy ancillary jurisdiction implicated the States’ 2 sovereign immunity, the States agreed in the plan of convention 3 not to assert that immunity. Id. at 373, 378. 4 Katz did not define the range of proceedings that would 5 qualify as an ancillary proceeding and fall within the States’ 6 waiver of sovereign immunity. However, it provided some guidance 7 by setting out three critical in rem functions of bankruptcy 8 courts: (1) the exercise of exclusive jurisdiction over all of 9 the debtor’s property; (2) the equitable distribution of that 10 property among the debtor’s creditors; and (3) the ultimate 11 discharge that gives the debtor a “fresh start.” Id. at 363-64. 12 2. Sovereign Immunity Does Not Apply To The Class Action’s Turnover Claims Even If It Interferes 13 With The State’s Procedures For Administering Escheated Property 14 15 We now turn to the Controller’s sovereign immunity 16 challenges to the Class Action. We begin with a review of the 17 California statutory scheme for dealing with unclaimed property 18 in order to decide if California’s sovereign interest is 19 implicated by the Class Action. 20 Escheat is a procedure for dealing with unclaimed property 21 with roots in feudal law. In common law, if a tenant of real 22 property died without heirs, the land escheated to the lord of 23 the fee, but as feudal titles do not exist in the United States, 24 it is the State, by virtue of its sovereignty, which steps into 25 the place of the feudal lord, to take title to escheated 26 property. See Taylor v. Westly, 402 F.3d 924, 926 (9th Cir. 27 2005). 28

14 1 California’s escheat procedures are governed by the UPL. 2 The law has two purposes: (1) “to protect unknown owners by 3 locating them and restoring their property to them”; and (2) “to 4 give the [S]tate, rather than the holders of unclaimed property 5 the benefit of the use of it, most of which experience shows will 6 never be claimed.” Harris v. Westley, 116 Cal. App. 4th 214, 219 7 (Cal. Ct. App. 2004); Fong v. Westly, 117 Cal. App. 4th 841, 844 8 (Cal. Ct. App. 2004). 9 The UPL distinguishes between “escheat” and “permanent 10 escheat.” CCP § 1300(c) and (d). Where property has not 11 permanently escheated, title vests in California; but, the title 12 is defeasible and meant to be temporary until a claim by the 13 owner is made pursuant to the UPL. Morris v. Chiang, 163 Cal. 14 App. 4th 753, 757 (Cal. Ct. App. 2008). Owners5 of property that 15 the Controller holds, but that have not permanently escheated to 16 California, may claim and receive their property back, but 17 interest is not payable on a claim for escheated funds. Id. at 18 756; CCP § 1540(c). The UPL provides that if a claimant is 19 dissatisfied with the Controller’s determination not to return 20 escheated property, the claimant may seek judicial review of the 21 denial in California state court. CCP § 1352(c). 22 To the extent funds held by the Controller have not 23 permanently escheated to the State, the Eleventh Amendment does 24 25 5 An owner is defined as “the person who had legal right to 26 the property prior to its escheat, his or her heirs, his or her 27 legal representative, or a public administrator acting pursuant to authority granted in Sections 7660 and 7661 of the Probate 28 Code.” CCP § 1540(d).

15 1 not bar the Class Action because it seeks a return of the Class 2 members’ — not California’s — property. Suever v. Connell, 3 439 F.3d 1142, 1146-47 (9th Cir. 2006); see also Taylor, 402 F.3d 4 at 933. 5 The Controller does not, however, argue that the Class 6 Action is improper because it seeks California’s funds. Instead, 7 he argues that the Class Action improperly interferes with 8 California’s core interest in administering the UPL. Unlike the 9 plaintiffs in Suever and Taylor, where claims were not initially 10 filed with the Controller, here, the Trustee did file a claim 11 with the Controller. Therefore, according to the Controller, 12 California’s “core” interest in having appeals of denied claims 13 heard in California state court bars the Class Action. 14 Furthermore, because the Class definition includes trustees whose 15 claims were rejected because of a determination that they “lacked 16 authority” to file claims under CCP § 1540, the Controller 17 asserts that the Class Action improperly seeks to interfere with 18 his administration of California law. 19 However, the Controller ignores a critical fact. The reason 20 why the Class members do not have authority to file claims under 21 CCP § 1540 is because of the Controller’s determination that 22 debtors’ escheated funds are not bankruptcy estate property. The 23 Class Action, therefore, challenges the Controller’s application 24 of federal law, not the UPL. 25 Nevertheless, the Controller asserts that any challenge to 26 the Controller’s alleged policy, even if the policy is based on 27 an interpretation of federal bankruptcy law, must be brought in 28

16 1 California state court pursuant to § 106(a)(4).6 Whatever the 2 scope of Congressional abrogation may be under § 106(a) after 3 Hood and Katz, the provisions of § 106(a), which exempt States 4 from federal bankruptcy law remain viable. 2 COLLIER ON 5 BANKRUPTCY ¶ 106.03 (Alan N. Resnick & Henry J. Sommer eds., 16th 6 ed. 2011). Thus, according to the Controller, § 106(a)(4) 7 requires that denials of trustees’ claims to escheated property 8 be heard exclusively in a California state court. 9 Section 106(a)(4)’s scope, however, is limited to the 10 enforcement of orders against a State. It does not require that 11 state procedures be followed to obtain that order. If 12 jurisdiction is proper, an order may be obtained against a State 13 in federal court. Once the order is obtained, § 106(a)(4) 14 requires that it be enforced, consistent with applicable state 15 law. 16 The Controller contends that because the Trustee made a 17 claim under the UPL, he acknowledged that he was bound to comply 18 with the UPL’s requirements regarding that claim. As a result, 19 the Controller contends that the Trustee’s only recourse, if he 20 was unhappy with the Controller’s decision, was to file an action 21 in California state court. If the Controller’s rejection of the 22 Debtor’s claims was based on state law, the Controller’s argument 23 might be persuasive. However, once a dispute arises about 24 6 25 Section 106(a)(4) provides: “The enforcement of any such order, process, or judgment against any governmental unit shall 26 be consistent with appropriate nonbankruptcy law applicable to 27 such governmental unit and, in the case of a money judgment against the United States, shall be paid as if it is a judgment 28 rendered by a district court of the United States.”

17 1 whether property is property of a bankruptcy estate, exclusive 2 jurisdiction to resolve that question lies with the federal 3 courts. 28 U.S.C. § 1334(e); In re Wash. Mut., Inc., 461 B.R. 4 200, 217 (Bankr. D. Del. 2011); Brown v. Fox Broad. Co., (In re 5 Cox), 433 B.R. 911, 919 (Bankr. N.D. Ga. 2010); In re Roman 6 Catholic Archbishop of Portland in Or., 335 B.R. 842, 850-51 7 (Bankr. D. Or. 2005). Because the Class Action is limited to 8 members whose claims are denied because of the purported 9 determination that such funds are not bankruptcy estate property, 10 jurisdiction is proper in the bankruptcy court. 11 In his reply brief, the Controller asserts that if 12 bankruptcy courts have exclusive jurisdiction over estate 13 property, there is no need for the Class Action because the Class 14 members can file turnover actions in their individual bankruptcy 15 cases. This argument is meritless. Just because individual 16 trustees may file turnover actions in their cases, does not mean 17 that a class action is not appropriate. Here, each claim of 18 individual trustees is quite small — making it difficult for the 19 trustees to obtain adequate legal representation. A class action 20 permits the trustees to spread litigation costs and, therefore, 21 it may be the most efficient way for trustees to adjudicate their 22 claims. 23 The Controller also argues that Suever and Taylor are not 24 applicable because the holdings in those cases require a showing 25 that in refusing to return escheated property, the Controller has 26 committed ultra vires or unconstitutional acts. See Suever, 27 439 F.3d at 1147. According to the Controller, the determination 28 that debtors’ escheated funds are not property of their

18 1 bankruptcy estates is, at most, a legal error, not an “ultra 2 vires” act. However, wrongfully exercising power over estate 3 property is not just a legal error, it’s a violation of federal 4 law and, therefore, beyond the powers granted to the Controller 5 under the UPL. Accordingly, if the Class Action allegations are 6 true, the Controller’s action would constitute an ultra vires 7 act.7 8 To the extent turnover claims of the Class Action do not 9 seek anything more than turnover of debtors’ escheated property, 10 the Eleventh Amendment does not bar the Claims. Id. Moreover, 11 to the extent that California has a sovereign interest in having 12 the UPL’s procedures followed, that interest was waived regarding 13 determinations of what constitutes bankruptcy estate property 14 when California ratified the Constitution. Katz 546 U.S. at 373, 15 378. 16 3. The Class Action’s Assertion Of In Personam Jurisdiction Over The Controller Is Not Proper 17 18 a) Turnover Claims 19 The Controller asserts that bankruptcy in rem jurisdiction, 20 as explained in Katz and Hood, is limited to adjudicating claims 21 of specific property of individual bankruptcy estates and that 22 because the Class Action seeks an injunction to overturn an 23 alleged policy of the Controller, it improperly invokes the in 24 personam jurisdiction of federal courts over a state officer. 25 In Katz, however, the Supreme Court held that bankruptcy 26 7 27 We do not need to decide whether the Class Actions’ allegations are true, only that it alleges actions which would be 28 ultra vires. See Taylor, 402 F.3d at 934.

19 1 jurisdiction could properly be asserted over ancillary 2 proceedings, including in personam proceedings to the extent 3 necessary to effectuate jurisdiction over the res. Id. at 1004. 4 Accordingly, the exercise of ancillary in personam jurisdiction 5 over a state officer, if necessary to effectuate a turnover of 6 estate assets, is permitted because the States agreed in the plan 7 of convention not to assert that immunity. Id. at 373. The 8 result is not any different because the in personam jurisdiction 9 is being asserted in a class action. The compensatory purpose of 10 class actions, which permit litigation and compensation of small 11 claims that would otherwise not be pursued, is as important 12 inside bankruptcy as outside. In re Am. Reserve Corp., 840 F.2d 13 487, 492 (7th Cir. 1988); Aiello v. Providian Fin. Corp., Inc. 14 (In re Aiello), 231 B.R. 693, 712 (Bankr. N.D. Ill. 1999). 15 b) Stay Violation Claims 16 The automatic stay is the mechanism which protects the core 17 bankruptcy functions of exercising jurisdiction over estate 18 property, equitably distributing estate property and protecting a 19 debtor’s discharge. The stay “facilitates the orderly 20 administration and distribution of the estate by ‘protect[ing] 21 the bankruptcy estate from being eaten away by creditors’ 22 lawsuits and seizures of property before the trustee has had a 23 chance to marshal the estate’s assets and distribute them equally 24 among the creditors.’” Fla. Dep’t of Revenue v. Diaz (In re 25 Diaz), 647 F.3d 1073, 1085 (11th Cir. 2011) quoting Martin- 26 Trigona v. Champion Fed. Sav. & Loan Ass’n, 892 F.2d 575, 577 27 (7th Cir. 1989). If a proceeding’s purpose is to facilitate the 28 in rem function of bankruptcy jurisdiction by assuring that the

20 1 automatic stay is honored, then it falls within the “consent by 2 ratification” exception to sovereign immunity. Id. at 1085-86 3 (determining that there will generally be bankruptcy jurisdiction 4 over contempt motions against States for stay violations); see 5 also In re Griffin, 415 B.R. 64, 71 (Bankr. N.D.N.Y. 2009) 6 (bankruptcy jurisdiction over emotional distress damages for stay 7 violation). 8 The Controller cites In re Diaz as authority for the 9 proposition that there is no waiver of sovereign immunity for 10 stay violation claims after a debtor’s discharge is issued. In 11 In re Diaz, a chapter 13 debtor sued the Departments of Revenue 12 and Social Services for damages as a result of an alleged stay 13 violation when they attempted to collect a child support 14 obligation. The debtor brought suit after the chapter 13 plan 15 had been completed and the estate assets had been fully 16 distributed. As a result, the court found that there was no 17 longer any in rem function of the bankruptcy court because the 18 estate had been fully distributed. 647 F.3d at 1086. 19 In re Diaz does not, however, stand for the broad 20 proposition that there cannot be an exercise of ancillary 21 jurisdiction for stay violations after a debtor receives a 22 discharge. Such a result would be inconsistent with § 362(a)’s 23 protection of estates’– as well as debtors’– property. 11 U.S.C. 24 § 362(a)(2), (3) and (4); Little Pat, Inc. v. Conter (In re 25 Soll), 181 B.R. 433, 444 (Bankr. D. Ariz. 1995) (“The automatic 26 stay protects not only debtors, but also property of the 27 estate.”). It is also inconsistent with § 362(c)(1), which 28 maintains the stay until such property is “no longer estate

21 1 property.” Estate property remains protected by the automatic 2 stay until it is divested from the estate by exemption, 3 abandonment, sale and, if properly scheduled, by the closing of 4 the case under § 554(c). 5 c) Damages8 6 The Class Action seeks interest on the Class members’ 7 escheated property from the time a claim is denied by the 8 Controller until paid. The UPL, however, does not allow a 9 recovery of interest on returned escheated funds. CCP § 1540(c). 10 The Class Action cannot provide more relief to the Class than is 11 otherwise available to other claimants under the UPL. Therefore, 12 § 106(a)(4) applies and requires that any turnover order be 13 consistent with the UPL, which limits recovery solely to the 14 amount of the escheated funds. 15 The Controller argues that § 106(a)(4) should also apply to 16 any damages arising out of the stay violation claims because the 17 UPL does not provide for damages for violations of § 362(a). 18 However, the UPL is not the law at issue in considering stay 19 violations. Stay violations are governed by the Bankruptcy Code. 20 The Controller’s position would allow governmental units to 21 violate the stay with impunity because there would likely never 22 be a state law that authorizes damages for such violations. As a 23 result, bankruptcy courts would be unable to enforce their 24 8 25 The Class Action seeks actual damages in the form of interest on the turnover claims and actual damages and sanctions 26 on the stay violation claims. However, in his Answering Brief 27 and at oral argument, the Trustee asserted that he is seeking damages solely for the costs and attorneys’ fees incurred in 28 prosecuting the Class Action.

22 1 jurisdiction over estate property and debtors’ discharges. See, 2 e.g., Fla. Dep’t. of Revenue v. Omine (In re Omine), 485 F.3d 3 1305, 1314 (11th Cir. 2007), opinion withdrawn due to settlement, 4 2007 WL 6813797 (June 26, 2007)(“The bankruptcy court’s ancillary 5 order to enforce an automatic stay, which is one of the 6 fundamental debtor protections provided by the bankruptcy laws, 7 operates free and clear of the Florida DOR’s claim of sovereign 8 immunity.”). 9 In summary, the Claims for interest on escheated property 10 are barred by sovereign immunity, but the damage claims for stay 11 violation are not. 12 B. Jurisdiction Under 28 U.S.C. §§ 1334(a) And 157 13 In addition to seeking dismissal under Civil Rule 12 for 14 lack of subject matter jurisdiction because of sovereign 15 immunity, the Controller also sought dismissal under 28 U.S.C. 16 §§ 1334 and 157. On appeal, the Controller’s only mention of 17 this argument appears in a footnote asserting that the Class 18 Action “is not really an action that arises under §§ 543 [sic], 19 543 or 362, so the bankruptcy court lacked authority to assert 20 jurisdiction under 28 U.S.C. §§ 1334 and 157." The Controller 21 does not further explain that statement; nevertheless, we will do 22 our best to address it. 23 The Claims are based on § 105 (contempt), § 362 (violations 24 of the stay); and § 542 (turnover of estate property). Such 25 claims arise under the Bankruptcy Code and, therefore, the 26 district court has jurisdiction over the Claims pursuant to 27 28

23 1 28 U.S.C. § 1334(b).9 As explained below, the Claims are also 2 “core” proceedings under 28 U.S.C. § 157(b)(2) and, accordingly, 3 bankruptcy courts may enter final judgment in such proceedings 4 subject to any constitutional limitations on the powers of 5 Article I courts under Stern v. Marshall, – U.S. – , 6 131 S.Ct. 2594 (2011). 7 The Class Action seeks turnover of estate property. Before 8 turnover can be required, there must be a determination that the 9 property is estate property. The Ninth Circuit has distinguished 10 actions seeking to obtain property owed to a debtor from actions 11 seeking to obtain property of a debtor. See, e.g., John Hancock 12 Mut. Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1165 13 (9th Cir. 1990). With respect to the latter, “an action to 14 obtain property of the estate would necessarily involve a 15 determination regarding ‘the nature and extent of property of the 16 estate,’ the action would also be a matter ‘concerning the 17 administration of the estate’ and, therefore, a core proceeding.” 18 Id. (citing 28 U.S.C. § 157(b)(2)(A)). 19 A determination of whether there has been a stay violation 20 is also a core proceeding. Johnson v. Smith (In re Johnson), 21 575 F.3d 1079, 1083 (10th Cir. 2009). Exercise of civil contempt 22 23 9 Section 1334(b) provides in relevant part: 24 (b) Except as provided in subsection (e)(2), and 25 notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than 26 the district courts, the district courts shall have 27 original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or 28 related to cases under title 11.

24 1 powers under § 105(a), if based on a core matter such as 2 enforcement of the automatic stay, is also a core matter. 3 Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 4 444, 448 (10th Cir. 1990). 5 Accordingly, the bankruptcy court did not err in determining 6 that it had subject matter jurisdiction over the Class Action 7 under 28 U.S.C. §§ 1334 and 157. 8 C. Nationwide Scope Of The Class Action 9 The Controller argues that even if the bankruptcy court has 10 jurisdiction over the Debtor’s escheat claims, that jurisdiction 11 cannot be extended to assert jurisdiction over other bankruptcy 12 estates. According to the Controller, a bankruptcy court’s 13 jurisdiction is strictly limited to the cases filed in its court 14 and may not be extended to cases in other districts. 15 Questions regarding the territorial scope of a bankruptcy 16 court's jurisdiction must begin with an analysis of district 17 court jurisdiction from which it is derived. Under 28 U.S.C. 18 §§ 1334(a) and (b), district courts have jurisdiction over all 19 bankruptcy cases, and over all civil proceedings “arising under 20 title 11, or arising in or related to cases under title 11.” 21 Pursuant to 28 U.S.C. §§ 1334, 157, and 151, district courts may 22 assign their bankruptcy jurisdiction to bankruptcy courts.10 23 Accordingly, with the exception of personal injury tort claims 24 (28 U.S.C. § 157(b)(5)), bankruptcy courts have authority to 25 26 10 27 This is subject to any constitutional limits on the authority of Article I judges. See generally Stern v. Marshall, 28 131 S.Ct. 2594 (2011).

25 1 adjudicate all matters that fall within the district court's 2 bankruptcy jurisdiction. 3 The Controller asserts, however, that the reference in 4 28 U.S.C. § 1334(e)11 to “a case” limits bankruptcy jurisdiction 5 to the district court where the case is filed – the so-called 6 “home court.” But, federal bankruptcy jurisdiction is not that 7 narrow. See Noletto v. NationsBanc Mortg. Corp. (In re Noletto), 8 244 B.R. 845, 851-852 (Bankr. S.D. Ala. 2000) holding that “home 9 court” interpretation of 28 U.S.C. § 1334(e) rendered the venue 10 provisions of 28 U.S.C. § 1409 meaningless. The Noletto court 11 concluded that only in rem claims against estate property were 12 limited to the “home court.” Id. at 856; see also Cano v. GMAC 13 Mortg. Corp. (In re Cano), 410 B.R. 506, 550-51 (Bankr. S.D. Tex. 14 2009) (“Nothing within [28 U.S.C] §§ 1334 or 157 ties bankruptcy 15 jurisdiction over debtor adversary proceedings to the location of 16 the debtor’s bankruptcy case.”). 17 Here, the Class Action seeks a determination that the 18 escheated funds are property of the Class members’ bankruptcy 19 estates subject to turnover and an injunction against continued 20 denial of claims based on the Controller’s allegedly improper 21 policy. A request for a determination that the Class members 22 have a right to a turnover of property – debtors’ escheated funds 23 – is not the same as the determination that the Class members 24 25 11 28 U.S.C. § 1334(e) provides, in relevant part, “The 26 district court in which a case under Title 11 is commenced or is 27 pending shall have exclusive jurisdiction: (1) of all the property, wherever located, of the debtor as of the commencement 28 of such case, and (2) of property of the estate.”

26 1 have a right to a specific amount of escheated funds.12 2 Therefore, the turnover, declaratory and injunctive relief claims 3 are not solely in rem claims, and the nationwide scope of the 4 Class Action as to those claims is proper. 5 However, the nationwide jurisdiction over the Class Action 6 stay violation claims is not appropriate because § 362(k) 7 provides relief only to individuals. Damages suffered as a 8 result of stay violations are not suffered by trustees as 9 individuals, but as the representatives of the bankruptcy estate. 10 Havelock v. Taxel (In re Pace), 67 F.3d 187, 193 (9th Cir. 1995). 11 The only way a trustee can recover damages for stay violations is 12 by bringing an action under § 105(a) for civil contempt. Knupfer 13 v. Lindblade (In re Dyer), 322 F.3d 1178, 1189-90 (9th Cir. 14 2003). 15 Civil contempt proceedings must be brought by a motion in 16 the court where the bankruptcy case is pending. Barrientos v. 17 Wells Fargo Bank, N.A., 633 F.3d 1186, 1190 (9th Cir. 2011) 18 (“[C]ontempt proceedings brought by the trustee . . . are 19 contested matters that must be brought by motion in the 20 bankruptcy case under Rule 9014.”) (emphasis added).13 21 Accordingly, the bankruptcy court lacks subject matter 22 23 24 12 To the extent that the Trustee seeks turnover of a 25 specific amount, his claim is limited to the approximately $10,000 allegedly due in the Debtor’s case. 26 13 27 Barrientos involved an alleged violation of a discharge injunction, but the holding of the case, which is based on 28 Rule 9020, applies to any motion for contempt.

27 1 jurisdiction over the stay violation claims in cases pending in 2 other bankruptcy courts. 3 In summary, the Class Action may not seek interest on the 4 Class member’s claims for escheated property and the bankruptcy 5 court lacks jurisdiction over stay violation claims in cases not 6 filed in its own court. We reject the balance of the 7 Controller’s jurisdictional challenges to the Class Action. 8 II. Class Certification 9 A. Article III Standing 10 We turn, now, to the Controller’s challenge to the Class 11 Certification Order. We begin with the Controller’s arguments 12 that the Trustee and Class members lack standing under 13 Article III of the U.S. Constitution. 14 Article III standing requires that the party invoking the 15 court’s authority demonstrate that he personally suffered actual 16 or threatened injury in fact, that the injury be a result of 17 defendant’s action, and that the injury be redressable by 18 judicial decision. Valley Forge Christian Coll. v. Am. United 19 for Separation of Church and State, Inc., 454 U.S. 464, 471-72 20 (1982). 21 1. Trustee’s Standing 22 The Controller asserts that the Trustee lacks standing 23 because the Class Action is allegedly being pursued solely for 24 the benefit of bankruptcy trustees in other bankruptcy cases.14 25 26 14 Even though the Controller did not raise this argument 27 before the bankruptcy court, because Article III standing is a 28 jurisdictional requirement that cannot be waived, it may be considered as part of this appeal. See United States v. Hayes, 515 U.S. 737, 742 (1995).

28 1 In support of his argument, the Controller cites cases that stand 2 for the proposition that a bankruptcy trustee may not prosecute 3 class actions solely for the benefit of third-party creditors 4 where the only recovery for the bankruptcy estate is an 5 administrative claim for the trustee’s expenses. Williams v. 6 Cal. 1st Bank, 859 F.2d 664, 667 (9th Cir. 1988); In re Wash. 7 Group, Inc., 476 F.Supp. 246, 252 (M.D.N.C. 1979). 8 The Trustee counters that the Class Action will benefit the 9 Debtor because the Trustee has negotiated a fee agreement that 10 caps attorneys’ fees at $5,000, thereby assuring a minimum 11 recovery of approximately $5,000 for the Debtor’s creditors. The 12 Trustee argues that should he separately pursue the Debtor’s 13 claims, the cost of the litigation would far exceed the amount of 14 the claims. Therefore, the Trustee argues that pursuing the 15 Class Action is consistent with his fiduciary duty to the 16 Debtor’s creditors and that it is being pursued for the benefit 17 of those creditors as well as the Class. 18 The cases cited by the Controller are distinguishable 19 because here, the Class Action is being prosecuted for the 20 benefit of the Debtor’s estate as well as the Class. The 21 Trustee, therefore, meets the Article III requirement of 22 demonstrating that he has an injury, which can be redressed by a 23 favorable decision in the Class Action. 24 2. Class Members’ Standing 25 The Controller challenges the inclusion of future claimants 26 in the Class because future claimants have not yet filed claims 27 with the Controller and, therefore, by definition, cannot have 28 been injured by the Controller’s alleged policy. However, when a

29 1 class action challenges a policy of the defendant, inclusion of 2 future claimants is appropriate. Apilado v. N. Am. Gay Amateur 3 Athletic Alliance, 792 F.Supp.2d 1151, 1164 (W.D. Wash. 2011) 4 (citing Armstrong v. Davis, 275 F.3d 849, 865 (9th Cir. 2001) 5 cert. denied, 537 U.S. 812 (2002)); Davis v. Astrue, 250 F.R.D. 6 476, 485 (N.D. Cal. 2008);. 7 The Controller also asserts that future members of the Class 8 will not be affected by the Controller’s actions because if 9 bankruptcy courts have exclusive jurisdiction over estate 10 property, claims for escheated property can be filed in the 11 bankruptcy court where the Class members’ cases are pending. 12 This assertion lacks merit. Bankruptcy courts have exclusive and 13 final jurisdiction to determine if property is property of a 14 bankruptcy estate. Once that determination is made, it does not 15 follow that the federal court is the proper tribunal in which to 16 adjudicate state law issues related to estate property. 17 Finally, the Controller challenges the inclusion in the 18 Class of trustees who could have but did not file claims with the 19 Controller. We agree with the Controller that the Class may not 20 include trustees in pending and prior cases who did not actually 21 file a claim with the Controller. See, e.g., Serena v. Mock, 22 547 F.3d 1051, 1054 (9th Cir. 2008); Madsen v. Boise State Univ., 23 976 F.2d 1219, 1220 (9th Cir. 1992) (“[A] plaintiff lacks 24 standing to challenge a rule or policy to which he has not 25 submitted himself by actually applying for the desired 26 benefit.”). Accordingly, the Class may not properly include 27 28

30 1 trustees who could have but did not file claims with the 2 Controller.15 3 B. Statute Of Limitations 4 The Controller contends that the Class certification is 5 improper because the Class could potentially include claims that 6 might be barred by the statute of limitations. However, the 7 Controller failed to raise the statute of limitations argument 8 before the bankruptcy court, in the MTD, in the answer to the 9 Class Action, or in the Opposition. Because a statute of 10 limitations defense is an affirmative defense, it cannot be 11 considered for the first time on appeal. Roberts v. Coll. of the 12 Desert, 870 F.2d 1411, 1414 (9th Cir. 1988). 13 C. Class Certification Under Civil Rule 2316 14 Historically, class actions were used in English chancery 15 courts for resolving disputes where joinder of all parties was 16 15 17 Trustees who failed to file claims in the past may, however, still be members of the Class as future claimants. 18 16 19 Because we have determined that the bankruptcy court cannot assert jurisdiction over the stay violation claims of the 20 Class Action under 28 U.S.C. § 1334(e), we do not address the stay violation claims in our Civil Rule 23 analysis. We note, 21 however, that a number of courts have refused to certify class 22 actions for stay and/or discharge violations because the element of damages would require a detailed examination of the facts 23 surrounding each class member’s claim, thereby making it impossible for the class to meet the commonality requirements of 24 Civil Rule 23(a)(2). See In re Aiello, 231 B.R. at 712 (too many 25 variations in claims for actual damages under § 362(h) to meet commonality requirements); Walls v. Wells Fargo Bank, N.A. (In re 26 Walls), 262 B.R. 519, 529 (Bankr. E.D. Cal. 2001) (extent of 27 damages will depend not just on the class-wide behavior of the defendant but on the extent of damages to each individual 28 debtor).

31 1 not possible. Civil Rule 23 is based on that practice. It 2 authorizes class actions in the interest of judicial economy and 3 efficiency. One of the primary purposes of Civil Rule 23 is to 4 spread litigation costs and afford individual claimants with 5 small claims access to judicial relief that would otherwise be 6 economically unavailable to them. In re Aiello, 231 B.R. at 709. 7 While the trial court has broad discretion to certify a 8 class, its discretion must be exercised within the framework of 9 Civil Rule 23. Zinser v. Accufix Research Inst., Inc., 253 F.3d 10 1180, 1192-93 (9th Cir. 2001). Class certification involves a 11 two-part analysis. First, the movant must demonstrate that the 12 proposed class satisfies the requirements of Civil Rule 23(a) 13 that: 14 (1) the members of the proposed class be so numerous that 15 joinder of all claims would be impracticable; 16 (2) there be questions of law or fact common to the class; 17 (3) the claims or defenses of the representative parties 18 must be typical of the claims or defenses of absent class 19 members; and 20 (4) the representative parties must fairly and adequately 21 protect the interest of the class. 22 If a movant meets the requirements of Civil Rule 23(a), then 23 at least one of the three subsections of Civil Rule 23(b) must 24 also be met before a class action may proceed. 25 1. Civil Rule 23(a) 26 a) Numerosity 27 The bankruptcy court found that the Class Action satisfies 28 the numerosity requirement because the number of potential Class

32 1 members – trustees throughout the United States – is large. The 2 Controller does not challenge that finding on appeal. 3 b) Commonality 4 Commonality focuses on the relationship of common facts and 5 legal issues among class members, but: 6 All questions of fact and law need not be common to satisfy [Civil Rule 23(a)(2)]. The existence of shared 7 legal issues with divergent factual predicates is sufficient, as is a common core of salient facts 8 coupled with disparate legal remedies within the class. 9 Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9th Cir. 1998). 10 The Trustee contends that the commonality requirement has been 11 met because Class membership includes numerous common factual 12 elements, including that all Class members are trustees with an 13 existing or potential claim to escheated funds that would be 14 rejected by the Controller. The common legal issues include 15 whether debtors’ interest in escheated funds is property of their 16 bankruptcy estates, and, whether trustees in such cases have 17 standing to file claims for the escheated funds. 18 The Controller counters that the Class Action would require 19 the bankruptcy court to determine the amount due to each 20 individual trustee, and therefore, when such individualized 21 determinations are required, the commonality standard of Civil 22 Rule 23(a)(2) cannot be met.17 However, the Trustee asserts that 23 24 17 The Trustee argues that, because the Controller did not 25 make this argument before the bankruptcy court, we should not consider it for the first time on appeal. In conducting the 26 Civil Rule 23 analysis, the bankruptcy court necessarily made 27 findings of fact which normally should not be reviewed for the first time on appeal. El Paso v. Am. W. Airlines, Inc. (In re Am 28 (continued...)

33 1 the Class Certification Order does not require individual 2 determination of specific amounts due to each Class member. 3 Rather, it defines the Class in terms of whether its members are 4 “entitled” to turnover and an accounting of debtors’ escheated 5 funds under § 542 and § 543. “Entitle” means “to furnish with 6 proper grounds for seeking or claiming something.” BLACK’S LAW 7 DICTIONARY 532 (6th ed. 1990). To the extent that the Class 8 Action requests a determination that Class members have a right 9 to escheated funds that have been withheld solely on the grounds 10 that the funds are not estate property (but not a determination 11 of the amount due to each Class member), then certification is 12 proper. 13 c) Typicality 14 Civil Rule 23(a)(3) requires that the claims of the class 15 representative be typical of the class claims. In examining 16 typicality, courts consider “‘whether other members have the same 17 or similar injury, whether the action is based on conduct which 18 is not unique to the named plaintiffs, and whether other class 19 members have been injured by the same course of conduct.’” 20 Kanawi v. Bechtel Corp., 254 F.R.D. 102, 110 (N.D. Cal. 2008) 21 17 22 (...continued) W. Airlines, Inc.), 217 F.3d 1161, 1165 (9th Cir. 2000) (Absent 23 exceptional circumstances, we generally will not consider arguments raised for the first time on appeal, although we have 24 discretion to do so.). However, when the issue is one of law and 25 either does not depend on the factual record, or the record has been fully developed, we may address the argument. Marx v. Loral 26 Corp., 87 F.3d 1049, 1055 (9th Cir. 1996). Here, the record is 27 fully developed regarding the facts relevant to the commonality determination and, therefore, we exercise our discretion to 28 review it.

34 1 citing Hanon v. DataProducts Corp., 976 F.2d 497, 508 (9th Cir. 2 1992). The bankruptcy court found that the Letter describing the 3 Controller’s “long standing position” of rejecting trustee claims 4 met the typicality requirement. 5 The Controller contends that the typicality requirement has 6 not been met because the Class includes members who have not yet 7 filed claims with the Controller. However, where the challenged 8 conduct is a policy or practice that affects all class members, 9 the injuries of the class representative and that of the class 10 members need not be identical. Typicality is met if the class 11 representative and members suffer identical injuries as a result 12 of the alleged wrongful policy. See Armstrong v. Davis, 275 F.3d 13 at 868-69. Here, the Trustee and the Class members all suffer 14 the same injury: the denial or potential denial of their claim by 15 the Controller based on the Controller’s stated position that the 16 funds are not property of the bankruptcy estate. 17 d) Adequacy Of Representation 18 Finally, Civil Rule 23(a)(4) requires a determination that 19 the class representative will adequately protect the interests of 20 the class. In determining whether the interests of a class will 21 be adequately represented, the court must determine that the 22 class representative does not have an interest antagonistic to 23 the class; and, that the class counsel must be qualified, 24 experienced and able to conduct the litigation. James W. Moore 25 et al., 5 MOORE’S FEDERAL PRACTICE § 23.25([3][a]) (3d ed. 2007). 26 The Controller argues that the Trustee cannot satisfy Civil 27 Rule 23(a)(4) because there is an inherent conflict of interest 28 between the Trustee’s fiduciary duty to the bankruptcy estate and

35 1 his role as Class representative. A potential for conflict 2 between a bankruptcy trustee’s fiduciary obligations to 3 efficiently and quickly administer a bankruptcy estate and to act 4 as a class representative has long been recognized. See Dechert 5 v. Cadle Co., 333 F.3d 801, 802-03 (7th Cir. 2003); Centrue Bank 6 v. Samson (In re Thompson), 2010 WL 4065421 *2-3 (S.D. Ill. Oct. 7 15, 2010). However, there is no per se rule barring a bankruptcy 8 trustee from serving as a class representative. Dechert 9 recognized that there could be situations where only a fiduciary 10 could act as a class representative. 333 F.3d at 803. 11 Here, as the bankruptcy court noted: “Who else but a 12 bankruptcy trustee can assert that the Controller is improperly 13 denying payment of claims to bankruptcy trustees?” Thus, because 14 the Debtor is affected by the same alleged improper conduct as 15 the Class, the bankruptcy court found that no conflict would be 16 suffered by the Debtor by having the Trustee pursue the Class 17 Action. We see nothing illogical about the bankruptcy court’s 18 determination and, accordingly, find no abuse of discretion with 19 respect to its determination that the Trustee could act as Class 20 representative. 21 2. Civil Rule 23(b) 22 Once the requirements of Civil Rule 23(a) are met, at least 23 one of the requirements of Civil Rule 23(b) must also be 24 satisfied before a class can be certified. Civil Rule 23(b) 25 classifications are written in the alternative. In this case, 26 the bankruptcy court certified the Class under Civil Rule 27 23(b)(1)(A), (b)(2) and (b)(3). 28

36 1 Civil Rule 23(b)(1)(A) is appropriate if prosecuting 2 separate actions would create a risk of inconsistent results that 3 would establish incompatible standards of conduct for the party 4 opposing the class or absent class members. Even though the 5 Certification Order certified the Class under Civil 6 Rule 23(b)(1), the bankruptcy court did not make a specific 7 finding that separate actions would create a risk of inconsistent 8 results or incompatible standards of conduct for the Controller. 9 It is unlikely that such a finding could be made. 10 The Ninth Circuit has adopted a conservative view of Civil 11 Rule 23(b)(1), which requires that either: (1) “rulings in 12 separate actions would subject [a] defendant to incompatible 13 judgments requiring inconsistent conduct to comply with the 14 judgment; or (2) a ruling in the first of a series of separate 15 actions will ‘inescapably alter the substance of the rights of 16 others having similar claims.’” Mateo v. M/S Kiso, 805 F.Supp. 17 761, 772 (N.D. Cal. 1991) quoting McDonnell Douglas Corp. v. U.S. 18 Dist. Ct. of Cal., 523 F.2d 1083, 1086 (9th Cir. 1975). Neither 19 of these two conditions is met by the Class Action. If the Class 20 is not certified, it is not clear that the Controller will be 21 subject to multiple individual actions or incompatible judgments. 22 In fact, if the Trustee were to prevail on the Debtor’s claims, 23 California’s law of issue preclusion would likely prevent the 24 Controller from denying other trustees’ claims for debtors’ 25 escheated property.18 26 18 27 Under California law, the party asserting issue preclusion has the burden of establishing the following 28 (continued...)

37 1 If, however, the Trustee pursues an action solely in 2 Debtor’s case against the Controller and fails, that result would 3 not bind other bankruptcy estates because those estates are not 4 in privity with the Debtor. Accordingly, a ruling against the 5 Trustee will not “inescapably” alter the rights of other trustees 6 having similar claims. Id. at 773. Consequently, the bankruptcy 7 court abused its discretion in certifying the Class under Civil 8 Rule 23(b)(1). 9 Civil Rule 23(b)(2) provides for Class certification when 10 “the party opposing the class has acted or refused to act on 11 grounds generally applicable to the class, thereby making 12 appropriate final injunctive relief or corresponding declaratory 13 relief with respect to the class as a whole.” Zinser, 253 F.3d 14 at 1195. Here, while the bankruptcy court made no specific 15 findings, it did find that the Letter demonstrated a commonality 16 17 18 (...continued) 18 “threshold” requirements: (1) the issue sought to be precluded must be identical to 19 that decided in a former proceeding; 20 (2) the issue must have been actually litigated in the 21 former proceeding; (3) it must have been necessarily decided in the former 22 proceeding; 23 (4) the decision in the former proceeding must be final and 24 on the merits; and, (5) the party against whom preclusion is sought must be the 25 same as, or in privity with, the party to the former 26 proceeding. 27 Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001); Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 28 367 B.R. 99, 104 (9th Cir. BAP 2007).

38 1 of claims, which is consistent with the findings required under 2 Civil Rule 23(b)(2). Under the Controller’s policy, all 3 bankruptcy trustees are denied the right to make a claim for 4 debtors’ escheated funds for the same reason — the Controller’s 5 determination that such funds are not estate property. 6 Certification of a class under Civil Rule 23(b)(2) is 7 appropriate only where the primary relief sought is declaratory 8 or injunctive relief, not monetary. Id. The Controller asserts 9 that the bankruptcy court’s certification under Civil Rule 10 23(b)(2) was error because the Class Action seeks monetary relief 11 for the amount of each estate’s escheated funds. However, at 12 oral argument and in his brief, the Trustee asserted that the 13 only damages being sought are for attorneys’ fees incurred in 14 bringing the Class Action. Assuming that is the case, then the 15 damages being sought are merely incidental to the primary claims 16 for injunctive and declaratory relief. Daly v. Harris, 17 209 F.R.D. 180, 192 (D. Haw. 2002).19 As a result, the 18 bankruptcy court did not err in certifying the Class under Civil 19 Rule § 23(b)(2). 20 Finally, certification under Civil Rule 23(b)(3) is 21 appropriate when individualized damage claims are being sought. 22 However, the Trustee admits that the only damages being sought 23 19 However, absent some type of damages claim, the Trustee 24 may be unable to recover attorneys’ fees for prosecuting the 25 Class Action because Civil Rule 23(h) limits an award of attorneys’ fees to circumstances where such a recovery is 26 authorized by law. Here, we have determined that the Class 27 Action may not seek damages in the form of interest on the escheated funds and that the bankruptcy court lacks jurisdiction 28 over Class members’ stay violation claims.

39 1 are not individualized, but are limited to the costs and fees 2 incurred in prosecuting the Class Action. Accordingly, Civil 3 Rule 23(b)(3) is inapplicable to the Class Action. 4 In summary, we find that the bankruptcy court did not abuse 5 its discretion in certifying the Class under Civil Rule 23(a) and 6 Civil Rule 23(b)(2). However, the bankruptcy court did err in 7 certifying the Class under Civil Rule 23(b)(1)(A) and (b)(3). 8 VII. CONCLUSION 9 Based on the foregoing reasons, we determine that the claims 10 for interest on escheated funds are barred by sovereign immunity. 11 Under the holding of Katz, California has waived its sovereign 12 immunity claims to the balance of the Claims. The bankruptcy 13 court, however, lacks subject matter jurisdiction over the stay 14 violation claims, which may only be pursued by civil contempt 15 motions filed in each Class member’s cases. 16 Additionally, we determine that the certification of the 17 Class under Civil Rule 23(b)(1) was error. The Trustee has 18 admitted that the Class Action does not seek individualized 19 damages claims and, accordingly, certification of the Class under 20 Civil Rule 23(b)(3) was also error. Although the bankruptcy 21 court did not err in certifying the Class under Civil 22 Rule 23(b)(2), as noted above, unless there is some federal or 23 state law which authorizes recovery of attorneys’ fees for the 24 Claims, such fees are not recoverable under Civil Rule 23(h). 25 Therefore, we REVERSE the Certification Order entry and remand 26 the matter to the bankruptcy court to issue a certification order 27 solely under Civil Rules 23(a) and (b)(2), and which narrows the 28

40 1 scope of the Class Action by eliminating claims for interest 2 damages and claims for willful violation of the automatic stay. 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