In re: Fariborz Zanjanee Babaee Malihe P. Babaee

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: June 17, 2022
• Docket: CC-21-1230-LGT CC-21-1231-LGT
• Status: Unpublished

Opinion

FILED JUN 17 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. CC-21-1230-LGT FARIBORZ ZANJANEE BABAEE; BAP No. CC-21-1231-LGT MALIHE P. BABAEE, (related appeals) Debtors. Bk. No. 8:20-bk-10268-TA FARIBORZ ZANJANEE BABAEE; MALIHE P. BABAEE, Appellants, v. MEMORANDUM∗ RICHARD A. MARSHACK, Chapter 7 Trustee, Appellee.

Appeal from the United States Bankruptcy Court for the Central District of California Theodor C. Albert, Chief Bankruptcy Judge, Presiding

Before: LAFFERTY, GAN, and TAYLOR, Bankruptcy Judges.

INTRODUCTION

Chapter 71 debtors Fariborz Zanjanee Babaee and Malihe P. Babaee

(“Debtors”) appeal the bankruptcy court’s orders approving the chapter 7

∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101–1532. “Rule” references are the Federal Rules of 1 trustee’s (“Trustee”) motions to (1) sell their Newport Beach residence (the

“Property”) and (2) approve agreements with two junior secured creditors,

under which those creditors would subordinate and transfer to the estate a

portion of their liens. Absent the agreements, the sale would generate no

distribution to unsecured creditors. Debtors argue that the bankruptcy

court lacked authority to approve the motions because the agreements

overrode their statutory exemption rights.

We DISMISS for lack of standing.

FACTS

Debtors filed a joint chapter 7 petition in January 2020. They listed

the Property on Schedule A with a value of $2.9 million. Schedule D listed

four consensual liens and two tax liens on the Property totaling

approximately $2.6 million. Debtors claimed a $175,000 homestead

exemption under California Code of Civil Procedure § 704.730. They also

scheduled nonpriority unsecured claims totaling $430,027.

In April 2020, Trustee filed a Notice of Assets; he then hired a real

estate agent to market the Property. Trustee eventually received an offer to

purchase the Property for $2,860,000. He negotiated agreements with two

secured creditors, Comerica Bank (“Comerica”), the holder of the third

position deed of trust, and Valley Economic Development Center, Inc.

(“VEDC”), 2 the holder of the fourth position deed of trust, to subordinate a

Bankruptcy Procedure. 2 Some of the parties’ papers refer to City National Bank (“CNB”) as a party to

2 portion of their liens, transfer the subordinated portions to the estate, and

consent to the sale of the Property free and clear of their liens. Trustee filed

a motion under Rule 9019 to approve those agreements (the “Compromise

Motion”).

The Compromise Motion stated that Schedule D and Trustee’s books

and records reflected that the Property was encumbered by the following

liens:

Shellpoint Mortgage Servicing $1,650,243.80

First Choice Bank $ 150,000.00

Comerica $ 449,325.00

VEDC $ 425,000.00

Internal Revenue Service $ 104,035.00

Orange County Treasurer $ 29,914.00

Judgment lien $ 173,808.00

Total $2,982,082.00

Under the agreements, Comerica agreed to subordinate all but

$410,000 of its claim, and VEDC agreed to subordinate all but $191,000 of

its claim, to the claims of Trustee, his professionals, and general unsecured

creditors. To effectuate this agreement, Comerica and VEDC would

transfer the subordinated portions of their liens to Trustee for the benefit of

the VEDC agreement. CNB is the assignee of the VEDC Liquidating Trust, which was created pursuant to a confirmed chapter 11 plan in VEDC’s bankruptcy case. 3 the estate. Based on Trustee’s calculations, absent the agreements,

unsecured creditors would receive no distribution.

Debtors objected to the Compromise Motion, arguing: (1) there was

no bona fide dispute between Trustee and the settling creditors; (2) the

motion was a circuitous attempt to object to Debtors’ homestead

exemption; and (3) the law disfavors sales of fully encumbered properties.

Shortly thereafter, Trustee filed a motion to sell the Property for

$2,860,000, subject to overbids, free and clear of liens and encumbrances

pursuant to various subsections of § 363 (the “Sale Motion”). Trustee also

requested the sale to be free and clear of Debtors’ homestead exemption

based on § 522(g), such that their exemption would not attach to the

recovered liens resulting from the subordination agreements. 3 In his reply

brief, Trustee estimated the net recovery to the estate at approximately

$293,144.

Debtors filed an omnibus objection in which they strenuously

objected to their homestead exemption not being paid out of the recovered

liens and argued that Trustee and his professionals would be the primary

beneficiaries of the sale, and no funds would go to pay general unsecured

creditors. As such, they argued, the proposed terms constituted an

impermissible surcharge of their homestead exemption. Debtors also

requested the court compel Trustee to abandon the Property.

3 Because we are dismissing this appeal for lack of standing, we need not address the substance of the requested relief. 4 In reply, Trustee asserted that he was not required to demonstrate a

dispute under Rule 9019, and in any event the agreements could be

approved as stipulations. He disputed that the presumption of impropriety

for overencumbered property sales applied to the contemplated sale, but

even if it did, Trustee had met the standard for overcoming that

presumption. He also disputed that he and his professionals were the

primary financial beneficiaries of the proposed sale. Trustee asserted that

the sale would generate significant funds for unsecured creditors based on

the estimated commissions, counsel fees, and Trustee’s compensation, the

latter two of which could be adjusted, if necessary, to ensure a meaningful

distribution to unsecured creditors.

Trustee, however, did propose a revised distribution scheme under

which Debtors would be paid their exemption after payment of closing

costs and all consensual liens, including the subordinated portion of the

Comerica and VEDC liens. According to Trustee’s calculation, Debtors

could expect to receive $45,962.76 on account of their homestead

exemption.

After hearing argument, the bankruptcy court adopted its tentative

ruling granting both motions, stating that it viewed the Trustee’s efforts as

“entirely proper.” It rejected Debtors’ arguments to the contrary. An

overbidder appeared at the hearing, and, after conducting a brief auction,

the bankruptcy court approved the sale at a price of $2,880,000—$20,000

over the original offer. The order approving the Sale Motion (the “Sale

5 Order”) contains a § 363(m) finding that the buyers acted in good faith.

Debtors timely appealed both orders.

After unsuccessfully seeking stays pending appeal from the

bankruptcy court and this Panel, Debtors moved out of the Property. The

sale closed on November 19, 2021. Shortly thereafter, Trustee paid the IRS

$74,649.02, the compromised amount on its claim, as approved by the

bankruptcy court. According to Trustee, he is currently holding

approximately $225,852 of sale proceeds, to be distributed upon further

order of the court. On February 4, 2022, a BAP motions panel denied

Trustee’s motion to dismiss these appeals as moot.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A) and (N). We discuss our jurisdiction below.

ISSUE

Do Debtors have standing to challenge the orders on appeal?

STANDARD OF REVIEW

“While standing to appeal is generally a legal issue reviewed de

novo, whether an appellant is a ‘person aggrieved’ by the order appealed is

a question of fact we review in the first instance.” Landress v. Cambridge

Land Co. II, LLC (In re Cambridge Land Co. II, LLC), 626 B.R. 319, 323 (9th Cir.

BAP 2021), appeal filed, No. 21-60028 (9th Cir. 2021) (citing Palmdale Hills

Prop., LLC v. Lehman Com. Paper, Inc. (In re Palmdale Hills Prop., LLC), 654

F.3d 868, 873 (9th Cir. 2011)).

6 DISCUSSION

A. Scope of Appeal

Debtors concede that, pursuant to § 363(m), the sale of the Property

cannot be reversed or modified on appeal. 4 Accordingly, this appeal is

limited to the propriety of the bankruptcy court’s approval of the

compromises. The appeal touches on the Sale Order only to the extent the

Sale Order approves the proposed distribution scheme.

B. Debtors lack standing in these appeals.

“A federal court may exercise jurisdiction over a litigant only when

that litigant meets constitutional and prudential standing requirements.”

Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th Cir.

BAP 2011) (citation omitted). Constitutional standing requires an injury in

fact that is caused by or fairly traceable to some conduct, and which the

requested relief will likely redress. Id. (citing Sprint Commc’ns Co., L.P. v.

APCC Servs., Inc., 554 U.S. 269, 273-74 (2008); additional citations omitted).

“The prudential standing doctrine or the ‘person aggrieved test’

provides that ‘[o]nly those persons who are directly and adversely affected

pecuniarily by an order of the bankruptcy court . . . have standing to

4 Section 363(m) provides:

The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and 7 appeal that order.’” Palmdale Hills Prop. v. Lehman Com. Paper, Inc. (In re

Palmdale Hills Prop., LLC, 654 F.3d 868, 874 (9th Cir. 2011) (quoting Fondiller

v. Robertson (In re Fondiller), 707 F.2d 441, 442 (9th Cir. 1983)). “An order that

diminishes one’s property, increases one’s burdens, or detrimentally affects

one’s rights has a direct and adverse pecuniary effect for bankruptcy

standing purposes.” Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 890 F.3d

1188, 1191 (9th Cir. 2018) (citation omitted).

As the appellants, it is Debtors’ burden to establish standing. Hasso v.

Mozsgai (In re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th Cir. BAP 2002)

(citing Bennett v. Spear, 520 U.S. 154, 167-68 (1997)). Trustee raised the issue

in his answering brief. In their reply brief, Debtors contended that they

would benefit pecuniarily by reversal of the orders on appeal because

Comerica and VEDC have already released their liens in exchange for the

discounted payoffs. They assume that if the orders are reversed, there will

be funds available to pay their homestead exemption because all the

consensual liens have been released. But they miss two critical points: first,

the value of the Property that was encumbered by the Comerica and VEDC

liens never belonged to Debtors and thus could not be subject to their

homestead exemption; and second, if the orders are reversed, this would

undo the settlement, meaning that Comerica and VEDC would be entitled

to be paid the full amounts owed on their original liens. Based on the final

payoff figures, Comerica would be entitled to an additional $73,518.81, and

such sale or lease were stayed pending appeal. 8 VEDC $274,578.19, for a total of $348,097, well over the amount held by

Trustee. 5

At oral argument, Debtors’ counsel argued that his clients were

affected pecuniarily by the orders on appeal because they must relocate.

But Debtors have already conceded that the sale cannot be undone, even if

we were to reverse the order approving the compromise. In other words,

the compromise itself had no impact on Debtors other than to enable the

sale of their overencumbered Property. If anything, the sale benefited

Debtors by relieving them of nearly $3 million in secured debt. And it is yet

to be determined whether or how much Debtors will receive on account of

their homestead exemption, which would also benefit them.

Our resolution of this appeal on standing grounds obviates the need

for the more intensive inquiry normally required in consideration of the

merits—though this is the perhaps rare case in which an understanding of

why Debtors lack standing required a fairly involved examination of the

real world effects of the orders approved by the bankruptcy court and the

consequences of their reversal.

But we pause here for a moment because, on a perhaps more

fundamental level, Debtors’ argument against the transactions initiated by

Trustee and approved by the bankruptcy court reveals what is in essence a

competing standing argument, i.e., that where a chapter 7 debtors’

5 These figures are taken from the final settlement statement filed with the bankruptcy court on December 7, 2021. 9 homestead is apparently overencumbered, the opportunity to realize value

through a creative transaction “belongs” to the debtors, and that value

should invariably flow to them via their resuscitated homestead

As an initial matter, this Panel has held that, although there is a

rebuttable presumption of impropriety when a chapter 7 trustee seeks to

sell overencumbered property subject to a carve-out agreement, there is no

per se bar on a trustee’s efforts to realize value for the estate in similar

circumstances, which confirms the Trustee’s ability to structure and

complete transactions like the ones utilized here. See In re KVN Corp., 514

B.R. 1 (9th Cir. BAP 2014).

And, even more importantly, Debtors’ conception of “standing”

under these circumstances would fundamentally alter the role of the

Trustee, who is empowered by the Code to take control of estate assets and

prioritize finding value for creditors. Debtors fail to realize that, once they

filed their chapter 7 case, they gave up their ability, i.e., their standing, to

control their property. That control passed to Trustee, who had a fiduciary

duty to maximize assets of the estate. See Goodwin v. Mickey Thompson Ent.

Grp., Inc. (In re Mickey Thompson Ent. Grp., Inc.), 292 B.R. 415, 421 (9th Cir.

BAP 2003). The trustee’s “primary job is to marshal and sell the assets, so

that those assets can be distributed to the estate’s creditors.” In re KVN

Corp., 514 B.R. at 5 (citation omitted). When they filed their petition and

sought a discharge of their considerable unsecured debt, Debtors took the

10 risk that Trustee might sell the Property, and they would be paid their

homestead exemption only to the extent there were proceeds left over after

payment of costs of sale and consensual liens.

In short, Debtors have not met their burden to show either

constitutional or prudential standing. They have not established

constitutional standing by showing that the orders on appeal resulted in an

injury in fact fairly traceable to the compromise, or that reversal of those

orders would redress any injury. As noted, reversal would leave Debtors

with no possibility of a distribution on their homestead exemption. For the

same reasons, they have not established prudential standing, i.e., that they

are directly and adversely affected pecuniarily by the orders on appeal.

Accordingly, these appeals must be dismissed.

CONCLUSION

These appeals are DISMISSED.