FILED NOT FOR PUBLICATION DEC 31 2024 SUSAN M. SPRAUL, CLERK UNITED STATES BANKRUPTCY APPELLATE PANEL U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT OF THE NINTH CIRCUIT
In re: BAP Nos. SC-24-1034-BGC HOMESITE HOLDINGS LLC, SC-24-1035-BGC Debtor. (Related Appeals)
HOMESITE HOLDINGS LLC; MICHAEL Bk. No. 20-03216-MM7 R. CARTWRIGHT, II, Appellants, Adv. No. 21-90032-MM v. RONALD E. STADTMUELLER, Chapter 7 MEMORANDUM∗ Trustee; HOUSHANG AFRAMIAN; SMDL, LLC; T2, LLC, Appellees.
Appeal from the United States Bankruptcy Court for the Southern District of California Margaret M. Mann, Bankruptcy Judge, Presiding
Before: BRAND, GAN, and CORBIT, Bankruptcy Judges.
INTRODUCTION
The bankruptcy estate in this case was comprised of real property that
was encumbered by multiple liens, subject to remediation orders for landslides
that had occurred on the property, and which was in danger of further erosion
and landslides. After engaging in years of litigation, Ronald E. Stadtmueller
∗ 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 ("Trustee"), the chapter 7 1 trustee in this case, entered into a global tripartite
settlement that resolved all of the litigation issues, resulted in the transfer of
the subject property to one of the creditors, and allowed for the closing of the
case. The bankruptcy court approved the settlement and at the same time
denied a motion for summary judgment filed by Appellants, chapter 7 debtor
Homesite Holdings LLC ("Debtor") and its principal Michael R. Cartwright, II
(together "Appellants"), that would have disallowed the claims of creditors
SMDL, LLC ("SMDL") and T2, LLC ("T2") (together "SMDL/T2"), the proposed
purchasers of the property under the global settlement.
Appellants appeal three orders in these related appeals: (1) the order
granting the joint motion to settle claims between multiple parties, sell
Debtor's real property to SMDL/T2, and dismiss several adversary
proceedings; (2) the order denying Appellants' motion for summary judgment
as to proofs of claim and the complaint filed against Debtor by SMDL/T2; and
(3) an order denying Appellants' motion for reconsideration of both of the
above orders. Seeing no reversible error by the bankruptcy court as to any of
its rulings, we AFFIRM.
FACTS
A. The parties
Mr. Cartwright is the manager and sole member of Debtor. In 2017,
Debtor acquired vacant land known as lots 5, 6, 7, and 8 on Castellammare and
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule" references are to the Federal Rules of Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil Procedure. 2 Revello Drives in the high-end community of Pacific Palisades near Los
Angeles ("Property"). The Property was Debtor's sole asset. Various owners
have tried to develop the Property since the 1990s without success; Debtor
made no changes to it since taking ownership in 2017.
Unsecured creditors SMDL/T2 own properties which adjoin and are
uphill from the Property. The ascending slope between the parties' properties
is steep and near vertical in places. SMDL/T2's properties receive lateral and
subjacent support from the Property.
Houshang Aframian held a senior lien on the Property for $1.275 million
and filed a proof of claim for that amount. Appellants' objection to the claim
was consolidated with Trustee's adversary proceeding against Mr. Aframian,
which sought disallowance of his claim and cancellation of his senior lien. Big
A Rancho Santa Fe, LLC ("Big A") held a $2 million junior lien on the Property.
In a settlement with Trustee, Big A agreed to reduce its lien to $21,000 plus
interest.
B. Relevant prepetition events
In 2002, in an attempted development of the Property, retaining walls
were constructed along some of the lots. In 2005, a landslide occurred on the
parties' properties. The City of Los Angeles ("City") issued stop work orders
and orders to comply, requiring the owners to correct the slope failure. In
2006, the City recorded Certificates of Substandard Property against the
properties based on a "Class I Slope Failure." Debtor's predecessor
unsuccessfully litigated with the City over the certificate. The landslide on
3 Debtor's Property has continued unabated since 2005. It is unknown what has
been done since 2005 on SMDL/T2's properties.
In 2009, the City approved a plan to repair the hillside, but the plan was
never completed. In 2014, the California Coastal Commission ("Commission")
approved proposed construction of new retaining walls on the parties'
properties to stabilize the hill, but the new walls were never constructed.
C. The bankruptcy case
After exhausting all state court efforts to stop a foreclosure by Mr.
Aframian, Debtor filed a chapter 7 bankruptcy case on June 25, 2020. Trustee
was appointed as the chapter 7 trustee.
SMDL/T2 filed unsecured proofs of claim for $3 million each. They
asserted that Debtor was liable for damages caused to their properties by
illegal and reckless grading activity on the Property from 2000-2002, which
caused the 2005 landslide and the deteriorating and unstable condition of the
hillside. SMDL/T2 asserted that Debtor was obligated to restore the lateral and
subjacent support for their properties and that such repairs could not be
completed until the landslide condition on Debtor's Property, which they
contended was a continuing nuisance, was repaired.
Appellants objected to SMDL/T2's proofs of claim. Thereafter, SMDL/T2
filed an adversary complaint for declaratory judgment that Debtor had a
statutory duty to provide lateral and subjacent support to SMDL/T2's uphill
properties and that Debtor's Property could not be sold free and clear of that
obligation. The bankruptcy court consolidated the claim objection and the
4 adversary since they involved common questions of law and fact, and both
matters proceeded in the adversary proceeding.
1. Summary judgment in the adversary
Appellants moved for summary judgment as to SMDL/T2's proofs of
claim and request for declaratory relief ("MSJ"). Appellants' expert opined that
Debtor's retaining walls actually stabilized, not caused, the 2005 landslide. He
maintained that SMDL/T2's actions, namely improper drainage pipes on their
properties, caused the 2005 landslide. However, even if work performed on
the Property was the cause, Appellants argued that Debtor was not liable for
damage caused by prior owners. And, even if Debtor was liable, argued
Appellants, SMDL/T2's claims for a permanent nuisance accrued in 2005 and
were barred by the three-year statute of limitations. Alternatively, if SMDL/T2
could prove that the conditions on Debtor's Property were a "continuing"
nuisance, which could give rise to successive actions for damages each with a
three-year time bar, Appellants argued that SMDL/T2 failed to provide
evidence of damages that occurred within the three years prior to their
complaint.
In opposition, SMDL/T2 argued that Appellants' expert's opinion as to
the cause of the 2005 landslide was controverted by the City's conclusion that
it was caused by the construction of the retaining walls based on faulty
geological plans. SMDL/T2's expert disputed Appellants' expert's "drainage
pipes" causation theory and maintained that an active landslide existed on the
Property, which was evidenced by winter storms in 2023 that caused debris to
5 push through the lower retaining wall and spill out onto the street.
SMDL/T2 argued that Appellants' position that Debtor had no successor
liability for the prior owner's excavation for the retaining walls was incorrect.
Rather, their claims were based on damage caused by construction of the
unfinished and unreasonably dangerous retaining walls still existing when
Debtor acquired the Property and Debtor's failure to remediate the dangerous
artificial condition. SMDL/T2 argued that the dangerous condition caused by
the unapproved and unfinished retaining walls, and the ongoing landslide
that was overtaking them, was a continuing nuisance that could be abated by
stabilizing the hillside. Estimates for hillside repairs, which might require
removal or enhancement of the retaining walls, ranged from $2.7 to $3.8
million. 2
In reply, Appellants argued that if the walls were a continuing nuisance,
SMDL/T2's estimated repair of $3.8 million was unreasonably high compared
to the Property's value, which Appellants contended was between $2.35 and
$3.8 million. Consequently, argued Appellants, the high remediation costs to
value rendered the nuisance permanent, not continuing, barring SMDL/T2's
claims.
2. The settlement and sale motion
Before the bankruptcy court ruled on the MSJ, Trustee, SMDL/T2, and
Mr. Aframian filed a joint motion for approval of a settlement and release of
2 Although SMDL/T2 obtained a repair bid in 2020 for $858,000, which Appellants raised, the engineer's plans for that bid were incorrect and the City would not approve it. 6 claims between them and a sale of the Property to SMDL/T2 ("Settlement and
Sale Motion"). The settlement terms of the agreement ("Agreement") are
summarized as follows:
• SMDL/T2 would withdraw their $3 million proofs of claim and Appellants' objections to those claims would be deemed withdrawn;
• SMDL/T2 would waive repayment of their administrative claim for $150,000, which they provided to Trustee to fund his investigation of Big A's liens; to date, SMDL/T2 had provided $141,141 of that $150,000;
• SMDL/T2 would dismiss their adversary proceeding against Debtor and agree with Trustee to a mutual general release of all claims;
• Mr. Aframian would reduce his $1.275 million senior lien on the Property to $150,000, release his lien upon payment at the sale, and withdraw his proof of claim;
• Trustee would dismiss the adversary proceeding against Mr. Aframian and agree to a mutual general release of all claims, and SMDL/T2 and Mr. Aframian would agree to a mutual general release of all claims;
• Big A's lien on the Property, which had been reduced to $21,300 plus interest, would be satisfied upon the sale to SMDL/T2.
As for the sale terms of the Agreement, Trustee would convey the Property to
SMDL/T2 subject to all liens, interests, and encumbrances, except the Aframian
and Big A liens to be paid by SMDL/T2 through escrow. SMDL/T2 would also
satisfy the approximate $200,000 delinquent property tax claims. Hence, under
the Agreement, Trustee would receive a total of $338,505.40.
In evaluating the settlement under A & C Properties, Trustee argued that
the settlement between SMDL/T2 and the estate, Mr. Aframian and the estate, 7 and SMDL/T2 and Mr. Aframian was fair and equitable, negotiated in good
faith, and in the best interest of creditors and the estate. In short, Trustee
argued that the tripartite settlement resolved all matters, disposed of the
distressed Property, and allowed him to finally close the case without further
expense and uncertainty of protracted litigation and potential appeals.
Trustee asserted that the outcome of the pending litigation between him
and the various parties was uncertain. If the Agreement was not approved, he
believed that the SMDL/T2 matter would continue to be heavily litigated,
especially given Mr. Cartwright's propensity to litigate, and was likely
resolvable only through the use of expert witnesses which the insolvent estate
could not afford. Trustee argued that settlement with SMDL/T2 would avoid
trial and the cost, delay, and risk of complex litigation. The settlement with Mr.
Aframian also avoided trial and its related cost, delay, and risk. The settlement
additionally provided cash to the estate, payment of Big A's allowed lien, and
payment of the long-outstanding property taxes. Trustee argued that
settlement was in the best interest of Debtor, its creditors, its estate, and the
public; all creditors' claims would be resolved through payment or otherwise
and a public hazard would finally be addressed.
Regarding the sale of the Property to SMDL/T2 under § 363(b), Trustee
asserted that it was negotiated at arm's length and in good faith, was in the
best interest of estate, was fair and reasonable, and should be approved based
on his sound business judgment. While Trustee did not put a value on the
Property, he did not believe it was worth as much as Mr. Cartwright asserted.
8 Trustee explained that a broker tried to sell the Property but those efforts
failed. Trustee said he learned that the Property was borderline valueless
because it was fraught with many legal and practical problems as evidenced
by the failed sale attempt and preliminary title report. Trustee argued that due
to the complex issues related to the Property, it was impossible to establish
overbid terms that would equate to the value of the Agreement. Trustee
requested a finding under § 363(m) that SMDL/T2 were good faith purchasers.
Appellants opposed the Settlement and Sale Motion. They argued that
Trustee presented no analysis regarding the probability of success of the
SMDL/T2 litigation. Appellants continued to challenge the claims as baseless,
for the same reasons asserted in their MSJ. Appellants also challenged
Trustee's concerns about the expense of litigation, noting that Mr. Cartwright
had been paying for the SMDL/T2 and Aframian litigation and that he could
continue to do so through trial.
Appellants further argued that Trustee failed to show he was getting
optimal value for the Property. Although he stated that his broker's efforts to
sell the Property had failed, he did not provide any details about what those
efforts were or provide a declaration from the broker explaining why he was
unable to sell the Property, which was in a highly desirable oceanfront
neighborhood. Appellants asserted that SMDL/T2's baseless claims and
litigation tainted the Property and depressed its value so that they could buy it
for a grossly inadequate price, which supported the argument that they were
not good faith purchasers under § 363(m).
9 In response to an unsolicited overbid submitted by another Cartwright
entity, 3 SMDL/T2 disclosed that they had recently filed an emergency
application with the Commission (the "September application") for a permit to
repair the hillside, which included three of Debtor's four lots. SMDL/T2's
expert explained in his declaration that the slope remediation plans included
the drilling and placement of "soil nails" that would hold a steel "Tecco" mesh
to restrain the surface soils from sliding. Although the September application
the expert referenced was not filed with his declaration, SMDL/T2 corrected
that error by filing it later that day.
3. Ruling on MSJ and Settlement and Sale Motion
The bankruptcy court denied the MSJ, ruling that triable issues of fact
regarding Debtor's liability precluded summary judgment ("MSJ Order"). It
was disputed as to who or what caused the unremediated landslide which was
possibly still active, and whether Debtor was alternatively liable for failing to
repair the retaining walls, which may or may not have been a dangerous
artificial condition and may have created an exception to the general rule that
a successor is not liable for removal of support. It was also disputed if Debtor
was liable for nuisance, whether permanent or continuing, which was key to
the applicability of the three-year statute of limitations. The court found that
abatement costs of $2.7 million could be found to be reasonable at trial given
3 Although the Agreement was not subject to overbids, CTPC, LLC submitted one. Ultimately, the bankruptcy court rejected the overbid in favor of the Agreement. This is not challenged on appeal, but we discuss it as it relates to the reconsideration motion. 10 Mr. Cartwright's valuation of the Property at $3.8 million, which could
support a continuing nuisance theory.
Next, the bankruptcy court approved the Settlement and Sale Motion
("Settlement and Sale Order"). Applying the four factors under A & C
Properties, the court found that the settlement part of the Agreement was
reasonable, fair, and equitable. Though Trustee had not separately evaluated
SMDL/T2's claims and the probability of success in litigating them, the court
said that its summary judgment denial accomplished a thorough evaluation of
those claims and their inherent challenges. The extensive summary judgment
briefing identified triable issues of fact that would depend on further
testimony from key and expert witnesses to resolve. Among those issues was
whether liability ran with the land, which depended on the triable issue of
whether the landslide or retaining walls were a continuing nuisance. Difficulty
in collection was not critical. In the court's opinion, the settlement's value was
not the recovery of money, but the reduction or elimination of claims that
resulted in equity for the estate. The court found that risk in the litigation with
SMDL/T2 was substantial because of the disputed facts that would require
expert witnesses and significant litigation to complete. Besides the high costs
and delay in what was a very complex case, delay in closing the estate carried
the additional risk that the landslide would be exacerbated and render the
estate more administratively insolvent. Further, proceeding with litigation
might not yield any better return for creditors. Finally, and what the court
found most important, the settlement served the paramount interest of
11 creditors. It resolved all claims and had been negotiated at arm's length
resulting in a fair and reasonable agreement. Further litigation put creditors at
risk of receiving nothing.
The court also found that Trustee's sound business judgment supported
approving the sale of the Property to SMDL/T2, which liquidated the estate's
sole asset that was subject to landslide risks and extricated the estate from
litigation. The court did not fault Trustee for not stating a value for the
Property. In denying the MSJ, the court found that it may be worth a range of
values and that its value could not be determined without resolving disputed
factual issues as to the scope of the landslide, the cost to remediate, and
whether or to what extent either or both parties were responsible. Put simply,
determining the true value of the Property was impossible without a trial.
Finally, the court found that SMDL/T2 were good faith purchasers under
§ 363(m). Trustee and Mr. Weintraub, SMCL/T2’s principal, attested that the
sale was not the result of fraud, collusion, or coercion, but was the result of
three years of litigation involving zealous advocacy on all sides and extensive
arm's-length, good faith negotiations. The court rejected Appellants' argument
that SMDL/T2 lacked good faith because they were pursuing baseless claims to
leverage a grossly inadequate sale price; the summary judgment ruling was to
the contrary. Without extensive litigation, noted the court, it was impossible to
determine which party or parties were responsible for the landslide. And
while SMDL/T2's claims may not be as strong as they thought, the court found
that this did not affect their good faith.
12 4. Motion to reconsider
Appellants moved for reconsideration of the MSJ Order and the
Settlement and Sale Order and requested a stay of both orders. They sought
relief under Civil Rule 59(e) based on newly discovered evidence, and under
Civil Rule 60(b)(3) based on SMDL/T2's alleged fraud.
Appellants asserted that they were entitled to relief based on their
discovery of an undisclosed application SMDL/T2 submitted to the
Commission in October 2023 (the "October application"). The October
application proposed a completely different repair system from the September
application submitted to the bankruptcy court. Appellants' expert opined that
the soil nails/Tecco mesh repair identified in the October application would
not be possible if, as SMDL/T2 contended, the retaining walls on Debtor's
Property were defective, unstable, or were a contributory cause of the 2005
landslide. And it was these supposed defects and instability in the retaining
walls, argued Appellants, that SMDL/T2 claimed were an unreasonably
dangerous artificial condition, thus allowing them to avoid the successor
liability rule, the three-year statute of limitations for a permanent nuisance,
and summary judgment. In short, argued Appellants, the October application
showed that SMDL/T2 now admitted that Debtor's retaining walls were not a
dangerous condition but actually provided stability for their latest proposed
repair for the slope failure.
Appellants argued that the October application constituted "new
evidence" because it was not discovered until after the hearing where the court
13 announced that it was approving the Settlement and Sale Motion and denying
the MSJ. Appellants argued that SMDL/T2 concealed the October application
and should have disclosed it in discovery. Instead, Appellants had to learn
about it by contacting the Commission.
Appellants also argued that SMDL/T2 had engaged in fraud and
misconduct by misrepresenting to the court, Trustee, and all parties that they
were relying on the September application for their repair plans, when they
were really relying on the October application which flatly contradicted any
notion that Debtor's retaining walls were defective or unstable. Appellants
argued that the concealment of this information appeared to be deliberate
because the plans attached to the October application were dated September
2022 – one year before the October application was submitted to the
Commission.
In opposition, SMDL/T2 argued that Appellants did not establish that
failure to disclose the October application was fraudulent and further that the
information it contained was available prior to the hearing on the MSJ and the
Settlement and Sale Motion. SMDL/T2's expert disclosed the soil nails/Tecco
mesh repair proposed in the October application in their response to CTPC's
overbid in advance of the hearing. Unfortunately, the September application
was mistakenly referenced and filed with the court, but SMDL/T2 argued that
this was a mistake rather than "fraud." In any case, their expert disagreed with
Appellants' expert. SMDL/T2's expert asserted that the proposed repair
method of soil nails/Tecco mesh did not depend upon the condition of the
14 retaining walls. Therefore, they argued, the factual issues regarding whether
the soil nails/Tecco mesh repair could be used if Debtor's retaining walls were
defective or unstable were disputed and would not change the outcome for
Appellants.
5. Ruling on reconsideration
The bankruptcy court denied reconsideration of the MSJ Order and the
Settlement and Sale Order and Appellants' request for a stay. Ruling under
Civil Rule 59(e), the court rejected Appellants' argument that the October
application, which proposed the repair of soil nails/Tecco mesh, was "newly
discovered evidence." It was available to them by inquiry to the Commission
before the hearing and the court's final ruling, but neither Appellants nor their
expert thought to look for it. Further, even if SMDL/T2 could be faulted for
failing to supplement their discovery responses with the October application,
the court observed that the case had progressed well beyond the discovery
stage.
However, and what the court found crucial, the October application only
confirmed its reasons for entering the MSJ Order and Settlement and Sale
Order in the first place. SMDL/T2's expert's opinion had not changed, and
Appellants did not "prove" that only SMDL/T2 were responsible for the slope
instability. The court found that even if the October application had been part
of the record when it ruled on the MSJ, it still would have held that a trial was
necessary. Consequently, relief from the orders was not warranted.
Appellants timely appealed. They sought a stay of the pending appeals
15 from the BAP, which was denied. SMDL/T2 moved to dismiss the appeals as
moot. As we explain below, the motion is DENIED.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(N) and (O). Subject to our discussion of standing and mootness
below, we have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Do Appellants have standing to challenge the orders on appeal?
2. Are the appeals moot?
3. Did the bankruptcy court clearly err in finding that SMDL/T2 were good
faith purchasers under § 363(m)?
4. Did the bankruptcy court err in denying the MSJ or abuse its discretion
in granting the Settlement and Sale Motion?
5. Did the bankruptcy court abuse its discretion in denying reconsideration
of the MSJ Order and the Settlement and Sale Order?
STANDARDS OF REVIEW
While standing to appeal is generally a legal issue we review de novo,
whether an appellant is a "person aggrieved" by the order appealed is a
question of fact we review in the first instance. See Palmdale Hills Prop., LLC v.
Lehman Com. Paper, Inc. (In re Palmdale Hills Prop., LLC), 654 F.3d 868, 873 (9th
Cir. 2011). Mootness is a question of law reviewed de novo. Ellis v. Yu (In re
Ellis), 523 B.R. 673, 677 (9th Cir. BAP 2014).
We review de novo the bankruptcy court's grant or denial of summary
16 judgment. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125
(9th Cir. 2014).
We review a § 363(m) "good faith" finding for clear error. Thomas v.
Namba (In re Thomas), 287 B.R. 782, 785 (9th Cir. BAP 2002). Factual findings are
clearly erroneous if they are illogical, implausible, or without support in the
record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
We review § 363 sale orders for an abuse of discretion. Fitzgerald v. Ninn
Worx Sr, Inc. (In re Fitzgerald), 428 B.R. 872, 880 (9th Cir. BAP 2010). And we
likewise review the bankruptcy court's approval of a settlement for an abuse of
discretion. Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1380 (9th Cir.
1986).
We review orders denying reconsideration for an abuse of discretion,
whether the motion for reconsideration is based on Civil Rule 59(e) or Civil
Rule 60(b). Sch. Dist. No. 1J v. AC&S, Inc., 5 F.3d 1255, 1262 (9th Cir. 1993).
A bankruptcy court abuses its discretion if it applies an incorrect legal
standard, misapplies the correct legal standard, or makes factual findings that
are illogical, implausible, or not supported by the record. United States v.
Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc).
DISCUSSION
A. Appellants have standing.
An appellant of a bankruptcy court order must establish both Article III
standing and that it is aggrieved by the order. Clifton Cap. Grp., LLC v. Sharp (In
re E. Coast Foods, Inc.), 80 F.4th 901, 905 (9th Cir. 2023), as amended (citing
17 Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983)). Article
III or 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. at 906. The "person aggrieved" standard is a prudential rule of
appellate standing. Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 890 F.3d 1188,
1191 (9th Cir. 2018). "[O]nly a person aggrieved, that is, someone who is
directly and adversely affected pecuniarily by a bankruptcy court's order, has
standing to appeal that order." Id. (cleaned up). "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."
Id. (citation omitted).
Mr. Aframian argues that Appellants lack standing because the estate is
administratively insolvent. Therefore, he argues, Appellants do not meet the
"person aggrieved" standard nor have they suffered a redressable injury
because, as equity interest holders, they do not stand to receive distributions
from the estate after payment of all claims and administrative expenses.
It is true that when an appellant's chances of receiving a distribution
from the bankruptcy estate are hopeless, the appellant may lack standing to
appeal orders affecting the size of the bankruptcy estate. See Duckor Spradling
& Metzger v. Baum Tr. (In re P.R.T.C., Inc.), 177 F.3d 774, 778 n.2 (9th Cir. 1999);
In re Fondiller, 707 F.2d at 442. But Mr. Aframian presupposes that the
bankruptcy court was correct in its rulings on the MSJ and the Settlement and
Sale Motion. If we were to reverse the MSJ Order, thereby disallowing
18 SMDL/T2's claims totaling $6 million, as well as the Settlement and Sale Order,
and accept Appellants' $3.8 million valuation for the Property as possible, then
there might be a surplus upon a sale. And this could be true even if Mr.
Aframian's senior lien remained at $1.275 million and property tax claims are
$200,000. Notably, neither Mr. Aframian nor Trustee stated how much
administrative expenses are to date. Accordingly, for these reasons, we decline
to dismiss these appeals on appellate standing grounds.
B. Mootness
We lack jurisdiction over a moot appeal. In re Ellis, 523 B.R. at 677.
SMDL/T2 appear to argue that the appeal of the MSJ Order is constitutionally
moot, and that the appeal of the Settlement and Sale Order is both statutorily
and equitably moot. "The party moving for dismissal on mootness grounds
bears a heavy burden." Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re
Thorpe Insulation Co.), 677 F.3d 869, 880 (9th Cir. 2012) (citation omitted); United
States v. Gould (In re Gould), 401 B.R. 415, 421 (9th Cir. BAP 2009), aff'd, 603 F.3d
1100 (9th Cir. 2010).
1. The MSJ Order is not constitutionally moot.
An appeal becomes constitutionally moot "when, by virtue of an
intervening event, a court of appeals cannot grant any effectual relief whatever
in favor of the appellant." Calderon v. Moore, 518 U.S. 149, 150 (1996) (cleaned
up). The Constitution requires that "an actual controversy be extant at all
stages of review." Campbell-Ewald Co. v. Gomez, 577 U.S. 153, 160 (2016)
(cleaned up). SMDL/T2 argue that the appeal of the MSJ Order is
19 constitutionally moot because the adversary proceeding was dismissed with
prejudice, and so there is no longer a live case or controversy. This argument
lacks merit. The MSJ was dismissed because the Agreement required it, and
SMDL/T2's additional argument that the dismissal with prejudice makes it
impossible for us to reverse the MSJ Order ignores the Panel's power to reverse
the MSJ Order, as well as the Settlement and Sale Order, and find in favor of
Appellants on SMDL/T2's claims. While dismissal might be what Appellants
wanted in the adversary proceeding, which SMDL/T2 contend precludes
Appellants' ability to challenge it, Appellants sought to defeat SMDL/T2's
proofs of claim. Therefore, the appeal of the MSJ Order is not constitutionally
moot.
2. The Settlement and Sale Order is not statutorily moot and we decline to consider if it is equitably moot.
SMDL/T2 argue that the appeal of the Settlement and Sale Order is
statutorily moot because Appellants did not obtain a stay, the bankruptcy
court found that SMDL/T2 were good faith purchasers entitled to the
protections of § 363(m), and the sale has closed. We disagree.
Section 363 authorizes a trustee to sell property of the estate. Under
§ 363(m), when "a sale of assets is made to a good faith purchaser, it may not
be modified or set aside unless the sale was stayed pending appeal." Paulman
v. Gateway Venture Partners III, L.P. (In re Filtercorp, Inc.), 163 F.3d 570, 576 (9th
Cir. 1998) (citing § 363(m)). But several exceptions exist to the statutory
mootness rule. One exception is for appeals questioning whether the buyer
purchased the property in good faith. In re Fitzgerald, 428 B.R. at 880 (citing Sw. 20 Prods., Inc. v. Durkin (In re Sw. Prods., Inc.), 144 B.R. 100, 102-03 (9th Cir. BAP
1992)). Indeed, Appellants attack the good faith finding on appeal, which we
address below. If we reverse on this point, we could examine the sale itself. See
Ferrari N. Am., Inc. v. Sims (In re R.B.B., Inc.), 211 F.3d 475, 480 (9th Cir. 2000).
SMDL/T2 additionally argue that the appeal of the Settlement and Sale
Order is equitably moot because the sale has closed, money was paid, liens
were released, adversary proceedings were dismissed, and the Property has
been transferred from SMDL/T2 to a third party. We may dismiss an appeal if
we deem it equitably moot. Clear Channel Outdoor, Inc. v. Knupfer (In re PW,
LLC), 391 B.R. 25, 33-34 (9th Cir. BAP 2008). Because we affirm the bankruptcy
court's decision on the merits, we decline to reach the question of equitable
mootness. See Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 957 F.3d 990, 1002
(9th Cir. 2020) (circuit panel declining to exercise its discretion to consider if
appeal was equitably moot since it was affirming the district court's ruling on
the merits).
C. The bankruptcy court did not clearly err in finding that SMDL/T2 were good faith purchasers under § 363(m).
A good faith purchaser is "one who buys in good faith and for value."
Ewell v. Diebert (In re Ewell), 958 F.2d 276, 281 (9th Cir. 1992) (cleaned up).
Typically, a lack of good faith is shown by "fraud, collusion between the
purchaser and other bidders or the trustee, or an attempt to take grossly unfair
advantage of other bidders." Adeli v. Barclay (In re Berkeley Del. Ct., LLC), 834
F.3d 1036, 1041 (9th Cir. 2016) (quoting In re Filtercorp, Inc., 163 F.3d at 577).
The relevant focus of inquiry is good faith during the course of the sale 21 proceedings. Cmty. Thrift & Loan v. Suchy (In re Suchy), 786 F.2d 900, 902 (9th
Cir. 1985).
The bankruptcy court found that the sale of the Property to SMDL/T2
was not the result of fraud, collusion, or coercion, but was the result of three
years of litigation involving zealous advocacy on all sides and extensive arm's-
length, good faith negotiations. These findings were supported by declarations
from Trustee and SMDL/T2's principal, Mr. Weintraub.
Appellants argue that the bankruptcy court erred in finding that
SMDL/T2 were good faith purchasers because the sale process was tainted.
Specifically, they contend SMDL/T2 sabotaged the marketing and sale process
by filing baseless claims and litigation against Debtor and claiming that Debtor
was liable for the alleged removal of lateral or subjacent support for
SMDL/T2's properties by a previous owner. Appellants argue that SMDL/T2's
unsupported claims were used to leverage a grossly inadequate sales price.
The bankruptcy court rejected these arguments, finding that its denial of
summary judgment for Appellants demonstrated that SMDL/T2's claims
against Debtor were neither baseless nor unsupported. Precisely, the court
found that, while SMDL/T2's claims might not be as strong as they thought,
this did not affect their good faith.
Further, successor liability based on the removal of lateral or subjacent
support was not SMDL/T2's only theory of liability. They also asserted a
continuing nuisance theory based on the landslide, and argued that the
retaining walls and Debtor's failure to repair them created a dangerous
22 artificial condition. Under California law, even if the defendant did not create
the nuisance, it may still be liable if it knew of the nuisance and did nothing to
abate it. Both the parties who maintain the nuisance and who create the
nuisance are responsible for the ensuing damages. City of L.A. v. San Pedro Boat
Works, No. CV 02-7986 ABC (JWJx), 2008 WL 11334051, at *10 (C.D. Cal. Apr.
28, 2008) (citing cases), aff'd, 635 F.3d 440 (9th Cir. 2011); Cal. Civ. Code
§ 3483.4 In addition, under § 366 of the Restatement (Second) of Torts, Debtor
as successor owner could be liable for ongoing damages if, as asserted by
SMDL/T2, the retaining walls are a dangerous artificial condition.5 For these
reasons, the bankruptcy court correctly rejected Appellants' claim that
SMDL/T2's claims were used to impair Trustee's ability to sell the Property
and leverage a grossly inadequate sale price.
Appellants also argue that the bankruptcy court erred in finding that
SMDL/T2 were good faith purchasers, because SMDL/T2 misled the court
regarding the stability of Debtor's retaining walls in order to obtain a vastly
discounted sale price. Appellants argue that SMDL/T2 claimed in opposition
4 Cal. Civ. Code § 3483 provides: "Every successive owner of property who neglects to abate a continuing nuisance upon, or in the use of, such property, created by a former owner, is liable therefor in the same manner as the one who first created it." 5 Section 366 of the Restatement (Second) of Torts provides an exception to the
general rule of successor liability, when the successor owner knowingly takes possession of real property upon which an unreasonably dangerous structure or artificial condition exists, without the consent of those affected by it, and the owner has failed after a reasonable opportunity to make it safe or protect such persons against it. Appellants are incorrect that California does not recognize this exception. The court simply did not apply it in Lee v. Takao Building Development Co., 175 Cal. App. 3d 565 (1985), because an artificial condition was not the basis for plaintiff's claim. 23 to the MSJ that Debtor's retaining walls were unstable, but then withheld from
the court and Appellants the October application which presupposed the
stability of the retaining walls. This is a red herring. The bankruptcy court
properly rejected these arguments when Appellants raised them in their
reconsideration motion. This information was available to Appellants before
the hearing had they requested it, and even without the October application,
SMDL/T2's expert addressed the same soil nails/Tecco mesh repair identified
in the October application in his declaration in support of SMDL/T2's response
to CTPC's overbid. Further, SMDL/T2's expert opined that the soil nails/Tecco
mesh repair did not depend on the stability of the retaining walls. As the
bankruptcy court found, the October application and dueling expert opinions
simply confirmed its reasons for entering the MSJ Order and the Settlement
and Sale Order in the first place.
Therefore, because Appellants did not obtain a stay, and the bankruptcy
court's finding of good faith under § 363(m) is supported by the record and
was not clearly erroneous, we are unable to reach the merits of the sale portion
of the Settlement and Sale Order or undo the sale, which is the relief
Appellants seek.
D. The bankruptcy court did not abuse its discretion in approving the settlement portion of the Settlement and Sale Motion, nor did it err in denying the MSJ.
Rule 9019 allows the bankruptcy court to approve a compromise or
settlement. The bankruptcy court has great latitude in approving a
compromise or settlement under Rule 9019. Goodwin v. Mickey Thompson Ent.
24 Grp., Inc. (In re Mickey Thompson Ent. Grp., Inc.), 292 B.R. 415, 420 (9th Cir. BAP
2003). Even so, the compromise must be fair and equitable, in the best interests
of the estate, and reasonable. Id. Rather than conduct an exhaustive
investigation or a mini-trial on the merits of the claims sought to be
compromised, the court's role is to "canvas the issues and see whether the
settlement falls below the lowest point in the range of reasonableness." In re
Pac. Gas & Elec. Co., 304 B.R. 395, 417 (Bankr. N.D. Cal. 2004) (citations
omitted); see also Burton v. Ulrich (In re Schmitt), 215 B.R. 417, 423 (9th Cir. BAP
1997).
In determining whether a proposed compromise is fair, reasonable, and
adequate, the bankruptcy court must consider: (1) the probability of success in
the litigation; (2) the difficulties, if any, of collection; (3) the complexity of the
litigation involved, and the expense, inconvenience, and delay necessarily
attending it; and (4) the paramount interest of the creditors and a proper
deference to their reasonable views in the premises. In re A & C Props., 784 F.2d
at 1381.
Despite the multifaceted settlement, Appellants contest only Trustee's
settlement with SMDL/T2. They argue that the bankruptcy court erred by
concluding that SMDL/T2's claims were potentially viable and they should not
have been considered in the A & C Properties analysis. Basically, Appellants'
argument is that the bankruptcy court misapplied the law on SMDL/T2's
claims on summary judgment, so therefore these claims should never have
25 been considered for, nor a part of, any settlement. 6
Here, the bankruptcy court amply considered the A & C Properties factors
and did not err in applying them to ultimately determine that the settlement
was reasonable, fair, and equitable and in the best interests of the estate. While
Trustee did not present evidence regarding the likelihood of success on the
SMDL/T2 claims, the court's thorough analysis of the claims in the context of
the summary judgment motion served that purpose. The court made detailed
findings as to each of the factors and those findings were not clearly erroneous.
As A & C Properties explained, "[t]he law favors compromise and not litigation
for its own sake, and as long as the bankruptcy court amply considered the
various factors that determined the reasonableness of the compromise, the
court's decision must be affirmed." 784 F.2d at 1381 (citations omitted). We see
no abuse of discretion in the court's decision respecting the compromise, and
Appellants have not identified any.
Moreover, the bankruptcy court did not err in denying summary
judgment. The court carefully reviewed the record and considered the parties'
arguments and determined that disputed issues of material fact precluded
judgment in Appellants' favor. Summary judgment may only be granted
where there is no material factual dispute. See Civil Rule 56(a); Rule 7056; T.W.
6 Although Appellants spend a great deal of time discussing the legal standards for a compromise under Rule 9019, much of their argument goes to the sale of the Property and their contention that insufficient evidence existed as to its value and that the bankruptcy court lacked sufficient information to determine if Trustee received "optimal value" for it. Since the bankruptcy court's § 363(m) good faith finding is supported by the record, we are precluded from reviewing the merits of the sale. 26 Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (if
the trier of fact might resolve an issue of material fact in favor of the
nonmovant, summary judgment must be denied). SMDL/T2 asserted different
theories of liability and each required resolution of disputed facts, which
would likely only be resolvable with expert witnesses. The court did not make
any real findings or legal conclusions as Appellants suggest. Such
determinations could only be made after trial. We agree, and conclude that the
bankruptcy court did not err in denying the MSJ.
E. The bankruptcy court did not abuse its discretion in denying reconsideration.
Appellants moved for reconsideration under Civil Rules 59(e) and
60(b)(3), applicable here by Rules 9023 and 9024. The bankruptcy court ruled
under only Civil Rule 59(e), presumably because the motion was filed within
14 days after entry of the MSJ Order and the Settlement and Sale Order.
Ultimately, the court found that no grounds warranted reconsideration of
either order.
Relief to alter or amend a judgment under Civil Rule 59(e) is appropriate
if the movant demonstrates: (1) a manifest error of law or fact; (2) intervening
change in the controlling law; or (3) newly discovered evidence that was not
available at the time of the original hearing. See Zimmerman v. City of Oakland,
255 F.3d 734, 740 (9th Cir. 2001). For relief under Civil Rule 60(b)(3), the
movant must prove that an order was obtained through fraud,
misrepresentation, or other misconduct that prevented the movant from fully
and fairly presenting its defense. Also, the fraud must not have been 27 discoverable with the exercise of due diligence. Casey v. Albertson's Inc., 362
F.3d 1254, 1260 (9th Cir. 2004) (citations omitted).
Appellants argue that relief was warranted based on SMDL/T2's "bait
and switch" with the September application and the October application,
which they argue flatly contradicted any notion that Debtor's retaining walls
were defective or unstable, because the soil nails/Tecco mesh repair was only
possible if the walls were stable. Appellants argue that without any evidence
of defects in Debtor's retaining walls, the reason for the court to refuse to grant
summary judgment was eliminated, along with SMDL/T2's multi-million
dollar claims.
Ruling under Civil Rule 59(e), the bankruptcy court determined that the
October application was not "newly discovered evidence" because it was
available to them from the Commission before the January 25 hearing on the
MSJ and the Settlement and Sale Motion and the court's final ruling on
February 26. Alternatively, we conclude that at least the pertinent information
Appellants rely upon to make their point about the soil nails/Tecco mesh
repair and the walls' stability was available to them in SMDL/T2's expert's
declaration filed with SMDL/T2's response to CPTC's overbid, which was filed
on January 22. While that was only three days before the hearing, this evidence
was not newly discovered within the meaning of Civil Rule 59(e). See Feature
Realty, Inc. v. City of Spokane, 331 F.3d 1082, 1093 (9th Cir. 2003) (evidence in the
possession of the movant before the order was rendered is not "newly
discovered").
28 Appellants were also not entitled to relief under Civil Rule 60(b)(3), even
though the bankruptcy court did not deny relief on that basis. Although
SMDL/T2 should have provided the October application to Appellants, its
absence did not prevent them from fully and fairly presenting their defense,
because the pertinant information upon which they depend was available
before the hearing and the court's ruling. In addition, although Appellants
stress that the offending conduct need not be outcome determinative for relief
under Civil Rule 60(b)(3) – i.e., that the movant would have prevailed had the
offending conduct not occurred – the practical reality is that the information
regarding the soil nails/Tecco mesh did not necessarily resolve the retaining
wall issue in Appellants' favor and eliminate the need for trial, as the
bankruptcy court found. SMDL/T2's expert testified that this proposed repair
was not dependent upon the condition of the retaining walls. In other words, it
did not prove their stability or that they were not a dangerous artificial
condition.
Accordingly, the bankruptcy court did not abuse its discretion in
denying reconsideration of the MSJ Order or the Settlement and Sale Order.
CONCLUSION
For the reasons stated above, we AFFIRM.