FILED APR 9 2025 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. WW-24-1129-LSG J S KALAMA, LLC, Debtor. Bk. No. 3:20-bk-41495-MJH J S KALAMA, LLC, Appellant, v. MEMORANDUM ∗ WILSON OIL, dba Wilcox + Flegel; RUSSELL D. GARRETT, Attorney, Trustee; VIRGIL GENE LIVINGSTON; SANDRA WILSON; UST- UNITED STATES TRUSTEE, SEATTLE, Appellees.
Appeal from the United States Bankruptcy Court for the Western District of Washington Mary Jo Heston, Bankruptcy Judge, Presiding
Before: LAFFERTY, SPRAKER, and GAN, Bankruptcy Judges.
INTRODUCTION
J S Kalama, LLC (“Debtor”) appeals the bankruptcy court’s order of
distribution of estate funds to Wilson Oil, dba Wilcox + Flegel (“W+F”).
∗ 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 After a chapter 11 1 trustee was appointed in Debtor’s case, the trustee
negotiated a $7 million sale of Debtor’s commercial property to W+F. The
trustee anticipated, correctly, that the sale proceeds would satisfy all claims
against the estate in full. As part of the estate’s sale agreement with W+F,
the trustee promised to sue Debtor’s former tenant (an entity wholly
owned by Debtor’s owner and manager) based on the estate’s claim for,
among other things, past-due rent. The trustee further promised to assign
any recovery to W+F, effectively reducing the purchase price by the
amount of recovery on the rent claim. The court approved this
arrangement in connection with its order approving the sale.
After the sale, certain matters involving the estate, W+F, and the prior
tenant of the property remained unresolved, including the estate’s claim
for past-due rent against the former tenant and for disposition of certain
items of personal property. The parties reached an agreement resolving
these issues.
As relevant here, part of the agreement required that certain funds
that had been promised to W+F would be distributed as estate funds to
W+F in connection with the trustee’s final report if certain conditions were
met, including the availability of funds after payment to the estate’s
creditors and approval of the distribution by the bankruptcy court. Debtor
1Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and “Rule” references are to the Federal Rules of Bankruptcy Procedure. 2 initially objected to approval of the settlement agreement, but later
consented to entry of an order approving the agreement.
When the trustee was prepared to make a final report and close the
case, W+F sought distribution from the estate in accordance with the court-
approved settlement agreement. Debtor objected. As Debtor saw it: (i) the
trustee was statutorily obligated to pay any surplus to Debtor; (ii) the
settlement agreement could not compel Debtor to distribute its funds to
W+F; and (iii) the court lacked subject matter jurisdiction over the dispute.
The bankruptcy court disagreed, holding that it had subject matter
jurisdiction and that distribution of funds from the estate to W+F was
appropriate under the settlement agreement.
We AFFIRM.
FACTS 2
A. Prepetition events. In August 2009, Debtor purchased the real property located at 522
Hendrickson Road, Kalama, Washington 98625 (the “Kalama Property”)
for $3.5 million. From the purchase of the Kalama Property until its
eventual sale through bankruptcy, Somarakis, Inc. (“Somarakis”) occupied
the Kalama Property as Debtor’s tenant, and Debtor’s only source of
income was the rents and charges it received from Somarakis.
2 We have taken judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 During the course of Somarakis’ tenancy, the Kalama Property had
manufacturing equipment installed on the property, which was used for
Somarakis’ business of manufacturing and repairing liquid ring vacuum
pumps and compressors. Somarakis is wholly owned by John Somarakis;
Mr. Somarakis also is Debtor’s manager and owns 99.75% of Debtor.
Debtor and Somarakis financially struggled for years. Somarakis
failed to make all rent payments owed to Debtor under its lease agreement
and, as a result, Debtor and Somarakis defaulted on mortgage and
property tax payments. Facing notices of default and a downturn in
Somarakis’ business, Debtor decided to seek bankruptcy protection.
B. Debtor’s bankruptcy filing and the motion to sell the Kalama Property. In June 2020, Debtor filed its chapter 11 petition as a single asset real
estate debtor. Other than a claim for rents owed by Somarakis and minimal
cash in a bank account, Debtor’s only scheduled asset was the Kalama
Property, which Debtor valued at $5.5 million. After a failed attempt at
confirming a chapter 11 plan, Debtor stipulated to appointment of a
chapter 11 trustee (the “Trustee”).
The Trustee then moved to reject Debtor’s lease with Somarakis and
ultimately evicted Somarakis from the Kalama Property. Post-eviction,
several fixtures and personal property assets remained on the Kalama
Property (the “Equipment”).
4 In November 2022, the Trustee moved to sell the Kalama Property to
W+F for $7 million (the “Sale Motion”), an amount that would be sufficient
to satisfy all the claims against the estate in full. In connection with the Sale
Motion, the Trustee submitted for approval the estate’s sale agreement
with W+F (the “Sale Agreement”). As relevant to this appeal, the Sale
Agreement provided that the Trustee would initiate an adversary
proceeding against Somarakis, among others, to: (i) adjudicate the
“removal and characterization of” the Equipment; and (ii) assert claims for
unpaid rent, taxes, and other costs owed to the estate. The Sale Agreement
also required the Trustee to assign its rights in the adversary proceeding to
W+F. In other words, the Sale Agreement obligated the Trustee to dispose
of estate assets.
Finally, the Sale Agreement provided that the sum of $500,000 would
be held back from the purchase price to reimburse W+F for any costs
associated with removal of the Equipment (the “Holdback Funds”), subject
to approval by the bankruptcy court, and that any balance thereafter would
be released to the estate. 3
3 This provision allowed W+F to recover attorneys’ fees and costs incurred in connection with the removal of the Equipment, subject to approval by the bankruptcy court. W+F eventually filed an application for approval of its attorneys’ fees and costs before the bankruptcy court, which the bankruptcy court approved as an administrative expense of the estate. 5 Debtor, Somarakis, and Mr. Somarakis all filed separate objections to
the Sale Motion. 4 Notably, although Mr. Somarakis acknowledged in his
objection that the sale proceeds would leave a surplus after payment to
creditors, neither Debtor, Somarakis, nor Mr. Somarakis argued in their
separately filed objections that the offset provided to W+F in the Sale
Agreement (i.e., the assignment of the estate’s claims for unpaid rent)
would potentially invade any surplus that would otherwise be paid to
Debtor. In December 2022, the bankruptcy court entered an order
approving the sale of the Kalama Property (the “Sale Order”).
C. The settlement agreement. Soon after filing the Sale Motion, and in accordance with the Sale
Agreement, the Trustee commenced an adversary proceeding against
Somarakis and other defendants to ascertain the ownership of the
Equipment (the “Ownership Claims”) and collect past-due rents and
charges from Somarakis (the “Rents Claim”).
Subsequently, the Trustee, Somarakis, Mr. Somarakis, W+F, and
certain other entities with interests in the Equipment reached agreements
resolving the adversary proceeding. The Trustee thereafter filed a motion
for approval of the agreements (the “Settlement Motion”).
4 The objecting parties mostly made arguments that are not relevant to this appeal, such as Debtor requesting that the bankruptcy court allow Debtor to obtain financing and propose a chapter 11 plan instead of selling the Kalama Property and Somarakis disputing the ownership of the Equipment. 6 Among the several settlement agreements submitted for approval via
the Settlement Motion was an agreement between the Trustee, Somarakis,
Mr. Somarakis, and W+F (the “Settlement Agreement”). The Settlement
Agreement accomplished resolution of both the Ownership Claims and the
Rents Claim and, in accordance with the Sale Agreement, confirmed the
assignment of the estate’s rights in the adversary proceeding to W+F.
First, the Settlement Agreement resolved the Ownership Claims by
providing that some of the Equipment on the Kalama Property was owned
by Somarakis (the “Somarakis Property”), and then setting mutually
agreeable procedures to auction the Somarakis Property. Settlement
Agreement, ¶ 7. The parties agreed that the $500,000 in Holdback Funds
would be utilized to fund the auction. If the auction generated proceeds
(the “Auction Proceeds”), the parties further agreed that the Auction
Proceeds would be distributed as follows: (i) first, to pay costs of the
auction not already satisfied from the Holdback Funds; (ii) second, to the
estate to replenish any Holdback Funds used to fund the auction; and
(iii) third, to W+F pursuant to the parties’ agreement resolving the Rents
Claim, as discussed below.
To resolve the Rents Claim, the parties agreed to the following:
In complete satisfaction of the Assigned Claims, the Settling Parties agree that W+F will receive $475,000 (the “Claims Settlement Amount”), which, until paid in full, shall be paid by the earliest available of: (a) [the Auction Proceeds, using the disbursement scheme described above] and (b) funds
7 transferred to W+F, pursuant to a stipulation executed by the Parties and the Estate, from surplus funds in the Bankruptcy Case pursuant to an order of disbursement (the "Disbursement Stipulation"), in substantially the same form as Exhibit B, attached hereto. However, nothing contained herein shall be interpreted to create a liability of the Estate or the Trustee to pay the Claims Settlement Amount. The Disbursement Stipulation shall only be paid by the Trustee if it is approved by the Bankruptcy Court as part of the Trustee's final report and accounting, and, if approved, only to the extent that there are funds remaining in the possession of the Trustee for the Estate that are to be turned over to the post-bankruptcy Debtor. Settlement Agreement, ¶ 9.
Finally, the Settlement Agreement provided that the entire agreement
was subject to approval by the bankruptcy court, and that the parties
“agree to submit to the exclusive jurisdiction and venue of the Bankruptcy
Court with respect to any claims arising from or relating to this Settlement
Agreement or the subject matter of this Settlement Agreement.” Settlement
Agreement, ¶¶ 13, 17.
Debtor objected to the Settlement Motion. Among other objections,
Debtor argued that the court should not approve payment of the $475,000
Claims Settlement Amount to W+F because that amount should instead be
paid to Debtor as surplus.
The bankruptcy court held a hearing on the Settlement Motion. At
the hearing, the parties represented to the court that they were negotiating
the terms of an order that would be agreeable to all parties. Debtor
8 appeared at the hearing and informed the bankruptcy court that it would
be withdrawing its objection pending review of the new proposed order.
The bankruptcy court allowed the parties to submit either a stipulated
order or, if there was a dispute, competing orders.
On May 15, 2023, the bankruptcy court entered an order approving
the Settlement Agreement (the “Settlement Order”). Nothing in the record
indicates that Debtor or any other party objected to the form of order prior
to its entry.
The Settlement Order slightly modified the Settlement Agreement.
Among other modifications, the Settlement Order provided that, instead of
allowing for distribution of Auction Proceeds to W+F after replenishment
of the Holdback Funds, the liquidator would disburse any remaining
Auction Proceeds pursuant to a written agreement between W+F,
Somarakis, and Mr. Somarakis. If the parties failed to agree on the
distribution of the Auction Proceeds, the liquidator would deposit the
proceeds into an escrow account.
The Settlement Order did not modify the Settlement Agreement’s
alternative method of satisfying the Claims Settlement Amount, i.e., by
seeking court authorization to pay the Claims Settlement Amount via
distribution from the estate in connection with the Trustee’s final report
and accounting.
The auction did not produce sufficient proceeds to pay W+F any part
of its Claims Settlement Amount.
9 D. The dispute over distribution of estate funds. Eventually, the Trustee determined that the estate would have funds
remaining after distribution to all creditors. As a result, in June 2024, the
Trustee filed a motion regarding distribution of potential surplus proceeds.
Soon thereafter, W+F filed a motion to be included in the Trustee’s
final distribution in accordance with the approved Settlement Agreement
(the “Motion for Inclusion”). W+F essentially argued that all parties,
including Debtor, consented to W+F receiving a distribution of $475,000
from any remaining surplus if W+F was not satisfied in full from the
Auction Proceeds.
Debtor objected to the Motion for Inclusion. In its opposition, Debtor
argued, among other things, that the estate was not required to make a
distribution to W+F and that the bankruptcy court lacked jurisdiction to
resolve the dispute. In a separate filed response to the Trustee’s motion for
distribution, Debtor also argued that any distribution of funds to W+F
would violate the distribution scheme under § 726(a).
The court held a hearing on the Motion for Inclusion, at which time it
approved the distribution of $475,000 to W+F prior to any distribution of
surplus to Debtor. The court reasoned that Debtor had withdrawn its
objection to the Settlement Agreement, and that W+F had relied on the
provisions in the Settlement Agreement regarding the funding of its Claims
Settlement Amount. The court further noted that the provisions were part
10 of the overall agreement with the estate and were important to effectuate
matters that were beneficial to the estate.
Subsequently, the court entered an order granting the Motion for
Inclusion and allowing distribution of $475,000 to W+F (the “Distribution
Order”). Debtor timely appealed. 5
JURISDICTION
As further discussed below, the bankruptcy court had jurisdiction
under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (O). We have jurisdiction
over the bankruptcy court’s determination under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court have jurisdiction to enter the
Distribution Order?
2. Did the bankruptcy court err in holding that W+F was entitled to
distribution from the estate?
3. Did the Distribution Order violate the priority scheme set forth in
§ 726(a)?
5 After Debtor appealed the Distribution Order, the Trustee filed a motion for approval of a structured dismissal of Debtor’s case (the “Structured Dismissal Motion”). Debtor responded to the Structured Dismissal Motion by noting that it does not oppose a structured dismissal, but that any order dismissing the case should be stayed until resolution of this appeal. Debtor also filed a motion for a stay pending appeal. The court subsequently entered two orders approving a structured dismissal but staying any distribution to W+F and the dismissal of Debtor’s case until resolution of this appeal. 11 STANDARDS OF REVIEW
Questions regarding jurisdiction are reviewed de novo. Durkin v.
Benedor Corp. (In re G.I. Indus. Inc.), 204 F.3d 1276, 1279–80 (9th Cir. 2000).
Interpretation of a settlement agreement is a question of law that we also
review de novo. See Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1064
(9th Cir. 2002). De novo review means that we review the matter anew, as
if the bankruptcy court had not previously decided it. Francis v. Wallace (In
re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
Otherwise, “[w]e review a bankruptcy court’s findings of fact for
clear error and review de novo its conclusions of law.” Leavitt v. Alexander
(In re Alexander), 472 B.R. 815, 820 (9th Cir. BAP 2012).
DISCUSSION
On appeal, Debtor contends that: (i) the bankruptcy court lacked
subject matter jurisdiction to enter the Distribution Order; (ii) the
Settlement Agreement did not obligate the Trustee or the estate to
distribute funds to W+F; (iii) Debtor cannot be bound by the Settlement
Agreement; and (iv) the Distribution Order violates the priority scheme set
forth in § 726(a). 6
As we discuss in section A, we believe functions as crucial as
determining whether an entity has a right to distribution of estate funds,
6 We note that the Trustee did not seek approval of a distribution under § 726(a); rather, the Trustee requested approval of a structured dismissal in a chapter 11 case. As we discuss below, such structured dismissals must approximate the distribution scheme set forth in § 726(a). 12 deciding the order of such distributions by a representative of the estate,
and interpreting and applying prior final orders disposing of estate assets
necessarily invoke the core jurisdiction of bankruptcy courts. Thus, we
hold that the court had subject matter jurisdiction over this dispute. As we
discuss in section B, we disagree with Debtor’s interpretation of the
Settlement Agreement and conclude that the estate was obligated to
disburse $475,000 to W+F in accordance with the Settlement Agreement
approved by the bankruptcy court.
Finally, as we discuss in section C, even if the distribution to W+F
violates the Code’s priority scheme, Debtor’s consent to the Settlement
Agreement allowed for an alteration of the order of priorities.
A. The bankruptcy court has subject matter jurisdiction over distribution of estate funds. “Subject matter jurisdiction defines the court’s authority to hear a
given type of case; it represents the extent to which a court can rule on the
conduct of persons or the status of things.” Carlsbad Tech., Inc. v. HIF Bio,
Inc., 556 U.S. 635, 639 (2009) (cleaned up). “Like all federal courts, the
jurisdiction of the bankruptcy courts is created and limited by statute.”
Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729
F.3d 1279, 1284 (9th Cir. 2013) (citing Celotex Corp. v. Edwards, 514 U.S. 300,
307 (1995)).
That statute is 28 U.S.C. § 1334, through which Congress granted
bankruptcy courts, by referral from district courts, “original and exclusive
13 jurisdiction of all cases under title 11,” 28 U.S.C. § 1334(a), and “original
but not exclusive jurisdiction of all civil proceedings arising under title 11,
or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b).
Prior to delving into the court’s jurisdiction, it is important to
delineate exactly what the bankruptcy court adjudicated. Debtor contends
that the dispute before the bankruptcy court was “a civil matter between
two non–parties to the case over a private agreement,” referring to W+F
and Somarakis as the two “non-parties” before the court.
However, this is a mischaracterization of the matter before the
bankruptcy court. The bankruptcy court did not adjudicate any dispute
between W+F and Somarakis. Neither W+F nor Somarakis sought a
determination from the bankruptcy court regarding their obligations vis-à-
vis each other under the Settlement Agreement.
The actual issue before the bankruptcy court was whether W+F was
entitled to receive a distribution from the estate 7 and, if so, if the Code
7 As further discussed below, Debtor asserts that the disputed funds are not property of the estate, but instead belong to Debtor by operation of § 726(a)(6). However, during the pendency of the bankruptcy case and prior to its closure, the Trustee represents the estate and controls its assets, including funds in estate accounts. §§ 323, 349, 1106. That Debtor may have an interest in the funds once all other required entities are paid gives Debtor standing to present arguments with respect to the funds, but such a future interest does not transform the funds from property of the estate to Debtor’s property prior to final distribution of the funds and closure of this case, neither of which has occurred. Thus, we properly frame the issue before us as one involving disbursement of funds from the estate, and not from Debtor. In any event, as we conclude in sections B and C, pursuant to the Settlement Agreement, Debtor consented to distribution of the estate funds to W+F ahead of 14 allowed for such distribution ahead of Debtor. That dispute did not even
involve Somarakis. Rather, among other alleged creditors who claimed an
interest in the funds and who are not relevant to the instant appeal, the
dispute was between W+F, which asserted a right to distribution pursuant
to its agreement with, among others, the estate, and Debtor, which asserted
a right to distribution under the Code, namely, § 726(a)(6).
Given that the issue before the court was a determination regarding
the order of distribution of funds, i.e., a core function of bankruptcy courts,
it is difficult to conceive of any reason why the court would lack subject
matter jurisdiction over the Distribution Order. And while it is true that
part of the court’s analysis hinged on interpreting whether an agreement
involving nondebtor parties (as well as the estate) altered the statutory
order of distribution, as discussed below, that interpretation did not divest
the court of subject matter jurisdiction over distribution of estate funds.
While Debtor may argue that the court’s interpretation was wrong, or
otherwise violated the Code, these issues are separate from the issue of
whether the court had subject matter jurisdiction to determine them in the
first place. As discussed below, we believe the court not only had “related
to” jurisdiction, as disputed by Debtor, but also “arising in” jurisdiction.
Debtor, and thus the subject $475,000 is not property of Debtor either before or after closure of this case. 15 1. The bankruptcy court had “arising in” jurisdiction over this dispute. As articulated in 28 U.S.C. § 1334(b), bankruptcy courts may exercise
jurisdiction over matters that (i) “arise under” the Code (i.e., where the
Code provides the rule of decision); (ii) “arise in” a bankruptcy case (i.e.,
the proceeding would not exist outside of the bankruptcy case); or (iii) are
“related to” a bankruptcy case (i.e., the outcome of the proceeding could
conceivably have an effect on administration of the estate). In re Wilshire
Courtyard, 729 F.3d at 1285-87.
“A matter ‘arises under’ the Bankruptcy Code if its existence depends
on a substantive provision of bankruptcy law, that is, if it involves a cause
of action created or determined by a statutory provision of the Bankruptcy
Code.” Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1131 (9th
Cir. 2010) (citations omitted). A proceeding “arises in” a case under the
Code “if it is an administrative matter unique to the bankruptcy process
that has no independent existence outside of bankruptcy and could not be
brought in another forum, but whose cause of action is not expressly
rooted in the Bankruptcy Code.” Id. (citation omitted).
Although the overarching dispute in this case arose from a statutory
function of the court, i.e., distribution of property of the estate under
§ 726(a), resolution of this matter, as illuminated below, depends on
application of both bankruptcy and state law. Thus, the matter does not
solely “arise under” the Code.
16 However, a dispute of this nature – regarding which entities are
entitled to distribution from the estate and in which order – can only arise
in a bankruptcy case. As noted above, 28 U.S.C. § 1334(a) grants
“exclusive” jurisdiction to bankruptcy courts over bankruptcy “cases.” The
term “case” refers to the bankruptcy petition itself, In re Combustion Eng’g,
Inc., 391 F.3d 190, 225 n.38 (3d Cir. 2004), as amended, and is “the basis for
taking control of all pertinent interests in property, dealing with that
property, determining entitlements to distributions, the procedures for
administering the mechanism, and discharging the debtor.” Menk v.
LaPaglia (In re Menk), 241 B.R. 896, 908 (9th Cir. BAP 1999) (emphasis
added).
Logically, distribution of estate assets depends on the existence of an
estate in the first place, i.e., the filing of a bankruptcy petition. Such
distribution would not exist anywhere outside of bankruptcy. The
bankruptcy court, and no other court, is tasked with presiding over this
distribution in accordance with the Code. 8 Consequently, a dispute that
arises regarding the propriety of distribution of estate assets is an
“administrative matter unique to the bankruptcy process that has no
8Confusingly, Debtor argues in its brief before the Panel that, “[a]lthough the [Distribution Order] affects the amount of Surplus Funds left in the estate, that is only because it was the bankruptcy court that made the order.” Appellant’s Brief, p. 24. Of course, the bankruptcy court entered the Distribution Order because it was the only court that could do so. 17 independent existence outside of bankruptcy and could not be brought in
another forum.” In re Ray, 624 F.3d at 1131.
It is true that part of the resolution of this matter rests on interpreting
the Settlement Agreement under state law. However, the application of
nonbankruptcy law, standing alone, does not eject a matter from the core
jurisdiction of the bankruptcy court. For instance, the Ninth Circuit has
found “arising in” jurisdiction where the debtor sued the trustee and third
parties in state court, asserting state law causes of action, regarding a
settlement agreement approved by the bankruptcy court. Harris v. Wittman
(In re Harris), 590 F.3d 730, 738 (9th Cir. 2009). Despite the fact that the
debtor asserted state law causes of action, the Ninth Circuit held that the
action could not exist outside of bankruptcy because it involved the
trustee’s conduct in administering the estate. Id.
Similarly, here, notwithstanding the application of Washington law
to interpret the Settlement Agreement, a dispute regarding distribution of
estate funds could not exist independent of the bankruptcy case. In
addition, as in Harris, the mere fact that third parties, such as Somarakis,
are signatories to the Settlement Agreement does not divest the court of
subject matter jurisdiction.
Ultimately, the bankruptcy court adjudicated whether to direct an
estate representative to distribute estate funds pursuant to an agreement to
which the estate was a party and which the court approved. It would
18 stretch the limits of credulity to hold that such a matter was outside the
core subject matter jurisdiction of the bankruptcy court.
2. The bankruptcy court had “related to” jurisdiction over this dispute. Debtor appears to focus its jurisdictional argument on whether the
bankruptcy court had “related to” jurisdiction. Although we hold that the
court had “arising in” jurisdiction, we further conclude that, at a minimum,
the court had “related to” jurisdiction over this dispute.
An action is “related to” a bankruptcy case if the outcome of the
proceeding could conceivably alter the debtor’s rights, liabilities, options or
freedom of action (either positively or negatively) in such a way as to
impact the administration of the bankruptcy estate. Fietz v. Great W. Sav. (In
re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (adopting Pacor, Inc. v. Higgins,
743 F.2d 984, 994 (3d Cir. 1984)). “Congress intended to grant
comprehensive jurisdiction to the bankruptcy courts so that they might
deal efficiently and expeditiously with all matters connected with the
bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995).
As noted above, Debtor mischaracterizes the matter before the
bankruptcy court. As Debtor explains it, the dispute involves: (i) two
nondebtor entities (Somarakis and W+F); (ii) over a “private agreement”;
(iii) with no conceivable impact on Debtor’s bankruptcy case.
In fact, the opposite is true. The dispute involves (i) Debtor, the
estate, and a party asserting it has a right to distribution from estate funds;
19 (ii) over an agreement approved by the bankruptcy court that resolved,
among other things, disputes over estate assets and obligations; (iii) with
an impact on the estate that is clear simply by reference to the fact that final
distribution of estate assets is impossible without resolution of this dispute.
To the extent Debtor argues the instant matter is divorced from the
estate’s involvement with the Sale Agreement and the Settlement
Agreement, and assuming that’s relevant to analyze whether a bankruptcy
court has jurisdiction over disbursement of estate funds, a brief recounting
of the trajectory of Debtor’s case reflects the level of entanglement between
the instant dispute and the estate’s previous dealings with W+F.
Notwithstanding Debtor’s valuation of the Kalama Property at $5.5
million, the Trustee negotiated a sale and settlement with W+F for $7
million, an amount that funded payment of all creditors of the estate in full.
In exchange for W+F’s transfer of the funds that would pay all claims
against the estate, the estate undertook certain obligations beyond simply
transferring the Kalama Property to W+F.
As more fully discussed below, one of those obligations was to satisfy
the Claims Settlement Amount in connection with the Trustee’s final
distribution of assets if certain conditions were met, including approval by
the bankruptcy court. The Claims Settlement Amount cannot be severed
from the overall deal reached between the estate and W+F. The Claims
20 Settlement Amount was meant to settle the Rents Claims, 9 which the
Trustee first agreed to transfer to W+F as part of the Sale Agreement. As a
result, the Claims Settlement Amount appears to be in furtherance of
W+F’s and the estate’s overall bargain, starting with the sale of the Kalama
Property, continuing through the settlement and resulting auction, and, if
other methods of satisfaction proved unsuccessful, ending with
distribution of the Claims Settlement Amount. Given that the Settlement
Agreement contemplated both the estate’s and the court’s continuing
involvement with enforcement of the Settlement Agreement through the
closure of Debtor’s case, the impact on estate administration is especially
evident.
As a result, even if the court lacked “arising in” jurisdiction, 10 the
court had “related to” jurisdiction.
9 As Debtor points out, the Claims Settlement Amount was originally intended to satisfy the Rents Claim owed by Somarakis to W+F, after the estate transferred its interest in the claim to W+F. Despite this, the court approved the Settlement Agreement, including the clause regarding W+F’s ability to receive a distribution from the estate, under the applicable standards. See Rule 9019. The Settlement Order approving the Settlement Agreement was never appealed and, as a result, is a final order to which the parties are bound. See Thomas v. Bible, 983 F.2d 152, 154 (9th Cir. 1993) (a “court is generally precluded from reconsidering an issue that has already been decided by the same court”). It is too late for Debtor to criticize the prudence of the Trustee’s business judgment in agreeing to the terms contained in the Settlement Agreement. 10 At certain points in Debtor’s brief, Debtor also asserts that the court did not
have the “power” to enter the Distribution Order. “Subject matter jurisdiction and power are separate prerequisites to the court’s capacity to act. Subject matter jurisdiction is the court’s authority to entertain an action between the parties before it. Power. . . is the scope and forms of relief the court may order in an action in which it has jurisdiction.” Am. Hardwoods, Inc. v. Deutsche Credit Corp. (In re Am. Hardwoods, Inc.), 21 B. The estate was obligated to pay the Claims Settlement Amount to W+F if certain conditions were met. Turning to the merits of the matter before us, Debtor next argues that
the estate did not have an obligation to pay the Claims Settlement Amount.
In support of this argument, Debtor references the following clause from
the Settlement Agreement:
In complete satisfaction of the Assigned Claims, the Settling Parties agree that W+F will receive $475,000 (the “Claims Settlement Amount”), which, until paid in full, shall be paid by the earliest available of: (a) the W+F Turning Center Payment and (b) funds transferred to W+F, pursuant to a stipulation executed by the Parties and the Estate, from surplus funds in the Bankruptcy Case pursuant to an order of disbursement (the "Disbursement Stipulation"), in substantially the same form as Exhibit B, attached hereto. However, nothing contained herein shall be interpreted to create a liability of the Estate or the Trustee to pay the Claims Settlement Amount. The Disbursement Stipulation shall only be paid by the Trustee if it is approved by the Bankruptcy Court as part of the Trustee's final report and accounting, and, if approved, only to the extent that there are funds remaining in the possession of the Trustee for the Estate that are to be turned over to the post-bankruptcy Debtor.
885 F.2d 621, 624 (9th Cir. 1989). To the extent Debtor argues that the bankruptcy court did not have the power to enter a final order on the Motion for Inclusion, our conclusion that the court had “core,” “arising in” jurisdiction defeats the argument. Courts may enter final orders on core matters. See Stern v. Marshall, 564 U.S. 462, 475-78 (2011). Even if this matter is not “core,” parties may consent, even impliedly, to entry of a final order by a bankruptcy court. See Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 684–85 (2015). Debtor likely consented to entry of a final order by non-Article III judges by appealing to this Panel. Richards v. Richards (In re Richards), 655 B.R. 782, 795 (9th Cir. BAP 2023). 22 Settlement Agreement, ¶ 9 (emphases added).
Debtor focuses on a single sentence within this clause that reads:
“nothing contained herein shall be interpreted to create a liability of the
Estate or the Trustee to pay the Claims Settlement Amount.” According to
Debtor, this sentence absolves the estate of any obligation to disburse
$475,000 to W+F.
Debtor’s interpretation would render void the remaining language in
¶ 9. Under Washington law, 11 “we harmonize clauses that seem to conflict.
Our goal is to interpret the agreement in a manner that gives effect to all
the contract’s provisions.” Nishikawa v. U.S. Eagle High, LLC, 158 P.3d 1265,
1268 (Wash. Ct. App. 2007) (citation omitted). Contracts must be
considered “as a whole” and given “a fair, reasonable, and sensible
construction.” Kut Suen Lui v. Essex Ins. Co., 375 P.3d 596, 599 (Wash. 2016)
(internal quotation marks omitted) (emphasis added).
The Settlement Agreement requires satisfaction of the Claims
Settlement Amount from one of two sources: the Auction Proceeds or
disbursement of funds from the estate. See Settlement Agreement, ¶ 9 (the
Claims Settlement Amount “shall” be paid from the earliest available of the
two sources). 12 To obtain satisfaction from the latter source, the Settlement
11 Pursuant to ¶ 17 of the Settlement Agreement, the parties agreed that Washington law governs interpretation of the Settlement Agreement. 12 The record is clear that the Auction Proceeds did not generate sufficient funds
to pay any portion of the Claims Settlement Amount. Thus, the only source left to satisfy the Claims Settlement Amount was a disbursement by the estate. 23 Agreement states that the Trustee can pay W+F only if the distribution is
approved by the bankruptcy court and “as part of the Trustee’s final report
and accounting.” Id.
Under basic principles of bankruptcy administration, the Trustee has
the power to distribute estate funds in accordance with the Code and
bankruptcy court authorization. §§ 323, 704(a)(9), 1106. Had the Settlement
Agreement envisioned distribution by an entity other than the estate
and/or the Trustee, or contemplated the distribution of funds that were not
property of the estate, there would be no reason at all for ¶ 9 to mention
distribution by the Trustee in connection with a final report or require
authorization by the bankruptcy court. Thus, a holding that ¶ 9 does not
obligate the Trustee or the estate would render meaningless all of the
language regarding the Trustee, the final report, and court authorization.
The more harmonious reading of the language shielding the estate
from liability is that it protects the estate in case the conditions set forth in
the Settlement Agreement were not satisfied. Those conditions, contained
in the sentence directly after the one referenced by Debtor, are: (i) approval
by the bankruptcy court; and (ii) the availability of “funds remaining in the
possession of the Trustee for the Estate that are to be turned over to the
post-bankruptcy Debtor.” 13 Reading the sentence regarding liability in
conjunction with these conditions leads us to the conclusion that the estate
13 There is no dispute that both of these conditions occurred. 24 was shielded from liability if the court did not approve disbursement
and/or the estate did not have sufficient funds in its possession.
This interpretation gives effect to every word in ¶ 9. Debtor’s
interpretation, on the other hand, would require a distribution from the
estate only to immediately state in the very next sentence that distribution
from the estate was not required. This interpretation would neither be
“sensible” nor give effect to every provision in the Settlement Agreement.
Kut Suen Lui, 375 P.3d at 599; Nishikawa, 158 P.3d at 1268.
Because our interpretation of the Settlement Agreement obligated the
estate to disburse funds to W+F, Debtor’s argument that the Settlement
Agreement improperly bound Debtor to act by transferring its own
property (i.e., any surplus distributed to Debtor) is without merit. 14 Apart
from the liability language in ¶ 9 discussed above, Debtor’s arguments on
this point appear to stem from two points: (i) first, that the Settlement
Agreement states that the distribution to W+F will come from the
“surplus”; and (ii) second, that the Trustee stated in the body of the
Settlement Motion that the distribution to W+F would be a “post-
bankruptcy transfer.”
With respect to the first argument, although the parties nominally
referred to the Claims Settlement Amount as being sourced from the
14Nor was Debtor a necessary party to the Settlement Agreement. At the time the parties executed the Settlement Agreement, the Trustee was the representative of the bankruptcy estate with full control of the estate’s claims and liabilities and the ability to resolve them. 25 “surplus,” in effect, the parties essentially agreed to pay the Claims
Settlement Amount ahead of Debtor. As discussed above, ¶ 9 of the
Settlement Agreement explicitly provides for distribution “by the Trustee if
it is approved by the Bankruptcy Court as part of the Trustee’s final report
and accounting.” If the distribution were to come instead from a surplus
already paid to Debtor, the Trustee would not be tasked with distribution
along with the final report, and bankruptcy court authorization would not
be required.
Debtor’s second argument suffers for much the same reason. A clause
that contemplates distribution by the Trustee, with approval by the
bankruptcy court, is by definition not a “post-bankruptcy transfer.” In any
event, the Trustee’s characterization of the Settlement Agreement in the
Settlement Motion is not pertinent to our interpretation of the Settlement
Agreement. Under Washington law, courts do not consider extrinsic
evidence if “the parties’ intent can be divined from the actual words within
the four corners of the document.” Seattle Times Co. v. LeatherCare, Inc., 337
F.Supp.3d 999, 1054 (W.D. Wash. 2018) (citing Hearst Comms., Inc. v. Seattle
Times Co., 115 P.3d 262 (Wash. 2005)). Here, we can glean the parties’ intent
from the four corners of the Settlement Agreement; our interpretation gives
full effect to the provisions, and we need not consult another document to
make sense of the provisions in the Settlement Agreement.
In light of the above, the estate was obligated to disburse the Claims
Settlement Amount to W+F before paying Debtor any remaining surplus.
26 C. The distribution to W+F does not run afoul of the priority scheme set forth in § 726(a). Finally, Debtor contends that the distribution to W+F violates the
priority scheme of § 726(a). See Czyzewski v. Jevic Holding Corp., 580 U.S. 451
(2017). Specifically, Debtor contends that § 726(a)(6) mandates distribution
to the debtor after payment of all claims against the estate.
In Jevic, the Supreme Court considered whether a bankruptcy court
could dismiss a chapter 11 without reverting to the prepetition status quo
or adhering to the priority scheme set forth in the Code. Id. at 456. In other
words, the Court assessed whether bankruptcy courts could order
“structured dismissals” through which the bankruptcy court not only
dismissed the case but altered the prepetition relationship between the
debtor and creditors. Id.
The Court held that any such “structured dismissal” must follow the
ordinary priority rules set forth in the Code. Id. at 464. In so holding, the
Court referred to the Code’s statutory priority scheme as “a basic
underpinning” of bankruptcy law and “fundamental to the Bankruptcy
Code’s operation.” Id. at 464-65.
Significantly, the Court specified that its holding applied only to
nonconsensual alterations in the Code’s priority scheme. See id. at 464
(framing the issue presented as whether a bankruptcy court may “approve
a structured dismissal that provides for distributions that do not follow
ordinary priority rules without the affected creditors’ consent”) (emphasis
27 added); and id. at 465 (dismissal does not allow for “nonconsensual
priority-violating distributions of estate value”) (emphasis added).
That parties may consent to the alteration of the Code’s priority
scheme is uncontroversial. In fact, the Code itself contemplates such
alterations. For instance, § 726(a) – the statute Debtor contends requires
distribution to Debtor ahead of W+F – explicitly provides that § 510 may
alter the distribution scheme set forth in the statute. Section 510(a), in turn,
allows parties to agree to subordinate their claims to other claims against
the estate. The Code also, for example, permits chapter 11 plans to alter the
priority scheme with the consent of impacted creditors. § 1129; see also In re
Arnold, 471 B.R. 578, 592 (Bankr. C.D. Cal. 2012) (“The heart of the Chapter
11 process is creditor consent.”) (citing Elizabeth Warren & Jay Westbrook,
THE LAW OF DEBTORS AND CREDITORS 677 (6th ed. 2009)).
Here, even if the distribution to W+F would otherwise violate
§ 726(a), 15 Debtor consented to the distribution scheme ordered by the
bankruptcy court. Debtor’s arguments to the contrary are unconvincing.
15 Although Debtor contends that it had a right to payment of surplus, the Code is structured such that debtors are very last in line to receive a distribution from the estate, behind satisfaction of all other obligations of the estate. As discussed above, the Settlement Agreement created an obligation of the estate to pay W+F. Thus, payment to W+F ahead of Debtor may not have violated the Code’s priority scheme at all. Nevertheless, because Debtor consented to the distribution of funds to W+F ahead of Debtor, we need not reach the question of whether the distribution to W+F would otherwise violate § 726(a) without Debtor’s consent. 28 Debtor places immense weight on the fact that it did not sign the
Settlement Agreement. 16 But this argument ignores fundamental aspects of
the bankruptcy process. Unlike the usual two-party disputes in state court,
where the effect of contracts is generally litigated, a chapter 11 bankruptcy
case involves a collective process with several parties in interest. § 1109(b).
Those parties in interest, including the debtor, “may raise and may appear
and be heard on any issue in a case under this chapter.” Id.; see also Truck
Ins. Exch. v. Kaiser Gypsum Co., Inc., 602 U.S. 268, 280–81 (2024) (holding
that § 1109(b) allows for “broad participation” by all parties in interest).
This participation includes the ability to object to settlement
agreements involving the estate. As a result, even where a party is not a
signatory to the settlement agreement itself, if it is a “party in interest,” the
party may object and raise concerns regarding the impact of the agreement
on the party’s rights in the estate.
In this case, Debtor took advantage of its standing as a party in
interest and objected to the Settlement Agreement’s provision allowing
W+F a distribution of $475,000 ahead of Debtor. Although Debtor did not
sign the Settlement Agreement itself, Debtor was afforded a full and fair
opportunity to argue its concern regarding the order of distribution of
funds. The record demonstrates that the court considered Debtor’s
16 Of course, the Settlement Agreement was signed by Mr. Somarakis, who is both the manager and majority owner of Debtor, and thus would presumably be the signatory on behalf of Debtor as well. 29 argument and allowed Debtor and other parties in interest an opportunity
to modify the Settlement Order in a manner that satisfied all of the parties.
Debtor fully consented to entry of the Settlement Order in its final
form. While the Settlement Order did modify the Settlement Agreement
with respect to distribution of the Auction Proceeds, it left intact the
Settlement Agreement’s provision regarding distribution to W+F ahead of
Debtor in the case of a surplus estate. Debtor did not appeal the Settlement
Order, and the time to appeal that order has long since expired.
Accordingly, even if the distribution to W+F altered the Code’s order of
distribution, Debtor consented to the alteration.
For all the reasons stated above, the court’s order directing the
Trustee to distribute $475,000 to W+F from the estate was appropriate.
CONCLUSION
The bankruptcy court did not err in ordering distribution of $475,000
to W+F ahead of any distribution to Debtor. We therefore AFFIRM.