FILED MAR 29 2016 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. SC-15-1222-FJuKi ) 6 JAMES BERTRAM MORRIS, JR., ) Bk. No. 14-02962-CL7 ) 7 Debtor. ) _____________________________ ) 8 ) JAMES BERTRAM MORRIS, JR.; ) 9 MARK NISHI, ) ) 10 Appellants, ) ) 11 v. ) MEMORANDUM* ) 12 GERALD DAVIS, Chapter 7 ) Trustee; JEANEEN McGEE, ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on March 17, 2016 16 at Pasadena, California 17 Filed – March 29, 2016 18 Appeal from the United States Bankruptcy Court for the Southern District of California 19 Honorable Christopher B. Latham, Bankruptcy Judge, Presiding 20 21 Appearances: Michael A. Gardiner argued for Appellant James Bertram Morris, Jr.; Kathryn A. Millerick argued 22 for Appellee Gerald Davis, Chapter 7 Trustee. 23 Before: FARIS, JURY, and KIRSCHER, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 28 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 Appellants James Bertram Morris, Jr. and his friend and 3 business partner Mark Nishi appeal from the bankruptcy court’s 4 order granting Appellee and chapter 71 trustee Gerald H. Davis’ 5 motion to settle claims of Appellee Jeaneen McGee against 6 Mr. Morris’ estate. We hold that the bankruptcy court did not 7 abuse its discretion when it approved the settlement. 8 Accordingly, we AFFIRM. 9 FACTUAL BACKGROUND 10 A. The Arizona family court proceedings 11 Mr. Morris and Ms. McGee were involved in contentious 12 divorce proceedings before the Arizona family court. On 13 March 10, 2009, the family court approved a Consent Decree of 14 Dissolution of a Non-Covenant Marriage, which incorporated by 15 reference the attached Property Settlement Agreement. The 16 Property Settlement Agreement provided for the division of 17 substantial assets, including certain pending lawsuits. 18 Paragraph 29 of the Property Settlement Agreement discussed the 19 disposition of the so-called Cadence lawsuit: 20 29. CADENCE LAWSUIT. 21 The community formerly sued a company that will here be called “Cadence” on theories which need not 22 here be discussed. The community lost that lawsuit in a Federal District Court, and that Court’s decision has 23 been appealed to the Ninth Circuit Court of Appeals where it is currently being considered. . . . 24 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, and all “Civil Rule” references are 28 to the Federal Rules of Civil Procedure, Rules 1-86.
2 1 It appears that the attorneys who originally represented the community in the Federal District Court 2 lawsuit against Cadence, which resulted in the dismissal and subsequent appeal to the Ninth Circuit, 3 may have been negligent in their handling of the original case, and consequently caused the community to 4 lose a viable and valid claim against Cadence, and thus to suffer damages. . . . 5 6 Exhibit A to the agreement provided that Mr. Morris and Ms. McGee 7 would each take “50% of all right and value in the ‘Cadence’ 8 lawsuits and related lawsuits (See paragraph 29).” (Emphasis 9 added.) 10 A few months later, Mr. Morris initiated a malpractice 11 action against his original attorneys in the Cadence lawsuit. 12 About three years later, he settled the malpractice suit for 13 $1,125,000. Both before and after the settlement of the 14 malpractice litigation, Mr. Morris told Ms. McGee via e-mails 15 that she was the co-owner of the action and that she would 16 receive $250,000 or more. Mr. Morris also threatened that, if 17 Ms. McGee continued to press him for spousal maintenance, he 18 would keep all funds from her, including any proceeds from the 19 malpractice litigation: 20 I am going to give you a warning. I gave you a warning a couple of years ago that you did not heed, 21 and look where it got you. 22 You had better heed this warning. 23 If you f[--] with me again like you did a couple of years ago, I will make sure you never see another 24 penny from me in ANYTHING in the future. That includes, in particular, the malpractice lawsuit. I 25 will hide that money so f[–-] deep that nobody will ever find it, and I will be long gone from America and 26 untouchable by you and any American court. 27 And you will never get another penny from me for as long as you live. 28
3 1 (Expletives modified.) 2 Thereafter, Mr. Morris took the position that Ms. McGee was 3 not entitled to any part of the settlement proceeds. His counsel 4 communicated to Ms. McGee’s counsel that Mr. Morris’ “position is 5 that the divorce property settlement agreement does not 6 explicitly reference the malpractice suit and does not make any 7 provision for his ex-wife to share in the recovery.” Mr. Morris 8 now contends that the “related lawsuits” (referenced in 9 connection with Ms. McGee’s right to share in the proceeds of the 10 “‘Cadence’ lawsuits and related lawsuits”) do not refer to the 11 malpractice litigation, but refer to the so-called RaveSim 12 lawsuit,2 which is not mentioned anywhere in the Property 13 Settlement Agreement. 14 In or around January 2013, Ms. McGee filed a garnishment 15 action in the Arizona family court, seeking to recover her share 16 of the malpratice litigation settlement proceeds.3 The family 17 court awarded Ms. McGee $108,022.89 for unpaid spousal support 18 19 2 According to Mr. Morris, RaveSim had agreed to transfer 20 certain intellectual property rights to him but had failed to do so. He says he lost the Cadence lawsuit because RaveSim had not 21 assigned the intellectual property rights to him, and therefore 22 he lacked standing to prosecute his claims. The attorneys’ malpractice consisted of their failure to secure the RaveSim 23 rights before suing Cadence. Mr. Morris said that he sued RaveSim to enforce the RaveSim agreement and that the RaveSim 24 lawsuit is the “related” litigation mentioned in the Property Settlement Agreement. 25 3 26 Of the $1,125,000 settlement proceeds from the malpractice litigation, $250,000 went to Mr. Morris’ attorneys. If the 27 remaining $875,000 was divided in half, Ms. McGee would be entitled to $437,500. At issue in this appeal is Ms. McGee’s 28 half of the net settlement proceeds.
4 1 from Mr. Morris’ share of the settlement proceeds. However, the 2 family court did not adjudicate Ms. McGee’s claim that she is 3 entitled to 50% of the malpratice litigation settlement. The 4 family court ordered that Mr. Morris’ attorneys freeze the 5 balance of the settlement proceeds in their account. 6 B. Bankruptcy proceedings 7 While the Arizona family court was considering Ms. McGee’s 8 claims to the settlement proceeds,4 Mr. Morris filed a chapter 11 9 petition in the Southern District of California. 10 Mr. Nishi filed a proof of claim for $959,216.12. Mr. Nishi 11 is a friend and business partner of Mr. Morris in one or more of 12 Mr. Morris’ businesses. Anne Marie Groden, Mr. Morris’ sister, 13 filed an amended proof of claim for $1,153,898.99. Ms. McGee 14 filed a priority claim in the amount of $497,147.19. 15 On October 24, 2014, the United States Trustee moved to 16 convert Mr. Morris’ chapter 11 case to chapter 7. The court 17 granted the motion, stating that: 18 Here, Debtor has failed to accurately describe his interest in [a company in which he holds an interest]. 19 He has failed to report numerous prepetition and postpetition transfers involving his various entities 20 and made for his benefit. He has failed to disclose the existence of accounts and assets under his control. 21 He has expended estate assets without disclosing the transactions or obtaining court authority. In 22 23 4 Ms. McGee claims that Mr. Morris delayed the family court 24 proceedings for over a year and a half. He filed an interpleader action in the District Court of Nevada, which resulted in a “bad 25 faith, time-consuming, expensive and ultimately unsuccessful 26 attempt at forum shopping.” Ultimately, the district court dismissed the interpleader action, holding that Mr. Morris failed 27 to demonstrate that he was domiciled in Nevada and that the claims were not proper claims in an interpleader case. The 28 parties then resumed litigating in the Arizona family court.
5 1 particular, he has retained and paid special counsel without court approval. And given Debtor’s 2 circumstances, including his Arizona Family Court proceeding, there does not appear to be a reasonable 3 likelihood of rehabilitation. 4 Debtor has also not fully complied with the court’s directive to disclose postpetition income and 5 support. By failing to disclose the many transfers to and from the entities he holds interests in or 6 otherwise controls, Debtor has failed to satisfy applicable reporting requirements. Without good 7 cause, he has failed to attend a scheduled 341(a) meeting of creditors. And he has failed to timely 8 provide the UST with information reasonably requested. 9 Mr. Morris’ amended schedules list the settlement proceeds 10 as an asset of the estate, valued at $441,971.11. His amended 11 schedules also include a $4,138.87 exemption in “Litigation 12 settlement funds - Tiffany & Bosco trust acct” under § 522(d)(5). 13 C. The Motion to Settle 14 On May 28, 2015, the Trustee filed a motion to settle 15 Ms. McGee’s claims to half of the net malpractice settlement 16 proceeds (“Motion to Settle”). Essentially, the proposed 17 settlement provided that, out of the half of the net proceeds 18 that Ms. McGee claimed, the estate would receive $41,000 and 19 Ms. McGee would receive the remainder. Ms. McGee also agreed to 20 reduce her proof of claim from $497,147.19 to $59,647.19 (a 21 reduction of $437,500) and dismiss with prejudice her § 523(a)(6) 22 claim in her adversary proceeding. The Trustee examined the 23 compromise under Rule 9019 and the four factors of Martin v. Kane 24 (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986), and 25 he argued that the settlement was in the best interest of the 26 estate. 27 Mr. Morris opposed the Motion to Settle by arguing, in 28 summary, that the motion did not satisfy the four factors of
6 1 A&C Properties and Woodson v. Fireman’s Fund Insurance Co. 2 (In re Woodson), 839 F.2d. 610, 620 (9th Cir. 1988), and the 3 settlement was not in the best interests of the estate and 4 creditors. Both Mr. Nishi and Ms. Groden joined in the 5 opposition. 6 At the hearing on the Motion to Settle, counsel for 7 Mr. Nishi said for the first time that Mr. Nishi was proposing to 8 purchase the litigation against Ms. McGee for $45,000. The oral 9 proposal had only been presented to the Trustee on the morning of 10 the hearing. 11 Counsel for the Trustee argued that the offer was 12 gamesmanship and would not result in any significant, additional 13 benefit to the estate: 14 On the face of it, it just appears to the trustee and myself that this is just a little bit more gamesmanship 15 by the debtor, having Mr. Nishi come in and offer to buy the estate’s interest. 16 . . . . 17 And that kind of leads to my next point, which is 18 the cost. It’s a $4,400 increase. No, a $4,000 increase. And I’m concerned that the cost of analyzing 19 the assignability of it, the cost of renoticing, repapering, and potentially dealing with objection by 20 Mr. Cunningham’s firm on behalf of Ms. McGee, all we’re really doing is inviting more litigation rather than 21 resolving current litigation. And I’m concerned that those expenses are going to exceed any benefit of 22 $4,000. And the trustee - I’m echoing the trustee’s concerns, your honor. 23 And so rather than resulting in a settlement of 24 the matter, we see it, your honor, as certainly just creating and augmenting more litigation. 25 26 The Trustee also argued that Mr. Morris lacked standing to object 27 to the settlement. 28 At the conclusion of the hearing, the court said:
7 1 As far as the standing issue goes, I’m highly dubious that the debtor has standing. But observe: the 2 court has considered debtor’s counsel’s papers and his lengthy argument today, the most lengthy argument of 3 all this day, and credited all of those arguments via the joinder. So they were given a full airing and 4 consideration by the court. 5 I think under A and C Properties, because that’s where the analytical rubber meets the road in this 6 case, that the point has been made very clear that one side desires strongly to perpetuate the litigation in 7 the family law court. The probability of success is uncertain, at best. And that litigation is very 8 complex both within the family law case itself and as it intersects - as those issues intersect with 9 bankruptcy principles. 10 The settlement works a massive reduction in Ms. McGee’s claim . . . . 11 12 The court issued its order granting the Motion to Settle 13 (the “Order”). Appellants timely appealed the Order. 14 JURISDICTION 15 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 16 §§ 1334, and 157(b)(2)(A) and (O). We have jurisdiction under 17 28 U.S.C. § 158. 18 ISSUE 19 Whether the bankruptcy court abused its discretion in 20 granting the Motion to Settle. 21 STANDARD OF REVIEW 22 We review approval of both a Rule 9019 settlement agreement 23 and a § 363 sale for an abuse of discretion. Fitzgerald v. Ninn 24 Worx Sr, Inc. (In re Fitzgerald), 428 B.R. 872, 880 (9th Cir. BAP 25 2010) (§ 363 sale); Goodwin v. Mickey Thompson Entm’t Grp., Inc. 26 (In re Mickey Thompson Entm’t Grp., Inc.), 292 B.R. 415, 420 (9th 27 Cir. BAP 2003) (“Mickey Thompson”) (Rule 9019 settlement 28 agreement).
8 1 To determine whether the bankruptcy court has abused its 2 discretion, we conduct a two-step inquiry: (1) we review de novo 3 whether the bankruptcy court “identified the correct legal rule 4 to apply to the relief requested,” and (2) if it did, we consider 5 whether the bankruptcy court’s application of the legal standard 6 was illogical, implausible, or “without support in inferences 7 that may be drawn from the facts in the record.” United States 8 v. Hinkson, 585 F.3d 1247, 1261–62 & n.21 (9th Cir. 2009) 9 (en banc). “If the bankruptcy court did not identify the correct 10 legal rule, or its application of the correct legal standard to 11 the facts was illogical, implausible, or without support in 12 inferences that may be drawn from the facts in the record, then 13 the bankruptcy court has abused its discretion.” USAA Fed. Sav. 14 Bank v. Thacker (In re Taylor), 599 F.3d 880, 887–88 (9th Cir. 15 2010) (citing Hinkson, 585 F.3d at 1261–62). 16 DISCUSSION 17 A. Mr. Nishi has standing to appeal the Order. 18 As a preliminary matter, we must determine whether either 19 appellant has standing on appeal. The bankruptcy court 20 determined that while Mr. Morris lacked standing to challenge the 21 Motion to Settle, Mr. Nishi may have standing, and it thus 22 considered the arguments raised by Mr. Morris (and joined in by 23 Mr. Nishi). 24 To have standing to appeal from a bankruptcy court order, a 25 person must show that he is a “person aggrieved.” Fondiller v. 26 Robertson (In re Fondiller), 707 F.2d 441, 442 (9th Cir. 1983). 27 A person is aggrieved if he is “directly and adversely affected 28 pecuniarily” by the order appealed. Id. As a result, in a
9 1 typical case, “a hopelessly insolvent debtor does not have 2 standing to appeal orders affecting the size of the estate” as 3 “[s]uch an order would not diminish the debtor’s property, 4 increase his burdens, or detrimentally affect his rights.” Id.; 5 see also Duckor Spradling & Metzger v. Baum Trust 6 (In re P.R.T.C., Inc.), 177 F.3d 774, 778 n.2 (9th Cir. 1999). 7 It is well settled, however, that a creditor has “a direct 8 pecuniary interest in a bankruptcy court[’]s order transferring 9 assets of the estate.” In re P.R.T.C., Inc., 177 F.3d at 778 10 (citing Salomon v. Logan (In re Int’l Envtl. Dynamics, Inc.), 11 718 F.2d 322, 326 (9th Cir. 1983)); see Redwood Trust v. Am. 12 Bldg. Storage, LLC (In re Am. Bldg. Storage, LLC), 285 F. App’x 13 375, 376 (9th Cir. 2008) (An equity interest holder had “standing 14 as an aggrieved party because the settlement [guaranteeing 15 creditors $600,000] could ‘diminish [its] property . . . [and] 16 detrimentally affect its rights.’” (quoting In re P.R.T.C., Inc., 17 177 F.3d at 777)). 18 We need not decide whether Mr. Morris has standing because 19 we agree with the bankruptcy court that Mr. Nishi joined in 20 Mr. Morris’ objections, and Mr. Nishi has standing on appeal. It 21 is undisputed that Mr. Nishi currently holds an allowed claim 22 against Mr. Morris’ estate under § 502(a); he filed a proof of 23 claim for $959,216.12, to which no one has objected. Any 24 increase or decrease in the estate’s share of the malpractice 25 settlement funds would directly affect Mr. Nishi’s pecuniary 26 interest. As such, he has standing as a creditor to appeal the 27 court’s Order. 28 / / /
10 1 B. The court’s decision was consistent with § 363. 2 Appellants argue that the court committed an error of law by 3 not analyzing the settlement as a sale of estate assets under 4 § 363. We find no reversible error. 5 Section 363 provides, in relevant part, that “[t]he trustee, 6 after notice and a hearing, may use, sell, or lease, other than 7 in the ordinary course of business, property of the estate 8 . . . .” § 363(b)(1). In Mickey Thompson, we held that the 9 proposed compromise at issue was actually a sale of assets 10 requiring analysis under both Rule 9019 and § 363. In addition 11 to our Rule 9019 analysis, we stated: 12 this settlement is in essence a sale of potential claims to the Settling Parties. While the Agreement 13 purports to act as a mutual release of claims, no party has identified any claims which the Settling Parties 14 could assert against the estate or Trustee. The record does not contain any evidence that a release of claims 15 by the Settling Parties has value. 16 Thus, the settlement is in reality a purchase by the Settling Parties of a chose in action of the estate 17 and for which another entity has offered a higher price in circumstances that invite a competitive auction that 18 could yield a considerably higher price. Settling Parties were free to bid against the third party 19 overbidder. 20 We agree with the Third Circuit that the disposition by way of “compromise” of a claim that is 21 an asset of the estate is the equivalent of a sale of the intangible property represented by the claim, which 22 transaction simultaneously implicates the “sale” provisions under section 363 as implemented by 23 Rule 6004 and the “compromise” procedure of Rule 9019(a). 24 25 In re Mickey Thompson Entm’t Grp., Inc., 292 B.R. at 421 26 (citations omitted). 27 Appellants argue that the bankruptcy court failed to conduct 28 the § 363 analysis that Mickey Thompson requires. We disagree.
11 1 1. Appellants failed to raise § 363 before the bankruptcy court. 2 3 Appellants did not raise this argument before the bankruptcy 4 court. They merely argued that the settlement was inappropriate 5 under the Woodson and A&C Properties analysis and did not mention 6 § 363. 7 We decline to consider this issue on appeal, as it was not 8 properly raised before the bankruptcy court in the first 9 instance. As a general rule, 10 federal appellate courts will not consider issues not properly raised in the trial courts. O’Rourke v. 11 Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957 (9th Cir. 1989); see also Moldo v. Matsco, 12 Inc. (In re Cybernetic Servs., Inc.), 252 F.3d 1039, 1045 n.3 (9th Cir. 2001) (stating that appellate court 13 would not explore ramifications of argument because it was not raised in the bankruptcy court); Scovis v. 14 Henrichsen (In re Scovis), 249 F.3d 975, 984 (9th Cir. 2001) (stating that court would not consider issue 15 raised for first time on appeal absent exceptional circumstances). An issue only is “properly raised” if 16 it is raised sufficiently to permit the trial court to rule upon it. In re E.R. Fegert, Inc., 887 F.2d at 17 957. 18 Notwithstanding this general rule, “[a] reviewing court may consider an issue raised for the first time 19 on appeal if (1) there are exceptional circumstances why the issue was not raised in the trial court, 20 (2) the new issue arises while the appeal is pending because of a change in the law, or (3) the issue 21 presented is purely one of law and the opposing party will suffer no prejudice as a result of the failure to 22 raise the issue in the trial court.” Franchise Tax Bd. v. Roberts (In re Roberts), 175 B.R. 339, 345 (9th Cir. 23 BAP 1994) (internal quotations omitted) (citing United States v. Carlson, 900 F.2d 1346, 1349 (9th Cir. 24 1990)). 25 Ezra v. Seror (In re Ezra), 537 B.R. 924, 932-33 (9th Cir. BAP 26 2015) (emphasis added). 27 Appellants failed to raise § 363 in response to the proposed 28 settlement. Further, Appellants have failed to provide us with
12 1 any exceptional circumstances that would cause us to exercise our 2 discretion to consider this issue for the first time on appeal. 3 As such, we need not consider whether the court erroneously 4 failed to apply § 363 to the Motion to Compromise. 5 2. Even if § 363 was properly before the court, the Mickey Thompson analysis is not applicable because Ms. McGee 6 released valuable claims against the estate. 7 The § 363 analysis described in Mickey Thompson is not 8 applicable to the proposed compromise. The settlement here was a 9 mutual release between the estate and Ms. McGee, rather than a 10 unilateral compromise contemplated in Mickey Thompson. Cf. Fuchs 11 v. Snyder Tr. Enters. (In re Worldpoint Interactive, Inc.), 12 335 F. App’x 669, 670 (9th Cir. 2009) (“We are not persuaded by 13 [appellant’s] contention that the settlement amounted to an asset 14 sale under [Mickey Thompson], because both parties to the 15 settlement here released claims.” (citing In re Mickey Thompson 16 Entm’t Grp., Inc., 292 B.R. at 421)). 17 Ms. McGee agreed to reduce her claim by $437,500 and to 18 dismiss a portion of her adversary proceeding. Ms. McGee’s 19 claims had significant value because she claimed a right to a 20 specific fund - the malpratice settlement proceeds. In exchange, 21 the estate agreed to forego its claim of entitlement to $400,000 22 of the malpractice litigation settlement proceeds. Thus, both 23 parties released claims, rendering the settlement a mutual 24 compromise, rather than a sale. Accordingly, the court did not 25 need to analyze the proposed settlement under § 363. 26 3. The court had ample basis to reject Mr. Nishi’s proposed offer. 27 28 Even assuming that § 363 was raised before the bankruptcy
13 1 court and was applicable, we hold that the court did not abuse 2 its discretion in rejecting Mr. Nishi’s proposed offer.5 3 a. Mr. Nishi’s proposed offer was too late. 4 The bankruptcy court had ample reason to reject Mr. Nishi’s 5 eleventh-hour offer, which was only raised the morning of the 6 hearing. The court has the power to provide for orderly 7 proceedings and had discretion to disregard the late proposal. 8 b. There was no documentation of a legitimate offer. 9 Further, unlike the situation in Mickey Thompson, Mr. Nishi 10 did not make a definite, concrete offer of payment, but only 11 proposed to purchase the claims. His counsel called the 12 Trustee’s counsel the morning of the hearing to discuss the 13 proposal, but the Trustee remained skeptical. The Trustee’s 14 counsel informed the court, “I don't think it’s $45,000. I think 15 it was just an offer of $45,000.” Mr. Nishi’s failure to 16 document his proposal justified its rejection. 17 c. There were substantial doubts whether Mr. Nishi’s offer was made in good faith. 18 19 The Trustee also expressed concern that Mr. Nishi’s proposed 20 offer was “just a little bit more gamesmanship by the debtor[.]” 21 In addition to being a creditor of Mr. Morris’ estate, Mr. Nishi 22 is also Mr. Morris’ friend and business partner. The bankruptcy 23 court had already found that Mr. Morris had engaged in serious 24 5 The bankruptcy court did not rely on the following points, 25 but “[w]e may affirm the decision of the bankruptcy court on any 26 basis supported by the record.” Franklin High Yield Tax-Free Income Fund v. City of Stockton, Cal. (In re City of Stockton, 27 Cal.), 542 B.R. 261, 272 (9th Cir. BAP 2015) (citing ASARCO, LLC v. Union Pac. R. Co., 765 F.3d 999, 1004 (9th Cir. 2014); Shanks 28 v. Dressel, 540 F.3d 1082, 1086 (9th Cir. 2008)).
14 1 misbehavior in the bankruptcy case by grossly mismanaging the 2 estate, failing to obey court orders, and withholding 3 information. Faced with the fact that Mr. Nishi was an 4 “insider[ ] - or near insider[ ] -” of a misbehaving debtor, the 5 court did not abuse its discretion by refusing to entertain 6 Mr. Nishi’s proposed offer. 7 d. Appellants did not take into account Ms. McGee’s substantial reduction of her claim. 8 9 One purpose of the Mickey Thompson rule is to encourage 10 “overbidding,” to maximize creditor recovery. But Mr. Nishi’s 11 proposal was probably not an overbid, in the sense that it was 12 not more valuable to the estate than Ms. McGee’s settlement. 13 Mr. Nishi’s proposal exceeded the cash portion of the settlement 14 ($45,000 versus $41,000 in cash), but Ms. McGee also agreed to 15 reduce her claim by $437,500 in exchange for only about $400,000 16 of the settlement proceeds paid to Ms. McGee. Mr. Nishi’s 17 proposal contained nothing comparable to this claim reduction. 18 In other words, Mr. Nishi’s proposed offer was not necessarily a 19 better deal for the estate than the settlement with Ms. McGee. 20 e. Any benefit would be offset by extra costs. 21 The Trustee pointed out that the modest additional $4,000 22 received by Mr. Nishi’s offer would be negated by the additional 23 costs of litigation and administration. Appellants did not 24 contest this assertion. The court had good reason to reject the 25 proposed offer because the additional administrative expenses 26 associated with the new proposal would likely offset any 27 potential gain. 28 Accordingly, the court did not err under § 363. The record
15 1 amply supports numerous legitimate reasons for rejecting 2 Mr. Nishi’s proposed offer. 3 C. The court properly analyzed the settlement under Rule 9019. 4 Appellants argue that the court erred in its application of 5 Rule 9019 to the proposed settlement. We disagree. 6 Rule 9019(a) provides that, “[o]n motion by the trustee and 7 after notice and a hearing, the court may approve a compromise or 8 settlement.” Rule 9019(a). “The bankruptcy court has great 9 latitude in approving compromise agreements.” In re Woodson, 10 839 F.2d at 620 (citing In re A&C Props., 784 F.2d at 1380-81). 11 It is clear that there must be more than a mere good faith negotiation of a settlement by the trustee 12 in order for the bankruptcy court to affirm a compromise agreement. The court must also find that 13 the compromise is fair and equitable. See, e.g., Citibank, N.A. v. Baer, 651 F.2d 1341, 1345–46 (10th 14 Cir. 1980). 15 In determining the fairness, reasonableness and adequacy of a proposed settlement agreement, the court 16 must consider: 17 (a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in 18 the matter of collection; (c) the complexity of the litigation involved, and the expense, 19 inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a 20 proper deference to their reasonable views in the premises. 21 22 In re A&C Props., 784 F.2d at 1381 (citation omitted). The Ninth 23 Circuit has also stated that “[t]he trustee, as the party 24 proposing the compromise, has the burden of persuading the 25 bankruptcy court that the compromise is fair and equitable and 26 should be approved.” Id. (citing In re Hallet, 33 B.R. 564, 27 565–66 (Bankr. D. Me. 1983)). 28 The law favors compromise, “and as long as the bankruptcy
16 1 court amply considered the various factors that determined the 2 reasonableness of the compromise, the court’s decision must be 3 affirmed. Thus, on review, we must determine whether the 4 settlement entered into by the trustee was reasonable, given the 5 particular circumstances of the case.” Id. (internal citations 6 omitted). 7 Moreover, “‘[w]hen assessing a compromise, courts need not 8 rule upon disputed facts and questions of law, but only canvass 9 the issues.’ If the court were required to do more than canvass 10 the issue, ‘there would be no point in compromising; the parties 11 might as well go ahead and try the case.’” Suter v. Goedert, 12 396 B.R. 535, 548 (D. Nev. 2008) (citations omitted). 13 1. Probability of success in the litigation 14 First, the court considered the parties’ respective 15 likelihood of success before the Arizona family court. It held 16 that, “whether Debtor admits it or not, Ms. McGee has more than a 17 colorable claim to the settlement funds[,]” and “the probability 18 of the Trustee’s success in the Arizona Family Court is low.” 19 Appellants argue, in summary, that Ms. McGee’s probability 20 of success in the Arizona family court litigation is low, because 21 (1) it was improper for Ms. McGee to have brought the action in 22 family court, rather than civil court; (2) the e-mail evidence 23 offered by the Trustee is inadmissible hearsay and settlement 24 communications; and (3) the Property Settlement Agreement did not 25 give Ms. McGee any rights in the malpractice litigation 26 settlement. We do not find any of these arguments persuasive. 27 We find no error in the court’s assessment that Ms. McGee 28 has asserted at least a “colorable claim” to the settlement
17 1 proceeds with a substantial probability of success. Even 2 assuming, arguendo, that Ms. McGee asserted her claim in the 3 wrong venue, such a defect does not affect the likelihood of her 4 eventual success in civil court. Likewise, Appellants are wrong 5 regarding the admissibility of the e-mail evidence. The e-mails, 6 which clearly evidence Mr. Morris’ intent and expectation that 7 Ms. McGee recover half of the net malpractice litigation 8 settlement proceeds, are admissions of a party-opponent that are 9 not hearsay under Federal Rule of Evidence 801(d)(2). 10 Additionally, they were not confidential settlement 11 communications under Federal Rule of Evidence 408. As such, the 12 e-mails support the conclusion that Ms. McGee would likely be 13 successful in prosecuting her claims. 14 Further, Appellants’ interpretation of the Property 15 Settlement Agreement is implausible at best. Appellants argue 16 that the reference to “related” litigation points to the RaveSim 17 lawsuit, and not to the malpractice suit. But a plain reading of 18 the Property Settlement Agreement suggests that an action for 19 legal malpractice committed in the Cadence lawsuit is “related” 20 to that lawsuit. Further, the Property Settlement Agreement says 21 that Mr. Morris and Ms. McGee would split “the ‘Cadence’ lawsuits 22 and related lawsuits (See paragraph 29).” The only lawsuit 23 mentioned in paragraph 29 (apart from the Cadence lawsuit itself) 24 is the potential malpractice lawsuit. In contrast, the Property 25 Settlement Agreement does not even mention the RaveSim lawsuit. 26 Accordingly, we hold that the court did not err in holding that 27 the Trustee’s probability of success is low. 28 / / /
18 1 2. Difficulties in collection 2 Second, the court noted that an appeal by either side would 3 delay collection efforts. On appeal, Appellants argue that 4 “there is no danger in collecting once the issues are finally 5 adjudicated[,]” while Appellees argue that “this factor is 6 neutral[,]” because “[a]ppeals delaying collection are likely.” 7 Neither party has raised any difficulty in collecting, 8 because the Arizona family court froze the funds in Mr. Morris’ 9 attorneys’ client account. As such, this factor is neutral. 10 3. Complexity of the litigation involved and the attendant expense, inconvenience, and delay 11 12 Third, the court accurately observed that “Debtor’s 13 assertion that the Arizona Court has no jurisdiction to 14 adjudicate the matter actually hurts his cause - if that court 15 lacks jurisdiction, then Ms. McGee will bring her action in 16 another court, thus compounding the litigation’s complexity, 17 expense, inconvenience, and delay.” It held that “the issues the 18 Trustee faces in that court are decidedly complex, and very 19 likely to cause significant expense, inconvenience, and delay.” 20 Appellants do not offer any cogent argument contesting the 21 court’s ruling. The record amply demonstrates that Mr. Morris 22 would likely do anything in his power to delay and frustrate 23 Ms. McGee’s efforts to enforce the Property Settlement Agreement, 24 as he threatened in his e-mails to Ms. McGee. We find no error 25 in the court’s assessment of the underlying litigation. 26 4. Interests of the creditors 27 Fourth, the court held that “the Trustee’s proposed 28 settlement benefits the estate’s creditors.” It stated that,
19 1 “given this court’s findings that led to conversion of this case, 2 Debtor’s ability to argue on behalf of creditors of this estate 3 is dubious. Indeed, that the Trustee proposes to use these 4 settlement funds to investigate Debtor and his insiders only 5 highlights the essentially self-serving nature of Debtor’s 6 arguments . . . .” 7 The court ultimately held that “[t]he Trustee negotiated his 8 settlement with Ms. McGee in good faith. And the settlement is 9 both fair and equitable.” The court did not abuse its 10 discretion. Appellants only argue that the court did not explain 11 its ruling and that Mr. Nishi and Ms. Groden (who both asserted 12 claims against the estate) opposed the settlement. Especially 13 given Mr. Nishi’s and Ms. Groden’s connections to Mr. Morris, the 14 court did not err in declining to give deference to their views 15 and holding that the proposed settlement was in the best 16 interests of the creditors. 17 D. The Trustee presented the court with a sufficient record. 18 Appellants argue that the court could not have properly 19 evaluated the A&C Properties factors, because the Trustee 20 presented the court with a deficient evidentiary record 21 concerning the family court litigation and the malpractice 22 litigation settlement. In essence, Appellants argue that (1) the 23 Trustee failed to offer the declaration of Mr. Morris’ Arizona 24 attorney, Kelly Mendoza, regarding his likelihood of success or 25 his positions in the underlying suit; (2) the Trustee failed to 26 present Mr. Morris’ positions in the underlying dispute; and 27 (3) the Trustee made factual misstatements before the court. We 28 reject these arguments.
20 1 First, there is no requirement that the Trustee present the 2 declaration of Mr. Morris’ counsel. Appellants offer no 3 authority in support of such a requirement. Under A&C Properties 4 and its progeny, the bankruptcy court must canvass the issues, 5 see Suter, 396 B.R. at 548 (citation omitted), but there is no 6 requirement that the court must always solicit the views of both 7 parties or their counsel. We agree with Appellees that, based on 8 the documents in the record, the Trustee and the court did not 9 need Ms. Mendoza’s declaration to understand Mr. Morris’ 10 position. 11 Second, the record was sufficient for the court to 12 understand Mr. Morris’ position and his assessment of the state 13 court litigation. For example, the court was aware of 14 Mr. Morris’ position when it ruled on Ms. McGee’s motion for 15 relief from stay and Mr. Morris’ motion to dismiss Ms. McGee’s 16 adversary complaint, both of which informed the court of the key 17 issues considered in the Motion to Settle. As such, we reject 18 Appellants’ false contention that the court could not “make an 19 informed decision because the Court has no idea what it is to 20 make a decision about.” 21 Appellants appear to fault the Trustee for essentially 22 failing to argue Mr. Morris’ position that he is likely to 23 prevail in the Arizona family court litigation. It was not the 24 Trustee’s responsibility to do so. The Trustee, having 25 considered both Mr. Morris’ position and Ms. McGee’s position, 26 exercised his business judgment in determining that settling with 27 Ms. McGee was in the best interest of the estate. He had no duty 28 to advocate for Mr. Morris; rather, it was Mr. Morris’ counsel’s
21 1 job to convince the court of his client’s position. 2 Appellants also argue that the Trustee could not have 3 presented the court with a complete record, because he did not 4 discuss the settlement with Mr. Morris, either through counsel or 5 at his § 341 meeting. They conclude that, “because the Trustee 6 did not avail himself of the opportunity to informally discuss 7 the matter with the Debtor[,] the Trustee was unable to present 8 the Bankruptcy Court with a record regarding the Debtor’s 9 positions . . . .” However, the germane question is not what the 10 Trustee did or knew, but whether the court had a sufficient basis 11 for its ruling. As we noted above, the court had more than an 12 ample understanding of the issues. 13 Finally, regarding the alleged misstatements,6 we need not 14 make those factual determinations here. Even if Appellants were 15 correct, there is no indication that the court based its Order on 16 them. 17 Accordingly, we discern no reversible error concerning the 18 record before the court. 19 E. The Panel denies the parties’ motions to supplement. 20 Both Appellants and Appellees filed motions to supplement 21 6 Appellants argue that the Trustee made factual 22 misstatements that (1) Ms. McGee and “the community” were parties 23 to the malpractice lawsuit; and (2) that Mr. Morris’ Arizona attorneys were paid $6,000 and retained without court approval. 24 As to the first point, Appellants fail to explain how this statement affects the Motion to Settle. As to the second point, 25 Appellants concede that both statements are true, but contend 26 that they are misleading, because Ms. Groden paid the legal fees (not the estate), and Mr. Morris sought court approval to retain 27 counsel, but the application was denied. Again, Appellants fail to explain how these minor differences might have affected the 28 court’s decision.
22 1 the record. Appellants request leave to augment the record by 2 adding four additional documents filed in the bankruptcy court 3 after they filed their notice of appeal. Similarly, Appellees 4 offer two documents filed in the Arizona family court after 5 Appellants filed their notice of appeal. 6 We decline to take judicial notice of the documents. Our 7 job is to determine whether the bankruptcy court erred based on 8 the evidence before it, which in turn depends in part on the 9 then-existing circumstances surrounding the Motion to Settle. 10 The bankruptcy court did not have any of the proffered documents 11 before it, and therefore they are irrelevant to this appeal. 12 Additionally, Appellants claim that their documents are 13 “relevant to the issue of whether the appeal is moot.” The issue 14 of mootness was not briefed by the parties or otherwise raised on 15 appeal. No one claims that this appeal is moot, and, if 16 anything, the new documents confirm that this appeal is not moot. 17 We thus need not consider the new documents. 18 CONCLUSION 19 For the reasons set forth above, we conclude that the 20 bankruptcy court did not abuse its discretion in granting the 21 Motion to Settle as fair and equitable. Accordingly, we AFFIRM. 22 23 24 25 26 27 28