In re: Lenny Kyle Dykstra

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 8, 2011
• Docket: CC-10-1408-HPePa
• Status: Unpublished

Opinion

FILED DEC 08 2011 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-10-1408-HPePa ) 6 LENNY KYLE DYKSTRA, ) Bk. No. SV 09-18409-GM ) 7 Debtor. ) _____________________________ ) 8 ) LENNY KYLE DYKSTRA, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) DAVID K. GOTTLIEB, Chapter 7 ) 12 Trustee; JP MORGAN CHASE ) BANK, N.A., ) 13 ) Appellees. ) 14 _____________________________ ) 15 Argued and Submitted on November 16, 2011 at Pasadena, California 16 Filed - December 8, 2011 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Geraldine Mund, Bankruptcy Judge, Presiding 20 Appearances: Joel David Joseph, Esq. argued for the appellant, 21 Lenny Kyle Dykstra. Robert Huttenhoff, Esq. of Shulman Hodges & Bastian LLP argued for the 22 appellee, David K. Gottlieb, Chapter 7 Trustee. 23 Before: HOLLOWELL, PERRIS2 and PAPPAS, Bankruptcy Judges. 24 25 1 26 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 27 have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1. 2 Hon. Elizabeth L. Perris, United States Bankruptcy Judge for the District of Oregon, sitting by designation. 1 Lenny Kyle Dykstra (the Debtor) appeals the order of the 2 bankruptcy court approving a compromise between the chapter 73 3 bankruptcy trustee, Terri Dykstra4 and JP Morgan Chase Bank, N.A. 4 (Chase). We DISMISS the appeal as moot. 5 I. FACTS 6 Background 7 In 2007, the Debtor and his then-wife, Terri Dykstra, 8 entered into a loan arrangement with Washington Mutual (WaMu). 9 Ms. Dykstra executed a promissory note in the amount of $12 10 million (the Note). The Note was secured by a first priority 11 deed of trust on real property on Newbern Court in Thousand Oaks, 12 California (the Property). WaMu was subsequently taken over by 13 the Federal Deposit Insurance Corporation (the FDIC). In 2008, 14 FDIC sold WaMu’s assets to Chase pursuant to a Purchase and 15 Assumption Agreement. 16 Chase filed a secured proof of claim in the amount of $13.8 17 million on the outstanding Note. The Property is also encumbered 18 by second and third position trust deeds held by Index Investors 19 (Index). Index asserted a claim in the amount of $936,397 based 20 on two loans it extended to the Debtor. The Property was damaged 21 postpetition. It has not been appraised, but there appears to be 22 no dispute that if Chase and Index hold valid claims, there is no 23 3 24 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 25 All Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 26 4 27 Terri Dykstra was ultimately not a party to the Settlement. She joined with the Debtor in his opposition to the 28 Settlement.

-2- 1 equity in the Property. The Debtor asserts, however, that both 2 WaMu and Index engaged in predatory lending practices in 3 conjunction with the Note and violated the Truth in Lending Act 4 (TILA), 15 U.S.C. §§ 1601-1693r., entitling him to damages and 5 claims of setoff or recoupment. 6 Settlement Agreement 7 On July 7, 2009, the Debtor filed a petition for chapter 11 8 relief. On March 23, 2010, the bankruptcy trustee5 (Trustee) 9 filed a motion for approval of a compromise between the estate 10 and Chase (the Settlement). The Settlement proposed that Chase 11 release the estate of all claims, including its proof of claim, 12 pay the estate $400,000, and relinquish its interest in insurance 13 proceeds the estate received for damages to the Property 14 (totaling $500,000). In exchange, the estate would pay Chase 15 $92,000 for repairs to the Property, stipulate to relief from the 16 automatic stay so that Chase could foreclose on the Property, and 17 release all its claims against Chase. 18 19 5 Arturo M. Cisneros was appointed as the bankruptcy 20 trustee. When the case was later converted to a chapter 7, Cisneros continued as the trustee. After Cisneros filed the 21 motion to approve the Settlement, the Debtor filed numerous 22 oppositions and subsequently filed a motion to remove Cisneros based on allegations of partiality and bias. Although the 23 bankruptcy court denied that motion, Cisneros ultimately resigned as the trustee. On August 11, 2010, David K. Gottlieb was 24 appointed the successor chapter 7 bankruptcy trustee. 25 Gottlieb obtained special counsel to independently examine the terms of the proposed Settlement and to address the merits of 26 the estate’s claims against Chase in order to determine if the 27 Settlement would be beneficial to the estate. Based on special counsel’s analysis, Gottlieb sought approval of the Settlement on 28 its original terms.

-3- 1 On March 26, 2010, the Debtor filed an objection to the 2 Settlement, contending that the TILA and other claims held by the 3 estate against Chase in connection with the Note were worth 4 millions of dollars and would result in equity in the Property 5 for the benefit of the estate. After months of briefing and 6 hearings, the Trustee submitted an independent analysis prepared 7 by his special counsel, which comprehensively evaluated each of 8 the asserted claims the Debtor argued the estate held against 9 Chase related to the Note, as well as Chase’s potential defenses 10 to those claims. The conclusion of the analysis was that the 11 bulk of the claims were either barred by the statute of 12 limitations or subject to various defense theories that would 13 make it difficult for the estate to succeed on the claims. 14 Prior to a final hearing on the Settlement, the bankruptcy 15 court issued a tentative ruling (Tentative Ruling) applying the 16 factors used in evaluating settlement agreements set forth in 17 Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1380-81 18 (9th Cir. 1986), and found that, “while success [in litigating 19 the estate’s claims against Chase] is not an impossibility on at 20 least some theories, it is not very probable on any of the 21 theories presented.” Furthermore, it found that any litigation 22 on the estate’s claims against Chase would be complex, time- 23 consuming, and involve legal theories of first impression in the 24 Ninth Circuit, which could result in appeals, further delaying 25 resolution and increasing litigation costs. Therefore, it 26 concluded that the Settlement would provide a beneficial result 27 for the estate’s creditors. 28 The Settlement hearing was held on October 7, 2010. The

-4- 1 bankruptcy court entered its order approving the Settlement on 2 October 22, 2010, adopting its Tentative Ruling and additional 3 findings made at the Settlement hearing (the Settlement Order). 4 The Debtor appealed. 5 II. JURISDICTION 6 The bankruptcy court had jurisdiction under 28 U.S.C. 7 §§ 1334 and 157(b)(2)(A). We have jurisdiction over final orders 8 under 28 U.S.C. § 158, but address whether the appeal is moot 9 below.6 10 III. ISSUE 11 Do we have jurisdiction to decide if the bankruptcy court 12 abused its discretion in entering the Settlement Order? 13 IV. STANDARDS OF REVIEW 14 Our jurisdiction is a question of law that we address de 15 novo. Menk v. Lapaglia (In re Menk), 241 B.R. 896, 903 (9th Cir. 16 BAP 1999). We lack jurisdiction to hear moot appeals. I.R.S. v. 17 Pattullo (In re Pattullo), 271 F.3d 898, 901 (9th Cir. 2001). If 18 an appeal becomes moot while it is pending before us, we must 19 dismiss it. Id. 20 V. DISCUSSION 21 The Trustee contends that this appeal is moot because the 22 Debtor failed to seek and obtain a stay pending appeal and events 23 tethered to the Settlement have occurred that are too complicated 24 25 6 The Trustee filed a Motion to Dismiss the appeal with the 26 Bankruptcy Appellate Panel (BAP) on April 8, 2011. The Debtor 27 opposed the motion. On June 16, 2011, the BAP entered an order taking the matter under advisement with consideration of the 28 merits. This memorandum disposes of that motion.

-5- 1 and too far consummated to be undone. For example, he asserts 2 that other settlements would be affected by a reversal of the 3 Settlement Order. 4 Prior to entering the Settlement, Cisneros negotiated a 5 compromise on behalf of the estate with Fireman’s Fund Insurance 6 Company and Associated Indemnity Corporation (Insurance Company) 7 related to various claims asserted against insurance policies 8 covering the Property after it had been damaged. The bankruptcy 9 court approved that compromise on May 3, 2010. The compromise 10 provided that the estate would waive its claims against the 11 Insurance Company in exchange for a payment of $500,000 in 12 proceeds (Insurance Proceeds). Both Chase and Index had liens on 13 the Insurance Proceeds. 14 Cisneros also negotiated compromises with both Chase and 15 Index. Approximately three months after submitting the 16 Settlement for approval, the Trustee filed for the approval of a 17 settlement with Index (Index Settlement). The Index Settlement 18 resolved claims that the Debtor had brought against Index in 19 state court, prepetition (which were removed to the bankruptcy 20 court postpetition), for the alleged violation of certain lending 21 laws in connection with the loans secured by the Property. The 22 Index Settlement was approved by the bankruptcy court on July 20, 23 2010. It provided that the estate dismiss, with prejudice, the 24 state court action, stipulate to relief from stay to allow Index 25 to proceed with foreclosure on the Property, pay Index $70,000 26 from the Insurance Proceeds for remediation on the Property, and 27 assign to it claims related to construction defects on the 28 Property. In exchange, Index released its claim to the Insurance

-6- 1 Proceeds and waived any claims against the estate, including its 2 $936,397 proof of claim. The Index Settlement was contingent on 3 the approval of the Settlement. 4 After the Settlement Order was entered, and because no stay 5 pending appeal was sought or obtained by the Debtor, the Trustee 6 took actions to consummate both the Index Settlement and the 7 Settlement. Therefore, the Trustee has dismissed the lawsuit 8 against Index with prejudice, paid Index and Chase from the 9 Insurance Proceeds for repairs to the Property, assigned to Index 10 the estate’s claims related to construction defects, and received 11 $400,000 from Chase. Additionally, Index and Chase obtained 12 relief from the automatic stay and Index has since foreclosed on 13 the Property and sold the Property to a third party. Finally, 14 the Trustee distributed payment on various administrative claims 15 related to both of the settlement agreements. The disbursements 16 were made from the remainder of the Insurance Proceeds, which had 17 reverted to the estate after Index and Chase relinquished their 18 liens, as well as from Chase’s $400,000 payment to the estate. 19 As a result, the Trustee argues the appeal is now equitably, if 20 not constitutionally, moot. 21 Constitutional mootness is derived from Article III of the 22 U.S. Constitution, which provides that the exercise of judicial 23 power depends on the existence of a case or controversy. DeFunis 24 v. Odegaard, 416 U.S. 312, 316 (1974); Clear Channel Outdoor, 25 Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 33 (9th Cir. BAP 26 2008). The mootness doctrine applies when events occur during 27 the pendency of the appeal that make it impossible for the 28 appellate court to grant effective relief. Id. The determining

-7- 1 issue is “whether there exists a ‘present controversy as to which 2 effective relief can be granted.’” People of Village of Gambell 3 v. Babbitt, 999 F.2d 403, 406 (9th Cir. 1993) (quoting Nw. Envtl. 4 Def. Ctr. v. Gordon, 849 F.2d 1241, 1244 (9th Cir. 1988)). If no 5 effective relief is possible, we must dismiss for lack of 6 jurisdiction. United States v. Arkison (In re Cascade Rds., 7 Inc.), 34 F.3d 756, 759 (9th Cir. 1994). 8 Additionally, the doctrine of equitable mootness has been 9 applied when the appellant has failed to obtain a stay and 10 although relief may be possible, the ensuing transactions are too 11 complex or difficult to unwind. In re PW, LLC, 391 B.R. at 33. 12 “‘Ultimately, the decision whether to unscramble the eggs turns 13 on what is practical and equitable.’” Id. quoting Baker & Drake, 14 Inc. v. Pub. Serv. Comm’n (In re Baker & Draker, Inc.), 35 F.3d 15 1348, 1352 (9th Cir. 1994). 16 The Debtor argues that meaningful relief could be provided 17 if the estate repaid Chase the $400,000 and allowed the Debtor to 18 pursue his claims against Chase individually. He argues that 19 upon reversal of the Settlement Order, the claims against Chase 20 for recoupment or set off could be asserted against the proceeds 21 from the sale of the Property. Nevertheless, even if the Debtor 22 is correct that recoupment could still be asserted against the 23 sale proceeds, the Debtor’s contention is somewhat simplistic and 24 minimizes the effect of reversal. Indeed, at oral argument the 25 Debtor’s counsel conceded that he was unsure how other events 26 could be “unscrambled.” 27 If the Settlement Order were reversed, the estate’s claims 28 against Chase might be restored; however, other events could not

-8- 1 be. For example, the Index Settlement and the Chase Settlement 2 have been fully consummated. As a result, the estate has relied 3 on the money from the settlements and used it to pay various 4 administrative expenses. Those transactions cannot be easily 5 unwound. Therefore, while relief may not be totally impossible, 6 there has been a “comprehensive change in circumstances” that has 7 rendered it inequitable to consider the merits of the appeal. 8 See Focus Media, Inc. v. Nat’l Broad. Co., Inc. (In re Focus 9 Media, Inc.), 378 F.3d 916, 923 (9th Cir. 2004) (internal 10 citations omitted). Accordingly, the appeal is moot and beyond 11 our jurisdiction to review. 12 VI. CONCLUSION 13 For the foregoing reasons, we DISMISS the appeal for lack of 14 jurisdiction. 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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