In re: Mc2 Capital Partners, LLC

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: February 25, 2015
• Docket: NC-14-1190-PaJuTa
• Status: Unpublished

Opinion

FILED FEB 25 2015 SUSAN M. SPRAUL, CLERK 1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-14-1190-PaJuTa ) 6 MC2 CAPITAL PARTNERS, LLC, ) Bankr. No. 11-14366 ) 7 Debtor. ) ___________________________________) 8 ) MONAHAN-PACIFIC CONSTRUCTION ) 9 CORPORATION, ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M1 ) 12 ) COMMITTEE OF UNSECURED CREDITORS, ) 13 ) Appellee. ) 14 ___________________________________) 15 Argued and Submitted on February 19, 2015 at San Francisco 16 Filed - February 25, 2015 17 Appeal from the United States Bankruptcy Court 18 for the Northern District of California 19 Honorable Alan Jaraslovsky, Bankruptcy Judge, Presiding 20 Appearances: Wendy McGuire Coats of McGuire Coats LLP argued for 21 appellant Monahan-Pacific Construction Corp; Peter Wakaye Ito of Polsinelli Shughart P.C. argued for 22 appellee Committee of Unsecured Creditors. 23 Before: PAPPAS, JURY, and TAYLOR, Bankruptcy Judges. 24 25 26 1 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 9th 28 Cir. BAP Rule 8024-1.

-1- 1 In this appeal, creditor Monahan-Pacific Construction 2 Corporation (“MPCC”) challenges certain findings made by the 3 bankruptcy court in an order sustaining the objection of the 4 Official Committee of Unsecured Creditors (the “Committee”) to 5 MPCC’s claim and the court’s order denying MPCC’s motion to amend 6 those findings. We AFFIRM the bankruptcy court’s findings and 7 orders. 8 I. FACTS 9 Chapter 112 debtor MC2 Capital Partners, LLC (“MC2") is a 10 California limited liability company formed to develop an eighty- 11 two-unit apartment complex in San Rafael, California (the 12 “Property”). MPCC is the general contractor engaged by MC2 to 13 construct the improvements on the Property. Thomas M. Monahan 14 (“Monahan”) controls both MC2 and MPCC, and he controls the 15 accounting for both companies. 16 On July 18, 2008, Pacific National Bank (together with its 17 successor in interest U.S. Bank, the “Bank”) loaned MC2 18 $35 million on a recourse basis, secured by the Property. The 19 purpose of the loan was to fund construction on the Property. The 20 loan was memorialized in a Promissory Note, a Construction Loan 21 Agreement, and a Construction Deed of Trust. Monahan guaranteed 22 the payment obligations under the Note and performance under the 23 Construction Loan Agreement. 24 Under the Construction Loan Agreement, MPCC as general 25 contractor would submit a monthly invoice called an “Application 26 2 Unless otherwise indicated, all chapter, section and rule 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. We 28 refer to the Federal Rules of Civil Procedure as “Civil Rules.”

-2- 1 for Payment” (“Application”) to MC2 and, in turn, MC2 would submit 2 the Application to the Bank as part of a loan draw request. Each 3 Application included an itemization of the costs that MPCC had 4 incurred to date, the amount held back until completion of the 5 project, the amount billed by MPCC from the previous Application, 6 the current payment due MPCC, and the balance to finish the 7 contract. The Bank was to be informed of any credits for 8 construction costs issued by MPCC in favor of MC2. 9 In late 2010, MPCC lost a lawsuit and a money judgment was 10 entered against it. Subsequently, MCC’s contractor’s license was 11 terminated by the State of California. 12 Then, on December 3, 2010, Monahan terminated the 13 construction contract between MC2 and MPCC. 14 On April 6, 2011, U.S. Bank notified MC2 that it was in 15 default under the loan. U.S. Bank formally declared a default and 16 accelerated the Note in a letter to MC2 dated June 14, 2011. 17 Next, on December 1, 2011, MC2 filed a chapter 11 petition. 18 Monahan was designated as the responsible person for the corporate 19 debtor-in-possession MC2, and the U.S. Trustee appointed the 20 Committee on January 4, 2012. 21 MC2's proposed plan of reorganization was confirmed by the 22 bankruptcy court on May 11, 2012. The plan provided for 23 liquidation of the assets of MPCC and for pro rata distribution of 24 the proceeds to unsecured creditors, after payment in full of all 25 secured and priority claimants. 26 On April 5, 2012, MPCC filed an unsecured proof of claim for 27 $1,614,713.51. This amount represented the total due from MC2 to 28 MPCC for construction costs for the Property, and was comprised of

-3- 1 $759,410.22, claimed due for services before the contract was 2 terminated, and $855,303.69 for “post termination transition 3 services.” 4 The Committee objected to MPCC’s proof of claim on August 23, 5 2012; it amended that objection on December 10, 2012. The 6 Committee argued, among other things, that MPCC had lost its 7 contractor’s license during the term of the contract, and that 8 under Cal. Bus. & Prof. Code § 7031(b), MPCC was therefore liable 9 to MC2 for all amounts paid to MPCC while it was an unlicensed 10 contractor. The Committee also noted that MPCC had not submitted 11 or attached to its proof of claim any documents to support its 12 claim and that the Committee had not completed discovery. 13 MPCC responded to the Committee’s objection on September 13, 14 2012, arguing that it was entitled to be paid for its services, 15 and that it was not required to file supporting documents. 16 On December 5, 2013, the bankruptcy court conducted an 17 evidentiary hearing regarding the Committee’s objection to MPCC’s 18 claim. At the beginning, the parties agreed that there were two 19 critical issues for consideration by the bankruptcy court: (1) the 20 status of five invoices/Applications that MPCC contends were not 21 paid or only partially paid; and (2) the impact of a credit memo 22 that may have been created by MPCC “after the fact” to create a 23 claim. 24 The bankruptcy court heard testimony from Jeff Koehler, a 25 vice president of U.S. Bank and custodian of the documents 26 regarding the loan, and Jeanne Zamanillo, controller of MPCC. 27 While the bankruptcy court took the issues under advisement at the 28 conclusion of the hearing, it offered its opinion before

-4- 1 adjourning that Monahan had engaged in “machinations” regarding 2 some of the relevant transactions. Hr’g Tr. 82:2-10, December 5, 3 2013. 4 The bankruptcy court entered a “Memorandum on Objection to 5 Claim 35" on December 16, 2013. In it, the court found that: 6 Monahan feared that the judgment creditor would seize any progress payments made by MC2 so he terminated the 7 construction contract between MC2 and MPCC, ostensibly (i.e., for the purposes of the judgment creditor) due to 8 poor performance by MPCC. The date of the cancellation was December 3, 2010. Thereafter, MC2 was to pay the 9 subcontractors directly. Monahan had his accountants mark all but one outstanding invoice from MPCC as “PAID” 10 and issued a credit to MC2 for $2,118,586.46. Of course, Monahan saw no need to inform the construction 11 lender, U.S. Bank, about any of his machinations. He continued to present the bank with requests for progress 12 payments in the name of MC2, showing that payments were current. 13 14 Memorandum at 1. 15 Based on the evidence and its findings, the bankruptcy court 16 concluded: 17 A proof of claim is prima facie evidence of its validity until an objector produces evidence to rebut the 18 presumption of validity. The burden then shifts to the claimant to prove its claim. In re Garvida, 347 B.R. 19 697, 7078 (9th Cir. BAP 2006). In this case, the Creditors Committee has rebutted the presumption of 20 validity by demonstrating that most of the invoices supporting the [proof of] claim were marked “PAID” and 21 that Monahan, on behalf of both MC2 and MPCC, represented to U.S. Bank that the invoices supporting 22 the claim were paid. MPCC is unable to prove its claim. Monahan was manipulating the books and records of both 23 MC2 and MPCC in order to avoid enforcement efforts of a judgment creditor. He controlled both entities, and his 24 accountants kept the books of both. No independent audit was produced. Due to these facts, the evidence 25 produced to substantiate the claim lacks all credibility. The court cannot find by a preponderance 26 of the evidence that the claim has any validity at all. 27 Memorandum at 2 (emphasis added). The bankruptcy court entered an 28 order sustaining the Committee’s objection and disallowing MPCC’s

-5- 1 claim on December 17, 2013. 2 On December 30, 2013, MPCC filed a motion to amend the order 3 relying on Rule 9023, which incorporates Civil Rule 59(e). The 4 motion did not ask the bankruptcy court to modify or change the 5 order disallowing the claim in any manner. Instead, the motion 6 sought only that the bankruptcy court amend its Memorandum to 7 remove the finding that “Monahan was manipulating the books and 8 records of both MPCC and MC2 . . . as such language could be 9 improperly used in state and/or adversary proceedings to argue 10 this Court had reviewed the books and records of MPCC and MC2, 11 when in fact such a review has not occurred.” MPCC sought this 12 relief because it was concerned about the potential preclusive 13 effect of the subject finding. 14 The bankruptcy court heard the motion to amend on April 11, 15 2014. During the hearing, the court repeatedly reminded counsel 16 for MPCC that it was not its responsibility to anticipate the 17 preclusive effects of its orders in future proceedings: 18 I’ve rendered my decision. I gave my reasons. And if another court decides that they want to give preclusive 19 effect, that’s for another court to decide. 20 Hr’g Tr. 5:6-8, April 11, 2014. However, MPCC’s counsel insisted 21 that the alleged offensive finding should be removed from the 22 Memorandum. 23 The bankruptcy court entered a minute order on April 11, 24 2014, memorializing its decision to deny the motion to amend and 25 then entered an order denying the motion on June 2, 2014. MPCC 26 filed a timely notice of appeal regarding both the order 27 sustaining the objection to claim, and the minute order denying 28 the motion to amend, on April 14, 2014.

-6- 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 3 and 157(b)(2)(B). However, we have concerns about MPCC’s standing 4 and, thus, our jurisdiction over this appeal, under 28 U.S.C. 5 § 158. 6 The constitutional requirements for standing under 7 Article III are jurisdictional, cannot be waived by any party, and 8 may be considered by the court sua sponte. City of L.A. v. Cnty. 9 of Kern, 581 F.3d 841, 845 (9th Cir. 2009). In its most recent 10 discussion of constitutional standing, the Ninth Circuit observed. 11 The oft-repeated "irreducible constitutional minimum of standing contains three elements." Lujan v. Defenders 12 of Wildlife, 504 U.S. 555, 560, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992). "First, the plaintiff must have 13 suffered an 'injury in fact,'" which is both concrete and particularized, as well as actual or imminent. Id. 14 "Second, there must be a causal connection between the injury and the conduct complained of," meaning that the 15 injury must be "fairly traceable to the challenged action of the defendant." Id. (quoting Simon v. E. Ky. 16 Welfare Rights Org., 426 U.S. 26, 41-42, 96 S. Ct. 1917, 48 L. Ed. 2d 450 (1976) (quotation mark and alterations 17 omitted)). Third, it must be likely that a favorable decision would redress the injury identified. Id. at 18 561. 19 Sturgeon v. Masica, 768 F.3d 1066, 1071 (9th Cir. 2014). These 20 three elements also apply to standing to appeal. Wolford v. 21 Gaekle (In re First Capital Holdings Corp. Fin. Prod. Sec. 22 Litig.), 33 F.3d 29, 30 (9th Cir. 1994). Commenting further on 23 the first element, injury in fact, the Supreme Court has noted 24 that the injury cannot be “conjectural or hypothetical.” Knisley 25 v. Network Assocs., Inc., 312 F.3d 1123, 1126 (9th Cir. 2002). 26 The sole request by MPCC for relief in this appeal is that 27 the Panel strike the phrase “manipulate the books and records” 28 from the bankruptcy court’s findings in its Memorandum sustaining

-7- 1 the Committee’s objection to MPCC’s claim. In the bankruptcy 2 court, MPCC claimed it was harmed by this finding because it 3 implied that it had engaged in fraud. 4 [MPCC Counsel]: Manipulation of books and records is essentially committing an act of fraud. . . . My client 5 then bears the burden of disproving that fraud occurred[.] 6 7 However, the bankruptcy court immediately corrected counsel: 8 THE COURT: I didn’t make a finding of fraud. 9 Hr’g Tr. 5:9-14. 10 It is important to note that the word “fraud” does not appear 11 in either of MPCC’s briefs on appeal. MPCC’s suggestion that the 12 bankruptcy court’s finding that Monahan was “manipulating the 13 books and records” constitutes a finding of fraud that could 14 potentially be afforded preclusive effect in other proceedings is 15 not compelling under these facts. As a result, it can be argued 16 that MPCC has not established that it has suffered any cognizable 17 injury in fact that is concrete and particularized, actual or 18 imminent, and not hypothetical or conjectural. In response, MPCC 19 argues that the bankruptcy court’s allegedly erroneous finding may 20 subject it to some amorphous adverse exposure in subsequent 21 litigation. The premise for this contention is completely 22 speculative.3 23 3 24 We are also puzzled by MPCC’s motion to supplement the appellate record to include a transcript of a hearing conducted in 25 an adversary proceeding between MPCC and the Committee in this bankruptcy case presided over by a different bankruptcy judge. 26 That judge not only declined to give any preclusive effect to the finding in the Memorandum regarding Monahan’s “manipulation of the 27 books and records,” the second judge flatly rejected that finding: “[T]his Court rejects the characterization and the inference that 28 (continued...)

-8- 1 While it is a close call, and while it is difficult to see 2 how MPCC was, or will be, injured by the bankruptcy court’s 3 findings, the Panel will credit MPCC’s argument that it may be 4 subject to some future injury as a result of the challenged 5 finding by the bankruptcy court. We will not dismiss this appeal 6 based upon MPCC’s lack of appellate standing, but will instead 7 resolve this appeal on the merits. 8 III. ISSUES 9 Whether the bankruptcy court abused its discretion in denying 10 MPCC’s motion to amend the judgment. 11 Whether the bankruptcy court erred in finding that Monahan 12 manipulated the books and records of MC2 and MPCC. 13 IV. STANDARD OF REVIEW 14 A motion to amend the judgment under Rule 9023 is reviewed 15 for abuse of discretion. Sch. Dist. No. 1J, Multnomah Cnty., Or. 16 v. AC and S, Inc., 5 F.3d 1255, 1262-63 (9th Cir. 1993). The 17 standard is the same for review under Rule 7052. Weiner v. Perr, 18 Settles & Lawson, Inc. (In re Weiner), 208 B.R. 69, 72 (9th Cir. 19 BAP 1997). 20 A factual finding is clearly erroneous if it is “illogical, 21 implausible, or without support in the record.” In re Retz, 22 606 F.3d at 1196 (citing United States v. Hinkson, 585 F.3d 1247, 23 1261-62 & n.21 (9th Cir. 2009) (en banc)). 24 25 3 (...continued) 26 there was a manipulation of the books and records.” Hr’g Tr. 11:4-5, December 9, 2014. While we will grant MPCC’s request to 27 supplement the record, the substance of this transcript appears to undercut MPCC’s argument that the bankruptcy court’s finding could 28 have preclusive effect in any future proceedings.

-9- 1 V. DISCUSSION 2 Simply put, MPCC’s arguments lack merit, and the bankruptcy 3 court did not err in making the finding in the Memorandum that 4 Monahan had manipulated the books and records of MPCC and MC2, nor 5 did it abuse its discretion in denying MPCC’s motion to amend. 6 A. “Books and records” is not a legal term of art with an 7 expansive meaning. 8 MPCC argues that by referring to “the books and records” in 9 its findings in the Memorandum, the bankruptcy court employed a 10 legal term of art with an “expansive scope.” Since, at the 11 hearing on the Committee’s objection to MPCC’s claim, the 12 bankruptcy court was given only a small portion of the business 13 records of MPCC and MC2, MPCC insists that the bankruptcy court 14 erred because its finding suggests that the court “reviewed and 15 made findings regarding the entire ‘books and records’ of MPCC and 16 MC2.” MPCC’s Op. Br. at 17. For several reasons, we disagree. 17 First, MPCC has cited no authority for the assertion that the 18 phrase “books and records” is recognized as a legal term of art 19 with a universally understood meaning in this context, nor have we 20 located any such authority in our own search. Rather, MPCC simply 21 points to various provisions in statutes that include the phrase 22 “books and records.” That does not make the phrase a term of art. 23 Second, by definition, a legal term of art does not have an 24 expansive scope. On the contrary, a legal term of art is usually 25 narrow, specific, and precise. As the foremost legal dictionary 26 observes, a term of art is "[a] word or phrase having a specific, 27 precise meaning in a given specialty, apart from its general 28 meaning in ordinary contexts." BLACK'S LAW DICTIONARY 1700 (10th ed.

-10- 1 2014). The Supreme Court has cautioned that a term of art is not 2 “merely a generic or descriptive term.” Hamling v. United States, 3 418 U.S. 87, 121 (1974). Other courts interpreting a “term of 4 art” generally hold that it has a specific, precise meaning in 5 context. United States v. Zuniga-Arteaga, 681 F.3d 1220, 1224 6 (11th Cir. 2012); Miller v. Barberton Municipal Ct., 935 F.2d 775, 7 778 (6th Cir. 1991); AGFA Corp. v. United States, 491 F.Supp.2d 8 1317, 1322 (Ct. Int'l Trade 2007), aff'd, 520 F.3d 1326 (Fed. Cir. 9 2008). 10 MPCC spends much of its appellate briefing arguing about how 11 broad the term “books and records” is. We agree. As MPCC 12 acknowledges, the term at common law included not only ledgers, 13 but also financial statements, records pertaining to receivables 14 and payables, purchase orders, and invoices. MPCC’s Op. Br. at 19 15 (citing Mooney v. Bartenders Union, 311 P.2d 857 (Cal. 1957)). 16 However, we find it inconsistent that, in its arguments, MPCC 17 contends that the meaning of “books and records” is expansive, 18 while simultaneously suggesting that the documents reviewed by the 19 bankruptcy court in this case were not part of MPCC’s and MC2's 20 “books and records.” The bankruptcy court reviewed thirty-one 21 Applications, which were effectively invoices for payment for 22 MPCC’s services, and determined that five of them, those which 23 purportedly supported most of MPCC’s claim, had been marked 24 “PAID.” These documents hardly supported MPCC’s claim, but 25 instead, constituted evidence that, as the bankruptcy court found, 26 Monahan had engaged in creative bookkeeping to forestall any 27 potential collection efforts by MPCC’s judgment creditor. 28 MPCC has not shown that the bankruptcy court’s use of the

-11- 1 term “manipulating the books and records” was an inaccurate use of 2 a term of art. Terms of art are not expansive, but are narrow and 3 precise. Nor has MPCC shown that “the books and records” can only 4 be construed to mean all the books and records of MPCC and MC2. 5 Indeed, as we read the bankruptcy court’s Memorandum, its 6 reference to “the books and records” necessarily describes only 7 those business records presented to the court in evidence. 8 In sum, the evidence supports the bankruptcy court’s finding 9 that Monahan was “manipulating the books and records” of MPCC and 10 MC2 to avoid collection efforts of the judgment creditor. In 11 making this finding, the court was relying upon the documentary 12 evidence submitted by both parties and the testimony of witnesses. 13 We give deference to the findings of the bankruptcy court adduced 14 at a trial. Rule 8013. To the extent that the court was 15 presented with two plausible views of the evidence, the trial 16 judge’s choice between them cannot be clearly erroneous. Anderson 17 v. City of Bessemer City, N.C., 470 U.S. 564, 573-74 (1985). 18 B. The bankruptcy court did not abuse its discretion in 19 denying MPCC’s motion to amend. 20 Under Civil Rule 59(e), as applicable in bankruptcy 21 proceedings by Rule 9023, a bankruptcy court may alter or amend an 22 order.4 Motions under Civil Rule 59(e) should not be granted 23 4 24 MPCC’s use of a motion to amend the judgment under Rule 9023/Civil Rule 59(e) seems inapt in this procedural context. 25 MPCC does not seek to amend the order of the bankruptcy court, the relief provided under Civil Rule 59(e). Rather, MPCC’s clear 26 intent was to persuade the bankruptcy court to modify its findings in the Memorandum. As a result, we think MPCC should have invoked 27 Rule 7052, which incorporates Civil Rule 52(b): “On a party’s motion filed no later than 14 days after the entry of judgment, 28 (continued...)

-12- 1 unless the trial court “is presented with newly discovered 2 evidence, committed clear error, or if there is an intervening 3 change in controlling law.” Kona Enter., Inc. v. Est. of Bishop, 4 229 F.3d 877, 890 (9th Cir. 2000). Reconsideration is also 5 available to prevent manifest injustice. Navajo Nation v. 6 Confederated Tribes and Bands of the Yakama Indian Nation, 7 331 F.3d 1041, 1046 (9th Cir. 2003). 8 MPCC’s sole argument in its motion to amend was that the 9 bankruptcy court erred in finding that Monahan had manipulated the 10 books and records of MPCC and MC2 because it may have negative 11 preclusive effects. MPCC did not argue that there was any newly 12 discovered evidence, that the bankruptcy court committed clear 13 error, or that there was an intervening change in controlling law. 14 Rather, MPCC targeted the bankruptcy court’s alleged improper 15 finding as a manifest error of fact or law, because that finding 16 might be interpreted as a fraud finding in subsequent proceedings. 17 As we note above, the bankruptcy court effectively derailed 18 the likelihood that MPCC would suffer prejudice as a result of its 19 finding when it announced at the hearing that it was not making a 20 finding of fraud. But even if MPCC could demonstrate a potential 21 for injury, the bankruptcy court was on solid legal ground in 22 23 4 (...continued) 24 the court may amend its findings — or make additional findings — and may amend the judgment accordingly. The motion may accompany 25 a motion for a new trial under [Civil] Rule 59.” However, in the context of this appeal, MPCC’s reliance upon 26 the wrong rule for relief was harmless error. Under both Civil Rules 52 and 59(e), we review the bankruptcy court’s rulings for 27 “manifest error of fact or law.” In re Weiner, 208 B.R. at 72. Like the parties and bankruptcy court, we therefore proceed with 28 our analysis under Civil Rule 59(e).

-13- 1 declining to amend its findings. Indeed, as the Supreme Court has 2 twice ruled within the last six years, the bankruptcy court was 3 not permitted to consider the potential preclusive effect of its 4 own order. See, Medellin v. Texas, 128 S. Ct. 1346, 1361 n.9 5 (2008) (“The first court does not get to dictate the preclusion 6 consequences of its own judgment.”); Smith v. Bayer Corp., 131 S. 7 Ct. 2368, 2375 (2011) (citing Medellin for the same rule). See 8 also, In re Tutu Water Wells CERCLA Litig, 326 F.3d 201, 210 n.5 9 (3d Cir. 2003) (explaining that “[w]hether the [trial] court’s 10 findings have a preclusive effect against [the parties] only 11 becomes ripe for determination if and when the [parties] use the 12 findings and conclusions in other contexts.”). Here, MPCC has not 13 shown that the bankruptcy court’s findings are being used in 14 another proceeding in some “other context.” 15 Contrary to MPCC’s position, the bankruptcy court did not 16 abuse its discretion in denying the motion to amend. In making 17 the challenged finding, it had committed no manifest error in law 18 or fact. Instead, the bankruptcy court was faithful to the 19 Supreme Court’s teachings in observing that: 20 I’ve rendered my decision. I gave my reasons. And if another court decides that they want to give preclusive 21 effect, that’s for another court to decide. 22 Hr'g Tr. 5:6-8, April 11, 2014. 23 VI. CONCLUSION 24 We AFFIRM the orders of the bankruptcy court. 25 26 27 28

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