In re: Patrick Roy Lewis

Opinion

FILED AUG 20 2014

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-13-1367-TaDKi )

6 PATRICK ROY LEWIS, ) Bk. No. SV 11-13919-AA )

7 Debtor. )

______________________________)

8 )

KALLMAN & COMPANY LLP, )

9 )

Appellant, )

10 )

v. ) OPINION 11 )

DAVID K. GOTTLIEB, CHAPTER 7 )

12 TRUSTEE; JUDITH LEWIS, )

)

13 Appellees. )

)

14 15 Argued and Submitted on June 26, 2014 at Pasadena, California

16 Filed – August 20, 2014

17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Alan M. Ahart, Bankruptcy Judge, Presiding 20 21 Appearances: Michael Sanford Kogan of Kogan Law Firm, APC for Appellant Kallman & Company LLP; Lawrence D.

22 Simons of the Law Offices of Larry D. Simons for Appellee David Gottlieb; and Simon Jonathan 23 Dunstan of Hughes & Dunstan, LLP for Appellee Judith Lewis.

24 25 26 Before: TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges.

1 TAYLOR, Bankruptcy Judge: 2 3 The bankruptcy court entered an order authorizing a sale of 4 the bankruptcy estate’s interest in a state court action to 5 creditor Kallman & Company LLP (“K&C”). After the Debtor moved 6 for reconsideration of the K&C sale order, the chapter 7 trustee 7 moved to approve the sale of the same property to the Debtor’s 8 non-filing wife pursuant to § 363(i).1 The bankruptcy court 9 entered an order approving the § 363(i) sale; K&C appealed. 10 This Panel vacated the order approving the § 363(i) sale and 11 remanded to the bankruptcy court for further findings of fact and 12 conclusions of law. See Kallman & Co. LLP v. Gottlieb (In re 13 Lewis), 2013 WL 2367797 (9th Cir. BAP May 30, 2013). On remand, 14 the bankruptcy court issued findings and conclusions and entered 15 a second order approving the § 363(i) sale; K&C again appeals. 16 We conclude that the bankruptcy court was authorized to 17 enter the second § 363(i) order and that it did not abuse its 18 discretion in approving the § 363(i) sale to the non-filing wife. 19 We, thus, AFFIRM the bankruptcy court. 20 FACTS 21 The Debtor, Patrick Roy Lewis, has been married to Judith 22 Lewis (“Judith”)2 since 1992. 23 Prior to filing bankruptcy, the Debtor initiated an action 24

1

Unless otherwise indicated, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 26 All “Rule” references are to the Federal Rules of Bankruptcy Procedure.

27

2

We refer to Judith by her first name for clarity and 28 consistency with the prior memorandum decision; we intend no disrespect.

1 against K&C – his former employer – in California state court. 2 The complaint alleged claims for breach of contract, breach of 3 fiduciary duty, failure to pay wages, and an accounting (the 4 “Claims”). In response, K&C filed a cross-complaint against the 5 Debtor. 6 While the state court action was pending (and prior to 7 judgment), the Debtor filed a chapter 7 bankruptcy petition, and 8 David K. Gottlieb was appointed as Trustee. Judith did not file 9 and, thus, was not a debtor. In scheduling the Claims, the 10 Debtor did not indicate whether they were a community asset or 11 belonged to him separately, although he specifically identified 12 the ownership of other scheduled assets. 13 At some point, K&C approached the Trustee about purchasing 14 the estate’s interest in the Claims. Following negotiations, the 15 parties agreed that K&C would purchase the Claims for $40,000, 16 subject to a minimum overbid of $10,000, and that parties would 17 enter into mutual releases. The parties reduced the agreement to 18 a writing, which each executed (the “Agreement”). 19 The Trustee sought approval of the sale under § 363(b); the 20 Debtor opposed. At the sale hearing, the bankruptcy court 21 overruled the Debtor’s opposition and, in the absence of any 22 overbid, orally approved the sale of the Claims to K&C. The 23 parties apparently intended to proceed slowly to conclude the 24 sale; the Agreement did not require payment of consideration from 25 K&C until 30 days after the closing date, and the closing date 26 occurred only when the order approving the sale became final and 27 nonappealable. 28 A week after the K&C sale hearing, Debtor’s counsel advised

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1 the Trustee that Judith intended to exercise her right under 2 § 363(i) to purchase the Claims for $40,000. Unaware of the 3 brewing controversy, the bankruptcy court entered an order 4 approving the sale of the Claims to K&C (“K&C Sale Order”). The 5 Debtor then timely moved for reconsideration and the Trustee 6 concurrently moved to approve a stipulation to sell the Claims to 7 Judith under § 363(i). The Trustee based the § 363(i) motion on 8 his stated assumptions that the Claims were community property 9 and that a § 363(i) sale was appropriate as the sale to K&C was 10 not yet consummated. 11 At the subsequent hearing on both the motion to reconsider 12 and the motion to approve the § 363(i) sale, the parties agreed 13 that they could not locate any case authority establishing the 14 date of consummation for purposes of § 363(i). In the absence of 15 such authority, they disagreed as to when or whether the K&C sale 16 was consummated. After further argument, the bankruptcy court 17 orally approved the § 363(i) motion. 18 The bankruptcy court then turned to the reconsideration 19 motion, which K&C and the Trustee both opposed. The Trustee, in 20 particular, maintained that the K&C Sale Order was necessary to 21 establish the price that Judith was required to pay for the 22 § 363(i) sale. As a result, the bankruptcy court orally denied 23 the reconsideration motion. 24 The bankruptcy court afterward entered two orders in May of 25 2012: an order denying the Debtor’s reconsideration motion and an 26 order approving the § 363(i) sale to Judith (“First Judith Sale 27 Order”). K&C appealed the First Judith Sale Order to this Panel. 28 The order denying reconsideration was not appealed, and, thus,

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1 the K&C Sale Order became final on May 23, 2012. 2 Based on a lack of factual findings as required by Rule 3 7052, the Panel vacated the First Judith Sale Order and remanded 4 to the bankruptcy court with instructions to enter its findings 5 and conclusions and to determine whether the First Judith Sale 6 Order superseded the K&C Sale Order. The bankruptcy court did 7 so; it entered a second order approving the § 363(i) sale to 8 Judith (“Second Judith Sale Order”) and issued separate findings 9 and conclusions supporting its decision. It determined that: the 10 Claims were community property; the K&C sale was not consummated 11 before Judith invoked her § 363(i) purchase right; and, in any 12 event, the Second Judith Sale Order superseded the K&C Sale 13 Order. K&C timely appealed. 14 JURISDICTION 15 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 16 §§ 1334 and 157(b)(2)(N). We have jurisdiction under 28 U.S.C. 17 § 158. 18 ISSUES 19 1. Was the bankruptcy court authorized to enter the Second 20 Judith Sale Order? 21 2. Did the bankruptcy court abuse its discretion in approving 22 the sale to Judith pursuant to § 363(i)? 23 STANDARD OF REVIEW 24 We review an order approving a § 363 sale for an abuse of 25 discretion. Moldo v. Clark (In re Clark), 266 B.R. 163, 168 (9th 26 Cir. BAP 1998). A review of an abuse of discretion determination 27 involves a two-pronged test; first, we determine de novo whether 28 the bankruptcy court identified the correct legal rule for

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1 application. United States v. Hinkson, 585 F.3d 1247, 1261-62 2 (9th Cir. 2009) (en banc). If not, then the bankruptcy court 3 necessarily abused its discretion. Id. at 1262. Otherwise, we 4 next review whether the bankruptcy court’s application of the 5 correct legal rule was clearly erroneous; we will affirm unless 6 its findings were illogical, implausible, or without support in 7 inferences that may be drawn from the facts in the record. Id. 8 DISCUSSION 9 On appeal, K&C argues that the bankruptcy court lacked 10 authority to enter the Second Judith Sale Order and that, in the 11 alternative, the bankruptcy court erred in approving the § 363(i) 12 sale to Judith. 13 A. The bankruptcy court was authorized to enter the Second 14 Judith Sale Order. 15 K&C argues that the K&C Sale Order became a final, 16 nonappealable order on May 23, 2012 and, thus, that the sale was 17 consummated for § 363(i) purposes on the same date. On this 18 record, we disagree. 19 1. The sale to K&C was never consummated. 20 In pertinent part, § 363(i) provides that: 21 Before the consummation of a sale . . . of property of the estate that was community property of the debtor 22 and the debtor’s spouse immediately before the commencement of the case, the debtor’s spouse . . . may 23 purchase such property at the price at which such sale is to be consummated.

24 25 The plain text of the statute makes clear that the debtor’s 26 spouse must both exercise a § 363(i) purchase right and complete 27 the purchase prior to consummation of the first sale. The Code, 28 however, does not define “consummation.” Only eight other Code

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1 sections contain the term in some variation. Most of these Code 2 sections involve consummation or substantial consummation of a 3 chapter 11 plan and, while indirectly helpful, involve facts that 4 are facially distinguishable from an asset sale as is relevant to 5 § 363(i).3 The other Code sections including the term 6 consummation relate to asset sales, but there is no case law in 7 connection with these sections that aids our analysis here.4 8 We, thus, begin with the common meaning of consummation, 9 which is “[t]he action or an act of completing, accomplishing, or 10 finishing,” OED Online, http://www.oed.com/view/Entry/39989? 11 (last visited August 18, 2014), or “the ultimate end,” 12 Merriam-Webster Online, 13 http://www.merriam-webster.com/dictionary/consummation (last 14 visited August 18, 2014). This common meaning dictates that, for 15 the purposes of § 363(i), a sale of property is consummated when 16 the sale is complete, accomplished, finished, or at the ultimate 17 end. Fundamentally, consummation is an elastic concept, based on 18

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19 See 11 U.S.C. §§ 1101(2) (definition of substantial consummation of chapter 11 plan), 1112(b)(4)(M) (inability to 20 effectuate substantial consummation of confirmed chapter 11 plan constitutes cause to dismiss or convert case), 1127(b) (confirmed 21 chapter 11 plan may be modified before substantial consummation 22 of plan), 1127(e) (individual chapter 11 debtor may modify confirmed chapter 11 plan regardless of whether plan was 23 substantially consummated), 1141(d)(3) (chapter 11 plan confirmation does not discharge debtor if, among other things, 24 debtor does not engage in business after plan consummation), 1142(b) (bankruptcy court’s authority to direct execution or 25 delivery of any instrument necessary for plan consummation), 26 1145(b)(1)(C) (definition of federal securities underwriter).

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27 See 11 U.S.C. §§ 363(n) (in collusive bidding scheme, trustee may recover the difference between the property value and 28 the consummated sale price), 741(2)(A)(iii) (definition of customer for purposes of § 741).

1 the particular circumstances in the case. In general, however, 2 it involves more than mere approval of a sale and requires 3 finalization of the sale; this will typically involve payment. 4 This plain reading of § 363(i) consummation is not 5 inconsistent with the other Code sections that include the term; 6 in particular, it is consistent with the definition of 7 “substantial consummation” for chapter 11 plan purposes in 8 § 1101(2). Substantial consummation is defined as far more than 9 plan confirmation; it requires significant progress toward 10 finalization of the actions required by the plan and the 11 commencement of distributions. By analogy, consummation of a 12 § 363 sale does not occur simply because the bankruptcy court 13 enters an order approving the sale. 14 Here, the bankruptcy court determined that the K&C sale was 15 not consummated for the purposes of § 363(i). We agree. The 16 Agreement defined the transaction closing date as the date of 17 entry of a final and nonappealable order approving the K&C sale. 18 And, while a closing date is typically the date on which a deal 19 is finalized and consideration conveyed, the Agreement provided 20 for payment to the Trustee within 30 days of the closing date. 21 The path to sale consummation was thus cleared when the 22 bankruptcy court granted the K&C sale motion and approved the 23 Agreement. Judith, however, erected a barrier to consummation 24 when she asserted her rights under § 363(i). True, the 25 bankruptcy court entered the K&C Sale Order prior to Judith’s 26 completion of her purchase. Also true, the bankruptcy court 27 denied the Debtor’s motion for reconsideration of the K&C Sale 28 Order, such that this order became final and nonappealable on May

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1 23, 2012. See Fed. R. Bankr. P. 8002(b)(4); see also In re 2 Lewis, 2013 WL 2367797, at *4. These events, however, did not 3 constitute consummation of the K&C sale; they merely removed 4 obstacles to consummation of a sale, a consummation that never 5 occurred. 6 First, the Second Judith Sale Order provided that it 7 supplanted the K&C Sale Order. Although the second order was 8 entered on July 22, 2013, it was not entered on a new or 9 different motion - instead, it related back to the § 363(i) 10 motion, the bankruptcy court’s grant of that motion, and entry of 11 the First Judith Sale Order. 12 As a result, although the K&C Sale Order was final and 13 nonappealable as of May 23, 2012, there existed an intervening 14 order that sold the Claims to Judith. There could be no 15 consummation of the K&C sale when the Claims were instead sold to 16 Judith, as specifically authorized by the Code. In this respect, 17 the term “superseded” is somewhat inapt. The bankruptcy court 18 actually determined that Judith had the first right to purchase 19 the Claims at the K&C purchase price. Had she failed to deliver 20 payment, the K&C Sale Order allowed immediate sale to K&C. The 21 Trustee was not free to re-market the Claims. Thus, by virtue of 22 § 363(i), Judith’s right to purchase the Claims was superior to 23 K&C’s purchase right, while K&C’s right to purchase was superior 24 to that of any other party. 25 Second, as the bankruptcy court determined and as K&C does 26 not dispute, K&C never tendered the purchase price to the Trustee 27 pursuant to the terms of the Agreement. In its defense, K&C 28 attributes its failure to pay to the Trustee’s instruction to

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1 hold payment until the bankruptcy court resolved the competing 2 sale motions. Whether the Trustee directed K&C to hold payment, 3 however, is ultimately irrelevant – K&C never tendered payment 4 and, therefore, the sale was never consummated. 5 Arguably, K&C has no one to blame but itself. It could 6 have assumed certain risks and paid the purchase price 7 immediately. It also could have eliminated or reduced any risks 8 by obtaining a waiver of the Rule 6004(h) stay, seeking a 9 § 363(m) finding that provided protection on appeal, or, again, 10 immediately paying the purchase price. Instead, it provided 11 Judith with sufficient time to assert her § 363(i) right and to 12 prove that she had the ability to make good on her offer. 13 K&C’s arguments as to alternative dates for consummation of 14 the sale - February 22, 2012, the hearing date on which the 15 bankruptcy court orally approved the K&C sale, and March 8, 2012, 16 the date that the bankruptcy court entered the K&C Sale Order - 17 similarly fail. For the reasons already discussed, on neither of 18 those dates was the sale to K&C completed. Thus, the bankruptcy 19 court did not err in determining that the K&C sale was not 20 consummated at the time that Judith exercised her § 363(i) 21 purchase right. 22 2. The Second Judith Sale Order supplanted the K&C Sale 23 Order. 24 K&C also argues that the bankruptcy court erred in 25 superseding the K&C Sale Order. It disputes that the Second 26 Judith Sale Order vacated the K&C Sale Order and that the 27 “evidence on the record” supports the bankruptcy court’s decision 28 to supersede the prior order, one year after the K&C Sale Order

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1 became final. 2 Generally, a bankruptcy court may enter an order that 3 supersedes a prior order without formally vacating the antecedent 4 order. Indeed, “supersede” means “[t]o annul, make void, or 5 repeal by taking the place of.” Black’s Law Dictionary (9th ed. 6 2009). As a result, in many circumstances, the effect of a 7 superseding order is the same as vacation of the prior order. 8 That the bankruptcy court here did not “officially” vacate the 9 K&C Sale Order is, thus, of no significance when considering the 10 validity of the Second Judith Sale Order.5 And as discussed 11 above, the use of the term “supersede” is somewhat inexact. The 12 bankruptcy court in substance merely recognized that Judith’s 13 § 363(i) rights were superior to K&C’s rights under its prior 14 order. 15 And, insofar as K&C argues that the final and nonappealable 16 status of an order divests the bankruptcy court of authority to 17 enter a superseding order, we emphatically reject that notion. 18 K&C references no such authority in support of its proposition, 19 nor could we locate any. Of course, the bankruptcy court may 20 only supersede or vacate a prior order to the extent that no 21 intervening rights have vested in reliance on the prior order. 22 See Meyer v. Lenox (In re Lenox), 902 F.2d 737, 739-40 (9th Cir. 23

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24 The record, in fact, supports that this was a conscious decision made by the bankruptcy court. At the April 18 hearing, 25 Debtor’s counsel requested reconsideration of the K&C Sale Order 26 for the very reason that K&C now seeks to exploit: the existence of two conflicting sale orders involving the same asset. In 27 response, K&C’s counsel – joined by Trustee’s counsel – asserted that there would be no basis for the § 363(i) sale to Judith, if 28 the bankruptcy court vacated the K&C Sale Order. The bankruptcy court accordingly denied the reconsideration motion.

1 1990) (“[B]ankruptcy courts . . . have the power to reconsider, 2 modify or vacate their previous orders so long as no intervening 3 rights have become vested in reliance on the orders.”). Here, 4 K&C identifies no such right. And § 363(i) expressly 5 contemplates that exactly such an order may intervene. The 6 bankruptcy court, thus, was “authorized” to enter the subsequent 7 order. 8 Further, K&C’s murky challenges to the evidence supporting 9 the bankruptcy court’s supersession determination and the timing 10 of the Second Judith Sale Order are unreasonable. As discussed, 11 the bankruptcy court entered the second order post-appeal, 12 following this Panel’s issued mandate; thus, the second order 13 related back to entry of the First Judith Sale Order. The 14 bankruptcy court effectively conditioned the K&C Sale Order; 15 again, if Judith failed to tender payment, the K&C Sale Order 16 allowed an immediate sale to K&C. Contrary to K&C’s argument, 17 the bankruptcy court was not required to weigh evidence, other 18 than to make a determination as to whether any intervening rights 19 vested in reliance on the K&C Sale Order. 20 K&C also urges this Panel to reverse the bankruptcy court’s 21 decision based on policy reasons. It contends that supplanting a 22 § 363 sale order upsets the expectations of purchasers, 23 discourages prospective purchasers from timely making an offer, 24 undermines confidence in judicial sales, and results in chaos for 25 the bankruptcy estate. 26 Once again, Judith was not an ordinary bidder at a § 363 27 sale. In enacting § 363(i), Congress specifically carved out a 28 special provision for non-debtor spouses and property co-owners.

1 Further, the plain language of § 363(i) is clear and unambiguous. 2 Thus, while it is true that policy generally favors the finality 3 of § 363 sales, it is also clear that Congress contemplated that, 4 in the course of a § 363 sale, two particular categories of 5 persons can intervene and alternatively purchase property. This 6 statutory risk is obvious. Indeed, the Rule 6004(h) stay, in 7 part, allows a spouse or co-owner the time necessary to exercise 8 this right. In this context, policy does not trump unambiguous 9 statutory language. 10 Based on the foregoing, K&C has not shown that, for the 11 purposes of § 363(i), the K&C sale was consummated or that the 12 bankruptcy court erred in determining that the Second Judith Sale 13 Order provided rights superior to the K&C Sale Order. It also 14 has not shown that the bankruptcy court was somehow divested of 15 authority to enter the Second Judith Sale Order. 16 B. The bankruptcy court did not abuse its discretion in 17 approving the § 363(i) sale to Judith. 18 K&C next challenges the bankruptcy court’s approval of the 19 § 363(i) sale. It predominantly argues that Judith lacked 20 standing to assert a § 363(i) purchase right as the Claims were 21 not community property; all of its arguments fail. 22 1. The Claims were community property. 23 K&C challenges the Judith Sale Order on the grounds that 24 Judith lacked standing to exercise a § 363(i) purchase right 25 because the Claims were not community property. In particular, 26 it contends that the Debtor’s schedules – prepared by the same 27 attorney who represented Judith in the sale – failed to designate 28 the Claims as community property and, thus, that the Debtor’s own

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1 evidence refutes the community property presumption. It also 2 contends that the Trustee failed to show that the Claims were 3 community property assets. 4 Except as otherwise provided by statute, all property, real 5 or personal, wherever situated, acquired by a married person 6 during marriage while domiciled in California is community 7 property. Cal. Fam. Code § 760. This includes recovery of or a 8 contingent, future interest in the recovery of a lawsuit. See 9 Vick v. DaCorsi, 110 Cal. App. 4th 206, 212 n.35 (2003) (“A cause 10 of action to recover money damages, as well as the money 11 recovered is a chose in action and therefore a form of personal 12 property.”); Barnett v. First Nat. Ins. Co. of Am., 184 Cal. App. 13 4th 1454, 1460 (2010) (“[A] cause of action for damages is 14 community property, as is any recovery on that cause of 15 action . . . . This is true whether the cause of action is for 16 injury to real property or financial interests or for personal 17 injuries.”); see also In re Marriage of Biddle, 52 Cal. App. 4th 18 396, 400 (1997). Thus, there is a strong presumption that 19 property acquired during the marriage is community property. See 20 In re Marriage of Valli, 58 Cal. 4th 1396, 1400 (2014); see also 21 Cal. Fam. Code §§ 760, 802. To rebut the presumption, the 22 evidence must show “that another statute makes the property 23 something other than community property.” In re Marriage of 24 Valli, 58 Cal. 4th at 1407 (Chin, J., concurring). 25 The bankruptcy court determined that the Claims were 26 community property immediately before the commencement of the 27 bankruptcy case and, thus, property of the estate. Here, it is 28 undisputed that the Debtor and Judith were married and lived in

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1 California when the Claims arose. The presumption of community 2 property, thus, applies. K&C, as the party challenging the 3 presumption, bore the burden of showing that the Claims were not 4 community property. See In re Marriage of Weaver, 127 Cal. App. 5 4th 858, 864 (2005) (party contesting community property status 6 bears burden of rebutting presumption). It advanced no evidence 7 in this regard and failed to meet its evidentiary burden. 8 The fact that the Debtor did not schedule the Claims as 9 community property did not preclude Judith from asserting a 10 community property interest in the Claims. She was not a co- 11 debtor, and she did not sign the schedules. Therefore, the 12 Debtor’s schedules had no preclusive or estoppel effect on 13 Judith’s ability to exercise independently her § 363(i) purchase 14 right. On this record, there was no error in the bankruptcy 15 court’s determination that the Claims were community property 16 subject to § 363(i). 17 2. The remainder of K&C’s arguments lack merit, are 18 irrelevant, or both. 19 K&C’s remaining arguments can be dismissed summarily. The 20 fact that the parties executed the Agreement prior to approval by 21 the bankruptcy court did not divest the estate of its interest in 22 the Claims or the Trustee of his ability to sell the Claims. Nor 23 did executing the Agreement, as K&C claimed at oral argument, 24 immediately transfer title of the Claims. This was a sale 25 outside the ordinary course of business, the Trustee could only 26 sell the Claims after receiving approval from the bankruptcy 27 court, and the effect of any order approving the sale was stayed 28 for a period of time that allowed Judith to exercise her § 363(i)

1 rights. See 11 U.S.C. § 363(b); Fed. R. Bankr. P. 6004(h). 2 Moreover, we reject the notion that whatever rights the Trustee 3 and K&C had under the Agreement could somehow deprive Judith of 4 her statutory § 363(i) rights. Simply put, the parties could not 5 waive Judith’s § 363(i) rights for her. 6 Nor did Judith waive her § 363(i) rights when she attended 7 the K&C sale but did not express interest in purchasing the 8 Claims at that time; the Code merely required that she purchase 9 the Claims prior to consummation of the K&C sale. And, finally, 10 the argument that Judith did not pay the purchase price offered 11 by K&C, because she did not provide compensation equal to the 12 cash price plus the value of the release, also fails. This 13 argument has merit in the abstract, but here K&C failed to 14 provide any evidence of the value of the release. The Trustee, 15 however, explained that it was valueless from the perspective of 16 the estate because any K&C judgment would never be paid. Here, 17 the estate’s assets would be exhausted prior to payment in full 18 of priority tax claims. The bankruptcy court, thus, implicitly 19 rejected these arguments in reaching its determinations. On this 20 record, K&C has not persuaded us that this was error. 21 CONCLUSION 22 Based on the foregoing, we AFFIRM the bankruptcy court. 23 24 25 26