In re: Southern California Research, LLC Darrell Maag

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: October 18, 2022
• Docket: CC-22-1055-TSG
• Status: Unpublished

Opinion

FILED OCT 18 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. CC-22-1055-TSG SOUTHERN CALIFORNIA RESEARCH, LLC; DARRELL MAAG, Bk. No. 9:22-bk-10022-DS Debtors. SOUTHWESTERN RESEARCH, INC., Appellant, v. MEMORANDUM* SOUTHERN CALIFORNIA RESEARCH, LLC; DARRELL MAAG, Appellees.

Appeal from the United States Bankruptcy Court for the Central District of California Deborah J. Saltzman, Bankruptcy Judge, Presiding

Before: TAYLOR, SPRAKER, and GAN, Bankruptcy Judges.

INTRODUCTION

Almost immediately after initiation of these chapter 11 1 cases,

appellant Southwestern Research, Inc. (“Southwestern”) filed a motion

* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy Procedure. seeking either conversion to chapter 7 or appointment of a chapter 11

trustee. It relied not on postpetition conduct but on prepetition actions,

alleged bad faith, and allegations that reorganization was an impossibility.

The bankruptcy court denied the motion.

Southwestern appealed. Its principal concern was the bankruptcy

court’s alleged failure to rely on prepetition misconduct in its ruling.

We determine that the order on appeal is not final; thus, we lack

jurisdiction and must dismiss absent a determination that an interlocutory

appeal is appropriate. As we are confident that the bankruptcy court found

the evidence of prepetition conduct insufficient in isolation – not irrelevant

or inappropriate for consideration in connection with a similar motion filed

later in this case – interlocutory appeal is not warranted.

As a result, we DISMISS this appeal for lack of jurisdiction.

FACTS

Prepetition Southwestern obtained substantial default judgments

against Debtors Darrell Maag and Southern California Research LLC

(“SCR”) (collectively the “Debtors”). The default judgments followed

terminating sanctions and included punitive damage awards and

imposition of an equitable lien on real property owned by Mr. Maag. The

trial court findings included a determination of negligent and intentional

breach of fiduciary duty by Debtors.

Debtors appealed, failed to provide a bond, and faced aggressive

collection activities. Chapter 11 petitions followed, and, according to

2 Southwestern, fraudulent transfers and preferential payments to insiders

occurred pre-bankruptcy.

Approximately three weeks after the petition date, Southwestern

filed its motion seeking conversion of Debtors’ cases to chapter 7 or

appointment of a chapter 11 trustee (the “Motion”). Southwestern argued

that: (1) both cases were “essentially single-creditor cases which were filed

in bad faith [as a litigation tactic] to obtain a [stay pending appeal];” (2)

Mr. Magg’s prepetiton misconduct in the state court litigation was cause to

convert both cases; (3) SCR is not profitable and has no reorganization in

prospect; (4) since Southwestern will never agree to any plan, Debtors

cannot confirm a plan; and (5) Mr. Maag’s prepetition conduct establishes

that he will not comply with his fiduciary duties. It also noted that these

assertions justified appointment of a chapter 11 trustee.

The Debtors argued that the Motion was premature and alleged: (1)

the need for a breathing spell given aggressive collection efforts and the

impact of the pandemic; (2) their financial inability to obtain the required

$40 million appellate bond; (3) the lack of negative postpetition SCR cash

flow or a decline in asset value; and (4) the irrelevance of Debtors’

prepetition conduct.

At the hearing, the bankruptcy court discussed the relevant § 1112(b)

factors and the various cases cited by both sides and denied the Motion.

The bankruptcy court commented:

3 ....we are at the beginning of these Chapter 11 cases, I don’t see that the factors weigh in support of a finding of bad faith. You know, these aren’t single-asset cases. You know, how these factors are applicable here. We don’t have a lack of employees. You know, certainly there are issues of conduct by Mr. Maag, but that alone, I think, does not support a finding of bad faith that would justify a conversion or appointment of a trustee at this stage, certainly without any record as to postpetition conduct.

This isn’t a new debtor syndrome case and I don’t see that this is a -- you know, a leap of foreclosure type of situation that the case law would use in its definition of bad faith here. So I don’t [think] the record supports the finding of bad faith, but I don’t think prepetition conduct would be a basis for granting this relief and I don’t think that appointment of a trustee would be appropriate here either.

Southwestern timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). Subject to the discussion below, we have jurisdiction under

28 U.S.C. § 158.

ISSUES

Is the order on appeal, which denies conversion or appointment of a

trustee (the “Order”), final?

If the Order is interlocutory, is leave to appeal appropriate?

4 DISCUSSION

A. The Order is not final. Debtors assert that the Order is not final and that this appeal must be

dismissed. We agree.

Finality is a requirement for bankruptcy appellate jurisdiction.

Phillips v. Gilman (In re Gilman), 887 F.3d 956, 961 (9th Cir. 2018). Typically,

it exists when the decision on appeal ends a dispute on the merits and

leaves nothing for the trial court to do but execute the judgment. Gugliuzza

v. FTC (In re Gugliuzza), 852 F.3d 884, 890 (9th Cir. 2017) (citations omitted).

But a determination of finality in the often convoluted decisional path of

bankruptcy proceedings isn’t always easy. Thus, the Ninth Circuit

recognizes that some interim determinations during the course of a

bankruptcy case are sufficiently final to allow appellate review, and it uses

a “pragmatic or flexible” approach to make finality decisions. See Dunkley

v. Rega Props., Ltd. (In re Rega Props., Ltd.), 894 F.2d 1136, 1138 (9th Cir.

1990). Thus, finality requires that a decision: (1) fully and finally determine

the discrete issue or issues it presented; and (2) resolve discrete issues

seriously affecting substantive rights. See Eden Place, LLC v. Perl (in re Perl),

811 F.3d 1120, 1126 (9th Cir. 2016). Put another way, an order is final and

appealable if it “alters the status quo and fixes the rights and obligations of

the parties . . . [or] alters the legal relationships among the parties.” Ocwen

Loan Servicing LLC, v. Marino (In re Marino), 949 F.3d 483, 487 (9th Cir. 2020)

(internal citation omitted).

5 Southwestern argues that Ritzen Group, Inc. v. Jackson Masonry, LLC,

140 S. Ct. 582, 587 (2020), requires a determination that this order is final.

We disagree. Ritzen involved an order denying stay relief to allow litigation

to proceed in state court. The Supreme Court found that this order

substantially affected the rights of the parties because it determined on a

final basis where the litigation would proceed. The Supreme Court cited

Bullard v. Blue Hills Bank, 575 U.S. 496, 501 (2015), and noted that orders in

bankruptcy cases qualify as final when they definitively dispose of discrete

disputes within the overarching case. Ritzen 140 S. Ct. at 586. Thus, the

decision was final because it was anterior to, and separate from, the

underlying merits determination, decided a critical issue, and was

incapable of later revisitation by the federal courts through appellate

review or otherwise. Id. at 589. The analysis in Ritzen does not support that

the Order is final.

Here, the Motion did not begin a discreet proceeding before and

apart from the bankruptcy cases. And it did not end the litigation on the

merits and leave nothing for the court to do but execute the judgment. The

Debtors’ bankruptcy cases will proceed, and § 1112(b) will continue to

apply. Indeed, Southwestern’s counsel admitted at oral argument that it

could file a second motion to convert the cases at any time; conversion or

appointment of a trustee are not foreclosed by the Order.

Further, the Order does not seriously affect any parties’ substantive

rights. Southwestern remains a creditor with all of its rights including the

6 right to seek conversion or appointment of a chapter 11 trustee in the

future. Nothing about the Motion’s denial permanently alters the status

quo in the cases or fixes or changes any rights or obligations of the parties.

The impact on rights seen in Ritzen is not extant here.

Our determination on finality is also consistent with the Ninth

Circuit’s analogous determination that denial of a motion to dismiss a

chapter 9 case as an alleged bad faith filing was not final. See Silver Sage

Partners v. City of Desert Hot Springs (In re City of Desert Hot Springs), 339

F.3d 782 (9th Cir. 2003). There, the Ninth Circuit emphasized: “the denial of

Silver Sage’s initial objection to the bankruptcy does not resolve the issue

of bad faith in such a way that the bankruptcy court may not later dismiss

the petition.” Id. at 790.

Southwestern asserts that the order is final because it must now

participate in the Debtors’ ongoing cases and incur the cost of doing so. But

as the Ninth Circuit noted in Desert Hot Springs, the requirement of

participation in the bankruptcy process is not the type of damage that

supports a finality determination; creditors are always subject to the risk

that debtors will file for bankruptcy. Id. at 791.

Finally, Southwestern asserts that the Order seriously affects its

substantive rights because: “the [D]ebtors’ extensive prepetition bad faith

conduct has been rendered irrelevant and may not be considered by the

bankruptcy court.” The record does not support this conclusion; the

bankruptcy court specifically noted that Mr. Maag’s prepetition conduct

7 was concerning but that it was not sufficient by itself to establish bad faith

at this early time in the cases. And Debtors conceded at oral argument that

prepetition conduct may be considered if Southwestern files another

motion to dismiss.

Here the Order is not final.

B. Interlocutory appeal is not appropriate.

Southwestern also requests that the Panel grant leave to appeal if the

Order is interlocutory. We decline this request.

The Panel may consider a timely notice of appeal to be a motion for

leave to appeal. Rule 8003(c); Belli v. Tempkin, (In re Belli), 268 B.R. 851, 858

(9th Cir. BAP 2001). Such leave is appropriate where: (1) there is a

controlling question of law; (2) as to which a substantial ground for a

difference of opinion exists; and (3) an immediate appeal could materially

advance the ultimate termination of the litigation. See Arizona v. Ideal Basic

Indus. (In re Cement Antitr. Litig), 673 F.2d 1020, 1026 (9th Cir. 1981); see also,

Travers v. Dragul (In re Travers), 202 B.R. 624, 626 (9th Cir. BAP 1996). The

Panel may also consider whether denying leave to appeal will result in

wasted litigation and expense. See, e.g., Roderick v. Levy (In re Roderick

Timber Co.), 185 B.R. 601, 604 (9th Cir. BAP 1995). But, leave for appellate

review of an interlocutory order is granted sparingly, under exceptional

circumstances. See, Lear Siegler, Inc. v. Adkins, 330 F.2d 595, 598 (9th Cir.

1964).

8 Southwestern argues that the controlling question of law is whether

the bankruptcy court can consider prepetition misconduct as grounds for

conversion or appointment of a trustee. But as noted, we conclude that the

bankruptcy court did not rule as Southwestern fears. Instead, it noted

Mr. Maag’s conduct, considered other factors supporting denial of the

Motion, and determined that it would not convert the cases or appoint a

trustee based on that conduct alone. The record does not support that the

bankruptcy court erroneously concluded that prepetition conduct is

irrelevant. So, no issue supporting interlocutory review exists.

Nor has Southwestern explained what the substantial ground for

difference of opinion might be. Debtors’ counsel conceded at oral argument

that prepetition conduct could be considered by the bankruptcy court in

determining a later motion to convert or appoint a trustee.

Finally interlocutory appeal will not necessarily materially advance

the cases. It won’t do so if Southwestern loses on appeal. And during the

pendency of any appeal, Southwestern may bring a later successful motion

to convert or appoint a trustee or the Debtors may confirm plans. In either

case, the appeal becomes a nullity.

Interlocutory appeal is not appropriate here.

CONCLUSION

Based on the foregoing, this appeal is DISMISSED.