FILED 2/21/2014 1 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. AZ-13-1291-PaKuD ) 6 STRATA TITLE, L.L.C., ) Bankr. No. 12-24242-DPC ) 7 Debtor. ) ______________________________) 8 ) STRATA TITLE, L.L.C., ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) PURE COUNTRY TOWER, LLC, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on January 23, 2014 at Tempe, Arizona 15 Filed - February 21, 2014 16 Appeal from the United States Bankruptcy Court 17 for the District of Arizona 18 Honorable Daniel P. Collins, Bankruptcy Judge, Presiding 19 Appearances: Ronald J. Ellett of Ellett Law Offices, P.C. 20 argued for appellant Strata Title, L.L.C.; Craig Solomon Ganz of Gallagher & Kennedy, P.A. argued 21 for appellee Pure Country Tower, LLC. 22 Before: PAPPAS, KURTZ and DUNN, Bankruptcy Judges. 23 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. 28 See 9th Cir. BAP Rule 8013-1. 1 Chapter 112 debtor Strata Title, LLC (“Debtor”) appeals the 2 order of the bankruptcy court determining that Debtor’s 3 membership interest in Tempe Tower, LLC (“Tempe Tower”) lapsed by 4 operation of the parties’ agreement and is no longer property of 5 the estate. We AFFIRM. 6 FACTS 7 Debtor is an Arizona limited liability company; its sole 8 member is John Lupypciw (“Lupypciw”). Pure Country Tower, LLC 9 (“Pure Country”) is also an Arizona LLC; its members are Joseph 10 Hindbo and Jordan Hindbo. This appeal arises out of a dispute 11 over the respective membership interests of Debtor and Pure 12 Country in Tempe Tower, another LLC, created by the parties 13 solely to own and operate a commercial office building in Tempe, 14 Arizona (the “Property”). 15 When formed in 2012, Debtor and Pure Country each held a 16 50 percent membership interest in Tempe Tower. Under the terms 17 of the parties’ Operating Agreement executed February 24, 2012, 18 Lupypciw was designated manager of Tempe Tower. At the center of 19 the dispute is Schedule 1 of the Operating Agreement, which 20 provides: 21 Schedule 1 22 SCHEDULE OF PERCENTAGE INTERESTS 23 The following shall be the Percentage Interests of the Members of the Company. 24 25 2 Unless otherwise indicated, all chapter and section 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 27 "Rule" references are to the Federal Rules of Bankruptcy Procedure. All “Civil Rule” references are to the Federal Rules 28 of Civil Procedure.
-2- 1 Name of Member Percentage Interest 2 Strata Title, LLC 50% Pure Country Tower, LLC 50% 3 The Percentage Interests shall be subject to the 4 following adjustments: 5 (1) Subject to subsection (2) below, at such time as 100% of [Pure Country’s] initial Capital Contribution in the 6 amount of $850,000 is returned to [Pure Country], the Percentage Interest of the Members shall be: 7 Strata Title, LLC 70% 8 Pure Country Tower, LLC 30% 9 (2) Notwithstanding anything to the contrary herein, in the event that [Pure Country] does not received 100% of its 10 initial Capital Contribution of $850,000 on or before February 23, 2013 (“CC Return Date”), John Lupypciw 11 hereby irrevocably assigns his and the entire right, title and interest of Strata Title, LLC in the Company 12 to [Pure Country] or its nominee, so that following the CC Return Date [Pure Country] or its nominee shall own 13 one hundred percent (100%) of the Percentage Interest of the Company and Strata Title, LLC, shall not be 14 entitled to any return of any Capital Contributions or other amounts advanced or loaned to the company prior 15 to such time. This provision shall be self-operative but John Lupypciw shall within five (5) days of [Pure 16 Country’s] request execute any instrument reasonably requested by [Pure Country] to evidence or confirm the 17 same. 18 In February 2012, Tempe Tower purchased the Property using 19 the $850,000 capital contribution from Pure Country, a $3,000 20 capital contribution from Debtor, and a one-year loan from 21 Milestone Tempe, LLC (“Milestone”) of $1,365,000 (the “Milestone 22 Loan”). In July 2012, Lupypciw, acting as manager of Debtor, 23 allegedly made a $140,000 capital contribution to Tempe Tower. 24 In September 2012, Pure Country alleges that Debtor informed it 25 that Tempe Tower had insufficient funds to pay the monthly 26 payments due on the Milestone Loan. Pure Country alleges that it 27 advanced $20,000 at that time to avoid a default. However, Tempe 28 Tower’s financial problems continued.
-3- 1 Debtor filed a petition for relief under chapter 11 on 2 November 6, 2012. Debtor initially did not list its membership 3 interest in Tempe Tower on its Schedule B, nor the Operating 4 Agreement as an executory contract on its Schedule G. The 5 membership interest in Tempe Tower was added by amendment to the 6 schedules on December 10, 2012, and the Operating Agreement was 7 disclosed as an executory contract in an amended schedule on 8 February 21, 2013. Pure Country received no formal notice of 9 Debtor’s bankruptcy filing. However, it filed a notice of 10 appearance in the bankruptcy case on February 12, 2013. 11 Pure Country contacted Milestone by phone on or about 12 December 18, 2012. Pure Country alleges that it was during this 13 call that, for the first time, Pure Country was informed that 14 Tempe Tower was in default on the Milestone Loan, and that a 15 trustee’s foreclosure sale of the Property was scheduled for 16 March 29, 2013. 17 On January 11, 2013, Pure Country sent a letter to Debtor 18 demanding that Debtor take action to cure the Milestone Loan 19 default. At about this time, Debtor had arranged to refinance 20 the Milestone Loan using a new loan from RLS Capital, Inc. for 21 $1.7 million with an interest rate of 18 percent, secured by the 22 Property. The RLS Loan closed on January 23, 2013. The escrow 23 agent, Security Title, allegedly issued a check to Milestone’s 24 agent for $1,461,191.94 in full payment of the Milestone Loan, 25 recorded a release of Milestone’s deed of trust, and recorded a 26 deed of trust in favor of RLS, Inc. 27 On January 28, 2013, Milestone contacted Pure Country to 28 inform it that the Milestone Loan was being refinanced. Pure
-4- 1 Country informed Milestone that it was not aware of, and would 2 not consent to, the refinance. Instead, working with Security 3 Title, Pure Country unwound the refinancing. Milestone returned 4 the loan proceeds to RLS, which executed a release of its deed of 5 trust. 6 In the bankruptcy case, on February 12, 2013, Debtor filed a 7 motion for an order deeming the Operating Agreement of Tempe 8 Tower rejected as an executory contract (the “Rejection Motion”). 9 Debtor argued that LLC operating agreements are generally 10 considered executory contracts under the Bankruptcy Code. Debtor 11 further suggested that Pure Country was using its powers under 12 the Operating Agreement in bad faith and in an attempt to obtain 13 ownership of Debtor’s equity in the Property for itself. 14 On February 14, 2013, Pure Country removed Lupypciw as 15 manager of Tempe Tower and filed papers with the Arizona 16 Corporation Commission designating Pure Country as the new 17 manager of Tempe Tower. Debtor does not contest that Pure 18 Country thereby became the manager of Tempe Tower. 19 Pure Country filed an objection to Debtor’s Rejection Motion 20 on February 20, 2013. Pure Country argued that the Operating 21 Agreement was not an executory contract. Alternatively, Pure 22 Country urged that if the Operating Agreement were rejected, then 23 the bankruptcy court should also declare that Debtor would 24 thereby lose all membership rights in Tempe Tower. 25 The bankruptcy court conducted an expedited hearing on the 26 Rejection Motion on February 20, 2013. In an order entered 27 February 22, 2013, the court ruled that the Operating Agreement 28 was an executory contract and granted Debtor’s Rejection Motion.
-5- 1 However, the court’s order also provided that: 2 This order is strictly limited to Debtor’s rejection of the Operating Agreement. Nothing contained in this 3 order shall be construed to prejudge any of the following issues: the damages (if any) which arise from 4 rejection; [or] the terms or enforceability of Schedule 1; the future governance of Tempe Tower’s 5 business activities[.] 6 The order granting the Rejection Motion was not appealed. 7 The February 23, 2013, deadline in Schedule 1 for repayment 8 of the $850,000 capital contribution to Pure Country expired 9 without payment. On March 7, 2013, Pure Country filed a motion 10 in the bankruptcy case for an order enforcing the terms of 11 Schedule 1 (the “Enforcement Motion”). In particular, the 12 Enforcement Motion prayed for entry of an order by the bankruptcy 13 court directing Debtor to specifically perform its obligations 14 under the Operating Agreement to execute an assignment of 15 Debtor’s membership interest in Tempe Tower to Pure Country. 16 Debtor responded to the Enforcement Motion on March 20, 2013, 17 arguing that specific performance was not a remedy available to 18 Pure Country after rejection of the Operating Agreement as an 19 executory contract. 20 The bankruptcy court held a hearing on the Enforcement 21 Motion on March 21, 2013. On March 28, 2013, the bankruptcy 22 court entered a minute order providing that: 23 At issue is Schedule 1 attached to the Operating Agreement and its effect upon the debtor and others. 24 The Court hereby finds that remedies identified in Schedule 1 are not stayed as to Mr. Lupypciw by this 25 bankruptcy proceeding. The court does not presently make any decision relative to whether there is a stay 26 in place as to Strata’s interest in Tempe Tower LLC nor does the Court issue any decision relative to whether 27 specific performance can or cannot be compelled to require [Debtor] to accomplish certain events or 28 transactions. . . . By agreement of the parties on the
-6- 1 record, counsel for Pure Country shall prepare a form of order acknowledging Strata’s consent to the filing 2 of a bankruptcy petition by Tempe Tower LLC. . . . All other issues pertaining to the [Enforcement Motion] 3 have not been decided by this Court and await further decision by the Court. 4 5 Undeterred, on April 13, 2013, Pure Country filed a Motion 6 for Determination That Debtor Assigned Membership Interest in 7 Tempe Tower, LLC Pre-Petition; and Alternative Request for Stay 8 Relief to Either: (1) Effectuate the Transfer of Membership 9 Interest to Pure Country Tower, LLC, or (2) Allow Pure Country 10 Tower, LLC to Foreclose Its Membership Interest (the “Membership 11 Motion”). Pure Country argued that before bankruptcy, Debtor had 12 absolutely assigned its membership interest in Tempe Tower to 13 Pure Country pursuant to Schedule 1, and that Debtor had no 14 further interest in Tempe Tower. Pure Country sought a 15 declaratory judgment that all Debtor’s membership interest in 16 Tempe Tower was assigned to Pure Country, and that the Debtor’s 17 interest was not and never has been property of the estate. In 18 the alternative, Pure Country argued that, if the bankruptcy 19 court were to find that the Debtor still held an interest in 20 Tempe Tower, Pure Country should be granted relief from the 21 automatic stay so it could enforce its rights against Debtor as 22 provided in the Operating Agreement. 23 Debtor responded on April 17, 2013, arguing that Pure 24 Country’s Membership Motion was procedurally flawed because the 25 relief it requested required an adversary proceeding. Debtor 26 argued that, if the issues raised in the Membership Motion were 27 adjudicated in a contested matter, not an adversary proceeding, 28 its due process rights would be violated.
-7- 1 The bankruptcy court held its first hearing on the 2 Membership Motion on April 17, 2013. The court directed the 3 parties to provide supplemental briefing and continued the 4 hearing. 5 In its supplemental briefing, in addition to arguing that 6 there was no absolute assignment of Debtor’s membership interest 7 effected in Schedule 1, Debtor asserted that Pure Country held, 8 at best, an unperfected security interest in Debtor’s membership 9 interest in Tempe Tower.3 Pure Country responded with its 10 supplemental brief on May 3, 2013. It argued that whether it had 11 properly perfected a security interest in Debtor’s membership 12 interest was irrelevant, because it never asserted that its 13 interests in Tempe Tower were secured, but had instead been 14 absolutely assigned by Debtor. 15 The bankruptcy court held the continued hearing on the 16 Membership Motion on May 7, 2013. After listening to counsel for 17 Debtor, Pure Country, Milestone, and Tempe Tower, the court took 18 the issues under advisement. On June 6, 2013, the bankruptcy 19 court entered an “Under Advisement Decision Determining: 20 (1) Membership Interests Are No Longer Estate Property; and 21 (2) Order Lifting the Section 362(a) stay.” (the “Decision”). In 22 the Decision, the court determined that: 23 - On the petition date, Debtor’s membership interest in 24 Tempe Tower became property of the bankruptcy estate. What the 25 Debtor owned at the time of filing the petition was a 50 percent 26 27 3 The question whether LLC membership interests involve 28 security interests is not on appeal.
-8- 1 membership interest in Tempe Tower. 2 - If Schedule 1 created a security interest in either of the 3 parties’ membership interests in Tempe Tower, that security 4 interest was not perfected. 5 - Debtor’s rejection of the Operating Agreement as an 6 executory contract did not affect the parties’ substantive rights 7 under the Operating Agreement, which are governed by Arizona 8 state law. 9 - Pursuant to A.R.S. § 29-682(B), an LLC operating agreement 10 may contain provisions regarding changes in classes of members, 11 and rights to acquire members’ interests. 12 - Under terms of the Operating Agreement and Schedule 1, 13 “the Debtor’s membership interest in Tempe Tower could only 14 remain property of the Debtor if it paid $850,000 to Pure Country 15 by February 23, 2013. Having failed to do so, the Debtor 16 ceased to own any membership interests in Tempe Tower as of 17 February 24, 2013.” 18 - “Schedule 1 required no action by Pure Country, or any 19 other party, to change the membership interest of the Debtor in 20 Tempe Tower. Instead, the simple passage of time changed the 21 nature of the property the Debtor once owned.” 22 - “The nonpayment of $850,000 by February 23, 2013 results 23 in Pure Country owning 100% of the LLC membership interests with 24 no further action by any party.” 25 - “To the extent stay relief is necessary for Pure Country 26 to proceed as it wishes, stay relief is granted to Pure Country.” 27 Debtor filed a timely appeal of the Decision on June 20, 28 2013.
-9- 1 JURISDICTION 2 The bankruptcy court had jurisdiction under 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A) and (O). The Panel’s jurisdiction is 4 based upon 28 U.S.C. § 158. Pure Country challenges our 5 jurisdiction because it alleges that this appeal is moot. We 6 discuss that argument below. 7 ISSUES 8 Whether this appeal is moot. 9 Whether the bankruptcy court erred by not requiring Pure 10 Country to commence an adversary proceeding to determine the 11 parties’ rights, and the extent of Debtor’s membership interest, 12 in Tempe Tower. 13 Whether the bankruptcy court violated Debtor’s due process 14 rights. 15 STANDARDS OF REVIEW 16 We determine our jurisdiction, including mootness issues, 17 de novo. Professional Programs Grp. v. Dep’t of Commerce, 18 29 F.3d 1349, 1352 (9th Cir. 1994). 19 The bankruptcy court’s interpretation of the Rules is 20 reviewed de novo. Moldo v. Blethen (In re Blethen), 259 B.R. 21 153, 155 (9th Cir. BAP 2000). 22 Whether the bankruptcy court’s procedures comport with due 23 process is reviewed de novo. Garner v. Shier (In re Garner), 24 246 B.R. 617, 619 (9th Cir. BAP 2000). 25 DISCUSSION 26 Significantly, in this appeal Debtor raises only procedural 27 28
-10- 1 challenges to the Decision by the bankruptcy court.4 Debtor does 2 not contest the bankruptcy court’s substantive analysis or its 3 conclusions concerning the continuing vitality of Debtor’s 4 membership interest in Tempe Tower. Debtor implicitly 5 acknowledged that Arizona law allows LLC operating agreements to 6 include provisions enforceable in bankruptcy cases modifying the 7 extent of membership interests or of members’ rights to acquire 8 other members’ interests; that pursuant to Schedule 1, Debtor 9 could only retain its membership interest in Tempe Tower if Pure 10 Country’s $850,000 capital contribution was repaid by 11 February 23, 2013; and that, as the result of nonpayment, Debtor 12 ceased to own any membership interest in Tempe Tower as of 13 February 24, 2013. Instead, Debtor’s arguments in this appeal 14 focus solely on the bankruptcy court’s acquiescence in what 15 Debtor argues was an inappropriate procedure employed by Pure 16 Country to obtain these rulings by the court. As discussed 17 below, we affirm the bankruptcy court’s decision in this case. 18 19 4 20 In Debtor’s opening brief, it also asserted that the bankruptcy court erred by ordering the specific performance of a 21 rejected executory contract. Debtor’s Op. Br. at 12. However, 22 as Pure Country points out, the bankruptcy court never referred to “specific performance” or in any way ordered the parties to 23 perform under the Operating Agreement. Pure Country’s Br. at 28. Indeed, as the bankruptcy court stated, “the simple passage of 24 time changed the nature of the property the Debtor once owned.” 25 In reply, Debtor appears to concede that this issue is not on appeal, but persists in requesting that the Panel instruct the 26 bankruptcy court on remand that specific performance is not 27 available as a remedy for Pure Country. Debtor’s Reply Br. at 11-12. The Panel declines to address the specific performance 28 issue.
-11- 1 I. 2 This appeal is not moot. 3 Before reviewing Debtor’s procedural arguments, we first 4 address Pure Country’s contention that this appeal is moot. Pure 5 Country notes that, “[g]enerally, an appeal will be dismissed as 6 moot when events occur which prevent the appellate court from 7 granting any effective relief even if the dispute is decided in 8 favor of the appellant.” Pure Country’s Br. at 15 (quoting 9 Matter of Combined Metals Reduction Co., 557 F.2d 179, 187 (9th 10 Cir. 1977). Pure Country argues that, in this case, the Panel 11 cannot offer any relief whatsoever because Debtor failed to 12 obtain a stay of the Decision pending resolution of this appeal, 13 and because Tempe Tower sold the Property on August 6, 2013 to 14 JAH Ventures, LLC, an alleged “good faith purchaser,” for 15 $2.2 million. Pure County further contends that since by this 16 appeal Debtor seeks only to retain its membership interest in 17 Tempe Tower, and the sole asset of Tempe Tower was the Property, 18 Debtor has nothing to gain if it prevails on appeal because any 19 resulting membership interest in Tempe Tower would be worthless. 20 The test for mootness is whether an appellate court can 21 fashion any effective relief in the event that it decides in 22 favor of the appellant. Motor Vehicle Cas. Co. v. Thorpe 23 Insulation Co. (In re Thorpe Insulation Co.), 627 F.3d 869, 24 880-81 (9th Cir. 2012) (emphasis added). In particular, 25 equitable mootness arises when “a comprehensive change of 26 circumstances has occurred so as to render it inequitable for a 27 court to consider the merits of the appeal.” Id. at 880-81. In 28 cases such as this one, the principal question we must answer is
-12- 1 whether the appeal "present[s] transactions that are so complex 2 or difficult to unwind that the doctrine of equitable mootness 3 would apply." Lowenschuss v. Selnick (In re Lowenschuss), 4 170 F.3d 923, 933 (9th Cir. 1999). The party arguing for 5 dismissal based on mootness, "bears the heavy burden of 6 establishing that we cannot provide any effective relief." 7 United States v. Gould (In re Gould), 401 B.R. 415, 421 (9th Cir. 8 BAP 2009). 9 We conclude that the issues are not moot in this case 10 because it might be possible for the Panel to fashion relief were 11 it to hold for Debtor. 12 First, Pure County correctly observes that Debtor, through 13 this appeal, is attempting to retain a membership interest in 14 Tempe Tower, not an ownership interest in the Property, which was 15 sold during the appeal. However, Pure Country’s argument that 16 the sale of the Property moots this appeal is incorrect. If 17 Debtor succeeds on appeal, it may, through its membership 18 interest in Tempe Tower, attempt to pursue state law claims 19 against Milestone and Pure Country. 20 Second, even though the Property was sold, it is not 21 accurate to assume that the Panel can provide no effective relief 22 to Debtor. As noted above, the Property was sold by Tempe 23 Tower’s manager, Pure Country, to JAH Ventures, LLC. Pure 24 Country acknowledges that the general partner of JAH Ventures, 25 LLC is JAH Management, LLC. The managing members of 26 JAH Management, LLC are Joseph Hindbo and Jordan Hindbo, who are 27 also the only members of Pure Country. In a practical sense, 28 then, Joseph and Jordan Hindbo effectively sold the Property to
-13- 1 themselves. As the sole members of Pure Country, Joseph and 2 Jordan Hindbo were the beneficiaries of the Decision by the 3 bankruptcy court, and similarly, control Pure Country’s 4 participation in this appeal. Under these circumstances, it 5 would not be impossible for the bankruptcy court or this Panel to 6 fashion some sort of relief for Debtor. See In re Sun Valley 7 Ranches, 823 F.2d 1373, 1375 (9th Cir. 1987); Paulman v. Gateway 8 Venture Partners III (In re Filtercorp), 163 F.3d 570, 577 (9th 9 Cir. 1998) (reaffirming the Sun Valley rule that, where real 10 property is sold to a party before the court, the court may be 11 able to fashion effective relief). 12 Given these realities, Pure Country has not satisfied the 13 “heavy burden of establishing that [the Panel] cannot provide any 14 effective relief.” This appeal is not moot. 15 II. 16 The bankruptcy court’s decision to proceed in a contested matter rather than to 17 require an adversary proceeding was harmless error. 18 The bankruptcy court considers disputed matters in two 19 contexts. Adversary proceedings are separate lawsuits within the 20 bankruptcy case and have all the attributes of a lawsuit in the 21 district court, including the filing and service of a formal 22 complaint and application of most of the Civil Rules, as 23 incorporated or modified by the Part VII of the Bankruptcy Rules. 24 In a contested matter, there is no summons and complaint, 25 pleading rules are somewhat relaxed, counterclaims and 26 third-party practice do not apply, and much pre-trial procedure 27 is either restricted or dispensed with in the interest of time 28 and simplicity. Contested matters are governed by other Rules,
-14- 1 mostly by Rule 9014. Khachikyan v. Hahn (In re Khachikyan), 2 335 B.R. 121, 125-26 (9th Cir. BAP 2005). Debtor contends in 3 this appeal that the bankruptcy court erred by resolving the 4 issues in a contested matter rather than by adversary proceeding. 5 Even so, we conclude any error by the bankruptcy court does not 6 require reversal. 7 Rule 7001 lists ten categories of proceedings specifically 8 identified as adversary proceedings; Debtor focuses on three of 9 them. Under Rule 7001, “[t]he following are adversary 10 proceedings: (1) a proceeding to recover money or property 11 . . . ; (2) a proceeding to determine the validity, priority or 12 extent of a lien or other interest in property . . . ; (9) a 13 proceeding to obtain a declaratory judgment relating to any of 14 the foregoing . . . .” 15 Debtor argues that because Pure Country’s Membership Motion 16 sought a declaration by the bankruptcy court concerning the 17 extent of Debtor's and Pure Country’s “interest in property,” the 18 bankruptcy court could render such a decision only in an 19 adversary proceeding, not in a contested matter. Debtor points 20 out that, through Lupypciw, it obtained the RLS Loan by which 21 Tempe Tower could pay off its secured loans, and qualify for 22 additional loans to repay the $850,000 capital contribution to 23 Pure Country. According to Debtor, if Pure Country had commenced 24 an adversary proceeding, instead of filing the Membership Motion, 25 Debtor could have used that procedural vehicle to prove that Pure 26 Country and Milestone wrongfully conspired to undo the RLS Loan, 27 which rendered Tempe Tower unable to pay off Pure Country. As a 28 result of this conduct, Debtor urges, Pure Country should not
-15- 1 have been allowed to invoke Schedule 1 to deprive Debtor of its 2 interest in Tempe Tower. 3 As a general proposition, Debtor is correct that an 4 adversary proceeding is usually required to determine the extent 5 of a debtor’s interest in property. GMAC Mortg. Corp. v. 6 Salisbury (In re Loloee), 241 B.R. 655-60 (9th Cir. BAP 1999). 7 And, in particular, an adversary proceeding is the preferred 8 route when considering the extent of a debtor’s ownership 9 interest in a business. In re Cadiz Props., Inc., 278 B.R. 744 10 (Bankr. N.D. Tex. 2002) (extent of stock ownership); In re Corky 11 Foods Corp., 85 B.R. 903, 904 (Bankr. S.D. Fla. 1988) (extent of 12 debtor's interest in limited partnership); In re Colrud, 45 B.R. 13 169 (Bankr. D. Alaska 1984) (debtor's interest in mortgaged 14 property). However, neither the Ninth Circuit nor this Panel 15 have ever held that the requirement for an adversary proceeding 16 under these circumstances is absolute. Instead, where the record 17 shows that the parties proceeded by a contested matter under 18 Rule 9014, there was adequate notice to the parties concerning 19 the nature of the issues raised in a contested motion proceeding, 20 extensive hearings occurred, supplemental briefing was submitted, 21 and the parties were given "ample time to air [their] position[s] 22 . . . for all practical purposes an adversary proceeding was 23 held." Trust Corp. of Mont., Inc. v. Patterson (In re Copper 24 King Inn, Inc.), 918 F.2d 1404, 1407 (9th Cir. 1990). 25 In reviewing the bankruptcy court’s decision to allow the 26 contest between Debtor and Pure Country to be litigated in a 27 contested matter rather than in an adversary proceeding, we apply 28 a harmless error analysis. Korneff v. Downey Reg’l Med. Ctr.
-16- 1 Hosp., Inc. (In re Downey Reg. Med. Ctr. Hosp., Inc.), 441 B.R. 2 120, 127 (9th Cir. BAP 2010) (“The bankruptcy court's decision 3 not to require an adversary proceeding is subject to a harmless 4 error analysis.”); see also Austein v. Schwartz (In re Gerwer), 5 898 F.2d 730, 734 (9th Cir. 1990); USA/Internal Revenue Service 6 v. Valley Nat’l Bank (In re Decker), 199 B.R. 684, 689 (9th Cir. 7 BAP 2006). The harmless error standard is especially apt where 8 the bankruptcy motion in question was the procedural equivalent 9 of a motion for summary judgment, with the issues to be decided 10 by the bankruptcy court dealing with questions of law, not 11 disputed fact. City Equities Anaheim, Ltd. v. Lincoln Plaza 12 Development Co. (In re City Equities Anaheim, Ltd.), 22 F.3d 954, 13 958-59 (9th Cir. 1994). 14 In this case, while the bankruptcy court possibly erred in 15 not requiring that an adversary proceeding be commenced by Pure 16 Country to obtain a declaration that Debtor’s interest in Tempe 17 Tower had lapsed under Schedule 1,5 we conclude that such error 18 19 5 Of course, the Membership Motion requested not only a 20 determination by the bankruptcy court that Debtor’s membership interest terminated post-bankruptcy by operation of the Operating 21 Agreement, but also sought relief from the automatic stay “to the 22 extent the Debtor’s membership interests were still protected by § 362(a)(3) or if further acts are necessary to obtain possession 23 and control of the Debtor’s membership interests.” Decision at 9. Indeed, the bankruptcy court granted stay relief to Pure 24 Country in the Decision. 25 Clearly, relief from the automatic stay is appropriately sought via a contested matter, not through an adversary 26 proceeding under Rule 7001. See Rule 4001(a) (instructing that 27 “[a] motion for relief from an automatic stay . . . shall be made in accordance with Rule 9014 . . . .”) (emphasis added); Johnson 28 (continued...)
-17- 1 was harmless. Pure Country’s Membership Motion was clear in its 2 factual allegations, its legal theories, and in describing the 3 relief it sought. There were two hearings conducted concerning 4 the Membership Motion. In addition to its original opposition, 5 Debtor was afforded an opportunity to make supplemental 6 submissions contesting the Membership Motion before the second 7 hearing occurred, and the issues were comprehensively briefed by 8 the parties. As it turns out, the bankruptcy court decided that, 9 as a matter of law, Schedule 1 was effective despite Debtor’s 10 bankruptcy filing, and that based solely on the undisputed 11 failure to timely repay Pure Country’s $850,000 capital 12 contribution, Debtor lost its interest in Tempe Tower. On this 13 record, it is difficult to understand how Debtor was procedurally 14 disadvantaged by the bankruptcy court’s approach. 15 As Pure Country correctly observes, Debtor has not provided 16 any specific examples of how the contested proceedings employed 17 in this case caused it any significant prejudice. See Downey 18 Reg. Med. Ctr. Hosp., 441 at 128 (requiring the party claiming 19 20 5 (...continued) 21 v TRE Holdings, LLC (In re Johnson), 346 B.R. 190, 195 (9th Cir. 22 BAP 2006). Strata conceded before the bankruptcy court that a contested hearing was the proper procedure for a request for 23 relief from stay. Hr’g Tr. 46:19-22, April 17, 2013 ([Counsel for Debtor]: “I admit freely that stay relief motions don’t 24 require an adversary.”). The Panel has also held that when the 25 relief sought in a declaratory motion is a determination that the automatic stay does not apply to a particular action, then the 26 proper procedure is a contested motion. In re Wade, 115 B.R. 27 222, 225 (9th Cir. BAP 1990); accord 9 COLLIER ON BANKRUPTCY ¶ 4001.02[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed., 28 2013).
-18- 1 prejudice to identify discoverable facts or witnesses that would 2 “have changed the outcome of the case.”). Instead, Debtor’s 3 claims of unfairness are vague and overstated: “Pure Country 4 . . . obstinately refused to comply with the adversary rules. 5 Plainly, Pure Country wanted to avoid, at any cost, an 6 evidentiary proceeding where its own conspiracy, bad faith and 7 bre[a]ch of fiduciary [obligations] would be exposed for all to 8 see.” Debtor’s Op. Br. at 10.6 9 In particular, Debtor argued that it was entitled to a trial 10 in this matter. But by this contention, Debtor seemingly fails 11 to understand that contested matters may include evidentiary, 12 trial-like hearings. See Rule 9014(d).7 As the Advisory 13 Committee note for Rule 9014(d) explains: 14 If the motion cannot be decided without resolving a 15 6 16 Debtor argues that Pure Country breached its fiduciary duty, the parties’ contract, and acted in bad faith by conspiring 17 with Milestone and Security Title to undo Debtor’s RLS Loan, which led to Debtor’s and Tempe Tower’s inability to pay Pure 18 Country the $850,000. If true, under Arizona law, the preferred 19 remedy for such wrongs is an action for damages. Burkons v. Ticor Title Ins. Co., 813 P.2d 710 (Ariz. 1991). At oral 20 argument, counsel for Debtor was repeatedly questioned by the Panel concerning why Debtor did not initiate its own adversary 21 proceeding, or better yet, simply pursue an action for damages 22 against Pure Country in state court. The bankruptcy court made a similar inquiry. Hr’g Tr. 46:23-47. While apparently conceding 23 that Debtor was not without a remedy under state law, Debtor’s 24 counsel’s response was that Debtor would prefer to prevent Pure Country from forfeiting Debtor’s interest in Tempe Tower rather 25 than suing Pure Country for damages. Hr’g Tr. 47:12-15. 26 7 “Testimony of Witnesses. Testimony of witnesses with 27 respect to disputed material factual issues shall be taken in the same manner as testimony in an adversary proceeding.” 28 Rule 9014(d).
-19- 1 disputed material issue of fact, an evidentiary hearing must be held at which testimony of witnesses is taken 2 in the same manner as testimony is taken in an adversary proceeding or at a trial in a district court 3 civil case. 4 2002 Advisory Committee Note to [Rule] 9014(d); see also Caviata 5 Attached Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached 6 Homes, LLC), 481 B.R. 334, 344 (9th Cir. BAP 2012) (disputed 7 material facts in a contested matter ordinarily require an 8 evidentiary hearing). In addition, Debtor has not shown that it 9 at any time formally requested that the bankruptcy court conduct 10 an evidentiary hearing. 11 Debtor also argues that Pure Country was attempting to avoid 12 discovery: “If in fact Milestone and Pure Country were not 13 conspiring together, then they should have nothing to fear from 14 simple depositions and discoveries. The fact that they have gone 15 to such extremes to avoid discovery utterly belies their 16 contention that [they] have nothing to hide.” Debtor’s Reply Br. 17 at 4. While not articulating what sort of facts it would expect 18 to discover, of course, Debtor’s argument ignores that the 19 discovery rules are also applicable in contested matters. See 20 Rule 9014(c) (listing as applicable in contested matters the 21 discovery procedures available in adversary proceedings via 22 Rules 7026, and 7028-7037); In re Downey Med. Ctr.-Hosp, Inc., 23 441 B.R. at 129 (noting that discovery would be available in a 24 contested proceeding similar to this appeal, i.e., immediately 25 following the filing of an emergency motion or before the 26 continued hearing on the motion). And, again, we lack sympathy 27 for Debtor’s argument that it lacked sufficient time to conduct 28 discovery when, in fact, it never formally requested discovery in
-20- 1 the bankruptcy court. In short, we conclude, therefore, that 2 there is no merit to Debtor’s suggestion that, through use of a 3 contested matter, the bankruptcy court allowed Pure Country to 4 “evade” discovery. 5 The Panel has developed a list of factors that we consider 6 in determining whether prejudice has resulted from a bankruptcy 7 court’s decision to proceed by contested matter rather than 8 adversary proceeding: (1) the material facts were few and 9 undisputed, (2) the dispositive issues were pure questions of 10 law, (3) neither party expressed any discontent with the 11 contested matter procedures the bankruptcy court utilized, and 12 (4) this Panel was "satisfied that neither the factual record nor 13 the quality of the presentation of the arguments would have been 14 materially different had there been an adversary proceeding." 15 Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 551 (9th Cir. BAP 16 2002). Under this rubric, Debtor has not shown it was 17 prejudiced. 18 First, although Debtor argues that there were disputed facts 19 and law, those disputes do not implicate the facts and law at the 20 heart of the appeal: that there was an Operating Agreement that 21 by operation of law terminated the membership interest of Debtor 22 on February 24, 2013. In other words, the material facts 23 concerning the nature of the parties’ agreement and Debtor’s 24 failure to pay under the Operating Agreement relied upon by the 25 bankruptcy court were undisputed. 26 Admittedly, under the third criterion, Debtor protested to 27 the bankruptcy court that a contested matter was inappropriate 28 and sought an adversary proceeding. Even so, we are satisfied
-21- 1 that neither the factual record, nor the quality of the 2 presentation of the arguments would have been materially 3 different had there been an adversary proceeding. Instead, it 4 appears that Debtor had adequate notice of the issues raised in 5 the Membership Motion, extensive hearings were conducted, 6 supplemental briefing was submitted, the parties had ample time 7 to air their positions, and for all practical purposes, an 8 adversary proceeding was held in this case. In re Copper King 9 Inn, Inc., 918 F.2d at 1407. 10 Although the first hearing was scheduled by the court on 11 shortened notice, Debtor received both a second hearing and an 12 opportunity for supplemental briefing. Debtor’s protests that it 13 needed an evidentiary hearing are of no moment, because an 14 evidentiary hearing could have been held in the bankruptcy court 15 had Debtor requested one, which it did not do. And the evidence 16 that Debtor hoped to present to the bankruptcy court, as it 17 turned out, was irrelevant to the central issue, whether Debtor’s 18 membership interest terminated by operation of contract and of 19 law on February 24, 2013. In short, the record in the bankruptcy 20 court was developed to a sufficient degree that any arguably 21 enhanced record generated in an adversary proceeding likely would 22 not have been material. 23 Absent a credible argument or specific examples from Debtor 24 showing it suffered some procedural disadvantage as a result of 25 the procedures used in the bankruptcy court, that the court 26 allowed the action to proceed as a contested motion rather than 27 adversary proceeding is not a sufficient reason to disturb the 28 Decision. Even if the bankruptcy court erred in not requiring an
-22- 1 adversary proceeding, such error did not affect the substantial 2 rights of the parties, is not inconsistent with substantial 3 justice, and was therefore harmless. 28 U.S.C. § 2111; Civil 4 Rule 61, incorporated by Fed. R. Bankr. P. 9005 (requiring that a 5 court "disregard all errors and defects that do not affect any 6 party's substantial rights"); In re Copper King Inn, Inc., 7 918 F.2d at 1406-07; Laskin v. First Nat'l Bank (In re Laskin), 8 222 B.R. 872, 874 (9th Cir. BAP 1998); United States v. Valley 9 Nat'l Bank (In re Decker), 199 B.R. 684, 689-90 (9th Cir. BAP 10 1996). 11 III. 12 Debtor was not deprived of due process. 13 The fundamental components of due process are the right to 14 be heard after notice reasonably calculated under the 15 circumstances to apprise a party of the pendency of a matter, and 16 adequate to afford that party of an opportunity to object. 17 Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 18 (1950). Here, in a single page in its opening brief, Debtor 19 claims the bankruptcy court’s procedures in this case did not 20 accommodate rights to due process; the principal authority Debtor 21 cites to support this argument is Société Int’l v. Rogers, 22 357 U.S. 197 (1958): 23 The Supreme Court had made it clear that the 5th Amendment Due Process Clause imposes “constitutional 24 limitations upon the power of courts, even in aid of their own valid processes” preventing resolution of an 25 action without first “affording a party the opportunity for a hearing on the merits of his cause.” 26 27 Debtor’s Op. Br. at 12, quoting Société, 357 U.S. at 209 28 (emphasis added).
-23- 1 The due process requirements Debtor invokes are satisfied in 2 both adversary proceedings under Rule 7001 and contested matters 3 under Rule 9014. Fortune & Faal v. Zumbrun (In re Zumbrun), 4 88 B.R. 250, 253 (9th Cir. BAP 1988). There can be no doubt that 5 Debtor was afforded more than adequate notice of the filing of 6 the Membership Motion, and an ample opportunity to object and be 7 heard concerning the merits of its cause. It responded to the 8 Membership Motion, and after an initial hearing on the motion, 9 the bankruptcy court allowed Debtor additional time to file a 10 supplemental response. Société Int'l, 357 U.S. at 209 (observing 11 that only one hearing with notice meets the requirements for due 12 process). The court conducted a continued, second hearing on the 13 Membership Motion, took the issues under advisement, and entered 14 a detailed Decision explaining its findings, conclusions, and 15 reasons for its rulings. 16 As the Panel has previously ruled, due process in bankruptcy 17 proceedings is not violated where property interests are 18 determined in a contested matter where the bankruptcy court had 19 jurisdiction, notice of the motion was provided, the party was 20 represented at all hearings by counsel and had a meaningful 21 opportunity to respond. In re Downey Reg’l Med. Ctr.-Hosp., 22 441 B.R. at 128. Here, the bankruptcy court had jurisdiction 23 over the issues, Debtor had adequate notice of the Membership 24 Motion and was given ample opportunity to respond, and Debtor was 25 represented by counsel who was heard at both hearings. Simply 26 stated, Debtor was not denied due process in this case. 27 28
-24- 1 CONCLUSION 2 To the extent the bankruptcy court may have erred in not 3 requiring that Pure Country seek relief via an adversary 4 proceeding, that error was harmless. Debtor’s right to due 5 process was not violated. We therefore AFFIRM the Decision of 6 the bankruptcy court. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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