FILED APR 30 2024 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. WW-23-1158-LBS YING LIU and ZHIWEN YANG, Debtors. Bk. No. 2:22-bk-10855-TWD YING LIU; ZHIWEN YANG, Appellants, v. MEMORANDUM∗ YUN ZHANG, Appellee.
Appeal from the United States Bankruptcy Court for the Western District of Washington Timothy W. Dore, Bankruptcy Judge, Presiding
Before: LAFFERTY, BRAND, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Ying Liu and Zhiwen Yang (“Debtors”) appeal the bankruptcy
court’s order denying their motion for relief under Civil Rule 60(b) 1 from
an order approving a settlement agreement. Prepetition, one of Debtors’
∗ 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, “Rule” references are to the Federal Rules of Bankruptcy Procedure, “Civil Rule” references are to the Federal Rules of Civil Procedure, and “FRE” references are to the Federal Rules of Evidence. 1 creditors obtained a judgment against Debtors in China, followed by a
judgment from a Washington state court recognizing the Chinese
judgment. Upon Debtors’ filing of a bankruptcy case, the creditor asserted
a substantial claim against Debtors’ estate based on that litigation.
Debtors repeatedly asserted, before and after their bankruptcy filing,
that this creditor fraudulently obtained the Chinese judgment.
Nevertheless, after months of settlement negotiations between Debtors and
the creditor, Debtors voluntarily entered into a settlement agreement with
the creditor, through which Debtors settled not just the validity and
amount of the creditor’s claim, receiving a $2 million reduction of that
claim, but also the creditor’s threatened objections to Debtors’ subchapter
V election, Debtors’ discharge, and confirmation of Debtors’ plan.
Debtors then filed a motion for approval of that settlement
agreement, arguing that the settlement was “fair and equitable” and would
benefit creditors of the estate, mainly because the estate would otherwise
expend considerable resources litigating the multiple disputes between the
parties in multiple courts. The bankruptcy court approved the settlement
agreement. Debtors proposed a chapter 11 plan of reorganization
incorporating the terms of the agreement, and the bankruptcy court
confirmed that plan.
Several months after plan confirmation, the Chinese court vacated
the Chinese judgment. Debtors, contending that this absolved them of all
obligations to the creditor under the settlement agreement, moved to
2 vacate the bankruptcy court’s order approving the agreement. The crux of
Debtors’ argument was, once again, that the creditor had fraudulently
obtained the Chinese judgment, i.e., the same argument Debtors repeatedly
asserted for years preceding their settlement. Debtors asserted that, in light
of the vacation of the Chinese judgment, they were now entitled to relief
from the settlement order under Civil Rule 60(b)(3), (b)(5), and (b)(6). The
bankruptcy court denied the motion, holding that Debtors knew all
pertinent facts before entering into the settlement agreement and that it
would not be inequitable to hold Debtors to the bargain they voluntarily
made for the benefit of the estate.
We AFFIRM.
FACTS2
A. Prepetition Events
In 2017, Yun Zhang obtained a money judgment against Debtors in
China (the “Chinese Judgment”) based on a breach of Debtors’ commercial
obligations to her. Subsequently, Ms. Zhang filed a petition in the Superior
Court for King County in Washington for recognition of the Chinese
2 In their reply brief, Debtors request that the Panel strike certain documents from Ms. Zhang’s Supplemental Excerpts of Record, on the basis that the documents were not properly designated under Rule 8009. Reply Brief, pp. 1-2. Although the Panel may take judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system, see O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989), in this case, the Panel did not rely on any of the documents to which Debtors object. As such, the Panel overrules Debtors’ objection as moot. 3 Judgment. In response to this petition, Debtors asserted that Ms. Zhang
had fraudulently obtained the Chinese Judgment. Notwithstanding
Debtors’ objection, the Superior Court entered a judgment against Debtors
in the amount of $4,698,122 (the “Washington Judgment”).
Debtor Ying Liu later filed an action in China to set aside the Chinese
Judgment, again asserting that Ms. Zhang committed fraud in obtaining
the Chinese Judgment. Debtors also advised Hao Lu, an individual
residing in China to whom Debtors owed money, that Ms. Zhang had
fraudulently obtained the Chinese Judgment which threatened Hao Lu’s
recovery against Ms. Liu. As a result, Hao Lu filed a separate lawsuit to
revoke the Chinese Judgment (the “Hao Lu Action”).
B. Debtors’ Bankruptcy Filing and the Parties’ Settlement
Shortly after Hao Lu initiated the Hao Lu Action, Debtors filed their
chapter 11 case. In their schedules, Debtors identified the secured and
unsecured claims held by Ms. Zhang, indicating that both claims were
disputed. Ms. Zhang also filed a proof of claim, asserting a secured claim
against the estate in the amount of $5,020,131.68.
At virtually every stage of Debtors’ bankruptcy case, Debtors argued
that Ms. Zhang did not have a valid claim and that Ms. Zhang obtained the
Chinese Judgment by inappropriate means. And, as evidenced by an email
from Debtors’ lawyer, Debtors knew about the Hao Lu Action, which
sought to vacate the Chinese Judgment on the basis of fraud.
4 Nevertheless, from July through August 2022, Debtors and Ms.
Zhang engaged in settlement negotiations. Both parties were represented
by counsel. As part of the settlement negotiations, Debtors requested
inclusion of a clause in the final agreement that would nullify the
settlement agreement if the Chinese Judgment was vacated (the
“Nullification Clause”). Ms. Zhang did not accept Debtors’ proposed
Nullification Clause. Nevertheless, the parties reached a consensus and
finalized a settlement agreement (the “Settlement Agreement”).
In August 2022, Debtors filed a motion for approval of the Settlement
Agreement in accordance with Rule 9019 (the “Settlement Motion”). The
Settlement Agreement submitted to the bankruptcy court did not include
the Nullification Clause. But it did include a requirement that the plan
contain provisions consistent with the Settlement Agreement and that the
plan be confirmed.
In the Settlement Motion, Debtors argued that their agreement with
Ms. Zhang was fair and equitable, and that it satisfied the four-part test for
compromises of controversies. Specifically, Debtors asserted that the
benefits the estate would receive from the Settlement Agreement
“outweigh[ed] the likely rewards of litigation because of the economic
benefits of reducing [Ms.] Zhang’s claim while forgoing lengthy and
extremely costly litigation.” Debtors stressed:
Consider first the complexity, cost and delay of litigation. Yun Zhang has agreed to forgo objections to the Debtors’ subchapter
5 V election, the discharge of debt, and plan confirmation, meaning the estate will likely not be burdened with the time and expense of defending against such objections, regardless of whether any has merit. The administrative costs that would otherwise be expended on such litigation can instead be used to pay holders of allowed claims. Further, the delay and expense of litigation must include the real possibility of a lengthy appeals process. Accordingly, the Debtors believe the Agreement is fair in relation to the costs and benefits of pursuing litigation. Debtors also argued that the Settlement Agreement was in the
interest of all creditors of the estate. Debtors noted that, although Ms.
Zhang’s “claim may be reduced further through successful litigation,” the
Settlement Agreement was based on “a sound economic decision[] to
preserve current and future estate funds in order to make meaningful
distributions to unsecured creditors.”
The bankruptcy court approved the settlement agreement (the
“Settlement Order”). In the Settlement Order, the bankruptcy court found
that the terms of the Settlement Agreement were “fair and equitable, in the
interest of all parties, and satisf[ied] the standard for compromises and
settlements pursuant to [Rule] 9019….”
Subsequently, Debtors filed a chapter 11 plan of reorganization (the
“Plan”). In the Plan, Debtors proposed treatment of Ms. Zhang’s claim in
accordance with the Settlement Agreement. The bankruptcy court entered
an order confirming the Plan.
6 C. The Vacation of the Chinese Judgment and Debtors’ Motion for Relief from the Settlement Order Approximately nine months after entry of the Settlement Order and
eight months after confirmation of the Plan, the Chinese court presiding
over the Hao Lu Action vacated the Chinese Judgment. Debtors then filed a
motion for relief from the Settlement Order under Civil Rule 60(b)(3),
(b)(5), and (b)(6) (the “Motion for Relief”). In the Motion for Relief, Debtors
argued that: (i) Ms. Zhang fraudulently obtained the Chinese Judgment by
serving Debtors at the wrong address and making misrepresentations
before the Chinese court; (ii) continued enforcement of the Settlement
Order was no longer equitable; (iii) the Chinese Judgment was the sole
basis for the Settlement Order, and vacation of the Chinese Judgment
should similarly result in vacation of the Settlement Order; and (iv)
extraordinary circumstances warranted relief from the Settlement Order.
At the hearing on the Motion for Relief, the bankruptcy court ruled
that relief under Civil Rule 60(b)(3) was not warranted. The bankruptcy
court found that any “fraud, misrepresentation, or opposing party
misconduct” would relate to entry of the Chinese Judgment and not the
Settlement Order, and that Debtors were aware of the alleged bad acts
before voluntarily entering into the Settlement Agreement.
As to Civil Rule 60(b)(5), the bankruptcy court held that it was “not
inequitable to hold the debtors to the terms of a settlement agreement they
entered into while knowing all the relevant facts that have allowed them to
7 successfully challenge [Ms.] Zhang’s claim.” The court also stated that the
existence of the Chinese Judgment was just one factor in Debtors’ decision
to settle.
With respect to Civil Rule 60(b)(6), the bankruptcy court held that
there was no manifest injustice because Debtors knew all the relevant facts
before settling. Finally, the court noted that the terms of the Settlement
Agreement were incorporated into the Plan. Therefore, vacating the
Settlement Order would not accomplish much because the parties were still
bound by the confirmed Plan. As a result, the bankruptcy court entered an
order denying the Motion for Relief. Debtors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court err in holding that Civil Rule 60(b) is
generally not available to avoid binding settlement agreements?
2. Did the bankruptcy court err in relying on certain settlement
communications for its ruling?
3. Did the bankruptcy court err in denying Debtors’ motion for relief
from the Settlement Order under Civil Rule 60(b)(3)?
4. Did the bankruptcy court err in denying Debtors’ motion for relief
from the Settlement Order under Civil Rule 60(b)(5)?
8 5. Did the bankruptcy court err in denying Debtors’ motion for relief
from the Settlement Order under Civil Rule 60(b)(6)?
6. Did the bankruptcy court err by commenting on the futility of
vacating the Settlement Order in light of the confirmed Plan?
STANDARD OF REVIEW
The Panel reviews a trial court’s decision to deny a Civil Rule 60(b)
motion for abuse of discretion. Cmty. Dental Servs. v. Tani, 282 F.3d 1164,
1167 n.7 (9th Cir. 2002), as amended on denial of reh'g and reh'g en banc, (April
24, 2002). In applying an abuse of discretion test, we first “determine de
novo whether the [bankruptcy] court identified the correct legal rule to
apply to the relief requested.” United States v. Hinkson, 585 F.3d 1247, 1262
(9th Cir.2009) (en banc). If the bankruptcy court identified the correct legal
rule, we then determine whether its “application of the correct legal
standard [to the facts] was (1) illogical, (2) implausible, or (3) without
support in inferences that may be drawn from the facts in the record.” Id.
(internal quotation marks omitted).
DISCUSSION
At the core of Debtors’ appeal is their argument that vacation of the
Chinese Judgment should translate into vacation of the Settlement Order.
However, Debtors have not established that Civil Rule 60(b) provides an
avenue for such relief. Consequently, the bankruptcy court did not abuse
its discretion in denying Debtors’ request to vacate the Settlement Order
under Civil Rule 60(b)(3), (b)(5), and (b)(6), as discussed in Sections C., D.,
9 and E., respectively. Nor did the bankruptcy court err in noting that Civil
Rule 60(b) generally does not allow for voiding of settlement agreements,
as discussed in Section A., relying on certain settlement communications,
as discussed in Section B., or noting that Debtors’ confirmed Plan presented
an additional obstacle to the relief sought by Debtors, as discussed in
Section F.
A. The bankruptcy court did not err in noting that Civil Rule 60(b) is generally not available to avoid binding settlement agreements. Debtors contend that the bankruptcy court erred by holding that the
Settlement Agreement remains binding despite vacation of the Chinese
Judgment, and by referencing Pilkington v. Cardinal Health, Inc. (In re Syncor
ERISA Litigation), 516 F.3d 1095 (9th Cir. 2008), in support of its holding.
However, Debtors mischaracterize the bankruptcy court’s ruling. The
bankruptcy court did not hold that the Settlement Agreement remains
binding under every theory available to Debtors. Rather, the bankruptcy
court simply commented that Civil Rule 60(b) is usually not the right tool
to attack settlement agreements.
Specifically, the bankruptcy court relied on Syncor to note that
“[g]enerally, [Civil] Rule 60(b) is not available to avoid a binding
settlement agreement.” Thus, the bankruptcy court employed Syncor to
articulate a general rule for application of Civil Rule 60(b) to settlement
agreements. Nevertheless, Debtors argue that the bankruptcy court’s
reliance was a mistake because Syncor involved a different context, i.e., a
10 class action lawsuit. This argument is unpersuasive: Syncor did not limit
application of the rule quoted by the bankruptcy court to a specific context,
and a review of the case makes clear that the rule would apply in other
cases.
In Syncor, prior to the court’s ruling on a motion for summary
judgment filed by defendants, the parties entered into a class action
settlement agreement that required court approval under the Civil Rules.
Id. at 1097-99. The parties notified the district court of their settlement, but
the district court entered an order granting the motion for summary
judgment anyway. Id. Subsequently, the class filed a motion under Civil
Rule 60(b) requesting that the court set aside the judgment. Id. The district
court denied this motion. Id.
On appeal, the Ninth Circuit Court of Appeals reversed the district
court’s decision. Id. at 1103. The Court of Appeals first noted that “the
requirement that the district court approve a class action settlement does
not affect the binding nature of the parties’ agreement.” Id. at 1100. The
Court of Appeals reasoned:
At the time of the settlement, Defendants knew they had dispositive motions pending and chose the certainty of settlement rather than the gamble of a ruling on their motions. Thus, Defendants chose to forego the chance that the district court would grant summary judgment in their favor. Because the parties bound themselves to a settlement agreement subject only to court approval (which they had agreed to seek) and gave the required notice of the agreement, the district court
11 should not have (1) filed its order granting the motions for summary judgment and (2) entered final judgments against the Class. Id.; see also Sheng v. Starkey Lab’ys, Inc., 117 F.3d 1081, 1083 (8th Cir. 1997)
(“[Civil] Rule 60(b) does not allow district courts to indulge a party’s
discontent over the effects of the party’s bargain.”) (citation and
international quotation marks omitted).
Debtors’ attempt to distinguish Syncor by arguing that Syncor
involved a complex class action lawsuit presents a distinction without a
difference. Syncor acknowledged and adopted the holding of Sheng, which
set forth the general principal that district courts lack the discretion to
allow parties to nullify a fully executed settlement agreement by
employing Civil Rule 60(b). This statement of general application is not
dependent on the size or type of litigation. Debtors have not articulated
why the Court of Appeals’ reasoning does not equally apply to the
Settlement Agreement.
Debtors place great weight on the Court of Appeals’ statement that
the strong judicial policy favoring settlement is particularly important
“where complex class action litigation is concerned.” Syncor, 516 F.3d at
1101. However, as discussed above, the complexity of the case in Syncor
does not make this policy inapplicable to less complex cases.
Moreover, in support of Syncor’s policy conclusion, the Court of
Appeals referenced local rules that set forth policies and procedures for
12 settlement to encourage disposition of civil litigation by settlement. Id. The
local rules cited by the Court of Appeals make clear that, notwithstanding
the complexity of a matter, the policy regarding settlement is important in
any case. Id.
The very same policies are reflected in the Local Bankruptcy Rules for
the Western District of Washington (the “Local Bankruptcy Rules”),
through which the bankruptcy courts in that district offer a specialized
mediation program to streamline settlement of disputes arising from
bankruptcy cases. Local Bankruptcy Rules 9040-1 – 9054-1. As stated in the
Local Bankruptcy Rules:
The court recognizes that formal litigation of disputes in bankruptcy cases and adversary proceedings frequently imposes significant economic burdens on parties and often delays resolution of those disputes. The procedures established by these Local Bankruptcy Rules are intended primarily to provide litigants with the means to resolve their disputes more quickly, at less cost, and often without the stress and pressure of litigation.
The court also notes that the volume of cases, contested matters and adversary proceedings filed in the Western District of Washington has placed substantial burdens upon counsel, litigants and the court, all of which contribute to the delay in the resolution of disputed matters. A court authorized mediation program, in which litigants and counsel meet with a Mediator, offers an opportunity to parties to settle legal disputes promptly and less expensively, to their mutual satisfaction. Local Bankruptcy Rule 9040-2.
13 Thus, the “strong judicial policy favoring settlement” is equally present in
bankruptcy cases and proceedings.
The bankruptcy court did not err in relying on Syncor or noting that
Civil Rule 60(b) generally does not provide an avenue for avoidance of
settlement agreements.
B. The bankruptcy court did not err in relying on communications regarding settlement negotiations. Debtors assert that the bankruptcy court’s ruling impermissibly
relied on settlement communications in violation of FRE 408. 3 FRE 408
provides that certain settlement communications are not admissible “either
to prove or disprove the validity or amount of a disputed claim or to
impeach by a prior inconsistent statement or a contradiction.” FRE 408(a).
Nevertheless, “[t]he court may admit this evidence for another purpose….”
FRE 408(b).
Here, the bankruptcy court did not admit the settlement
communications for the purpose of proving or disproving the validity or
amount of a claim, or to impeach prior inconsistent statements. Rather, the
bankruptcy court used the settlement communications merely to establish
that Debtors were aware of the possibility that the Chinese Judgment might
be vacated, and attempted to include a clause that would nullify the
Settlement Agreement if such a contingency occurred. These were not
3 Debtors raise this objection despite furnishing all of the subject communications as part of their excerpts of record. 14 prohibited uses of the communications for purposes of FRE 408(a). 4 As
such, the bankruptcy court did not err in referencing these communications
in its ruling.
C. The bankruptcy court did not abuse its discretion in denying Debtors’ request for relief under Civil Rule 60(b)(3). Pursuant to Civil Rule 60(b)(3), “the court may relieve a party or its
legal representative from a final judgment, order, or proceeding” based on
“fraud (whether previously called intrinsic or extrinsic), misrepresentation,
or misconduct by an opposing party.” “To prevail, the moving party must
prove by clear and convincing evidence that the [order] was obtained
4 Notwithstanding their objection to the use of these settlement communications, Debtors rely on one such communication to argue that both parties believed that the Settlement Agreement would be nullified upon vacation of the Chinese Judgment. Specifically, Debtors reference an email by Ms. Zhang’s counsel, in which counsel stated that inclusion of such a nullification clause would be “redundant.” The parties dispute the meaning of the word “redundant” as used in this communication. However, this issue was irrelevant to the bankruptcy court’s ruling and is similarly irrelevant for purposes of this appeal. The issue of interpreting a settlement agreement is different from the issue of whether to vacate an order approving the settlement agreement. See Satellite Cap., LLC v. Emaciation Cap., LLC (In re Sawtelle Partners, LLC), No. 2:16-BK-21234-BR, 2019 WL 2855786, at *6 (9th Cir. BAP Jul. 1, 2019). The bankruptcy court was not presented with an issue of contract interpretation in response to a Civil Rule 60(b) motion. See id. The bankruptcy court merely assessed whether Debtors had stated grounds for relief under Civil Rule 60(b). For that narrow purpose, the bankruptcy court only used the subject email communications to note that Debtors were aware of the possibility that the Chinese Judgment might be vacated, as evidenced by their attempt to include an explicit nullification clause in the Settlement Agreement, and that, eventually, they were unsuccessful in including any such explicit clause. Debtors’ additional argument that the Settlement Agreement actually included an implicit nullification clause is beyond the scope of this appeal, and would require initiation of a different action for contract interpretation. 15 through fraud, misrepresentation, or other misconduct and the conduct
complained of prevented the losing party from fully and fairly presenting
the defense.” De Saracho v. Custom Food Mach., Inc., 206 F.3d 874, 880 (9th
Cir. 2000).
Debtors first contend that the bankruptcy court abused its discretion
by relying on Pacific & Arctic Railway and Navigation Co. v. United
Transportation Union, 952 F.2d 1144 (9th Cir. 1991), for the proposition that
bad conduct warranting relief under Civil Rule 60(b)(3) must have been
unknown and not discoverable prior to entry of the order from which relief
is sought. In Pacific, the Ninth Circuit reviewed whether an arbitrator had
committed fraud prior to entering an award against a railroad company. Id.
at 1146-47. The Court of Appeals held that both the Federal Arbitration Act
and Civil Rule 60(b)(3) “require that fraud be proven by clear and
convincing evidence, not be discoverable by due diligence before or during
the proceeding, and be materially related to the submitted issue.” Id. at
1148.
The bankruptcy court’s reliance on Pacific was limited to a reference
to this quote. The court did not otherwise analogize the facts of Pacific to
the current dispute between Debtors and Ms. Zhang, or otherwise “rely”
on that decision. Nevertheless, Debtors assert that this holding in Pacific
applies only to arbitration awards under the Railway Labor Act, and that
the statement was dicta.
16 Casey v. Albertson’s Inc., 362 F.3d 1254, 1260 (9th Cir. 2004), refutes
Debtors’ contention. Casey did not involve the Railway Labor Act or the
Federal Arbitration Act. Rather, the plaintiff in Casey sought vacation of a
judgment entered in favor of defendant in a civil lawsuit involving
discrimination and sexual harassment claims. Casey, 362 F.3d at 1256.
Despite the completely different causes of action, the Court of Appeals
quoted the same language from Pacific, stating that, for purposes of Civil
Rule 60(b)(3), the fraud must “not be discoverable by due diligence before
or during the proceedings.” Id. at 1260 (quoting Pacific, 952 F.2d at 1148).
Because the Court of Appeals in Casey was assessing whether the
plaintiff had a valid request for relief under Civil Rule 60(b)(3), Debtors
cannot contend that the quoted law was dicta. Nor can Debtors seriously
contend that the principle articulated in Casey is limited to any particular
area of law. See also Del Toro v. 360 P’Ship LP, No. 22-55078, 2022 WL
17223042, at *1 (9th Cir. Nov. 25, 2022) (quoting same language in an action
arising out of a foreclosure); Smith v. Waggener, No. 20-15891, 2022 WL
213376 (9th Cir. Jan. 24, 2022) (quoting same language in action alleging
constitutional violations under 42 U.S.C. § 1983); Coulon v. Fairbank, 812
Fed. App’x. 699, 700 (quoting same language in an action under the
Americans with Disabilities Act and the Fair Housing Act). Accordingly,
there is no reason why the bankruptcy court should not have applied this
principle to this case.
17 Debtors also have not identified any findings of fact by the
bankruptcy court that were illogical, implausible or without support in the
record. The bankruptcy court’s finding that Debtors were aware of all the
alleged acts of fraud prior to entry of the Settlement Order is amply
supported by the record. Debtors themselves have repeatedly detailed their
efforts to vacate both the Washington Judgment and the Chinese Judgment
on much the same allegations of fraud, long before Debtors negotiated the
terms of the Settlement Agreement. Thus, the bankruptcy court did not
abuse its discretion in finding that Debtors were aware of all the pertinent
facts of fraud or misconduct prior to entry of the Settlement Order.
The bankruptcy court also correctly identified a causation issue in
Debtors’ argument under Civil Rule 60(b)(3). Specifically, the bankruptcy
court noted that Debtors’ arguments regarding fraud focused on fraud in
the procurement of the Chinese Judgment, not fraud in the entry of the
Settlement Order.
The record supports this conclusion. In their Motion for Relief before
the bankruptcy court, Debtors mainly asserted that Ms. Zhang fraudulently
obtained the Chinese Judgment, as they repeatedly had alleged before and
after the filing of their bankruptcy case. Other than a conclusory statement
that Ms. Zhang “induce[d] the Debtors into a settlement agreement”
despite “know[ing] that the Debtors did not actually owe [Ms.] Zhang
anything,” Debtors did not provide any facts that would lead the
bankruptcy court to believe that Ms. Zhang had procured the Settlement
18 Order by fraud, misrepresentation, or misconduct. And, even if Ms. Zhang
knew that Debtors did not owe her anything, by the time the parties
entered into the Settlement Agreement, Debtors also knew as much; again,
Debtors had repeatedly taken this stance prior to engaging in settlement
discussions with Ms. Zhang.
On appeal, Debtors now assert that “[d]uring negotiations of the
settlement, [Ms.] Zhang made false representations of material fact,
intended to induce [Debtors] to agree to an allowed claim, the
representations were made with knowledge of their falsity, and [Debtors]
justifiably relied upon those false representations to their detriment.”
Appellants’ Opening Brief, p. 18. But Debtors do not reference any facts in
the record supporting this blanket recounting of the elements of fraud.
Consequently, the bankruptcy court did not abuse its discretion in finding
that Debtors failed to provide “clear and convincing” evidence of fraud or
misconduct related to the Settlement Order.
D. The bankruptcy court did not abuse its discretion in denying Debtors’ request for relief under Civil Rule 60(b)(5). Civil Rule 60(b)(5) permits a court to relieve a party from a final
judgment if “the judgment has been satisfied, released, or discharged; it is
based on an earlier judgment that has been reversed or vacated; or
applying it prospectively is no longer equitable.” Civil Rule 60(b)(5).
Debtors mainly argue that prospective application of the Settlement Order
19 is no longer equitable, but also contend that the Settlement Order was
based on a now vacated judgment, i.e., the Chinese Judgment.
1. The bankruptcy court did not err in holding that prospective application of the Settlement Order would not be inequitable. Prospective application of an order is no longer equitable if “a
significant change either in factual conditions or in law” renders continued
enforcement “detrimental to the public interest.” Horne v. Flores, 557 U.S.
433, 447 (2009) (citing Rufo v. Inmates of Suffolk Cnty. Jail, 502 U.S. 367, 384
(1992)). “Relief from a court order should not be granted, however, simply
because a party finds ‘it is no longer convenient to live with the terms’ of
the order.” SEC v. Coldicutt, 258 F.3d 939, 942 (9th Cir. 2001) (quoting Rufo,
502 U.S. at 383).
In addition, “[t]he equitable considerations applicable to [Civil] Rule
60(b)(5) cannot merely involve private interests.” In re Brown, 547 B.R. 846,
855 (Bankr. S.D. Cal. 2016). The public interest in finality of judgments and
upholding settlement agreements outweighs “considerable injury” a party
to private litigation may suffer based on changed circumstances. Id.
Here, the bankruptcy court did not abuse its discretion in holding
that it would not be inequitable, for purposes of Civil Rule 60(b)(5), to
uphold the Settlement Order. As discussed by the bankruptcy court,
Debtors knew all the pertinent facts before voluntarily entering into the
Settlement Agreement. Although the Chinese Judgment was vacated after
20 entry of the Settlement Order, the parties were well aware of the possibility
that it could be vacated when they entered into the Settlement Agreement. 5
In addition, as noted by the bankruptcy court, the Settlement
Agreement was not based solely on the Chinese Judgment. Debtors
themselves argued that the Settlement Agreement was beneficial because
of the “complexity, cost and delay of litigation” which likely would involve
a “lengthy appeals process.” This prospect of litigation would not
disappear simply because the Chinese Judgment was vacated; among other
things, Debtors would still have to: (i) wait for resolution of an appeal of
the Chinese court’s decision to vacate the Chinese Judgment; (ii) move to
vacate the Washington Judgment; and (iii) object to Ms. Zhang’s claim
against the estate. Moreover, the record does not reflect that Debtors did
not owe Ms. Zhang any amount of money; rather, the record demonstrates
only that Ms. Zhang no longer held one of the judgments on the debt.
The estate also received benefits beyond the reduction of the amount
of Ms. Zhang’s claim. As noted by Debtors in their Settlement Motion, Ms.
5 Debtors also generally argue throughout their appellate brief that they had no choice but to settle. According to Debtors, it would have been very unlikely that any court would sustain an objection to Ms. Zhang’s claim because of the existence of the Chinese Judgment. First, as noted by the bankruptcy court, Debtors must have contemplated the possibility that the Chinese Judgment would be vacated because they attempted to include the Nullification Clause in the Settlement Agreement. As such, Debtors could have made a number of other choices, such as objecting to Ms. Zhang’s claim or proposing alternative treatments to Ms. Zhang’s claim in the Plan. Second, even if the Panel were to take Debtors’ comments as true, whether or not Debtors felt they had alternatives is not a relevant consideration for any of the subsections of Civil Rule 60(b). 21 Zhang agreed to forego her objections to: (i) Debtors’ subchapter V
election; (ii) Debtors’ discharge; and (iii) confirmation of the Plan. As such,
Debtors themselves acknowledged that the bargain they received from the
Settlement Agreement included saving resources from litigating not just
the validity or amount of Ms. Zhang’s claim, but several other contested
matters on the horizon. All of these facts supported entry of the Settlement
Order under the Ninth Circuit’s “fair and equitable” standard in Martin v.
Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986). As such,
the vacation of the Chinese Judgment did not qualify as a “significant
change in factual conditions.” See Horne, 557 U.S. at 447 (emphasis added).
In addition, even if the vacation of the Chinese Judgment qualified as
a significant change in factual conditions, the equitable considerations set
forth by Debtors “merely involve private interests.”6 Brown, 547 B.R. at 855.
And, to the extent the public interest is implicated, it would support the
bankruptcy court’s conclusion:
There is a deeply embedded judicial and legislative policy in favor of keeping final judgments final. That is especially true for settlement agreements. A settlor's remorse cannot alone justify abandoning such judgments. Else, the key virtue of settling cases—letting the parties move on after they each get some of what they want—would be lost.
6 The order vacating the Chinese Judgment also suggests that debtor Liu Ying may have colluded with Ms. Zhang in executing certain false IOUs. To the extent private equitable concerns are implicated, such concerns would militate against allowing Debtors to benefit from their own misconduct. 22 Cummings v. Greater Cleveland Reg'l Transit Auth., 865 F.3d 844, 846 (6th Cir.
2017) (citing, inter alia, Ackermann v. United States, 340 U.S. 193, 198 (1950)).
This interest in finality is especially prevalent in chapter 11 cases, where
plans of reorganization often rely on final orders approving settlement
agreements between the estate and creditors. In such cases, it is not only
the parties to the settlement agreements that have an interest in finality, but
all creditors of the estate.
Consequently, the bankruptcy court did not abuse its discretion in
denying Debtors’ request for relief under this prong of Civil Rule 60(b)(5).7
2. The bankruptcy court did not err in holding that the Settlement Order was not based exclusively on the Chinese Judgment. Although Debtors focus on their argument that enforcement of the
Settlement Order is no longer equitable, Debtors also argue that the
Settlement Order may be vacated because it is based on a prior judgment
that has been reversed or vacated. However, “application of this clause has
been limited to cases in which the present judgment is based on the prior
judgment in the sense of res judicata or collateral estoppel.” Schwartz v.
7 In their brief on appeal, Debtors mention, in passing, that the doctrines of in pari delicto and unclean hands support Debtors’ request for relief. Debtors did not present these arguments to the bankruptcy court and, as a result, may not present them belatedly on appeal. See Fegert, 887 F.2d at 957 (“The rule in this circuit is that appellate courts will not consider arguments that are not properly raised in the trial courts.”) (internal quotation marks omitted). 23 United States, 976 F.2d 213, 217 (4th Cir. 1992) (internal quotation marks
omitted).
Here, the Settlement Order was not based on the Chinese Judgment
under theories of res judicata or collateral estoppel – indeed, the Chinese
Judgment was being challenged through a number of mechanisms at the
same time Debtors were settling with Ms. Zhang. Rather, as noted by the
bankruptcy court, the existence of the Chinese Judgment was just one
factor Debtors considered when voluntarily entering into the Settlement
Agreement. 8 As such, the bankruptcy court also did not abuse its discretion
in denying relief under this prong of Civil Rule 60(b)(5).
E. The bankruptcy court did not abuse its discretion in denying Debtors’ request for relief under Civil Rule 60(b)(6). Under Civil Rule 60(b)(6), a court may relieve a party from a final
order for “any other reason that justifies relief.” A party seeking relief
under Civil Rule 60(b)(6) must show extraordinary circumstances that
demonstrate it is faultless in the delay. Pioneer Inv. Servs. Co. v. Brunswick
Assocs. Ltd. P'ship, 507 U.S. 380, 393 (1993).
As to Civil Rule 60(b)(6), Debtors first contend that the bankruptcy
court committed “clear error” by relying on Harvest v. Castro, 531 F.3d 737
(9th Cir. 2008). Debtors assert that Harvest involved a writ of habeas corpus,
and that the facts in that case are distinguishable from the facts of this case.
8 The record before the Panel also is devoid of the status of the Washington Judgment. As such, despite the vacation of the Chinese Judgment, it appears that Ms. Zhang still holds a judgment against Debtors. 24 However, the bankruptcy court relied on Harvest for the unremarkable
proposition that Civil Rule 60(b)(6) is “to be used sparingly” and “to
prevent manifest injustice” in “extraordinary circumstances.” Harvest, 531
F.3d at 749. This language in Harvest referenced another Ninth Circuit
Court of Appeals decision. See Latshaw v. Trainer Wortham & Co., 452 F.3d
1097, 1103 (9th Cir. 2006). Latshaw, in turn, involved a motion for relief
from a judgment based on a settlement under, among other subsections,
Civil Rule 60(b)(6). Id. at 1102-04. As such, Debtors position is without
merit.
Debtors also contend that the bankruptcy court abused its discretion
by finding a lack of “extraordinary circumstances” warranting relief under
Civil Rule 60(b)(6). However, the bankruptcy court’s conclusion was not
illogical, implausible, or without support from the record.
Schwartz, referenced above, is squarely on point. In Schwartz, the
appellant settled a civil forfeiture action, but moved for relief from the
settlement after the underlying convictions that led to the forfeiture action
were vacated. Schwartz, 976 F.2d at 214. Relying on a Supreme Court
decision, the Fourth Circuit Court of Appeals stated that “strategic
decisions made during the course of litigation provide no basis for relief
under [Civil Rule] 60(b)(6), even though with hindsight they appear
wrong.” Id. at 218 (citing Ackermann, 340 U.S. 193). Although Ackermann
involved relief from a decision not to appeal, the Schwartz court explained:
25 We find no meaningful distinction between a motion asking for relief from a decision not to appeal, as in Ackermann, and one that asks for relief from a decision to settle, as in this case. The decision to settle a case is made in the same manner as any other decision with respect to the course of litigation, including a decision not to appeal. A litigant weighs the chance of success against the probable cost of achieving that success through further litigation, all based on whatever limited information is available at the time. [The appellant] necessarily undertook such a cost-benefit weighing in 1984 when he decided to settle his challenge to the forfeiture. His was as calculated, free, and deliberate a choice as that of [the appellants in Ackermann], and as their’s was not, he should not be relieved from it. Id. at 218-19; see also Brandon v. Bodeker (In re Bodeker), 525 B.R. 770, 774 (D.
Mont. 2015), aff’d, 689 F. App’x 879 (9th Cir. 2017) (collecting cases and
holding that a “party’s failure to properly estimate the loss or gain from
entering a settlement agreement is not an extraordinary circumstance” and
that Civil Rule 60(b)(6) “was not intended to relieve a party from a
settlement agreement entered voluntarily with the advice of counsel”).
As in Schwartz and Ackermann, Debtors made a strategic decision to
settle with Ms. Zhang. Such a decision does not come within the purview
of Civil Rule 60(b)(6).9
9 Debtors also argue that the circumstances here are “extraordinary” because they are attempting to protect other creditors of the estate. However, as far as the Panel can tell from the record, Debtors appropriately served parties in interest with the Settlement Motion and no such parties in interest objected to the terms of the Settlement Agreement. As such, creditors consented to entry of the Settlement Order, and Debtors’ contention that other parties will now be prejudiced is unpersuasive. 26 Finally, clause (6) and clauses (1) through (5) of Civil Rule 60 are
mutually exclusive. Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847,
863 n.11 (1988). Thus, Civil Rule 60(b)(6) applies “only when the reason for
granting relief is not covered by any of the other reasons set forth in [Civil]
Rule 60.” Delay v. Gordon, 475 F.3d 1039, 1044 (9th Cir. 2007). Here, the
main crux of Debtors’ argument is that Ms. Zhang fraudulently obtained
the Settlement Order, which is directly covered by Civil Rule 60(b)(3). As
such, the “catch-all” provision of Civil Rule 60(b)(6) is inapplicable to this
case.
F. The bankruptcy court did not err by commenting on the futility of vacating the Settlement Order. Debtors assert that the bankruptcy court erred by noting that
vacating the Settlement Order would “accomplish little, as [Debtors] and
other parties would remain bound by the terms of the confirmed plan.” In
their brief on appeal, Debtors acknowledge that any ruling on the Motion
for Relief, alone, would not accomplish Debtors’ goal, i.e., disallowance of
Ms. Zhang’s claim against the estate. Appellants’ Brief, p. 23. Nevertheless,
Debtors assert that the bankruptcy court should not have held that “the
plan must be modified to accomplish those ends.” Id.
Debtors misconstrue the bankruptcy court’s statement. The
bankruptcy court simply noted that the Plan incorporated the terms of the
Settlement Agreement and observed that vacating the Settlement Order
would not be the last step in Debtors’ plan to disallow Ms. Zhang’s claim
27 against the estate. The bankruptcy court did not state that the Plan must be
modified and did not make any findings regarding whether Debtors could
or could not object to Ms. Zhang’s claim pursuant to the terms of the Plan.
That issue was not before the bankruptcy court. As such, the parties’
arguments regarding the terms of the Plan are not properly before the
Panel, and Debtors have not otherwise identified an error in the
bankruptcy court’s comment regarding the Plan.
CONCLUSION
The bankruptcy court did not err in denying Debtors’ request for
relief from the Settlement Order under Civil Rule 60(b)(3), (b)(5), and (b)(6).
We therefore AFFIRM.