Opinion
NOT FOR PUBLICATION
Argued and Submitted at Orange, California: November 15, 2006
Appeals from the United States Bankruptcy Court for the Central District of California. Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding. Bk. No. LA 04-10052-TD. Adv. No. LA 04-01969-TD.
Before: KLEIN, MONTALI and BRANDT, Bankruptcy Judges.
MEMORANDUM
We confront four related appeals arising from the chapter 7 trustee's efforts to liquidate nonexempt equity in the debtor's residence. The debtor appeals orders requiring turnover of the property to the trustee (No. CC-05-1344), authorizing sale of the property (No. 06-1195), and surcharging the debtor's homestead exemption (No. 06-1180). In addition, one of two people claiming to be the " Lili Lin" to whom the debtor granted a lien on his residence appeals the order approving a settlement with the other Lili Lin (No. 05-1303). In a parallel appeal, we have affirmed the denial of the debtor's discharge (No. CC-05-1352).
We DISMISS, as moot, the appeals from the orders authorizing turnover and sale of the residence and AFFIRM the order approving the settlement with one of the two Lili Lins, but clarify (as conceded by the trustee during oral argument) that there has not been an adequate judicial determination that the other Lili Lin does not actually have a lien; hence we will also extend the stay of distribution of the sale proceeds that we previously entered pending the resolution of this appeal until the other Lili Lin's rights have been determined. We REVERSE the order surcharging the debtor's homestead exemption.
FACTS
Stephen Law filed a chapter 7 case in January 2004 in which he scheduled and claimed as exempt a residence in Hacienda Heights, California. Alfred Siegel is the case trustee.
The residence was scheduled as having a value of $363,348.00 subject to two voluntary liens. The first is a note and deed of trust on a conventional mortgage dated from 1988 on which $147,156.52 was owed at the time in filing. Second, a 1999 note and deed of trust debt (" Note and DOT") scheduled at $156,929.04 in favor of Lili Lin was listed on Schedule D as " Lin's Mortgage & Associates, 114 Shan Xan Jui Rd, Guangzhou, PR China." There were also two judgment liens of $131,821.74 and $3,750.00.
Appeal No. 05-1303
The trustee challenged the Lili Lin lien by filing Adversary Proceeding No. 04-1969 to avoid the grant of the lien on a fraudulent transfer theory by way of California Civil Code § 3439.04(a) and the " strong arm" power under 11 U.S.C. § 544(b).
In the complaint, the trustee alleged that the $168,000 promissory note to Lili Lin, dated June 24, 1999, and the attendant deed of trust were fictitious, fraudulent, and intended to diminish the equity in the property.
We have no explanation how, or whether, the original note amount was paid down or the scheduled amount was an error. In any event, the discrepancy is not material to our analysis of the issues before us.
The trustee obtained a default judgment in the adversary proceeding on August 31, 2004, which was vacated on October 21, 2004, after a Lili Lin from China (" Lili Lin of China") filed a Motion to Set Aside Default and Default Judgment through counsel.
In April 2005, a Lili Lin from Artesia, California (" Lili Lin of Artesia"), filed an answer in the adversary proceeding and a stipulation for judgment that purported to resolve all the differences between the trustee and Lili Lin of Artesia with respect to the adversary proceeding.
Lili Lin of Artesia executed a declaration stating that she knows the debtor and did not loan him money as set forth in the Note and DOT. She further declared that the debtor gave her a copy of the Note and DOT in 1999, but never explained to her why he gave her the documents. She also stated that she did not reside in China, she did not sign a declaration in support of the motion to set aside the default judgment, and had never retained attorney Peter Chow to represent her in the adversary proceeding, nor had she ever spoken with him.
The trustee filed a Motion to Approve Compromise with Lili Lin of Artesia. Lili Lin of China filed an opposition to the compromise arguing that she had not settled with the trustee.
A hearing on the compromise was held on May 18, 2005. The trustee appeared through counsel, the debtor appeared pro se, and attorney Peter Chow appeared on behalf of Lili Lin of China.
The court ruled that Lili Lin of China lacked standing to oppose the compromise motion. The court noted that Lili Lin of China had never actually appeared in court in person and had not furnished evidence to the court that she was the lienor. In contrast, there was Lili Lin of Artesia's evidence that she had been involved in the grant of the lien in 1999.
The court determined that the evidence proffered by the trustee was sufficient to grant the compromise motion and that approval of the stipulated judgment in favor of the trustee was fair and equitable, and in the best interests of the estate. The stipulated judgment provided that the transfer to Lili Lin of Artesia was avoided under § 544(b), and California Civil Code § 3439.04(a). The interests of Lili Lin of Artesia in the Note and DOT were deemed recovered by the trustee under § 550(a) and preserved for the benefit of the estate under § 551.
On May 31, 2005, Lili Lin of China, acting pro se, filed an answer to the trustee's adversary complaint, together with a Motion for Reconsideration of the order approving the compromise between the trustee and Lili Lin of Artesia.
A hearing on the Motion for Reconsideration was held on July 6, 2005. Neither Lili Lin of China, nor the debtor appeared at the hearing. On July 12, 2005, the court denied the motion. Lili Lin of China appealed (BAP No. CC-05-1303).
The answer by Lili Lin of China remains on file. During oral argument of this appeal, the trustee conceded that the settlement with Lili Lin of Artesia did not resolve the contention by Lili Lin of China that she is the lienor and that the issue is still open to be resolved. To the extent that the trustee may need to take action that requires service of process, attorney Andrew Smyth (who entered an appearance and argued the appeal on behalf of Lili Lin of China) agreed in open court to accept service of process on behalf of Lili Lin of China.
Turnover motion (BAP No. CC-05-1344)
On July 8, 2005, the trustee filed a Motion for Turnover of the property pursuant to 11 U.S.C. § 542 on the premise there was equity in the property for the benefit of the estate.
A hearing was held on August 3, 2005, and the motion was granted on August 10, 2005, over the debtor's opposition.
The debtor appealed the turnover order (BAP No. CC-05-1344). We denied a motion for stay pending appeal, as did the Ninth Circuit. The property has since been turned over and sold.
Sale Motion (BAP No. CC-06-1195 and 06-1180)
On January 9, 2006, the trustee filed a Motion to Sell the property free and clear of liens, interests, and encumbrances pursuant to 11 U.S.C. § § 363(f) & (m). Debtor opposed the motion, which was heard by the court on February 1, 2006.
At the hearing on the sale motion, an auction was conducted. The property was sold to the high bidder for $680,000, which was approximately $165,000 more than the sum of all liens listed on Schedule D plus the debtor's homestead exemption.
The order granting the sale motion was entered on February 22, 2006. Escrow on the sale closed on March 9, 2006. The court ruled that the purchaser of the property was a buyer in " good faith" within the meaning of 11 U.S.C. § 363(m), and was entitled to the protections afforded by that section.
Surcharge motion (BAP No. CC-06-1195 and 06-1180)
When he filed the sale motion, the trustee also filed a Motion to Surcharge in which he sought to surcharge the debtor's $75,000 homestead exemption by $75,000 because the debtor " engaged in exceptional circumstances of misconduct" by " willfully and knowingly attempt[ing] to defraud his creditors by removing equity from the property."
With respect to the surcharge motion, which was also heard at the February 1 hearing, the parties acquiesced in the court's suggestion to discuss settlement regarding the distribution of the sale funds so that the debtor may be able to keep some or all of his homestead exemption. The court thereupon continued the hearing on the surcharge motion.
On February 24, 2006, the debtor and Lili Lin of China filed a Motion for Reconsideration of the sale order. In the alternative, they sought a stay of the sale order pending appeal.
On March 22, 2006, the court held a combined hearing on the reconsideration motion and the continued surcharge motion.
With respect to the surcharge motion, the parties informed the court that settlement negotiations had failed. The court explained to the debtor that settlement would be in the best interests of all parties involved because the expenses associated with the debtor's conduct would consume " just about any benefit that anybody might get" out of the case. The court then granted the surcharge motion. In doing so, the court stated:
Having said that, I would also have to acknowledge, without in any way adjudicating the matter, that as far as I am aware, all of the appellate activity in this case has been initiated by Mr. Law. I am not sure where any of those appeals are going. It is not my business to know that. It is my business to wait and see what the appellate courts have to say. But I can at least acknowledge that the fact that the Trustee in matters brought before me has expended enormous amounts of time and energy in bringing this case to the point that it has been brought. The case has been a difficult one, both in terms of the claims made by the Trustee, but also in the resistence put up by Mr. Law. And those efforts have resulted in substantial, although not yet accounted for to me, expenses of the Trustee and fees of the Trustee's attorneys.
While it is unfortunate that Mr. Law is not able to benefit from his homestead exemption claim as a result of my ruling today, it seems to me that all things considered, it is basically Mr. Law's conduct that has been the direct cause of the expenses that have been incurred by the Trustee, or at least the bulk of the expenses that have been incurred by the Trustee in this case, up to this point, before me and presumably, in order to vindicate the orders issued in favor of the Trustee, I would have to surmise that substantial additional expenses are going to be incurred by the estate in defending Mr. Law's appeals.
The court also denied the debtor's motion to reconsider the sale order and his oral motion for stay pending appeal.
The debtor appealed the sale and surcharge orders (BAP Nos. CC-06-1195 and CC-06-1180).
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUES
(1) Did the court abuse its discretion when it approved the compromise between the trustee and Lili Lin of Artesia?
(2) Whether the court's finding that Lili Lin of China lacked standing to oppose the compromise between Lili Lin of Artesia and the trustee was conclusive to determine Lili Lin of China's status as a lienholder.
(3) Whether the debtor's appeals of the orders requiring turnover of the property and authorizing its sale are moot.
(4) Whether surcharge of the debtor's entire $75,000 homestead exemption was warranted.
STANDARD OF REVIEW
We review an order approving a compromise of a controversy for an abuse of discretion. Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1380 (9th Cir. 1986). Findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004). Equitable surcharge is reviewed for abuse of discretion. Id., at 786.
DISCUSSION
Adversary proceeding 04-1969 (BAP No. CC-05-1303)
The bankruptcy court concluded that Lili Lin of China did not have standing to oppose the compromise between the trustee and Lili Lin of Artesia.
Lili Lin of China argues that she has not received a judicial determination of whether she is the " real" Lili Lin. Rather, she contends that the bankruptcy court simply accepted the trustee's word that Lili Lin of Artesia is the " real" Lili Lin involved in the 1999 Note and DOT with the debtor.
Lili Lin of China further argues that the court-approved stipulated judgment between the trustee and Lili Lin of Artesia inappropriately establishes facts adverse to her as a " non party" and cites Howard Young Mediation Ctr., Inc. v. Shalaka, 207 F.3d 437 (7th Cir. 2000), in support.
As to standing, Lili Lin of China had the burden to establish her standing, which requires a demonstration that the compromise would cause her to be " injured in fact." United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544, 551, 116 S.Ct. 1529, 134 L.Ed.2d 758 (1996); Oregon Advocacy Ctr. v. Mink, 322 F.3d 1101, 1108-09 (9th Cir. 2003); Cheng v. K& S Diversified Invs., Inc. (In re Cheng), 308 B.R. 448, 454 (9th Cir. BAP 2004), aff'd mem., 160 Fed.Appx. 644 (9th Cir. 2005).
Lili Lin of China has not demonstrated that she has been " injured in fact" by the compromise between the trustee and Lili Lin of Artesia. The settlement with one of the Lili Lins does not, in principle, affect the rights of the other.
Indeed, the court's conclusion that Lili Lin of China lacked standing necessarily constituted the court's determination that she was not " injured in fact" by the compromise with the other Lili Lin. It follows, then, that her fear that she might lose her right to continue to assert the 1999 lien (which is premised on the assumption that she would be frozen out and, hence, " injured in fact") is misplaced.
Since the court's determination that she lacked standing was necessarily premised on a lack of " injury in fact, " the ruling, by definition, contradicts a contention that she would be precluded from proceeding by virtue of that ruling. It is plain that Lili Lin of China remains entitled to assert her claim to the 1999 Note and DOT.
Moreover, at oral argument, the trustee conceded that the rights of Lili Lin of China have not been judicially resolved; this concession also was consistent with the trustee's contention that Lili Lin of China lacks appellate standing. The answer filed by Lili Lin of China caused her to join the issue on the merits. Attorney Andrew Smyth represented to this Panel that he now represents Lili Lin of China and will proceed towards prompt judicial resolution and will accept service of process and other papers on behalf of Lili Lin of China. The court will now need to resolve the dispute by way of findings of fact and conclusions of law following the close of appropriate proceedings.
We will leave the precise procedure to the discretion of the bankruptcy court, subject to applicable rules of procedure and principles of due process. While we are mindful that the trustee may have evidence that would enable the court to conclude that Lili Lin of China is not the beneficiary of the 1999 Note and DOT and might not even exist, the current posture of the dispute reveals two sides to the story. It is peculiarly within the fact-finding competence of a trial court to believe and disbelieve evidence and to ascertain the correct story.
In short, the court did not err in determining that Lili Lin of China was not " injured in fact" by the trustee's compromise with Lili Lin of Artesia.
Appellate standing is different. In order to have appellate standing, one must be " directly and adversely affected pecuniarily by an order of the bankruptcy court." Fondiller v. Robertson (In re Fondiller), 707 F.2d at 442-43 (9th Cir. 1983); Cheng, 308 B.R. at 454.
The question of appellate standing is clouded in this instance by the trustee's efforts to distribute the proceeds of the sale of the residence as if the rights of Lili Lin of China had been conclusively rejected. We have, in a separate order issued on November 9, 2006 (in 06-1379), found it necessary to issue a stay of that distribution. At oral argument of this appeal, the trustee's counsel repeatedly responded to questions about the need to obtain judicial resolution of the status of Lili Lin of China before distributing the proceeds by saying words to the effect, " I am not sure I have to do that, " which may be construed to include the implied conclusion, " hence, I am not going to do that." That prospect of unilateral action by the trustee, however unwarranted, arguably supports appellate standing.
For purposes of this appeal and for the sake of completeness, we assume, without deciding, that Lili Lin of China has standing to appeal because of the risk that the trustee will attempt to dissipate the sale proceeds without having first obtained a judicial determination establishing Lili Lin of China's lien status in those proceeds.
The order being appealed is a compromise reached between the trustee and Lili Lin of Artesia. Pursuant to the compromise, the transfer accomplished by the grant of the deed of trust in 1999 was avoided under California Civil Code § 3439.04(a), as incorporated by § 544(b), and the Note and DOT were recovered from Lili Lin of Artesia to the extent she had rights in that lien that were preserved for the benefit of the estate under § 551.
A compromise, which must be in the best interests of the estate, is scrutinized under the legal standard of whether it is " fair and equitable, " taking into account: (a) probability of success in litigation; (b) collectability; (c) complexity, expense, inconvenience, and delay attendant to continued litigation; and (d) the interests of creditors. A & C Props., 784 F.2d at 1381; Simantob v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 290 (9th Cir. BAP 2005).
If Lili Lin of Artesia is the " true" Lili Lin, then based on the evidence proffered by the trustee, the compromise is fair and equitable and is in the best interests of the estate because it amounts to total victory for the trustee. Conversely, if she is merely an interloper, the compromise is also fair and equitable because it eliminates the interloping. It follows that the bankruptcy court did not abuse its discretion when it approved the trustee's compromise with Lili Lin of Artesia. The order approving the compromise will be affirmed.
Turnover Order (BAP No. CC-05-1344)
The trustee argues that the appeal from the turnover order is moot because the turnover has been completed and the property has been sold to a good faith purchaser, without a stay pending appeal having been obtained. We agree. Onouli-Kona Land Co. v. Richards (Onouli-Kona Land Co.), 846 F.2d 1170, 1172-73 (9th Cir. 1988); Vista Del Mar Assocs., Inc. v. West Coast Land Fund (In re Vista Del Mar Assocs., Inc.), 181 B.R. 422, 424 (9th Cir. BAP 1995). The appeal from the turnover order will be dismissed as moot.
Sale Order (BAP No. CC-06-1195)
The trustee argues that the appeal from the sale order is moot because the property has been sold to a good faith purchaser, without a stay pending appeal having been obtained.
The debtor counters that he requested a stay pending appeal in his motion for reconsideration of the sale order that he caused to be set for hearing on March 22, 2006, but that the trustee sold the property before the hearing. Although the debtor contends that there may ultimately be a remedy imposed against the trustee personally (as to which we express no view), we are constrained to conclude that the appeal is statutorily moot.
If an appellant does not obtain a stay pending appeal of an order permitting the sale of assets to a good faith purchaser, the appeal is moot. Onouli-Kona Land Co., 846 F.2d at 1172-73; In re Vista Del Mar Assocs., Inc., 181 B.R. at 424.
There are two recognized exceptions to the mootness rule: (1) where the debtor has a statutory right of redemption, and (2) whether other state law would permit the sale to be set aside. Vista Del Mar Assocs., Inc., 181 B.R. at 425. Neither exception applies here. The debtor has no redemption rights under California law, nor has he cited other state law that would permit the sale to be set aside.
The court ruled in the sale order that the property was sold to a good faith purchaser under 11 U.S.C. § 363(m). The debtor does not contend that the purchaser acted with a lack of good faith. Since the validity of that ruling is not challenged, we have no occasion to examine its factual basis.
The debtor's assertion that the sale was inappropriately precipitous is not persuasive. The record reflects that, on February 24, 2006, the debtor sought reconsideration of the sale order, or, in the alternative, stay pending appeal and set a hearing date for March 22, 2006. The pendency of such a motion did not operate as a stay and did not prevent the closing of escrow on the sold property on March 9, 2006. The debtor chose March 22, 2006, as the hearing date on his motion for the stay pending appeal. Central District of California Local Bankruptcy Rule 9075-1 permitted the debtor to file either an emergency motion for stay or a motion for stay to be heard on shortened notice. The debtor did neither.
Accordingly, the appeal from the sale order must be dismissed as moot by virtue of § 363(m).
Surcharge order (BAP No. CC-06-1180)
The debtor appeals the order surcharging his $75,000 homestead exemption by $75,000. He contends that the only sanction imposed in his case was in the amount of $3,520 and argues that the sole reason for surcharging the entire $75,000 exemption is to pay the trustee and his attorney their fees.
The trustee argues that the court appropriately surcharged the entire homestead exemption in response to the debtor's exhibited fraudulent conduct, his bad faith in pursuing repeated litigious actions, and his failure to comply with the court's orders and with the trustee.
A bankruptcy court may equitably surcharge a debtor's statutory exemptions when necessary to protect the integrity of the bankruptcy process. Latman, 366 F.3d at 786. Denial of discharge and surcharge are separate inquiries that are not necessarily mutually inconsistent. Id., at 783-84.
Surcharge is an equitable power that enables a bankruptcy court to fashion a remedy in " exceptional circumstances" that is tailored to " ensure that debtors retain their statutory 'fresh start, ' while also permitting creditors access to property in excess of that which is properly exempted under the Bankruptcy Code. Id., at 786. Equitable surcharge of a debtor's statutory exemptions must be " reasonably necessary both to protect the integrity of the bankruptcy process and to ensure that a debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code." Id.
The Latman decision is instructive. It involved a situation where assets were hidden by the debtors and later discovered by the trustee. The debtors' discharge was denied, and the court surcharged the debtors' " wild card" exemption in two respects: (a) the amount of proceeds of an undisclosed sale; and (2) the amount of funds in a hidden bank account unless such funds were turned over to the trustee. Id., at 779-80. This was a remedy tailored to the particular situation that was not designed to " punish", but rather to protect the debtor's creditors by preventing the debtors from " sheltering more assets than permitted" by statute. Id. at 785 (emphasis in original).
Similarly, we have approved of conditioning the allowance of an amended claim of exemptions on payment of trustee fees and counsel fees from assets not otherwise available to the estate (i.e., surcharging an exemption) in circumstances that require determination of the appropriate amount of fees based on whether they were reasonable and incurred based on the reasonable expectations about what the estate would receive. Arnold v. Gill (In re Arnold), 252 B.R. 778, 788-89 (9th Cir. BAP 2000), cited with approval, Latman, 366 F.3d at 786 n.9.
In Arnold, we emphasized that total denial of an exemption (a $75,000 surcharge of a $75,000 exemption is tantamount to total denial) requires the existence of " bad faith" or of " prejudice to creditors." Arnold, 252 B.R. at 785-88.
Although this case presents instances of debtor misconduct, obstinance, blatant ignorance of court orders and directives, animosity towards the court and the trustee, and efforts to thwart administration of the case, the debtor was not hiding property. Rather, the nub of the dispute was that the trustee contested the validity of a fully-disclosed lien on real property, the validity of which has not yet been determined.
Regardless of the debtor's tactics, it is apparent that the debtor was not abusing his exemptions and that the trustee was not seeking to remedy such abuse. Rather, the intent of the trustee was to punish the debtor for his tactics. The sort of extraordinary circumstances that would be a prerequisite to surcharge have not been demonstrated.
Similarly, it is apparent that the court was merely shifting litigation expenses to the debtor in a fashion designed to punish the debtor for his litigation activity. The court explained that the debtor's conduct " has been the direct cause of the expenses that have been incurred by the trustee" and that " additional expenses are going to be incurred by the estate in defending [the debtor's] appeals." While we do not quarrel with those observations, they do not warrant denial of a homestead exemption that was claimed from the outset of the case.
While surcharge and denial of discharge are separate inquiries, the fact that the discharge has been denied is not irrelevant. After the bankruptcy case is over, creditors who may have been disadvantaged by the extent of litigation in the case will remain entitled to collect their debts.
In context, we have the definite and firm conviction that the $75,000 surcharge of a $75,000 exemption in this instance is not warranted by Latman or by Arnold. Accordingly, the order surcharging the debtor's $75,000 homestead exemption by $75,000 will be reversed. We express no opinion whether specific instances of mischief by the debtor in the past might support further monetary sanctions in the future, including a surcharge against his exemption. We point out, however, that any such relief to the trustee should be supported by specific findings of fact and appropriate conclusions of law regarding the debtor's conduct, including an adequate explanation why any surcharge based on specific damages or expenses incurred by the estate should be reimbursed from the debtor's exemption.
CONCLUSION
The compromise reached between the trustee and Lili Lin of Artesia was fair and equitable and is AFFIRMED. However, because Lili Lin of China's status as a lienholder was not conclusively determined by the compromise order, if the trustee continues to contest the lien status of Lili Lin of China, it is incumbent upon the trustee to obtain an appropriate judicial determination eliminating her interest. The stay of distribution of sale proceeds will remain in effect until the dispute with Lili Lin of China is resolved. We are concurrently issuing an order in 06-1379 to that effect. The appeals from the turnover and sale orders are DISMISSED as moot. The order surcharging the debtor's $75,000 homestead exemption by $75,000 is REVERSED.