In re: Chad Paul Delannoy ( 2018 )

FILED
AUG 31 2018
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-17-1334-SKuL
CHAD PAUL DELANNOY, Bk. No. 8:17-bk-10423-ES
Debtor.
CHAD PAUL DELANNOY,
Appellant,
v. MEMORANDUM*
WOODLAWN COLONIAL, L.P.;
THOMAS H. CASEY,
Appellees.
Argued and Submitted on May 24, 2018
at Pasadena, California
Filed – August 31, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
*
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.
Honorable Erithe A. Smith, Bankruptcy Judge, Presiding
Appearances: Robert P. Goe of Goe & Forsythe, LLP argued for
appellant; Howard M. Bidna of Bidna & Kets, APLC
argued for appellee Woodlawn Colonial, L.P.
Before: SPRAKER, KURTZ, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Debtor Chad Paul Delannoy appeals from an order authorizing the
chapter 71 trustee, Thomas H. Casey, to sell and compromise appeal rights
arising from a state court judgment against Delannoy for conversion and
money had and received. The judgment creditors’ successor in interest,
Woodlawn Colonial, L.P., sought to purchase the appeal rights for the
express purpose of dismissing the appeal. In turn, dismissal potentially
would move Woodlawn one step closer to asserting the issue preclusive
effect of the state court’s judgment and findings in Woodlawn’s pending
nondischargeability action against Delannoy.
Delannoy argued in the bankruptcy court that Casey proposed the
sale in bad faith and for an improper purpose. He also argued that his
competing bid to purchase the appeal rights was markedly superior to
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal
Rules of Bankruptcy Procedure.
2
Woodlawn’s final bid. Delannoy additionally claimed that the sale to
Woodlawn constituted an impermissible waiver of his discharge.
The bankruptcy court rejected each of these arguments. On appeal,
Delannoy again asserts the same arguments. But he has not demonstrated
that the bankruptcy court committed reversible error in rejecting them.
Accordingly, we AFFIRM.
FACTS
Before Delannoy filed his chapter 7 petition, his employer, Alessa
Leigh LLC and its member, R. Scott Bell, sued Delannoy for conversion and
monies had and received under California law. After commencement of
the civil suit Delannoy pled guilty to one count of grand theft in violation
of Cal. Penal Code § 487(a). As part of his plea, Delannoy admitted that,
“on or about and between 12/20/10 and 7/1/13 I did unlawfully and
fraudulently appropriate, convert, steal and embezzle property belonging
to [Scott Bell], my employer . . . .”2 Notwithstanding this admission,
Delannoy attempted at trial in the civil matter to deny taking Alessa Leigh
LLC’s and Bell’s personal property. The state court found Delannoy’s
2
The record on appeal does not include a copy of the guilty plea. The above
referenced quotation from the guilty plea was set forth in paragraph 30 of Woodlawn’s
exception to discharge complaint, filed in the bankruptcy court on May 10, 2017. In his
answer to the complaint, filed on June 12, 2017, Delannoy admitted as follows:
“Answering paragraph 30, Defendant admits that the guilty plea referenced in this
paragraph speaks for itself.” We can take judicial notice of the filing and contents of
these pleadings. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955,
957–58 (9th Cir. 1989).
3
testimony not credible and, at times, evasive.
Also at the civil trial, the state court accepted Delannoy’s admissions
that he made checks payable to cash drawn on Alessa Leigh LLC’s and
Bell’s bank accounts and deposited those checks in his personal bank
account. The state court generally prohibited Delannoy from offering
testimony attempting to explain his check cashing practices.
On January 8, 2016, the state court entered its tentative statement of
decision on the claims for conversion and monies had and received.
Ultimately, it held that Delannoy converted $462,857 of the plaintiffs’ cash
and was liable for $259,673 in prejudgment interest for the converted cash.
Additionally, the state court held that Delannoy was liable for $59,550.07
for converted personal property other than cash, including prejudgment
interest. The court set the plaintiffs’ punitive damages claims for further
trial on July 25, 2016, after which it awarded plaintiffs a total of $60,000 in
punitive damages based on its finding that Delannoy acted with both fraud
and malice. The state court then entered judgment against Delannoy,
setting forth many of the same factual findings in its judgment as it had set
forth in its statement of decision. Alessa Leigh LLC and Bell subsequently
assigned the judgment to Woodlawn.
Delannoy appealed the state court judgment and also commenced his
chapter 7 case. Woodlawn then filed a nondischargeability complaint
against Delannoy seeking to have the judgment debt excepted from
4
discharge under §§ 523(a)(2), (4), and (6). The state court appeal is still
pending. Unless Delannoy prevails in that appeal, Woodlawn intends to
assert that the state court’s findings are entitled to issue preclusive effect in
the nondischargeability action.
In the main bankruptcy case, Casey filed a motion seeking to sell the
appeal rights to Woodlawn for $7,500, subject to overbid. In his
memorandum in support of his motion, Casey explained that prosecuting
the appeal on behalf of the estate would be costly and stated his conclusion
that there was “minimal likelihood of success.”3 Casey also explained that
abandonment of the appeal rights to the debtor would yield “no value to
the Estate,” unlike the sale he was proposing. Based on these facts, and on
his and his counsel’s assessment of the appeal of the underlying judgment,
Casey asserted that the proposed sale represented “optimal value” for the
appeal rights.
Casey further maintained that his proposed disposition of the appeal
rights constituted a fair and reasonable compromise that also could be
approved under Rule 9019. In support of this assertion, Casey analyzed the
proposed compromise under the four “A & C Props. factors”4 and
concluded that the factors supported the compromise. Among other things,
3
Casey estimated that prosecution of the appeal would cost the estate
somewhere between $35,000 and $45,000 in legal fees and expenses.
4
Mart. v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir.1986).
5
Casey pointed out that the only potential benefit to the bankruptcy estate
arising from a successful prosecution of the appeal would be the partial or
full disallowance of Woodlawn’s claim. Under no circumstances would the
resolution of the appeal result in an increase in estate assets. In addition,
Casey reiterated that successful prosecution of the appeal was highly
unlikely.
Delannoy opposed the sale and compromise of the appeal rights. He
expressed a much more optimistic view of the likelihood of success on
appeal. But even if the court concluded that the prospects of prevailing on
appeal were very poor, Delannoy insisted that his proposal to purchase the
assets for a similar amount was “vastly superior” because he promised to
prosecute the appeal to conclusion at no expense to the estate. In
Delannoy’s own words: “even if Debtor only possessed merely a 1% chance
of success on appeal, a sale to Debtor for the same price Woodlawn has
offered to pay($7,500), ensuring the meaningful prosecution of the appeal,
is a vastly superior outcome to the proposed sale to Woodlawn.”
Opposition to Motion to Sell Appeal Rights (August 24, 2018) at p. 6.
In support of his opposition, Delannoy submitted the declaration of
his state court counsel as well as key documents from the litigation. In
essence, Delannoy claimed that the proposed sale was not in the estate’s
best interest because the appeal, if prosecuted successfully, would
dramatically increase the recovery from the estate for the estate’s
6
unsecured nonpriority creditors (other than Woodlawn). Alternately,
Delannoy claimed that, even if the court were to find the $7,500 sale price
fair and reasonable, it only should permit a sale at that price to Delannoy.
Delannoy represented that, if he were the successful purchaser, he would
pursue the appeal rights at no cost to the estate.
Delannoy also opposed any sale of the appeal rights as worthless. He
incorporated into his opposition the estate distribution analysis set forth in
his pending motion to compel Casey to abandon the appeal rights.
According to Delannoy’s calculations, if the appeal rights were sold for
$7,500, and all of the other property of the estate were sold for $75,000 as
separately proposed by Casey, “general unsecured creditors will receive no
more (and likely, much less) than 3% on account of their claim.”
Opposition to Motion to Sell Appeal Rights (August 24, 2018) at p. 5 n.4.5
Finally, Delannoy contended that Casey improperly proposed to sell
5
Casey’s other sale motion, seeking authority to sell all of the estate’s other
property for $75,000, was heard at the same time as the motion to sell the appeal rights,
and the bankruptcy court entered an order approving that sale on September 29, 2017.
Delannoy did not appeal this other sale ruling. The bankruptcy court also heard
Delannoy’s abandonment motion at the same time it heard the sale motions. The
bankruptcy court denied the abandonment motion, and Delannoy did not appeal that
ruling. At the hearing, Delannoy all but abandoned his abandonment motion and
instead offered a competing $8,500 bid for the appeal rights that he claimed was a much
better deal for the estate (than Woodlawn’s purchase offer) because it included a
promise to prosecute the appeal rights at no cost to the estate. According to the
bankruptcy court, the willingness of both parties to make competing bids for the appeal
rights convinced it that the appeal rights had some value to the estate and thus that the
abandonment motion should be denied.
7
Woodlawn the appeal rights for the express purpose of enabling it to
dismiss the appeal and invoke issue preclusion. This, Delannoy argued,
amounted to an impermissible waiver of Delannoy’s right to a discharge in
violation of § 524(c).
At the hearing on the sale and compromise motion, Casey again
stressed his opinion that the likelihood of success on the appeal was
minimal. He further argued that the costs and delay associated with
keeping the estate open while the appeal was prosecuted exceeded any
benefit the estate could realize from reducing Woodlawn’s claim. Delannoy
submitted an overbid at the sale hearing of $8,500. Woodlawn then bid
$9,000. Delannoy’s final bid was for $9,500. Woodlawn’s final bid was for
$10,000, and the bankruptcy court approved the sale for that amount to
Woodlawn.
The bankruptcy court agreed with Casey’s view of the proposed sale
of the appeal rights. The court specifically found that Casey had proposed
the sale in good faith, for a sound purpose, and that the sale was in the
estate’s best interests.
In the process of ruling, the bankruptcy court also considered the
merits of the state court appeal and the likelihood of the appellant
prevailing. After carefully reviewing the state court’s statements of
decision and its judgment, as well as the declarations of counsel for both
parties assessing the likelihood of success on the merits, the bankruptcy
8
court twice referred to the appeal as a longshot. The court also described
the chance of appellant completely prevailing as “probably highly
unlikely” and “probably unlikely.” The bankruptcy court also indicated
that the complexity of the matter and the delay associated with prosecution
of the state court appeal favored Casey’s proposed sale to Woodlawn. The
court concluded that, in light of all of the circumstances mentioned above,
the proposed sale to and compromise with Woodlawn was reasonable.
As for the paramount interest of creditors, the bankruptcy court
concluded that creditors other than Woodlawn would prefer an
expeditious resolution of the bankruptcy case as opposed to a delayed
resolution with the possibility of Woodlawn’s claim being reduced as a
result of the potential outcome of the appeal. Ultimately, the court’s
assessment of the paramount interests of the estate’s creditors hinged on its
view of what those creditors likely would receive with and without a
reduction of Woodlawn’s claim. The court held that, under any realistic
scenario, the bankruptcy distribution to the estate’s unsecured creditors
would be de minimis. In other words, in the absence of any meaningful
increase in the potential recovery for other unsecured creditors from the
continued prosecution of the appeal, the court reasoned that an expedited
resolution of the estate was in the best interests of the estate. As the
bankruptcy court put it:
We don't have any other creditors here to argue one way or the
other as to whether or not they would prefer to have a shot at
9
reducing the Woodlawn claim at some point depending on how
the -- how the appeal goes or whether they would prefer to
have the bird in the hand. Even though it’s only an extra $500,
it's here, and the Trustee continues to administer the case and
close it out.
Hr’g Tr. (Sept. 7, 2017) at 70:2-71:7.
On November 1, 2017, the bankruptcy court entered its order
authorizing Casey to sell the appeal rights, and to compromise them, in
exchange for Woodlawn’s payment of $10,000 to the estate. Delannoy
timely appealed the sale and compromise order.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(N) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion when it approved the
sale and compromise of the appeal rights?
STANDARD OF REVIEW
We review the bankruptcy court’s sale authorization under § 363 for
an abuse of discretion. Fitzgerald v. Ninn Worx Sr, Inc. (In re Fitzgerald), 428
B.R. 872, 880 (9th Cir. BAP 2010). We similarly review compromises
approved pursuant to Rule 9019. Goodwin v. Mickey Thompson Entm't Grp.,
Inc. (In re Mickey Thompson Entm't Grp., Inc.), 292 B.R. 415, 420 (9th Cir. BAP
2003).
A bankruptcy court abuses its discretion if it applies an incorrect
10
legal rule or if its factual findings are illogical, implausible or without
support in the record. United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th
Cir. 2009) (en banc).
DISCUSSION
A. Legal Standards Governing Sale and Compromise of Estate Claims.
When a bankruptcy trustee proposes to sell the estate’s legal claims,
we typically require the trustee, and ultimately the bankruptcy court, to
assess the desirability and propriety of the sale in two different ways. Not
only must the sale pass muster as a sale of estate property under § 363, but
also the sale normally should be scrutinized as a compromise under Rule
9019. Simantob v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 289-90
(9th Cir. BAP 2005) (citing In re Mickey Thompson Entm't Grp., Inc., 292 B.R.
at 420-21). Accord, In re Fitzgerald, 428 B.R. at 884.
We require the trustee and the bankruptcy court to assess the sale of
the estate’s claims as a compromise because, when the target of the
litigation (the defendant or the appellee) purchases the claims, the sale
usually results in termination of that litigation. In essence, the sale
functions as a settlement of the underlying litigation. See Fridman v.
Anderson (In re Fridman), 2016 WL 3961303 (Mem. Dec.) (9th Cir. BAP July
15, 2016) (citing In re Lahijani, 325 B.R. at 290). We require this extra
scrutiny of a proposed sale of estate claims because competition to
purchase the claims often is limited or constrained. In re Lahijani, 325 B.R. at
11
289. Ordinarily, only the litigants are interested in purchasing the claims,
because they already have a stake in the outcome of the litigation. Id. A sale
price obtained from the litigants in the underlying dispute may not reflect
the “optimal value” for the estate in administering the claims. Id.6
In this instance, there is no legitimate dispute that the bankruptcy
court applied the correct legal standards for sales under § 363. The estate’s
representative must propose the sale in good faith and for a proper
purpose. See 240 N. Brand Partners, Ltd. v. Colony GFP Partners, L.P. (In re
240 N. Brand Partners), 200 B.R. 653, 658 (9th Cir. BAP 1996). The sale also
must be in the best interests of the estate and yield “optimal value under
the circumstances.” In re Lahijani, 325 B.R. at 288. The court referenced these
factors and made determinations as to each of them.
Nor is there any real dispute that the bankruptcy court articulated
and applied the appropriate factors for evaluating a compromise under
Rule 9019. The compromise must be fair and equitable. In re Mickey
Thompson Entm't Grp., Inc., 292 B.R. at 420 (citing In re A & C Props., 784
F.2d at 1381). To determine the fairness and equity of the proposed
compromise, the bankruptcy court is required to analyze the transaction
6
While a sale of estate claims almost always will necessitate treatment as a
compromise, it is not always true that a compromise involving estate claims will need
to be separately evaluated as a sale of estate property. Because of the limited interest in
and competition for purchasing the claims, a sale process under the auspices of § 363(b)
might not always be desirable. See In re Mickey Thompson Entm't Grp., Inc., 292 B.R. at
422 & n.7.
12
with the following factors in mind:
(a) The probability of success in the litigation; (b) the
difficulties, if any to be encountered in the matter of collection;
(c) the complexity of the litigation involved, and the expense,
inconvenience and delay necessarily attending it; [and] (d) the
paramount interest of the creditors and a proper deference to
their reasonable views in the premise.
In re Mickey Thompson Entm't Grp., Inc., 292 B.R. at 420 (citing In re A & C
Props., 784 F.2d at 1381).
Importantly, so long as the trustee and the bankruptcy court work
within the confines of the above-referenced analytical framework, their
informed decisions and judgment as to what sort of transaction was
desirable and appropriate is entitled to deference and “great latitude.” Id.
B. Delannoy’s Arguments on Appeal.
Delannoy makes several arguments on appeal, but they ultimately
reduce to two broad propositions. First, Delannoy contends that the sale of
his appeal rights was improper because it effectively terminated his
challenge to the largest claim against the estate and negatively impacted
his discharge. Second, he maintains that the appeal rights were worthless,
but proceeds to argue that the bankruptcy court erred in approving the sale
to Woodland because his offer provided more benefit to the estate. We
consider each argument in turn.
1. Propriety of the Sale of Defensive Appeal Rights.
Chapter 7 bankruptcy trustees are fiduciaries of the bankruptcy
13
estate statutorily obligated to promptly “collect and reduce to money the
property of the estate for which such trustee serves, and close such estate as
expeditiously as is compatible with the best interests of parties in interest.”
§ 704(a)(1). As is often repeated, property of the estate is broadly defined
to include “all legal or equitable interests of the debtor in property as of the
commencement of the case.” § 541(a)(1). A debtor’s property interests are
defined by state law. Butner v. United States, 440 U.S. 48, 55 (1979). In this
instance, California law governs, and it defines property to include any
“right [] created or granted by statute.” Cal. Civ. Code § 655. “Under
California law, the right to appeal an adverse judgment is a right created
by statute.” In re Marciano, 2012 WL 4369743 (C. D. Cal. 2012) (citing Cobb v.
Univ. of So. Cal., 32 Cal. App. 4th 798, 801 (1995)); see also Mozer v. Goldman
(In re Mozer), 302 B.R. 892, 895-96 (C.D. Cal. 2003). Casey maintains that he
was statutorily obligated to promptly liquidate the estate’s interest in the
appeal rights, and that he properly did so by selling those rights to the
highest bidder after taking competing bids.
Delannoy does not challenge the trustee’s ability to sell his defensive
appeal rights. Instead, he argues that the sale was improper because it
could not result in a meaningful distribution to the unsecured creditors.
Delannoy also argues that the sale of the appeal rights impermissibly
interfered with one of the cornerstone goals of the Code: his fresh start. See
generally Grogan v. Garner, 498 U.S. 279, 286 (1991). We address both of
14
these arguments below.
a. The Trustee Properly Sought to Liquidate an Asset of
the Estate.
Delannoy posits that it was obvious the proposed sale would not
yield any recovery for the estate’s unsecured creditors, and, therefore, it
was error to approve the settlement. He first argued that Casey abused his
position as trustee by attempting to sell a worthless asset. However, the
bankruptcy court rejected Delannoy’s argument that the appeal rights were
worthless when it denied his motion to compel abandonment of the appeal
rights under § 554(a). Delannoy never appealed that decision. Moreover,
the offer and competing bids resulted in a $10,000 sale. This amount was
not inconsequential, and precludes Delannoy’s argument. Accordingly,
Casey properly sought to liquidate the estate’s interests in the appeal
rights.
Delannoy next argues that the sale was improper because the
proposed sale amount ($7,500) doubtlessly was less than the resulting
administrative expenses incurred to propose and effectuate the sale. He
urges the court to adopt a per se rule that precludes the approval of a sale
that does not generate a recovery for the unsecured creditors net of
associated administrative expenses. He believes that the proposed sale was
made in bad faith and simply to increase Casey’s recovery of his
commission and legal fees.
Delannoy’s argument is factually unsupported. The proposed sale
15
contemplated overbids, and was not necessarily limited to $7,500. In fact,
the sale ultimately yielded a higher price of $10,000. Accordingly, the asset
had value. Delannoy counters that the bankruptcy court should not have
approved the sale because the sale never would have yielded sufficient
proceeds to cover more than the trustee fees and legal fees arising from the
sale process. Yet, there is no serious argument that, absent Delannoy’s
strenuous and continuing opposition to the sale, it would have yielded net
proceeds beyond the amount necessary to compensate Casey and his
counsel. Moreover, there was no information presented during the sale
and compromise proceedings regarding the trustee’s projected legal fees
arising from the proposed sale. In short, the amount of legal fees incurred
by the trustee largely was the result of Delannoy’s opposition to the sale
and not a result of the sale itself.
In support of his position, Delannoy relies on In re KVN Corp., 514
B.R. 1 (9th Cir. BAP 2014), but his reliance on KVN is misplaced. KVN
involved a proposed sale of estate property that was fully encumbered by a
security interest in favor of Wilshire State Bank. Id. at 3. In exchange for the
bankruptcy trustee’s help in selling the assets, the Bank proposed to split
with the estate the net sale proceeds, which the trustee estimated would
yield a few thousand dollars for the estate. Id. The bankruptcy court denied
the trustee’s motion for authorization to sell the property, and the trustee
appealed. Id. at 4. After noting the rule generally prohibiting sales of fully
16
encumbered estate property, and the rule presuming the impropriety of
“carve out” agreements, we vacated and remanded for further fact
findings.7 We held that the presumption of impropriety was rebuttable and
that the bankruptcy court failed to make relevant findings regarding
whether, on the record presented, the trustee had overcome the
presumption.
KVN stands for the general proposition that bankruptcy trustees
should not sell fully encumbered assets, particularly when the estate’s
unsecured creditors will not benefit from the sale. KVN has no application
here. Casey proposed to sell unencumbered appeal rights. Furthermore, as
suggested above, by far the biggest obstacle to Casey realizing any net sale
proceeds for the benefit of the estate’s unsecured creditors is, and always
has been, Delannoy’s strenuous opposition to the sale. The trustee
properly sought to sell an asset of the estate. That Delannoy has attempted
to thwart that sale by pressing continuous legal challenges and increasing
administrative expenses does not render the sale improper.
7
When a secured creditor agrees to share with the bankruptcy estate the
proceeds from the sale of fully encumbered estate property in exchange for
administration (sale) of the asset through the bankruptcy estate, the agreement
commonly is known as a “carve out” agreement because the secured creditor carves out
from its entitlement to the sale proceeds a specific amount or percentage for the benefit
of the estate. See id.
17
b. The Sale of the Appeal Rights did not Impair the
Debtor’s Discharge.
Delannoy contends that, even if the appeal rights were an asset
subject to liquidation by the estate, the bankruptcy court should not have
permitted Casey to sell them to Woodlawn because the sale ultimately
would enable Woodlawn to assert the preclusive effect of the state court’s
findings in the nondischargeability action. Delannoy reasons that, if the
state court findings are given preclusive effect, he essentially would be
barred from mounting a meaningful defense against Woodlawn’s
exception to discharge claims. According to Delannoy, this is tantamount
to a waiver of his right to a discharge.
More specifically, Delannoy contends that the sale of his appeal
rights violated § 524(c). That provision imposes significant restrictions on a
debtor’s ability to waive discharge as to particular debts by entering into
reaffirmation agreements with creditors. Section 524(c) has no application
to the trustee’s sale of the appeal rights.
Woodlawn candidly acknowledges that it purchased the appeal
rights to terminate the state court action thereby rendering its judgment
against Delannoy final. Woodlawn further admits that it will seek to use
the preclusive effect of the state court’s findings to bar Delannoy from
relitigating identical issues in the nondischargeability action. Delannoy
insists that the sale of the appeal rights impermissibly interferes with his
entitlement to a discharge. We disagree.
18
In making his discharge-related argument, Delannoy relies upon the
unpublished decision of this panel in In re Fridman, 2016 WL 3961303. But
Fridman never held that a bankruptcy sale of appeal rights arising from a
state court judgment that might have some sort of preclusive effect in a
subsequent nondischargeability action impermissibly interferes with the
debtor’s discharge. See id. at *1 & n.3. To the extent Fridman is relevant here,
it only stands for the general proposition that appeal rights are property of
the estate that can be sold and compromised subject to the requirements of
§ 363 and Rule 9019. Id. at *7. Delannoy has not disputed this proposition.
Dismissal of the state court appeal is in no way the functional or legal
equivalent of a waiver of discharge. Issue preclusion and exceptions to
discharge are distinct legal doctrines with drastically different legal
standards. Compare § 523(a) (identifying grounds for nondischargeability)
with Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 462 (9th Cir.
BAP 2015) (identifying standards for issue preclusion). The standards of
both doctrines would need to be satisfied before the bankruptcy court could
declare Woodlawn’s judgment debt nondischargeable.
While issue preclusion generally can be applied in
nondischargeability actions, see Garner, 498 U.S. at 284-85, it does not
obviate the requirement that the plaintiff establish all of the elements of
nondischargeable conduct. Id. Furthermore, dismissal of the state court
appeal is only one of many steps Woodlawn would need to take to
19
successfully assert issue preclusion. In California, all of the following
threshold requirements must be satisfied before any finally-determined
issue might be given preclusive effect:
(1) the issue sought to be precluded from relitigation is identical
to that decided in a former proceeding; (2) the issue was
actually litigated in the former proceeding; (3) the issue was
necessarily decided in the former proceeding; (4) the decision in
the former proceeding is final and on the merits; and (5) the
party against whom preclusion is sought was the same as, or in
privity with, the party to the former proceeding.
In re Plyam, 530 B.R. at 462. Even when these threshold requirements are
met, imposition of issue preclusion remains a matter of discretion. Id. at
461-62. A court considering application of issue preclusion must weigh the
effect of applying the doctrine in the particular case against the policies
underlying the doctrine. Id.
Because the dismissal of the state court appeal and waiver of
Delannoy’s discharge are not the same, we reject Delannoy’s discharge-
related argument.8
8
We express no opinion regarding whether the sale of defensive appeal rights
ever might be so inconsistent with the debtor’s fresh start, or with other critical
bankruptcy goals, that sale of them to the party opposing the debtor would be
impermissible. The circumstances presented in this appeal make it a poor candidate for
exploring the outer boundaries of the trustee’s right to sell defensive appeal rights. As
described above, these circumstances include the unchallenged findings: (1) that the
appeal was a longshot; and (2) that sale of the appeal rights would enable the trustee to
expeditiously complete administration of the bankruptcy estate.
20
2. The Bankruptcy Court Did Not Err in Authorizing the Sale of
the Appeal Rights to Woodlawn.
Delannoy asserts that the bankruptcy court erred in approving the
sale of the appeal rights to Woodlawn because his offer was better and
more valuable to the estate. He maintains that his $9,500 bid to purchase
the appeal rights was better for the estate than Woodlawn’s winning bid of
$10,000 because he promised to prosecute the appeal rights at no cost to
the estate. Delannoy claims that the bankruptcy court failed to account for
the value to the estate inherent in his promised prosecution of the state
court appeal.
a. Sales Price.
Delannoy argues that the $500 difference between his offer and
Woodlawn’s final bid was immaterial, particularly given the significant
benefit Delannoy believed would accrue to the estate by permitting him to
continue to contest the primary claim against the estate. The fact remains,
however, that the estate conducted an auction for the asset and Woodlawn
prevailed as the highest bidder. See generally In re Mickey Thompson
Entertainment Group, Inc., 292 B.R. at 422 (“entertaining overbids often
triggers a bidding sequence that may lead to a much higher price.”).
b. Continued Litigation.
Delannoy asserts that the bankruptcy court failed to properly credit
the benefit to be gained by his continued litigation against Woodlawn.
Delannoy argues that the bankruptcy court erred in accepting Woodlawn’s
21
offer because it effectively terminated his continued prosecution of the
appeal. Delannoy viewed the continued litigation as being in his best
interests as it prevented Woodlawn from asserting in the bankruptcy court
that he was precluded from relitigating the state court’s findings in the
pending nondischargeability action. The pending appeal further preserves
any chance (no matter how remote) Delannoy has of overturning the state
court judgment.
The bankruptcy court considered both the merits of the appeal and
the likely effect of the continued litigation upon the estate. As to the merits,
the bankruptcy court found that Delannoy’s chances on appeal were a
“longshot.” Importantly, Delannoy has not challenged this finding on
appeal. Given the uphill battle Delannoy faced in prosecuting the state
court appeal, the bankruptcy court further found that the benefit to the
estate from Delannoy’s continued litigation in the state courts was de
minimis. The court noted that such litigation could not possibly yield any
additional assets for the estate as it was limited to adjudication of the
creditor’s claims against the debtor. Additionally, the court reasoned that
Delannoy’s appeal was not likely to completely eliminate Woodlawn’s
claim. The bankruptcy court concluded that, even if the appeal was
partially successful, Delannoy might (at most) reduce Woodlawn’s share of
the unsecured creditor pool from roughly 90% (as it currently existed) to
60%-70% of claims. As the bankruptcy court put it:
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In terms of creditors, as I said before, the likelihood that
this claim is going to be reduced to zero I think is fairly low. So
the question is that assuming that there could be some
reduction, what impact would that be – would that have on
other unsecured creditors. We have a creditor here who I
believe the claim is currently 90 percent of the claim pool.
Maybe that goes down to 70 percent, 60 percent, probably not
much lower than that to be honest, and then having the
distribution amongst all creditors and also taking into account
that there are going to be administrative expenses of the estate,
obviously they get paid ahead of general unsecured creditors.
The distribution to creditors I think under almost any
scenario is going to be de minimis, so de minimis that I can't
say that the Trustee would be in error to accept the Woodlawn
offer over the Debtor's offer.
Hr’g Tr. (Sept. 7, 2017) at 71:20-72-10.
The bankruptcy court’s distribution analysis did not estimate specific
amounts or percentages the unsecured creditors could expect to recover
with or without reduction of Woodlawn’s claim. Nor is it necessary for us
to parse the record in an attempt to calculate precise amounts or
percentages. Regardless, the bankruptcy court correctly surmised that,
under any reasonably likely scenario, the distribution would remain de
minimis. The court obviously understood that reducing Woodlawn’s claim
from roughly 90% of the unsecured creditor pool to 60% of the pool
necessarily would increase the remaining creditors’ share of any
distribution. But even in that scenario, because of the limited amount of
23
assets available, the distribution would remain de minimis. The record
reflects that there was, in total, $85,000 in estate assets to be distributed;
however, that amount necessarily would be reduced by Delannoy’s
exemptions totaling slightly more than $20,000, and a priority tax claim in
the approximate amount of $19,000, leaving $46,000 before accounting for
administrative expenses.9
With regard to administrative expenses, in addition to more than
$6,000 in statutory trustee’s fees, Delannoy’s appeal brief references interim
fees awarded to trustee’s counsel of roughly $30,000. We must point out
that such fees were not sought, or known, at the time of the proposed sale.
Moreover, this amount included, in part, some fees incurred after the sale
was approved. Still, the point remains that the trustee’s expected
commission and his expected legal fees left a relatively small amount to
distribute amongst the unsecured creditors, regardless of the extent of
Woodlawn’s participation. Indeed, by Delannoy’s own admission, given
the limited amount of the assets available for distribution, the percentage
recovery to unsecured creditors (without a reduction of Woodlawn’s claim)
most likely was going to be “much less” than 3%: “general unsecured
creditors will receive no more (and likely, much less) than 3% on account of
9
These amounts are consistent with those set forth in Delannoy’s creditor
distribution analysis. As for the aggregate amount of unsecured debt, according to
Delannoy, at the time of his bankruptcy filing, there was roughly $1,130,000 in
nonpriority unsecured debt, of which $936,000 was Woodlawn’s judgment claim.
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their claim.” Opposition to Motion to Sell Appeal Rights (August 24, 2018)
at p. 5 n.4.
The bankruptcy court weighed the uncertainty, delay and costs
associated with continued prosecution of the appeal against what it
perceived to be a speculative chance to slightly increase the distribution to
unsecured creditors. The bankruptcy court, in the final analysis, found that
this slight possible bump in the distribution amount did not outweigh the
uncertainty, delay and costs. We cannot say that this finding was illogical,
implausible or unsupported by the record.
In closing, we note that a debtor’s best interests do not always
overlap with those of the bankruptcy estate. This is such a case. In
approving the trustee’s sale of the appeal rights to Woodlawn, the
bankruptcy court properly took the merits into account, as well as the de
minimis effect a partially successful appeal would have upon unsecured
creditor distributions. Also, the court properly considered the additional
time necessary to complete the state court appeal, which if successful
would include not only the appeal, but any possible matters on remand.10
10
Even if Delannoy had succeeded beyond the expectations of the bankruptcy
court and obtained reversal of the judgment, that reversal most likely would not have
meant a full and final defeat of the legal claims underlying the judgment. In light of the
types of issues Delannoy’s counsel suggested would be raised on appeal (regarding
denial of additional time for discovery and exclusion of Delannoy’s evidence), if the
state appellate court agreed with Delannoy, the trial court presumably would have been
compelled to retry the case. The potential costs and delay arising from such a retrial
(continued...)
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Delannoy has not persuaded us that any of the bankruptcy court’s critical
findings were clearly erroneous. While the sale of the appeal rights may
impact Delannoy’s efforts to relitigate the state court’s findings, in this
instance that possibility did not render the sale improper.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
order approving the sale and compromise of the appeal rights.
10
(...continued)
would only have made prosecution of the appeal even less desirable from the estate’s
perspective.
26