FILED
JAN 29 2019
NOT FOR PUBLICATION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-18-1144-KuTaF
CC-18-1160-KuTaF
ELAINE MARIE ROACH, (related)
Debtor. Bk. No. 8:17-bk-12091-TA
ELAINE MARIE ROACH,
Appellant,
v. MEMORANDUM*
RICHARD A. MARSHACK, Chapter 7
Trustee,
Appellee.
Argued and Submitted on January 24, 2019
at Pasadena, California
Filed – January 29, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Theodor C. Albert, Bankruptcy Judge, Presiding
*
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.
Appearances: William Miles Burd of Ringstad & Sanders LLP argued
for appellant Elaine Marie Roach; David Edward Hays of
Marshack Hays LLP argued for appellee Richard A.
Marshack, Chapter 7 Trustee.
Before: KURTZ, TAYLOR, and FARIS, Bankruptcy Judges.
Chapter 71 debtor, Elaine Marie Roach, appeals from the bankruptcy
court's orders approving the motions filed by the chapter 7 trustee, Richard
A. Marshack (Trustee) to: (1) sell Ms. Roach's property (Property) free and
clear of liens (Sale Order) (BAP No. 18-1144) and (2) distribute the sale
proceeds with payment in full to the first and second lien holders with the
remaining proceeds split evenly between the estate and Mutual of Omaha
Bank (Omaha Bank) pursuant to a court-approved compromise
(Distribution Order) (BAP No. 18-1160). We AFFIRM both orders on
appeal.
FACTS
A. Prebankruptcy Events
Ms. Roach was the president and owner of Sesa, Inc. (Sesa), a
California corporation. In 2012, Sesa borrowed $937,000 from Omaha Bank.
Ms. Roach signed a guaranty of Sesa's obligation which was secured by a
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules
of Bankruptcy Procedure.
2
third deed of trust against her Property. Sesa defaulted on the loan in
November 2016 and soon after closed its doors.
B. Bankruptcy Events
In May 2017, Ms. Roach filed a chapter 7 petition. Mr. Marshack was
appointed chapter 7 trustee.
In amended schedules, Ms. Roach valued her Property at $1.2 million
and listed four secured creditors who held liens against the Property in the
total amount of $1,550,095.89: (1) Citimortgage, Inc. - $426,645.17; (2) Bank
of America - $468,619.61; (3) Omaha Bank - $634,831.11; and (4) Merhab
Robinson, Jackson & Clarkson (Merhab) - $20,000. In amended Schedule C,
Ms. Roach claimed a homestead exemption in the amount of $75,000. The
deadline for objecting to her homestead exemption passed without
objection.
Ms. Roach did not schedule any litigation claims against Omaha
Bank in either her original schedules or her amended schedules but
testified at the initial meeting of creditors that she may have such claims
against Omaha Bank or its attorney for alleged improper conduct and
threats (Litigation Claims).
1. Trustee's Compromise With Omaha Bank
Trustee filed a motion seeking an order approving a compromise of
the Litigation Claims with Omaha Bank under Rule 9019. The compromise
included the following provisions:
3
3.1 Subordination of one-half of [Omaha Bank's] Claim:
Pursuant to § 510(c)(1), [Omaha Bank] agrees to subordinate
50% of its [Omaha Bank] secured claim to be treated as a
general unsecured claim. The other half of the secured [Omaha
Bank] Claim shall retain the same validity, priority, and extent
that would otherwise exist under California law. Upon a sale of
the Property, and after all costs of sale have been paid, senior
liens including the approximate $465,000 owed to Bank of
America and the approximate $412,000 claim owed to
Citimortgage will be paid with the balance otherwise owed to
[Omaha Bank] to be split evenly between Omaha Bank and the
Estate;
3.2 The lien securing the subordinated portion of [Omaha
Bank's] Claim shall be transferred to the Estate. Pursuant to
§ 510(c)(2), the lien securing the subordinated half of the
[Omaha] Bank's claim would be transferred to the Estate with
the Estate receiving all associated rights held by [Omaha] Bank
as to the subordinated half of [Omaha] Bank's claim.
...
3.4 Release of Estate Claim. In consideration of the
subordination provisions of the Agreement, the Estate releases
[Omaha Bank], its officers, directors, shareholders,
representatives, employees, lawyers, including the law firm of
Mirman, Bubman, & Nahmias, LLP and its attorneys,
shareholders, officers, directors, and employees, of any liability
arising out of or related to the alleged Litigation Claim.
In a footnote, Trustee explained that he did not believe the
subordination provisions set forth in the agreement constituted a "carve-
4
out" subject to the standards set forth in In re KVN Corporation,
514 B.R. 1, 8
(9th Cir. BAP 2014). He asserted, however, that even if considered a carve-
out, those standards were met; i.e.: (1) Trustee fulfilled his basic duties;
(2) there was a benefit to the estate because up to $317,500 would be
distributed; and (3) the terms of the carve-out agreement were fully
disclosed to the bankruptcy court.
Although Ms. Roach did not file a written opposition to the
compromise, her newly hired counsel appeared at the hearing. New
counsel advised the bankruptcy court that Ms. Roach did not believe she
had any claims against Omaha Bank or its counsel and, therefore, she did
not object to the release of those claims. However, Ms. Roach argued that
approval of a carve-out agreement with Omaha Bank was premature until
there was an actual offer on the Property; only then could the court
determine whether a meaningful distribution to unsecured creditors would
be made.
In December 2017, the bankruptcy court approved the compromise.
No appeal was taken, and the order became final.
2. Trustee's Motion to Sell Real Property and Motion to
Distribute the Proceeds of the Sale
Trustee filed a motion to sell the Property for $1.3 million and a
motion to distribute the proceeds of the sale. Trustee proposed to pay the
senior first and second liens in full, current property taxes, a broker's
5
commission, and title and escrow fees. He then proposed to split the
remaining proceeds evenly between Omaha Bank and the bankruptcy
estate based on the court-approved compromise. Trustee explained that the
estate was projected to receive approximately $160,000 from the sale
proceeds, which was sufficient to pay administrative claims capped at
$100,000, priority claims of $31,700 in full, and to make pro rata
distributions to general unsecured creditors. Trustee proposed to reduce
his and his firm's administrative fees such that at least $18,520 or about
15% would be distributed to unsecured creditors.
Because the sale proceeds would be exhausted by the first three
deeds of trust recorded against the Property, Trustee maintained that there
would be no proceeds available to pay any portion of the fourth deed of
trust held by Merhab or anything to Ms. Roach on account of her
homestead exemption.
In addition, Trustee argued that Ms. Roach could not claim an
exemption against the projected $160,000 recovered pursuant to the
subordination agreement with Omaha Bank because such a claim would be
prohibited by § 522(g). That statute provides that exemptions in property
recovered by a trustee under § 510(c)(2) may only be claimed where the
recovered property was not voluntarily transferred by the debtor. Here,
Ms. Roach had voluntarily transferred an interest in her Property to Omaha
Bank as security for its loan made to Sesa.
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Ms. Roach objected to Trustee's motions on the grounds, among
others, that Trustee was improperly attempting to sell the Property without
paying her on account of her homestead exemption and that the sale failed
to meet the KVN standards for approval of a carve-out agreement.
Ms. Roach further argued that the funds going to the estate as part of the
carve-out were proceeds from the sale of her Property and subject to her
homestead exemption under the holdings in In re Wilson,
492 B.R. 502, 506
(Bankr. C.D. Cal. 2013), and In re Reade,
2014 WL 1329808 (Bankr. C.D. Cal.
2014). Finally, Ms. Roach maintained that Trustee's § 522(g) argument was
"nonsensical" since that section applies to property which was voluntarily
transferred by the debtor and has been recovered by the trustee. Here,
Trustee had recovered nothing.
The bankruptcy court issued a tentative ruling, granting Trustee's
motions. The court found that In re Wilson and In re Reade were factually
and legally distinguishable from the instant case because in this case there
was an assignment of Omaha Bank's lien to the estate as part of the court-
approved compromise. The court noted that homesteads cannot be used to
trump voluntary liens and there was no reason that should change just
because a lien is assigned to the estate. The court further found that the
previously approved compromise met all the requirements of KVN and
noted that the 15% distribution to unsecured creditors was not de minimus.
Finally, the bankruptcy court agreed with Trustee that Ms. Roach
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voluntarily liened the Property for far more than its value. Accordingly,
there was no legal or equitable reason for allowing Ms. Roach to receive
proceeds, at the expense of her creditors, that Trustee was able to pry out of
the Property.
At the hearing on the matter, the court considered whether the
subordination provisions constituted a carve-out agreement or an
assignment of the money portion of Omaha Bank's lien. The court
acknowledged that the agreement between the parties was unclear as to
what portion of Omaha Bank's lien was subordinated, but the court did not
find the agreement fatally vague. When reading all the motions and orders
together, the bankruptcy court found that it was clear there was an
assignment to the bankruptcy estate consisting of one-half of the money
portion of Omaha Bank's lien such that monies owed to Omaha Bank
would be evenly split between Omaha Bank and the estate. In the end, the
court found the assignment of the lien made this case different from the
carve-out cases. The bankruptcy court granted Trustee's motions and
entered orders accordingly. Ms. Roach filed a single notice of appeal from
those orders.
C. Post-appeal Events
By order, the Panel required Ms. Roach to file a separate appeal and
pay a separate filing fee for each order so that the appeals would proceed
as separate matters. The appeal of the Distribution Order was assigned
8
BAP No. 18-1160.
Trustee moved to dismiss the appeal of the Sale Order (BAP No. 18-
1144), arguing that it was moot because escrow had closed, there was no
stay pending appeal, and the buyers qualified as good faith purchasers
under § 363(m). The Panel denied the motion, finding that effective relief
could be granted because the Sale Order granted two types of relief: it
approved a sale and it allocated the proceeds. The Panel found that the
portion of the order concerning the actual sale transaction was moot since
the sale of the Property was made to a good faith purchaser and was not
stayed pending appeal. Paulman v. Gateway Venture Partners III, L.P. (In re
Filtercorp, Inc.)
163 F.3d 570, 576 (9th Cir. 1998). However, the Panel found
that the appeal as to the second relief was not moot because the proceeds
had not been distributed (and even if they had, such proceeds could be
recovered). Accordingly, the Panel denied the motion without prejudice to
reconsideration by the merits panel assigned to this appeal.2
2
Generally, a merits panel is not bound by the decisions of a motions panel.
Stagecoach Utils., Inc. v. Cty. of Lyon (In re Stagecoach Utils., Inc.),
86 B.R. 229, 230 (9th Cir.
BAP 1988). We see no reason to reconsider the decision made by the motions panel. The
scope of our review in these related appeals is limited to the bankruptcy court's decision
regarding the distribution of the sale proceeds.
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JURISDICTION
The bankruptcy court had jurisdiction pursuant to
28 U.S.C. §§ 1334
and 157(b)(2)(A) and (N). We have jurisdiction under
28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in concluding that Ms. Roach
was not entitled to claim a homestead exemption in the estate's share of
proceeds received from the sale of her Property due to Omaha Bank's
assignment to the estate one-half of the money portion of its lien.
STANDARD OF REVIEW
We review a bankruptcy court's interpretation of its own order for an
abuse of discretion. Rosales v. Wallace (In re Wallace),
490 B.R. 898, 906 (9th
Cir. BAP 2013) (citing Arenson v. Chicago Mercantile Exch.,
520 F.2d 722, 725
(7th Cir.1975)); see also Hallett v. Morgan,
296 F.3d 732, 739–40 (9th Cir. 2002)
(special consideration is given to the trial court's interpretation of its own
orders); Colonial Auto Ctr. v. Tomlin (In re Tomlin),
105 F.3d 933, 941 (4th
Cir.1997) (the bankruptcy judge who has presided over a case from its
inception is in the best position to clarify the court's rulings).
A bankruptcy court abuses its discretion if it applied the wrong legal
standard or its findings were illogical, implausible or without support in
the record. TrafficSchool.com, Inc. v. Edriver Inc.,
653 F.3d 820, 832 (9th Cir.
2011).
10
DISCUSSION
These appeals are about Ms. Roach's homestead exemption in
proceeds received by the bankruptcy estate after the sale of her Property. In
California, the homestead exemption may exceed home equity on the
petition date. Wilson v. Rigby (In re Wilson),
909 F.3d 306, 310 (9th Cir. 2018).
The allowed amount of the debtor's homestead is determined when the
subject property is sold rather than being fixed as of the date the debtor
files bankruptcy. Robertson v. Alsberg (In re Alsberg),
161 B.R. 680, 684 (9th
Cir. BAP 1993), aff'd
68 F.3d 312 (9th Cir. 1995). In this case, the
disbursement of proceeds is a result of the bankruptcy court's order
approving the compromise between Omaha Bank and Trustee. That order
became a final order after the time for appeal passed. Accordingly, we
cannot address whether the approval of the compromise or the distribution
of proceeds was appropriate or not.
Further, in ruling on Trustee's motions, the bankruptcy court re-
examined the meaning of the compromise agreement to determine whether
the subordination provisions constituted a carve-out agreement or an
assignment of the money portion of Omaha Bank's lien. The bankruptcy
court found that although the agreement was unclear as to what portion of
Omaha Bank's lien (i.e., the unsecured portion or the secured portion) was
subordinated, the agreement was not fatally vague. The bankruptcy court
concluded that reading all the motions and orders together, it was clear
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that there was an assignment to the bankruptcy estate consisting of one-
half of the money portion of Omaha Bank's lien such that monies owed to
Omaha Bank would be evenly split between Omaha Bank and the estate.
"'We owe substantial deference to the bankruptcy court's
interpretation of its own orders and will not overturn that interpretation
unless we are convinced that it amounts to an abuse of discretion.'"
Marciano v. Fahs (In re Marciano),
459 B.R. 27, 35 (9th Cir. BAP 2011)
(quoting Ill. Inv. Trust No. 92 7163 v. Allied Waste Indus., Inc. (In re Resource
Tech. Corp.),
624 F.3d 376, 386 (7th Cir. 2010)). The bankruptcy court was in
the best position to construe the subordination provisions in the
compromise agreement. Considering the record and the plain text of the
compromise, we are not convinced that the bankruptcy court's
interpretation was an abuse of discretion. Because Omaha Bank assigned
the money portion of its lien to the bankruptcy estate, the bankruptcy court
properly determined that under the terms of the compromise, Ms. Roach
was not entitled to claim a homestead exemption in the sale proceeds
attributed to the transferred lien.
CONCLUSION
For these reasons, we AFFIRM both orders on appeal.
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