Harkey v. Grobstein (In re Point Ctr. Fin., Inc.)

• Decision Date: 29 May 2018
• Docket Number: No. 16-56321,16-56321
• Citation: 890 F.3d 1188
• Parties: In the MATTER OF POINT CENTER FINANCIAL, INC., Debtor, Dan J. Harkey; Robin B. Graham, as Trustee of the Robin B. Graham and Celia Allen-Graham Revocable Trust; Celia Allen-Graham, as Trustee of the Robin B. Graham and Celia Allen-Graham Revocable Trust; Richard Schachter, Appellants, v. Howard B. Grobstein, Chapter 7 Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

890 F.3d 1188

In the MATTER OF POINT CENTER FINANCIAL, INC., Debtor,Dan J. Harkey; Robin B. Graham, as Trustee of the Robin B. Graham and Celia Allen-Graham Revocable Trust; Celia Allen-Graham, as Trustee of the Robin B. Graham and Celia Allen-Graham Revocable Trust; Richard Schachter, Appellants,

v.Howard B. Grobstein, Chapter 7 Trustee, Appellee.

No. 16-56321

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 5, 2017 Pasadena, California

Filed May 29, 2018

Sean A. O'Keefe (argued), O'Keefe & Associates Law Corporation P.C., Irvine, California, for Appellants.

Roye Zur (argued), Landau Gottfried & Berger LLP, Los Angeles, California, for Appellee.

Before: A. Wallace Tashima and Marsha S. Berzon, Circuit Judges, and Matthew F. Kennelly,^* District Judge.

OPINION

KENNELLY, District Judge:

Appellants are members and the original president of Dillon Avenue 44, LLC (Dillon), a limited liability company whose interests have been implicated in the bankruptcy proceedings of Point Center Financial, Inc. (PCF). They appealed from a bankruptcy court order that, among other things, authorized PCF’s Chapter 7 trustee, Howard B. Grobstein, to assume Dillon’s operating agreement long after the deadline for assuming or rejecting executory contracts had passed. The district court dismissed the appeal on the ground that Appellants lacked standing to challenge the bankruptcy court order because, despite receiving adequate notice of the motion, they did not file an objection or attend the hearing before the bankruptcy court. We reverse.

I. Background

A. Facts

This appeal arises from an order issued by the bankruptcy court in the bankruptcy proceeding of Point Center Financial, Inc., an originator and servicer of residential and commercial loans. PCF obtained funding for loans from private investors who would typically receive a fractionalized interest in the loan and in the deed of trust securing the loan. In the event of a default, PCF would initiate foreclosure proceedings against the real property securing the loan. If PCF purchased that property at the foreclosure sale, PCF would create a new limited liability company (LLC) to hold title to the property, and the investors' interests in the loan and foreclosed deed of trust would then be exchanged for membership interests in the LLC, which PCF would manage.

After a borrower defaulted on a PCF-originated loan secured by an undeveloped property in Indio, California, PCF formed Dillon Avenue 44, LLC to hold title to the property. Once Dillon obtained title to the Indio property after foreclosure, the investors who provided the funds for the original loan exchanged their fractional interests in the loan and deed of trust for membership interests in Dillon. Dillon’s 2011 operating agreement designated PCF as the manager of the company, and appellant Dan J. Harkey was appointed president. Appellants Robin B. Graham, Celia Allen-Graham, and Richard Schachter all hold membership interests in Dillon.

B. Procedural history

In February 2013, PCF filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. The proceeding was later converted to a Chapter 7 proceeding. In January 2014, the bankruptcy court entered an order setting February 28, 2014 as the deadline for Grobstein, the Chapter 7 trustee, to assume or reject PCF’s remaining executory contracts, which included Dillon’s 2011 operating agreement. Grobstein did not assume Dillon’s operating agreement by the February 28, 2014 deadline.

In May 2016, Grobstein filed a motion (the Assumption Motion) asking the bankruptcy court to issue an order (1) authorizing him to exercise management authority over Dillon, so long as a majority of the membership interests in Dillon so voted, (2) authorizing him to assume Dillon’s operating agreement backdated to February 2013, and (3) compelling delivery to him of the company’s records and property. Grobstein’s motion alleged that his failure to assume the operating agreement by the February 2014 deadline was the result of excusable neglect stemming from reliance on deliberate misrepresentations made by appellant Harkey and others. Grobstein provided notice of the motion to Appellants. The notice stated that, pursuant to a local bankruptcy court rule, any response to the motion must be filed and served at least 14 days prior to the hearing date. No one filed an opposition to the motion prior to the hearing.

The bankruptcy court held a hearing on the Assumption Motion on June 21, 2016. Neither Appellants nor counsel for Appellants attended the hearing. At the end of the hearing, the bankruptcy court orally granted the motion, stating that it was unopposed. The transcript of the hearing makes clear that the court contemplated that Grobstein’s counsel would draft an order for the court’s signature.

On June 28, 2016, evidently having learned that the bankruptcy court had orally granted the Assumption Motion, Appellants filed an emergency motion for reconsideration and sought an expedited hearing on the motion. The bankruptcy court had not yet issued the anticipated written order on the Assumption Motion. On June 29, the bankruptcy court denied Appellants' application for an order setting a hearing on the emergency motion for reconsideration. The bankruptcy court stated that it could construe Appellants' failure to file a written opposition to the Assumption Motion as consent to the granting of the motion, but instead it addressed the merits of Appellants' arguments in support of reconsideration. The court noted that the order on the Assumption Motion had not yet been entered but concluded that Appellants had not shown either that the oral ruling was manifest error or that they were likely to prevail on appeal. Later that day, the bankruptcy court entered a written order (the Assumption Order) granting the Assumption Motion in its entirety. Appellants filed a timely notice of appeal, stating that they were appealing from the bankruptcy court’s order on the Assumption Motion.

Before the district court, Grobstein moved to dismiss the appeal on the ground that Appellants lacked standing to appeal because they did not file an objection to the Assumption Motion or attend the June 2016 hearing on the matter, despite having received adequate notice of the motion. The district court agreed and granted Grobstein’s motion to dismiss for lack of standing.

II. Discussion

We review a district court’s decision on appeal from the bankruptcy court de novo, "applying the same standards applied by the district court, without deference to the district court." Hughes v. Tower Park Props. (In re Tower Park Props., LLC ), 803 F.3d 450, 456 n.5 (9th Cir. 2015) (internal quotation marks and citation omitted). Standing is an issue of law that we review de novo, while related factual determinations are reviewed for clear error. Palmdale Hills Prop., LLC v. Lehman Commercial Paper, Inc. (In re Palmdale Hills Prop., LLC ), 654 F.3d 868, 873 (9th Cir. 2011).

All circuits, including this one, limit standing to appeal a bankruptcy court order to "person[s] aggrieved" by the order. See, e.g. , Opportunity Fin., LLC v. Kelley , 822 F.3d 451, 457 (8th Cir. 2016) ; Duckor Spradling & Metzger v. Baum Tr. (In re P.R.T.C., Inc. ), 177 F.3d 774, 777 (9th Cir. 1999). Under this prudential standing doctrine, only a "person aggrieved," that is, someone who is "directly and adversely affected pecuniarily" by a bankruptcy court’s order, has standing to appeal that order. Fondiller v. Robertson (In re Fondiller ), 707 F.2d 441, 443 (9th Cir. 1983). An order that diminishes one’s property, increases one’s burdens, or detrimentally affects one’s rights has a direct and adverse pecuniary effect for bankruptcy standing purposes. See, e.g. , P.R.T.C. , 177 F.3d at 777.

As we explained in Fondiller , this prudential standing requirement "exists to fill the need for an explicit limitation on standing to appeal in bankruptcy proceedings." Fondiller , 707 F.2d at 443. Bankruptcy proceedings invariably give rise to disputes that implicate the interests of many different stakeholders, including those who are not formally parties to the litigation. Id. Limiting appellate standing to "person[s] aggrieved" by a particular bankruptcy order serves the interests of judicial efficiency. Id. ; see also In re Ray, 597 F.3d 871, 874 (7th Cir. 2010) ("[C]ourts consistently have noted a public policy interest in reducing the number of ancillary suits that can be brought in the bankruptcy context so as to advance the swift and efficient administration of the bankrupt’s estate. This goal is achieved primarily by narrowly defining who has standing in a bankruptcy proceeding.") (quoting Cult Awareness Network, Inc. v. Martino (In re Cult Awareness Network, Inc. ), 151 F.3d 605, 609 (7th Cir. 1998) ).

In the present case, the district court concluded that Appellants' failure to attend the bankruptcy court hearing on the Assumption Motion deprived them of standing to appeal the Assumption Order. The district court relied for this conclusion on Brady v. Andrew (In re Commercial Western Finance Corp. ), 761 F.2d 1329, 1335 (9th Cir. 1985), which stated in dicta that "attendance and objection" at the bankruptcy court proceedings "should usually" be prerequisites to meeting the "person aggrieved" bankruptcy standing rule.

Although a number of unpublished, non-binding opinions in this circuit appear to suggest otherwise,¹ there is no controlling law in this circuit regarding whether a person who has a pecuniary interest affected by a bankruptcy proceeding and received adequate notice of a bankruptcy court hearing, but failed to appear and object, may be found to satisfy the "person aggrieved" requirement for appellate standing. This court’s suggestion in In re Commercial Western Finance Corp. ( Commercial ) that "attendance and objection should usually be prerequisites to fulfilling the ‘person aggrieved’ standard" was not a holding and does not...