Brady v. Otton, Case No. 15-cv-00757-WHO
| Decision Date | 27 April 2015 |
| Docket Number | Case No. 15-cv-00757-WHO |
| Court | U.S. District Court — Northern District of California |
| Parties | LOIS I. BRADY, Plaintiff, v. TERRY OTTON, et al., Defendants. |
Re: Dkt. Nos. 3, 4
In this bankruptcy matter, defendant-appellants Nancy and Terry Otton appeal an order dismissing their counterclaim in a multiparty adversary proceeding still pending in the United States Bankruptcy Court for the Northern District of California. The bankruptcy trustee, plaintiff-appellee Lois Brady, moves to dismiss the appeal for lack of jurisdiction under 28 U.S.C. § 158. I agree with Brady that the order dismissing the Ottons' counterclaim was not a final order appealable as of right under 28 U.S.C. § 158(a)(1). The circumstances of this case do not warrant interlocutory review under 28 U.S.C. § 158(a)(3) and neither party has identified any other basis for jurisdiction. Accordingly, the motion to dismiss is GRANTED.
Hill Wine Company, LLC ("HWC") was a winery based in Napa County, California owned and operated by Rebecca and Jeffrey Hill. On May 1, 2014, HWC filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of California. Dkt. No. 13-1 at 3. The bankruptcy case was converted to a Chapter 7 liquidation proceeding shortly thereafter. Id.
Nancy Otton is Rebecca Hill's aunt. Mot. 2 (Dkt. No. 4). She and her husband, Terry Otton, loaned $1.75 million to HWC. Dkt. No. 9-26 at ¶¶ 6-8. The Ottons also personallyguaranteed a $300,000 advance to HWC from Umpqua Bank. Mot. 2. The Ottons filed two proofs of claim in HWC's bankruptcy case: (1) Claim No. 59 for the $1,659,988.00 allegedly still due on the $1.75 million loan; and (2) Claim No. 60 in the amount of $320,770.50 for their guaranty of the Umpqua Bank advance. Id.
On October 15, 2015, Brady filed an adversary proceeding against both the Ottons and the Hills. Brady alleges that both Ottons are statutory "insiders" as defined by 11 U.S.C. § 101(31) because Nancy Otton was the Chief Financial Officer of HWC and Terry Otton was its Chief Operating Officer. Dkt. No. 9-22. The complaint asserts several causes of action against the Ottons, including (i) avoidance of fraudulent transfers, 11 U.S.C. §§ 544(b), 548; (ii) avoidance of preferential transfers, 11 U.S.C. §§ 547, 550, 551; (iii) usury; (iv) breach of fiduciary duty; and (v) equitable subordination, 11 U.S.C. § 510(c). Id. at ¶¶ 21-65.
On November 17, 2014, the Ottons counterclaimed against HWC, alleging (i) breach of contract in connection with the $1.75 million loan (i.e., the subject matter of Claim No. 59); and (ii) breach of contract and indemnity in connection with their guaranty of the Umpqua Bank advance (i.e. the subject matter of Claim No. 60). Dkt. No. 9-26 at ¶¶ 15-27. Brady moved to dismiss the counterclaim, arguing, among other things, that the exclusive means of recovering money damages from a Chapter 7 bankruptcy estate is through the filing of a proof of claim. Dkt. No. 9-31 at 5.
On January 29, 2015, the bankruptcy court issued a memorandum decision granting Brady's motion. Dkt. No. 1-3. The memorandum decision states in relevant part:
Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, an action should be dismissed if it fails to state a claim upon which relief can be granted. The court cannot grant relief to the Ottons on their counterclaim because to do so would violate [11 U.S.C. §§ 502 and 726] as well as [Federal Rule of Bankruptcy Procedure 3002(a)]. There is no conceivable scenario whereby an unsecured creditor can obtain an enforceable money judgment against a Chapter 7 bankruptcy estate on account of a prepetition debt.
Id. The bankruptcy court further formalized the dismissal of the counterclaim in its "Order Granting Motion to Dismiss Counterclaim" on February 2, 2015(the "dismissal order"). Dkt. No. 1-1. That order states in relevant part: "Brady's motion to dismiss the counterclaim is granted,without leave to amend, but also without prejudice to the filing of a proof of claim and without prejudice to raising any of the matters asserted in the counterclaim as a defense or setoff, to the extent permitted by applicable law." Id.
The Ottons filed a timely notice of appeal on February 18, 2015. Dkt. No. 1. The appeal presents the question of whether the bankruptcy court's dismissal of the counterclaim, on the ground that granting relief on the counterclaim would violate 11 U.S.C. §§ 502 and 726 and Federal Rule of Bankruptcy Procedure 3002(a), was in error. Dkt. No. 13-1 at 4. The Ottons contend that the statutes and rule "do not preclude the court from granting relief on [the counterclaim], which instead is duly authorized by [Federal Rule of Civil Procedure 13] and [Federal Rule of Bankruptcy Procedure 7013] . . . and interpretive case law." Id.
Brady filed this motion to dismiss for lack of jurisdiction on March 11, 2015. Dkt. No. 3-4.1 I heard argument from the parties on April 22, 2015. Dkt. No. 19.
28 U.S.C. § 158(a)(1) vests jurisdiction in district courts to hear appeals from the final judgments and orders of bankruptcy judges. Appeals from final orders under section 158(a)(1) are as of right. See, e.g., In re Cameron, No. 13-cv-02018-SI, 2014 WL 1028436, at *2 (N.D. Cal. Mar. 17, 2014). In contrast, with limited exceptions not relevant here, district courts lack jurisdiction over appeals from the interlocutory orders of bankruptcy judges except where the district court grants leave to appeal under 28 U.S.C §158(a)(3).
In considering whether to grant leave to appeal, courts generally "loo[k] to the standards set forth in 28 U.S.C. § 1292(b), which concerns the taking of interlocutory appeals from the district court to the court of appeals." In re Roderick Timber Co., 185 B.R. 601, 604 (B.A.P. 9th Cir. 1995); see also In re Belli, 268 B.R. 851, 858 (B.A.P. 9th Cir. 2001) (). The relevant question under 28 U.S.C § 1292(b) is "whetherthe order on appeal involves a controlling question of law as to which there is a substantial ground for difference of opinion and whether an immediate appeal may materially advance the ultimate termination of the litigation." Roderick, 185 B.R. at 604. Courts also consider whether denying leave to appeal from the interlocutory order would result in "wasted litigation and expense." In re NSB Film Corp., 167 B.R. 176, 180 (B.A.P. 9th Cir. 1994); see also Belli, 268 B.R. at 858; Roderick, 185 B.R. at 604. "Interlocutory appeals are generally disfavored and should only be granted where extraordinary circumstances exist." Cameron, 2014 WL 1028436, at *4.
Brady argues this Court lacks jurisdiction over the Ottons' appeal because the dismissal order was not a final order within the meaning of section 158(a)(1), and because the circumstances of this case do not justify discretionary review under section 158(a)(3). Mot. 4-7. For the following reasons, I agree.
The Ottons contend that the dismissal order is a final order under the flexible finality approach often applied by the Ninth Circuit to determine finality in the bankruptcy context. Opp. 5-6. A final order is ordinarily one that "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Kirkland v. Legion Ins. Co., 343 F.3d 1135, 1139 (9th Cir. 2003) (internal quotation marks omitted); see also Ray Haluch Gravel Co. v. Cent. Pension Fund of Int'l Union of Operating Engineers & Participating Employers, 134 S. Ct. 773, 779 (2014) ().
Applying this traditional concept of finality to bankruptcy appeals "has bedeviled courts because the idiosyncrasies of bankruptcy sometimes make it difficult to discern whether orders entered in bankruptcy cases are final in the classic sense of ending litigation on the merits and leaving nothing for the court to do but execute the judgment." Belli, 268 B.R. at 854. The Ninth Circuit has accordingly developed a "pragmatic approach to finality in bankruptcy that emphasizes the need for immediate review rather than whether the order is technically interlocutory." In reRosson, 545 F.3d 764, 769 (9th Cir. 2008) (). Under this "flexible finality" approach, "a bankruptcy court order is considered to be final and thus appealable where it (1) resolves and seriously affects substantive rights and (2) finally determines the discrete issue to which it is addressed." In re Bonham, 229 F.3d 750, 761 (9th Cir. 2000) (internal quotation marks omitted).2
While flexible finality is the general rule in the bankruptcy context, courts have recognized that it does not apply to the same extent to all bankruptcy decisions. In In re Belli, the Ninth Circuit Bankruptcy Appellate Panel observed that "the actual amount of flexibility applied depends on the circumstances," and that "[t]here is little flexibility when traditional finality rules are adequate." 268 B.R. at 854. Following these principles, the panel held that flexible finality does not apply to orders issued in adversary proceedings:
Adversary proceedings are merely federal civil actions under another name, and do not ordinarily present the types of uncertainties that necessitate "flexible finality" analysis. Adversary proceedings are a "single judicial unit." The parties are named in the pleadings; the claims are those presented in the respective counts of the complaint. The litigation is conducted under the Federal Rules of Civil Procedure . . . and follows the ordinary pattern of summons and complaint, answer,...
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