Harkey v. Grobstein (In re Point Ctr. Fin., Inc.)
| Citation | 957 F.3d 990 |
| Decision Date | 29 April 2020 |
| Docket Number | No. 18-56398,18-56398 |
| Parties | IN RE POINT CENTER FINANCIAL, INC., Debtor, Dan J. Harkey; Robin B. Graham; Celia Allen-Graham; Richard Schachter, as Trustees of the Robin B. Graham and Celia Allen-Graham Revocable Trust, Appellants, v. Howard B. Grobstein, Chapter 7 Trustee, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
On October 9, 2018, the district court entered an order affirming the June 29, 2016 judgment of the bankruptcy court that granted a motion by Howard Grobstein, the Chapter 7 Trustee and Appellee, authorizing the Trustee to exercise management rights over Dillon Avenue 44, LLC ("Dillon"), and authorizing the Trustee’s assumption of the operating agreement with Dillon. Dillon is a limited liability company created to hold title to foreclosed property securing investments by private investors in Point Center Financial. Appellants are the former principal of Point Center Financial, the debtor, and members of Dillon.
Appellants argue that the bankruptcy court lacked jurisdiction to extend the deadline for accepting or rejecting the operating agreement and to issue an order approving the election of the Trustee as manager of Dillon. Appellants base their argument on the premise that the expiration of the deadline two years earlier constituted a statutory rejection of the agreement, and rendered the agreement no longer property of the estate. In addition to their jurisdictional arguments, Appellants argue that the bankruptcy court did not have authority to modify its own final order under Fed. R. Bankr. P. 9006(b).
Appellee argues Appellants do not have standing to bring this appeal because they are not pecuniarily harmed by the bankruptcy court’s order. Appellee further argues that the appeal is equitably moot because the Trustee has substantially completed the wind-down of Dillon.
The district court rejected Appellants’ jurisdictional and statutory arguments and affirmed the bankruptcy court’s order. This appeal followed. We AFFIRM .
Debtor Point Center Financial, Inc. (PCF) was in the business of originating and servicing loans by private investors. PCF would obtain funding from private investors secured by real property. Investors received either fractionalized interest in the deeds of trust securing their investments or investment in a blind mortgage pool in return for funding. When loans began to default following the recession in 2008, PCF foreclosed on the property securing the loans and would create a limited liability company ("LLC") to hold title to the property. Investors’ interests were commonly converted to membership interests in the LLC. Dillon Avenue 44, LLC ("Dillon") was one such LLC that held title to undeveloped property in Indio, California. Appellants are PCF’s former principal and some of Dillon’s members.
On February 19, 2013, PCF filed a petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California.
On August 13, 2013, the bankruptcy court entered an order appointing Howard Grobstein as PCF’s Chapter 11 Trustee. The case was converted to a Chapter 7 Bankruptcy, and Grobstein became the Chapter 7 Trustee.
On December 24, 2013, the Trustee moved for the bankruptcy court to extend the deadline set forth in 11 U.S.C. § 365 for him to assume or reject executory contracts. On January 30, 2014, the bankruptcy court granted the Trustee’s motion and set February 28, 2014 as the deadline for the assumption or rejection of most executory contracts, including the operating agreement with Dillon. The Trustee did not assume the operating agreement by the deadline because Dan Harkey, PCF’s former principal, had falsely represented that no sale of real estate owned by Dillon was imminent. On May 31, 2016, the Trustee filed a motion seeking an order authorizing the Trustee to exercise management rights over Dillon based on his election as manager by Dillon’s members, and alternatively for an order permitting him to assume Dillon’s operating agreement. The Trustee argued that his failure to assume the operating agreement by the February 28, 2014 deadline was the result of "excusable neglect" under Fed. R. Bankr. P. 9006(b) given Harkey’s dishonest "representations that there was no sale of Dillon’s real property on the horizon, and therefore no reasonable likelihood that the estate could recover ... millions of dollars." A hearing was set on the assumption motion for June 21, 2016, and Appellants failed to appear, claiming they failed to understand the threat to their rights under the motion. They filed an emergency motion for reconsideration on June 28, 2016, contending the bankruptcy court lacked jurisdiction. The district court denied this motion, concluding that Appellants filed no written opposition to the assumption motion, offered no newly discovered evidence, and demonstrated no other highly unusual circumstances that would warrant reconsideration.
On June 29, 2016, the bankruptcy court issued an order granting the Chapter 7 Trustee’s motion authorizing the Trustee to exercise management rights over Dillon and authorizing the Trustee’s assumption of the operating agreement ("Assumption Order"). The Trustee sold the real property belonging to Dillon and distributed the proceeds to creditors, PCF, and Dillon members under a plan approved by the bankruptcy court.
On October 9, 2018, the Central District of California affirmed the bankruptcy court’s Assumption Order, holding the bankruptcy court had jurisdiction to hear the assumption motion and approve the Dillon membership vote, and properly extended its own deadline pursuant to Fed. R. Bankr. P. 9006(b). Appellants filed a notice of appeal to this Circuit on October 19, 2018.
This Court has jurisdiction to hear appeals from the district court pursuant to 28 U.S.C. § 1291. This Court generally "review[s] de novo a district court's decision on appeal from a bankruptcy court," and "review[s] a bankruptcy court decision independently and without deference to the district court's decision." In re JTS Corp. , 617 F.3d 1102, 1109 (9th Cir. 2010). Findings of fact of the bankruptcy court are reviewed for clear error, and conclusions of law are reviewed de novo. Id. (citing In re Strand , 375 F.3d 854, 857 (9th Cir. 2004) ). Mixed questions of law and fact are reviewed de novo. Id. (citing In re Chang , 163 F.3d 1138, 1140 (9th Cir. 1998).
The question of a bankruptcy court’s jurisdiction is a question of law reviewed de novo. In re Marciano , 459 B.R. 27, 34 (B.A.P. 9th Cir. 2011). The question of the statutory construction of Fed. R. Bankr. P. 9006 is also a question of law reviewed de novo. In re Simpson , 557 F.3d 1010, 1014 (9th Cir. 2009).
Appellee argues that the standard of review of the bankruptcy court’s order is plain error because Appellants forfeited their opposition to the Assumption Motion by failing to appear at the underlying hearing at the bankruptcy court. In its May 29, 2018 Order, this Court found Appellants had not waived their challenge to the Assumption Order but found "the question of forfeiture is open for determination on remand." Matter of Point Ctr. Fin., Inc. , 890 F.3d 1188, 1193 (9th Cir. 2018). In a footnote, the district court noted it "affirms the bankruptcy court’s decision on other grounds, and therefore does not address the issue of forfeiture." Because this Court likewise affirms the district court’s decision on other grounds, we need not reach the question of forfeiture.
The Trustee argues Appellants lack standing to pursue this appeal because they are not pecuniarily harmed by the bankruptcy court’s order. The Trustee moved to assume Dillon’s operating agreement after the deadline for assuming or rejecting the executory contract had passed. The bankruptcy court granted this motion in its Assumption Order. The district court initially found Appellants lacked standing to challenge the bankruptcy court’s order because they did not attend the hearing before the bankruptcy court.
This Court reversed and remanded. Matter of Point Ctr. Fin., Inc. , 890 F.3d 1188. This Court reviewed the district court’s decision de novo. Id. at 1191. In order to appeal a bankruptcy court’s order, Appellants must be "directly and adversely affected pecuniarily" by the order. Matter of Fondiller , 707 F.2d 441, 442 (9th Cir. 1983). This Court found that "[b]ankruptcy standing concerns whether an individual or entity is ‘aggrieved,’ not whether one makes that known to the bankruptcy court," and therefore Appellants failure to appear in court did not deprive them of standing to appeal the bankruptcy court’s order. Matter of Point Ctr. Fin., Inc. , 890 F.3d at 1193.
The Trustee now argues Appellants lack standing to pursue this appeal because they are not pecuniarily harmed given that the bankruptcy court’s order does not require them to do anything or surrender any property. Appellants explain that their interest in reversing the bankruptcy court’s order means preventing Dillon’s investors from "forfeit[ing] another thirty to forty percent of the remaining cash available through the deduction of the ‘springing’ management fee created by the bankruptcy court’s order." The Trustee argues that, because the bankruptcy court found that the issue of management fees would be dealt with in another proceeding, Appellants cannot claim this is a pecuniary interest affected by the bankruptcy court’s order.
This Court finds Appellants have standing to bring this appeal. Even if the management fees will be addressed in another proceeding, Appellants’ ability to pursue them is dependent on the bankruptcy court’s original order and this appeal. This Court has already found "there is no question that Appellants’ pecuniary...
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