In re Cedar Funding, Inc.

Decision Date16 November 2009
Docket NumberBAP No. NC-09-1066-JuBaD.,Bankruptcy No. 08-52709.,Adversary No. 08-05312.
Citation419 B.R. 807
PartiesIn re CEDAR FUNDING, INC., Debtor. David A. Nilsen, Appellant, v. R. Todd Neilson, Appellee.
CourtU.S. Bankruptcy Appellate Panel, Ninth Circuit

David A. Nilsen, Monterey, CA, Pro se Appellant.

Cecily A. Dumas, Freidman Dumas & Springwater, LLP, San Francisco, CA, for Todd Neilson.

Before: JURY, BAUM1 and DUNN, Bankruptcy Judges.

OPINION

JURY, Bankruptcy Judge.

Appellant David A. Nilsen ("Nilsen") appeals the bankruptcy court's order dismissing his postpetition complaint against the chapter 11 trustee R. Todd Neilson for alleged defamatory statements about Nilsen made during Cedar Funding, Inc.'s ("CFI") bankruptcy proceeding.

This appeal raises two closely related questions, either of which, if answered in the affirmative, would preclude liability against the trustee as a matter of law: whether the trustee was entitled to absolute immunity under federal bankruptcy law, and whether his statements were absolutely privileged under California law. We answer both questions in favor of the trustee.

We conclude that the bankruptcy court erred in deciding that the trustee was not entitled to immunity for his allegedly defamatory statements and emphasize that immunity principles may protect a trustee from allegations of libel and slander. The trustee's allegedly defamatory statements were made while performing functions within the scope of his official duties during the administration of CFI's estate. We decide that these functions were judicial in nature because they involved discretionary judgment and were part and parcel of the chapter 11 bankruptcy process. Therefore, we determine that the trustee is protected by absolute quasi-judicial immunity under these facts.

The court's decision on the trustee's immunity, however, was harmless error because we agree with its conclusion that the trustee's statements were absolutely privileged under California law. As a result, the bankruptcy court's dismissal of Nilsen's complaint was appropriate on this ground alone. We AFFIRM.

I. FACTS

Nilsen was the founder, sole shareholder and president of CFI, a corporation engaged in the mortgage lending business. CFI did not use its own money for loans, but received money from clients which was invested in fractionalized deeds of trust or a mortgage fund2 securing loans to borrowers. In March 2008, CFI stopped paying investors their interest payments. Several investors commenced an action against CFI and Nilsen in state court which resulted in the appointment of a receiver to replace Nilsen and take control over CFI's assets on May 22, 2008.

A few days later, on May 26, 2008, Nilsen put CFI into a voluntary chapter 11 proceeding presumably so he could regain control of his company. This did not pan out as expected because several investors immediately moved for the appointment of a chapter 11 trustee.3 The investors' motion was based on some of the same allegations made in the state court receivership action; i.e., that Nilsen was running a "Ponzi" scheme and made insider loans to himself. On June 17, 2008 the bankruptcy court approved the appointment of a chapter 11 trustee.

On August 21, 2008 the trustee convened the § 341(a)4 meeting of creditors. At that meeting the trustee made certain statements to the investors about Nilsen which Nilsen claimed to be defamatory; for example, that Nilsen had "lied", played a "cruel hoax" on them and, in the trustee's opinion, committed a fraud.

On September 4, 2008 Nilsen sent a letter (the "September 4th Letter") to CFI's investors which contradicted the trustee's statements made at the § 341(a) meeting. Nilsen explained his position regarding CFI's financial condition and accused the trustee of being deceptive. Nilsen also told the investors that the trustee was dismantling the company and their investments and Nilsen asked each investor to request the court to sever their deed(s) of trust from the bankruptcy estate.

The trustee responded with his own letter to CFI's investors (the "Rebuttal Letter") to ensure they were not misled by Nilsen's September 4th Letter and posted it on the official bankruptcy website of CFI's estate. In that letter, the trustee made several allegedly defamatory statements about Nilsen, summarized as follows:

• Mr. Nilsen was knowingly operating a Ponzi scheme;

• The continuation of the business would only mean more investors would lose their life savings in a hopeless vortex of fraud;

• that if [investors] had been told the truth, Mr. Nilsen's fraud would have mercifully come to a grinding halt;

• that Nilsen should account for all of the funds he misappropriated during his tenure with Cedar Funding;

• that there were others who participated in the financial looting of Cedar Funding; and

• that Mr. Nilsen had gone directly to the investors with an untruthful recitation of the facts.

Nilsen had neither been convicted of any crime nor was he the subject of a criminal investigation at the time the trustee made the above statements.

Nilsen commenced an action against the trustee in the Monterey County Superior Court seeking injunctive relief as well as actual and punitive damages on the grounds that the trustee's written and oral statements were defamatory on their face.5

On November 7, 2008 the trustee filed a notice to remove the case to the bankruptcy court asserting that Nilsen's state court action was a non-core related proceeding under 28 U.S.C. § 1334(b) and that he consented to the bankruptcy judge's entry of a final order or judgment.6 The trustee later filed an addendum to the notice of removal which recharacterized Nilsen's action as core because it was inextricably intertwined with the trustee's administration of CFI's estate.

At the same time, Nilsen filed a supplement to the notice of removal, citing 28 U.S.C. § 1334(c)(2) (the mandatory abstention provision)7 and attached a first amended complaint. The first amended complaint merely added the allegations that the trustee's statements were neither judicial nor pursuant to the court's orders and were beyond the scope of the court's jurisdiction.

On November 17, 2008 the trustee filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6)8 on the ground that Nilsen's complaint failed to state a claim upon which relief could be granted because (1) the trustee was absolutely immune under federal bankruptcy law and (2) the trustee's statements were absolutely privileged under California law. In opposition, Nilsen asserted that his state court action was not a core proceeding over which the bankruptcy court had jurisdiction and requested the court to remand the action to state court. Nilsen also asserted that the trustee's motion to dismiss should be converted to a motion for summary judgment because it attached Nilsen's September 4th Letter and the trustee's Rebuttal Letter, which were referenced in Nilsen's first amended complaint but not physically attached. Lastly, Nilsen requested the court to grant him permission to file the first amended complaint that he had previously filed in state court.

The bankruptcy court granted the trustee's motion to dismiss by order entered on January 30, 2009. The court determined that Nilsen's defamation action was a core proceeding because the trustee's postpetition statements were made while performing his statutory duties. On this basis, and noting that Nilsen provided no grounds for a discretionary remand, the court denied Nilsen's request for remand to state court. The court held that the doctrine of absolute quasi-judicial immunity did not protect the trustee from Nilsen's allegations of libel and slander, but concluded that California's litigation privilege did.

On February 27, 2009 Nilsen filed his notice of appeal and a motion to extend the time to appeal. The bankruptcy court granted his motion by order entered on May 18, 2009 thereby making his notice filed on February 27, 2009 timely.

II. JURISDICTION

The bankruptcy court had jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2).9 We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES10

Whether the bankruptcy court erred

(a) in determining that Nilsen's postpetition state law defamation action against the trustee qualified as a core proceeding;

(b) in denying Nilsen's request to remand the adversary proceeding to state court;

(c) in denying Nilsen's request to convert the trustee's motion to dismiss to a summary judgment motion;

(d) in holding that the trustee was not entitled to the protection of the absolute quasi-judicial immunity doctrine;11

(e) in dismissing Nilsen's complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim for relief upon which relief could be granted because California's litigation privilege completely protected the trustee; and

(f) in denying Nilsen's request for leave to amend the complaint.

IV. STANDARDS OF REVIEW

The existence of jurisdiction is a question of law that we review de novo. Bethlahmy v. Kuhlman (In re ACI-HDT Supply Co.), 205 B.R. 231, 234 (9th Cir. BAP 1997). We review the bankruptcy court's decision not to remand on an equitable basis for an abuse of discretion. Id.

We review the bankruptcy court's dismissal of an action under Fed. R.Civ.P. 12(b)(6) de novo. Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 668 (9th Cir.2009). Since we take all allegations of material fact in the complaint as true for purposes of a motion to dismiss, we review the bankruptcy court's decision to deny a grant of immunity to the bankruptcy trustee de novo. New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1300 (9th Cir.1989). Likewise, the applicability of California's litigation privilege is a question of law which we review de...

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