Meruelo v. Meruelo Maddux Props., Inc. (In re Meruelo Maddux Props., Inc.), BAP No. CC-12-1304-TaMoMk

CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit
PartiesIn re: MERUELO MADDUX PROPERTIES, INC., Debtor. RICHARD MERUELO, individually and as Trustee of the Richard Meruelo Living Trustee U/D/T dated September 15, 1989, Appellant, v. MERUELO MADDUX PROPERTIES, INC., Appellee.
Docket NumberBk. No. 09-13356-VK,BAP No. CC-12-1304-TaMoMk
Decision Date06 May 2013

In re: MERUELO MADDUX PROPERTIES, INC., Debtor.
RICHARD MERUELO, individually and as Trustee of the Richard
Meruelo Living Trustee U/D/T dated September 15, 1989, Appellant,
v.
MERUELO MADDUX PROPERTIES, INC., Appellee.

BAP No. CC-12-1304-TaMoMk
Bk.
No. 09-13356-VK

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Filed May 6, 2013


NOT FOR PUBLICATION

MEMORANDUM*

Argued on February 21, 2013 at Pasadena, California
Submitted on February 28, 2013**

Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Victoria Kaufman, Bankruptcy Judge, Presiding

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Appearances:

Gregory M. Salvato of Salvato Law Offices on
behalf of Appellant; Christopher E. Prince of
Lesnick Prince & Pappas LLP on behalf of Appellee.

Before: TAYLOR, MONTALI,*** and MARKELL, Bankruptcy Judges.

INTRODUCTION1

Reorganized debtor and Appellee Meruelo Maddux Properties, Inc. ("MMPI") and related reorganized debtors (collectively,

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"Debtors")2 objected to proofs of claim3 (collectively, "Claims") filed by Appellant Richard Meruelo ("Richard")4 and moved for disallowance. In the Claims, Richard sought indemnification for liabilities that he incurred in defending actions and proceedings based on guaranties that he executed for the benefit of the Debtors, for fees he incurred in connection with the Debtors' bankruptcies, and for payment on a judgment. The bankruptcy court granted the Debtors' motion and Richard appealed.

Here, we address only the issues related to the guaranty liabilities and bankruptcy legal fees. We decline to address the issue related to the payment on the judgment as it was not addressed by Richard in his statement of issues on appeal, in his opening or reply brief, or in a substantive fashion at oral

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argument. Thus, we VACATE and REMAND in part and AFFIRM in part.

FACTS5

On March 26, 2009, Debtors initiated chapter 11 bankruptcy cases (collectively, "Cases"). Richard previously served as MMPI's Chairman, CEO, and major shareholder.

On September 24, 2009, Richard filed the Claims. In each of the Claims, Richard sought reimbursement and indemnification for incurred or anticipated liabilities. He based the Claims on two pre-petition agreements: a Contribution Agreement dated September 19, 2006 and an Indemnification Agreement dated January 30, 2007 (collectively, the "Agreements"). Richard asserted that he had possible exposure to liability on guaranties that he executed for the benefit of seven different lenders or lessors ("Guaranties"). He further asserted that the Agreements contractually obligated the Debtors to indemnify him and to reimburse him in connection with any payment under or in connection with the Guaranties.

At some point, the parties holding the Guaranties threatened or initiated litigation. Richard retained Neufeld Marks & Gralnek ("Neufeld") to represent him in his defense of these claims. During the course of the Cases, Richard also retained Levene, Neale, Bender, Rankin & Brill ("Levene") as personal bankruptcy counsel.

Meanwhile, the Debtors moved for and obtained an order of

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the bankruptcy court that authorized the employment of professionals. The order allowing retention required that each retained professional submit a declaration of disinterestedness. As required, Neufeld submitted its declaration of disinterestedness and therein disclosed its concurrent representation of one or more of the Debtors. Neufeld, however, failed to disclose that it represented Richard in connection with the Guaranties.

The bankruptcy court confirmed a third party's plan in the Cases on June 24, 2011. The Debtors subsequently objected to proofs of claim for pre-petition legal services filed by Neufeld to the Debtors and moved for disallowance. The Debtors also objected to Neufeld's request for payment of an administrative claim for post-petition fees. The bankruptcy court heard all Neufeld fee related matters on March 1, 2012. The bankruptcy court determined, among other things, that Neufeld improperly failed to disclose its simultaneous representation of Richard (and other insiders) in non-bankruptcy proceedings and that, as a result of the concurrent representations, Neufeld was not disinterested for purposes of section 327(a). The bankruptcy court, thus, ordered Neufeld to disgorge fees previously received and denied its various requests for further payment.6

The Debtors also moved to disallow the Claims ("Motion to Disallow"). They argued that neither of the Agreements formed a

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basis for Richard's reimbursement claims and that disallowance under section 502(e)(1)(B) was warranted because the Claims were contingent. In response to the Motion to Disallow, Richard submitted an amended proof of claim in the MMPI case ("Amended Proof of Claim") and filed opposition. In the Amended Proof of Claim, Richard reiterated that he was entitled to reimbursement and indemnification based on the Agreements and listed total claims in the amount of $316,294.39, consisting of three different categories of liabilities:

(1) $151,453.53 in attorneys' fees paid to Neufeld on account of its representation of Richard in proceedings related to the Guaranties and in the Cases ("Neufeld Claim");
(2) $142,224.48 in attorneys' fees paid to Levene on account of its representation of Richard in the Cases ("Levene Claim"); and
(3) $22,526.38 on account of Richard's payment of a state court judgment against Richard and a related entity pursuant to a guarantied lease ("Nemiroff Claim").

Apparently, the Debtors failed to properly serve Richard with the Motion to Disallow.7 Consequently, the parties stipulated to a continuance of the hearing. Pursuant to a subsequent bankruptcy court order, the Debtors submitted a supplemental memorandum ("Supplemental Brief") in support of the Motion to Disallow. They renewed their prior objections and also asserted that Richard waived his indemnity rights under the terms

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of the Guaranties, which contained Gradsky8 waivers. The Debtors also made other new arguments, including that Richard failed to comply with certain notice provisions in the Contribution Agreement, that the Indemnification Agreement did not encompass guaranty obligations, and that Richard was not entitled to indemnification for fees incurred in the Cases. The Debtors further argued that the Nemiroff Claim was unenforceable because Nemiroff failed to file a proof of claim, and that the Neufeld Claim should be disallowed based on the disallowance of the law firm's direct claims against the Debtors.

In opposition, Richard argued that based on his execution of new agreements with lenders and the Debtors in the Cases, the waiver argument was inapplicable as the new agreements paid the outstanding debt in full. He also asserted that the Debtors' other arguments relating to notice, scope of indemnity, and conflicts were irrelevant or lacked a legal basis.

The bankruptcy court heard the Motion to Disallow on May 11, 2012 and, after argument, granted it in its entirety. It disallowed the Levene Claim because the fees were not related to an indemnification purpose. It disallowed the Neufeld claim based on the law firm's prior disqualification in the Cases. Finally, it disallowed the Nemiroff Claim because the underlying Claim was unenforceable in the bankruptcy case.

On May 29, 2012, the bankruptcy court entered an order ("Disallowance Order") that sustained the Debtors' objections and disallowed the Claims. Richard timely filed his appeal.

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JURISDICTION

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

ISSUE

Did the bankruptcy court err in disallowing the Claims?

STANDARD OF REVIEW

We review the bankruptcy court's legal conclusions de novo, and its findings of fact for clear error. See Allen v. US Bank, N.A. (In re Allen), 472 B.R. 559, 564 (9th Cir. BAP 2012). The court's findings of fact are clearly erroneous if illogical, implausible, or lacking support from the record. Retz v. Sampson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). We review the bankruptcy court's Disallowance Order de novo. Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1020 (9th Cir. 2012), cert. denied, 133 S. Ct. 119 (2012); see also Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers, Inc.), 293 B.R. 489, 493 (9th Cir. BAP 2003) (issues related to disallowance are questions of law reviewed de novo).

Contract interpretation and the meaning of contractual provisions are reviewed de novo. DP Aviation v. Smiths Indus. Aerospace & Def. Sys. Ltd., 268 F.3d 829, 836 (9th Cir. 2001).

DISCUSSION

On appeal, Richard argues that the bankruptcy court erred by: (1) failing to articulate the grounds for the disallowance under section 502(b); (2) finding that Richard was not entitled to indemnity under the Agreements; (3) finding that Richard was not entitled to...

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