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IN RE SULLIVAN & LODGE

August 19, 2003

IN RE: SULLIVAN & LODGE, INC., DEBTOR


The opinion of the court was delivered by: Charles Breyer, District Judge

ORDER VACATING BANKRUPTCY COURT'S RULING ON MOTION TO COMPEL ABANDONMENT
This matter is before this Court on appeal from the United States Bankruptcy Court. Appellant seeks an order from this Court vacating the bankruptcy court's order granting debtor's motion to compel abandonment of certain legal causes of action.

BACKGROUND

The debtor corporation is a producer of bottled water sold under the Cobb Mountain and Forest Lake labels. Debtor believes that its financial troubles result at least in part from unfair competition and false advertising by other players in the bottled-water market. Accordingly, debtor retained the law firms of Jaret & Jaret ("Jaret") and Lieff Cabraser ("Lieff") as special counsel to pursue legal action against its competitors. These two firms are referred to collectively herein as "Special Counsel."

Two days after debtor signed an engagement letter in April 1999, Special Counsel filed a consumer class action against debtor's competitors. Roughly one month later, Special Counsel filed suit on behalf of the estate. [ Page 2]

Although the estate ultimately obtained settlements totaling $1.2 million, the principals came to believe that Special Counsel's representation of the estate was compromised by a conflict of interest. They opposed Special Counsel's request for compensation on this basis. Finding that Special Counsel "failed to insure that Sullivan & Lodge received the undivided loyalty and commitment from them that it was entitled to receive," the bankruptcy court held that "[n]othing less than a complete forfeiture of all fees would be just in this case." The bankruptcy court denied a motion for reconsideration, and Special Counsel appealed. The district court affirmed the bankruptcy court's ruling.

Debtor's principals believe that they have legitimate affirmative causes of action against Special Counsel stemming from the conflict of interest. Although the principals encouraged the trustee to pursue these claims, the trustee declined to do so. The principals then filed a motion in the bankruptcy court to compel the trustee to abandon the claims to the corporation.

The trustee did not oppose the motion. Special Counsel, however, did file opposition. They based their opposition on the fact that they had offered to purchase the putative claims for $30,000. In their view, this offer rendered the claims unsuitable for abandonment under 11 U.S.C. § 554, which permits abandonment of estate property when that property is either "burdensome to the estate" or "of inconsequential value and benefit to the estate." In response, the principals argued that Special Counsel did not have standing to oppose the motion.

The bankruptcy court granted the motion to compel abandonment. At the hearing on the motion, the court explained its reasoning in the following terms:

Well, as I said before, most of the time we're interested in maximizing the estate, 99.9 percent of the time. But occasionally the situation arises where justice is better served by letting people who really feel-I mean it's obvious that Sullivan and Lodge, the moving parties here, they obviously have strong feelings about what happened. And it just seems fair and just under all the circumstances to let them prosecute that, even though I understand that the estate could be $30,000 richer if they didn't. . . .
[U]nder the unique circumstances presented here and in the absence of any objections by the estate's representative, the motion to abandon is granted. [ Page 3]
The court did not express an opinion on whether Special Counsel had legal standing to oppose the motion.

This appeal is limited to the bankruptcy court's ruling on the motion to compel abandonment. For purposes of the appeal, the Court will assume that the estate has a valid affirmative cause of action against Special Counsel. The only question for this Court is whether the motion to compel abandonment of that cause of action was properly granted.

STANDARD OF REVIEW

"Once a bankruptcy court has determined whether `the factual predicates for abandonment . . . are present, the court's decision to authorize or deny abandonment is reviewed for an abuse of discretion." In re Viet Vu, 245 B.R. 644, 647 (B.A.P. 9th Cir. 2000) (quoting In re Johnston, 49 F.3d 538, 540 (9th Cir. 1995)). "A court abuses its discretion if its decision is `based on an erroneous conclusion of law or when the record contains no evidence on which [the bankruptcy court] could have based [the] decision [to authorize abandonment].'" Id. (quoting In re Windmill Farms. Inc., 841 F.2d 1467, 1472 (9th Cir. 1988)).

DISCUSSION

I. ...


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