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In re Marshall

March 18, 2009

IN RE: J HOWARD MARSHALL, III, AND ILENE O. MARSHALL, DEBTORS
ELAINE T. MARSHALL, APPELLANT,
v.
J. HOWARD MARSHALL, III, AND ILENE O. MARSHALL, APPELLEES.



The opinion of the court was delivered by: David O. Carter United States District Judge

BAP NO: CC-03-01460 CACD USBC NO: LA02-30769-SB

ORDER AFFIRMING THE BANKRUPTCY COURT'S DECISIONS:

[1] DENYING RECUSAL OR REASSIGNMENT;

[2] CONFIRMING REORGANIZATION PLAN; AND

[3] DENYING MOTION TO DISMISS

Appellant Elaine T. Marshall ("Elaine"), as Successor Trustee of the Bettye B. Marshall Living Trust, Trustee of the J. Howard Marshall, II Marital Trust Number Two, and Trustee of the E. Pierce Marshall Family Trust Created Under the Bettye B. Marshall Living Trust Indenture Dated October 30, 1990, appeals from Orders of the Bankruptcy Court, United States Bankruptcy Judge Samuel Bufford ("Judge Bufford" or the "Bankruptcy Court") Denying the Trusts' Motions for Reassignment or Recusal, Confirming the Debtors' First Amended Chapter 11 Plan, and Denying the Trusts' Motion to Dismiss. After considering the parties' Opening Briefs, and the appellant's Reply Brief, as well as the parties' oral argument, and for the following reasons the Court hereby AFFIRMS the Bankruptcy Court's Order Denying the Trusts' Motion for Reassignment or Recusal, AFFIRMS the Bankruptcy Court's Order Confirming the Debtors' First Amended Chapter 11 Plan, and AFFIRMS The Bankruptcy Court's Order Denying the Trust's Motion to Dismiss.

BACKGROUND

Texas tycoon J. Howard Marshall II ("J. Howard") died August 4, 1995. He was survived by his two sons, E. Pierce Marshall ("Pierce") and J. Howard Marshall III ("Howard"), and wife Vickie Lynn Marshall ("Vickie"). Pierce, as Trustee of a number of trusts created during J. Howard's lifetime, was a creditor in the present bankruptcy case. He is succeeded by Elaine, his successor Trustee and the appellant in the current proceeding. The debtors in this matter are Howard and his wife Ilene O. Marshall ("Ilene"). They are appellees in the current proceeding.

When he died, J. Howard left an estate plan which included Pierce, but not Howard or Vickie. Both Howard and Vickie challenged the estate plan in the Texas Probate Court (the "Probate Case"). Howard claimed that J. Howard orally promised that his assets would be distributed equally to Howard and Pierce when J. Howard repurchased voting shares of Koch Industries from Howard. Pierce claimed, and a jury found, that Howard sold the shares of Koch Industries to J. Howard with the undisclosed intention to later claim that his father promised, as consideration for this sale, to treat Pierce and Howard equally. The jury further found that Howard had committed fraud with malice. The Probate Court entered judgment on August 15, 2001, and amended judgments on October 15, 2001 and December 7, 2001 (the "Texas Fraud Judgment"). The judgment became final on February 11, 2001. The Texas Fraud Judgment is now worth more than $12 million.

Howard timely appealed in the Texas courts. On January 31, 2002, he filed a Motion to Stay Execution of the Judgment, or Alternatively, to Lower the Amount of Security for Supersedeas. At this time, he claimed his net worth to be $22,413,220 and stated that he was unable to obtain a bond necessary to appeal. Elaine claims that the parties reached an agreement concerning a stay and the amount of the bond, but that Howard reneged, being unable to obtain financing for the agreed bond.

In any case, Pierce moved to enforce the Probate Court's judgment. On July 18, 2002, the Probate Court asked Howard to consider voluntarily moving assets to Texas to satisfy the judgment. The Court set another hearing on July 25, 2002, to determine whether to order Howard to do so. Instead, Howard filed for bankruptcy on July 23, 2002, and filed notice of this bankruptcy in the Probate Court the following day.

The Texas Probate Court also entered a judgment against Vickie. Vickie claimed that Pierce had wrongfully interfered with her expectancy of a gift from J. Howard. The Probate Court rejected this claim, and awarded Pierce $541,000 in fees and costs against Vickie.

Vickie filed for bankruptcy in the Central District of California, (the "Vickie Lynn Case") and her case was assigned to Judge Bufford. Vickie again claimed that Pierce had interfered with her expectancy of a gift from J. Howard. Pierce sought a determination that his claim against Vickie was not subject to discharge in bankruptcy. Judge Bufford rejected Pierce's claim and ultimately awarded Vickie just shy of $475 million.

During the course of the Vickie Lynn Case, Judge Bufford became convinced that Pierce was engaged in discovery abuses. Specifically, he found that Pierce destroyed certain documents, failed to respond to discovery requests, failed to produce a privilege log and documents in camera, and failed to produce some documents in the possession of J. Howard's lawyers, Edwin K Hunter and Jeff Townsend. As a sanction for this purported misconduct, Judge Bufford award $5,000 to Vickie in connection with a 1997 motion to compel. Judge Bufford issued other sanctions orders throughout the bankruptcy proceeding.

In September 1998 Pierce sought to withdraw the bankruptcy reference in the Vickie Lynn Case. District Judge Keller withdrew the reference in October 1998. In early 1999, Judge Bufford submitted a "secret memorandum" to "assist [Judge Keller] in his review of the matter." On February 1, 1999, Judge Keller stayed the sanctions order. The following day Judge Bufford declared the stay invalid and issued a sanctions order deeming certain facts adverse to Pierce to be established. On March 9, 1999, Judge Keller vacated this order for lack of evidence. After confirming receipt of the "secret memorandum," Judge Keller vacated his order withdrawing the case. On May 20, 1999, Judge Bufford again issued a sanctions order deeming Vickie's allegations established.

Judge Bufford then conducted a five-day hearing on Vickie's claims. On the first day of this hearing, he responded on the record to questions by a reporter, indicated that the case was related to the Probate Case, and discussed how members of the press should obtain public records or contact the Court. Press reports concerning the case noted that Vickie had an "advantage" going towards trial because of Judge Bufford's negative impression of Pierce.

As the hearing progressed, Judge Bufford relied heavily on his sanctions order. He refused to permit evidence contrary to the facts established in the sanction. Ultimately, he found in Vickie's favor on her claim and awarded Vickie $449,754,134 in actual damages. First, he based this decision on a "widow's election" theory that was not raised by Vickie. On October 6, 2000, he revised this opinion, abandoning the "widow's election" theory and holding that the decision was justified based on the presumed facts adverse to Pierce. On November 21, 2000, he assessed $25,000,000 in punitive damages. He entered a final judgment for Vickie on December 29, 2000.

Pierce appealed to this Court, which ultimately reduced the actual damages to $44,300,000 but increased the punitive damages to the same amount based on Pierce's "willfulness, maliciousness, and fraud." Pierce appealed this decision to the Ninth Circuit, which held, inter alia, that this Court lacked jurisdiction. Vickie appealed to the Supreme Court and prevailed on this issue. The Supreme Court then remanded to the Ninth Circuit, where the case remains.

On July 23, 2002, Howard and Ilene filed their voluntary petition under chapter 11 of the Bankruptcy Code. Howard and Ilene filed an addendum under Local Bankruptcy Rule 1015-2. Although the cases were admittedly not "related" under the definition used by the Local Rules, the addendum suggested that this case involved many of the same parties as the Vickie Lynn case. Based on this addendum, the clerk assigned this case to Judge Bufford.

On October 7, 2002, Pierce filed a motion for reassignment or recusal. This motion was denied at an October 29, 2002 hearing. Judge Bufford then issued an Order to Show Cause why the motion should not be denied and heard argument on January 23, 2003. He again denied the Recusal Motion on March 11, 2003. He denied the Motion a final time on March 27, 2003.

On August 6, 2002, Howard and Ilene filed their first bankruptcy schedules listing their assets at $8,391,904. In this initial schedule, Howard and Ilene listed their stock portfolio as having an unknown value, although Pierce claimed that it was worth more than $5,000,000. Howard and Ilene filed an amended schedule on September 4, 2002. This amended schedule showed their assets being worth just over $13 million.

Pierce raised a number of irregularities with the amended schedule as well. First, in the amended schedule, Howard and Ilene valued their stock portfolio "as of July 16, 2002," a date when the portfolio was trading at an abnormally low price. According to Pierce, the $4,746,407.38 valuation took into account stocks the debtors did not own and failed to take into account stocks they did own. Principally, on July 15, 2002, Howard and Ilene held 24,000 shares of Immunex Corporation stock. The next day AmGen, Inc. purchased Immunex. Consequently, AmGen stock made up the majority of Howard and Ilene's portfolio. As a result of this transaction, AmGen's stock was trading at its second lowest price for the year on July 16, 2002. Howard and Ilene also listed no value for a debenture in favor of Howard, (the "Debenture") that had been listed as a $6,050,000 asset in the Probate Court. Although they stated no value for the Debenture, Howard and Ilene provided a page-long description of the Debenture in their schedules. Pierce "conservatively" calculated the value of the Debenture at $3,583,375. Pierce also claimed that value of certain bank accounts were misstated. Finally, he claimed that the schedules improperly valued Howard and Ilene's partnership interests using a book value approach versus market value.

In addition to the $11 million judgment, plus more than $1 million in interest, from the Texas Probate Court, Howard and Ilene had additional actual and threatened liabilities. At the time their plan was confirmed, they had $16,375 in undisputed debts and $464,000 in other disputed debts. Further, another family member sued Howard for $5 million, and Pierce threatened to sue for another $100 million.

Howard and Ilene filed their first plan of reorganization taking into account the $12 million Texas Fraud Judgment.

Pierce never filed a proof of claim in the bankruptcy proceeding. The bar for doing so passed on November 15, 2002. Instead, on December 13, 2002, Pierce filed a Motion to Dismiss the case under 11 U.S.C. § 1112(b) claiming that the debtors were acting in bad faith. The Bankruptcy Court denied the motion, finding that the Howard and Ilene filed in good faith.

On April 16, 2003, Howard and Ilene filed their first amended plan of reorganization (the "Chapter 11 Plan"). Because Pierce did not have an allowed claim, he could not vote on the plan. The Chapter 11 Plan provided that Howard and Ilene would pay "General Unsecured Claims" in full. This included $16,375 in undisputed claims, which would be paid, and according to Howard and Ilene, $464,000 in disputed claims, which would not. The Plan also provided for payment in full to three classes of secured creditors, all of which hold mortgages to Howard and Ilene's real property. Finally, the plan provided for payment in full to a "convenience class" of unsecured claims for $25,000 or less.

Notably, the plan did not provide for any payment to Pierce, although it did purport to discharge the Fraud Judgment.

On May 9, 2003, Pierce objected to the confirmation of the plan, claiming that confirmation of the plan in favor of solvent debtors was unconstitutional. The Bankruptcy Court confirmed the plan nonetheless.

Pierce filed the present appeal on September 3, 2003, claiming that the Bankruptcy Court erred by Denying his Motion for Recusal or Reassignment, Denying his Motion to Dismiss, and Overruling his Objection to the Confirmation.

He sought a stay of these orders in the Bankruptcy Court, this Court, and the Ninth Circuit. This Court denied the stay claiming that Pierce lacked a likelihood of success on appeal and irreparable harm. The Ninth Circuit granted a stay pending appeal in this Court. The Circuit then stayed this Court's proceedings on the matter pending resolution of the Vickie Lynn Case. On October 3, 2007, the Ninth Circuit lifted the stay on this appeal in light of the Supreme Court's decision in the Vickie Lynn case.

STANDARD OF REVIEW

The Court typically reviews challenged decisions of the Bankruptcy Court for abuse of discretion. In re Stolrow's, Inc., 84 B.R. 167, 170 (9th Cir. BAP 1988) (dismissal for bad faith); "A bankruptcy court abuses its discretion if it applies the law incorrectly or if it rests its decision on a clearly erroneous finding of a material fact." In re Brotby, 303 B.R. 177, 184 (9th Cir. B.A.P. 2003); In re So. Cal. Plastics, Inc., 165 F.3d 1243, 1245 (9th Cir. 1999). To the extent that the decision is based on an incorrect legal conclusion, review is plenary. United States v. Furst, 886 F.2d 558, 580 (3d Cir. 1989).

Whether the judge was required to recuse himself under § 455 involves both a legal and factual determination: a) what the appropriate standard is for recusal; and b) whether the judge's impartiality might reasonably be questioned. To the extent that Elaine claims that Judge Bufford's view of the law was incorrect, the Court reviews this decision de novo.

The legal determination of whether the Constitution prohibits confirming the chapter 11 plan of solvent debtor is also reviewed de novo.

A finding of bad faith is essentially a fact question reviewed for clear error. In re Marsch, 36 F.3d 825, 828 (9th Cir. 1994); In re Villaneuva, 274 B.R. 836, 840 (9th Cir. B.A.P. 2002).*fn1 "Clear error exists only when the reviewing court is left with a definite and firm conviction that a mistake has been committed." In re Brotby, 303 B.R. 177, 184 (9th Cir. B.A.P. 2003).

DISCUSSION

I. REASSIGNMENT AND RECUSAL

Elaine argues that Judge Bufford erred by failing to randomly reassign the case and by refusing to recuse himself. The Court addresses each purported error in turn.

A. Random Reassignment

Elaine contends that the case should have been randomly assigned and that the assignment to Judge Bufford based on the "Addendum" to the Debtor's bankruptcy filing was improper. Thus, she argues, Judge Bufford's refusal to submit the case to random assignment was error.

Assignment of cases is governed by 28 U.S.C. § 137, which provides that "[t]he business of a court having more than one judge shall be divided among the judges as provided by the rules and orders of the court." Cases in this District are randomly assigned. See General Order 224 § 1.2. The General Orders of the Bankruptcy Court for the Central District provide an exception to random assignment where cases are related. U.S. Bankruptcy Court, C.D. Cal., General Order 99-02. Local Bankruptcy Rule 1015-2 provides a list of relationships that render two cases "related" for purposes of General Order 99-02 -- e.g. where the debtors are the same, spouses, partners, or have an interest in property that is the property of another bankruptcy estate.

Although counsel for Howard and Ilene suggested at oral argument that the cases may be related, they do not appear to fit in any of the relationships described in Local Bankruptcy Rule 1015-2. Accordingly, the Court assumes that the cases were not, as a technical matter, related cases under the Local Bankruptcy Rules and General Orders of this Court.

Random assignment is important chiefly because it precludes real or apparent bias by preventing "judge shopping." In re Yagman, 796 F.2d 1165, 1177-78 (9th Cir. 1986); see also Cruz v. Abbate, 812 F.2d 571, 573-74 (9th Cir. 1987) (noting the importance of avoiding real or perceived arbitrariness or unfairness.) Leaving judge selection to chance assures that the deck is not stacked against one party or another. United States v. Phillips, 59 F. Supp. 2d 1178, 1180 (D. Utah 1999)(collecting authorities). As the Ninth Circuit put it, General Order 224 "evinces a policy of objectivity and fairness in the distribution of all matters . . . [which is] important to the fair administration of justice . . .." United States v. Flynt, 756 F.2d 1352, 1356 n.2 (9th Cir. 1985).

Consequently, the Local Rules give no discretion to the clerk to assign cases on any basis other than random selection. General Order 224 § 1.2 ("Neither the Clerk nor any Deputy Clerk shall have discretion in determining the judge to whom any civil case shall be assigned."); see also Phillips, 59 F. Supp. 2d at 1184. Judges, on the other hand, do have "inherent authority" to transfer cases between them. See United States v. Martinez, 686 F. 2d 334 (5th Cir. 1982) ("District Judges have the inherent power to transfer cases from one to another for the expeditious administration of justice." (quoting United States v. Stone, 411 F.2d 597, 598 (5th Cir. 1969)).

However, Elaine does not merely ask this Court to determine that the Clerk improperly assigned this matter to Judge Bufford. She also does not ask the Court to assign a new or different judge to the matter. Instead, she asks the Court to use non-random assignment as a reason to vacate all of Judge Bufford's decisions.

Assignment, even if improper, cannot support such a result. There is no due process right to random assignment. See United States v. Torbert, 496 F.2d 154, 157 (9th Cir. 1974); Cruz, supra. As the Circuit has recognized, a party has no "vested right to any particular procedure." Torbert, supra. Aside from assuring that the proceedings are free from bias or partiality, the selection procedure is committed to the discretion of the trial court. Cruz, supra. General Order 224 "is a housekeeping rule for the internal operation of the district court which has 'a large measure of ...


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