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Brooks v. Brooks

April 2, 2010

SCOTT BROOKS, APPELLANT,
v.
FOSTER L. BROOKS AND TERESA R.L. BROOKS, APPELLEES.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Appellant Scott Brooks ("Scott") appeals the Bankruptcy Court's order in favor of Foster L. Brooks ("Foster") and Teresa R.L. Brooks (collectively "Debtors" or "Appellees"). Pursuant to its oral decision on May 4, 2009 and subsequent written order on June 2, 2009, the bankruptcy court granted the Debtors' motion to confirm their first amended Chapter 13 plan. For the reasons set forth below, the bankruptcy court's order will be affirmed.

BACKGROUND

Around 2001, Scott Brooks offered his brother, Foster Brooks, a job as manager of two car washes he owned, including Dribbles Carwash, Inc. ("Dribbles Carwash") in Manteca, California. Foster accepted the offer and was later granted a ten percent ownership interest in Dribbles Carwash. Around 2004, the employment relationship between the brothers ended.

On October 19, 2005, Foster filed a lawsuit in San Joaquin County Superior Court alleging wrongful termination and other claims against Scott, Scott's wife, Sherry Brooks, and Dribbles Carwash. Scott subsequently filed a cross-complaint for defamation and other related causes of action. The state court action remains ongoing.

On August 22, 2008, Foster and Teresa Brooks filed a petition for bankruptcy under Chapter 13. They concurrently filed a proposed Chapter 13 plan. Among the debts Appellees sought to discharge through the proceeding was any debt owed to Scott. The schedules submitted along with the initial reorganization plan did not list the state court lawsuit as an asset despite the fact that Appellees believed it had substantial value.

On October 15, 2008, Scott filed an objection to the proposed plan and at the November 10, 2008 hearing, the bankruptcy court denied plan confirmation for failure to include the lawsuit as an asset.

On February 24, 2009, Appellees filed an amended plan which included the lawsuit and in which they promised to pay their unsecured creditors in full.

As a funding source for those payments, Appellees cited their potential recovery from the pending state court litigation, and placed a value on that lawsuit of $750,000.00. Scott filed an opposition to the amended plan. On May 4, 2009, the court orally granted Appellees' motion to confirm their amended plan even though the unsecured creditors would receive nothing under the plan unless the Debtors prevailed in their ongoing state court action against Scott and Sherry Brooks and Dribbles Carwash.

During the course of the May 4th hearing, the bankruptcy court explained that Appellee's initial plan confirmation failed largely because of non-compliance with 11 U.S.C. § 1325(a)(4), which requires that debtors meet the so-called "best interest of the creditors" test.*fn1 The court concluded that defect was cured by the amended plan which listed Appellees' lawsuit as an asset of the bankruptcy estate.

The bankruptcy court went on to reject Scott's other objections concerning the nature and status of the state court litigation, specifically stating that it declined to "make any findings or conclusions" with respect to that litigation. ER at 429.*fn2

The Court noted that if Appellees "do not [prevail], or if they do but do not obtain enough to pay all the creditors in full within 60 months, this bankruptcy case will be dismissed and they will not receive a Chapter 13 discharge unless they obtain the necessary funds from some other source." Id.

The bankruptcy court further described Scott's strategy as a "transparent" attempt to "convince the court that the debtors' litigation has a poor chance of success, get the case converted to Chapter 7 then convince a Chapter 7 trustee to accept a fairly nominal settlement like the one recently offered to the debtors." Id. The court declined to proceed in that fashion, stating that an "accurate evaluation of the litigation in this court is not possible...the best method of liquidating the claim is to allow it to go forward in state court." Id.

The court further clarified in its June 2, 2009 Memorandum that Class 7 unsecured creditors will receive a payment only if the debtors recover on their claim against Scott. Such creditors stand to obtain nothing, however, in the absence of such recovery.

Scott now appeals the bankruptcy ...


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