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In re Orange County Nursery

October 12, 2010

IN RE ORANGE COUNTY NURSERY, INC., DEBTOR,
THE MINORITY VOTING TRUST, DAVID F. VEYNA, CARMEN VEYNA, AND ANNA M. ZANKEL, TRUSTEES, APPELLANTS,
v.
ORANGE COUNTY NURSERY, INC., APPELLEE.



The opinion of the court was delivered by: Dolly M. Gee United States District Judge

ORDER RE BANKRUPTCY APPEAL

This matter is before the Court on various appeals from the Bankruptcy Court. The Court deems this matter suitable for decision without oral argument. Fed. R. Civ. P. 78(b); C.D. Cal. L.R. 8012-7. For the reasons set forth below, the decisions of the Bankruptcy Court are REVERSED.

I. FACTUAL AND PROCEDURAL BACKGROUND

Debtor and Appellee Orange County Nursery, Inc. ("OCN") is a closely held corporation that has been continuously run by the Veyna family since the 1880s. It operates a wholesale tree nursery selling bare root and containerized trees with growing grounds in California and Texas. The relationship among OCN's shareholders has grown acrimonious over time and the shareholders have split into two factions. OCN's majority shareholders exercise control through a voting trust that owns 50.25% of the corporation's stock. (Case No. 09-08158, Appellant's Opening Brief at 3-4; Case No. 09-08158, Appellee's Brief at 3-4.)

Appellants are minority shareholders ("Minority") who own 40.25% of OCN's stock. The Minority seeks to sever all ties to OCN. On August 4, 2006, the Minority filed a verified complaint in Orange County Superior Court for OCN's dissolution under California Corporations Code section 1800(b)(4) and (b)(5); inspection of corporate records, documents, and premises; appointment of a receiver; and injunctive relief.

On June 29, 2007, OCN notified the Superior Court of its election,*fn1 under California Corporations Code section 2000,*fn2 to purchase the Minority's 950 shares of capital stock and thereby avoid a trial on the merits and potential dissolution. On July 27, 2007, the parties filed a stipulation, which the court adopted later that day, that OCN would purchase the Minority's shares in exchange for a stay of the Minority's suit.

Because the parties could not agree on the shares' fair value, the court stayed the proceedings and appointed three independent appraisers to determine a valuation for OCN. On October 14, 2008, the appraisers submitted a unanimous report, which calculated OCN's value as of August 4, 2006 to be $12.19 million.*fn3 The Superior Court entered a decree on November 21, 2008, confirming the appraisers' valuation, determining the pro rata value for the Minority shares to be $4,906,475, and awarding the Minority $343,453 for one year of interest. The decree further ordered as follows:

4. OCN shall pay plaintiffs the sum of $5,249,928.00, by cashier's check or wire transfer . . . , to be received by plaintiffs' counsel on or before December 15, 2008 at 5:00 p.m.

5. Upon receipt of payment in full, plaintiffs shall transfer the Shares to OCN.

6. OCN is hereby ORDERED liquidated, wound up and dissolved if payment in the full is not timely received by plaintiffs' counsel. In such event, 1) judgment shall be entered against OCN and its surety or sureties for all expenses and attorneys' fees incurred by plaintiffs in connection with OCN's election on June 26, 2007 to purchase the Shares pursuant to Corporations Code § 2000, according to proof; and 2) the parties shall attend a case management conference . . . to discuss issues related to liquidation, including the possible appointment of a receiver to assume control of OCN and supervise the liquidation process. (ER1 71-72.)

OCN appealed the decree on December 5, 2008. On December 8, 2008, OCN requested that the California Court of Appeal issue a stay. The Court of Appeal denied OCN's request on the grounds that (1) California law does not provide for an automatic stay of a decree issued under California Corporations Code section 2000; and (2) the decree was self-executing. Veyna v. Orange County Nursery, Inc., 170 Cal. App. 4th 146, 155-56, 87 Cal. Rptr. 3d 658 (2009). The Court of Appeal noted that OCN might nonetheless seek a discretionary stay but that it should do so initially in the Superior Court. The Court of Appeal further noted that any such discretionary stay would be conditioned upon OCN posting appropriate security to guarantee the purchase of the Minority's shares. Id. at 157-58. In addition, the Court of Appeal extended OCN's payment deadline to January 22, 2009 at 4:00 p.m. Id. at 158.

On January 20, 2009, OCN filed with the Superior Court an ex parte application for stay without a bond requirement. The Superior Court denied OCN's application for a stay on January 21, 2009.

On January 22, 2009, at 1:57 p.m., OCN filed a bankruptcy petition for corporate reorganization under Chapter 11 of the Bankruptcy Code. The Minority filed a proof of claim on May 14, 2009, asserting its entitlement to $6,008,424.75, which included $758,496.75 in prepetition fees and costs, based on the Superior Court's decree. On June 14, 2009, OCN filed its first amended plan of reorganization, which classified the Minority's claim as an equity interest-related claim, which would not receive anything under the plan. The parties subsequently stipulated to have the Bankruptcy Court determine the treatment of the Minority's claim.

On October 15, 2009, the Bankruptcy Court, the Honorable Geraldine Mund presiding, held a hearing and issued a tentative ruling ("Bankruptcy Order"), which it adopted in an order issued the next day.*fn4 The Bankruptcy Court found, inter alia, that at the time of the bankruptcy petition, the Minority had an equity interest through its shares of stock. The Minority appealed this ruling to this Court in case number 09-08158 and appealed the Bankruptcy Court's confirmation of OCN's reorganization plan, which treats the Minority as equity-holders, in case number 10-01605. The Bankruptcy Court allowed the Minority's claim for prepetition fees and costs related to the Superior Court action but, in a March 22, 2010 order, found that the award was limited to the amount of the $150,000 bond posted by OCN. The Minority appealed this ruling in case number 10-05808.

II. STANDARD OF REVIEW

A district court reviews a bankruptcy court's conclusions of law and interpretation of the Bankruptcy Code de novo. Greene v. Savage (In re Greene), 583 F.3d 614, 618 (9th Cir. 2009) (citing Salazar v. McDonald (In re Salazar), 430 F.3d 992, 994 (9th Cir. 2005)). Factual findings are reviewed for clear error. The Court must accept the bankruptcy court's factual findings unless, upon review, the Court is left with the definite and firm conviction ...


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