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Brady v. Otton

United States District Court, N.D. California

April 27, 2015

LOIS I. BRADY, Plaintiff,
v.
TERRY OTTON, et al., Defendants.

ORDER GRANTING PLAINTIFF-APPELLEE'S MOTION TO DISMISS Re: Dkt. Nos. 3, 4

WILLIAM H. ORRICK, District Judge.

INTRODUCTION

In this bankruptcy matter, defendant-appellants Nancy and Terry Otton appeal an order dismissing their counterclaim in a multiparty adversary proceeding still pending in the United States Bankruptcy Court for the Northern District of California. The bankruptcy trustee, plaintiff-appellee Lois Brady, moves to dismiss the appeal for lack of jurisdiction under 28 U.S.C. § 158. I agree with Brady that the order dismissing the Ottons' counterclaim was not a final order appealable as of right under 28 U.S.C. § 158(a)(1). The circumstances of this case do not warrant interlocutory review under 28 U.S.C. § 158(a)(3) and neither party has identified any other basis for jurisdiction. Accordingly, the motion to dismiss is GRANTED.

BACKGROUND

Hill Wine Company, LLC ("HWC") was a winery based in Napa County, California owned and operated by Rebecca and Jeffrey Hill. On May 1, 2014, HWC filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of California. Dkt. No. 13-1 at 3. The bankruptcy case was converted to a Chapter 7 liquidation proceeding shortly thereafter. Id.

Nancy Otton is Rebecca Hill's aunt. Mot. 2 (Dkt. No. 4). She and her husband, Terry Otton, loaned $1.75 million to HWC. Dkt. No. 9-26 at ¶¶ 6-8. The Ottons also personally guaranteed a $300, 000 advance to HWC from Umpqua Bank. Mot. 2. The Ottons filed two proofs of claim in HWC's bankruptcy case: (1) Claim No. 59 for the $1, 659, 988.00 allegedly still due on the $1.75 million loan; and (2) Claim No. 60 in the amount of $320, 770.50 for their guaranty of the Umpqua Bank advance. Id.

On October 15, 2015, Brady filed an adversary proceeding against both the Ottons and the Hills. Brady alleges that both Ottons are statutory "insiders" as defined by 11 U.S.C. § 101(31) because Nancy Otton was the Chief Financial Officer of HWC and Terry Otton was its Chief Operating Officer. Dkt. No. 9-22. The complaint asserts several causes of action against the Ottons, including (i) avoidance of fraudulent transfers, 11 U.S.C. §§ 544(b), 548; (ii) avoidance of preferential transfers, 11 U.S.C. §§ 547, 550, 551; (iii) usury; (iv) breach of fiduciary duty; and (v) equitable subordination, 11 U.S.C. § 510(c). Id. at ¶¶ 21-65.

On November 17, 2014, the Ottons counterclaimed against HWC, alleging (i) breach of contract in connection with the $1.75 million loan (i.e., the subject matter of Claim No. 59); and (ii) breach of contract and indemnity in connection with their guaranty of the Umpqua Bank advance (i.e. the subject matter of Claim No. 60). Dkt. No. 9-26 at ¶¶ 15-27. Brady moved to dismiss the counterclaim, arguing, among other things, that the exclusive means of recovering money damages from a Chapter 7 bankruptcy estate is through the filing of a proof of claim. Dkt. No. 9-31 at 5.

On January 29, 2015, the bankruptcy court issued a memorandum decision granting Brady's motion. Dkt. No. 1-3. The memorandum decision states in relevant part:

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, an action should be dismissed if it fails to state a claim upon which relief can be granted. The court cannot grant relief to the Ottons on their counterclaim because to do so would violate [11 U.S.C. §§ 502 and 726] as well as [Federal Rule of Bankruptcy Procedure 3002(a)]. There is no conceivable scenario whereby an unsecured creditor can obtain an enforceable money judgment against a Chapter 7 bankruptcy estate on account of a prepetition debt.

Id. The bankruptcy court further formalized the dismissal of the counterclaim in its "Order Granting Motion to Dismiss Counterclaim" on February 2, 2015(the "dismissal order"). Dkt. No. 1-1. That order states in relevant part: "Brady's motion to dismiss the counterclaim is granted, without leave to amend, but also without prejudice to the filing of a proof of claim and without prejudice to raising any of the matters asserted in the counterclaim as a defense or setoff, to the extent permitted by applicable law." Id.

The Ottons filed a timely notice of appeal on February 18, 2015. Dkt. No. 1. The appeal presents the question of whether the bankruptcy court's dismissal of the counterclaim, on the ground that granting relief on the counterclaim would violate 11 U.S.C. §§ 502 and 726 and Federal Rule of Bankruptcy Procedure 3002(a), was in error. Dkt. No. 13-1 at 4. The Ottons contend that the statutes and rule "do not preclude the court from granting relief on [the counterclaim], which instead is duly authorized by [Federal Rule of Civil Procedure 13] and [Federal Rule of Bankruptcy Procedure 7013]... and interpretive case law." Id.

Brady filed this motion to dismiss for lack of jurisdiction on March 11, 2015. Dkt. No. 3-4.[1] I heard argument from the ...


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