United States District Court, N.D. California
ORDER AFFIRMING THE ORDER OF THE BANKRUPTCY
CHHABRIA United States District Judge.
Prosperity Group ran a food-processing business. A class of
employees won a wage-and-hour case against it in state court,
and was awarded a multi-million dollar judgment. To begin
collecting on that judgment, the workers had the San
Francisco Sheriff's Department levy United Prosperity
Group's bank account, which contained $235, 250.02.
United Prosperity Group entered Chapter 11 bankruptcy
proceedings. In bankruptcy proceedings, United Prosperity
Group sought to regain control over the funds in the levied
bank account. The bankruptcy court agreed, holding that the
funds were property of the bankruptcy estate, to be turned
over to the bankruptcy trustee (or, equivalently, the
debtor-in-possession, see 11 U.S.C. § 1107(a))
when the debtor entered bankruptcy. See 11 U.S.C.
§ 543(b)(1). The workers appeal the order returning the
funds to United Prosperity Group's control. United
Prosperity Group argues that this appeal is constitutionally
or equitably moot, because it has already used the funds to
pay other creditors; alternatively, it argues that the
bankruptcy court's order should be affirmed on the
appeal is not constitutionally moot. "The test for
mootness of an appeal, " in a constitutional sense,
"is whether the appellate court can give the appellant
any effective relief in the event that it decides the matter
on the merits in his favor. If it can grant such relief, the
matter is not moot." Motor Vehicle Cas. Co. v.
Thorpe Insulation Co. (In re Thorpe Insulation
Co.), 677 F.3d 869, 880 (9th Cir. 2012). Here, a court
could give the appellants some relief: a court could order
United Prosperity Group to pay the appellants money. See
Spirtos v. Moreno (In re Spirtos), 992 F.2d
1004, 1007 (9th Cir. 1993). Money is fungible, so it
doesn't matter that "the property at issue has
already been transferred." Answering Brief at 14. Nor
does it matter whether the money has been transferred
"to creditors with claims that are entitled to priority
over Appellants' claims." Id. For one
thing, if the money from the levied bank account wasn't
the bankruptcy estate's property in the first place, then
it doesn't matter whether other creditors would have a
superior claim to the bankruptcy estate's property. If
the Appellants won this appeal, it would clear the way for
them to attempt to recover the money from the estate that
should never have reverted to the estate. If they lost the
appeal, they wouldn't be able to do so. There is thus is
a live controversy.
this appeal equitably moot. Equitable mootness is prudential,
not jurisdictional: "Unlike Article III mootness, which
causes federal courts to lack jurisdiction and so to have an
inability to provide relief, equitable mootness is a
judge-created doctrine that reflects an
unwillingness to provide relief." JPMCC
2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props.,
Inc. (In re Transwest Resort Props., Inc.), 801
F.3d 1161, 1167 (9th Cir. 2015) (Friedland, J.). The party
asserting this non-jurisdictional defense bears the burden of
establishing it - a burden that courts describe as
"heavy." First S. Nat'l Bank v. First
Sunnyslope Hous. Ltd. P'ship (In re Sunnyslope
Hous. Ltd. P'ship), 818 F.3d 937, 944 (9th Cir.
2016). United Prosperity Group has not borne this heavy
burden. It asserts, in conclusory fashion, that
"effective relief on appeal (recovering the already
transferred and used funds from creditors with superior
claims), would be impractical, imprudent, and therefore,
inequitable, " Answering Brief at 14, but it makes no
effort to explain how or why this is so. This appeal concerns
a single, simple transaction - an order returning a known
quantity of money in a single bank account to United
Prosperity Group's control - so "this case does not
present transactions that are so complex or difficult to
unwind that the doctrine of equitable mootness would
apply." Lowenschuss v. Selnick, (In re
Lowenschuss), 170 F.3d 923, 933 (9th Cir.
Bankruptcy Code requires a "custodian" to turn over
"any property of the debtor" under the
custodian's control whenever he or she learns the debtor
has entered bankruptcy proceedings. 11 U.S.C. §
543(b)(1). The merits of the appellants' challenge to the
bankruptcy court's turnover order thus turn on two
questions: was the sheriff a "custodian, " and were
the funds "property of the debtor"?
to the appellants' argument, the sheriff was a
"custodian" of the funds. Under the Bankruptcy
Code, a "trustee, receiver, or agent" who "is
appointed or authorized to take charge of the property of the
debtor for the purpose of enforcing a lien against such
property" is a custodian. 11 U.S.C. § 101(11)(C).
The sheriff fits that description.
question, then, is whether the funds were property of United
Prosperity Group. The Bankruptcy Code does not define
"property, " so courts look to state law to
determine property rights in bankruptcy. Gaughan v. The
Edward Dittlof Revocable Trust (In re Costas), 555 F.3d
790, 793 (9th Cir. 2009); see also Butner v. United
States, 440 U.S. 48, 54-55 (1979). The appellants argue
that, under California law, the funds ceased to be United
Prosperity Group's property when the sheriff levied
United Prosperity Group's bank account. For this
proposition, the appellants rely on a 1952 California Court
of Appeal decision stating that property collected to enforce
a judgment under a writ of execution "is property of the
judgment creditors and not the debtor." Del Riccio
v. Superior Court, 251 P.2d 678, 679 (Cal.Ct.App. 1952).
But Del Riccio has been superseded by statute.
Section 697.710 of the California Code of Civil procedure,
enacted in 1983, provides, "A levy on property under a
writ of execution creates an execution lien on the
property" until other conditions (not relevant here) are
satisfied. In other words, under section 697.710, the
sheriffs levy didn't extinguish United Prosperity
Group's ownership of the funds in the levied bank account
- it just gave the workers a security interest in the funds.
Accordingly, the funds remained "property of the
debtor" subject to turnover under 11 U.S.C. §
543(b)(1), and the bankruptcy court's order is AFFIRMED.
IS SO ORDERED.