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Johannes v. Johannes

United States District Court, S.D. California

April 21, 2017



          Hon. Anthony J. Battaglia United States District Judge

         Appellant Deborah Johannes (“Deborah”) appeals the United States Bankruptcy Court's confirmation of Appellee Patrick Allen Johannes's (“Patrick”) Chapter 11 Reorganization Plan (“Plan”), arguing the Plan was proposed in bad faith as it relates to Deborah and the valuation of her interest in Foothills Consulting Group, Inc. (“Foothills”) is erroneous. (Doc. No. 45.) For the reasons set forth below, the Court AFFIRMS the bankruptcy court's rulings.


         Deborah and Patrick are former spouses. Following dissolution of their marriage and a subsequent eleven-day property division trial, the family law judge entered a proposed statement of decision (“PSOD”) on December 20, 2013, which divided the parties' assets.

         (Bankr. Doc. No. 30 at 12-57, Doc. No. 50 at 85-125, Doc. No. 51 at 2-6.)[1] On January 7, 2014, Patrick filed for Chapter 11 bankruptcy. (Doc. No. 75-8 at 120-33.) Pursuant to the bankruptcy court granting in part Deborah's motion for relief from stay, the family court entered its final statement of decision (“SOD”) on May 8, 2014, judgment on which was entered February 26, 2015. (Bankr. Doc. No. 570 at 2-3, Doc. No. 54 at 40-41; see Doc. No. 75-8 at 69-115.)

         Of relevance to the instant appeal, the family court awarded Deborah an equalization payment of $633, 988.99. (Doc. No. 75-8 at 107.) This equalization payment included $548, 500 for Deborah's community property interest in Patrick's business, Foothills Consulting Group, Inc. (“Foothills”), after which he would own 50% of Foothills as his sole and separate property.[2] (Id. at 80, 107.) The family court also awarded Deborah the parties' former family residence (“Robin Hill home” or “home”) as her sole and separate property, finding she had a separate property interest of $504, 000 in the home. (Id. at 88.) This was in addition to the $10, 400 monthly spousal support Patrick was obligated to pay Deborah. (Doc. No. 75-1 at 64.) However, as the bankruptcy court found, Patrick did not have sufficient liquid assets to pay his obligations to all of his creditors, including Deborah. (Bankr. Doc. No. 571 at 17, Doc. No. 54 at 70.)

         The bankruptcy court held a two-day evidentiary hearing on July 30 and 31, 2015. (Bankr. Doc. No. 570 at 4, Doc. No. 54 at 42.) On November 3, 2015, the Plan was confirmed. (Bankr. Doc. No. 572, Doc. No. 54 at 84.) Pertinent to this appeal, the Plan required the sale of the Robin Hill home. (Bankr. Doc. No. 572 at 28, Doc. No. 54 at 106.)

         The Plan also revalued Deborah's interest in Foothills, reducing her interest to $354, 758. (Bankr. Doc. No. 571 at 14, Doc. No. 54 at 67.) While Foothills' overall valuation had increased, the reduction to Deborah's interest was due to the bankruptcy court's application of a litigation discount. (Bankr. Doc. No. 571 at 10-14, Doc. No. 54 at 63-67.) This discount was prompted by litigation Deborah threatened to bring against Patrick, his business partner Philip Ashworth (“Ashworth”), and Foothills. (Bankr. Doc. No. 571 at 10, Doc. No. 54 at 63; see Bankr. Doc. No. 420 at 7-13, Doc. No. 75-5 at 9-15.) Deborah asserted a claim of at least $970, 000 for payment of her attorney's fees and dividends that Foothills distributed to Patrick. (Bankr. Doc. No. 571 at 10, 13, Doc. No. 54 at 63, 66.) Based on the testimony of Patrick's expert, Stephen Jones (“Jones”), the bankruptcy court discounted Deborah's interest in Foothills by $242, 500 (calculated as 25% of $970, 000), representing “the maximum exposure a buyer would face.” (Bankr. Doc. No. 570 at 9, Doc. No. 54 at 47.)

         Deborah instituted this appeal by filing a notice of appeal on November 19, 2015. (Doc. No. 1.) On February 29, 2016, Deborah sought an order staying that portion of the Plan that required sale of the Robin Hill home. (Doc. No. 41.) That motion was ultimately dismissed without prejudice on the parties' joint motion due to a settlement wherein Patrick agreed to quitclaim his interest in the home to Deborah. (Doc. Nos. 69, 72.) That agreement became final on May 12, 2016. (Doc. No. 73 at 2; Doc. No. 73-1 at 5-7.) Meanwhile, the parties filed their opening and reply appellate briefs. (Doc. Nos. 45, 75, 77.) Briefing was completed June 6, 2016. (Doc. No. 77.) This order follows.


         I. Whether the Appeal is Moot

         The first issue the Court must tackle is whether Deborah's appeal should be dismissed as moot. Patrick offers alternative theories he contends necessitate dismissal of this appeal on mootness grounds. First, Patrick asserts the doctrine of equitable mootness applies because Deborah failed to obtain a stay pending appeal and the plan has been carried out to substantial culmination, or the rights of third parties have intervened. (Doc. No. 75 at 30-34.) Second, Patrick argues the mootness rule contained in 11 U.S.C. § 363(m) applies to moot any and all issues related to the sale of Deborah's interest in Foothills to Patrick. (Id. at 34-37.)[3]

         A. Equitable Mootness

         On the issue of equitable mootness, Patrick argues Deborah's entire appeal is mooted because she failed to obtain a stay pending appeal, and (1) the plan has been carried out to substantial culmination, and/or (2) the rights of third parties have intervened. (Id. at 30- 34.) Deborah retorts that her entire appeal is not mooted because it is not impossible to fashion a remedy that will not impact innocent bystanders. (Doc. No. 77 at 6.) Specifically, she argues reconsideration of the Foothills valuation would require Patrick only to make additional payments to her, which Patrick “anticipated and expressly provided for himself, ” and which would in no way alter the Plan. (Id.)

         The jurisdiction of federal courts is limited to actual cases and controversies. U.S. Const. art. III, § 2, cl. 1. Federal courts may not entertain an appeal if the case is moot. In re Thorpe Insulation Co., 677 F.3d 869, 879-80 (9th Cir. 2012) [hereinafter In re Thorpe]. However, the “party moving for dismissal on mootness grounds bears a heavy burden.” Id. (quoting Jacobus v. Alaska, 338 F.3d 1095, 1103 (9th Cir. 2003)).

         The equitable mootness doctrine derives from the policy that debtors, creditors, and third parties should be able to rely on the finality of bankruptcy judgments. Id. In determining whether an appeal is equitably moot, courts in the Ninth Circuit first ask “whether a stay was sought, for absent that a party has not fully pursued its rights.” Id. at 881. If a stay was sought but not obtained, the Court considers (1) “whether substantial consummation of the plan has occurred, ” (2) “the effect a remedy may have on third parties not before the court, ” and (3) “whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan . . . .” Id.

         Considering all the factors, the Court finds this appeal is not equitably moot. It is undisputed that Deborah failed to seek a stay of the Plan as it relates to Foothills and that the Plan is substantially consummated. However, neither of these factors is dispositive where the reorganization is not complex and there is no possibility of negative impact on third parties. In re PW, LLC, 391 B.R. 25, 34 (9th Cir. BAP 2008) (finding one aspect of appeal not equitably moot where providing relief “raises neither the issue of complexity nor the issue of negative impact on third parties”); In re Baker & Drake, Inc., 35 F.3d 1348, 1351 (9th Cir. 1994) (“Failure to obtain a stay, standing alone, is often fatal but not necessarily so; nor is the ‘substantial culmination' of a relatively simple reorganization plan.”).

         Rather, the Court finds more persuasive the fact that Patrick has failed to identify any third parties not before the Court who would be negatively impacted by remand to the bankruptcy court on issues related to Foothills.[4] See In re PW, LLC, 391 B.R. at 34 (finding one aspect of appeal not equitably moot in part because party asserting mootness “has not identified any third party who would be prejudiced because it relied on the bankruptcy court's orders”). And, “most importantly, ” if Deborah is entitled to the relief she seeks on appeal, the bankruptcy court on remand would be able to devise an equitable remedy without upsetting the balance of the Plan. In re Thorpe, 677 F.3d at 883. Notably, Patrick admits that,

[o]n its face, the Plan contemplates paying Deborah $962, 915 (the amount of the SOD) within seven years. The Plan provides . . . that $213, 893.42 of that sum would be paid in Years 6 and 7 of the Plan. However, due to the Bankruptcy Court's $242, 500 litigation discount, there is now no need for Patrick to make the Years 6 and 7 payments to Deborah. Patrick's Plan obligations to Deborah of $720, 415 will [accordingly] be paid out over five years.

(Doc. No. 75 at 14.) Given that the Plan provides for up to seven years' worth of payments, and the litigation discount results in Patrick now having to make only five years' worth of payments to Deborah, it would be easy for the bankruptcy court to remove or reduce the litigation discount, thus requiring Patrick to make payments for longer than five years, but not exceeding seven. For all these reasons, the Court finds Deborah's appeal is not equitably moot.

         B. Mootness Rule Under 11 U.S.C. § 363(m)

         Patrick next argues that even if the general equitable mootness doctrine does not preclude consideration of Deborah's appeal, statutory mootness does. (Doc. No. 75 at 34- 37.) Deborah does not respond to this argument. 11 U.S.C. § 363(b) permits the trustee or debtor in possession, after notice and a hearing, to sell property of the bankruptcy estate. See also 11 U.S.C. § 1107(a) (stating a debtor in possession has all the rights and powers, and must perform all the functions and duties, of a trustee, subject to certain exceptions). Section 363(m) provides that “[t]he reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.” 11 U.S.C. § 363(m).

         Patrick contends the mootness rule contained in § 363(m) applies to Deborah's appeal in its entirety because the only issues on appeal relate to the transfer of her interest in Foothills to Patrick. (Doc. No. 75 at 35-37.) Because she failed to seek a stay of the Plan to the extent it required the sale of her interest in Foothills, ...

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