United States District Court, S.D. California
ORDER AFFIRMING THE BANKRUPTCY COURT'S
Anthony J. Battaglia United States District Judge
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.
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.
Doc. No. 30 at 12-57, Doc. No. 50 at 85-125, Doc. No. 51 at
2-6.) 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.)
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. (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
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.)
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.)
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.
Whether the Appeal is Moot
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.)
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.
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.
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.
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.”).
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. 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
Mootness Rule Under 11 U.S.C. § 363(m)
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).
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, ...