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Patrick v. S&J Advertising, Inc.

United States District Court, E.D. California

November 13, 2019




         This matter is before the Court on appeal from various decisions and orders issued by the United States Bankruptcy Court for the Eastern District of California regarding the case captioned as In re Clark, bankruptcy petition No. 14-21394. Patrick David Clark and Suzanne Clark (collectively, “Appellants”) filed their operative brief on February 10, 2017.[1] (ECF No. 41.) Appellants' brief raises six separate grounds for appeal. (ECF No. 41 at 3-4.) S&J Advertising, Inc. (individually, “the Corporation”) and Geoffrey Richards, the Chapter 7 Trustee (collectively, “Appellees”), filed an opposition brief on May 12, 2017. (ECF No. 45.) Appellants filed a reply brief on May 26, 2017. (ECF No. 47.)

         I. Factual and Procedural Background

         The background to this appeal is lengthy, complex, and occasionally characterized by sharp litigation tactics. Accordingly, the Court will summarize only those aspects of the background that are critical to the instant appeal.

         Appellants filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of California on February 14, 2014. (Bankr. ECF No. 1.) One of the assets listed on Appellants' Schedule B in their petition was Ms. Clark's fifty-percent interest in the Corporation (hereinafter, “Ms. Clark's shares”), which Appellants valued as being worth $42, 250. (Bankr. ECF No. 1 at 14.)

         In June 2014, Ms. Clark filed a certificate of election to wind up and dissolve the Corporation with the California Secretary of State pursuant to California Corporations Code § 1900, which she had the authority to do as the owner of half the Corporation's shares. (Bankr. ECF No. 60 at 3); see Cal. Corp. Code §§ 1900, 1901. Ms. Clark's election was irrevocable under California Corporations Code § 1902. See Cal. Corp. Code § 1902.

         In August 2014, the Corporation filed a petition to stay dissolution proceedings and ascertain value of Ms. Clark's shares pursuant to California Corporations Code § 2000 (“§ 2000”) in the Superior Court for the County of Solano. (Bankr. ECF No. 60 at 4-14.) In December 2014, the state court granted the Corporation's petition and stayed the dissolution until appraisers could arrive at a fair valuation of Ms. Clark's shares, at which point the Corporation could purchase those shares rather than dissolve. (Bankr. ECF No. 60 at 15-16.)

         In January 2015, the Corporation moved the bankruptcy court for relief from the automatic stay imposed by 11 U.S.C. § 362(a) so the process of valuing Ms. Clark's shares could proceed in state court. (Bankr. ECF No. 58.) On March 4, 2015, the bankruptcy court allowed the appraisal process to continue but ordered, “All further proceedings relating to the § 2000 process to value and purchase the debtor's shareholder interest shall be brought before this court.” (Bankr. ECF No. 70 at 1-2.)

         On March 10, 2015, Appellants filed a third modified Chapter 13 plan, which included a provision requiring Appellants to contribute no less than $160, 000 from the sale of Ms. Clark's shares to fund the plan. (Bankr. ECF No. 71 at 3.) The bankruptcy court confirmed the third modified plan on May 18, 2015. (Bankr. ECF No. 104.)

         In June 2015, appraisers selected by both parties issued a detailed report pursuant to § 2000, valuing Ms. Clark's shares at $247, 000. (Bankr. ECF No. 108.) That same month, the Corporation moved the bankruptcy court to approve the valuation and transfer of Ms. Clark's shares. (Bankr. ECF No. 105-108.) The bankruptcy court held hearings on September 9 and 11, 2015, at which it made oral findings granting in part and denying in part the Corporation's motion. (ECF No. 6 at 3.) In relevant part, the bankruptcy court concluded 11 U.S.C. § 363 governed the sale of Ms. Clark's shares, not § 2000. (Bankr. ECF No. 41-1 at 13.) The Corporation filed a motion to clarify the ruling shortly thereafter. (Bankr. ECF No. 144.) On September 24, 2015, Appellants appealed the September 2015 ruling. (ECF No. 1.)

         On October 20, 2015, the bankruptcy court issued a written memorandum prompted by the Corporation's clarification motion. (Bankr. ECF No. 176.) In its memorandum, the bankruptcy court amended its September 2015 ruling insofar as to hold that § 2000, not 11 U.S.C. § 363, governed the valuation and sale of Ms. Clark's shares. (Bankr. ECF No. 176 at 10.) Accordingly, the bankruptcy court granted the Corporation's motion to approve the valuation and transfer of stock and scheduled an evidentiary hearing to approve the joint appraisal. (Bankr. ECF No. 176 at 12-14.) On October 23, 2015, Appellants filed a second appeal, this time challenging the bankruptcy court's amended ruling.[2] (ECF No. 12.)

         Also, on October 20, 2015, the bankruptcy court also authorized Federal Rule of Bankruptcy Procedure 2004 examinations (“Rule 2004 examinations”) sought by the Corporation. (Bankr. ECF No. 177.) The bankruptcy court issued subpoenas for Appellants to produce documents by December 2, 2015, and to appear for the Rule 2004 examinations on December 4, 2015. (Bankr. ECF No. 195 at 4-15.) Appellants moved to quash the subpoenas on November 3, 2015. (Bankr. ECF No. 193.) The bankruptcy court denied Appellants' motion to quash on December 2, 2015, and the parties later stipulated to extend the dates for document production and examinations. (Bankr. ECF No. 225; Bankr. ECF No. 247 at 3.) On December 14, 2015, before the new deadlines, Appellants moved to amend the bankruptcy court's order and informed the Corporation's attorney that they intended to ignore the bankruptcy court's order because they believed the order was subject to clarification in the event of a dispute. (Bankr. ECF No. 247 at 3-4.) Appellants did not produce documents by the extended deadline, nor did they appear for the rescheduled Rule 2004 examinations. (ECF No. 41-1 at 27-28.)

         On December 23, 2015, the Corporation filed a motion to convert the bankruptcy from Chapter 13 to Chapter 7. (Bankr. ECF No. 244.) The bankruptcy court granted the motion to convert on February 3, 2016. (Bankr. ECF No. 277.) The bankruptcy court explained that the case was converted, among other reasons, due to Appellants' intentional disobedience of the court's order to attend the Rule 2004 examinations and deceitful conduct toward the court and creditors for misrepresenting the value of their shares. (ECF No. 283 at 15.) The bankruptcy court appointed a Chapter 7 Trustee that same day. (ECF No. 277.)

         On February 5, 2016, Appellants filed a third appeal, which challenged the bankruptcy court's conversion order. (ECF No. 13 at 1.) The Court consolidated all three appeals. (ECF No. 11.) The Court then granted Appellees' motion to dismiss Appellants' first and second appeals, holding that the valuation-related orders were unappealable interlocutory orders. (ECF No. 20 at 7.) However, the Court found that the subject of the third appeal, the conversion order, was a final judgment and therefore appealable. (ECF No. 20 at 8.)

         On August 16, 2016, after this Court dismissed the two valuation-related appeals, the Corporation moved the bankruptcy court to reschedule the evidentiary hearing regarding the joint appraisal. (Bankr. ECF No. 375.) The bankruptcy court granted the Corporation's motion. (Bankr. ECF No. 379.) On September 27, 2016, the bankruptcy court announced its tentative decision that § 2000 continued to govern the dissolution valuation after conversion of the case to Chapter 7. (ECF No. 41-1 at 72.) The evidentiary hearing took place on November 7, 2016. (Bankr. ECF No. 408.) That same day, the bankruptcy court granted a motion to compromise between the Chapter 7 Trustee and the Corporation and granted the approval of valuation and transfer of Ms. Clark's shares to the Corporation for $247, 000. (Bankr. ECF No. 412; Bankr. ECF No. 424.)

         On November 21, 2016, Appellants filed a fourth appeal regarding the bankruptcy court's orders approving of the compromise and ordering the sale of Ms. Clark's shares. (ECF No. 38.) The Court consolidated the fourth appeal with the remaining appeal of the bankruptcy court's conversion order. (ECF No. 39.) The Court then requested that the parties submit updated briefing to incorporate the issues raised by the fourth appeal. (ECF No. 40.) The Court will thus consider only the arguments raised in Appellants' brief (ECF No. 41), Appellees' brief (ECF No. 45), and Appellants' reply (ECF No. 47), respectively.

         II. Standard of Review

         The Court reviews the bankruptcy court's factual findings for clear error, In re Southern Cal. Plastics, Inc., 165 F.3d 1243, 1245 (9th Cir. 1999), its conclusions of law de novo, id., and its evidentiary rulings for an abuse of discretion, In re Slatkin, 525 F.3d 805, 811 (9th Cir. 2008). “To reverse on the basis of an erroneous evidentiary ruling, [the Court] must conclude not only that the bankruptcy court abused its discretion, but also that the error was prejudicial.” Slatkin, 525 F.3d at 811.

         III. Analysis

         Appellants raise the following six grounds for appeal: (1) the bankruptcy court lacked subject matter jurisdiction over the § 2000 proceeding pending in state court; (2) the bankruptcy court erred when it compelled Appellants to sell their shares; (3) the bankruptcy court erred when it judicially estopped Appellants from challenging the value of their shares; (4) the bankruptcy court abused its discretion when it granted the Corporation's request to undertake Rule 2004 examinations of Appellants, denied Appellants' motion to quash their subpoenas for the Rule 2004 examinations, and denied Appellants' motion to amend the denial of their motion to quash; (5) the bankruptcy court erred when it failed to determine whether the sale of the shares complied with California Corporations Code § 500; and (6) the bankruptcy court erred when it granted Corporation's motion to involuntarily convert Appellants' Chapter 13 bankruptcy to Chapter 7.

         Appellants request that this Court vacate each of the bankruptcy court's orders relating to § 2000, the Rule 2004 examinations, motion to quash, conversion order, the sale order, and “all orders necessary to further this court's decision regarding the matters argued herein.” (ECF No. 41 at 76.) Appellants also request that this Court enter new orders granting the motion to quash, granting Appellants' request for Rule 2004 examination, granting discovery in the § 2000 proceeding, and denying the conversion order. (ECF No. 41 at 76-77.)

         It appears Appellants essentially aim to undo a chain of decisions by the bankruptcy court that led to the sale of Ms. Clark's shares. At the outset, the Court notes its concern about whether it can equitably grant Appellants' requested relief. Appellants never sought to stay the bankruptcy court orders at issue, and the sale of Ms. Clark's shares has long passed as a result. Based on this concern, the Court ordered the parties to file supplemental briefs as to the doctrine of equitable mootness. See In re Transwest Resort Properties, Inc., 801 F.3d 1161 (9th Cir. 2015); see also In re City of Stockton, 542 B.R. 261, 273 (B.A.P. 9th Cir. 2015) (“[E]quitable mootness raises jurisdictional questions that [courts] have an independent duty to consider sua sponte.”).

         In Transwest, the Ninth Circuit described the doctrine of equitable mootness as it relates to bankruptcy cases:

Equitable mootness is a prudential doctrine by which a court elects not to reach the merits of a bankruptcy appeal. An appeal is equitably moot if the case presents transactions that are so complex or difficult to unwind that debtors, creditors, and third parties are entitled to rely on the final bankruptcy court order. 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.

         801 F.3d at 1167 (internal citations omitted). The Transwest court then outlined four considerations to determine whether a bankruptcy appeal is equitably moot: (1) whether a stay was sought; (2) if a stay was sought and not gained, a court will look to whether substantial consummation of the plan has occurred; (3) the effect a remedy may have on third parties not before the court; and (4) whether the bankruptcy court can fashion effective and equitable relief without creating an uncontrollable situation for the bankruptcy court. Id. at 1167-1168.

         Applying the Transwest factors, it is undisputed that Appellants failed to seek a stay of the orders pending appeal, which suggests Appellants have not fully pursued their rights. See Id. at 1167. Further, the Court is concerned about the impact vacating the sale might have on third parties. The Corporation has continued to operate since the sale three years ago, and the sole owner has made extensive investments and improvements to the business during that time. (ECF No. 54 at 5; ECF No. 54-1.) It is also unclear whether the bankruptcy court can fashion equitable relief. The bankruptcy court effectively gave Appellants what they asked for: Ms. Clark made an irrevocable election in state court to dissolve the Corporation while her bankruptcy case was pending, and the bankruptcy court ultimately sold the shares pursuant to state law based on the valuation Ms. Clark's jointly-selected appraisers provided. Moreover, the shares were sold for $274, 000, which was far beyond the $42, 250 valuation Appellants repeatedly represented to the bankruptcy court. Put simply, Appellants now seek to vacate the sale, even though Ms. Clark set the sale ...

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