United States District Court, E.D. California
ORDER
TROY
L. NUNLEY, UNITED STATES DISTRICT JUDGE
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 ...