James Paulett Charlton

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AUTH
US. G
INFO!

cA Entered on Docket FILED

E. LYNN SCHOENMANN, Chapter
11 Trustee; JAMES PAULETT

June 12, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA MAY 15 2006
NOT FOR PUBLICATION
HAROLD S. MARENUS, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: ) BAP No. NC-05-1298-RyBK
)
JAMES PAULETT CHARLTON, ) Bk. No. 04-32400
)
Debtor. )
)
)
CONSUELO CHARLTON, )
)
Appellant, )
)
vane ) MEMORANODU ™
)
}
)
)
)
)
)

CHARLTON,
Appellees.
Argued and Submitted on March 24, 2006
at San Francisco, California
Filed - May 15, 2006
Appeal from the United States Bankruptcy Court
for the Northern District of California
Honorable Thomas E. Carlson, Bankruptcy Judge, Presiding
Before: RYAN,* BRANDT AND KLEIN, Bankruptcy Judges
1 This disposition is not appropriate for publication and

may not be cited to or by the courts of this circuit except when
relevant under the doctrines of law of the case, res judicata or
collateral estoppel. See 9th Cir. BAP Rule 8013-1.

2 Honorable John E. Ryan, Bankruptcy Judge for the Central
District of California, sitting by designation.

ATION) 10

GPO

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I. INTRODUCTION
James Paulett Charlton (“Debtor”) requested authority to
sell the Marc Chagall painting Le Peintre et L’Horloge or the

Painter and the Clock (the “Chagall”). Consuelo Charlton

(“Consuelo”), Debtor's ex-wife, objected to the extent Debtor
sought to use the proceeds from the sale, arguing that she had an
interest in the Chagall. Nevertheless, the parties stipulated to
the sale of the Chagall, and the court entered an order that the
proceeds would be held in escrow until the ownership issue was

resolved.

Later, Debtor filed a motion to authorize the release of the

sale proceeds to pay certain estate administrative expenses (the

“Motion”). Debtor argued that Consuelo’s interest in the Chagall
proceeds was inchoate and unvested. Consuelo again objected,
arguing that she had a vested interest in all of the “marital

property,” including the Chagall proceeds, based on the filing of
a divorce complaint. After a hearing, the court granted the
Motion, holding that Consuelo did not have a vested interest in
the Chagall and that her unvested, inchoate property interest was
subject to §§ 544(a) (1) and (3) of the Bankruptcy Code.?

Consuelo timely appealed.

We VACATE and REMAND.

> Unless otherwise indicated, all chapter, section, and rule
references are to the Bankruptcy Code (the “Code”), 11 U.S.C.
§§ 101-1330, prior to its amendment by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (the “Act”), Pub.
L. 109-8, 119 Stat. 23, as the case from which this appeal arose
was filed before the Act’s effective date (October 17, 2005), and
to the Federal Rules of Bankruptcy Procedure (the “Rules”), Rules

1001-9036.

bo

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II. STATEMENT OF FACTS

On May 29, 1993, Consuelo and Debtor married. During the
marriage, the Chagall was acquired. The parties do not dispute
that the Chagall was Debtor’s separate property. Debtor and
Consuelo separated during February 1999. In May 2003, Consuelo
filed for divorce in Utah. On December 18, 2003, the Utah court
granted a bifurcated decree of divorce leaving. for further
determination the equitable distribution of the marital property.

On August 24, 2004, Debtor filed a voluntary chapter 11
petition. The Chagall was listed on Debtor’s Schedule B. On

October 25, 2004, Debtor filed a motion to sell the Chagall and

another painting outside the ordinary course of business (the
“Sale Motion”). Debtor argued that the sale of the paintings was
necessary to pay for the costs of administering the estate.
Consuelo opposed the sale to the extent Debtor sought to use the
proceeds, arguing that she had an interest in the Chagall because
under Utah law she would likely receive at least one-half of the
marital estate. In addition, Consuelo argued that the proposed
purchase price was not representative of the Chagall’s actual
value.

At the hearing on the Sale Motion, Consuelo withdrew her
objection, provided that her interest attached to the sale
proceeds. By order signed November 19, 2004, the bankruptcy
court authorized the sale of the Chagall free and clear of
Consuelo’s alleged interest with the proceeds to be held in
escrow until the ownership issues were resolved.

The Chagall was sold for $200,000. On January 18, 2005,

Debtor filed the Motion, arguing that Consuelo’s interest in the

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Chagall proceeds was inchoate and unvested, thereby leaving her
with an unsecured claim upon the bankruptcy filing. Consuelo
responded that she had a vested interest in the Chagall proceeds
because of the divorce decree and her interest was not estate
property. Therefore, she contended that her interest in the

proceeds could not be used to pay administrative expenses.

After a hearing, the court concluded that, as of the
petition date, Consuelo had an unvested, inchoate interest in the
Chagall subject to the trustee’s avoiding powers under
§§ 544(a) (1) and (3). Accordingly, the court granted the Motion,
and Debtor was authorized to use the Chagall proceeds to pay
certain administrative expenses totaling $46,250 and any other
administrative expenses that may be necessary to preserve the
estate or upon further court order. Consuelo timely appealed.

On April 1, 2005, the court ordered the appointment of E.
Lynn Schoenmann as chapter 11 trustee (“Trustee”).

Two weeks earlier, on March 14, 2005, the bankruptcy court
approved a stipulation granting relief from stay for the divorce
court to equitably distribute the property. On March 7, 2006,
Consuelo filed with the panel a copy of the Utah state court
findings of fact and conclusions of law issued on February 27,
2006, fixing the parties’ interests in the marital property (the
“Decision”). On March 24, 2006, the parties again brought the

Decision to our attention during oral argument.

Iit. Issues
1. Whether the bankruptcy court erred in its determination

that, as of the petition date, Consuelo’s marital property

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interest in the Chagall had not vested under Utah law.
2. Whether Consuelo’s interest in the Chagall was cut off by

the Trustee’s avoiding powers under §§ 544(a)(1) and (3).

IV. Jurisdiction
The bankruptcy court had jurisdiction under 28 U.S.C.
§ 1334 and 28 U.S.C. §§ 157(ajand (b). We have jurisdiction

under 28 U.S.C. §§ 158(c) and (d).

V. Standard of Review

The facts are undisputed. The extent and nature of property
of the estate is a question of law. We review the bankruptcy
court’s conclusions of law and interpretation of the Code de

novo. Bunyan v. United States (In re Bunyan), 354 F.3d 1149,

1150 (9th Cir. 2004); Tanzi v. Comerica Bank - California (In re

Tanzi), 297 B.R. 607, 610 (9th Cir. BAP 2003).

VI. DISCUSSION
Generally, “an appellate court should base its decision on
the facts as they existed at the time the trial court made its

decision.” Frankfurth v. Cummins (In re Cummins), 20 B.R. 652,

653 (9th Cir. BAP 1982). However, an appellate court may, in

extraordinary circumstances, take judicial notice of developments

in a case that occur while the appeal is pending. Id.; see also

Bryant v. Carleson, 444 F.2d 353, 357 (9th Cir. 1971) (taking

judicial notice of post-appeal developments affecting the issues

presented on appeal); and Alexander v. Jensen-Carter (In re

Alexander), 239 B.R. 911, 913 (8th Cir. BAP 1999).

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In the Decision, the Utah court, acting under the color of
relief from stay by the bankruptcy court, determined the property
rights of the parties as of December 18, 2003, the date of the
bifurcated divorce decree.* The state court ordered that certain
property, including any art titled in Debtor’s name, was in
constructive trust for Consuelo’s benefit.®

Therefore, the state court awarded the Chagall to Consuelo
nunc pro tunc effective December 18, 2003.° Because this
potentially affected the analysis of the parties’ ownership
interests in the Chagall as of the petition date, we take
judicial notice of the Findings.

Where “circumstances have changed between the ruling below

and the decision on appeal, the preferred procedure is to remand
to give the [trial] court an opportunity to pass on the changed

circumstances.” Korn v. Franchard Corp., 456 F.2d 1206, 1208 (2d

Cir. 1972); see also Warm Springs Dam Task Force v. Gribble, 621

F.2d 1017, 1026 (9th Cir. 1980); and Hadley v. Victory Constr.

Co., Inc. (In Re Victory Constr.), 37 B.R. 222, 227 (9th Cir. BAP

* The court reasoned that this was the latest date
available that would allow it to establish Debtor’s legal or
equitable interests as of the petition date. While the court
recognized that, in the end, only the bankruptcy court could
determine what property still existed, the court distributed the
property as if it existed as of December 18, 2003.

° The court stated that Consuelo requested the declaration
of a constructive trust because she believed that a constructive
trust would defeat the trustee’s strong-arm powers under
§§ 544(a) (1) & (3).

° The parties do not dispute that the Chagall was Debtor’s
separate property. Therefore, the Chagall is presumably “art
titled in [Debtor’s] name” that Debtor is to hold in constructive
trust for Consuelo’s benefit.

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1984). We will follow this practice here.
The nature of Consuelo’s interest in the Chagall as of the

petition date based on the commencement of divorce proceedings

under Utah law was critical to the bankruptcy court’s
determination that the proceeds from the Chagall could be used to
pay estate administrative expenses. The Decision appears to have
changed the basis for evaluating Consuelo’s interest. The Utah
court made a distinction between those assets that Consuelo
received via equitable division and those subject toa
constructive trust, indicating that the latter may defeat the
trustee’s strong-arm powers. That premise may be mistaken. See

Chbhat v. Tleel (In re Tleel), 876 F.2d. 769, 772 (9th Cir. 1989);

see also In re Roman Catholic Archbishop of Portland in Oregon,

335 B.R. 868, 878 (Bankr. D. Or. 2005). However, because the
Decision was issued after the briefing of this appeal neither the

bankruptcy court nor we have the benefit of fully developed

arguments on this issue.

Under the circumstances, the Decision is important in fixing
Consuelo’s pre-petition interest in the Chagall. Therefore,
justice is better served by remanding the case for the bankruptcy
court to consider the effect of the Decision and the resulting
supplemental divorce decree, if any,’ on Consuelo’s interest in
the proceeds from the sale of the Chagall and the use of those

proceeds to pay administrative claims of the bankruptcy estate.

’ The Utah court ordered that counsel for Consuelo prepare
a supplemental divorce decree consistent with the Findings.
Nothing in the bankruptcy court’s docket, nor anything filed in
supplementation of the record on appeal, indicates whether a
supplemental decree has been entered.

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VII. Conclusion

In sum, while this appeal was pending, the Decision issued
addressing Consuelo’s ownership interest in the Chagall as of
December 18, 2003. The Decision opens questions (about which we
intimate no views) regarding its effect on the bankruptcy case
that deserve more careful consideration than we can afford within
the confines of the appellate record. Therefore, justice is
better served by remanding this matter to provide the bankruptcy
court an opportunity to determine the effect of the Decision on
Consuelo’s interest in the Chagall proceeds and any use of those
proceeds to pay administrative claims.

We VACATE and REMAND.

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U.S. Bankruptcy Appeliate Panel
of the Ninth Circuit
125 South Grand Avenue, Pasadena, California 91105
Appeals from Central California (626) 229-7220
Appeals from all other Districts (626) 229-7225

NOTICE OF ENTRY OF JUDGMENT

BAP No. NC-05-1298-RyBK

RE: JAMES PAULETT CHARLTON

A separate Judgment was entered in this cage on 5/15/06

BILL OF COSTS:

Bankruptcy Rule 8014 provides that costs on appeal shall be taxed by the
Clerk of the Bankruptcy Court. Cost bills should be filed with the Clerk
of the Bankruptcy Court from which the appeal was taken.

9th Cir. BAP Rule 8014-1

ISSUANCE OF THE MANDATE:

The mandate, a certified copy of the judgment sent to the Clerk of
the Bankruptcy Court from which the appeal was taken, will be issued
7 days after the expiration of the time for filing a petition for
rehearing unless such a petition is filed or the time is shortened or
enlarged by order. See Federal Rule of Appellate Procedure 41.

APPEAL TO COURT OF APPEALS:

An appeal to the Ninth Circuit Court of Appeals is initiated by

filing a notice of appeal with the Clerk of this Panel. The Notice

of Appeal should be accompanied by payment of the $255 filing fee
(effective November 1, 2003) and a copy of the order or decision on
appeal. Checks may be made payable to the U.S. Court of Appeals for

the Ninth Circuit. See Federal Rules of Appellate Procedure 6 and the
corresponding Rules of the United States Court of Appeals for the Ninth
Circuit for specific time requirements.

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CERTIFICATE OF MAILING

The undersigned, deputy clerk of the U.S. Bankruptcy
Appellate Panel of the Ninth Circuit, hereby certifies that a copy
of the document on which this certificate appears was mailed this date
to all parties of record to this appeal.

By: Edwina Clay

Deputy Clerk: May 15, 2006

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