Frances Michael Fitzgerald

OCR transcription for search; preserved printed pages are authoritative

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FILED

1 APR 15 2010

2 ORDERED PUBLISHED SUSAN M SPRAUL, CLERK
OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL

4 OF THE NINTH CIRCUIT

5

6 |} In re: BAP No. CC-09-1314-MoPaB

7 || FRANCES MICHAEL FITZGERALD Bk. No. ND 09-12110-RR

8 } f.
Debtor.
)
10 || FRANCES MICHAEL FIT4GERALD,
LiL
11 Appellant,
12 || v. OPINION

13 i} NINN WORK SR, INC.; JERRY
NAMBA, TRUSTEE; THE JOHN
14 || LELDON GRAY TRUST,

er ee ee ee ee ee ee ee ee ee ee ee ee ee ee

15 Appellees.
16
1? Argued and Submitted on March 19, 2010
at Pasadena, California
ve Filed - April 15, 2010
a Appeal from the United States Bankruptcy Court
20 for the Central District of California
21 Hon. Robin L. Riblet, Bankruptcy Judge, Presiding.
22

23 || Before: MONTALI, PAPPAS and BRANDT,’ Bankruptcy Judges.
24
25

26

27
1

28 | pistrict of Washington, sitting by designation.

AUTHENTICATED
U.S. GOVERNMENT

INFORMATION 4
GPO

LR US Sana COURT
CENTRAL Dissalet oF

Hon. Philip H. Brandt, Bankruptcy Judge for the Western

wet
re EY

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MONTALI, Bankruptcy Judge:

In this decision we revisit the heightened duty of a
bankruptcy court to make an independent analysis and evaluation
in the all too familiar situation of a trustee in bankruptcy
selling to a defendant the estate’s causes of action against that
defendant. Our conclusion that such an analysis and evaluation
should have been made in this case is bolstered by recent United
States Supreme Court precedent reminding bankruptcy judges of
their duty to make the inquiry regardless of the manner in which
the parties have presented them with the question.

Debtor-Appellant, Frances Michael Fitzgerald (“Fitzgerald”)
appeals an order of the bankruptcy court authorizing the
chapter 7* trustee-Appellee’s (“Trustee”} sale of certain assets
of Fitzgerald’s estate to Appellee, the John Leldon Gray Trust
(the “Trust,” collectively with Trustee, “appellees”). For the
foregoing reasons, we REVERSE the sale order.’

I. BACKGROUND
A. Prepetition Background.

Fitzgerald, a/k/a Michael Ninn, formed N Worx Media, Inc.
(“NWM’), a company that owned and distributed adult films
directed, edited, and produced by Fitzgerald. In June 2007, John
Gray (“Gray”), as trustee of the Trust, approached Fitzgerald

with a proposal] to create a new corporation that would market and

2 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. $$ 101-1532, and
to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

3 We GRANT Appellees’ Request for Judicial Notice filed
concurrently with their response brief and excerpts of record.

= > =

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distribute Pitzgerald’s library of films, and finance the
production of future adult films. One month later, Fitzgerald
and the Trust formed Ninn Worx SR, Inc. (“NWSR”), with Fitzgerald
contributing to NWSR his 100% interest in NWM in exchange for
$1,000 and a 49% interest in NWSR. The Trust owned the remaining
51% interest. Fitzgerald was appointed chief executive officer
of NWSR, and continued to work as a film director.

The collaboration was short-lived. Fitzgerald was relieved
of his duties as chief executive officer of NWSR on or around May
30, 2008. Relations between Fitzgerald and Gray further
deteriorated and in August, 2008, NWSR sued Fitzgerald in Los
Angeles County Superior Court for breach of fiduciary duty,
tortious interference, and violation of the California Business
and Professions Code (“State Court Action”). Fitzgerald filed a
cross~complaint against NWSR, Gray, the Trust, and other third
parties. NWSR demurred. Fitzgerald responded by filing an
amended cross-complaint alleging ten causes of action, praying
for damages of at least $1 million for each claim. NWSR again
demurred. On February 25, 2009, the state court sustained the
demurrer to eight of Fitzgerald’s causes of action, granting him
leave to amend all eight, and overruled the demurrer with respect
to two causes of action: conversion and accounting. On or around
March 17, 2009, Tim Riley (“Riley”), new counsel for Fitzgerald
in the State Court Action, filed a second amended cross-complaint
alleging various cross-claims (the “Cross-Claims”) to which NWSR
filed a demurrer and a motion to strike.

B. Postpetition Background.

Assisted by bankruptcy attorney Elva Wallace (“Wallace”),

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Fitzgerald filed a chapter 7 petition on June 2, 2009. He did
not list the Cross-Claims in his schedules, and valued his 49%
interest in NWSR at $0.00. The section 341 meeting of creditors
was scheduled for July 27, 2009. On June 22, 2009, NWSR filed in
state court a Notice of Stay of Proceedings due to Fitzgerald’s
bankruptcy filing.

On July 13, 2009, Fitzgerald moved to dismiss his bankruptcy
case so he could continue to negotiate a settlement of the State
Court Action.’ After some docketing and other procedural errors,
Wallace eventually set Fitzgerald's dismissal motion for hearing
on September 6, 2009.

On August 25, 2009, NWSR and Trustee filed their combined
opposition to Fitzgerald’s motion to dismiss, opposing it on both
substantive and procedural grounds. Substantively, the
opposition noted that an asset sale to Gray (as trustee of the
Trust) was in the works, which would bring to the estate
approximately $60,000 to pay unsecured claims that totaled Just
over $40,000.

On August 28, 2009, Trustee filed an ex parte motion
requesting a continuance of the September 8 dismissal hearing
because he was unable to attend, and because he opposed dismissal
prior to the pending asset sale, which he expected to occur
sometime around September 28, 2009. For reasons unknown, the
bankruptcy court did not act on Trustee’s continuance motion, and
the hearing went as Wallace had scheduled on September 8. The

only party to appear at the hearing was NWSR, through counsel.

4 Fitzgerald filed an amended motion to dismiss his chapter

7 case two days later, reflecting some minor language changes.

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On September 11, 2009, the bankruptcy court entered an order
denying Fitzgerald’s motion to dismiss for his failure to serve
all creditors.

On August 31, 2009, Trustee filed and served a motion to
sell to the Trust (1) Fitzgerald’s 49% interest in NWSR, and (2)
Fitzgerald's Cross-Claims “for up to $60,000" (“Sale Motion”).
The $60,000 figure was the aggregate of filed, unsecured claims
of approximately $40,000, plus expected administrative fees and
expenses.

Trustee asserted that the proposed sale was in the best
interest of the estate because, based on the sale price and the
amount of unsecured claims, unsecured creditors would likely be
paid in full. He further asserted the proposed sale was fair and
reasonable considering that Fitzgerald’s 49% interest (which
Fitzgerald valued at $0.00) had no value to anyone other than the
Trust because distributions to NWSR shareholders were subordinate
to its $2 million debt, which, under its current financial
situation, was unlikely to be paid in the foreseeable future.
With respect to the Cross-Claims, Trustee offered no analysis
regarding their value or the costs of litigation, but stated that
the sale obviated the need for Trustee to prosecute and defend
them. Finally, although Trustee asserted in the Sale Motion that
the proposed sale was entered into in good faith, he did not seek
a “good faith” finding under section 363(m) or present any

evidence of the Trust’s good faith.’ Trustee set the sale

5 Section 363(m) provides:

(m) The reversal or modification on appeal of an
(continued...)

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hearing for September 23, 2009.

Just two days prior to the sale hearing, Fitzgerald filed an
amended schedule B, which changed the value of his 49% interest
in NWSR from $0.00 to $5.5 million and, for the first time,
identified an interest in 137 films with a value of $1.5 million.
Again, Fitzgerald did not list the Cress-Claims. He also filed
an amended schedule F, which now indicated that unsecured claims
totaled $784,366.87.°

1. The Sale Hearing.

The sale hearing went forward on September 23, 2009. No
written opposition was filed but Wallace and Riley, appearing for
Fitzgerald and his life partner, Suzette Rowe (“Rowe”), attempted
orally to oppose it.

Initially, the bankruptcy court granted the Sale Motion
because Fitzgerald failed to file any written opposition, and
Local Bankruptcy Rule 9013-1(h) of the Central District of
California deems such silence as consent. In response, Wallace
stated that Fitzgerald favored the sale if Trustee were selling
the assets for “full value,” but she needed a two-week

continuance to file an opposition, which she faiied to file

3(...continued)
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 (emphasis added).

6 The amended schedule F was referred to at the sale
hearing, but it was not before the bankruptcy court. It is not
part of the record on appeal.

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previously because she was out of town. Wallace further stated
that on September 22, 2009, she filed two unsecured claims
against the estate, one for $550,000 on behalf of Rowe’s mother,
who had lent Fitzgerald money for a home, and one for $192,000 on
behalf of Riley, for his attorneys fees jncurred to date in the
State Court Action. The court denied Wallace’s request, noting
that she had received sufficient notice to file an opposition,
and it again granted the Sale Motion.

Riley then stated that on September 14, he had drafted a
reply to NWSR’s and Trustee’s combined opposition to Fitzgerald’s
dismissal motion for Wallace to file.’ The court replied that it
never received Riley’s brief. Riley explained that he opposed
the $60,000 sale price as a “travesty” considering the
relationship between Gray and Fitzgerald and the fact that the
Trust was improperly buying its way out of the State Court
Action, a matter in which Riley had invested $192,000. He then
requested a 30-day continuance to file an opposition, which the
court denied.

It then came to the court’s attention, and Trustee’s
surprise, that Rowe wished to overbid, which the court decided to
allow. After a brief recess to discuss the bidding procedure,
Trustee informed the court that claims against Fitzgerald's
estate totaled around $40,000, but he had learned during the

recess that both bidding parties asserted respective claims that

7 Wallace filed Riley’s reply brief on September 21, just
two days before the sale hearing, but did not provide a copy of
it to the bankruptcy court. Riley’s brief, and supporting
declaration, focused primarily on supporting the dismissal of
Fitzgerald’s chapter 7 case, but also objected to the proposed
sale of assets to the Trust for $60,000.

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would increase the claims universe to “$i million and so forth.”
Trustee then stated, “[b]ut it seems to be somewhat equal on
either side, so I don’t think it’s going to impact this bid,” and
recommended that bidding proceed.* The auction commenced, with
Rowe’s top bid of $95,000 losing to the Trust’s bid of $100,00C.

Riley then interjected, contending that the parties had
agreed during the recess that Rowe’s offer would be considered a
better offer than the Trust’s since Riley was willing to
compromise his $192,000 claim for fees, and Rowe’s mother would
also compromise her $550,000 claim. He also asserted that Gray’s
threatened claim of $1 million was a fraud. Riley then asked for
a continuance, but alternatively offered an additional $5,000 of
his own funds to Rowe’s bid. The court replied that Riley did
not have the funds on his person, and instructed him to sit down.

Counsel for the Trust then informed the court, which Trustee
confirmed, that neither Fitzgerald nor Wallace appeared at the
section 341 meeting of creditors on July 27, 2009, or at the
continued meeting on September 21, 2009, and, had they done so,
perhaps Fitzgerald could have informed Trustee about his opinion
on the assets’ actual value. Wallace responded that they did not
attend the first meeting because they believed Fitzgerald’s
bankruptcy case would be dismissed. As for the September 21
meeting, Wallace acknowledged receiving Trustee's notice

continuing it to September 21, but contended there was some

8 While not completely clear from Trustee’s statement, from
the colloquy that followed and statements made to us at oral
argument, we take this to mean that if Rowe were the successful
pidder, her mother’s and Riley’s ciaims would be withdrawn; if
the Trust were successful, its $1 million claim would not share
in the sales proceeds.

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confusion about it because the docket indicated the meeting was
actually held on August 21.*® Trustee informed the court that the
section 341 meeting occurred on September 21. Upon hearing this,
the court swiftly confirmed the sale for §100,000 to purchaser,
the Trust.

On October 8, 2009, the bankruptcy court entered an order
granting Trustee’s Sale Motion (“Sale Order”). Although not
prayed for or determined at the sale hearing, the Sale Order
found the Trust to be a “good faith” purchaser pursuant to
section 363(m). Fitzgerald did not file any motions under Fed.
R. Civ. P. 59 or 60, incorporated by Rule 9023 and Rule 9024, in
response to the Sale Order, or seek a stay of the sale.
Fitzgerald filed a premature notice of appeal on October 2, 2009,
followed by a timely amended notice of appeal on October 13,
2009.

2. Post-Sale Events.

The sale closed on October 21, 2009. Trustee received
$100,000, which has been deposited into his trust account. Six
days later, the Trust sold the 49% interest in NWSR.

On November 12, 2009, the state court granted the Trust and
Trustee’s request to dismiss Fitzgerald’s Cross~Claims with
prejudice. On November 18, 2009, NWSR served Fitzgerald and

Riley with the Notice of Entry of Dismissal. No party lodged any

® Fitzgerald contends on appeal that he did not receive
notice of section 341 meetings of creditors that took place on
August 21 and August 26, 2009. Although the August 21 docket
entry seems to suggest this, careful examination of the document
Filed reveals that no meetings of creditors took place on either
of those dates. Further, Trustee confirmed at the sale hearing
that no such meetings occurred.

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objections or sought any other form of relief.

Il. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 157.

We address below our jurisdiction over the appeal under 28 U.S.C.

§ 158.'°
III. ISSUES
1. Is the appeal moot?
2. Did Fitzgerald preserve his objection to the Sale Order?
3. Did the bankruptcy court abuse its discretion by issuing the

Sale Order?
IV. STANDARD OF REVIEW
Sales under section 363 are reviewed for abuse of

discretion. Simantob v. Claims Prosecutor, LLC. (In re

Lahijani), 325 B.R. 282, 287 {9th Cir. BAP 2005).
V. DISCUSSION
A. Jurisdiction Over The Appeal.

Appellees contend the appeal is moot because: (1) it was not
stayed pending appeal; (2) the sale was conducted in good faith
under section 363(m); (3) the Cross-Claims have been dismissed
with prejudice; and (4) the Trust has sold the 49% interest in
NWSR for value to a third party. As the party advocating

mootness, Appellees have the burden of establishing its

10 Pitzgerald’s standing would initially appear to be an
issue since this is a chapter 7 case. We have an independent
duty to examine jurisdiction, and we lack jurisdiction over the
appeal if Fitzgerald lacks standing. Lee v. Oregon, 107 F.3d
1382, 1387 (9th Cir. 1997).

The bankruptcy court noted that perhaps this is a surplus
estate, which could provide Fitzgerald standing because of his
pecuniary interest. Nangle v. Surratt>Sales (In re Nangle), 288
B.R. 213, 216 (8th Cir. BAP 2003). Appellees do not contest this
issue, and therefore we assume it to be the case.

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application. Suter v. Goedert, 504 F.3d 982, 986 (9th Cir.

2007).

1. No Stay Order.

Appellees argue that Fitzgerald’s failure to obtain a stay
of the Sale Order renders his appeal moot. Fitzgerald concedes
that he did not obtain a stay, as allowed by Rule 8005. We
disagree with Appellees.

Even though an appeal from an order approving a sale is moot

if the sale has not been stayed and is consummated, there are

several exceptions. Sw. Prods., Inc. v. Durkin {In re Sw.
Prods.), 144 B.R. 100, 102-03 (9th Cir. BAP 1992). One exception

to the mootness rule is for appeals questioning whether the

purchaser purchased the property in good faith. Id.; see also

11 U.S.C. § 363(m).

Because, aS we explain below, there was no evidence in the
record to support a good faith finding under section 363({(m), the
appeal is not moot for Fitzgerald’s failure to obtain a stay.

2. Statutory Mootness Under Section 363(m).

While a finding of “good faith” is not an essential element
for approval of a sale under section 363(b), such a determination
becomes important with respect to potential mootness when an
appeal is taken from the order authorizing the sale. Thomas v.

Namba (In re Thomas), 287 B.R. 782, 785 (9th Cir. BAP 2002).

Appellees contend that there is “substantial evidence” to
support the “good faith” determination. We disagree. On the
contrary, we see absolutely no evidence in the record to support
a “good faith” finding under section 363(m). While Trustee noted

in the Sale Motion that the sale was entered into in good faith,

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Trustee did not request such a finding in the Sale Motion, nor
did the Trust submit a declaration or any other evidence
supporting this fact. Further, at the sale hearing, neither
Trustee nor the Trust presented any evidence of the Trust’s good
faith or requested any such finding, nor did the bankruptcy court
make any such determination.

The boilerplate “good faith” finding in the Sale Order does
not suffice under section 363(m), and the bankruptcy court should
not have signed such an order without an evidentiary foundation.

T.c. Investors v. Joseph (In re M Capital Corp.), 290 B.R. 743,

752 (9th Cir. BAP 2003). “Unless and until ‘good faith’ has been
determined, the appeal is not moot under section 363(m).”
Thomas, 287 B.R. at 785.

Accordingly, without a proper “good faith” finding under
section 363(m), there is no safe harbor to shield the Sale Order

from appellate review and appellate remedies. M Capital Corp.,

290 B.R. at 752.

3. Equitable Mootness.

Even though Fitzgerald's appeal is not statutorily moot
under section 363(m), his appeal may stili be moot under the
general principles of mootness. Suter, 504 F.3d at 987. As
Appellees note, the sale has closed and the 49% interest in NWSR
nas been sold to a third party for value.

Although an appeal is moot if the appellate court is unable
to grant any relief whatsoever, the appeal is not equitably moot
if the appellate court can fashion effective relief. Spirtos v.

Moreno (in re Spirtos), 992 F.2d 1004, 1006 (9th Cir. 1993).

As for the Cross-Claims, “fw]here the asset ‘sold’ without a

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stay is a lawsuit and ‘disposal’ of the asset is a dismissal, the
appropriate inquiry is whether the dismissal of the lawsuit could
be undone.” Suter, 504 F.3d at 987. In Suter, defendant law
firm purchased estate’s interest in plaintiff-debtors’ legal
malpractice claim at a bankruptcy court auction. After the sale,
the law firm entered into a stipulation with the bankruptcy
trustee to dismiss the malpractice case pending before the Nevada
Supreme Court. The debtors appealed the sale order to the
district court, and the law firm moved to dismiss for mootness
because the maipractice case had been dismissed. The district
court agreed, and granted the law firm’s motion. Debtors
appealed. The Ninth Circuit reversed. It determined that the
district court presumed erronecusly the debtors’ appeal was moot
because their interest in the malpractice case was extinguished
due to its dismissal. “Without affirmatively demonstrating that
the [debtors] have no recourse under Nevada law were they
successful in the district court on their appeal of the
bankruptcy court’s decision to approve the compromise, mootness
is not established.” Id. at 986.

Only Fitzgerald’s Cross-Claims have been dismissed; the
plaintiffs’ claims against Fitzgerald are presumably still
pending, subject to the stay of proceedings. All Appellees argue
on appeal is that the Cross-Claims have been dismissed with
prejudice. They have not met their burden under Suter to
demonstrate affirmatively that Fitzgerald’s Cross-Claims could
not be revived. As such, although we offer no opinion on this,
Fitzgerald or Trustee may have some effective relief under

California law as to the Cross-Claims.

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As for the subsequent sale of the 49% interest in NWSR, sale
to a third party is a classic example of mootness in the
bankruptcy context because it precludes meaningful relief. Baker

& Drake, Inc. v. Pub. Serv. Comm’n of Nev. (In re Baker & Drake,

inc.), 35 F.3d 1348, 1351 (9th Cir. 1994). Here, the first sale
was to insider the Trust - not a third party. Appellees confirm
that six days later “the Trust sold the 49% interest in NWSR to a
third party purchaser for value.” What Appellees fail to reveal
in their brief, as well at oral argument, is the identity of this
third party, its relationship, if any, with Gray or the Trust, or
the amount paid. The absence of any specifics from Appellees
about this second sale purchaser makes us question whether relief
cannot be afforded. Again, Appellees have not shown that
Fitzgerald or Trustee have no recourse.

Accordingly, on this record, we are unable to determine
conclusively the mootness of this appeal. Having established our
Jurisdiction, and concluding that we face no impediment to review
the Sale Order, we turn to its merits.

B. Fitzgerald Preserved His Objection To The Sale Order.
Appellees contend that Fitzgerald’s failure to file an
opposition to the Sale Motion means that he consented to the sale
and waived any right to object to it on appeal. We reject this
argument. Fitzgerald clearly objected at the sale hearing, and

the bankruptcy court considered his objections. Therefore,
despite the procedural anomalies, Fitzgerald did not consent to
the sale or waive his right to object to it on appeal.

We acknowledge that some of Fitzgerald’s arguments against a

sale ring hollow given Rowe’s active participation in the

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bidding. We are satisfied, however, that the crux of
Fitzgerald’s complaint is the sale of the Cross-Claims without a
proper examination of their worth, not the sale of his 49%
interest in NWSR. The Cross-Claims would have remained available
for prosecution had Rowe acquired them and, as we explain below,
it is the sale of those claims to one of the defendants that
Fitzgerald repeatedly challenged.

‘om The Bankruptcy Court Abused Its Discretion By Issuing The

Sale Order.”

1. Good Faith.

Fitzgerald, who appears pro sé on appeal, contends that
based on the volatile history bétween Gray and him, the
bankruptcy court erred when it found the Trust te be a “good
faith” purchaser under section 363{m) in the Sale Order.

The first requirement of a “good faith” purchaser is that

there be an identifiable purchaser. Ferrari N. Am., Inc. v. Sims

{In re R.B.B., Ine.}), 211 F.3d 475, 478-80 (9th Cir. 2000).

Secondly, generally the purchaser gives “value.” Ewell v.

Diebert (In re Ewell), 958 F.2d 276, 281 (9th Cir. 1992).

Fitzgerald spends much time in his briefs alleging

‘) Fitzgerald contends he did not receive sufficient notice
of the Saie Motion. Our review of the docket shows to the
contrary. Local Bankruptcy Rule 9013-1(d) for the Central
District of California dictates that such motions require notice
of at least 21 days. Trustee’s proof of service indicates that
the Sale Motion and supporting papers were served on August 28,
2009; the docket reflects that Trustee’s papers were filed on
August 31, 2009. Wallace presumably received notice sometime on
or around August 29, or, at minimum, she received electronic
notice of the filing on August 31. The sale hearing was set for
September 23, 2009. Either way, Fitzgerald received sufficient
notice. Plus, Fitzgerald, Riley and Rowe appeared at the sale
hearing and Rowe bid.

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conspiracy, fraud, and collusion between Trustee and the Trust
regarding the asset sale, in particular with respect to the
Cross-Claims that he contends could be worth millions of dollars.
He questions the propriety of even selling the Cross-Claims to
the defendant in the lawsuit. Leaving aside the conspiracy
allegation, Fitzgerald did raise this “value” issue, to an
extent, at the sale hearing. Riley explained to the bankruptcy
court that selling the Cross-Claims for $60,000 was a travesty,
especially considering the relationship between Gray and
Fitzgerald and the money invested in the State Court Action to
date. At oral argument before us, Fitzgerald asserted that
Trustee failed to investigate what the Cross-Claims might be
worth. Neither Appellee offered us any helpful information to
the contrary.

As to the propriety of selling the Cross-Claims, no one
disputes that Gray or the Trust bought them with the intention to
buy their way out of the State Court Action. However, causes of
action that exist independent of the bankruptcy can be, and often
are, sold by bankruptcy trustees under section 363(b). Lahijani,
325 B.R. at 288; 11 U.S.C. § 541(a) (1). Therefore, the Trust was
a perfectiy legitimate buyer.

Regarding the Cross-Claims’ value, Fitzgerald offered no
competent evidence prior to or at the sale hearing to show that
the market value of the assets was something other than $100,000.
Fitzgerald never disclosed the Cross-Claims in his schedules and,
up untii two days before the sale hearing, Fitzgerald considered
the value of his 49% interest in NWSR at $0.00. Wallace stated

at the sale hearing that Fitzgerald had no objection to the sale

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if the assets were being sold for “full value,” but she failed to
state what the “full value” was. Riley, other than contending
that the sale was a “travesty,” also failed to assert what he
thought was the proper market value of the Cross-Claims.

Nonetheless, despite Fitzgerald’s lack of contrary evidence,
his argument does have some merit. The price achieved by an
auction is ordinarily assumed to approximate market value when
there is competition by an appropriate number of bidders.
Lahijani, 325 B.R. at 289. However, when competition is
constrained, the price is less likely to be reliable and shceuid
be examined more carefully. Id. The sale of a cause of action
to a defendant in circumstances in which the plaintiff is the
only competition is an example of constrained competition that
warrants more scrutiny. Id.

Here, the bidders were a cross-defendant, the Trust (which
apparently was acting in the interest of all fellow cross-
defendants including Gray and NWSR), and cross~-plaintiff’s life
partner Rowe. Thus, due to the nature of the parties involved,
the $60,000 sale price calls for a higher level of scrutiny, and
Trustee bore the burden to examine it more carefully. Id.

In the Sale Motion, Trustee offered a satisfactory analysis
on the value for the 49% interest in NWSR, asserting that based
on Fitzgerald’s value of $0.00, and due to the nature of the
asset, it had no meaningful market value. Therefore, presumably,
the $60,000 sale price was driven primarily by the value of the
Cross-Claims. Other than Trustee’s contention that selling the
Cross-Claims would obviate the estate’s need to prosecute them,

thereby reducing administrative expenses, and his declaratory

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statement that he “reviewed the docket and certain key pleadings
in the [State Court Action],” Trustee offered no analysis
whatsoever regarding the value of the Cross-Claims or why, in his
business judgment, $60,000 was a fair and reasonable price. This
clearly falls short of what is required of a bankruptcy trustee
under Lahijani.

Once faced with opposition to the sale, the bankruptcy court
had the ultimate responsibility to assure that optimal value was
being realized by the estate. Id. at 288-89. The debtor ina
solvent estate is a beneficiary of the trust administered by a
bankruptcy trustee, and it is not encugh for Trustee to have
stopped his inquiry when he determined that the sale price was
adequate as long as it covered administrative expenses and the
claims of non-insider creditors. Because of this failure, and
the reasons discussed below, we must reverse the Sale Order.

2. Compromise Under Rule 9019.

While not raised precisely by Fitzgerald on appeal, we have
the discretion, if not the obligation, to ensure that bankruptcy

law is properly applied. United Student Aid Funds, Inc. v.

Espinosa, No. 08-1134, 2010 WL 1027825, at *9, fn. 14, 15 (-_S.
Mar. 23, 2010).** The sale at issue here was both a sale under
section 363 and a compromise under Rule 9019. The bankruptcy
court erred when it issued the Sale Order without performing the

analysis required by the case law regarding compromises under

We acknowledge that Espinosa instructs that bankruptcy
courts have a duty to ensure compliance with statutory
directives; although we see no reason why the same admonition
shouid net apply to case-developed instructions, we need not
resolve that question in this case.

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Rule 9619.

In Lahijani, we determined that when a sale amounts to an
acquisition of causes of action by a defendant, it must also be
analyzed as a compromise for which the court has an independent
duty to determine whether it is “fair and equitable.” 325 BLR,.
at 290. Notably, in Lahijani a cause of action was being sold to
a defendant over the objection of creditors. Here, the objector
is the debtor. However, as noted previcusly, if Fitzgerald’s is
a surplus estate, then he could have an interest in the
settlement funds. Further, Riley, who is a creditor, made his
objection known at the sale hearing. Therefore, Lahijani
applies.

The fair and equitable settlement standard under Rule 9019
requires consideration of: (1) probability of success in the
litigation; (2) collectability; (3) complexity, expense,
inconvenience, and delay attendant to continued litigation; and
(4) the interests of creditors, which are said to be “paramount.”

Martin v. Kane (In re A&C Props.}), 784 F.2d 1377, i381 (9th Cir.

1986). These four factors are often referred to as the “A&C
factors.” Trustee did not set forth any of the A&C factors in
the Sale Motion or his supporting declaration, nor did he request
that the court address any such factors at the sale hearing.
Confronted by what was actually, in Part, a motion to approve a
compromise under Rule 9019, the bankruptcy court made no findings
on any of the four A&C factors at the sale hearing or in the Sale
Order.

By not applying the fair and equitable settlement standards,

the A&C factors, the bankruptcy court applied an incorrect legal

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standard and thereby abused its aiscretion. Lahijani, 325 B.R,

at 287. Consequently, we REVERSE the Sale Order.

VI. CONCLUSION

Based on the foregoing reasons, we REVERSE.}3

** Appellees filed a Motion to Strike Portions of
Appellant’s Excerpts of Record and a Motion to Strike Portions of

Appellant’s Declaration.

These motions will be disposed of by a

separate order entered concurrently with this Opinion.

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U.S. Bankruptcy Appellate 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.: CC-09-1314-MoPaB
RE: FRANCES MICHAEL FITZGERALD

A separate Judgment was entered in this case on 04/15/201 0.

BILL OF COSTS:

Desc

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 $455 filing fee 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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Case 9:09-bk: in Document Page 22 of 22
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 transmitted
this date to all parties of record to this appeal.

By: Freddie Brown, Deputy Clerk
Date: April 15, 2010