Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-00372/USCOURTS-azd-2_08-cv-00372-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Edward L. Hohn, et al., 

Appellants, 

vs.

Timothy J. Gay, et al., 

Appellees. 

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No. CV-08-0372-PHX-ROS

ORDER

Background

This case is on appeal from a final order of the United States Bankruptcy Court for

the District of Arizona (No. BK-04–20529-RTB) (E.R. 97, 99), pursuant to 28 U.S.C. §

158(a)(1). On November 24, 2004, Appellants filed a voluntary petition to initiate Chapter

13 bankruptcy proceedings (ER 1). On November 23, 2005, the Bankruptcy Court converted

the proceedings to Chapter 7 (ER 6) and, on June 9, 2006, converted the proceedings to

Chapter 11 (ER 13). On October 4, 2006, a Trustee (Appellee Gay) was appointed to

administer Appellants’ estate (ER 24). On July 26, 2007, the Trustee filed a Chapter 11

Reorganization Plan for the estate, to which Appellants objected (ER 44, 76). On November

6, 2007, a hearing was held to confirm the Trustee’s proposed Reorganization Plan, after

which the Bankruptcy Court took both the Plan and objections under consideration (ER 84,

96). On November 26, 2007, the Bankruptcy Court overruled the objections and ordered the

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1

See In re Stolrow’s Inc., 84 B.R. 167, 170 (9th Cir. B.A.P. 1988) (“The question of good

faith is factual and will often require the introduction of evidence.”); In re Sylmar Plaza, L.P., 314

F.3d 1070, 1075 (9th Cir. 2002) (the good faith of a Chapter 11 Reorganization Plan is determined

“on a case-by-case basis”) (internal citation omitted); In re Corey, 892 F.2d 829, 885 (9th Cir. 1989)

(conferring “substantial deference” to a bankruptcy court’s § 1129(a)(3) good faith determination).

Appellants cite In re Bammer, 131 F.3d 788, 791-92 (9th Cir. 1997), for the position that §

1129(a)(3) good faith determinations are mixed questions of fact and law, reviewed de novo.

Bammer, however, specifically defines mixed questions as those in which “the historical facts are

established; the rule of law is undisputed . . . and the issue is whether the facts satisfy the legal rule.”

Id. Here, the parties dispute the facts concerning the Trustee’s alleged conflict of interest and thus

Bammer is inapplicable.

 

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Plan to be re-filed with specified modifications (ER 87). On February 12, 2008, the duly

modified Plan was confirmed in a final order of the Bankruptcy Court (ER 97, 99). On

February 28, 2008, Appellants filed notice of appeal (ER 102). The matter is fully briefed

and before the Court.

Discussion

Appellants challenge confirmation of the Reorganization Plan on two grounds,

alleging the Bankruptcy Court erred because: (1) the Trustee did not submit the Plan in good

faith, as required by 11 U.S.C. § 1129(a)(3); and (2) the Bankruptcy Court failed to grant

Appellants’ requests for discovery and an evidentiary hearing, in violation of 11 U.S.C. §

1128 and the Due Process Clause of the Fifth Amendment. For the reasons set forth below,

the Bankruptcy Court’s Order will be affirmed and Appellants’ appeal denied.

A. Standard

“On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy

judge’s judgment, order, or decree or remand with instructions for further proceedings.” Fed.

R. Bankr. P. 8013. “Findings of fact, whether based on oral or documentary evidence, shall

not be set aside unless clearly erroneous.” Id. Whether a Chapter 11 Reorganization Plan

was submitted in good faith is a question of fact and reviewed for abuse of discretion.1

 See

e.g. In re Cogar, 210 B.R. 803, 808 (9th Cir. B.A.P. 1997) (“An order approving a

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Appellees cite In re Int’l Fibercom, Inc., 503 F.3d 933, 946 (9th Cir. 2007) for the position

that a bankruptcy court’s failure to grant a full evidentiary hearing is reviewed for abuse of

discretion. However, Int’l Fibercom dealt narrowly with a bankruptcy court’s discretion to grant

an evidentiary hearing in response to a motion to alter or amend a final order, pursuant to Federal

Rule of Bankruptcy Procedure 9023, and not the distinct question of how much discretion a

bankruptcy court has in accepting evidence in a Chapter 11 Reorganization Plan confirmation

hearing, pursuant to §§ 1128-29. 

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reorganization plan is reviewed for an abuse of discretion.”); In re Pine Mountain, Ltd., 80

B.R. 171, 172 (9th Cir. B.A.P. 1987) (same). Conclusions of law are reviewed de novo. See

In re New England Fish Co., 749 F.2d 1277, 1280 (9th Cir. 1984) (appeals court review of

bankruptcy court’s conclusions of law is de novo); In re U.S. Trustee, 32 F.3d 1370, 1372

(9th Cir. 1994) (district and appeals courts review a bankruptcy court’s findings under the

same standard). The question of whether a Reorganization Plan confirmation hearing

conforms with 11 U.S.C. § 1128 or constitutional due process is reviewed de novo. See In

re Acequia, Inc., 787 F.2d 1352, 1358 (9th Cir. 1986) (interpretation of § 1128 hearing

requirements is a question of law reviewed de novo); In re Center Wholesale, Inc., 759 F.2d

1440, 1445 (9th Cir. 1985) (whether procedural aspect of a hearing violated due process is

a question of law reviewed de novo).2

 

B. Lack of Good Faith

1. Question of Law

Appellants argue the Trustee’s proposed Chapter 11 Reorganization Plan was per se

invalid, vis-a-vis the § 1129(a)(3) good faith requirement, because the Trustee’s business

relationship with Appellants’ former counsel and current creditor, Mr. Dodge, created a bad

faith conflict of interest. In Appellants’ own words, “a Chapter 11 plan that has been

proposed by a person who holds a conflict of interest – as a matter of law – can never be

approved and confirmed by a bankruptcy court, because the conflict of interest will ‘taint’

any plan proposed by that person, and thus the ‘good faith’ requirement of 11 U.S.C. §

1129(a)(3) can never be satisfied” (Doc. 7 at 12). While § 1129(a)(3) allows a bankruptcy

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court to “confirm a plan only if . . . [t]he plan has been proposed in good faith,” the statute

does not define “good faith.” 11 U.S.C. § 1129(a)(3) (emphasis added). Under Appellants’

interpretation of § 1129(a)(3), any “significant business relationship” between a trustee and

a creditor implicates a bad faith conflict of interest and thus a proposed Rule 11

Reorganization Plan submitted by such a trustee would be per se invalid (Doc. 7 at 18). This

interpretation is squarely at-odds with Ninth Circuit case law requiring the good faith of a

proposed reorganization plan to be determined by the extent to which “it achieves a result

consistent with the objectives and purposes of the Code.” Sylmar Plaza, L.P., 314 F.3d at

1074. Sylmar clearly eschews per se rules in favor of a more flexible examination of each

plan on a “case-by-case basis.” Id. at 1075 (rejecting party’s “proposed per se rule” because

it “would inject unnecessary and undesirable rigidity into the good faith inquiry.”).

Appellants cite three out-of-state bankruptcy court decisions in support of the proposed per

se rule. See In re Coram Healthcare Corp., 271 B.R. 228 (Bankr. D. Del. 2001); In re

Unichem Corp., 72 B.R. 95 (Bankr. N.D. Ill. 1987); Matter of Fiesta Homes of Ga., Inc., 125

B.R. 321 (Bankr. S.D. Ga. 1990). Assuming these cases support Appellants’ proposed per

se rule, an assumption which Appellees contest, they are unpersuasive, as contradicting

established Ninth Circuit law.

2. Question of Fact

Even if the Court were to accept the proposed construction of § 1129(a)(3), for

Appellants to prevail, the Court must also reverse the Bankruptcy Court’s factual finding that

the Trustee’s relationship with Mr. Dodge did not present a conflict of interest. See e.g. In

re AFI Holding, Inc., 355 B.R.139, 151-52 (9th Cir. B.A.P. 2006) (“Whether an interest is

‘materially adverse’ necessarily requires an objective and fact-driven inquiry.”); In re Dick

Cepek, Inc., 339 B.R. 730, 740-41 (9th Cir. B.A.P. 2006) (same); see also Fed. R. Bankr. P.

8013 (“Findings of fact, whether based on oral or documentary evidence, shall not be set

aside unless clearly erroneous.”). The Bankruptcy Court found, after hearing the same

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conflict-of-interest argument during adjudication of Appellants’ Motion to Terminate

Appointment of Chapter 11 Trustee and Restore Debtors to Possession, that:

The question raised is[:] does the connection between the trustee

and Mr. Dodge mean that the trustee is not a “disinterested

person” as the term is used in Section 101(14) of the Bankruptcy

Code . . . Here the connection involves interests in a home

building business entity, which entity has no connection with

this case. Both interests are passive in nature, i.e., no active day

to day involvement in the home building business. The court

views the interests and connections akin to the appearance of a

conflict as opposed to an actual or potential conflict of interest.

(ER 87 at 1073-74).

To undermine the Bankruptcy Court’s factual findings, Appellants cite three verified

statements submitted by the Trustee which outline the extent of the Trustee’s business

dealings with Mr. Dodge (ER 26, 29, 72). However, these statements do no more than flesh

out the details of the Bankruptcy Court’s findings, explaining the exact nature of the

Trustee’s and Dodge’s relationship, and do not contravene the Bankruptcy Court’s analysis.

Appellants also cite their own affidavits which claim the Trustee and Dodge discussed

appointment of a trustee to represent the bankrupt estate without Appellants’ knowledge or

permission (ER 82-83). Given the Appellants’ self interest, these statements are of

questionable evidentiary value, and, even if true, the discussion does not necessarily infer the

conclusion that the Trustee’s and Dodge’s relationship created a conflict of interest between

the Trustee and the estate. The Bankruptcy Court’s factual findings are not clearly erroneous

for failing to adopt this inference. Appellants further cite the fact that the Trustee did not

oppose Mr. Dodge’s application to collect legal fees incurred by the estate (ER 30). Again,

the Bankruptcy Court was not required to infer a conflict of interest simply because the

Trustee did not contest Dodge’s application; Dodge’s rightful claim to the fees is just as

reasonable an explanation. Appellants’ final citation is to their own written and oral

argument during Bankruptcy Court proceedings, neither of which is evidence (ER 58, 96).

In this way, Appellants provide only meager evidence suggesting a conflict of interest

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between the Trustee and Dodge and fail to show the Bankruptcy Court’s finding is “clearly

erroneous.” Fed. R. Bankr. P. 8013. 

The Bankruptcy Court thus did not err in failing to find a conflict of interest between

the Trustee and Dodge; nor did the Bankruptcy Court err in failing to find the Trustee acted

in bad faith when submitting the proposed Rule 11 Reorganization Plan. 

C. Procedural Rulings

1. Evidentiary Hearing

Appellants next argue the Bankruptcy Court erred by failing to grant Appellants’ oral

requests for an evidentiary hearing, that is, “an opportunity to present evidence to establish

the significance and extent of the conflict of interest between Mr. Gay [the Trustee] and Mr.

Dodge,” in violation of 11 U.S.C. § 1128 and the Due Process Clause of the Fifth

Amendment (Doc. 7 at 14). 

Title 11 U.S.C. § 1128 requires a bankruptcy court to hold a hearing prior to

confirming a Chapter 11 Reorganization Plan. See 11 U.S.C. § 1128(a) (“After notice, the

court shall hold a hearing on confirmation of a plan.”). Federal Rule of Bankruptcy

Procedure 3020(b) further requires a bankruptcy court to accept evidence during such a

hearing if an objection is timely filed to the proposed Plan. See Fed. R. Bankr. P. 3020(b)(2)

(“The court shall rule on confirmation of the plan after notice and hearing . . . If no objection

is timely filed, the court may determine that the plan has been proposed in good faith and not

by any means forbidden by law without receiving evidence on such issues.”). Neither the

Bankruptcy Code nor the Rules offer further instruction. In this case, the required hearing

was held on November 6, 2007 (ER 96), in anticipation of which, the Bankruptcy Court

accepted various submissions from the parties, including documentary evidence. Appellants

understood this procedure and submitted documentary evidence in support of the pendent

motions (ER 60; 96 at 1150). 

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Appellants contend the Bankruptcy Court’s acceptance and review of only

documentary evidence was insufficient because § 1128 requires an “evidentiary hearing”

which, according to Appellants, must allow for presentation of testimony. In support,

Appellants cite In re Acequia, in which the Ninth Circuit states: “The bankruptcy court must

hold an evidentiary hearing in ruling on confirmation.” 787 F.2d 1352 at 1358. Yet,

Acequia is unclear whether an “evidentiary hearing” requires testimony or whether review

and discussion of documentary evidence alone is sufficient. At least one bankruptcy court

has interpreted Acequia to define “evidentiary hearing” as requiring presentation of

testimony. See In re Martin, 66 B.R. 921, 925 (Bankr. D. Mont. 1986) (“[T]he court must

hold, and the Debtor must submit testimony at an evidentiary hearing, before ruling on

confirmation.”). Other sources read Acequia to permit “evidentiary hearings” in which only

documentary evidence is presented. See e.g. In re Gulfstar Indus., Inc., 236 B.R. 75, 77-

78 (M.D. Fla. 1999) (“During this required evidentiary hearing, it is sufficient for the court

to decide compliance with 11 U.S.C. § 1129 based upon the Court file.”); Alan N. Resnick

& Henry J. Somner, 7 Collier On Bankruptcy, § 1128.03 at 1128-4 (2008 ed.) (“The evidence

may come, however, from the court’s file in the case, and the court need not take evidence

during the hearing if the evidence in the court’s file from the case will support

confirmation.”). 

The Court finds the latter reasoning more persuasive. Requiring testimony at all

Chapter 11 Reorganization Plan confirmation hearings would unnecessarily waste judicial

resources. In some cases, testimony will provide unique insight that cannot be properly

presented through a document. In other cases, testimonial evidence will closely replicate

evidence already produced, or easily capable of production, in document format and will add

nothing to the proceedings except time and expense. The bankruptcy court is in the best

position to determine whether testimonial evidence will enhance or detract from the

proceedings. Accordingly, absent an express mandate to the contrary from the Ninth Circuit

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or another precedential source, the question of whether to allow such testimony should be

at the discretion of the bankruptcy court. 

In this case, the Bankruptcy Court did not abuse its discretion in failing to grant

Appellants’ oral request to present testimony. Local Rule of the Bankruptcy Court for the

District of Arizona 9014-2(b) requires all requests for presentation of testimony to be in

motion form and include a proposed order. See LRBankr. 9014-2(b) (“Any party filing a

motion, application, or objection who reasonably anticipates that its resolution will require

live testimony may file an accompanying motion for an evidentiary hearing . . . The party

requesting an evidentiary hearing shall accompany the motion with a form of order.”); see

also LRBankr. 9014-2(a) (“[A]ll hearings scheduled on contested matters will be conducted

without live testimony except as otherwise ordered by the court.”). Appellants’ oral requests

during the November 6, 2007 hearing for permission to present testimonial evidence did not

follow procedure and were properly ignored by the Bankruptcy Court. 

Appellants’ failure to follow proper procedure in requesting presentation of

testimonial evidence also undermines the due process claim, as failure to follow the rules and

make use of existing procedure cannot constitute a denial of due process.

Lastly, the Court rejects Appellants’ argument that the Bankruptcy Court, in refusing

to permit introduction of testimonial evidence, failed to perform its “affirmative duty to

ensure that the Plan satisfied all 11 U.S.C. § 1129 requirements for confirmation.” In re

Ambanc La Mesa Ltd. P’ship, 115 F.3d 650, 653 (9th Cir. 1997). As discussed above,

Appellants cite scant evidence suggesting the Bankruptcy Court’s factual findings were in

error. Nor do Appellants proffer, with any specificity, what testimonial evidence would have

been presented at the November 6, 2007 hearing and why this evidence would have rendered

the Bankruptcy Court’s findings clearly erroneous. Without such a showing, the Court has

no basis to find the Bankruptcy Court failed to perform its duty to ensure the proposed

Reorganization Plan satisfied § 1129.

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3

In a February 21, 2008 minute order, the Bankruptcy Court states Appellants filed two

motions to compel on November 5, 2007 (E.R. 101 at 2). Later in the paragraph, the Court states

the motions were “never submitted for ruling to the court.” (E.R. 101 at 2). Because the status of

the two motions is unclear, the Court will assume they were properly submitted but not decided. 

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The Bankruptcy Court did not err in failing to accept testimonial evidence at the

November 6, 2007 confirmation hearing or otherwise order an evidentiary hearing in which

testimony would be allowed. 

2. Motions To Compel

Lastly, Appellants claim the Bankruptcy Court’s failure to rule on two motions to

compel discovery constituted a denial of due process (ER 78-79). The record is not entirely

clear on the facts of this issue, but the Court will assume the Bankruptcy Court properly

received the motions and failed to rule on them.3

 

The Bankruptcy Court’s failure to rule on the discovery motions was not an exercise

of discretion and must be reviewed de novo. See First Pac. Bank v. Gilleran, 40 F.3d 1023,

1027 (9th Cir. 1994). Nevertheless, the Bankruptcy Court did not err. Failure to rule on a

discovery motion before reaching final decision on an issue comports with due process if the

court determines the record is sufficiently developed to support the final decision and the

failure causes no substantive harm to the movant. See Charlotte’s Office Boutique, Inc. v.

Comm’r of Internal Revenue, 425 F.3d 1203, 1212 (9th Cir. 2005) (discovery motion movant

was not denied due process when the Tax Court reached a decision on a contested issue

without resolving the motion because (A) the Tax Court determined the record was sufficient

and (B) the reviewing court could discern no substantive harm to the movant). In this case,

the Bankruptcy Court reviewed the proposed Chapter 11 Reorganization Plan and found the

existing factual record sufficient to support confirmation (E.R. 99). Appellants point to no

specific evidence in the record suggesting the Bankruptcy Court’s determination was

erroneous and Appellants were substantively harmed by the ignored discovery requests. The

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Court thus affirms the Bankruptcy Court’s failure to rule on Appellants’ discovery motions.

Accordingly,

IT IS ORDERED the Bankruptcy Court’s confirmation of the Chapter 11

Reorganization Plan (ER 97, 99) IS AFFIRMED and Appellants’ Appeal IS DENIED.

The Clerk of Court shall close this case. 

DATED this 30th day of March, 2009.

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