Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-56045/USCOURTS-ca9-13-56045-0/pdf.json

Parties Involved:
Alexander Hughes
Appellant
Tower Park Properties, LLC

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF: TOWER PARK

PROPERTIES, LLC,

Debtor,

ALEXANDER HUGHES, Sole NonContingent Beneficiary of the Mark

Hughes Family Trust,

Appellant,

v.

TOWER PARK PROPERTIES, LLC,

Appellee.

No. 13-56045

D.C. No.

2:13-cv-01006-

GHK

OPINION

Appeal from the United States District Court

for the Central District of California

George H. King, Chief District Judge, Presiding

Argued and Submitted

June 3, 2015—Pasadena, California

Filed September 28, 2015

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Before: Raymond C. Fisher and Jay S. Bybee, Circuit

Judges and Elizabeth E. Foote,* District Judge.

Opinion by Judge Bybee

SUMMARY**

Bankruptcy

The panel affirmed the district court’s judgment

dismissing for lack of standing Alexander Hughes’ appeal

from the bankruptcy court’s order approving a settlement

agreement in the Chapter 11 bankruptcy of Tower Park

Properties, LLC.

The panel held that a beneficiary of a trust who disagrees

with the way the trust was administered by former trustees is

not a “party in interest” under 11 U.S.C. § 1109(b) with

standing to object to the bankruptcy court’s approval of a

settlement agreement between a debtor, creditor entities held

by the trust, and the former trustees, at least where the

beneficiary’s interests are adequately represented by a partyin-interest trustee.

* The Honorable Elizabeth E. Foote, District Judge for the U.S. District

Court for the Western District of Louisiana, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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COUNSEL

Scott D. Bertzyk (argued), Eric V. Rowen, Howard J.

Steinberg, Kevin P. Garland, Karin Bohmholdt, and Matthew

R. Gershman, Greenberg Traurig, LLP, Los Angeles,

California, for Appellant.

Jeremy V. Richards (argued) and Dean A. Ziehl, Pachulski,

Stang, Ziehl & Jones LLP, Los Angeles, California; David B.

Golubchik and Daniel H. Reiss, Levene, Neale, Bender, Yoo

& Brill L.L.P., Los Angeles, California, for Appellee.

OPINION

BYBEE, Circuit Judge:

The Bankruptcy Code confers a “right to be heard” with

respect to “any issue in a case under [Chapter 11]” on any

“party in interest.” 11 U.S.C. § 1109(b). We have previously

held that party-in-interest status is a necessary prerequisite to

bankruptcy standing. In re Thorpe Insulation Co., 677 F.3d

869, 884 (9th Cir. 2012). In this case, we consider whether

a beneficiary of a trust who disagrees with the way the trust

was administered by former trustees is a “party in interest”

with standing to object to the bankruptcy court’s approval of

a settlement agreement between a debtor, creditor entities

held by the trust, and the former trustees.

1 We hold that the

trust beneficiary does not have party-in-interest standing

under § 1109(a) to object to the settlement, at least where his

1 Given the evolving status of Hughes’ efforts to remove the original

trustees, discussed infra, the statement of the issue is based on the fact the

trustees were formally removed by order of the probate court.

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interests are adequately represented by a party-in-interest

trustee. We thus affirm the judgment of the district court

dismissing this case for lack of standing.

I

A. The Facts

Appellant Alexander Hughes (“Hughes”) is the only son

of Mark Hughes, the founder of Herbalife who passed away

in 2000, and is the sole, non-contingent beneficiary of the

Mark Hughes Family Trust (“Trust”). Mark Hughes’ estate

had an estimated worth of over $300 million at the time of his

death, and the bulk of his estate was placed in the Trust. See

Hughes v. Klein, 2015 WL 1455981, at *1 (Cal. Ct. App.

Mar. 30, 2015) (unpublished). The Trust principal must

remain in the Trust, per Mark Hughes’ instructions, until

Alexander turns 35 in 2026. Id. Before his death, Mark

Hughes named three successor trustees to the Trust: Conrad

Lee Klein, Christopher Pair, and Jack Reynolds. Id. Once

they assumed responsibility for the Trust, the trustees agreed

that Klein would act as the lead, full-time trustee and

manager of the Trust’s various corporate holdings. Id. The

Trust owns two LLC’s relevant here: Hughes Investment

Partnership, LLC (“HIP”) and MH Holdings II H, LLC (“MH

II”) (together, the “Hughes Entities”). Virtually all of the

Trust’s assets are held either by one of the Hughes Entities or

another LLC owned by the Trust.

At the time of Mark Hughes’ death, MH II owned a real

property asset called “Tower Grove”—a 157-acre

undeveloped residential property located on a hill

overlooking Beverly Hills, California. In 2004, the trustees

authorized the sale of the Tower Grove property to Tower

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Park Properties, LLC (“Tower Park”), the debtor and

appellee. Notably, the sale was entirely seller-financed; MH

II loaned Tower Park the $23.75 million required to purchase

the property. HIP advanced additional funding to Tower Park

for the purpose of developing Tower Grove. Through that

transaction, MH II and HIP became the two largest secured

creditors of Tower Park.2

B. Bankruptcy Court Proceedings

Tower Park soon defaulted on its obligations and, in July

2008, filed for Chapter 11 bankruptcy. As of 2009, HIP and

MH II’s aggregate claims, which included the purchase,

construction, and development financing plus interest,

amounted to approximately $57 million. Tower Park’s

proposed plan of reorganization restructured the Hughes

Entities’ loans, modifying the interest rates and conditionally

reducing the principal balance on certain loans. The proposed

plan further provided that HIP would provide Tower Park

with $7 million in exit financing. The bankruptcy court

entered an order confirming Tower Park’s Chapter 11 plan in

April 2010. After the confirmation of the plan, however,

2 This case concerns only a part of the substantial litigation that the sale

of Tower Grove spawned. We grant Hughes’ motion to take judicial

notice of various documents filed in the U.S. District Court for the Central

District of California in a related proceeding (No. 2:13-cv-01518-GHK)

and in the California probate court trustee removal proceeding (Los

Angeles Superior Ct. No. BP063500). We also take judicial notice of the

California Court of Appeal’s decision on appeal from the probate court,

Hughes v. Klein, 2015 WL 1455981 (Cal. Ct. App. Mar. 30, 2015), and

Tower Park’s Chapter 11 case and adversary proceedings in the U.S.

Bankruptcy Court for the Central District of California (Nos. 2:08-bk20298; 2:12-ap-01803; 2:12-ap-01845). See Harris v. Cnty. of Orange,

682 F.3d 1126, 1132 (9th Cir. 2012) (“We may take judicial notice of

undisputed matters of public record.”).

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disputes arose between the trustees, the Hughes Entities, and

Tower Park over the implementation of the plan provisions. 

For two years, the parties litigated various disputes in

bankruptcy court and, in at least one adversary proceeding,

Tower Park named Klein individually as a defendant, alleging

various claims of personal misconduct.

Consequently, Tower Park entered into negotiations with

the trustees and Hughes Entities to settle the disputes. After

six weeks of negotiations and two full-day mediation

sessions, Tower Park and its various associated entities

entered into a Settlement Agreement with HIP, MH II,

Conrad Klein (individually and as trustee), and Jack Reynolds

(individually and as trustee).3 The Agreement was signed in

early January 2013. The day after the Agreement was signed,

Tower Park filed a motion seeking bankruptcy court approval

of the Agreement. See Fed. R. Bankr. Proc. 9019(a) (“On

motion by the trustee and after notice and a hearing, the court

may approve a compromise or settlement.”). Tower Park

requested and received an expedited hearing date, which the

court set for later that month.

Meanwhile, Hughes had just completed a several months

long trial in California probate court concerning a petition he

had filed back in 2010 to remove the three trustees. The

petition alleged that each of the trustees had committed

various breaches of fiduciary duty with respect to the sale of

Tower Grove and other trust management decisions. The

3

It is unclear from the record why Christopher Pair, one of the three cotrustees, was not a party to the Settlement Agreement. Although Pair did

not sign the Agreement, the Agreement states that Tower Park will

dismiss with prejudice all matters against Pair in either his individual or

trustee capacity.

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parties were still awaiting a final decision by the probate

court when Tower Park filed its motion for approval of the

Settlement Agreement. Six days after the Agreement was

filed, Hughes filed an ex parte application with the probate

court seeking the immediate suspension of the trustees and

the appointment of a successor trustee. The probate court

granted the motion the same day. In place of the trustees, the

probate court appointed Fiduciary Trust International of

California (“FTIC”) as trustee ad litem. The court ordered

FTIC to “analyze . . . and independently determine whether

the [Settlement] . . . is proper and in the best interests of the

Trust,” and “take whatever action is necessary and

appropriate to promote or forestall approval of [the

Settlement].”

The day after the probate court suspended the trustees,

Hughes filed an Objection to the Settlement Agreement with

the bankruptcy court. He asked the bankruptcy court to take

judicial notice of the pending probate court proceedings,

including his petition for removal in probate court, ex parte

application, and the probate court’s grant of immediate

suspension of the co-trustee’s powers. Based on his concerns

about the trustees’ potential breach of trust, Hughes

contended that the Agreement was not negotiated in good

faith and constituted an impermissible modification of a

“substantially consummated” plan, prohibited under

§ 1127(b) of the Bankruptcy Code. Specifically, Hughes

observed that under the proposed Agreement, HIP and MH II

agreed to accept a “discounted payoff amount” of $57.5

million in “full satisfaction” of the Tower Park obligations

under its loans, if approved by the bankruptcy court and paid

by a certain date. The Agreement acknowledged that as of

December 2012, the total outstanding balance on the Hughes

Entities’ loans had risen to approximately $81.6 million. The

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discounted payoff amount of $57.5 million thus equaled a

$24.1 million (or thirty-percent) reduction of Tower Park’s

debt. Pointing to his removal petition, Hughes contended that

the trustees agreed to the Agreement’s “massive,” thirtypercent reduction of the debt in exchange for personal gain: 

$5 million in cash and “broad personal releases,” not subject

to court approval, to “avoid the prospect of having to defend

and settle the claims using their personal funds after they are

removed as trustee[s] of the Hughes Trust.”4 Based on these

objections, Hughes asked the bankruptcy court to deny

approval of the Agreement, or, in the alternative, hold the

matter in abeyance to allow the trustee ad litem—appointed

just the day before—adequate time to review the Agreement.

FTIC filed a “Limited Joinder” to Hughes’ Objection,

joining only the portion requesting abeyance of the approval

motion “to enable [FTIC] to review and independently

determine whether the Agreement is proper and in the best

interests of the Trust.”

On January 16, Tower Park filed a reply opposing

Hughes’ Objection and FTIC’s Limited Joinder on the

grounds that both Hughes and FTIC lacked standing to object

to the Settlement Agreement. Tower Park argued that

Hughes’ status as beneficiary of the Trust does not confer

standing to object. Additionally, it contended, FTIC lacked

standing because it represents the Trust, and the Trust was not

4 The Settlement Agreement contained reciprocal releases. Tower Park

and its entities agreed to dismiss with prejudice “all actions, adversary

proceedings, contested matters or motions” filed against HIP, MH II,

Conrad Klein, Jack Reynolds, and Christopher Pair. HIP, MH II, Conrad

Klein, and Jack Reynolds conditionally agreed to dismiss with prejudice

all pending actions filed against Tower Park and its entities.

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a party to the Settlement Agreement. Tower Park further

argued that the Settlement meets the Rule 9019 criteria, offers

benefits to the estate, does not constitute an impermissible

plan modification, and was negotiated in good faith under the

mediator’s guidance. Hughes did not file a response to

Tower Park’s reply.

In late January 2013, the bankruptcy court held its

scheduled hearing on the approval of the Settlement

Agreement. The debtor argued that the Settlement is “great”

for the estate, discounting the debt by over $20 million. “But

the main thing,” the debtor explained, “is that the litigation

goes away. There’s finality, there’s certainty[,] and we can

move forward with developing the property and getting the

lender paid knowing what the amount is.” Counsel for

Hughes explained his reasons for objecting to the Settlement

and argued that Hughes had standing to object because,

among other reasons, he would be financially impacted by the

Settlement as the sole, non-contingent beneficiary of the

Trust. FTIC also defended its standing to object and

explained that it needed more time to fulfill its mandate from

the probate court to independently assess the benefits of the

Agreement for the Trust. While unable to take a position on

the propriety of the former trustees’ actions at the time of the

hearing, FTIC made clear that it intended to investigate and

determine whether the co-trustees acted outside the bounds of

their fiduciary obligations, and take appropriate action.

At the close of the hearing, the bankruptcy court stated

that it would approve the Settlement. Although the

Settlement “troubled” the court, it was not an improper

modification and it clearly benefited the estate. The court

also concluded that Hughes and FTIC had standing:

“[A]lthough I have questions about it, I think from my

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standpoint that you have standing. It’s a close question, but

I think that they have standing.” Later on, the court

acknowledged that standing is “a tricky little question,” but

explained that “I always like to give the benefit of the doubt

to people that have standing.” With that explanation, the

court issued its order granting Tower Park’s motion to

approve the Settlement Agreement and overruling Hughes’

objection.

In March 2013, after the Settlement Agreement was

finalized, the probate court issued its final decision regarding

the removal of the co-trustees. The court found that the

trustees breached their duty to act with prudence, skill and

diligence when, among other things, they sold Tower Grove

to Tower Park. The court explained that the Tower Park

principal to whom the co-trustees entrusted the development

of Tower Grove “had no formal education in real estate,

property management, real estate financing, and no

professional licenses or certifications.” Consistent with its

prior ruling, the court ordered the co-trustees removed from

their duties and retained FTIC in place as the interim trustee

ad litem. The probate court’s decision was recently affirmed

by the California Court of Appeal. See Hughes v. Klein, 2015

WL 1455981, at *8 (Cal. Ct. App. Mar. 30, 2015)

(unpublished).

C. District Court Proceedings

In February2013, Hughes and FTIC took separate appeals

to the U.S. District Court for the Central District of California

to challenge the bankruptcy court’s approval of the

Settlement. The district court dismissed Hughes’ appeal for

lack of bankruptcy standing, principally because it concluded

that Hughes was not a “party in interest” as required under

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the BankruptcyCode. Quoting the Second Circuit’s decision

in In re Refco Inc., 505 F.3d 109, 118 (2d Cir. 2007), the

court explained that “‘[b]ankruptcy court is a forum where

creditors and debtors can settle their disputes with each

other,’” and it would be “unfair to allow what is essentially

a dispute between Alex Hughes and the Hughes Trust trustees

about whether the Settlement is ‘too good’ for [Tower Park]

to obstruct [Tower Park’s] ‘speedy and efficient’

reorganization.” The court noted that Hughes also had

alternative forums available to resolve his dispute with the

trustees, and indeed, had been using them: “since 2010, he

has been litigating in probate court a petition to remove the

Hughes Trust trustees for alleged ‘self[-]dealing and breaches

of fiduciary duties.’” In sum, the court concluded,

“[Hughes’] stake is too remote, and allowing such remote

parties to participate would unduly obstruct the bankruptcy

with collateral issues.” After holding that Hughes lacked

party-in-interest status, the court analyzed Hughes’ Article III

standing and found that he had none. The district court thus

declined to address whether Hughes had prudential standing. 

Accordingly, the court dismissed Hughes’ appeal for lack of

standing. Hughes timely appealed.

Although the district court dismissed Hughes’ appeal for

lack of standing, it did not dismiss the appeal taken by FTIC. 

At present, FTIC continues to litigate before the district court. 

In fact, FTIC has taken the position that the Conditional

Provisions became null and void when Hughes’ appeal to the

district court prevented the Agreement from becoming final

by the agreed-upon deadline, February 15.

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II

The question before us is whether Hughes has standing

such that he possesses a right to be heard on his objection to

the Settlement Agreement. The bankruptcy court thought the

issue “close” and “tricky,” but granted Hughes “party-ininterest” standing and ruled against him on the merits. The

district court, however, dismissed his appeal on the grounds

that he lacked standing in the bankruptcy court. Hughes has

standing to appeal the district court’s decision, so the

question presented is one of bankruptcy standing. In re

Thorpe Insulation Co., 677 F.3d 869, 883–84 (9th Cir. 2012).

In order to have standing in bankruptcy court, Hughes

must satisfy three requirements. First, he must satisfy the

statutory requirements of the BankruptcyCode and qualify as

a “party in interest” under 11 U.S.C. § 1109(b). Second,

because he seeks standing in federal court, he must satisfy the

constitutional minimum required by Article III. Third, he

must meet federal court prudential standing requirements. 

Thorpe, 677 F.3d at 884. The district court concluded that

Hughes satisfied neither the “party in interest” nor the Article

III requirements of the bankruptcy standing test, and declined

to reach the prudential standing requirement.5

5 We review “de novo the district court’s decision on appeal from the

bankruptcy court, applying the same standards applied by the district

court, without deference to the district court. The bankruptcy court’s

conclusions of law are reviewed de novo, and its findings of fact are

reviewed for clear error.” Thorpe, 677 F.3d at 879 (citation omitted). 

“Standing is an issue of law which we review de novo. Factual

determinations underlying the standing decision are reviewed for clear

error.” In re Palmdale Hills Prop., LLC, 654 F.3d 868, 873 (9th Cir.

2011) (citations omitted).

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We first address whether Hughes is a party in interest. 

Hughes advances two arguments. He claims that he is a party

in interest because of his future financial stake in the Trust,

which holds corporations that are parties to the Settlement. 

Hughes also argues that he is a party in interest because,

under California law, he has a cause of action against Tower

Park for its complicity in the trustees’ breach of their

fiduciary duty. Because we conclude that neither rationale

supports the conclusion that Hughes is a party in interest for

purposes of § 1109, we decline to address Article III and

prudential standing requirements.

A. Hughes’ Financial Stake is Insufficient to Confer Partyin-Interest Status

We turn to the question whether Hughes is a “party in

interest,” as required for bankruptcy standing. Section

1109(b) of the BankruptcyCode governs the right to be heard

in Chapter 11 proceedings:

A party in interest, including the debtor, the

trustee, a creditors’ committee, an equity

security holder’s committee, a creditor, an

equity security holder, or any indenture

trustee, may raise and may appear and be

heard on any issue in a case under this

chapter.

11 U.S.C. § 1109(b) (emphasis added). The Bankruptcy

Code does not define the term “party in interest” except

operationally: Section 1109(b) supplies us with a list of

parties who must be considered parties in interest. Because

the list of parties is preceded by the word “including,” the list

is illustrative, and not exhaustive. We have observed that the

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party-in-interest standard has “generally been construed

broadly,” and that “[c]ourts must determine on a case by case

basis whether the prospective party has a sufficient stake in

the proceedings so as to require representation.” Thorpe,

677 F.3d at 884 (quoting In re Amatex Corp., 755 F.2d 1034,

1042 (3d Cir. 1985)). At the same time, we have also

recognized that our sister circuits have not interpreted “party

in interest” to mean “anyone who might be affected by the

bankruptcy proceedings”; rather, a party in interest is one

who has a “legally protected interest that could be affected by

a bankruptcy proceeding.” Id. (quoting In re James Wilson

Assocs., 965 F.2d 160, 169 (7th Cir. 1992)) (emphasis added);

see also In re Global Indus. Techs., 645 F.3d 201, 210 (3d

Cir. 2011).6 Thus, an entity “that may suffer collateral

damage” but does not have a legally protected interest does

not have standing under § 1109(b). In re C.P. Hall Co.,

750 F.3d 659, 661 (7th Cir. 2014). Such interests are “too

remote to entitle the entity to intervene in a bankruptcy case.” 

Id.; see 7 Collier on Bankruptcy ¶ 1109.01[1] (“The general

theory behind the section is that anyone holding a direct

financial stake in the outcome of the case should have an

opportunity . . . to participate in the adjudication of any issue

that may ultimately shape the disposition of his or her

interest.”).

Both parties agree that Hughes does not fall under any of

the categories of parties in interest listed in § 1109(b). They

6

If we adopted a broader reading, we would effectively collapse the

§ 1109(b) requirements into Article III standing requirements. Although

at least one circuit has suggested that these two measures are “effectively

coextensive,” Global Indus. Techs., 645 F.3d at 211, we must give some

effect to Congress’s words. We think that effect was captured in our

holding in Thorpe: the party asserting standing to object in a bankruptcy

proceeding must have a “legally protected interest.” 677 F.3d at 884.

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disagree over whether Hughes has a legally protected interest

in the Settlement approval proceedings such that he

constitutes a party in interest under the Bankruptcy Code. 

Hughes argues that he has a legally protected interest because

any loss borne by the Hughes Entities as a result of the

Settlement will create a loss for the Trust, which will, in turn,

create a loss for Hughes. By contrast, Tower Park contends

that Hughes’ interest in the Trust assets is too remote, and

that allowing trust beneficiaries to participate would clutter

the bankruptcy proceeding with collateral issues. While we

have not previously addressed whether a trust beneficiary has

bankruptcy standing to object to a settlement that may

detrimentally affect trust assets, a comparison of our decision

in Thorpe, 677 F.3d 869, with the Second Circuit’s decision

in In re Refco Inc., 505 F.3d 109 (2d Cir. 2007), is instructive.

In Thorpe, we considered whether certain insurers of a

debtor had standing to object to the debtor’s Chapter 11

reorganization plan. 677 F.3d at 876. The debtor, Thorpe

Insulation Company, faced substantial asbestos-related

liability and thus filed a plan of reorganization under 11

U.S.C. § 524(g), a provision of the Bankruptcy Code

specially enacted to deal with asbestos claims. Id. at 877. As

required under § 524(g), Thorpe established a trust for the

primary purpose of distributing funds to present and future

holders of asbestos claims. Id. at 877–78. Thorpe also

reached settlements with thirteen of its insurers, which

together agreed to provide more than $600 million in assets

to fund the trust. Id. at 878. In exchange, the settling insurers

sought protection under § 524(g)’s sheltering mechanism: an

injunction, issued upon plan confirmation, designed to

channel asbestos-related claims to the trust. Id. The resulting

plan permitted asbestos claimants to either bring their claims

against the trust or get permission from the trust to sue the

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insurers who had not settled with the debtor. Id. at 878–79. 

The non-settling insurers objected to the plan, and the

bankruptcy court dismissed their objection for lack of

standing. Id. at 879.

We concluded that the non-settling insurers were parties

in interest because the plan directly affected their legal

interests. We identified two interests relevant here. First, we

determined that the non-settling insurers might be bound by

the trust’s determination of liability. Thus, the trust’s actions

would have preclusive effect on the non-settling insurers. Id.

at 885–86; cf. In re Teligent, Inc., 640 F.3d 53, 60–61 (2d Cir.

2011) (because entity lacked standing to challenge the

settlement in bankruptcy court, it was not estopped from

asserting a defense challenging the validity of the agreement

in another forum). Second, the settlement affected the nonsettling insurers’ rights to recover costs against settling

insurers, and cost recovery had previously been negotiated in

a contract between the two groups of insurers. Thorpe,

677 F.3d at 886–87. The non-settling insurers “reasonably

complain[ed]” that if they lacked standing to challenge the

bankruptcy plan, which increased their liabilities, they might

be bound by the plan’s valuation of particular insurance

claims even though “they were not permitted to participate in

establishing the valuation matrix” and could not challenge it. 

Id. at 886.7

7 Contrast Thorpe with the Seventh Circuit’s recent decision in In re

C.P. Hall Co. In that case, also concerned with asbestos and insurance

funds, Hall was in bankruptcy and sought to settle its insurance coverage

with Integrity. 750 F.3d at 660. Hall had $10 million in insurance

coverage remaining with Integrity, but Integrity was also bankrupt, and

Hall and Integrity agreed to settle for $4.125 million. Id. Columbia

Casualty was Hall’s excess insurer, and it objected to the settlement on the

ground that anything Integrity did not have to pay might be charged to

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In Refco, the Second Circuit considered whether investors

were parties in interest with standing to object to an allegedly

fraudulent settlement between their company and the debtor

company. 505 F.3d at 111. In that case, approximately $300

million worth of investment funds belonging to Sphinx, an

investment management company, were transferred from

Refco Capital Markets, Ltd. (“RCM”)—where the funds had

previously been invested—to accounts held on Sphinx’s

behalf at Lehman Brothers. Id. at 112. Five days after the

transfer, Refco, Inc. and its RCM affiliate filed for Chapter 11

bankruptcy. Id. at 112 & n.3. RCM’s creditors sued Sphinx,

complaining that Sphinx had effected a preferential transfer

and demanding a return of the funds to the RCM estate. Id.

at 112. Sphinx and RCM’s creditors eventually reached a

settlement in which Sphinx agreed to return $263 million to

the RCM estate and waive any claim against RCM related to

the transfer, including its right to file a claim against RCM’s

estate. RCM filed a 9019 motion, seeking bankruptcy court

approval of the settlement. Id. at 111–13. Sphinx’s investors

objected, arguing that the settlement was the product of

collusion and fraud, and pointed to evidence suggesting that

Sphinx’s directors had acted ultra vires in agreeing to the

settlement. Id. at 113. The bankruptcy court found that the

investors lacked standing to object and approved the

settlement. Id. at 114.

On appeal, the investors argued that the settlement would

cost them tens of millions of dollars, imposing a direct,

pecuniary harm. Id. at 115. In the alternative, the investors

Columbia. Id. The Seventh Circuit held that Columbia lacked standing

under § 1109(b) because it was “not a creditor of Hall’s estate in

bankruptcy, [and was] not the debtor.” Id. at 661. Any damage it might

suffer was “collateral.” Id.

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contended that when the Sphinx directors breached their

fiduciary duty by entering into a fraudulent settlement, the

funds became the res of a constructive trust, of which the

investors were the beneficiaries. Because they held a

constructive trust over the funds used in the Settlement, they

argued, theyhad standing under the direct-pecuniary-interests

test. Id.

The Second Circuit disagreed with the investors’

arguments. It concluded that party-in-interest standing does

not extend to those seeking to assert rights that are purely

derivative of another party’s rights, and here, the investors

could not claim to enforce any rights distinct from those of

Sphinx. Id. at 117. The court reasoned that, “[b]y investing

in Sphinx, Investors placed control of their funds entirely

within the hands of the Sphinx directors . . . . Only Sphinx,

not individual Investors, or even Investors as a group, could

assert a claim against the Refco estate, and only Sphinx was

permitted to negotiate a settlement . . . .” Id. Therefore,

“Investors maintain a financial ‘interest’ in Sphinx, but they

are not a party in interest within the meaning of the

Bankruptcy Code.” Id.

With respect to the investors’ allegations of breach, the

court acknowledged that “[i]t may be that the Sphinx

directors violated their fiduciary duties by entering into a

settlement that was not in the best interests of Investors.” Id.

at 118. But the court concluded that the bankruptcy court was

not the appropriate forum in which to resolve such a dispute: 

“Bankruptcy court is a forum where creditors and debtors can

settle their disputes with each other. Any internal dispute

between a creditor and that creditor’s investors belongs

elsewhere.” Id. at 118 (emphasis in original). Permitting too

many “peripheral parties” status as parties in interest “thwarts

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the traditional purpose of bankruptcylaws which is to provide

reasonablyexpeditious rehabilitation of financiallydistressed

debtors with a consequent distribution to creditors who have

acted diligently.” Id. (quoting In re Ionosphere Clubs, Inc.,

101 B.R. 844, 850–51 (Bankr. S.D.N.Y. 1989)). Thus, the

court concluded, permitting the investors to enter the

bankruptcy plan confirmation process and attempt to prove

the “litany of wrongs allegedly wrought by the officers and

directors of Sphinx upon Investors”—claims, the court noted,

the investors could file elsewhere—would cause a substantial

delay in the Refco bankruptcy proceeding and would not be

countenanced. Id. at 119.

Applying Refco and Thorpe to the facts of this case, we

conclude that Hughes’ financial stake in the Trust assets does

not make him a party in interest within the meaning of

§ 1109(b). The California Court of Appeal has explained that

“[a] trust beneficiary has no legal title or ownership interest

in the trust assets,” and as such, in civil lawsuits, a trust

beneficiary’s “right to sue is ordinarily limited to the

enforcement of the trust, according to its terms.” Saks v.

Damon Raike & Co., 7 Cal. App. 4th 419, 427 (1992). In

general, therefore, a trust beneficiary is not the entity

positioned to take legal recourse to protect the trust assets,

unless the beneficiary is seeking only to enforce the terms of

the trust. Here, Hughes’ objection to the Settlement

Agreement is not an action to enforce the terms of the Trust. 

Nor has Hughes suggested that his interest in the Trust assets

is somehow different from that of an ordinary trust

beneficiary. Indeed, the record shows that the Hughes

Entities and other LLC’s own the vast majority of assets in

the Trust, including all the debt owed the Trust by Tower

Park. Hughes has not claimed any direct ownership interest

in the Trust assets, nor any legal entitlement to control or

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manage those assets at this time. He does not, as we held in

Thorpe, have a “legally protected interest” in the Settlement

itself.

Hughes’ interest in the Settlement is therefore distinct

from that of the insurers in Thorpe. Whereas the insurers

demonstrated that the proposed plan directly interfered with

their legal rights and financial liabilities, Hughes makes no

such showing.

8 Rather, the financial “interest” that Hughes

purports to possess in the trust assets is analogous to the

interest possessed by the investors in Refco. While the

investors in Refco held a financial “interest” in Sphinx’s

assets insofar as a threat to the assets impacted their return on

investment, they did not maintain control or management

over the funds. Once they invested in Sphinx, the investors

“placed control of their funds entirely within the hands of the

Sphinx directors.” Refco, 505 F.3d at 117. As such, the

investors were not parties properly positioned to assert claims

or negotiate a settlement relating to those assets. Id. The

same is true for Hughes. Once Mark Hughes placed assets in

the Trust for his son’s benefit, he placed control of those

assets entirely within the hands of the trustees. The legally

8 At oral argument, counsel for Hughes argued—for the first time—that

the Settlement Agreement directly interferes with Hughes’ legal rights

because it purports to release claims of any Hughes Entities’ beneficiaries

against Tower Park. This argument was not raised before the bankruptcy

court, the district court, or our Court prior to oral argument. It is therefore

forfeited. In re Mercury Interactive Corp. Secs. Litig., 618 F.3d 988, 992

(9thCir. 2010). We thus decline to consider whether this provision affects

Hughes’ legal rights such that he should be accorded party-in-interest

status, although a common-sense reading of the Settlement Agreement

provision belies Hughes’ interpretation. Hughes is not the owner of the

Hughes Entities; he is a beneficiary of the Trust, and the Trust was not a

party to the Settlement.

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protected interest in the properties at issue here rests with the

trustees, not the beneficiary. As such, Hughes is not the party

properly positioned to object to the Settlement as it relates to

the assets in the Trust—the proper party is FTIC, the trustee

ad litem.9

Refco also demonstrates that an allegation of fraud lodged

against parties to the settlement does not change the party-ininterest analysis. While acknowledging that there may very

well have been a breach of fiduciary duty by the Sphinx

directors, the Second Circuit concluded that such disputes do

not belong in bankruptcy court. Id. at 119. Likewise, even

though Hughes has alleged serious claims of breach against

the former trustees of the Trust, such allegations do not

convert Hughes into a party in interest. His disputes with the

trustees, like the investors’ disputes with the Sphinx directors,

belong elsewhere. Permitting Hughes to object to the

Settlement because of breach by the trustees is collateral to

the resolution of claims between the debtor (Tower Park) and

its creditors (the Hughes Entities). Indeed, had the

bankruptcy court waded in to the relationship between

Hughes and the trustees, it might have interfered with actions

in the appropriate fora for such challenges: the California

courts. The chronology of events in this case confirms this. 

Hughes has successfully adjudicated his disputes with the

trustees in the California probate court and the California

9 We reject Hughes’ claim that the district court erred in failing to give

proper “deference” to the bankruptcy court’s “implied findings of fact”

that Hughes had a significant financial stake in the Trust assets. The

district court did not dispute this factual contention; rather, the court

concluded as a matter of law that this financial stake—however significant

in monetary terms—was nevertheless “too remote” to confer “party in

interest” status. The district court’s application of the standards of review

was proper. See Thorpe, 677 F.3d at 879.

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Court of Appeal. See Hughes, 2015 WL 1455981, at *1–2. 

Bringing disputes between trust beneficiaries and trustees into

the settlement approval process interferes with the central

purpose of Chapter 11 to promote the efficient reorganization

of debtors. See Toibb v. Radloff, 501 U.S. 157, 163 (1991)

(the purpose of Chapter 11 is to “permit[] business debtors to

reorganize and restructure their debts in order to revive the

debtors’ businesses and thereby preserve jobs and protect

investors”). We wish to be clear: by refusing party-in-interest

status to Hughes, we are making no judgment as to the

validity of Hughes’ claims of breach against the trustees. 

However meritorious theymay be, those claims do not confer

party-in-interest standing upon Hughes.

As Refco recognized, the true party in interest is the party

properly charged with representing the financial interests of

the affected entity. See 505 F.3d at 117 (“Only Sphinx, not

individual Investors, or even Investors as a group, could

assert a claim against the Refco estate, and only Sphinx was

permitted to negotiate a settlement . . . . The party in interest

in the bankruptcy sense, representing the Investors’ financial

interest, is Sphinx.”). At present, the Trust is represented by

FTIC, which has shown itself willing and able to defend the

interests of the Trust. It not only joined Hughes’ objection

and motion to dismiss before the district court, but has also

continued to litigate the Settlement Agreement after Hughes’

suit was dismissed. FTIC’s appointment as trustee ad litem

allays any remaining doubt over whether Hughes’ objections

should be heard in light of concerns about the former trustees’

loyalty to the trust. Indeed, the trustee ad litem was charged

with representing the Trust in bankruptcy proceedings and

with “analyz[ing] . . . and independently determin[ing]

whether the [Settlement] . . . is proper and in the best interests

of the Trust,” and “tak[ing] whatever action is necessary and

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appropriate to promote or forestall approval of [the

Settlement].”

FTIC continues, to this day, to challenge the

enforceabilityof the Conditional Provisions. It holds the duty

to manage and invest trust funds, and, if necessary, maintain

legal proceedings against third parties on behalf of the Trust

and its beneficiaries. See Restatement (Third) of Trusts

§ 107(3) (2012) (“In appropriate circumstances, a trustee ad

litem may be appointed to consider and, if appropriate, to

maintain a proceeding against a third party on behalf of the

trust and its beneficiaries.”). Thus, even if there were reasons

to doubt the adequacy of the former trustees’ representation

of the Trust, those trustees have since been replaced by FTIC

for purposes of litigating the Settlement’s scope and validity. 

FTIC is the present trustee for the Trust, a willing and able

advocate for the Trust’s assets, and the proper party in

interest in this case.

B. Hughes’ Potential Claim Against Tower Park Does Not

Confer Party-in-Interest Status

Hughes seeks to distinguish his case from Refco, arguing

that he falls into a narrow exception to the general rule that

the trustee is the proper representative for the trust in legal

actions. Hughes relies on City of Atascadero v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., in which the California

Court of Appeal authorized a trust beneficiary to proceed

directly against a third party who had allegedly “actively

participated with a trustee in a breach of trust for their own

financial advantage.” 68 Cal. App. 4th 445, 467 (1998). The

court characterized this type of claim as “a direct right and

not one that is derivative through the trustee.” Id. (quoting

4 Scott on Trusts § 294.1 (4th ed. 1989)) (emphasis omitted). 

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Hughes contends that under Atascadero, he possesses a claim

against Tower Park for participating in the trustees’ alleged

breach of trust for its own financial gain. Such a claim would

not be derivative of the trustees’ power to sue Tower Park,

but rather a standalone, direct claim of interference with the

trustee-beneficiary relationship. Hughes explains that if he

can sue Tower Park directly to unwind a collusive settlement,

then “common sense dictates that he also satisfies the law’s

elastic concept of a ‘party in interest.’”

We disagree. At best, Hughes’ purported Atascadero

claim fails under that case’s own rationale. Atascadero held

that where a successor trustee is willing and available to

protect the trust through appropriate legal proceedings, a trust

beneficiary may not maintain separate proceedings to

accomplish the same end. Although Atascadero held that

beneficiaries may sue third parties directly for participating

in a breach of trust, the California Court of Appeal was

careful to specify that trust beneficiaries may maintain such

a suit only if a successor trustee appointed to replace the

breaching trustee “has refused to sue or is unavailable.” 

68 Cal. App. 4th at 467–68 (quoting 4 Scott on Trusts, supra,

§ 294.4). So long as “the trustee is ready and willing to

undertake the necessary proceedings,” then “the beneficiaries

cannot maintain a suit against adverse third parties.” Id. at

464–65; see also Restatement (Third) of Trusts § 107(2)(b)

(“A beneficiarymaymaintain a proceeding related to the trust

or its property against a third party only if . . . the trustee is

unable, unavailable, unsuitable, or improperly failing to

protect the beneficiary’s interest.” (emphasis added)). There

is no evidence here that the trustee ad litem failed to take the

“necessary and appropriate [actions] to promote or forestall

approval of [the Settlement],” as the probate court instructed

it to do.

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Even if Hughes could bring a direct Atascadero claim

against Tower Park, it would not change our conclusion that

the bankruptcy court is not the appropriate forum for Hughes’

dispute with Tower Park. There are more appropriate fora

available to adjudicate the numerous and time-consuming

issues involved in Hughes’ Atascadero claim. See Refco, 505

F.3d at 118–19 (“We note that although they are not parties

in interest . . . Investors may still have remedies for fraud

perpetrated by their fiduciaries.”). Adjudicating Hughes’

Atascadero claim would involve a significant amount of time

and a litany of issues: whether Tower Park induced, “actively

participated with,” or aided and abetted the trustees in a

breach of trust; whether Tower Park did so for its own

financial gain; whether Tower Park received and retained the

benefits under the Settlement in knowing breach of trust, etc. 

See Atascadero, 68 Cal. App. 4th at 462. Surely, these

questions would have caused a substantial delay in Tower

Park’s bankruptcy proceeding, contravening the purpose of

Chapter 11 to promote “speedy and efficient reorganization.” 

Refco, 505 F.3d at 119. Accordingly, even if Hughes has a

direct claim against Tower Park, it does not persuade us that

bankruptcy court is the appropriate forum in which to hear it

and that Hughes should be considered a party in interest.

III

In sum, we adopt the reasoning of the Second Circuit’s

opinion in Refco and hold that Hughes, as a trust beneficiary,

does not possess party-in-interest status under § 1109(b), at

least where his interests are adequately represented by a

party-in-interest trustee. We also reject Hughes’ argument

that Atascadero distinguishes his case from Refco. Because

we hold that Hughes lacks statutory party-in-interest status,

we decline to address whether Hughes satisfies the Article III

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and prudential standing requirements. The judgment of the

district court is

AFFIRMED.

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