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FILED

OCT 15 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP Nos. CC-14-1102-DTaSp

) CC-14-1103-DTaSp

MORRY WAKSBERG, M.D., ) (Related Appeals)

MORRY WAKSBERG, M.D., INC., )

) Bk. Nos. 06-16096-BB

Debtors. ) 06-16101-BB

______________________________)

)

THE BANKRUPTCY LAW FIRM, PC, )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

ALFRED H. SIEGEL, Chapter 7 )

Trustee; MORRY WAKSBERG, MD; )

IDA WAKSBERG, )

)

Appellees. )

______________________________)

Argued and Submitted on September 18, 2014

at Pasadena, California

Filed - October 15, 2014

Appeals from the United States Bankruptcy Court

for the Central District of California

Honorable Sheri Bluebond, Bankruptcy Judge, Presiding

 

Appearances: Kathleen P. March of The Bankruptcy Law Firm,

P.C., argued for Appellant The Bankruptcy Law

Firm, P.C.; Byron Moldo of Ervin, Cohen & Jessup

LLP and Daniel A. Lev of SulmeyerKupetz, APC

argued for Appellee Alfred H. Siegel, Chapter 7

Trustee.

 

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.
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Before: DUNN, TAYLOR, and SPRAKER,2 Bankruptcy Judges.

Years after the related chapter 113 cases of an

ophthalmologist, Morry Waksberg, M.D., and his corporation, Morry

Waksberg, M.D., Inc. ("Corporation"), were converted to

chapter 7, the bankruptcy court approved the chapter 7 trustee's

motion to consolidate the cases for distribution purposes. The

bankruptcy court also approved a settlement which allowed, inter

alia, substantial personal exemptions to Dr. Waksberg that he

first claimed more than two years after filing his personal

bankruptcy case. But for the consolidation, Dr. Waksberg’s

personal case apparently would not have sufficient funds to

implement the settlement and pay his allowed personal exemptions. 

The approval of consolidation and the settlement together would

deplete the funds of the Corporation's case, such that Appellant,

the holder of an unpaid chapter 11 administrative claim in the

Corporation's case, no longer would be paid its approved fees in

full.4 Hence, these appeals. We AFFIRM the bankruptcy court’s

order (“Compromise Order”) approving the settlement, as amply

supported by the record before us. However, we VACATE the order

2 The Honorable Gary A. Spraker, Chief Bankruptcy Judge

for the District of Alaska, sitting by designation.

3 Unless otherwise indicated, all chapter and section

references are to the federal Bankruptcy Code, 11 U.S.C.

§§ 101-1532, and all “Rule” references are to the Federal Rules

of Bankruptcy Procedure, Rules 1001-9037.

4 We granted a stay to preserve the status quo pending

disposition of the related appeals.

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granting substantive consolidation, as inconsistent with the

standard adopted by the Ninth Circuit in Alexander v. Compton

(In re Bonham), 229 F.3d 750 (9th Cir. 2000), in the face of

substantial opposition from an interested party, and REMAND to

the bankruptcy court for further proceedings.

I. FACTUAL BACKGROUND

The appeals pending before the Panel have their genesis in 

disputes that arose more than 20 years ago.5 In 2005,

Dr. Waksberg and the Corporation entered into a settlement

agreement ("Transamerica Settlement Agreement") with Transamerica

Insurance Company ("Transamerica"). The Transamerica Settlement

Agreement resolved litigation which Dr. Waksberg and the

Corporation had filed in 1992 against Transamerica, alleging

claims for defamation. The settlement with Transamerica was in

the amount of $11 million. Dr. Waksberg and the Corporation also

settled litigation pending against the law firm of Skadden, Arps,

Slate, Meagher & Flom, LLP ("Skadden Arps Settlement") for the

amount of $2.6 million.6 

5 One piece of the litigation is the subject of a

DC Circuit Court of Appeals decision in 1997; this decision

contains background facts relating to the underlying dispute only

tangentially relevant to this disposition. See United States v.

Waksberg, 112 F.3d 1225 (D.C. Cir. 1997). In essence, it appears

that Dr. Waksberg’s patients were improperly informed in the midto late 1980s that he no longer could participate in the Medicare

reimbursement program. Transamerica was the federal government’s

agent at the time.

6 Dr. Waksberg and the Corporation filed a state court

action against Skadden Arps, previously their counsel in the

Transamerica litigation, seeking damages for legal malpractice,

continue...

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On November 21, 2006, Dr. Waksberg and the Corporation each

filed voluntary petitions for relief under Chapter 11 of the

Bankruptcy Code. The cases were converted from chapter 11 to

chapter 7 on May 24, 2007. Alfred H. Siegel (“Trustee”) was

appointed trustee in both chapter 7 cases. Funds from the

Transamerica Settlement7 and the Skadden Arps Settlement8

constitute essentially all of the assets of the bankruptcy

estates. 

1. Allocation of the Settlement Proceeds Pursuant to the

Settlement Agreements

Paragraph 6.a. of the Transamerica Settlement Agreement

provides:

In full settlement of all claims covered herein, and

subject to all other terms of this Agreement,

Transamerica agrees to pay plaintiffs the amount of

Eleven Million Dollars and No Cents ($11,000,000.00).

The total consideration of eleven million dollars

($11,000,000.00) shall be promptly paid and disbursed

by Transamerica, in the form of seven separate checks

(or six separate checks and one wire transfer) as

6...continue

breach of fiduciary duty, fraud and deceit, nondisclosure, breach

of contract, conversion, replevin, injunction, invasion of

privacy, constructive trust, equitable accounting, and unjust

enrichment.

7 On November 1, 2006, the remaining proceeds of the

Transamerica Settlement Agreement (then in the amount of

$9,450,000 plus accrued interest) were interpleaded by

Transamerica into the California state court ("Interpleader

Action") in light of the numerous lien claims being asserted by

professionals in the litigation. Dr. Waksberg appears to have

had a volatile relationship with a series of attorneys.

8 In 2006, approximately $1 million was turned over to

the law firm of Hoge, Fenton, Jones & Appel, Inc., and thereafter

turned over to the Trustee in June of 2007.

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provided herein.

Paragraph 7 of the Transamerica Settlement Agreement sets

forth the specifics of how the six checks were to be issued:

- $600,000 payable to the Corporation as compensation

for lost earnings (corporate earnings for medical fees

not earned)

- $2,280,000 payable to the Corporation as compensation

for lost earnings (corporate earnings for medical fees

not earned)

- $2,750,000 payable to the Corporation as compensation

for loss of corporate medical practice and related

corporate Goodwill

- $1 million payable to Dr. Waksberg as compensation

for personal injuries which had a physical

manifestation

- $3 million payable to Dr. Waksberg as compensation

for loss of personal name and reputation (Goodwill) in

medical and related fields of business

- $420,000 payable to the Corporation as compensation

for lost earnings (corporate earnings for medical fees

not earned)

Finally, paragraph 6.c. of the Transamerica Settlement

Agreement provides for the payment of $950,000 to the

Corporation, either by check or by wire transfer, as compensation

for lost earnings (corporate earnings for medical fees not

earned).

It appears that similar allocations between Dr. Waksberg and

the Corporation were made in the Skadden Arps Settlement

Agreement. "The amount of $472,727.28 shall be allocated to

settlement of claims seeking compensation for personal injuries

to [Dr. Waksberg] which had a physical manifestation."9

9 This quotation was taken from the proposed settlement

of the Exemption Objection. No copy of the Skadden Arps

continue...

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2. The Law Firm's Claim for Unpaid Fees

An Official Committee of Unsecured Creditors ("Committee")

was appointed in the Corporation's chapter 11 case. An order

authorizing the employment of the Bankruptcy Law Firm, PC ("Law

Firm"), was entered on May 1, 2007.

On September 27, 2007, the bankruptcy court entered an order

granting compensation ("Fee Award"), on an interim basis, to the

Law Firm in the amount of $69,350.17 in fees and $3,606.40 in 

expenses for services provided in the Corporation's chapter 11

case. The Fee Award thereafter was approved on a final basis by

the court's order entered September 23, 2008. The bankruptcy

court authorized the payment of 50% of the Fee Award on March 30,

2009, from funds being held in the Interpleader Action. It is

undisputed that the Law Firm received the 50% payment and that

the remaining amount owed is $36,478.

3. Dr. Waksberg's Exemption Claims

In his personal case, Dr. Waksberg filed his original

Schedule B (personal property schedule) on December 21, 2006. He

included therein a contingent claim on account of litigation,

also identified in Item 4 of his Statement of Financial Affairs. 

Schedule B stated that the current value of Dr. Waksberg's

interest in the litigation was $0.00. As other personal property

in which he claimed an interest, Dr. Waksberg included the

Transamerica Settlement funds held in the Interpleader Action. 

Dr. Waksberg asserted the value of his interest in the

9...continue

Settlement Agreement is in the record.

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Transamerica Settlement proceeds was $3,538,245.60. He also

scheduled settlement funds held in a Wells Fargo trust account

and asserted the value of his interest in those funds was

$437,250.07.10 However, Dr. Waksberg did not claim an exemption

in any of the foregoing personal property assets in his

Schedule C (property claimed as exempt), also filed on

December 21, 2006. Neither did Dr. Waksberg assert an exemption

claim in these assets when he amended his Schedules B and C on

two occasions: on March 26, 2007 and on May 14, 2007.

On November 24, 2008, Dr. Waksberg filed an amended

Schedule C in which, for the first time, he claimed an exemption

in (a) a personal injury claim, asserting $20,725 as exempt, and

(b) loss of future income, asserting $3,600,000 as exempt. 

Another amended Schedule C was filed on December 3, 2008. It is

unclear why this December 3 amendment was made, as it appears to

10 The Law Firm did not include in the record a copy of

the Corporation’s original or amended Schedule B. We have

retrieved these documents from the bankruptcy court’s electronic

docket and take judicial notice of them. See O’Rourke v.

Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58

(9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co.

(In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

The Corporation filed its original Schedule B on

December 21, 2006 (docket no. 18). It then filed an amended

Schedule B on March 26, 2007 (docket no. 109) and then another

amended Schedule B on May 14, 2007 (docket no. 167). The

original and amended B schedules appear to contain the same

information.

The Corporation listed the proceeds from two cash

settlements. One was in the amount of $6,290,214.39, located in

the registry of the Los Angeles Superior Court. These settlement

proceeds were designated “interplead funds.” The other was in

the amount of $765,187.62, located in a Wells Fargo account.

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contain identical claims of exemption as the November 28

amendment.

On December 29, 2008, the Trustee objected to the new claims

of exemption ("Exemption Objection"). In the Exemption

Objection, the Trustee pointed out that the averments of

Dr. Waksberg's complaint against Transamerica alleged conduct by

Transamerica which directly interfered with, and damaged, his

professional reputation and interfered with prospective business

opportunities. The Trustee asserted that such allegations are

pecuniary in nature and do not give rise to a personal injury

claim. The Trustee further asserted that the late claims of

exemption were prejudicial to the creditors of Dr. Waksberg's

estate. Although Dr. Waksberg appears to have made a verbal

claim to the exemptions beginning from the time when the case

converted to chapter 7, he failed to assert the exemption claims

formally, notwithstanding the Trustee's ongoing position,

communicated to Dr. Waksberg, that no exemption claim was

appropriate. In the interim, the Trustee settled virtually all

secured claims against the Transamerica funds before Dr. Waksberg

claimed exemptions in those funds in his amended schedules. 

Finally, the Trustee suggested that Dr. Waksberg already had

received $1.55 million from the Transamerica settlement funds

before the bankruptcy cases were filed.

In his opposition filed on February 9, 2009, Dr. Waksberg 

asserted that the Transamerica Settlement Agreement allocated

$1 million for his personal injuries for which there was a

physical manifestation, and $3 million for his future earnings. 

Dr. Waksberg further asserted that the $1.55 million prepetition

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distributions were paid to the Corporation, not to him. Finally,

he asserted that the Trustee was on notice from the beginning of

the chapter 7 case of his claim of exemptions, and that the

Trustee failed to articulate how paying the exemptions now rather

than at the beginning of the case would cause prejudice to the

unsecured creditors, where there was not enough money to pay

general unsecured claims in the first instance, citing Arnold v.

Gil (In re Arnold), 252 B.R. 778, 787 (9th Cir. BAP 2000).

In his reply, the Trustee reiterated that the settlement

agreements and underlying complaints show no funds were allocated

to Dr. Waksberg for "loss of future earnings"; rather, the

allocations were for "loss of personal name and reputation,"

which did not entitle Dr. Waksberg to claim an exemption based on

CCP § 703.140(b)(11)(E), as asserted in the most recent

iterations of Dr. Waksberg's Schedule C.

4. Ida Waksberg's Claims

On March 16, 2007, Ida Waksberg, Dr. Waksberg’s mother,

filed proof of claim number 33-1 in the Corporation’s bankruptcy

case and claim number 49-1 in Dr. Waksberg’s case (hereinafter

jointly the “Ida Claim”). The Ida Claim was filed in the amount

of $587,000 plus interest. The Ida Claim represented the amount

Ida allegedly loaned to both Dr. Waksberg and the Corporation

between 1987 and 2006. The Ida Claim expressly reserved the

right to file an amendment, after an accounting had been

completed, to allocate the Ida Claim between the two cases.

The Ida Claim was filed as secured, and it stated that Ida

believed the claim was secured by "certain collateral" to be

identified in the amended claim to be filed.

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On December 23, 2011, the Trustee filed a motion ("Ida Claim

Objection") to disallow Ida's claim in the Corporation's case. 

In the Ida Claim Objection, the Trustee alleged that Ida's claim

constituted a false claim against the Corporation's bankruptcy

estate. In the four-and-one-half years since she filed her

claim, Ida never amended the claim, nor provided any supporting

evidence to substantiate the Corporation's liability, attachment

or perfection of her security interest, or the specific amount of

her claim.

5. The Trustee's Compromise of Dr. Waksberg's Exemption

Claims and Ida Waksberg's Claims

Following numerous continuances, the Exemption Objection

finally was scheduled to be heard on March 27, 2014. A

settlement was negotiated and documented by an agreement

(“Compromise Agreement”). On February 7, 2014, the Trustee filed

the motion to approve the Compromise Agreement (“Compromise

Motion”) to resolve the Exemption Objection. Although the

caption of the Compromise Motion specifically identified only the

November 24, 2008 amended Schedule C and the December 3, 2008

amended Schedule C as the matters that were being compromised,

the body of the Compromise Motion contained the following

catch-all: "and all of the claims of [Dr. Waksberg] and Ida

Waksberg against the estate, including, but not limited to, the

two secured claims filed by Ida Waksberg on March 16, 2007

against [Dr. Waksberg and the Corporation's] Estates, each in the

amount of $587,000." Through the Compromise Motion, the Trustee

proposed to pay Dr. Waksberg and Ida Waksberg, jointly, the total

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sum of $1.6 million.11

Dr. Waksberg contested nearly every action of the Trustee

throughout the pendency of the chapter 7 cases. Prior to

entering into the Transamerica Settlement Agreement and the

Skadden Arps Settlement Agreement, Dr. Waksberg and the

Corporation filed malpractice actions against no fewer than three

of the law firms that had represented them in the ongoing

litigation. After the Trustee was appointed, he negotiated

resolutions of these law firms’ competing claims to the

settlement proceeds. Dr. Waksberg and the Corporation not only

opposed the settlements, but also appealed the orders that

approved them.

Additionally, many professional applications for

compensation were filed and approved in the bankruptcy cases. 

Again, Dr. Waksberg and the Corporation not only opposed approval

of the compensation to these professionals, but also appealed the

orders that approved their compensation.

In total, Dr. Waksberg filed 13 appeals from bankruptcy

court orders to the United States District Court for the Central

District of California. Each of those appeals ultimately was

dismissed either by the District Court or at Dr. Waksberg's

request.

After the bankruptcy cases were converted to chapter 7,

11 Attached as Exhibit A to the Compromise Motion is the

Compromise Agreement between Dr. Waksberg and Ida Waksberg on the

one hand, and the Trustee (on behalf of both estates) on the

other. The Compromise Agreement sets out in detail the

significant litigation that had taken place to date in the

bankruptcy cases, a brief summary of which we include here.

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Dr. Waksberg and the Corporation filed litigation in state court

against various professionals, alleging causes of action for

fraud, negligence, breach of fiduciary duty, breach of contract,

etc. The Trustee removed the state court litigation to the

bankruptcy court and ultimately resolved all of the asserted

claims.

Two efforts were made to resolve globally the Exemption

Objection, the Ida Claim and other disputes between Dr. Waksberg

and the Trustee through the use of mediation conducted by retired

bankruptcy judges. Although the first mediation achieved a

resolution, Dr. Waksberg later withdrew his agreement. 

Ultimately, the Compromise Agreement was finalized and

presented to the bankruptcy court for approval.12

6. Substantive Consolidation Motion

Five days after filing the Compromise Motion, the Trustee

filed a motion (“Consolidation Motion”) seeking to consolidate

the two bankruptcy estates substantively. The Trustee asserted

in the Consolidation Motion that by consolidating the two

bankruptcy cases, "any uncertainty regarding allocation of the

Transamerica settlement proceeds will be eliminated." Further,

the Trustee alleged that the assets and the liabilities of each

bankruptcy estate were "virtually identical."

In his declaration in support of the Compromise Motion, the

12 Notably, the Compromise Agreement explicitly provides

that, after the compromise is approved, with limited exceptions,

Dr. Waksberg and Ida no longer have standing to oppose the

Trustee’s actions in the bankruptcy cases. This language is not

unlike vexatious litigant orders we have on occasion seen

trustees request.

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Trustee stated he had determined that the assets of the two

debtors were substantially commingled and intertwined. He

further stated that between them, the debtors had commingled and

transferred funds with no apparent corporate formalities or

repayment schedule such that it was impossible to determine

whether one debtor might be a creditor of the other. He asserted

that the Transamerica settlement proceeds were awarded "jointly

and severally" to the two debtors. He emphasized that the

related cases "share an unusual element where the majority of

their respective Bankruptcy Estates consist of the litigation

award recoveries that are joint and several as between the

Debtors." 

The Trustee averred that the schedules and statements of

financial affairs in the two cases reflected that the Schedule D

and F creditors were "virtually identical." He reported that all

of the secured claims of attorneys listed on the D schedules of

both cases had been resolved through the entry of court orders,

each of which provided for partial payment by the Trustee, with

the balance allowed as an unsecured claim in both the individual

and corporate cases.

To conclude his declaration, the Trustee restated that he

had entered a tentative settlement with Dr. Waksberg that would

resolve the Exemption Objection, and that granting the

Consolidation Motion would eliminate any uncertainty regarding

allocation of the Transamerica settlement proceeds. Therefore,

approving the Compromise Motion and the Consolidation Motion

would facilitate the case closing process.

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7. The Law Firm’s Opposition

In a single document, the Law Firm opposed both the

Consolidation Motion and the Compromise Motion. As to the

Consolidation Motion, the Law Firm asserted that substantive

consolidation of the cases was contrary to case law, and was

prejudicial to the Law Firm’s right to be paid the balance of its

allowed chapter 11 administrative expense claim. The Law Firm

opposed the Compromise Motion only to the extent that the trustee

intended to reach assets of the Corporation to fund payment to

Dr. Waksberg on his claim of personal exemption. The Declaration

of Kathleen P. March in support of the opposition includes the

following primary assertions: she was advised by the Trustee’s

counsel that (1) assets of the Corporation were necessary to fund

the Compromise Agreement; and (2) substantive consolidation would

render the two cases administratively insolvent past the

chapter 7 professionals level. 

The Law Firm pointed out that the Trustee bore the burden of

proving that substantive consolidation is allowable under the

circumstances. The Law Firm asserted that it would be contrary

to law to consolidate the cases substantively to enable the

Trustee to reach corporate assets, otherwise available to

claimants against the Corporation, to pay a personal exemption to

Dr. Waksberg. The Law Firm contended that the Consolidation

Motion contained no evidence establishing that creditors did not

rely on the separateness of Dr. Waksberg and the Corporation in

extending credit. Nor did the Trustee establish that there was

sufficient entanglement of the two debtors’ financial affairs

that the time and expense necessary to unscramble them threatened

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the realization of net assets to all creditors. The Law Firm

asserted that, to the extent there was any commingling, it was

done postpetition by the Trustee himself in the payment of

attorneys fees. The Law Firm posited that simple math would

enable the Trustee to allocate those attorneys fees between the

estates.

Finally, The Law Firm asserted that, if the bankruptcy court

was inclined to approve the Consolidation Motion, equity required

a “carve out” for its previously approved fees.

The Trustee responded to the Law Firm’s opposition, pointing

out that the Law Firm did not oppose the Compromise Motion on any

grounds set forth in Martin v. Kane (In re A & C Props.),

784 F.2d 1377 (9th Cir. 1986). Rather, the sole opposition was

that there would not be funds to implement the Compromise Order

absent improper consolidation of the cases.

The Trustee argued that if the Law Firm were to prevail in

its opposition to the Compromise Motion, he would be forced to

litigate the Exemption Objection. In the absence of

consolidation, previously paid chapter 11 administrative

expenses, and possibly some previously paid chapter 7

administrative expenses, in Dr. Waksberg's case would need to be

disgorged. Further, there were no funds in Dr. Waksberg's

individual case to fund the Exemption Objection litigation. In

addition, the Compromise Agreement settled the Ida Claim,

asserted as secured against the Corporation in the amount of

$587,000. The Trustee pointed out that Dr. Waksberg filed a

claim against the Corporation in the amount of $3,857,244, and

consolidation would eliminate claims between the two estates for

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the benefit of all of the creditors.

The Trustee further asserted that he was not bound by the

allocation between the Corporation and Dr. Waksberg as set forth

in the Transamerica and Skadden Arps settlement agreements. As

a consequence, the Law Firm’s attempt to allocate 7/11 of the

total settlement funds to the Corporation was not dispositive in

a determination as to the funds belonging to each estate.

8. The Bankruptcy Court’s Rulings

The bankruptcy court heard arguments on the Compromise

Motion and the Consolidation Motion on March 5, 2014. In

addressing the Law Firm’s contention that the Trustee had not

adequately established that creditors did not look to one of the

debtors in extending credit, the bankruptcy court made the

following findings relevant to the Consolidation Motion:

We do have a substantial overlap. We've got 48 of the

80 creditors in the individual case are the same

creditors as in the corporate case. The bulk of the

parties that we've dealt with, that’s anybody that's

ever come into this court, dealt with the debtor and

the corporation indistinguishable.

I do think that this is a case that as of the petition

date was an appropriate case for substantive

consolidation.

Tr. of March 5, 2014 H’rng at 34:8-16.

The bankruptcy court also focused on the manner in which the

Trustee’s settlements with all of the attorneys who had asserted

liens against the litigation settlement proceeds had been paid. 

Specifically, each of the disputed attorney liens was resolved

by: (1) a partial payment from the funds in the Interpleader

Action, without an allocation as to which debtor was paying the

lien claim; and (2) an unsecured claim allowed in both cases. 

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The bankruptcy court also noted that the Law Firm’s

objection to the Compromise Motion related only to the intended

use of the Corporation’s assets to fund the Compromise Agreement,

not to approval of the terms of the Compromise Agreement itself. 

However, at the Hearing, The Law Firm’s counsel asserted that the

Compromise Motion only was noticed in Dr. Waksberg’s individual

case and not in the Corporation’s case. The Trustee’s counsel

responded that he believed all creditors in both cases had been

provided with notice of the Compromise Motion. No evidence on

this point was introduced at the Hearing.

The bankruptcy court granted the Consolidation Motion as

well as the Compromise Motion. These appeals followed.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C.

§§ 1334 and 157(b)(2)(A), (B) and (O). We have jurisdiction under

28 U.S.C. § 158.

III. ISSUES

Whether the bankruptcy court abused its discretion when it

approved the Compromise Agreement.

Whether the bankruptcy court erred when it entered the

Consolidation Order.

IV. STANDARDS OF REVIEW

A bankruptcy court’s decision to approve a compromise

settlement is reviewed for abuse of discretion. Martin v. Kane

(In re A & C Props.), 784 F.2d 1377, 1380 (9th Cir.), cert.

denied, 479 U.S. 854 (1986); Goodwin v. Mickey Thompson

Entertainment Group, Inc. (In re Mickey Thompson Entertainment

Group, Inc.), 292 B.R. 415, 420 (9th Cir. BAP 2003). A

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bankruptcy court abuses its discretion if it applies an incorrect

legal standard or misapplies the correct legal standard, or if

its fact findings are illogical, implausible or without support

from evidence in the record. TrafficSchool.com v. Edriver Inc.,

653 F.3d 820, 832 (9th Cir. 2011).

A substantive consolidation decision presents a mixed

question of law and fact that we review de novo. In re Bonham,

229 F.3d at 763. A mixed question exists when the relevant facts

are established, the legal standard is clear, and the issue is

whether the facts satisfy the legal standard. Wechsler v. Macke

Int’l Trade, Inc. (In re Macke Int’l Trade, Inc.), 370 B.R. 236,

245 (9th Cir. BAP 2007).

De novo review requires that we consider a matter anew, as

if no decision had been made previously. United States v.

Silverman, 861 F.2d 571, 576 (9th Cir. 1988); B-Real, LLC v.

Chaussee (In re Chaussee), 399 B.R. 225, 229 (9th Cir. BAP 2008).

We may affirm the decision of the bankruptcy court on any

basis supported by the record. Shanks v. Dressel, 540 F.3d 1082,

1086 (9th Cir. 2008).

V. DISCUSSION

A. Introduction

Unfortunately, this case represents an unhappy tribute to

the ability of a difficult and litigious debtor to turn a

bankruptcy case into a morass from which no objectively desirable

outcomes are possible. Faced with this mess, the bankruptcy

court followed the lead of the Trustee in seeking to cut losses

and end the pain of metastasizing litigation. We conclude in

these circumstances that the bankruptcy court did not abuse its

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discretion in approving the Compromise Agreement, consistent with

the Ninth Circuit’s A & C Props. standards, but we also conclude

that it was inappropriate for the bankruptcy court to approve

substantive consolidation under In re Bonham over the material

substantive objections of an interested party. Our reasoning

follows:

B. Approval of the Compromise Agreement

Rule 9019(a) authorizes the bankruptcy court to approve a

compromise or settlement on motion of the chapter 7 trustee after

notice and a hearing. The bankruptcy court must inquire into all

“factors relevant to a full and fair assessment of the wisdom of

the proposed compromise.” Protective Comm. For Indep.

Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S.

414, 424 (1968). In other words, in order to approve a

compromise settlement, the bankruptcy court “must find that the

compromise is fair and equitable.” In re A & C Props., 784 F.2d

at 1381. And the Trustee, as the party advocating approval of

the compromise, bears “the burden of persuading the bankruptcy

court that the compromise is fair and equitable and should be

approved.” Id. However, bankruptcy courts have broad discretion

in considering approval of proposed settlements because they are

“uniquely situated to consider the equities and reasonableness

[of such settlements] . . . .” United States v. Alaska Nat’l

Bank (In re Walsh Constr., Inc.), 669 F.2d 1325, 1328 (9th Cir.

1982). “The purpose of a compromise agreement is to allow the

trustee and the creditors to avoid the expenses and burdens

associated with litigating sharply contested and dubious claims.” 

In re A & C Props., 784 F.2d at 1380.

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In determining whether the standards for approval of a

compromise settlement have been met, the bankruptcy court must

consider the following four factors:

(a) The probability of success in the litigation;

(b) the difficulties, if any, to be encountered in the

matter of collection; (c) the complexity of the

litigation involved, and the expense, inconvenience and

delay necessarily attending it; [and] (d) the paramount

interest of the creditors and a proper deference to

their reasonable views in the premises. 

Id., citing Flight Transp. Corp. Securities Litigation, 790 F.2d

1128, 1135 (8th Cir. 1984), cert. denied, 105 S. Ct. 1169 (1985). 

See Marlow v. Zamora (In re Marlow), 2011 WL 3299024 (9th Cir.

BAP Feb. 1, 2011) (unpublished).

In this case, the Trustee addressed all four factors at

length in the Memorandum of Points and Authorities filed in

support of the Compromise Motion, supported by the Trustee’s

declaration. With respect to the probability of success in

litigation, the Trustee and his counsel focused on Dr. Waksberg’s

exemption claims. The two primary issues to be determined were

1) whether Dr. Waksberg was entitled to any exemptions at all,

and 2) if so, the amount of exemptions that should be allowed. 

In light of the bankruptcy court’s determination that the

lateness of Dr’s Waksberg’s making the subject exemption claims

was not dispositive, the parties had focused on the present value

of “subsistence” versus “lifestyle maintenance” for Dr. Waksberg

and his aged and infirm mother. In his amended Schedule C,

Dr. Waksberg had claimed $3,600,000 as exempt but subsequently

had sought much more–between $4,223,543 and $4,631,402 after

taxes. The upper end of Dr. Waksberg’s exemption claims exceeded

the balance of funds the bankruptcy estates had on hand. The

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Trustee’s experts had opinions supporting amounts varying from

$170,190 to $776,143. However, the Trustee could not assume that

the bankruptcy court would agree with his experts and discount

entirely the expert testimony that Dr. Waksberg was prepared to

offer. The settlement amount of $1,600,000 was more than

$2,000,000 less than Dr. Waksberg had claimed in his most

recently amended Schedule C and well more than $3,000,000 less

than Dr. Waksberg’s high end claims.

Wrapped up in the settlement was resolution of Ida

Waksberg’s alleged secured claims against both Dr. Waksberg

individually and the Corporation. We note that the record

reflects that Ida Waksberg never produced any documentation that

her claims ever attached or were perfected. However, at oral

argument, counsel for the Trustee noted that Ida Waksberg,

age 98, had been a feisty presence in some of the proceedings

before the bankruptcy court. The settlement amount appears to

represent a compromise amount primarily (if not entirely)

relating to the risks associated with litigating Dr. Waksberg’s

exemption claims. As to Ida Waksberg’s claims, the Trustee

appears to have agreed to give her the sleeves off his vest. If

the Trustee needed to provide that the settlement amount was

payable jointly to Dr. Waksberg and his mother to reach the

Compromise Agreement and thus clothe the nakedness of the absence

of any documents to evidence Ida Waksberg’s alleged secured

claims without incurring additional settlement costs, we conclude

that so agreeing was a reasonable exercise of the Trustee’s

business judgment. 

With respect to potential difficulties in collection, the

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Trustee admitted that since he was in possession of the balance

of funds from the Transamerica Settlement and the Skadden Arps

Settlement, he was not really concerned with collection issues. 

However, he noted that in the event the bankruptcy court awarded

Dr. Waksberg more than the balance of funds held by the

bankruptcy estates, such a determination could have costly

adverse implications for creditors and other parties that already

had received distributions from the estates.

With regard to the complexity of open litigation issues and

the expense, inconvenience and delay necessarily attending their

resolution, the Trustee noted that prosecution to date of his

objections to Dr. Waksberg’s exemption claims and Ida Waksberg’s

claims already had been very time consuming and extremely costly. 

Resolving those objections through the evidentiary process would

further deplete estate assets and potentially clog the bankruptcy

court’s docket “for months and perhaps years to come,” not even

considering appeals (of which, to date, Dr. Waksberg had filed

many). The settlement would avoid those potentially very

expensive, adverse results.

Finally, as to the interests of creditors, the Trustee

argued that approving the Compromise Motion would “avoid further

administrative expenses and . . . facilitate the closure of this

case.” At the Hearing, counsel for the Trustee noted that no

prepetition creditor had filed an objection to the Compromise

Motion.

In its opposition to the Compromise Motion, the Law Firm did

not contest the Trustee’s showing as to satisfaction of the

In re A & C Props. standards but merely argued that it was not

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proper to pay Dr. Waksberg’s personal exemption claims out of

Corporation assets, an argument we address in discussing the

Consolidation Motion. At the Hearing, the Law Firm further

asserted that the Compromise Motion had not been noticed in the

Corporation’s case, without submitting any supporting evidence. 

In response, counsel for the Trustee stated, “Notwithstanding

Ms. March’s comments, I believe that notice was provided to all

creditors in both cases.”

The bankruptcy court ultimately concluded that the Trustee

had satisfied all relevant requirements for approval of the

Compromise Agreement and approved the settlement. On the record

before us, we perceive no abuse of discretion by the bankruptcy

court in approving the Compromise Motion. 

C. Substantive Consolidation

Approval of the Consolidation Motion is another matter. It

is undisputed that the bankruptcy court’s power to order

substantive consolidation is part of its general equitable

authority. “[C]onsistent with its historical roots, the power of

substantive consolidation derives from the bankruptcy court’s

general equity powers as expressed in section 105 of the

Bankruptcy Code.” In re Bonham, 229 F.3d at 764. However, as

recognized by the Ninth Circuit in In re Bonham, “[t]he primary

purpose of substantive consolidation ‘is to ensure the equitable

treatment of all creditors.’” Id., quoting Union Savings Bank v.

Augie/Restivo Baking Co. Ltd. (In re Augie/Restivo Baking Co.

Ltd.), 860 F.2d 515, 518 (2d Cir. 1988).

There is no dispute that approval of the Consolidation

Motion coupled with approval of the Compromise Agreement will

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result in no distribution to creditors in either Dr. Waksberg’s

individual case or the Corporation’s case. Accordingly, in

effect, the dispute before us is among Dr. Waksberg and

administrative claimants only. If the Consolidation Order is

affirmed, under the approved Compromise Agreement, Dr. Waksberg

and his mother will receive the settlement amount, and chapter 7

administrative claimants will have their allowed claims paid in

part, but chapter 11 administrative claimants with lower

priorities, such as the Law Firm, will receive nothing. 

Substantive consolidation cases tend to be fact specific

(see In re Bonham, 229 F.3d at 764), but it is very unusual to be

considering substantive consolidation where creditors will see no

direct financial benefit from the consolidation. In

In re Bonham, the Ninth Circuit adopted the two-factor Second

Circuit test to determine whether substantive consolidation is

appropriate:

(1) whether creditors dealt with the [subject] entities

as a single economic unit and did not rely on their

separate identity in extending credit; or (2) whether

the affairs of the debtor are so entangled that

consolidation will benefit all creditors.

In re Bonham, 229 F.3d at 766, quoting Reider v. FDIC

(In re Reider), 31 F.3d 1102, 1108 (11th Cir. 1994), in turn

citing In re Augie/Restivo Baking Co. Ltd., 860 F.2d at 518. 

Since, as noted above, the creditors will receive nothing

from substantive consolidation in terms of distributions, we do

not see how the second factor in the Bonham test is satisfied. 

As to the first factor, while many creditors in the two

bankruptcy cases are the same (48 based on the math as discussed

by the Law Firm’s counsel and the bankruptcy court at the

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hearing), the creditor bodies are not coextensive.13 The

bankruptcy court ultimately found that, “[t]he bulk of the

parties that we’ve dealt with, that anybody that’s ever come into

this Court, dealt with [Dr. Waksberg] and the [Corporation]

indistinguishably.” So, the first Bonham factor arguably

supported substantive consolidation.

However, as noted in Bonham, 229 F.3d at 767, substantive

consolidation is a remedy to be used “sparingly,” and if it

cannot be applied equitably, should not be applied at all. The

Law Firm did not rely on Dr. Waksberg’s credit in seeking

employment as counsel to the Committee in the Corporation’s

chapter 11 case. As so employed, it had no right to make a call

on the assets of Dr. Waksberg’s individual estate to pay its

allowed fees. Yet, if the estates are substantively

consolidated, the Law Firm will not receive the balance of its

finally approved fee award (which, in the absence of substantive

consolidation, would be paid) in order to allow for payment of

Dr. Waksberg’s compromise exemption claim in part out of

Corporation assets that otherwise would not be subject to

Dr. Waksberg’s personal exemption claims as a matter of law. 

That result is not equitable and does not support substantive

consolidation in this case in the face of the Law Firm’s

opposition.

13 At the Hearing, the Law Firm’s counsel reported after

reviewing the claims registers that 32 proofs of claim filed in

Dr. Waksberg’s individual case were not duplicated in the

Corporation’s case, and 16 proofs of claim filed in the

Corporation’s case were not also filed in the individual case.

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VI. CONCLUSION

For the foregoing reasons, we AFFIRM the bankruptcy court’s

approval of the Compromise Motion, but VACATE the Consolidation

Order and REMAND to the bankruptcy court for further proceedings.

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