Court Opinion

ID: 4232148
Source: CourtListenerOpinion
Date Created: 2017-12-23 01:01:00.584794+00
Date Added: 2024-06-11T14:16:03.520994
License: Public Domain

FILED
                                                                 DEC 21 2017
 1                       NOT FOR PUBLICATION
                                                            SUSAN M. SPRAUL, CLERK
                                                               U.S. BKCY. APP. PANEL
 2                                                             OF THE NINTH CIRCUIT

 3               UNITED STATES BANKRUPTCY APPELLATE PANEL
                           OF THE NINTH CIRCUIT
 4
 5   In re:                        )    BAP No. NV-16-1304-LTiF
                                   )
 6   NEVADA FIRE SAFE COUNCIL,     )    Bk. No. 3:12-bk-52625-BTB
     NON-PROFIT CORPORATION,       )
 7                                 )
                    Debtor.        )
 8   ______________________________)
                                   )
 9   CROSS CHECK SERVICES, LLC,    )
                                   )
10                  Appellant,     )
                                   )
11   v.                            )    M E M O R A N D U M*
                                   )
12   ALLEN M. DUTRA, Chapter 7     )
     Trustee; NEVADA FIRE SAFE     )
13   COUNCIL, NON-PROFIT           )
     CORPORATION; LAKE TAHOE FIRE )
14   PROTECTION DISTRICT; TAHOE    )
     DOUGLAS FIRE PROTECTION       )
15   DISTRICT; MEEKS BAY FIRE      )
     PROTECTION DISTRICT; LAKE     )
16   VALLEY FIRE PROTECTION        )
     DISTRICT; NORTH TAHOE FIRE    )
17   PROTECTION DISTRICT; FRANK    )
     CODY; U.S. DEPARTMENT OF      )
18   JUSTICE,                      )
                                   )
19                  Appellees.     )
     ______________________________)
20
                 Argued and Submitted on December 1, 2017
21                            at Reno, Nevada
22                       Filed - December 21, 2017
23            Appeal from the United States Bankruptcy Court
                        for the District of Nevada
24
          Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.
 1                         _________________________
 2   Appearances:     John G. Downing argued for Appellant; Michael
                      Lehners argued for Appellee Allen M. Dutra; Alicia
 3                    Hunt argued for Appellee United States Department
                      of Justice.
 4                         _________________________
 5   Before: LAFFERTY, TIGHE,** and FARIS, Bankruptcy Judges.
 6
 7        The chapter 71 trustee moved for approval of a settlement
 8   with the United States resolving disputes over federal grant
 9   funds to be used by the Debtor to pay third party vendors for
10   work performed pursuant to the grants.   The settlement released
11   approximately $9.6 million in contingent and unliquidated claims
12   asserted by the United States and required the United States to
13   pay more than $2 million to the trustee.    Of that amount,
14   approximately $1.4 million represented grant funds due vendors
15   for work performed pursuant to the grants and was not property of
16   the estate.    Those funds were to be used to pay those vendors’
17   claims in full pursuant to an agreed-upon schedule.    The
18   remaining funds, which were deemed to be estate funds, were to be
19   distributed pro rata, after deducting administrative expenses, to
20   those creditors asserting unsecured claims against the estate.
21        Appellant was among those vendors to be paid pro rata rather
22   than scheduled for payment pursuant to a specifically approved
23   grant.    Appellant objected to the settlement, arguing that it was
24
          **
           Hon. Maureen A. Tighe, U.S. Bankruptcy Judge for the
25   Central District of California, sitting by designation.
26        1
           Unless specified otherwise, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
     “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure.

                                      -2-
 1   not fair and equitable because it violated the Bankruptcy Code’s
 2   priority scheme.    The bankruptcy court overruled Appellant’s
 3   objection and approved the settlement, finding that it was fair
 4   and in the best interests of all creditors.    We AFFIRM.
 5                                   FACTS
 6        Nevada Fire Safe Council (“Fire Safe”) is a 26 U.S.C.
 7   § 501(c)(3) nonprofit corporation, established in 1999.     Fire
 8   Safe assists communities in creating defensible space within and
 9   around those communities to protect them from wildfire
10   destruction.
11        Fire Safe entered into nine financial assistance (grant)
12   agreements with the Bureau of Land Management (“BLM”) and two
13   with the U.S. Forest Service (“USFS”), each of which required
14   Fire Safe to conduct fuels reduction work (e.g., thinning trees
15   and removing underbrush) in the Lake Tahoe region.    Fire Safe
16   contracted with third-party vendors to perform the fuels
17   reduction tasks.    In order for vendors to be paid from grant
18   monies, Fire Safe was required to submit documentation to the
19   appropriate federal agency – USFS or BLM – for approval.
20        In 2011, the U.S. Department of Agriculture’s Office of the
21   Inspector General (“OIG”) audited Fire Safe.    OIG found that Fire
22   Safe had not properly accounted for its grant funds, had
23   commingled grant monies with its own funds, and had used grant
24   funds to pay unauthorized expenses.     As a result, all grant funds
25   were frozen.
26        Fire Safe filed for chapter 7 relief on November 18, 2012.
27   Appellee Allen M. Dutra was appointed chapter 7 trustee (the
28   “Trustee”).    The United States Department of Justice (“DOJ”)

                                      -3-
 1   filed two proofs of claim, one on behalf of USFS for
 2   $5,735,265.23 and the other on behalf of BLM for $3,958,795.18.
 3   The claims reflected the “contingent and unliquidated liability
 4   of the Debtor” to USFS and BLM for payments made to third-party
 5   vendors that were potentially unallowable, primarily due to
 6   insufficient documentation.2
 7        Claims were also filed by vendors, including Appellant Cross
 8   Check Services, LLC (“Cross Check”).   Cross Check filed an
 9   unsecured claim for $249,954.52 based on an arbitration award it
10   obtained for breach of contract.   The principal amount of the
11   award ($169,844) represented amounts Fire Safe had refused to pay
12   for extra fuels reduction work performed by Cross Check after
13   Fire Safe’s project manager, without first obtaining agency
14   authority, had assured Cross Check it would be paid.3
15        In the course of administering the estate, the Trustee took
16   the position that, notwithstanding DOJ’s proofs of claim, Fire
17   Safe had utilized third-party vendors to provide goods and
18   services for the benefit of both USFS and BLM in excess of grant
19   monies paid to Fire Safe, such that the estate had offsetting
20
21        2
           The parties did not include DOJ’s proofs of claim in their
22   excerpts of record. We have therefore exercised our discretion
     to examine the docket and imaged papers in the underlying
23   bankruptcy case. See Woods & Erickson, LLP v. Leonard
     (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008);
24   Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R.
227, 233 n.9 (9th Cir. BAP 2003).
25
          3
26         The final arbitration award was entered postpetition after
     the court approved the Trustee’s and Cross Check’s stipulation to
27   lift the stay to permit Cross Check to pursue a final judgment in
     the arbitration and to present its claim to Fire Safe’s insurance
28   company (but not to seek collection against estate assets).

                                    -4-
 1   claims against those entities.   DOJ took the position that if
 2   litigation were pursued, it would need to be filed in the Court
 3   of Federal Claims in Washington, D.C.    Because there was no money
 4   in the estate to pursue litigation in the District of Columbia,
 5   the Trustee continued negotiating with DOJ, and the parties
 6   eventually reached a settlement.
 7        On April 15, 2016, the Trustee filed a motion to approve
 8   compromise (the “Motion”).   The settlement called for the United
 9   States to pay $2,025,906.00 to the Trustee, of which
10   $1,412,902.04 was designated the “Grant Sub-Recipient Fund” and
11   was to be used to pay only specified sub-recipients that had
12   performed work relating to unpaid claims allowable under the
13   grants (“Schedule A Sub-Recipients”).    The Schedule A Sub-
14   Recipients were to be paid the lesser of the amount demanded in
15   their proof of claim or the amount listed on Schedule A to the
16   settlement agreement.   The remaining $613,003.06, designated as
17   the “Estate Fund,” represented reimbursement to the estate and
18   was to be used by the Trustee to pay allowed bankruptcy claims
19   pro rata in order of priority.   The settlement provided that the
20   Trustee’s statutory commission and allowed attorney’s fees of up
21   to $40,000 would be paid from the Estate Fund, with the
22   commission based upon all amounts distributed to creditors,
23   including Schedule A Sub-Recipients.    The settlement included
24   mutual releases.
25        The list of Schedule A Sub-Recipients and the amounts they
26   were to be paid was generated by USFS and BLM based on their
27   review and analysis of documents and records turned over by the
28   Trustee and certain third parties.     Conclusions as to the amounts

                                      -5-
 1   due each sub-recipient were based on the relevant grant
 2   agreement, claims submitted to USFS and BLM from Fire Safe, and
 3   documentation of work performed.    Cross Check was not among the
 4   Schedule A Sub-Recipients.
 5        Several parties, including Cross Check, filed oppositions to
 6   the Motion.4   The bankruptcy court held status conferences and
 7   continued the hearing on the Motion several times to give the
 8   objecting creditors time to communicate with DOJ regarding the
 9   amounts allocated (or not) to them on Schedule A.    During that
10   period, Cross Check submitted invoices and other documentation to
11   DOJ in an attempt to have its claim allowed as a Schedule A
12   claim.   The DOJ responded to Cross Check with a letter dated
13   July 22, 2016 (the “July 22, 2016 Letter”), explaining that
14   (i) Fire Safe had never submitted any documentation for
15   reimbursement of Cross Check’s claim, and (ii) in any event,
16   Cross Check’s claim would not have been allowable even if Fire
17   Safe had submitted documentation because Fire Safe’s claims
18   relating to work performed by Cross Check had been “paid in
19   excess of the amounts that were determined to be allowable after
20   review by the agencies . . . .”    According to the spreadsheet
21   attached to the July 22, 2016 Letter, the largest portion of the
22   claim that was disallowed represented cost overruns that had not
23
          4
24         Those parties included Appellees North Lake Tahoe Fire
     Protection District, Tahoe Douglas Fire Protection District,
25   Meeks Bay Fire Protection District, Lake Valley Fire Protection
26   District, North Tahoe Fire Protection District (collectively, the
     “Fire Protection Districts”), and Frank James Cody. In this
27   appeal, the Fire Protection Districts filed a joinder to the
     Trustee’s brief requesting that the Panel affirm the bankruptcy
28   court’s approval of the settlement.

                                       -6-
 1   been pre-approved by a federal program manager.   The spreadsheet
 2   also indicated that reimbursement for interest, attorney’s fees,
 3   and arbitration costs was not allowable under the grant terms.
 4        By the August 29, 2016 final hearing on the Motion, the only
 5   remaining objecting creditor was Cross Check; eight other
 6   creditors had sent letters to the Trustee – in response to the
 7   Trustee’s request for input – indicating their support for the
 8   compromise.   After hearing argument, the bankruptcy court granted
 9   the Motion, making the following oral findings:
10             [T]here is no money in this estate except for the
          United States providing a little over 2 million in this
11        on some conditions, that the people . . . who Fire Safe
          processed properly are getting their full claims, in
12        essence. The people that Fire Safe didn’t process
          properly are getting a portion of the $613,000 that is
13        part of what the government is giving.
14             I don’t think that if there was litigation
          concerning this there would be any better result. I
15        think it would cost tens of thousands, if not hundreds
          of thousands of dollars to litigate this. So I do
16        think it’s in compliance with [Rule] 9019 as
          interpreted by In re A&C Properties. And I'm going to
17        approve . . . the stipulation.
18             I think that the trustee and his counsel have done
          a very good job here. This was a no-asset case when it
19        started and it’s paying a significant amount to many of
          the creditors and it’s paying a . . . a not
20        insignificant amount to creditors who were, in effect,
          cheated by [Fire Safe].
21
               . . . I do think it’s a fair settlement. I do
22        think it’s in the best interest of the creditors.
23   Hr’g Tr. (August 29, 2016) at 42:23-43:22 (emphasis added).
24        The bankruptcy court entered written findings of fact and
25   conclusions of law and an order granting the motion on
26   September 22, 2016.   Cross Check timely appealed.
27                              JURISDICTION
28        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

                                     -7-
 1   §§ 1334 and 157(b)(2)(A).   We have jurisdiction under 28 U.S.C.
 2   § 158.
 3                                  ISSUE
 4         Whether the bankruptcy court abused its discretion in
 5   granting the Trustee’s motion to approve compromise.
 6                           STANDARD OF REVIEW
 7         We review the bankruptcy court’s order approving a trustee’s
 8   application to compromise controversy for abuse of discretion.
 9 Mart. v. Kane (In re A & C Props.), 784 F.2d 1377, 1380 (9th
10   Cir. 1986).   A bankruptcy court abuses its discretion if it
11   applies the wrong legal standard, misapplies the correct legal
12   standard, or if its actual findings are clearly erroneous.
13   TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th
14   Cir. 2011).
15                               DISCUSSION
16   A.    Standard for Approval of a Settlement
17         Before approving a compromise, the bankruptcy court must
18   find that it is fair and equitable.    In re A & C Props., 784 F.2d
19   at 1381.
20         In determining the fairness, reasonableness and
           adequacy of a proposed settlement agreement, the court
21         must consider: (a) [t]he probability of success in the
           litigation; (b) the difficulties, if any, to be
22         encountered in the matter of collection; (c) the
           complexity of the litigation involved, and the expense,
23         inconvenience and delay necessarily attending it;
           (d) the paramount interest of the creditors and a
24         proper deference to their reasonable views in the
           premises.
25
26   Id.
27         These factors “should be considered as a whole to determine
28   whether the settlement compares favorably with the expected

                                     -8-
 1   rewards of litigation. . . .   A trustee seeking approval of a
 2   settlement is not required to prove it would have been impossible
 3   to obtain a superior result by trying the case.”   Greif & Co. v.
 4   Shapiro (In re W. Funding Inc.), 550 B.R. 841, 851-52 (9th Cir.
 5   BAP 2016).
 6   B.   The bankruptcy court’s findings were sufficient to support
          approval of the settlement.
 7
 8        The bankruptcy court found that the settlement was fair.    As
 9   to the A & C Properties factors, the bankruptcy court found that
10   there would have been no difficulty with collection if the
11   Trustee prevailed in a lawsuit but that the lawsuit would have
12   been “somewhat complex” because of regulations and audit
13   requirements.   The bankruptcy court also found that the
14   settlement was in the best interests of all creditors “because
15   payment of $613,003.96 to the estate was conditioned upon having
16   the Trustee pay $1,412,902.04 to the Schedule “A” Sub-Recipients.
17   If that condition is not met, then creditors receive nothing.”
18   The bankruptcy court, however, crossed out the proposed
19   conclusion of law stating that the Trustee would not have had a
20   high probability of success in litigation because the grant funds
21   were not property of the estate.
22        Cross Check does not challenge the bankruptcy court’s
23   findings and conclusions but argues that they are insufficient to
24   support approval of the settlement.   Cross Check asserts that the
25   bankruptcy court did not find the settlement to be fair and
26   equitable.   This is incorrect: the bankruptcy court expressly
27   found that the settlement was fair – although this finding was
28   not incorporated into its written findings – and implicitly found

                                     -9-
 1   it was equitable in finding that it was in the best interests of
 2   all creditors.
 3         Cross Check argues, however, that the bankruptcy court’s
 4   refusal to make a finding regarding the probability of success in
 5   litigation is fatal to the approval of the settlement.    This
 6   argument is not persuasive.     While A & C Properties states that
 7   the bankruptcy court “must” consider the factors listed above,
 8   including the probability of success in the litigation, it does
 9   not require an explicit finding as to each factor.    In fact, in
10   A & C Properties, the Ninth Circuit Court of Appeals affirmed the
11   bankruptcy court’s approval of the settlement at issue despite
12   finding that the bankruptcy court’s findings were “rather
13   general.” 784 F.2d at 1383.   The Court of Appeals concluded that
14   the record supported approval of the settlement because it showed
15   that the bankruptcy judge “was informed and had apprised himself
16   of all facts necessary to make an intelligent and independent
17   judgment that the compromise was fair and equitable[,]” and that
18   there was “clear support in the record for our affirming the
19   findings of fact with respect to the approval of the compromise.”
20   Id.   Finding that the evidence supporting the compromise was
21   thorough and comprehensive, the bankruptcy court was familiar
22   with the entire record, had addressed the creditors’ objections,
23   and “held directly, expressly or by necessary implication, on
24   every substantial point of contention,” the Court of Appeals held
25   that the bankruptcy court did not abuse its discretion in
26   approving the compromise.   Id. at 1384.
27         The same can be said here.   Despite the lack of an explicit
28   finding regarding the probability of success in litigation, the

                                      -10-
 1   record as a whole supports the bankruptcy court’s ultimate
 2   conclusion that the settlement was fair and in the best interests
 3   of creditors.   Cross Check does not dispute the bankruptcy
 4   court’s findings that the litigation would be expensive, that the
 5   estate had no assets to fund such litigation, and that the
 6   settlement would provide a better outcome for creditors than
 7   could be obtained through litigation (except for the unequal
 8   distribution issue discussed below).   Given that there was no
 9   money in the estate to fund complex litigation in Washington,
10   D.C., and Trustee’s counsel’s representation that the settlement
11   resulted in a recovery that was $400,000 greater than what the
12   Trustee had initially expected to receive, a finding regarding
13   the probability of success in the litigation would have added
14   nothing of substance.   Overall, the record supported the
15   conclusion that the settlement compared “favorably with the
16   expected rewards of litigation.”   In re W. Funding, Inc.,
17 550 B.R. at 852.
18        Cross Check also contends that it was “denied due process”
19   because DOJ refused to review the merits of its claim for the
20   sole reason that Fire Safe did not submit invoices on Cross
21   Check’s behalf.    Based on the terms of the grants, DOJ would have
22   been within its rights to deny the claim solely on this basis.
23   Moreover, Cross Check’s contention is not supported by the
24   record: the July 22, 2016 Letter made clear that Cross Check’s
25   claim would not have been approved even if Fire Safe had
26   submitted the invoices on its behalf because none of the amounts
27   claimed were allowable under the grants.   Moreover, the
28   bankruptcy court found, and Cross Check does not dispute, that:

                                     -11-
 1        The creditors of the Debtor did not have any contract,
          express or implied in fact, with the United States. As
 2        such, no creditor has the right to directly sue the
          United States or any of its agencies, officers or
 3        employees in connection with Fire Safe’s grants or work
          performed for Fire Safe.
 4
 5   Because the United States’ only contracts were with Fire Safe,
 6   DOJ had no duties to Cross Check.    In its reply brief, Cross
 7   Check concedes that it could not assert any rights against the
 8   United States, but seems to argue that the Trustee could have
 9   successfully litigated the issue on behalf of Fire Safe.    Even if
10   that were true, Cross Check has not shown that the bankruptcy
11   court erred in finding that the settlement was in the best
12   interests of all creditors given the costs associated with
13   litigation.5
14   C.   The settlement does not violate the Bankruptcy Code’s
          priority scheme.
15
16        The settlement had the effect of reducing – by a significant
17   amount – the total claims against the estate and bringing
18   $613,000 into an administratively insolvent estate.    Without the
19   Settlement, creditors who were not entitled to distributions of
20   grant funds stood to receive nothing.    Cross Check does not
21
22        5
           Notably, the only relief requested by Cross Check in this
23   appeal is for the Panel to vacate the order approving the
     settlement and remand to require the bankruptcy court to
24   condition the settlement on a pro rata distribution of all the
     funds among all creditors. This relief seems inconsistent with
25   an argument that the bankruptcy court’s findings were either
26   erroneous or insufficient to support approval of the settlement;
     if the Panel were to so hold, the appropriate remedy would be to
27   reverse outright, reverse and remand, or vacate and remand.
     Further, the funds allocation is a term of the settlement, and we
28   lack power to rewrite the settlement on appeal.

                                   -12-
 1   dispute any of these points, but takes the position that the
 2   Settlement is not equitable because creditors who are not
 3   Schedule A Sub-Recipients will receive approximately 33 percent6
 4   of their claims while Schedule A Sub-Recipients will be paid in
 5   full.    Cross Check contends that because of this unequal
 6   distribution, the settlement is contrary to the Bankruptcy Code’s
 7   priority scheme, citing Motorola, Inc. v. Official Committee of
 8   Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452
 9   (2d Cir. 2007).    In that case, the Second Circuit Court of
10   Appeals remanded an order approving a settlement so the
11   bankruptcy court could assess the justification for distribution
12   of funds to junior creditors in violation of the priority rules.
13   Id. at 465-66.    The issue in Iridium Operating, however, was the
14   distribution of estate funds.    That case is thus distinguishable.
15        Here, the bankruptcy court found:
16        that the funds allocated to the Schedule “A” Sub-
          Recipients are not property of the bankruptcy estate
17        under section 541(a) because the Debtor lacked any
          beneficial or equitable interest in these grant funds
18        and its use of the funds was limited to budgeted and
          allowed uses defined and controlled by its grants and
19        applicable federal statutes, regulations and agency
          policies.
20
21   (Emphasis added).
22        Cross Check has never disputed, either in the bankruptcy
23   court or in this appeal, that the funds to be distributed to
24   Schedule A Sub-Recipients were not property of the bankruptcy
25   estate.    The bankruptcy court’s finding that the funds were not
26
27
          6
           In its reply brief, Cross Check suggests that the actual
28   distribution will be closer to 17 percent.

                                     -13-
 1   property of the estate was correct.    In general, where a
 2   governmental agency awards grant funds to a private nonprofit
 3   community service organization but maintains control over how
 4   those funds are spent, the nonprofit organization acts merely as
 5   a conduit and does not obtain any interest in the funds such that
 6   the funds become property of the estate if the organization files
 7   a bankruptcy case.   See Springfield v. Ostrander (In re LAN
 8   Tamers, Inc.), 329 F.3d 204 (1st Cir. 2003); Westmoreland Human
 9   Opportunities, Inc. v. Walsh, 246 F.3d 233 (3d Cir. 2001);
10   In re Joliet-Will Cty. Cmty. Action Agency, 847 F.2d 430 (7th
11   Cir. 1988).   In this case, it is undisputed that the terms of the
12   federal grants and the applicable federal regulations severely
13   restricted Fire Safe’s use of grant funds such that those funds
14   did not become property of the estate.
15        The Bankruptcy Code’s priority distribution rules apply only
16   to property of the estate.   See § 726 (setting forth priority
17   scheme for distributions of property of the estate).    Because the
18   $1.4 million allocated to Schedule A Sub-Recipients was not
19   property of the estate, there was no requirement that those funds
20   be distributed pro rata.   Under the settlement, the $613,000
21   deemed to be property of the estate is to be distributed pro
22   rata; thus the settlement is in compliance with the Bankruptcy
23   Code.
24                                CONCLUSION
25        For the reasons explained above, the bankruptcy court did
26   not abuse its discretion in granting the Trustee’s Motion.     We
27   therefore AFFIRM.
28

                                     -14-