Court Opinion

ID: 2757189
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:39.666904+00
Date Added: 2024-06-11T11:26:53.753716
License: Public Domain

FILED
                                                           DEC 08 2011
 1
                                                       SUSAN M SPRAUL, CLERK
                                                         U.S. BKCY. APP. PANEL
 2                                                       OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )       BAP No. CC-10-1408-HPePa
                                   )
 6   LENNY KYLE DYKSTRA,           )       Bk. No. SV 09-18409-GM
                                   )
 7                  Debtor.        )
     _____________________________ )
 8                                 )
     LENNY KYLE DYKSTRA,           )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )       M E M O R A N D U M1
11                                 )
     DAVID K. GOTTLIEB, Chapter 7 )
12   Trustee; JP MORGAN CHASE      )
     BANK, N.A.,                   )
13                                 )
                    Appellees.     )
14   _____________________________ )
15                  Argued and Submitted on November 16, 2011
                             at Pasadena, California
16
                            Filed - December 8, 2011
17
                 Appeal from the United States Bankruptcy Court
18                   for the Central District of California
19            Honorable Geraldine Mund, Bankruptcy Judge, Presiding
20
     Appearances:     Joel David Joseph, Esq. argued for the appellant,
21                    Lenny Kyle Dykstra. Robert Huttenhoff, Esq. of
                      Shulman Hodges & Bastian LLP argued for the
22                    appellee, David K. Gottlieb, Chapter 7 Trustee.
23
     Before: HOLLOWELL, PERRIS2 and PAPPAS, Bankruptcy Judges.
24
25
          1
26          This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
27   have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8013-1.
          2
            Hon. Elizabeth L. Perris, United States Bankruptcy Judge
     for the District of Oregon, sitting by designation.
 1        Lenny Kyle Dykstra (the Debtor) appeals the order of the
 2   bankruptcy court approving a compromise between the chapter 73
 3   bankruptcy trustee, Terri Dykstra4 and JP Morgan Chase Bank, N.A.
 4   (Chase).   We DISMISS the appeal as moot.
 5                                I.    FACTS
 6        Background
 7        In 2007, the Debtor and his then-wife, Terri Dykstra,
 8   entered into a loan arrangement with Washington Mutual (WaMu).
 9   Ms. Dykstra executed a promissory note in the amount of $12
10   million (the Note).   The Note was secured by a first priority
11   deed of trust on real property on Newbern Court in Thousand Oaks,
12   California (the Property).   WaMu was subsequently taken over by
13   the Federal Deposit Insurance Corporation (the FDIC).       In 2008,
14   FDIC sold WaMu’s assets to Chase pursuant to a Purchase and
15   Assumption Agreement.
16        Chase filed a secured proof of claim in the amount of $13.8
17   million on the outstanding Note.        The Property is also encumbered
18   by second and third position trust deeds held by Index Investors
19   (Index).   Index asserted a claim in the amount of $936,397 based
20   on two loans it extended to the Debtor.       The Property was damaged
21   postpetition.   It has not been appraised, but there appears to be
22   no dispute that if Chase and Index hold valid claims, there is no
23
          3
24          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
25   All Rule references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037.
26
          4
27          Terri Dykstra was ultimately not a party to the
     Settlement. She joined with the Debtor in his opposition to the
28   Settlement.

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 1   equity in the Property.   The Debtor asserts, however, that both
 2   WaMu and Index engaged in predatory lending practices in
 3   conjunction with the Note and violated the Truth in Lending Act
 4   (TILA), 15 U.S.C. §§ 1601-1693r., entitling him to damages and
 5   claims of setoff or recoupment.
 6        Settlement Agreement
 7        On July 7, 2009, the Debtor filed a petition for chapter 11
 8   relief.   On March 23, 2010, the bankruptcy trustee5 (Trustee)
 9   filed a motion for approval of a compromise between the estate
10   and Chase (the Settlement).   The Settlement proposed that Chase
11   release the estate of all claims, including its proof of claim,
12   pay the estate $400,000, and relinquish its interest in insurance
13   proceeds the estate received for damages to the Property
14   (totaling $500,000).   In exchange, the estate would pay Chase
15   $92,000 for repairs to the Property, stipulate to relief from the
16   automatic stay so that Chase could foreclose on the Property, and
17   release all its claims against Chase.
18
19        5
            Arturo M. Cisneros was appointed as the bankruptcy
20   trustee. When the case was later converted to a chapter 7,
     Cisneros continued as the trustee. After Cisneros filed the
21   motion to approve the Settlement, the Debtor filed numerous
22   oppositions and subsequently filed a motion to remove Cisneros
     based on allegations of partiality and bias. Although the
23   bankruptcy court denied that motion, Cisneros ultimately resigned
     as the trustee. On August 11, 2010, David K. Gottlieb was
24
     appointed the successor chapter 7 bankruptcy trustee.
25        Gottlieb obtained special counsel to independently examine
     the terms of the proposed Settlement and to address the merits of
26   the estate’s claims against Chase in order to determine if the
27   Settlement would be beneficial to the estate. Based on special
     counsel’s analysis, Gottlieb sought approval of the Settlement on
28   its original terms.

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 1        On March 26, 2010, the Debtor filed an objection to the
 2   Settlement, contending that the TILA and other claims held by the
 3   estate against Chase in connection with the Note were worth
 4   millions of dollars and would result in equity in the Property
 5   for the benefit of the estate.   After months of briefing and
 6   hearings, the Trustee submitted an independent analysis prepared
 7   by his special counsel, which comprehensively evaluated each of
 8   the asserted claims the Debtor argued the estate held against
 9   Chase related to the Note, as well as Chase’s potential defenses
10   to those claims.   The conclusion of the analysis was that the
11   bulk of the claims were either barred by the statute of
12   limitations or subject to various defense theories that would
13   make it difficult for the estate to succeed on the claims.
14        Prior to a final hearing on the Settlement, the bankruptcy
15   court issued a tentative ruling (Tentative Ruling) applying the
16   factors used in evaluating settlement agreements set forth in
17   Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1380-81
18   (9th Cir. 1986), and found that, “while success [in litigating
19   the estate’s claims against Chase] is not an impossibility on at
20   least some theories, it is not very probable on any of the
21   theories presented.”   Furthermore, it found that any litigation
22   on the estate’s claims against Chase would be complex, time-
23   consuming, and involve legal theories of first impression in the
24   Ninth Circuit, which could result in appeals, further delaying
25   resolution and increasing litigation costs.   Therefore, it
26   concluded that the Settlement would provide a beneficial result
27   for the estate’s creditors.
28        The Settlement hearing was held on October 7, 2010.      The

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 1   bankruptcy court entered its order approving the Settlement on
 2   October 22, 2010, adopting its Tentative Ruling and additional
 3   findings made at the Settlement hearing (the Settlement Order).
 4   The Debtor appealed.
 5                                  II.    JURISDICTION
 6           The bankruptcy court had jurisdiction under 28 U.S.C.
 7   §§ 1334 and 157(b)(2)(A).        We have jurisdiction over final orders
 8   under 28 U.S.C. § 158, but address whether the appeal is moot
 9   below.6
10                                        III.     ISSUE
11           Do we have jurisdiction to decide if the bankruptcy court
12   abused its discretion in entering the Settlement Order?
13                            IV.    STANDARDS OF REVIEW
14           Our jurisdiction is a question of law that we address de
15   novo.       Menk v. Lapaglia (In re Menk), 241 B.R. 896, 903 (9th Cir.
16   BAP 1999).      We lack jurisdiction to hear moot appeals.   I.R.S. v.
17   Pattullo (In re Pattullo), 271 F.3d 898, 901 (9th Cir. 2001).        If
18   an appeal becomes moot while it is pending before us, we must
19   dismiss it.      Id.
20                                   V.     DISCUSSION
21           The Trustee contends that this appeal is moot because the
22   Debtor failed to seek and obtain a stay pending appeal and events
23   tethered to the Settlement have occurred that are too complicated
24
25
             6
            The Trustee filed a Motion to Dismiss the appeal with the
26   Bankruptcy Appellate Panel (BAP) on April 8, 2011. The Debtor
27   opposed the motion. On June 16, 2011, the BAP entered an order
     taking the matter under advisement with consideration of the
28   merits. This memorandum disposes of that motion.

                                                 -5-
 1   and too far consummated to be undone.    For example, he asserts
 2   that other settlements would be affected by a reversal of the
 3   Settlement Order.
 4           Prior to entering the Settlement, Cisneros negotiated a
 5   compromise on behalf of the estate with Fireman’s Fund Insurance
 6   Company and Associated Indemnity Corporation (Insurance Company)
 7   related to various claims asserted against insurance policies
 8   covering the Property after it had been damaged.    The bankruptcy
 9   court approved that compromise on May 3, 2010.    The compromise
10   provided that the estate would waive its claims against the
11   Insurance Company in exchange for a payment of $500,000 in
12   proceeds (Insurance Proceeds).    Both Chase and Index had liens on
13   the Insurance Proceeds.
14           Cisneros also negotiated compromises with both Chase and
15   Index.    Approximately three months after submitting the
16   Settlement for approval, the Trustee filed for the approval of a
17   settlement with Index (Index Settlement).    The Index Settlement
18   resolved claims that the Debtor had brought against Index in
19   state court, prepetition (which were removed to the bankruptcy
20   court postpetition), for the alleged violation of certain lending
21   laws in connection with the loans secured by the Property.    The
22   Index Settlement was approved by the bankruptcy court on July 20,
23   2010.    It provided that the estate dismiss, with prejudice, the
24   state court action, stipulate to relief from stay to allow Index
25   to proceed with foreclosure on the Property, pay Index $70,000
26   from the Insurance Proceeds for remediation on the Property, and
27   assign to it claims related to construction defects on the
28   Property.    In exchange, Index released its claim to the Insurance

                                       -6-
 1   Proceeds and waived any claims against the estate, including its
 2   $936,397 proof of claim.   The Index Settlement was contingent on
 3   the approval of the Settlement.
 4        After the Settlement Order was entered, and because no stay
 5   pending appeal was sought or obtained by the Debtor, the Trustee
 6   took actions to consummate both the Index Settlement and the
 7   Settlement.   Therefore, the Trustee has dismissed the lawsuit
 8   against Index with prejudice, paid Index and Chase from the
 9   Insurance Proceeds for repairs to the Property, assigned to Index
10   the estate’s claims related to construction defects, and received
11   $400,000 from Chase.   Additionally, Index and Chase obtained
12   relief from the automatic stay and Index has since foreclosed on
13   the Property and sold the Property to a third party.   Finally,
14   the Trustee distributed payment on various administrative claims
15   related to both of the settlement agreements.   The disbursements
16   were made from the remainder of the Insurance Proceeds, which had
17   reverted to the estate after Index and Chase relinquished their
18   liens, as well as from Chase’s $400,000 payment to the estate.
19   As a result, the Trustee argues the appeal is now equitably, if
20   not constitutionally, moot.
21        Constitutional mootness is derived from Article III of the
22   U.S. Constitution, which provides that the exercise of judicial
23   power depends on the existence of a case or controversy.   DeFunis
24   v. Odegaard, 416 U.S. 312, 316 (1974); Clear Channel Outdoor,
25   Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 33 (9th Cir. BAP
26   2008).   The mootness doctrine applies when events occur during
27   the pendency of the appeal that make it impossible for the
28   appellate court to grant effective relief.   Id.   The determining

                                       -7-
 1   issue is “whether there exists a ‘present controversy as to which
 2   effective relief can be granted.’”      People of Village of Gambell
 3   v. Babbitt, 999 F.2d 403, 406 (9th Cir. 1993) (quoting Nw. Envtl.
 4   Def. Ctr. v. Gordon, 849 F.2d 1241, 1244 (9th Cir. 1988)).       If no
 5   effective relief is possible, we must dismiss for lack of
 6   jurisdiction.   United States v. Arkison (In re Cascade Rds.,
 7   Inc.), 34 F.3d 756, 759 (9th Cir. 1994).
 8        Additionally, the doctrine of equitable mootness has been
 9   applied when the appellant has failed to obtain a stay and
10   although relief may be possible, the ensuing transactions are too
11   complex or difficult to unwind.     In re PW, LLC, 391 B.R. at 33.
12   “‘Ultimately, the decision whether to unscramble the eggs turns
13   on what is practical and equitable.’”      Id. quoting Baker & Drake,
14   Inc. v. Pub. Serv. Comm’n (In re Baker & Draker, Inc.), 35 F.3d
15   1348, 1352 (9th Cir. 1994).
16        The Debtor argues that meaningful relief could be provided
17   if the estate repaid Chase the $400,000 and allowed the Debtor to
18   pursue his claims against Chase individually.      He argues that
19   upon reversal of the Settlement Order, the claims against Chase
20   for recoupment or set off could be asserted against the proceeds
21   from the sale of the Property.    Nevertheless, even if the Debtor
22   is correct that recoupment could still be asserted against the
23   sale proceeds, the Debtor’s contention is somewhat simplistic and
24   minimizes the effect of reversal.       Indeed, at oral argument the
25   Debtor’s counsel conceded that he was unsure how other events
26   could be “unscrambled.”
27        If the Settlement Order were reversed, the estate’s claims
28   against Chase might be restored; however, other events could not

                                       -8-
 1   be.   For example, the Index Settlement and the Chase Settlement
 2   have been fully consummated.     As a result, the estate has relied
 3   on the money from the settlements and used it to pay various
 4   administrative expenses.   Those transactions cannot be easily
 5   unwound.   Therefore, while relief may not be totally impossible,
 6   there has been a “comprehensive change in circumstances” that has
 7   rendered it inequitable to consider the merits of the appeal.
 8   See Focus Media, Inc. v. Nat’l Broad. Co., Inc. (In re Focus
 9   Media, Inc.), 378 F.3d 916, 923 (9th Cir. 2004) (internal
10   citations omitted).   Accordingly, the appeal is moot and beyond
11   our jurisdiction to review.
12                              VI.   CONCLUSION
13         For the foregoing reasons, we DISMISS the appeal for lack of
14   jurisdiction.
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