Court Opinion

ID: 4154517
Source: CourtListenerOpinion
Date Created: 2017-03-22 00:01:37.81457+00
Date Added: 2024-06-11T14:37:44.273361
License: Public Domain

FILED
                                                             MAR 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 1                          NOT FOR PUBLICATION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
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )       BAP No.    CC-16-1273-FCTa
                                   )
 6   LIBERTY ASSET MANAGEMENT      )       Bk. No.    2:16-bk-13575-TD
     CORPORATION, a California     )
 7   corporation,                  )
                                   )
 8                  Debtor.        )
     _____________________________ )
 9                                 )
     MAXWELL REAL ESTATE           )
10   INVESTMENT, LLC; CHUNBO ZHANG;)
     CHENHAN WU; GOLDEN STONE      )
11   INVESTMENT, LLC,              )
                                   )
12                  Appellants,    )
                                   )
13   v.                            )       MEMORANDUM*
                                   )
14   LIBERTY ASSET MANAGEMENT      )
     CORPORATION, a California     )
15   corporation,                  )
                                   )
16                  Appellee.      )
     ______________________________)
17
                    Argued and Submitted on February 23, 2017
18                           at Pasadena, California
19                            Filed – March 21,2017
20            Appeal from the United States Bankruptcy Court
                  for the Central District of California
21
         Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding
22
23   Appearances:      Stephen E. Ensberg argued on behalf of Appellants
                       Maxwell Real Estate Investment, LLC, Chunbo Zhang,
24                     Chenhan Wu, and Golden Stone Investment, LLC;
                       David B. Golubchik of Levene, Neale, Bender, Yoo &
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, see
28   9th Cir. BAP Rule 8024-1.
 1                    Brill LLP argued on behalf of Appellee Liberty
                      Asset Management Corporation.
 2
 3   Before: FARIS, CLEMENT,** and TAYLOR, Bankruptcy Judges.
 4                               INTRODUCTION
 5        Appellants Maxwell Real Estate Investment, LLC, Chunbo
 6   Zhang, Chenhan Wu, and Golden Stone Investment, LLC
 7   (collectively, “Maxwell Defendants”) sought relief from the
 8   automatic stay to prosecute their counterclaims against
 9   chapter 111 debtor Liberty Asset Management Corporation
10   (“Liberty”) in California state court or the bankruptcy court.
11   The bankruptcy court correctly noted that the Maxwell Defendants
12   did not need stay relief to pursue their claims against Liberty
13   in the bankruptcy forum and described their arguments as “a whole
14   lot of nothing.”   We agree and AFFIRM.
15                            FACTUAL BACKGROUND
16   A.   Prepetition events and Liberty’s bankruptcy filing
17        In 2012, the Maxwell Defendants loaned Liberty $5.4 million.
18   Liberty misused the funds, and the Maxwell Defendants demanded
19   that Liberty return the money.   Liberty agreed to repay the loan
20   with interest.   Liberty also agreed to convey to the Maxwell
21   Defendants several parcels of real property.   The proceeds from
22
23
          **
             he Honorable Fredrick E. Clement, United States
24   Bankruptcy Judge for the Eastern District of California, sitting
     by designation.
25
          1
26          Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532,
27   all “Rule” references are to the Federal Rules of Bankruptcy
     Procedure, and all “Civil Rule” references are to the Federal
28   Rules of Civil Procedure.

                                       2
 1   the sales of those properties were to pay down Liberty’s debt.
 2   After the properties were sold, Liberty still owed the Maxwell
 3   Defendants over $1.4 million.
 4        The parties entered into another agreement whereby Liberty
 5   agreed to transfer real property located on 10th Street in Santa
 6   Monica, California (the “10th Street Property”) to the Maxwell
 7   Defendants for sale.   Following the sale of the 10th Street
 8   Property, the Maxwell Defendants alleged that Liberty still owed
 9   them $489,910.81.   In contrast, Liberty argued that the Maxwell
10   Defendants owed it over $2.5 million.
11        Liberty filed a lawsuit in the California superior court
12   (the “State Court Action”) against the Maxwell Defendants.
13   Before the Maxwell Defendants responded to the operative second
14   amended complaint, Liberty filed a voluntary chapter 11 petition.
15   Liberty also removed the State Court Action to the bankruptcy
16   court.
17   B.   The motion for relief from stay
18        The bankruptcy court issued an order to show cause (“OSC”)
19   why the State Court Action should not be remanded to the state
20   court.   On July 27, 2016, the Maxwell Defendants filed a motion
21   for relief from the automatic stay (“Motion for Relief”), an
22   answer to the second amended complaint, a proposed counterclaim,
23   and a motion to remand the case to the state court (“Motion to
24   Remand”).
25        The Motion for Relief requested that the bankruptcy court
26   grant the Maxwell Defendants relief from the automatic stay so
27   that they could pursue their counterclaims against Liberty in the
28   state court.   They argued that the State Court Action involved

                                      3
 1   state law claims that did not affect the bankruptcy proceedings.
 2   They also contended that they wanted to litigate their
 3   counterclaims in a “non-bankruptcy forum.”
 4        Liberty opposed the Motion for Relief, arguing that the
 5   request was inappropriate because there was no longer any
 6   proceeding in the state court after Liberty removed the State
 7   Court Action to the bankruptcy court; that there was no “cause”
 8   to grant relief; and that the State Court Action was a core
 9   bankruptcy proceeding.
10        In their reply, the Maxwell Defendants insisted that the
11   State Court Action was not a core proceeding and should be
12   litigated in the state court.   They claimed that Liberty was
13   attempting to prevent them from “fully presenting and litigating
14   [their] contractual transactional dispute with Liberty[.]”    They
15   also rejected the notion of pursuing their counterclaims against
16   Liberty in the bankruptcy court: “A Proof of Claim is obviously
17   an insufficient vehicle to enable the Court to evaluate the
18   nature and breadth of the full and complete dispute between the
19   Parties.”   Although the Maxwell Defendants requested that the
20   court grant the Motion for Relief “so that the state court
21   action, BC588682 may proceed in state court[,]” they implied for
22   the first time that they also sought stay relief to file their
23   counterclaim in the adversary proceeding before the bankruptcy
24   court: “[i]f the Court does not remand the case, Maxwell still
25   needs stay relief to file and present its claims in the pending
26   removed Adversary Proceeding based on the 2nd Amended Complaint
27   filed by Liberty.”
28        After a hearing, the bankruptcy court withdrew the OSC and

                                      4
 1   denied the Motion to Remand.   This appeal does not include those
 2   decisions.2
 3        The bankruptcy court held a separate hearing on the Motion
 4   for Relief.   The Maxwell Defendants argued that the bankruptcy
 5   court “should allow us to proceed with this counterclaim in the
 6   bankruptcy court as part of this adversary proceeding, so that
 7   the Court can have a full elucidation of the facts presented by
 8   the parties, rather than a truncated, restrictive issue . . . .”
 9        The court explained to the Maxwell Defendants that they did
10   not need stay relief to file anything in the bankruptcy court and
11   that their claims would be heard at the appropriate time and
12   context:
13             I still don’t see the problem. You know, we’re
          here today because of your motion for relief from stay,
14        and I think your premise for the motion is just --
          doesn’t fit with what we do in this bankruptcy world we
15        live in here.
16             The bankruptcy world’s a little different than the
          outside world. You don’t need relief from stay to make
17        trouble for the debtor in this court. You can file
          anything you want to in this court to call the debtor
18        to account. You don’t need relief from stay to do
          that. If you think the debtor has cheated you out of
19        something, or is cheating you out of something, or is
          taking money out of your pocket, you can file the
20        motion, and I’ll hear the motion. That’s really the
          answer to your relief from stay motion, it’s just not
21        necessary. There’s nothing that I’m aware of in the
          bankruptcy law that prevents you from making any claim
22        you want against this debtor, if you think this debtor
          has treated you badly. And that will be heard in this
23        court whenever it comes up, however it comes up.
24
25        2
            The Maxwell Defendants appealed the denial of the Motion
26   to Remand to the BAP, BAP No. CC-16-1270. A motions panel
     determined that the appeal was interlocutory, denied leave to
27   appeal, and dismissed the appeal. The Maxwell Defendants do not
     seek further review of the bankruptcy court’s denial of the
28   Motion to Remand in this appeal.

                                      5
 1   (Emphases added.)    The court accordingly denied the Motion for
 2   Relief, and the Maxwell Defendants timely appealed.
 3                                  JURISDICTION
 4         The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 5   §§ 1334 and 157(b)(2)(G).      We have jurisdiction under 28 U.S.C.
 6   § 158.
 7                                     ISSUE
 8         Whether the bankruptcy court erred in denying the Maxwell
 9   Defendants relief from the automatic stay.
10                            STANDARDS OF REVIEW
11         We review for an abuse of discretion the bankruptcy court’s
12   decision to grant or deny relief from the automatic stay under
13   § 362(d).    Kronemyer v. Am. Contractors Indem. Co.
14   (In re Kronemyer), 405 B.R. 915, 919 (9th Cir. BAP 2009)
15   (citation omitted).    We apply a two-part test to determine
16   whether the bankruptcy court abused its discretion.       United
17   States v. Hinkson, 585 F.3d 1247, 1261–62 (9th Cir. 2009)
18   (en banc).    First, we consider de novo whether the bankruptcy
19   court applied the correct legal standard to the relief requested.
20   Id.   Then, we review the bankruptcy court’s factual findings for
21   clear error.    Id. at 1262.    We must affirm the bankruptcy court’s
22   factual findings unless we conclude that they are illogical,
23   implausible, or without support in inferences that may be drawn
24   from the facts in the record.      Id.
25         Additionally, “[w]e review de novo contentions that present
26   an issue of law regarding stay relief.”       In re Kronemyer,
27   405 B.R. at 919.    “De novo review requires that we consider a
28   matter anew, as if no decision had been made previously.”

                                         6
 1   Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir.
 2   BAP 2014) (citations omitted).
 3                                DISCUSSION
 4   A.   Section 362(d)(1) allows a court to grant relief from the
          automatic stay “for cause.”
 5
 6        The filing of a bankruptcy petition creates an automatic
 7   stay under § 362(a), which stays specific acts against the
 8   debtor, his property, and the property of the estate, including:
 9   “the commencement or continuation . . . of a judicial . . .
10   action or proceeding against the debtor that was or could have
11   been commenced before the commencement of the case under this
12   title, or to recover a claim against the debtor that arose before
13   the commencement of the case under this title.”   § 362(a)(1).
14        Section 362(d) allows the court to grant relief from the
15   automatic stay in certain circumstances.   Section 362(d)(1)
16   provides that the bankruptcy court may grant a creditor relief
17   from stay “for cause.”
18        “Because there is no clear definition of what constitutes
19   ‘cause,’ discretionary relief from the stay must be determined on
20   a case by case basis.”    MacDonald v. MacDonald (In re MacDonald),
21   755 F.2d 715, 717 (9th Cir. 1985); see Fadel v. DCB United LLC
22   (In re Fadel), 492 B.R. 1, 11 (9th Cir. BAP 2013) (“What
23   constitutes ‘cause’ to terminate the stay is determined on a
24   case-by-case basis.”).3
25
          3
26          When considering whether to lift the stay so that the
     creditor may pursue prepetition litigation, we have previously
27   used the twelve nonexclusive factors enumerated in In re Curtis,
     40 B.R. 795, 799-800 (Bankr. D. Utah 1984). See Lapierre v.
28                                                      (continued...)

                                       7
 1        “[T]he party seeking relief must first establish a prima
 2   facie case that ‘cause’ exists for relief under § 362(d)(1).
 3   Once a prima facie case has been established, the burden shifts
 4   to the debtor to show that relief from the stay is unwarranted.
 5   If the movant fails to meet its initial burden to demonstrate
 6   cause, relief from the automatic stay should be denied.”
 7   In re Advanced Med. Spa Inc., 2016 WL 6958130, at *4.
 8   B.   The bankruptcy court did not abuse its discretion in denying
          stay relief.
 9
10        1.   The Maxwell Defendants sufficiently raised before the
               bankruptcy court the issue of lifting the stay in the
11             adversary proceeding.
12        Liberty argues that the Maxwell Defendants only requested
13   that the bankruptcy court lift the stay to allow them to
14   prosecute their counterclaims in the state court.   It contends
15   that, as a result, the Maxwell Defendants cannot argue for the
16   first time on appeal for stay relief to pursue their claims in
17   the bankruptcy court.   We disagree.
18        As a general rule, we will only consider on appeal issues
19   that were distinctly raised before the bankruptcy court.   See
20   O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d
21   955, 957 (9th Cir. 1989) (“appellate courts will not consider
22   arguments that are not ‘properly raise[d]’ in the trial courts”).
23   An issue “must be raised sufficiently for the trial court to rule
24   on it” in the first instance.   Id.
25
          3
26         (...continued)
     Advanced Med. Spa Inc. (In re Advanced Med. Spa Inc.), BAP No.
27   EC-16-1087, 2016 WL 6958130, at *3-4 (9th Cir. BAP Nov. 28, 2016)
     (enumerating the Curtis factors); In re Kronemyer, 405 B.R. at
28   921 (recognizing the Curtis factors).

                                      8
 1        Liberty is correct that the Motion for Relief emphasized the
 2   request for stay relief to pursue counterclaims in the state
 3   court.    The only mention of the Maxwell Defendants’ desire for
 4   relief to pursue claims in the bankruptcy court came in one
 5   passing sentence in their reply brief.    There is no doubt that
 6   the Maxwell Defendants’ filings focused almost exclusively on
 7   getting their claims litigated in the state court.
 8            However, following the court’s denial of the Motion to
 9   Remand, the Maxwell Defendants changed tactics at the hearing on
10   the Motion for Relief and emphasized their request for stay
11   relief to proceed in the bankruptcy court.    They specifically
12   requested that the court “allow us to proceed with this
13   counterclaim in the bankruptcy court as part of this adversary
14   proceeding.”
15        While the Maxwell Defendants did not raise the request to
16   lift the stay to proceed in bankruptcy court in their written
17   submissions until the reply brief, the argument was sufficiently
18   raised at the hearing, and it was the only relief considered by
19   the court.4    Because the court had a sufficient opportunity to
20   consider the issue and made an informed ruling, this issue is
21   appropriate for our review.
22        Conversely, Liberty attempts to confuse the issues by
23   introducing new arguments at the oral argument before this Panel.
24
          4
            Liberty argues that we cannot consider arguments not
25   raised in the Motion for Relief, since it could not respond in
26   writing. However, Liberty could have addressed the arguments at
     the hearing on the motion. Moreover, the only operative question
27   is whether the court was presented with sufficient argument to
     rule on the issue currently on appeal, not whether Liberty could
28   sufficiently respond to that argument.

                                       9
 1   Liberty argued for the first time at oral argument that relief
 2   from stay is required to assert a setoff but is not required to
 3   asserts claims of recoupment.   We will not consider these new
 4   arguments on appeal.
 5        2.   The automatic stay does not bar the Maxwell Defendants
               from pursuing their claims in the bankruptcy court.
 6
 7        The only issue on appeal is whether the bankruptcy court
 8   erred in denying the Maxwell Defendants relief from stay to
 9   litigate their claims against Liberty in the bankruptcy court.
10   We consider only the narrow issue of whether relief from stay is
11   warranted, not whether the court must afford the Maxwell
12   Defendants’ claims any particular procedure or consideration.
13        The Maxwell Defendants argue that they require stay relief
14   to file their counterclaim in the adversary proceeding and
15   consolidate all matters regarding the $5.4 million loan and
16   10th Street Property before the bankruptcy court.   They claim
17   that the bankruptcy court’s ruling is prejudicial because the
18   mischaracterization of the issues will prevent the bankruptcy
19   court from understanding the full scope of the parties’
20   transaction.   The Maxwell Defendants misapprehend the bankruptcy
21   court’s decision.
22        We previously answered the question whether the automatic
23   stay prevents the bankruptcy court from adjudicating an adversary
24   proceeding against the debtor in a bankruptcy forum.   In Prewitt
25   v. North Coast Village, Ltd. (In re North Coast Village, Ltd.),
26   135 B.R. 641 (9th Cir. BAP 1992), the debtor and a creditor were
27   involved in litigation in the state court.   When the debtor filed
28   for chapter 11 bankruptcy protection, the creditor filed an

                                     10
 1   adversary proceeding against the debtor, alleging the same claims
 2   that were raised in the state court action.     The debtor moved to
 3   dismiss the creditor’s adversary complaint as a violation of the
 4   automatic stay and sought sanctions.     The bankruptcy court
 5   granted the debtor’s motion and dismissed the adversary complaint
 6   for violating the automatic stay.     135 B.R. at 642.
 7        On appeal, the BAP reversed.     We considered whether the
 8   automatic stay prevented the creditor from pursuing an adversary
 9   proceeding in the bankruptcy court where the bankruptcy case was
10   pending.   Id. at 642-43.   We pointed to the consensus among
11   various courts and said:
12             We agree that the stay does not apply to
          proceedings commenced against the debtor in the
13        bankruptcy court where the debtor’s bankruptcy is
          pending. Although the statutory language does not
14        differentiate between proceedings in bankruptcy courts
          and proceedings in other courts, the application of the
15        stay to proceedings against the debtor in the home
          bankruptcy court would be illogical and would not serve
16        the purposes underlying the automatic stay.
17   Id. at 643 (emphases added).
18        As the bankruptcy court correctly told the Maxwell
19   Defendants, “You don’t need relief from stay to make trouble for
20   the debtor in this court.    You can file anything you want to in
21   this court to call the debtor to account.     You don’t need relief
22   from stay to do that. . . .    That’s really the answer to your
23   relief from stay motion, it’s just not necessary.”       We agree.
24   The automatic stay does not preclude the Maxwell Defendants from
25   asserting their claims in either the main bankruptcy case or the
26   adversary proceeding, and the bankruptcy court’s order did not
27   prevent the Maxwell Defendants from filing anything concerning
28   the $5.4 million loan transaction.     The bankruptcy court denied

                                      11
 1   the Motion for Relief simply because relief from stay to proceed
 2   in the bankruptcy court is unnecessary.    As it said at the
 3   hearing, the Maxwell Defendants are free to file anything they
 4   want, and its filings will be “heard in this court whenever it
 5   comes up, however it comes up.”    Accordingly, there was no cause
 6   to lift the stay, and the bankruptcy court did not abuse its
 7   discretion.
 8        Although the automatic stay does not prevent the Maxwell
 9   Defendants from filing counterclaims in the adversary proceeding,
10   other rules might.   Ordinarily, creditors assert prepetition
11   claims by filing proofs of claim, not complaints or counterclaims
12   in adversary proceedings.   Compare §§ 501(a), 502(a), with
13   Rule 7001.    The bankruptcy court may impose sanctions on a party
14   who files a complaint or a counterclaim where a proof of claim
15   would have been proper.   In re N. Coast Vill., Ltd., 135 B.R. at
16   644 (“an adversary proceeding against the debtor seeking to
17   recover on a pre-petition dischargeable claim would not, under
18   our holding today, violate the automatic stay.    Such a proceeding
19   could, however, be dismissed and sanctions could be awarded under
20   [Rule] 9011 in an appropriate proceeding, because the claim
21   should have been asserted through the claims allowance process”).
22   But this is not an inexorable command.    The bankruptcy court
23   could, if it so chooses, permit the Maxwell Defendants to file a
24   counterclaim, rather than just a proof of claim, or consolidate
25   an objection to the Maxwell Defendants’ proof of claim with the
26   adversary proceeding.   The bankruptcy court also might find this
27   unnecessary; we do not agree with the Maxwell Defendants’
28   argument that they can only defend themselves and put Liberty’s

                                       12
 1   claims in context by filing a counterclaim.
 2        But these broader issues are not before us.     The bankruptcy
 3   court denied the Motion for Relief simply because the motion was
 4   unnecessary: the automatic stay did not preclude the Maxwell
 5   Defendants from doing what they wanted to do.   The bankruptcy
 6   court’s decision was correct.
 7                               CONCLUSION
 8        For the reasons set forth above, the bankruptcy court did
 9   not abuse its discretion in denying the Maxwell Defendants relief
10   from the automatic stay.   Accordingly, we AFFIRM.
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