Court Opinion

ID: 3197837
Source: CourtListenerOpinion
Date Created: 2016-04-26 18:01:22.877846+00
Date Added: 2024-06-11T12:24:13.649287
License: Public Domain

FILED
                                                                APR 26 2016
 1
                            NOT FOR PUBLICATION
 2                                                         SUSAN M. SPRAUL, CLERK
                                                             U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT
 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                        )       BAP Nos.    CC-15-1310-TaKuD
                                   )                   CC-15-1326-TaKuD
 6   NTD ARCHITECTS, INC.,         )                   (related appeals)
                                   )
 7                  Debtor.        )       Bk. No.     2:14-bk-16883-BR
     ______________________________)
 8                                 )
     LITTLE DIVERSIFIED            )
 9   ARCHITECTURAL CONSULTING,     )
     INC.,                         )
10                                 )
                    Appellant,     )
11                                 )
     v.                            )       MEMORANDUM*
12                                 )
     NTD ARCHITECTS, INC.; FRED    )
13   BOLLE; SHARON BOLLE,          )
                                   )
14                  Appellees.**   )
     ______________________________)
15
                      Argued and Submitted on March 17, 2016
16                            at Pasadena, California
17                            Filed – April 26, 2016
18                Appeal from the United States Bankruptcy Court
                      for the Central District of California
19
               Honorable Barry Russell, Bankruptcy Judge, Presiding
20
21   Appearances:      Stephen F. Biegenzahn of Friedman Law Group, P.C.
                       argued for appellant; appellee Sharon Bolle
22                     argued pro se.
23
24        *
             This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
26   See 9th Cir. BAP Rule 8024-1(c)(2).
27        **
             NTD Architects, Inc. did not file a brief; pursuant to
28   the BAP Clerk of Court’s conditional order of waiver, it waived
     the right to appear in this appeal.
 1   Before:     TAYLOR, KURTZ, and DUNN, Bankruptcy Judges.
 2                               INTRODUCTION
 3        Little Diversified Architectural Consulting, Inc.
 4   (“Little”) appeals from two nearly identical orders approving a
 5   stipulation between chapter 111 debtor NTD Architects, Inc. and
 6   appellees Sharon Bolle and Fred Bolle.     The stipulation, as
 7   approved by the bankruptcy court’s orders, negatively impacts
 8   Little’s rights, and there is no evidence that Little received
 9   notice sufficient to allow it to protect its interests.     The
10   record before us also raises other concerns.
11        We, thus, REVERSE and REMAND to the bankruptcy court for
12   further proceedings consistent with this decision.
13                                  FACTS
14        The Debtor was an established architectural firm and had
15   numerous accounts and ongoing projects.
16                     Post-Petition Secured Financing
17        After filing for bankruptcy, the Debtor obtained $100,000
18   in debtor-in-possession financing from Sharon Bolle, a longtime
19   employee of the Debtor, and her husband.     The Debtor agreed to
20   pledge some of its accounts receivable as collateral for the
21   loan.    The bankruptcy court entered an order (the “financing
22   order”) approving this secured post-petition financing.     There
23   was no appeal from the financing order, and it is now final.
24                       The § 363(f) Sale to Little
25        Not long after the Bolles’ loan, it became apparent that
26
27        1
             Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                      2
 1   reorganization was not feasible.    The Debtor, thus, commenced
 2   liquidation efforts and found a willing buyer for some of its
 3   assets, including some client contracts and its accounts
 4   receivable, in Little, an east coast architectural firm.
 5        The Debtor and Little entered into a purchase agreement
 6   that defined the client contracts subject to the sale as
 7   “Assigned Contracts” and expressly identified these contracts in
 8   an attached schedule.   It also provided that a portion of the
 9   purchase price would be paid by Little over a two year period
10   after closing and through quarterly payments based on a
11   percentage of the profits received under the Assigned Contracts
12   and the collections on the acquired accounts receivable.2
13        The purchase agreement contained a representation by the
14   Debtor that all assets sold were free and clear of liens, and
15   the truth of this representation was a condition to closing.
16   Consistent with this representation and condition, the purchase
17   agreement stated that the Debtor would indemnify Little to the
18   extent it suffered any loss resulting from or relating to a
19   failure to transfer the purchased assets to Little free and
20   clear of all liens.
21        The Debtor sought approval of the purchase agreement and
22   related sale through a motion authorizing a sale free and clear
23   of liens.   In support of the motion, the Debtor asserted that
24   the value of its assets was tied directly to the ability to
25
26        2
             An amended sale order supplemented the payment
27   arrangement; it provided that Little also would pay additional
     amounts upon collection to satisfy outstanding post-petition
28   claims of the Debtor’s consultants and sub-consultants.

                                     3
 1   complete existing client projects and then to collect on those
 2   receivables.   The Debtor, thus, argued that absent the sale to
 3   an architectural firm who could continue (and hopefully
 4   complete) the projects, the contracts (and related receivables)
 5   were significantly less valuable, if not valueless.   This was a
 6   key business justification for the sale to Little.
 7        The bankruptcy court entered an order approving the sale of
 8   assets to Little on the terms set forth in the purchase
 9   agreement.   Neither the sale motion nor the sale order expressly
10   referenced the Bolles’ lien.   And there was no proof of service
11   evidencing that the Debtor served the Bolles with notice of the
12   sale motion.   Little, however, asserts on appeal that the Bolles
13   had informal notice and that Sharon Bolle was present at the
14   hearing on the sale.   The sale order did not provide for liens
15   to attach to proceeds.   There was no appeal from the sale order,
16   and it is now final.
17            Stipulation between the Debtor and the Bolles
18        Six months after the sale to Little, the Debtor moved for
19   approval of a stipulation with the Bolles relating to the unpaid
20   balance of the post-petition loan.    There was no proof of service
21   evidencing that the Debtor correctly served Little with the
22   notice or the motion relating to the stipulation.    In its proof
23   of service, the Debtor included counsel for Little; as listed,
24   however, counsel’s email address is incorrect.   The domain name
25   in counsel’s email address is “flg-law.com.”   But the Debtor
26   listed it as “fig-law.com.”    And the only notice even arguably to
27   Little itself was not directed to an officer or other party with
28   the responsibility for its defense against such claims.   Instead,

                                       4
 1   it went to the Debtor’s former president, Jay Tittle, who is now
 2   employed by Little.    The proof of service reflects electronic
 3   service on “Tittle, Jay (former employee of NTD[)]:
 4   Jay.Tittle@littleonline.com.”    On this record there is no
 5   evidence that Tittle was authorized to receive service or notice
 6   on Little’s behalf.    The Bolles, however, assert on appeal that,
 7   at a minimum, Little had informal notice.
 8        The proposed stipulation informed the bankruptcy court that
 9   a dispute had arisen as to the exact collateral securing the
10   Bolles’ loan.   In resolving this dispute, the Debtor agreed to
11   pay $107,119.50, “from funds turned over or to be turned over by
12   Little [] which are traceable to the accounts or any receivables
13   generated form [sic] the accounts identified in the moving
14   papers.”
15        The Official Committee of Unsecured Creditors filed a notice
16   of position in connection with the motion seeking approval of the
17   proposed stipulation; it asserted that the stipulation was
18   inconsistent with the Bolles’ financing agreement and the terms
19   of the sale to Little.    The bankruptcy court disregarded these
20   concerns and approved the stipulation through an order that did
21   not mirror the language in the stipulation.    As relevant, the
22   order authorized payment to the Bolles of $107,119.50 from
23   “proceeds traceable to projects set forth in [an attached list]
24   . . . whether in the possession of [Little] or [Debtor’s
25   liquidating agent.]”
26        Following the bankruptcy court’s entry of an amended
27
28

                                       5
 1   stipulation order (the “stipulation order”),3 Little appealed.
 2                               JURISDICTION
 3        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 4   §§ 1334 and 157(b)(2)(A).   We have jurisdiction under 28 U.S.C
 5   § 158.
 6                                  ISSUES
 7        Whether Little has standing to appeal from the amended
 8   stipulation order; if so, whether the bankruptcy court abused its
 9   discretion in approving the stipulation between the Debtor and
10   the Bolles.
11                           STANDARD OF REVIEW
12        Standing is an issue that we may raise sua sponte and review
13   do novo.   Paine v. Dickey (In re Paine), 250 B.R. 99, 104 (9th
14   Cir. BAP 2000).   Whether an appellant is a “person aggrieved” for
15   the purposes of standing is a factual question.    Id. (citing
16   Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.),
17   177 F.3d 774, 777 (9th Cir. 1999)).
18        We review the bankruptcy court’s decision to approve the
19   stipulation for an abuse of discretion.    See In re KVN Corp.,
20   Inc., 514 B.R. 1, 5 (9th Cir. BAP 2014).     The bankruptcy court
21   abuses its discretion if it applies the wrong legal standard,
22   misapplies the correct legal standard, or if its factual findings
23   are illogical, implausible, or without support in inferences that
24
          3
25           The orders on appeal are virtually identical except that
     the amended stipulation order clarifies that the Bolles have a
26   “security interest,” rather than a “superpriority lien,” with
27   respect to the identified assets. It also supersedes the
     initial order. Thus, we dispose of both appeals in this appeal
28   but refer only to a single stipulation order in the text.

                                      6
 1   may be drawn from the facts in the record.   See
 2   TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
 3   (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247,
 4   1262 (9th Cir. 2009) (en banc)).
 5                                DISCUSSION
 6        Little argues that it purchased assets from the Debtor free
 7   and clear of all liens and interests, including the Bolles’ post-
 8   petition lien.   It argues that the stipulation order negatively
 9   impacts its property interests.    The Bolles, in response, contend
10   that Little lacks standing to appeal because it did not object to
11   the proposed stipulation in the bankruptcy court.   They also
12   express chagrin at Little’s reliance on the effect of the
13   § 363(f) sale; the Bolles contend that Little benefitted
14   tremendously from the sale and that, as a large and well-
15   capitalized company, it is ludicrous to argue that Little would
16   not have purchased the Debtor’s assets had it known of the
17   Bolles’ lien.
18        We first address the Bolles’ standing argument.
19   A.   Little has standing to appeal from the stipulation order.
20        To satisfy the prudential standing requirement in bankruptcy
21   cases, an “appellant must be a ‘person aggrieved’ by the
22   bankruptcy court’s order.”   In re P.R.T.C., Inc., 177 F.3d at 777
23   (citation omitted).   “An appellant is aggrieved if ‘directly and
24   adversely affected pecuniarily by an order of the bankruptcy
25   court’; in other words, the order must diminish the appellant’s
26   property, increase its burdens, or detrimentally affect its
27   rights.”   Id. (citation omitted).
28        It is beyond dispute that the bankruptcy court approved a

                                        7
 1   motion seeking to sell the Debtor’s accounts receivables and
 2   certain contracts to Little free and clear of any liens or
 3   interests; this broad language included the Bolles’ post-petition
 4   liens pursuant to the financing order.    The order approved a sale
 5   pursuant to the purchase agreement, which required a sale free
 6   and clear.   Notwithstanding the Bolles’ contention that they did
 7   not receive formal notice of the sale,4 that order is now final
 8   and non-appealable.    To the extent the stipulation order
 9   increased Little’s burdens or detrimentally affected its rights
10   to the purchased assets as established by the order approving the
11   purchase agreement, standing to appeal exists.    Here, the
12   stipulation order appears to negatively impact Little’s rights,
13   and the Bolles certainly argue that this is the case.
14   B.   Little did not waive its ability to appeal.
15        The Bolles refer to their argument as one involving
16   standing, but their primary argument is actually based on alleged
17   waiver; they focus on Little’s failure to oppose approval of the
18   stipulation before the bankruptcy court.    There are two reasons
19   why this argument fails.
20        First, there is no evidence in the record evidencing proper
21   service on Little.    Contrary to the Bolles’ assertion, there is
22   no evidence that Little’s counsel was served with notice of the
23   proposed stipulation via email; the email address in the proof of
24   service was wrong.    And as to service involving Tittle, this
25
26        4
             We acknowledge that the sale order created an issue
27   because the Bolles were not provided with formal notice of the
     sale and the sale had the effect of depriving the Bolles of
28   their lien rights created by the financing order.

                                       8
 1   appears to be an attempt at notice only to Tittle, the Debtor’s
 2   former employee, who happens now to work at Little.    There is
 3   nothing in the record establishing that this email constituted
 4   notice to Little.
 5        But even if service was adequate, the failure to object is
 6   not fatal to Little’s efforts here.    The language of the
 7   stipulation itself differs from the relief provided by the
 8   stipulation order.   The stipulation itself did not have a clear
 9   detrimental impact on Little’s rights.    Similarly, the limited
10   documents filed in support of the motion seeking approval of the
11   stipulation do not provide notice that Little’s property rights
12   were involved.   The stipulation order, however, contains broader
13   language that has a negative impact.    We cannot find that Little
14   waived an objection when the objectionable language emerged only
15   in the stipulation order.
16   C.   To the extent the stipulation order reflects the intent of
17        the parties, the bankruptcy court abused its discretion in
18        approving the stipulation; to the extent the stipulation
19        order materially differed from the stipulation, the
20        bankruptcy court also abused its discretion.
21        We do not understand how the bankruptcy court approved an
22   order providing the Bolles with a security interest in assets and
23   then approved the sale of some of those assets to Little, free
24   and clear of the Bolles’ lien but without proof of any notice to
25   them.   But, that is the state of affairs as a result of the final
26   sale order.
27        The Debtor retained the right to payment from Little and
28   that payment is calculated with reference to collections on the

                                      9
 1   assets sold.   Thus, Little has a contractual obligation to make
 2   payments to the Debtor.   The Bolles, however, have no continuing
 3   rights in the assets after sale.     The Debtor, of course, could
 4   assign its right to these payments, and the stipulation appears
 5   to evidence such a non-controversial contract.    But, as Sharon
 6   Bolle made clear at oral argument, that was not the Bolles’
 7   understanding of the stipulation.    The Bolles intended to obtain
 8   a limitation on Little’s right to continuing payment under the
 9   Assigned Contracts and acquired accounts receivable when they
10   entered into the stipulation.   The stipulation order contains
11   language consistent with the Bolles stated understanding.    On
12   this record, there is considerable confusion.    We cannot simply
13   affirm and require modification of the stipulation order.
14        The bankruptcy court appears to have understood that the
15   stipulation detrimentally impacted Little;5 yet it approved the
16   stipulation notwithstanding a lack of notice to Little.     This
17   error was not harmless as it deprived Little of due process in
18   connection with an order that negatively impacted its rights;
19   this constitutes reversible error.
20        Further, the terms of the stipulation order are inconsistent
21   with the terms of the stipulation.     In addition to approving the
22   stipulation, which provided for payment from funds paid or
23   payable by Little, the stipulation order provided for payment
24   from proceeds traceable to assets, including those sold to Little
25   free and clear of the Bolles’ lien, and including asset proceeds
26
          5
27           Indeed, the bankruptcy court commenced the stipulation
     hearing by observing that the only person subject to potential
28   injury would be Little. Hr’g Tr. (Aug. 12, 2015) at 1:14-19.

                                     10
 1   in Little’s possession.   To the extent the stipulation order
 2   granted relief beyond that provided for in the stipulation
 3   itself, reversible error also exists.6
 4                               CONCLUSION
 5        Based on the foregoing, we REVERSE and REMAND to the
 6   bankruptcy court for further proceedings consistent with this
 7   decision.
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21        6
             Finally, we note one additional concern, although it is
22   not a basis for our reversal. The stipulation included
     reference to charges for “monitoring charges per agreement” and
23   attorney’s fees. The inclusion of these charges raises
24   questions. The Debtor’s motion to approve the secured post-
     petition financing expressly provided that the monitoring fees
25   were “an independent obligation from repayment of the
     loan. . . .” And, the charge for “attorney’s fees” is an oddity
26   because, so far as we can tell on this record, the Bolles have
27   never been represented by counsel in the bankruptcy case. The
     bankruptcy court may wish to address the actual amount owed to
28   the Bolles under the terms of the financing agreement.

                                     11