Court Opinion

ID: 9882301
Source: CourtListenerOpinion
Date Created: 2023-10-05 18:00:48.826034+00
Date Added: 2024-06-11T14:58:59.175377
License: Public Domain

NOT FOR PUBLICATION                         FILED
                    UNITED STATES COURT OF APPEALS                        OCT 5 2023
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

In re: LONNIE TODD MOORE,                       No.    22-55383

             Debtor,                            D.C. No. 2:21-cv-04138-GW
______________________________

JAMES MACDONALD,                                MEMORANDUM*

                Appellant,

 v.

SHEREEN ARAZM KOULES; DAVID
HILTY,

                Appellees.

                   Appeal from the United States District Court
                      for the Central District of California
                    George H. Wu, District Judge, Presiding

                             Submitted October 5, 2023**

Before: BENNETT, SUNG, and H.A. THOMAS, Circuit Judges.

      Appellant James MacDonald appeals from the district court’s affirmance of

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The panel unanimously concludes that this case is suitable for
decision without oral argument. See Fed. R. App. P. 34(a)(2).
the bankruptcy court’s order (“Dismissal Order”) in an adversary proceeding

granting, without further leave to amend, the motion for judgment on the pleadings

by appellees. We DISMISS the appeal for lack of jurisdiction.

      On March 7, 2016, Lonnie Moore filed a voluntary petition for relief under

the Bankruptcy Code.1 On December 20, 2019, appellee David Hilty filed his

operative, amended proof of claim. On January 30, 2020, appellee Shereen Arazm

filed her operative, amended proof of claim.2 On June 24, 2020, appellant

MacDonald filed his operative, amended proof of claim.

      On October 28, 2020, the Trustee filed the Trustee’s Final Report (“TFR”)

in order to administer all estate assets and close the case. In the TFR, the Trustee

“allowed” Hilty, Arazm, and MacDonald’s claims and proposed payments of about

one percent of the amended claim amounts. On November 25, MacDonald started

an adversary proceeding seeking mandatory and equitable subordination of Hilty

      1
       Moore’s original petition was filed under Chapter 13 of the Bankruptcy
Code, but then converted to Chapter 7.
      2
        Hilty had filed his original proof of claim on December 2, 2016. Arazm
had filed her original proof of claim on December 5, 2016. In 2012, Hilty and
Arazm had sued Moore, the debtor, in Los Angeles Superior Court. The lawsuit
had sought damages against Moore for, among other alleged misconduct, securities
fraud, unjust enrichment, and breach of fiduciary duty with respect to LLCs in
which Hilty and Arazm were members. Both Hilty and Arazm obtained a
judgment against Moore in 2017. In 2019, the California Court of Appeal affirmed
this judgment in its entirety. See Hilty v. Moore, No. B284902, 2019 WL 4686265
(Cal. Ct. App. Sept. 26, 2019). Hilty and Arazm amended their claims to reflect
the amount of the judgment.

                                          2
and Arazm’s claims.3

      On December 10, following a hearing to consider the TFR, the Bankruptcy

Court entered its TFR Order. It authorized and directed the Trustee to make

distributions to all administrative creditors and claimants pursuant to the TFR

except with respect to Hilty, Arazm, and MacDonald’s claims—the distributions

for which were paused pending resolution of the adversary proceeding.

      Meanwhile, on December 21, in the adversary proceeding, appellee Arazm

and her husband, Oren Koules, filed a Notice of Lien on MacDonald’s claim

pursuant to § 708.410 et seq. of the California Code of Civil Procedure. The basis

for the lien was an unsatisfied award of mandatory appellate anti-SLAPP

attorneys’ fees Arazm and Koules had against MacDonald from a different lawsuit.

On February 5, 2021, MacDonald filed an amended complaint in the adversary

proceeding. Appellees filed their answer on March 9 and their motion for

judgment on the pleadings on March 10.

      On April 21, the Bankruptcy Court granted the motion in an oral ruling,

holding, among other things, that a claim for mandatory subordination can be

asserted only by an estate representative (trustee or debtor in possession). The

court also held that MacDonald lacked standing to pursue equitable subordination

      3
        On the same day, MacDonald also filed an Objection to the TFR and to the
claims of Hilty and Arazm. The Trustee filed a Response stating that she “found
each to be a properly filed claim.”

                                          3
because he did not—and could not—allege a particularized injury. The court also

determined that further amendment would be futile and prejudicial.

      On May 17, the Bankruptcy Court entered a written Dismissal Order that

incorporated its oral ruling. In the order, the court authorized the Trustee to release

the hold on funds meant for the distributions on the appellees’ and MacDonald’s

claims and to file a motion regarding directing the final distributions. MacDonald

appealed to the district court on May 18.4

      MacDonald had not sought to stay the enforcement of the Dismissal Order at

the time of filing his appeal to the district court. Therefore, on July 27, the Trustee

filed a motion requesting an order authorizing and directing final distributions on

the appellees’ and MacDonald’s claims as the Dismissal Order stated. On August

25, the day of the hearing on the Trustee’s motion, MacDonald sought a stay of the

Dismissal Order. The bankruptcy court denied the stay because MacDonald had

not shown a likelihood of success on the merits, as he had advanced no argument

to overcome his lack of standing as to his subordination claims.

      On August 27, the bankruptcy court entered an order (“Appellees

Distribution Order”) granting the Trustee’s request to distribute to Hilty and Arazm

the proposed payments on their claims, but denying the request regarding

      4
        MacDonald had already filed a Notice of Appeal on May 5—after the
court’s oral ruling. We treat the Notice as filed on the date of and after the entry of
the Dismissal Order. See Fed. R. Bankr. P. 8002(a)(2).

                                           4
MacDonald’s claim and ordering those funds to be deposited in an escrow account.

The order provides for a “final distribution,” that is not subject to any stay, and as

to which there “shall be no delay, in the enforcement and implementation of this

Order.” MacDonald did not appeal—or otherwise seek to challenge or stay—the

Appellees Distribution Order, and it became final in September 2021. See Fed. R.

Bankr. P. 8002(a)(1) (setting fourteen-day deadline).

      On September 15, the bankruptcy court held a hearing on allocating

MacDonald’s claim to Arazm and Koules based on their Notice of Lien. The court

found that there was no dispute over the finality or the unpaid amount of the

underlying judgment of attorneys’ fees, and therefore the lien was valid. On

September 29, the court assigned MacDonald’s claim to Arazm and Koules in an

order (“Assignment Order”). MacDonald did not appeal this order, and it became

final in October 2021. See Fed. R. Bankr. P. 8002(a)(1).

      Accordingly, on October 29, the Trustee filed the final account and

distribution report and applied to be discharged of her duties. At that point, the

underlying bankruptcy case was administratively concluded.

      On March 25, 2022, the district court affirmed the bankruptcy court’s

Dismissal Order. The district court agreed with the bankruptcy court’s

determination that MacDonald lacked statutory standing to seek subordination of

the appellees’ claims. Separately, the district court also held that MacDonald

                                           5
lacked standing to pursue the appeal because it was moot due to MacDonalds’

failure to appeal the intervening distribution and assignment orders. This appeal

followed.

      We lack jurisdiction over this appeal because it is moot. “In bankruptcy,

mootness comes in a variety of flavors: constitutional, equitable, and statutory.” In

re PW, LLC, 391 B.R. 25, 33 (B.A.P. 9th Cir. 2008). “Constitutional mootness is

jurisdictional and derives from the case-or-controversy requirement of Article III.”

In re Castaic Partners II, LLC, 823 F.3d 966, 968 (9th Cir. 2016). “The test for

mootness of an appeal is whether the appellate court can give the appellant any

effective relief in the event that it decides the matter on the merits in his favor.”

Garcia v. Lawn, 805 F.2d 1400, 1402 (9th Cir. 1986). “In a bankruptcy appeal,

when the underlying bankruptcy case is dismissed and that dismissal is allowed to

become final, there is likely no longer any case or controversy with respect to

issues directly involving the reorganization of the estate.” Castaic Partners II, 823

F.3d at 969 (internal quotation marks and citation omitted).

      Here, MacDonald did not appeal the Appellees Distribution Order and it

became final in September 2021. Therefore, the claims that he was seeking to

subordinate in favor of his claim have already been distributed. Even if

                                           6
MacDonald had statutory standing to seek such subordination,5 we could not grant

him “any effective relief” now even if we ruled “on the merits in his favor.”

Garcia, 805 F.2d at 1402.

      Separately, MacDonald also did not appeal the Assignment Order, and it

became final in October 2021. Therefore, he has no right to receive any

distribution from the Moore estate, even if his appeal could have proceeded and

even if any funds were left in the estate before the Trustee’s final distribution.

MacDonald no longer has a “personal stake in the outcome of the controversy.”

Wash. Legal Found. v. Legal Found. of Wash., 271 F.3d 835, 847 (9th Cir. 2001)

(en banc), aff’d sub nom., Brown v. Legal Found. of Wash., 538 U.S. 216 (2003).

      “If something happens during litigation that makes relief impossible, the

case is moot.” Planned Parenthood of Greater Wash. & N. Idaho v. U.S. Dep’t. of

Health & Hum. Servs., 946 F.3d 1100, 1109 (9th Cir. 2020). Here, the finality of

the Appellees Distribution Order and the Assignment Order independently make

      5
         “We apply a clearly erroneous standard to the bankruptcy court’s findings
of fact and review its conclusions of law de novo.” In re Weisman, 5 F.3d 417, 419
(9th Cir. 1993). The bankruptcy court did not err—let alone clearly err—in finding
that MacDonald had failed to allege any particularized injury and therefore could
not seek equitable subordination. The bankruptcy court also correctly concluded
that an unsecured creditor like MacDonald could not usurp an estate
representative’s general role in seeking mandatory subordination, and that
MacDonald did not satisfy any exceptions that would have let him seek such
subordination.

                                           7
relief impossible.6 This appeal is therefore no longer a live case or controversy,

and we lack jurisdiction due to mootness.

      DISMISSED.

      6
         Even if the Appellees Distribution Order were not final and even if
MacDonald succeeded on the merits so as to subordinate the appellees’ claims to
his, the case would still be moot. Currently, with post-judgment interest, the lien
Arazm and her husband Koules have against MacDonald is worth more than
$189,000. The TFR Order had only retained $177,442.09 (the sum total of the
proposed distributions for the appellees’ and MacDonald’s claims). Therefore,
MacDonald’s distribution would still only suffice for partial satisfaction of the lien.
His distribution would still be completely assignable to Arazm and Koules, and
MacDonald would still not have a “personal stake in the outcome of the
controversy.” Wash. Legal Found., 271 F.3d at 847.

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