Court Opinion

ID: 4232150
Source: CourtListenerOpinion
Date Created: 2017-12-23 01:01:01.155528+00
Date Added: 2024-06-11T14:16:03.548779
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 1                         NOT FOR PUBLICATION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-17-1210-FLTi
                                   )
 6   CONSOLIDATED NEVADA           )      Bk. No.      3:13-bk-51236-GWZ
     CORPORATION,                  )
 7                                 )
                    Debtor.        )
 8   _____________________________ )
                                   )
 9   In re:                        )      BAP No.      NV-17-1211-FLTi
                                   )
10   PAUL A. MORABITO,             )      Bk. No.      3:13-bk-51237-GWZ
                                   )
11                  Debtor.        )
     _____________________________ )
12                                 )
     PAUL A. MORABITO;             )
13   CONSOLIDATED NEVADA           )
     CORPORATION,                  )
14                                 )
                    Appellants,    )
15                                 )
     v.                            )      MEMORANDUM*
16                                 )
     JH INC.; JERRY HERBST; BERRY- )
17   HINCKLEY INDUSTRIES; WILLIAM )
     A. LEONARD, JR., Chapter 7    )
18   Trustee,                      )
                                   )
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 Gregg W. Zive, 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, see
28   9th Cir. BAP Rule 8024-1.
 1
 2   Appearances:    David B. Shemano of Robins Kaplan LLP argued for
                     appellants Consolidated Nevada Corporation and
 3                   Paul A. Morabito; Gerald M. Gordon of Garman
                     Turner Gordon LLP argued for appellees JH, Inc.,
 4                   Jerry Herbst, and Berry-Hinckley Industries; John
                     Francis Murtha of Woodburn & Wedge argued for
 5                   appellee William A. Leonard, Jr., Chapter 7
                     Trustee.
 6
 7   Before: FARIS, LAFFERTY, and TIGHE,** Bankruptcy Judges.
 8                              INTRODUCTION
 9        Chapter 71 debtors Paul A. Morabito and Consolidated Nevada
10   Corporation (“CNC”) (collectively, “Morabito Parties”) have long
11   been embroiled in a contentious dispute with creditors JH, Inc.,
12   Jerry Herbst, and Berry-Hinckley Industries (collectively,
13   “Herbst Parties”).   In this latest iteration of their battle,
14   the Morabito Parties - forced into involuntary bankruptcy because
15   of their failure to pay a substantial stipulated judgment against
16   them in the Herbst Parties’ favor - sued the Herbst Parties for
17   alleged fraud on the state court.    The bankruptcy court denied
18   their request to prosecute the fraud claims on behalf of their
19   respective estates or, in the alternative, to compel chapter 7
20   trustee William A. Leonard, Jr. (“Trustee”) to abandon those
21   claims.   On appeal, the Morabito Parties argue that, because the
22   Trustee refused to administer the claims, they should be able to
23
24        **
            The Honorable Maureen A. Tighe, U.S. Bankruptcy Judge for
     the Central 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, all
27   “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   prosecute the claims.     We discern no error and AFFIRM.
 2                             FACTUAL BACKGROUND2
 3   A.   Prepetition events
 4        In 2007, JH, Inc. agreed to purchase the stock of
 5   Berry–Hinckley Industries from P.A. Morabito & Co. Ltd. (the
 6   predecessor in interest to CNC).       Mr. Herbst guaranteed
 7   JH, Inc.’s obligations, and Mr. Morabito was the guarantor for
 8   P.A. Morabito & Co.   To induce the Herbst Parties to purchase
 9   certain development sites as a part of the purchase agreement,
10   Mr. Morabito agreed to serve as the construction manager.       He
11   also represented that Berry-Hinckley Industries had $3.1 million
12   of working capital.
13        Thereafter, a dispute arose between the parties, and the
14   Morabito Parties filed suit against the Herbst Parties in Nevada
15   state court.   The Herbst Parties filed numerous counterclaims
16   against the Morabito Parties, arguing that Mr. Morabito defrauded
17   them by promising to provide construction management services
18   that he never actually intended to render and that Mr. Morabito’s
19   representation about Berry-Hinckley Industries’ working capital
20   was fraudulently inflated.
21        The state court appointed an independent accountant to
22   examine the working capital issue.       In order to show that the
23   Morabito Parties’ working capital estimate was inflated, the
24   Herbst Parties prepared their own estimate; the Morabito Parties
25
26        2
            We borrow heavily not only from the bankruptcy court’s
27   findings of facts and conclusions of law but also from our
     previous decision, Morabito v. JH, Inc. (In re Morabito), BAP No.
28   NV-14-1593-FBD, 2016 WL 3267406 (9th Cir. BAP June 6, 2016).

                                        3
 1   disputed that estimate.   The independent accountant reported that
 2   no evidence supported the Morabito Parties’ working capital
 3   estimate, and the state court approved and adopted the
 4   independent accountant’s working capital report.
 5        The state court conducted a bench trial in May 2010.    It
 6   found that the Morabito Parties breached the stock sale agreement
 7   and engaged in fraud in the inducement and misrepresentation.     It
 8   found that Mr. Morabito never intended to render the construction
 9   management services that he had promised; that he made those
10   false representations to induce the Herbst Parties to purchase
11   certain development sites; that the Herbst Parties relied upon
12   those representations; and that the Herbst Parties were damaged
13   in the amount of $19,869,159.   The state court further concluded
14   that the working capital estimate prepared by Mr. Morabito
15   contained false representations (including the amount of accounts
16   payable); that the Herbst Parties would not have purchased Berry-
17   Hinckley Industries if they knew that the representations were
18   false; and that the Herbst Parties were damaged in the amount of
19   $66,002,205.75.   In total, the state court awarded the Herbst
20   Parties over $149 million in compensatory and punitive damages.
21        The Morabito Parties appealed to the Nevada Supreme Court,
22   and the Herbst Parties cross-appealed.   While the case was on
23   appeal, the parties executed a settlement agreement wherein the
24   parties agreed to dismiss the state court action with prejudice
25   and the Morabito Parties agreed to pay the Herbst Parties more
26   than $13 million over time.   To support their obligation to pay
27   the settlement amount, the Morabito Parties agreed to execute a
28   Confession of Judgment in the amount of $85 million and

                                      4
 1   Stipulation to Confession of Judgment.   Mr. Morabito admitted
 2   that he had acted in bad faith and committed fraud, including
 3   fraudulently inducing JH, Inc. to purchase Berry–Hinckley
 4   Industries.    The Morabito Parties agreed that if they failed to
 5   pay the settlement amount or otherwise breached the settlement
 6   agreement, the Herbst Parties could file the Confession of
 7   Judgment in state court.
 8        The Morabito Parties defaulted under the settlement
 9   agreement by failing to make timely payments.    They also
10   defaulted on a subsequent forbearance agreement.    The Herbst
11   Parties filed the Confession of Judgment in the state court.
12   B.   Involuntary chapter 7 proceedings
13        The Herbst Parties filed involuntary chapter 7 petitions
14   against Mr. Morabito and CNC.   Relying on the Confession of
15   Judgment and the Stipulation to Confession of Judgment, the
16   Herbst Parties asserted that they held claims totaling
17   $77 million.
18        After extensive litigation, the bankruptcy court granted
19   summary judgment and entered orders for relief.    Mr. Morabito
20   appealed the order for relief in his case.   We affirmed.
21   C.   Complaint against the Herbst Parties
22        The Morabito Parties filed a complaint (“Complaint”) in the
23   state court against the Herbst Parties for fraud on the court,
24   fraud, fraudulent inducement, and fraudulent misrepresentation
25   (the “Fraud Claims”).   They sought a declaration that the
26   Confession of Judgment was unenforceable because it was procured
27   by fraud.   They alleged that the Herbst Parties fraudulently
28   omitted several million dollars of receivables owed to Berry-

                                       5
 1   Hinckley Industries from the financial statements and working
 2   capital calculations that they submitted to the independent
 3   accountant.   They claimed that they did not become aware of the
 4   omissions until late 2016.
 5        The Herbst Parties removed the case to the bankruptcy court.
 6   The bankruptcy court denied the Morabito Parties’ motion to
 7   remand the case to the state court.
 8   D.   The motion for authority to prosecute claims or to compel
          abandonment
 9
10        The Morabito Parties filed a Motion for Authority to File
11   and Prosecute Claims on Behalf of Bankruptcy Estate or, in the
12   Alternative, to Compel Abandonment of Claims (“Motion”) in their
13   respective bankruptcy cases.   They requested that the bankruptcy
14   court authorize them to prosecute the Complaint or force the
15   Trustee to abandon the Fraud Claims, which they concede are
16   property of the estates.
17        Following a hearing on the Motion, the bankruptcy court
18   entered detailed findings of fact and conclusions of law and
19   denied the Motion.   It found Mr. Morabito’s story not credible
20   and was unconvinced that the Morabito Parties only recently
21   discovered the alleged discrepancy, given their counsel’s
22   “pattern of meticulous attention regarding all issues” in the
23   underlying litigation.
24        Regarding the Morabito Parties’ request for derivative
25   standing to prosecute the Fraud Claims, the bankruptcy court held
26   that the Morabito Parties did not present a colorable claim and
27   that prosecution of the claims would not benefit their estates.
28   It cited the Sixth Circuit’s four-part test articulated in

                                      6
 1   Canadian Pacific Forest Products, Ltd. v. J.D. Irving, Ltd.
 2   (In re Gibson Group, Inc.), 66 F.3d 1436, 1438-46 (6th Cir.
 3   1995), whereby derivative standing is appropriate where: (1) a
 4   demand is made upon trustee or debtor-in-possession to act;
 5   (2) the demand is declined; (3) the claim is colorable and would
 6   benefit the estate based on a cost-benefit analysis; and (4)
 7   inaction is an abuse of discretion.
 8        First, it held that the Morabito Parties did not make a
 9   demand on the Trustee to prosecute the Fraud Claims.    Second, it
10   held that the Trustee did not refuse any demand.    Nevertheless,
11   because the Trustee acknowledged that he could not prosecute the
12   Fraud Claims, the first and second factors were irrelevant.
13        Third, the court held that the Fraud Claims were not
14   colorable and would not survive a Civil Rule 12(b)(6) motion to
15   dismiss (made applicable in bankruptcy through Rule 7012(b)).     It
16   found that it is “implausible that Morabito could not have
17   discovered the ‘newly discovered evidence’ through reasonable
18   diligence.”   The court also stated that there were several bases
19   for the state court decision, including Mr. Morabito’s failure to
20   comply with the contract management agreement and his
21   misrepresentations in that agreement; Mr. Morabito’s attempt to
22   control or distort the documents and Berry-Hinckley Industries’
23   accountant’s financial analysis; and Mr. Morabito’s
24   misrepresentations on a number of other subjects.   It further
25   stated that the Morabito Parties’ premise that the working
26   capital report was at the heart of the state court decision was
27   “supposition and speculation.”   The court concluded that it is
28   “plausible that a court would find that the assertions of fraud

                                      7
 1   in the Complaint have nothing to do with the nearly $20 million
 2   awarded as damages for Morabito’s fraud with respect to the CMA.”
 3   It held that prosecution of the claims would be expensive and
 4   time-consuming (and Mr. Morabito told the court that he does not
 5   have any financial resources), such that it would not benefit the
 6   estates.    Additionally, the court found that Mr. Morabito’s
 7   declaration contained hearsay and legal argument; it also found
 8   the declaration not credible.
 9        Regarding the request for abandonment, the bankruptcy court
10   held that the Morabito Parties did not satisfy the requirements
11   of § 554.   It stated that the statute provides that the
12   bankruptcy court “may” order abandonment, which implies the
13   exercise of discretion.    The court noted that “the Debtors failed
14   to disclose the Claims to the Trustee, and the Court held that
15   the Claims were implausible, not colorable, and could not survive
16   a Rule 12 motion.    Thus, there is no possibility of a benefit to
17   the estate from abandonment.    The evidence does not present a
18   situation where the Court should apply the exception to the
19   rule.”   Finally, the court held that the estates’ retention of
20   the Fraud Claims is not burdensome and confers a value and
21   benefit on the estates by “aiding in the efficient and timely
22   administration of the cases. . . .    As such, the Trustee should
23   be permitted to retain the Claims for timely dismissal to prevent
24   a further delay in the Trustee’s administration of the cases.”
25        The bankruptcy court entered its order denying the Motion,
26   and the Morabito Parties timely appealed.
27   E.   The motion to dismiss
28        The Herbst Parties and the Trustee (collectively,

                                       8
 1   “Appellees”) filed a motion to dismiss these appeals, arguing
 2   that subsequent events had mooted the appeals.    Specifically, on
 3   October 3, 2017, the Trustee dismissed the Fraud Claims in state
 4   court and filed a notice of dismissal in the bankruptcy court.
 5        The Morabito Parties opposed the motion to dismiss, arguing
 6   that they had appealed from the notice of dismissal and denial of
 7   the motion for remand (BAP No. NV-17-1304), which preserved the
 8   instant appeal.
 9                               JURISDICTION
10        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
11   §§ 1334 and 157(b)(2)(A).    Subject to our discussion of mootness
12   below, we have jurisdiction under 28 U.S.C. § 158.
13                                  ISSUES
14        (1) Whether this appeal is moot.
15        (2) Whether the bankruptcy court abused its discretion in
16   refusing to compel the Trustee to abandon the Fraud Claims.
17        (3) Whether the bankruptcy court abused its discretion in
18   denying the Morabito Parties’ request for authority to prosecute
19   the Fraud Claims.
20                            STANDARDS OF REVIEW
21        We review de novo questions regarding mootness.    Giesbrecht
22   v. Fitzgerald (In re Giesbrecht), 429 B.R. 682, 687 (9th Cir. BAP
23   2010).    De novo review requires that we consider a matter anew,
24   as if no decision had been rendered previously.    United States v.
25   Silverman, 861 F.2d 571, 576 (9th Cir. 1988).
26        We review for abuse of discretion the bankruptcy court’s
27   decision to grant derivative standing to pursue claims of the
28   estate.    PW Racing Enters., Inc. v. N.D. Racing Comm’n

                                       9
 1   (In re Racing Servs., Inc.), 540 F.3d 892, 901 (8th Cir. 2008)
 2   (“the bankruptcy court’s decision whether to grant a creditor
 3   derivative standing will be reviewed for an abuse of
 4   discretion”).   We also review abandonment orders for an abuse of
 5   discretion.   Johnston v. Webster (In re Johnston), 49 F.3d 538,
 6   540 (9th Cir. 1995).
 7        To determine whether the bankruptcy court has abused its
 8   discretion, we conduct a two-step inquiry: (1) we review de novo
 9   whether the bankruptcy court “identified the correct legal rule
10   to apply to the relief requested” and (2) if it did, whether the
11   bankruptcy court’s application of the legal standard was
12   illogical, implausible, or without support in inferences that may
13   be drawn from the facts in the record.    United States v. Hinkson,
14   585 F.3d 1247, 1262–63 & n.21 (9th Cir. 2009) (en banc).
15                               DISCUSSION
16   A.   These appeals are not moot.
17        We must first satisfy ourselves that these appeals are not
18   moot and that we have jurisdiction over these appeals.    An appeal
19   is moot if events have occurred that prevent an appellate court
20   from granting effective relief.    Ederel Sport, Inc. v. Gotcha
21   Int’l L.P. (In re Gotcha Int’l L.P.), 311 B.R. 250, 253–54 (9th
22   Cir. BAP 2004).   The “party moving for dismissal on mootness
23   grounds bears a heavy burden.”    Motor Vehicle Cas. Co. v. Thorpe
24   Insulation Co (In re Thorpe Insulation Co.), 677 F.3d 869, 880
25   (9th Cir. 2012) (quoting Jacobus v. Alaska, 338 F.3d 1095, 1103
26   (9th Cir. 2003)).
27        The Appellees first argue that the appeals are
28   constitutionally moot because the Trustee dismissed the Complaint

                                       10
 1   and filed a notice of dismissal in the bankruptcy court.    We
 2   think that the Morabito Parties’ appeal from the notice of
 3   dismissal keeps these appeals from becoming moot.   If we reverse
 4   in both these appeals and the NV-17-1304 appeal, then the
 5   Morabito Parties could pursue the Fraud Claims.   Thus, it is
 6   possible to provide the Morabito Parties with some form of
 7   relief, and these appeals are not constitutionally moot.    Cf.
 8   United States v. Sprint Commc’ns, Inc., 855 F.3d 985, 989 (9th
 9   Cir. 2017) (in the context of a denial of a motion to intervene,
10   if neither party had appealed the underlying judgment that was
11   subsequently settled and dismissed, then a court could not grant
12   any effective relief on an appeal of a motion to intervene);
13   Canatella v. California, 404 F.3d 1106, 1109 n.1 (9th Cir. 2005)
14   (an appeal would not be moot if the appellant “has kept the
15   underlying action alive by filing a notice of appeal . . . ”).
16        The Appellees also argue that the appeals are equitably moot
17   because it is “impractical” to revive the Fraud Claims.    Under
18   the equitable mootness doctrine, we may “dismiss appeals of
19   bankruptcy matters when there has been a ‘comprehensive change of
20   circumstances . . . so as to render it inequitable for this court
21   to consider the merits of the appeal.’”   Rev Op Grp. v. ML
22   Manager LLC (In re Mortgages Ltd.), 771 F.3d 1211, 1214 (9th Cir.
23   2014) (quoting In re Thorpe Insulation Co., 677 F.3d at 880).
24   “An appeal is equitably moot if the case presents ‘transactions
25   that are so complex or difficult to unwind’ that ‘debtors,
26   creditors, and third parties are entitled to rely on [the] final
27   bankruptcy court order.’”   Id. at 1215 (quoting In re Thorpe
28   Insulation Co., 677 F.3d at 880).

                                     11
 1        We do not view the voluntary dismissal of a lawsuit as a
 2   particularly complex or hard-to-unwind transaction, and we fail
 3   to see how anyone has properly relied on that transaction.     There
 4   are no considerations of fairness that prevent us from ruling on
 5   these appeals.   These appeals are not moot.
 6   B.   The bankruptcy court did not err in refusing to compel the
          Trustee to abandon the Fraud Claims.
 7
 8        The Morabito Parties argue that the bankruptcy court should
 9   have compelled the Trustee to abandon the Fraud Claims.   They
10   contend that the Trustee unequivocally stated that he would not
11   administer the Fraud Claims, so they should be allowed to
12   prosecute the Complaint.   We disagree.
13        A bankruptcy trustee is the representative of the bankruptcy
14   estate and has exclusive standing to enforce the estate’s legal
15   claims.    See § 323(a) (“The trustee in a case under this title is
16   the representative of the estate.”).   He has the “authority to
17   act for the benefit of the estate and may sell the cause of
18   action, prosecute it in nonbankruptcy court, settle it, or
19   abandon it to the debtor as of inconsequential value to the
20   estate.”   Lopez v. Specialty Restaurants Corp. (In re Lopez),
21   283 B.R. 22, 32–33 (9th Cir. BAP 2002).   It follows that a
22   trustee may simply dismiss a claim if doing so would further the
23   estate’s interests.   The bankruptcy trustee must determine, in
24   his sound business judgment, what disposition is in the best
25   interests of the estate.   In re Moore, 110 B.R. 924, 927 (Bankr.
26   C.D. Cal. 1990).   The trustee’s authority is discretionary.   Id.
27   at 928.
28        Section 554(b) provides that, “[o]n request of a party in

                                      12
 1   interest and after notice and a hearing, the court may order the
 2   trustee to abandon any property of the estate that is burdensome
 3   to the estate or that is of inconsequential value and benefit to
 4   the estate.”   However, an order compelling abandonment is “the
 5   exception, not the rule.”   Viet Vu v. Kendall (In re Viet Vu),
 6   245 B.R. 644, 647 (9th Cir. BAP 2000) (citing Morgan v. K.C.
 7   Mach. & Tool Co. (In re K.C. Mach. & Tool Co.), 816 F.2d 238, 245
 8   (6th Cir. 1987)).   “The only issue before the court in an
 9   application for abandonment is whether there is a reason that the
10   estate’s interest in the property should be preserved or,
11   instead, whether the property is so worthless or burdensome to
12   the estate that it should be removed therefrom.”   In re K.C.
13   Mach. & Tool Co., 816 F.2d at 246.
14        There is no dispute that the Fraud Claims are property of
15   the debtors’ estates, and the Morabito Parties do not contend
16   that the Fraud Claims are burdensome.   Therefore, we must
17   consider whether the Fraud Claims are “of inconsequential value
18   and benefit to the estate.”
19        The Morabito Parties argue that once the bankruptcy court
20   found that prosecution of the Fraud Claims “could not plausibly
21   benefit the estate[,]” it lost its discretion to deny the Motion
22   and had to order abandonment.   While the bankruptcy court made
23   that finding concerning the Morabito Parties’ derivative
24   standing, the court also found that abandonment conferred no
25   benefit to the estate, and that instead the Fraud Claims should
26   be dismissed: “the estates’ retention of the implausible and
27   colorless Claims is not burdensome and confers a value and
28   benefit upon the estates by aiding the efficient and timely

                                     13
 1   administration of the cases.”
 2        Retention of the Fraud Claims so that the Trustee could
 3   dismiss them would confer value on the estates by aiding in the
 4   prompt resolution of the bankruptcy cases.      The bankruptcy court
 5   correctly observed that litigation of the Fraud Claims would
 6   delay the closing of the estates.      As long as the Fraud Claims
 7   were pending, a potential asset (however speculative) would
 8   remain unliquidated, and the claims of the Herbst Parties would
 9   remain undetermined.   Adjudicating the Fraud Claims could have
10   taken years.   There would be litigation over the validity of the
11   Fraud Claims, followed, if successful, by relitigation and
12   possibly retrial of the underlying dispute between the Morabito
13   Parties and the Herbst Parties, interspersed with an unknown but
14   probably large number of appeals and collateral controversies.
15   Eliminating this source of potentially extensive delay is
16   sufficient “reason that the estate’s interest in the property
17   should be preserved . . . .”    Id.3
18
19        3
            Allowing the Morabito Parties to pursue the Fraud Claims
20   on behalf of the estates would not only delay the administration
     of the estates and this never-ending litigation, but possibly
21   expose the estates to sanctions. This is a salient risk in light
     of the bankruptcy court’s finding that the claims are not
22
     colorable and Mr. Morabito’s admission that he is judgment-proof.
23   Mr. Morabito “has told the Court that he does not have financial
     resources . . . [sufficient to] fund prosecution of the
24   Complaint.” In the previous appeal, we noted that Mr. Morabito
     was not paying 98 percent of his debts as they came due and that
25   he had no way to pay his debts other than through the generosity
26   of his former companion, who covers Mr. Morabito’s “living
     expenses” totaling $50,000 to $75,000 per month, including
27   $11,000 per month in rent, $2,700 per month for lease of a
     Bentley, legal fees, and seven credit card balances. See
28   In re Morabito, 2016 WL 3267406, at *3, 10.

                                      14
 1        The Morabito Parties attack the Trustee’s discretion to
 2   administer the Fraud Claims.   They argue that he represented that
 3   he would not administer the Fraud Claims under any circumstance.
 4   This is false: the Trustee never stated that he would not
 5   administer the Fraud Claims, just that he is unable and unwilling
 6   to prosecute the Fraud Claims.   The Trustee has, in fact,
 7   administered the Fraud Claims by dismissing them.
 8        Moreover, we are loathe to second-guess a trustee’s business
 9   judgment.   The Trustee analyzed the Fraud Claims and determined
10   that, even accepting all of the Morabito Parties’ allegations,
11   there were no colorable claims against the Herbst Parties.      Based
12   on the weakness of the Fraud Claims and the estates’ lack of
13   funds, the bankruptcy court did not err when it found that it was
14   reasonable for the Trustee to dismiss the Fraud Claims rather
15   than prosecute them.
16        The Morabito Parties also misunderstand the bankruptcy
17   court’s discretion in compelling abandonment.   They argue that
18   once the court determines that the claims are burdensome or of
19   inconsequential value or benefit, the court loses all discretion
20   and must compel abandonment.   But § 554(b) clearly states that
21   the court may compel abandonment, and the Morabito Parties fail
22   to cite any authority that the court is ever divested of its
23   discretion.4   Even if it is correct (as the Morabito Parties
24
25        4
            The Morabito Parties cite Brown v. Locke (In re Brown),
26   BAP No. NC-06-1101-MaMeRy, 2006 WL 6810938 (9th Cir. BAP
     Sept. 28, 2006), where we vacated and remanded the bankruptcy
27   court’s order denying the debtor’s request for abandonment
     because the bankruptcy court did not make proper findings
28                                                      (continued...)

                                      15
 1   argue) that “may” can mean “must,” we are not convinced that
 2   “may” has anything other than its ordinary meaning in § 554(b).
 3        We also reject the Morabito Parties’ argument that refusing
 4   abandonment would increase the burden on the Trustee.   The
 5   Trustee dismissed the Complaint with no fuss or difficulty.
 6        Accordingly, the bankruptcy court did not abuse its
 7   discretion in refusing to compel abandonment of the Fraud Claims.
 8   C.   The bankruptcy court did not err in refusing to allow the
          Morabito Parties to assume and prosecute the Fraud Claims.
 9
10        The Morabito Parties argue that they should be allowed to
11   assume the Fraud Claims and prosecute them.   We again disagree.
12        In Gibson Group, the Sixth Circuit considered whether
13   creditors had standing to pursue claims on behalf of the
14   chapter 11 bankruptcy estate.   It examined the tests from other
15   jurisdictions and concluded:
16        a creditor or creditors’ committee may have derivative
          standing to initiate an avoidance action where: 1) a
17        demand has been made upon the statutorily authorized
          party to take action; 2) the demand is declined; 3) a
18        colorable claim that would benefit the estate if
19
          4
20         (...continued)
     regarding the value or benefit to the estate. The Morabito
21   Parties argue that, if a bankruptcy court has discretion to
     decide abandonment, we would not have remanded for further
22
     findings in Brown, because courts have discretion to deny relief
23   even if there is no value or benefit to the estate. But a
     court’s discretion is never unfettered and is always reviewed for
24   abuse. Discretion does not permit a court to make any decision
     unsupported by the record. It must actually consider the
25   evidence before it and articulate a decision with reasoning that
26   is logical, plausible, and supported by inferences from the facts
     in the record. In Brown, we held that the court did not receive
27   any relevant evidence and did not make any holding regarding the
     value of the asset. In the present case, the bankruptcy court
28   weighed the evidence and made an informed decision.

                                     16
 1        successful exists, based on a cost-benefit analysis
          performed by the court, and 4) the inaction is an abuse
 2        of discretion (“unjustified”) in light of the
          debtor-in-possession’s duties in a Chapter 11 case. A
 3        creditor has met its burden to show standing to file an
          avoidance action if it has fulfilled the first three
 4        requirements and the trustee or debtor-in-possession
          declined to take action without stating a reason. The
 5        burden then shifts to the debtor-in-possession to
          establish, by a preponderance of the evidence, that its
 6        reason for not acting is justified.
 7 66 F.3d at 1446.   Bankruptcy courts within the Ninth Circuit have
 8   adopted a version of this test.    See, e.g., In re Alaska Fur
 9   Gallery, Inc., No. A09-00196-DMD, 2010 WL 7765571, at *1 (Bankr.
10   D. Alaska May 21, 2010); In re Yellowstone Mountain Club, LLC,
11   No. 08-61570-11, 2009 WL 982207, at *6 (Bankr. D. Mont. Jan. 16,
12   2009).
13        Here, the bankruptcy court followed the Yellowstone Mountain
14   Club version of this test:
15        1. A demand has been made upon the statutorily
          authorized party to take action;
16
          2. The demand is declined;
17
          3. A colorable claim that would benefit the estate if
18        successful exists, based on a cost-benefit analysis
          performed by the court; and
19
          4. The inaction is an abuse of discretion
20        (“unjustified”) in light of the debtor-in-possession’s
          duties in a Chapter 11 case.
21
22   2009 WL 982207, at *6.
23        First, the Morabito Parties argue that the Gibson Group test
24   applies only to a chapter 11 case, not chapter 7, and that the
25   difference is crucial because a chapter 11 trustee is not charged
26   with liquidating the estate’s property.    We fail to see why a
27   different test should apply to a chapter 7 case.    Although a
28   chapter 11 debtor-in-possession (or trustee) is not charged with

                                       17
 1   liquidating the debtor’s estate, its basic duty is the same: to
 2   maximize the economic value of the estate.   Further, the Morabito
 3   Parties offer no alternative test for granting derivative status
 4   in a chapter 7 case.   We conclude that the court did not err in
 5   adopting the Gibson Group/Yellowstone Mountain Club test.
 6        Second, the Morabito Parties contend that the bankruptcy
 7   court erred in finding that the Fraud Claims were not colorable
 8   because it speculated about the success of the Fraud Claims in
 9   the state court.   The bankruptcy court did not err.   A court may
10   choose to evaluate the colorability of a claim through the lens
11   of Civil Rule 12(b)(6): a claim that could not even withstand a
12   motion to dismiss is one example of a claim that is not
13   colorable.5   To survive a motion to dismiss, “a complaint must
14   contain sufficient factual matter, accepted as true, to state a
15   claim to relief that is plausible on its face.   A claim has
16
17        5
            Although Gibson Group and the other cases do not
     explicitly use the Civil Rule 12(b)(6) standard, Gibson Group
18   determined whether the claims were colorable by looking at “the
19   face of the complaint[.]” 66 F.3d at 1446. This standard is
     analogous to a Civil Rule 12(b)(6) inquiry. Many courts have
20   explicitly adopted Civil Rule 12(b)(6) as the test for
     colorability. See, e.g., In re Sabine Oil & Gas Corp., 547 B.R.
21   503, 515 (Bankr. S.D.N.Y. 2016), aff’d, 562 B.R. 211 (S.D.N.Y.
     2016) (“The inquiry [for derivative standing] as to whether a
22
     claim is ‘colorable’ . . . is similar to that undertaken by the
23   court on a motion to dismiss.”); Walnut Creek Mining Co. v.
     Cascade Inv., LLC (In re Optim Energy, LLC), 527 B.R. 169, 173
24   (D. Del. 2015) (“The first element of that test [for derivative
     standing] — whether a party has asserted a colorable claim —
25   requires ‘the court [to] undertake the same analysis as when a
26   defendant moves to dismiss a complaint for failure to state a
     claim.’”); In re Dzierzawski, 518 B.R. 415, 419 (Bankr. E.D.
27 Mich. 2014) (“other courts have held that a creditor’s claims are
     ‘colorable’ in this context if they would survive a motion to
28   dismiss under [Civil Rule] 12(b)(6)”).

                                     18
 1   facial plausibility when the plaintiff pleads factual content
 2   that allows the court to draw the reasonable inference that the
 3   defendant is liable for the misconduct alleged.”    Ashcroft v.
 4   Iqbal, 556 U.S. 662, 678 (2009) (internal citations and quotation
 5   marks omitted).   To determine whether a claim is plausible, a
 6   court must use its experience and judgment to predict the
 7   possible outcome of the claim.   Id. at 679.   The test of
 8   “colorability” is similar.   Neither is speculative.   To hold
 9   otherwise would essentially require the court to hold a minitrial
10   on the substantive issues before granting a motion to dismiss or
11   determining the colorability of a claim.
12        The Morabito Parties did not provide any plausible account
13   of the Herbst Parties’ fraud, falsity, or an intent to deceive;
14   any misrepresentations (other than their own) in the working
15   capital calculation; or anyone’s reliance on the supposed
16   falsity.   The bankruptcy court was appropriately skeptical of
17   Mr. Morabito’s statement that he only recently discovered new
18   evidence by happenstance.    The bankruptcy court did not need to
19   accept as true unreasonable inferences or conclusory legal
20   allegations cast in the form of factual allegations.    See Bell
21   Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (“While a
22   complaint attacked by a Rule 12(b)(6) motion to dismiss does not
23   need detailed factual allegations, a plaintiff’s obligation to
24   provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires
25   more than labels and conclusions, and a formulaic recitation of
26   the elements of a cause of action will not do.”).    It also
27   accurately noted that much of the Complaint is “simply an attempt
28   to relitigate what either was or should have been litigated” in

                                      19
 1   the state court.
 2        The bankruptcy court was also correct that the state court
 3   judgment was not based solely on the fraud concerning the working
 4   capital estimate.   Rather, the court found that the judgment was
 5   based on Mr. Morabito’s “lack of credibility, his failure and
 6   lack of intention to comply in any fashion with the [construction
 7   management agreement], his intentional false representations
 8   . . . and his lack of truth regarding the working capital and the
 9   value of [Berry-Hinckley Industries].”   The court found it
10   plausible that the Fraud Claims, even if true, would not affect
11   the state court judgment.6
12        In sum, the bankruptcy court looked at a number of factors
13   to determine whether the Fraud Claims were colorable.   It drew
14   reasonable inferences and articulated reasons that the Fraud
15   Claims were unlikely to be successful if prosecuted.    We discern
16   no error.
17        Third, the Morabito Parties argue that the bankruptcy court
18   erred in making factual findings without holding an evidentiary
19   hearing.    But the Morabito Parties did not request an evidentiary
20   hearing before the bankruptcy court.   See Team Spirit Am., LLC v.
21   Kriegman (In re LLS Am., LLC), BAP No. EW-11-1524-DHPa, 2012 WL
22   2042503, at *9 (9th Cir. BAP June 5, 2012) (“By not making a
23   request for an evidentiary hearing on the Substantive
24   Consolidation Motion, . . . [appellant] waived its right to
25
          6
26          The Morabito Parties imply that the bankruptcy court held
     that a claim cannot be colorable unless it results in a positive
27   monetary recovery for the estate (as opposed to just a reduction
     of the state court judgment). The bankruptcy court made no such
28   statement.

                                      20
 1   complain about the lack of an evidentiary hearing.”).
 2        More importantly, the court was not required to hold an
 3   evidentiary hearing.   As we have noted, it is appropriate to
 4   analogize the colorability standard with the plausibility
 5   standard under Civil Rule 12(b)(6).   A procedural analogy is
 6   equally sound.   No rule requires an evidentiary hearing on a
 7   Civil Rule 12(b)(6) motion; indeed, because such a motion tests
 8   the facial sufficiency of the complaint, it would be anomalous to
 9   permit, let alone require, additional evidence.   Likewise, a
10   court should not be required to hold an evidentiary hearing to
11   determine the colorability of a complaint, which is also based on
12   the face of the pleading.   Here, the bankruptcy court properly
13   determined that the Morabito Parties failed to allege any
14   plausible instance of fraud.   It did not err in denying the
15   Motion without holding an evidentiary hearing.
16        Therefore, the bankruptcy court did not abuse its discretion
17   in declining to grant the Morabito Parties authority to prosecute
18   the Fraud Claims.7
19                               CONCLUSION
20        For the foregoing reasons, we AFFIRM.
21
22
23
          7
            At oral argument, the Morabito Parties raised various
24   issues not previously argued on appeal and not supported by the
     record. We do not consider any of these new arguments in the
25   first instance. See Yamada v. Nobel Biocare Holding AG, 825 F.3d
26   536, 543 (9th Cir. 2016) (“[g]enerally, an appellate court will
     not hear an issue raised for the first time on appeal”); Ezra v.
27   Seror (In re Ezra), 537 B.R. 924, 932 (9th Cir. BAP 2015)
     (“Ordinarily, federal appellate courts will not consider issues
28   not properly raised in the trial courts.”).

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