Court Opinion

ID: 4227726
Source: CourtListenerOpinion
Date Created: 2017-12-12 01:01:16.566148+00
Date Added: 2024-06-11T14:42:53.994834
License: Public Domain

FILED
                                                           DEC 11 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 1                       NOT FOR PUBLICATION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-17-1086-LTiF
                                   )
 6   LIFE ENHANCEMENT PRODUCTS,    )    Bk. No. 3:14-bk-51572-BTB
     INC.,                         )
 7                                 )
                    Debtor.        )
 8   ______________________________)
     SAMUEL KORNHAUSER,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )    M E M O R A N D U M*
11                                 )
     LIFE ENHANCEMENT PRODUCTS,    )
12   INC.; JAMES S. PROCTOR,       )
     Chapter 11 Trustee,           )
13                                 )
                    Appellees.     )
14   ______________________________)
15                Argued and Submitted on December 1, 2017
                               at Reno, Nevada
16
                         Filed - December 11, 2017
17
               Appeal from the United States Bankruptcy Court
18                       for the District of Nevada
19        Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding
                         _________________________
20   Appearances:   Appellant Samuel Kornhauser argued pro se; Louis
                    M. Bubala, III of Kaempfer Crowell argued for
21                  Appellee James S. Proctor.
                         _________________________
22
     Before: LAFFERTY, TIGHE,** and FARIS, Bankruptcy Judges.
23
24
          *
25         This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8024-1.
27
          **
           Hon. Maureen A. Tighe, U.S. Bankruptcy Judge for the
28   Central District of California, sitting by designation.
 1        Creditor Samuel Kornhauser appeals the bankruptcy court’s
 2   order approving the chapter 11 trustee’s motion to sell Debtor’s
 3   assets free and clear under § 363.1     Kornhauser, who filed an
 4   unsecured claim in the chapter 11 case, did not prove he had an
 5   interest in the assets being sold and failed to obtain a stay
 6   pending appeal.    The sale – which the bankruptcy court found was
 7   to a good faith buyer – closed shortly before this appeal was
 8   filed.   Accordingly, we DISMISS this appeal as statutorily moot
 9   under § 363(m).
10                                   FACTS
11        Debtor-Appellee Life Enhancement Products, Inc. (“LEP”),
12   located in Minden, Nevada, manufactured and sold nutritional
13   supplements.   Its president, Wallace Block, owned 99.2 percent of
14   the corporation.   LEP leased its manufacturing and office space
15   from Scientific Nutritional Formulations, LLC (“SNF”), a limited
16   liability company wholly owned by Block.
17        In late August 2014, Kornhauser obtained a $2.5 million
18   state court judgment against LEP for unpaid legal fees and other
19   damages.   Block was also a defendant in that litigation, but no
20   judgment was entered against him because he filed an individual
21   chapter 7 case shortly before the judgment was entered.
22   Kornhauser eventually obtained a judgment in Block’s bankruptcy
23   case declaring the debt nondischargeable.
24        On September 17, 2014, LEP filed for chapter 11 relief.
25
26        1
           Unless specified otherwise, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
     “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure.

                                      -2-
 1   Kornhauser filed a proof of claim for $2,592,961.50 based on the
 2   state court judgment.   The proof of claim did not categorize the
 3   claim as secured, and the attached Proof of Claim Itemization
 4   Chart explicitly referred to the claim as unsecured.
 5   Nevertheless, Kornhauser attached to the claim form a copy of a
 6   “Secured Promissory Note” dated March 25, 2005 for $450,000,
 7   which named Block as the obligor and was signed by Block, and a
 8   “Pledge Agreement” whereby Block granted Kornhauser a security
 9   interest in Block’s stock in LEP.     Also attached were copies of
10   UCC Financing Statements filed with the Nevada and California
11   secretaries of state, naming Block as the debtor and referencing
12   as collateral “$450,000 secured promissory note and pledge
13   agreement that has increased to $700,000.”    Kornhauser also
14   attached to his claim a copy of the judgment against LEP.
15   Kornhauser’s claim made him the largest unsecured creditor of the
16   estate, and he has actively participated in the case since it was
17   filed.
18        In April 2015, the bankruptcy court appointed Appellee James
19   S. Proctor (“Trustee”) as chapter 11 trustee.    In the months that
20   followed, the Trustee worked to improve LEP’s cash flow and
21   profits and actively pursued potential purchasers for LEP’s
22   assets.
23        In the meantime, in Block’s bankruptcy, Kornhauser
24   challenged Block’s claim of exemption in his LEP stock.
25   Kornhauser also filed adversary proceedings in Block’s and LEP’s
26   bankruptcy cases seeking to pierce the corporate veil and to
27   require turnover of LEP’s and SNF’s assets to Block’s chapter 7
28   estate.   The bankruptcy court stayed those adversary proceedings

                                     -3-
 1   in December 2016.
 2        On February 7, 2017, the Trustee filed a motion to sell free
 3   and clear under § 363 substantially all of LEP’s assets,
 4   consisting of personal property, inventory, records, intangible
 5   property, and goodwill (the “Sale Motion”).   The assets were to
 6   be sold to Sierra Nevada Bioscience, LLC (“SNB”) for $500,000,
 7   subject to overbid.   In the Sale Motion, the Trustee noted that
 8   Kornhauser had asserted an interest in the assets based on his
 9   claims in the stayed adversary proceedings.   The Trustee stated
10   that he did not believe Kornhauser had a security interest in the
11   assets such that § 363(f) would apply, but he argued out of an
12   abundance of caution that if it did, the sale could proceed free
13   and clear of Kornhauser’s claims under either § 363(f)(4) (bona
14   fide dispute over validity of interest) or § 363(f)(5) (entity
15   can be compelled in a legal or equitable proceeding to accept a
16   money satisfaction of his interest).
17        Kornhauser filed an opposition and a request for a
18   continuance of the hearing on the Sale Motion, complaining that
19   he had not had time to investigate the sale and the proposed
20   buyer (despite the Sale Motion having been timely served).   He
21   argued that the assets were worth significantly more than the
22   proposed sale price and expressed concern that the sale might be
23   a “sham,” i.e., that the proposed buyer had some connection with
24   Block that would result in Block continuing to control the
25   assets.   Kornhauser also argued that his veil-piercing litigation
26   in Block’s bankruptcy case needed to be resolved before any sale
27   of LEP’s assets.
28        At the March 7, 2017 hearing on the Sale Motion, no party

                                     -4-
 1   appeared with an overbid.   Kornhauser was the only party who had
 2   filed an objection to the sale.    At the hearing, he articulated
 3   his objections and requested a continuance, which the bankruptcy
 4   court denied.   The bankruptcy court, however, permitted witness
 5   testimony regarding the bona fides of the sale and the method by
 6   which the Trustee had arrived at the purchase price.
 7        After hearing testimony and argument, the bankruptcy court
 8   approved the sale and waived the 14-day stay under Rule 6004(h),
 9   entering its written order on March 15, 2017.   The court found,
10   among other things, that (i) Kornhauser was not a secured
11   creditor entitled to the provisions of § 363(f); (ii) Kornhauser
12   did not hold a secured claim against LEP; alternatively,
13   Kornhauser did not properly perfect any security interest in LEP
14   because the financing statement did not identify the stock or any
15   property of LEP; (iii) the buyer purchased the property in good
16   faith under § 363(m); (iv) the buyer was not a successor in
17   interest under Nevada law; and (v) LEP’s lease with SNF was
18   rejected upon closing of the sale.
19        The asset sale closed March 20, 2017.2   That same day,
20   Kornhauser filed a timely notice of appeal.   The bankruptcy court
21   denied Kornhauser’s request for a stay pending appeal, as did a
22
23
24
25        2
           The Trustee requested that we take judicial notice of three
26   exhibits attached to the Trustee’s Report of Sale, alleging that
     Kornhauser failed to include those exhibits in his excerpts of
27   record. But those exhibits are already included in the record.
     We therefore deny the Trustee’s request for judicial notice as
28   moot.

                                       -5-
 1   BAP motions panel.3
 2                                JURISDICTION
 3        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 4   §§ 1334 and 157(b)(2)(N).    Subject to the mootness analysis set
 5   forth below, we have jurisdiction under 28 U.S.C. § 158.
 6                                   ISSUE
 7        Whether this appeal is moot.
 8                            STANDARD OF REVIEW
 9        We review our own jurisdiction, including questions of
10   mootness, de novo.    Ellis v. Yu (In re Ellis), 523 B.R. 673, 677
11   (9th Cir. BAP 2014) (citing Silver Sage Partners, Ltd. v. City of
12   Desert Hot Springs (In re City of Desert Hot Springs), 339 F.3d
13   782, 787 (9th Cir. 2003)).
14                                 DISCUSSION
15        The asset sale closed on March 20, 2017, and both of
16   Kornhauser’s requests for a stay pending appeal were denied.
17   Section 363(m) provides:
18        The reversal or modification on appeal of an
          authorization under subsection (b) or (c) of this
19
20
          3
           Kornhauser filed a Request for Judicial Notice attaching
21   copies of three documents entered on the bankruptcy court docket
     after this appeal was filed: (i) Third Application for Order
22
     Approving Compensation and Reimbursement of Expenses for Kaempfer
23   Crowell, Attorney for Trustee – filed April 19, 2017; (ii) Samuel
     Kornhauser’s Opposition to the Third Application – filed May 3,
24   2017; and (iii) the Declaration of Ernie Vicentina, CFO of GVC
     Financial Services, LLC, an investment banking firm, opining that
25   LEP’s business was potentially worth $2 million – filed May 5,
26   2017. Generally, we do not consider facts outside the record
     that was before the bankruptcy court when it made its ruling.
27   See United States ex rel. Robinson Rancheria Citizens Council v.
     Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992). Appellant’s
28   Request for Judicial Notice is therefore DENIED.

                                      -6-
 1        section of a sale or lease of property does not affect
          the validity of a sale or lease under such
 2        authorization to an entity that purchased or leased
          such property in good faith, whether or not such entity
 3        knew of the pendency of the appeal, unless such
          authorization and such sale or lease were stayed
 4        pending appeal.
 5   Under this provision, a sale of property under § 363 cannot be
 6   challenged on appeal unless the court’s authorization and the
 7   sale were stayed pending appeal.    Adeli v. Barclay
 8   (In re Berkeley Del. Ct. LLC), 834 F.3d 1036, 1039 (9th Cir.
 9   2016).    “The requirement to seek a stay pending appeal only
10   applies to purchases of estate property that were made in good
11   faith, and is designed to protect the interests of good faith
12   purchasers by guaranteeing the finality of property sales.”      Id.
13   (citing Onouli-Kona Land Co. v. Richards (In re Onouli–Kona Land
14   Co.), 846 F.2d 1170, 1172 (9th Cir. 1988)).    Here, the bankruptcy
15   court explicitly found that the buyer purchased the assets in
16   good faith.    The evidence in the record supports that finding,
17   and Kornhauser does not challenge it.
18        Nevertheless, Kornhauser argues that this appeal is not
19   moot.    He asserts that § 363(m) is inapplicable because that
20   provision does not apply to sales under § 363(f).      But § 363(f)
21   did not apply to Kornhauser; that subsection applies only to an
22   entity that has an interest in the property to be sold:
23        The trustee may sell property under subsection (b) or
          (c) of this section free and clear of any interest in
24        such property of an entity other than the estate, only
          if–
25
          (1) applicable nonbankruptcy law permits sale of such
26        property free and clear of such interest;
27        (2) such entity consents;
28        (3) such interest is a lien and the price at which such

                                      -7-
 1        property is to be sold is greater than the aggregate
          value of all liens on such property;
 2
          (4) such interest is in bona fide dispute; or
 3
          (5) such entity could be compelled, in a legal or
 4        equitable proceeding, to accept a money satisfaction of
          such interest.
 5
 6   § 363(f) (emphasis added).
 7        The bankruptcy court found:
 8        Mr. Kornhauser is not a secured creditor entitled to
          the provisions of 11 U.S.C. § 363(f). . . .
 9        Mr. Kornhauser does not hold a secured claim against
          this Debtor based on Mr. Block’s pledge of stock in
10        this Debtor to secure a note from Mr. Block to
          Mr. Kornhauser. . . . Mr. Kornhauser did not properly
11        perfect any security interest in Debtor with the filing
          of the financing statement, as the financing statement
12        does not identify the stock or any property of Debtor.
13        Because Kornhauser had no interest in the assets, § 363(f)
14   had no bearing on him.
15        On appeal, Kornhauser contends that he is a secured creditor
16   because Block’s $450,000 promissory note is secured by LEP’s
17   assets and stock and by SNF’s assets.    He also references his
18   $2.5 million judgment against LEP.    We see no error, however, in
19   the bankruptcy court’s finding that Kornhauser had no security
20   interest (or other interest) in the assets.
21        Under § 363(p)(2), Kornhauser had the burden of proof on the
22   issue of the validity, priority, or extent of any interest in the
23   assets.   See Chequers Inv. Assocs. v. Hotel Sierra Vista Ltd.
24   P’ship (In re Hotel Sierra Vista Ltd. P’ship), 112 F.3d 429, 434
25   (9th Cir. 1997) (party asserting an interest in post-petition
26   revenues must prove (i) that it holds a perfected security
27   interest and (ii) the amount of money to which its liens attach).
28   Kornhauser failed to meet that burden.    The pledge agreement

                                     -8-
 1   attached to Kornhauser’s proof of claim pledged LEP stock owned
 2   by Block.    The UCC financing statement referenced as collateral
 3   “$450,000 secured promissory note and pledge agreement that has
 4   increased to $700,000.”   It did not reference any LEP assets.
 5   The judgment, standing alone, did not create a lien on LEP’s
 6   personal property assets, and there is nothing in the record to
 7   suggest that Kornhauser took any steps to create such a lien.4
 8        In support of his assertion that the appeal is not moot,
 9   Kornhauser cites the Panel’s opinion in Clear Channel Outdoor,
10   Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP 2008).
11   In that case, the BAP held that the lien-stripping portion of an
12   order approving an asset sale free and clear of a nonconsenting
13   junior lienholder’s interest under § 363(f)(5), which had not
14   been stayed pending appeal, was neither equitably nor statutorily
15   moot.    The Panel reasoned that the lien-stripping portion was not
16   equitably moot because the Panel could reverse the transfer of
17   Clear Channel’s lien to the sale proceeds and hold that it
18   remains attached to the property sold without prejudicing anyone
19   not a party to the appeal.   The Panel further found no statutory
20   mootness because § 363(m) is inapplicable to lien-stripping
21
          4
           In Kornhauser’s reply brief, he seems to assert that he has
22
     a recorded judgment lien against LEP’s assets. But his citation
23   to the record refers to the judgment entered in Marin County
     (California) Superior Court. There is no evidence in the record
24   that the judgment was recorded with any county recorder, which is
     required to create a lien on real or personal property. See Nev.
25   Rev. Stat. § 353C.170 (recordation of judgment creates a lien
26   upon all real and personal property situated in the county that
     is owned by the judgment debtor), and Nev. Rev. Stat. § 17.350 (a
27   foreign judgment may be filed with the clerk of a Nevada district
     court and thereafter enforced in Nevada the same as a Nevada
28   judgment).

                                      -9-
 1   authorizations under § 363(f).     Id. at 35-36.   Kornhauser argues
 2   that even if we find the sale authorization to be moot, we should
 3   apply Clear Channel in finding the lien-stripping aspect of the
 4   sale not moot.   But Clear Channel is distinguishable: in that
 5   case, it was undisputed that the appellant had a lien in the
 6   property to be sold.   Here, as discussed above, Kornhauser did
 7   not prove that he had any interest in LEP’s assets.
 8                               CONCLUSION
 9        For the reasons explained above, this appeal is statutorily
10   moot.   Accordingly, we DISMISS.
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                                      -10-