Court Opinion

ID: 4570998
Source: CourtListenerOpinion
Date Created: 2020-09-29 23:00:44.086891+00
Date Added: 2024-06-11T13:31:00.069069
License: Public Domain

FILED
                                                                              SEP 28 2020
                           NOT FOR PUBLICATION                           SUSAN M. SPRAUL, CLERK
                                                                            U.S. BKCY. APP. PANEL
                                                                            OF THE NINTH CIRCUIT

          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                               BAP No. NV-19-1331-GTaB
ANTHONY THOMAS and WENDI
THOMAS; AT EMERALD, LLC                              Bk. No. 3:14-bk-50333-GS
             Debtors.

ANTHONY THOMAS; WENDI
THOMAS,
               Appellants,
v.                                                   MEMORANDUM*
JERI COPPA-KNUDSON, Chapter 7
Trustee; UNITED STATES TRUSTEE,
               Appellees.

               Appeal from the United States Bankruptcy Court
                          for the District of Nevada
                Gary A. Spraker, Bankruptcy Judge, Presiding

Before: GAN, TAYLOR, and BRAND, Bankruptcy Judges.

                                 INTRODUCTION

      Chapter 71 debtors Anthony and Wendi Thomas (“Debtors”) appeal

      *
        This disposition is not appropriate for publication. 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 9th Cir. BAP Rule 8024-1.
      1
      Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
                                                                           (continued...)
the bankruptcy court’s order denying their motion to vacate an order

converting their to chapter 11 case to chapter 7, as void under Civil Rule

60(b)(4), made applicable by Rule 9024. Debtors contend that they did not

have adequate notice that the bankruptcy court would permit the

withdrawal of their counsel or that the bankruptcy court would convert

their case. They argue that the bankruptcy court violated their due process

rights by permitting counsel to withdraw without effective notice and by

converting the case to chapter 7 without notice.

       Debtors had adequate notice of their attorney’s motion to withdraw.

Although Debtors may not have had adequate notice that their case would

be converted to chapter 7, they failed to show any prejudice caused by the

procedural defect. Additionally, Debtors did not appeal the conversion

order and cannot use Civil Rule 60(b)(4) as a substitute for a timely appeal.

Accordingly, we AFFIRM.

                                         FACTS2

A.     The Bankruptcy Filings

       In March 2014, Debtors filed their joint chapter 11 petition. AT

       1
        (...continued)
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
       2
          We exercise our discretion to review the bankruptcy court’s docket and
relevant adversary proceedings. See Rivera v. Curry (In re Rivera), 517 B.R. 140, 143 n.2
(9th Cir. BAP 2014), aff’d in part & dismissed in part, 675 F. App’x 781 (9th Cir. 2017).

                                             2
Emerald, LLC (“AT Emerald”), an entity wholly owned by Mr. Thomas,

concurrently filed a chapter 11 petition, and the bankruptcy court granted a

motion for joint administration. The court then approved the employment

of Alan Smith as counsel for Debtors and AT Emerald.

      AT Emerald’s scheduled assets consisted of $200 in a checking

account and a single emerald which it valued at $200 million (the “Thomas

Emerald”). AT Emerald listed two creditors in its schedules: John Beach

(“Beach”), who held a claim of $540,000 secured by the Thomas Emerald,

and Sarasota Vault, which held a claim of $1,200 for unpaid rent.

      In April 2014, the United States Trustee (“UST”) filed a motion to

convert the AT Emerald case to chapter 7 based on AT Emerald’s failure to

insure the Thomas Emerald. After a stipulated continuance, the hearing

was set for September 10, 2014.

      Debtors and AT Emerald filed a motion to extend the exclusivity

period for filing a plan and disclosure statement for a period of 90 days.

Debtors and AT Emerald stated that they were awaiting the sale of the

Thomas Emerald and their “plans of reorganization [were] dependent

upon the sale of the emerald.”

B.    The Motion to Sell and Beach’s Motion to Compel

      AT Emerald then filed a motion to sell the Thomas Emerald, free and

clear of liens, to Koyo Shipping and Trading Corporation (“Koyo”) for an

undisclosed price (the “Sale Motion”). AT Emerald asserted that the

                                      3
purchase price would be sufficient to pay all secured and unsecured claims

in both the entity case and the individuals’ case, including an unscheduled,

disputed claim of Kenmark Ventures LLC (“Kenmark”).3 But because the

sale price was so substantial, Debtors argued that disclosure of the actual

price would risk their personal safety.

      The bankruptcy court granted the Sale Motion and ordered that the

sum of $20,000,000 from sale proceeds be deposited into Mr. Smith’s trust

account and not disbursed until further order from the court.

      While the Sale Motion was pending, Beach obtained an order

permitting it to inspect the Thomas Emerald which was held at the

Sarasota Vault in Sarasota, Florida. Prior to the hearing on the Sale Motion,

Beach filed a motion seeking to compel AT Emerald to provide the second

key required to access Sarasota Vault’s two-key system. AT Emerald

opposed the motion and argued that Koyo’s representative had already

inspected the Thomas Emerald and informed Mr. Thomas that Koyo did

not want anyone to have access to the vault

      The bankruptcy court granted the motion to compel and ordered the

parties to file a status report of the results of the examination and the status

of the sale. At a status conference, Beach reported that AT Emerald had not

provided the key and was unable to provide any update regarding the sale

      3
      In February 2016, the court entered a nondischargeable judgment in favor of
Kenmark and against Debtors in the amount of $4,500,000.

                                         4
of the Thomas Emerald. Based on AT Emerald’s disregard of the court’s

order and a lack of information about the sale, Beach moved for an order to

shorten the time for a hearing on a forthcoming motion to appoint a

chapter 11 trustee.

      The bankruptcy court entered an order setting a hearing on the

motion to appoint a chapter 11 trustee for August 22, 2014, and required

Debtors to appear at the hearing.

C.    The Motion to Appoint a Trustee, Withdrawal of Debtors’ Counsel
      and Conversion of the Case

      Beach then filed its motion to appoint a chapter 11 trustee (the “Beach

Motion”). Beach attached a letter from Koyo threatening to declare the

purchase and sale agreement null and void if Beach inspected the Thomas

Emerald. Beach argued that cause existed to appoint a trustee because AT

Emerald’s refusal to permit Beach to inspect the Thomas Emerald, the lack

of information about the alleged sale, and the strange letter from Koyo all

gave rise to “a severe lack of credibility and creditor confidence in current

management.” AT Emerald opposed the motion and argued that Mr.

Thomas was the best person to sell the Thomas Emerald and Koyo would

not work with a chapter 11 trustee.

      Prior to the hearing, Mr. Smith filed a motion to withdraw as attorney

for Debtors and AT Emerald (the “Withdrawal Motion”). Mr. Smith

asserted that he and his clients had come to an impasse regarding certain

                                       5
aspects of his representation and an adversarial relationship had

developed. Mr. Smith stated that he had provided reasonable written

notice to Debtors of his intent to withdraw. The bankruptcy court set the

hearing on the Withdrawal Motion to coincide with the hearing on the

Beach Motion. The certificate of service attached to the Withdrawal Motion

indicated that Debtors were served by mail and also by email.

     At the August 22, 2014 hearing, the bankruptcy court granted the

Withdrawal Motion. Mr. Smith indicated his willingness to argue the Beach

Motion on behalf of AT Emerald, but the bankruptcy court reasoned that

the parties would not be prejudiced, and given the irreconcilable

differences between Mr. Smith and his clients, it would likely be more

dangerous for Mr. Smith to represent those divergent interests. Debtors

made their appearances on the record, but they did not object to the

Withdrawal Motion.

     Mr. Thomas argued that a chapter 11 trustee should not be appointed

because based on his expertise and relationship with Koyo he was the best

person to handle the sale. The bankruptcy court then asked Mr. Thomas

about his history and dealings with Koyo, his due diligence with respect to

the buyer, the lack of documentation from Koyo, and why Koyo refused to

work with a chapter 11 trustee. During the discussion, Mr. Thomas

reported that he originally purchased the Thomas Emerald for $20,000.

After Mr. Thomas explained his history with Koyo, he asked for two weeks

                                     6
to hire new counsel.

      In response to Mr. Thomas’s statements and the Koyo letter, the UST

argued that Koyo did not appear to be a legitimate buyer. The UST stated

its support for conversion of the case to chapter 7 to permit a trustee to be

appointed and take control of the assets. Beach agreed that Koyo was not a

legitimate buyer and suggested modifying the Beach Motion to instead

convert the case to chapter 7.

      The bankruptcy court concluded that Koyo was not a legitimate

buyer and AT Emerald was being “scammed.” Mr. Thomas renewed his

request for a two-week continuance, which the court denied. The

bankruptcy court then converted both cases to chapter 7. The conversion

orders were entered on August 29, 2014. Debtors did not appeal. Chapter 7

trustee, Jeri Coppa-Knudson (the “Trustee”) was appointed in both cases.

After a lengthy process, the Trustee eventually sold the Thomas Emerald

for $25,000.4

D.    The Motion to Vacate and the Court’s Ruling

      In July 2019, after the bankruptcy court set a final evidentiary hearing

on the Trustee’s motion to sell the Thomas Emerald, Debtors filed a motion

to vacate the conversion order pursuant to Rule 60(b)(4). Debtors argued

      4
        During the sale process, Debtors filed a motion to recuse because they had filed
suit against Judge Beesley. Judge Beesley recused himself and the case was reassigned
to Judge Spraker on March 25, 2019.

                                           7
that the bankruptcy court’s failure to permit Debtors to retain counsel prior

to converting their case constituted a deprivation of their due process

rights. They argued that they were prejudiced by the conversion because

they lost the ability to control the sale of the Thomas Emerald and were not

permitted to show that the safety protocols at Sarasota Vault ensured the

safety of the emerald notwithstanding a lack of insurance.

      At the hearing on the motion to vacate, Debtors argued for the first

time that they did not have notice of the Withdrawal Motion and that they

had no notice that Mr. Smith had filed the opposition to the Beach Motion.

Based on these new factual issues, the bankruptcy court set an evidentiary

hearing.

      At the evidentiary hearing, Mr. Thomas requested a continuance of

30-60 days to permit Debtors to retain counsel. The Trustee and Kenmark

objected to the continuance and, although Mr. Thomas stated that he had

been negotiating with two attorneys about engagement, he declined to

present testimony in support of his request for a continuance. The

bankruptcy court denied his request. Mr. Thomas then refused to testify or

present any evidence in support of his motion to vacate.

      The Trustee called Mr. Smith,5 who testified that he notified Debtors

of the August 22, 2014 hearing and the requirement that they attend in

      5
        Debtors expressly waived their attorney-client privilege in their reply to the
Trustee’s opposition to the motion to vacate.

                                            8
person. Mr. Smith testified that he had a phone conversation with Anthony

Thomas on August 18, 2014, in which he discussed the need to file a

response to the Beach Motion and a need for Mr. Thomas’s signature on a

declaration. Mr. Smith also testified that his office sent an email to Debtors

on August 20, 2014, with a draft of the Withdrawal Motion and a reminder

to appear with their new replacement counsel at the August 22, 2014

hearing.

      Because AT Emerald could not appear without legal counsel and

Debtors could not represent AT Emerald in court, the bankruptcy court

construed the motion to vacate as seeking only to vacate the conversion

order with respect to Debtors’ individual case. The bankruptcy court

denied the motion to vacate and held that Debtors had adequate notice and

opportunity to be heard on the Withdrawal Motion and the Beach Motion.

The court also held that Debtors did not demonstrate that conversion

caused them any prejudice because they admitted their chapter 11 strategy

depended on liquidation of the Thomas Emerald, and they failed to explain

what would have been different if the August 22, 2014 hearing were

continued to allow them to retain new counsel. The bankruptcy court

entered a written order and Debtors timely appealed.

                              JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

                                       9
                                      ISSUE

      Whether the bankruptcy court erred by denying Debtors’ motion to

vacate the conversion order as void.

                           STANDARD OF REVIEW

      We review the denial of a motion under Civil Rule 60(b)(4) de novo.

Hasso v. Mozsgai (In re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th Cir.

BAP 2002). “Whether a person’s due process rights have been violated is a

mixed question of law and fact, which is reviewed de novo.” Id. (citing

Wilborn v. Gallagher (In re Wilborn), 205 B.R. 202, 206 (9th Cir. BAP 1996)).

Under a de novo review, we look at the matter anew, giving no deference

to the bankruptcy court’s determinations. Barnes v. Belice (In re Belice), 461
B.R. 564, 572 (9th Cir. BAP 2011).

                                 DISCUSSION

      As an initial matter we address the scope of this appeal. The

bankruptcy court properly construed Debtors’ motion to vacate as

applying only to Debtors’ individual case because AT Emerald was

required to be represented by counsel in federal court. See D-Beam Ltd.

P’ship v. Roller Derby Skates, Inc., 366 F.3d 972, 973-74 (9th Cir. 2004).

Debtors were permitted to file a notice of appeal on behalf of AT Emerald,

but, because the entity did not engage counsel, its appeal was subsequently

dismissed. Consequently, our review is limited to the bankruptcy court’s

denial of the motion to vacate the conversion order with respect to Debtors’

                                         10
individual case.

      Civil Rule 60(b)(4) permits a bankruptcy court to relieve a party from

a final order if it is “void.” An order is “void” for purposes of Civil Rule

60(b)(4) “only if the court that considered it lacked jurisdiction, either as to

the subject matter of the dispute or over the parties to be bound, or acted in

a manner inconsistent with due process of law.” United States v. Berke, 170
F.3d 882, 883 (9th Cir. 1999). Due process requires notice “reasonably

calculated, under all the circumstances, to apprise interested parties of the

pendency of the action and afford them an opportunity to present their

objections.” Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314

(1950).

      Debtors argue that the conversion order was entered without due

process because the bankruptcy court did not permit their attorney to

argue the motion to appoint a chapter 11 trustee and did not provide

adequate notice of the conversion.

      The record demonstrates that Debtors had sufficient notice of the

Withdrawal Motion. They appeared at the hearing and did not object to

withdrawal. Instead, they asked for a continuance of the Beach Motion to

find new counsel. Additionally, permitting counsel to withdraw prior to

the argument on the Beach Motion had no impact on Debtors’ individual

case because the Beach Motion sought to appoint a chapter 11 trustee only

in the AT Emerald case. This was not a deprivation of Debtors’ due process

                                       11
rights with regard to conversion of their individual case.

      However, we agree that Debtors did not have adequate notice that

the bankruptcy court intended to convert their individual case to chapter 7

at the August 2014 hearing. There was no pending motion to convert

Debtors’ case and the bankruptcy court did not raise the possibility of

conversion until the end of the hearing when it converted the case. The

bankruptcy court failed “to apprise interested parties of the pendency of

the action and afford them an opportunity to present their objections.”

Mullane, 339 U.S. at 314.

      But despite this procedural defect, the bankruptcy court did not err

by denying the motion to vacate because Debtors did not demonstrate any

prejudice and they cannot use Civil Rule 60(b)(4) as a substitute for a

timely appeal.

      Even in cases where a bankruptcy court errs by failing to provide

adequate notice and opportunity to object, the appellant must show

prejudice from the procedural deficiencies. See Rosson v. Fitzgerald (In re

Rosson), 545 F.3d 764, 776-77 (9th Cir. 2008) (“Because there is no reason to

think that, given appropriate notice and a hearing, Rosson would have said

anything that could have made a difference, Rosson was not prejudiced by

any procedural deficiency.”).

      In Rosson, the Ninth Circuit held that although the debtor was

deprived of a meaningful opportunity to be heard, the conversion order

                                      12
was proper because the debtor could “show no prejudice arising from the

defective process afforded him.” Id. at 776; see also City Equities Anaheim,

Ltd. v. Lincoln Plaza Dev. Co. (In re City Equities Anaheim, Ltd.), 22 F.3d 954,

959 (9th Cir. 1994) (rejecting due process claim for lack of prejudice where

debtor could not show that any different or additional arguments would

have been presented if bankruptcy court had timely approved petition for

new counsel).

       Debtors refused to present any evidence to the bankruptcy court in

support of their motion to vacate and they did not identify any prejudice

related to conversion of their individual case.6 Debtors did not provide any

persuasive, substantive argument why their case would not have been

converted if they had adequate notice, and they did not demonstrate any

prejudice by the procedural defect.

       Debtors were present at the August 2014 hearing when the

       6
         Debtors argued they were prejudiced by losing control of the sale of the
Thomas Emerald which they contend would have yielded hundreds of millions of
dollars. This contention is unsupported by the record. Mr. Thomas purchased the
Thomas Emerald for $20,000. The Trustee was able to sell the Thomas Emerald for
$25,000. Moreover, loss of control of the Thomas Emerald could feasibly establish
prejudice in the AT Emerald case, but not in the individual case. At oral argument,
Debtors argued for the first time that they were prejudiced because they also lost
control of two unscheduled litigation claims which the Trustee sold upon court
approval. Debtors waived this issue by failing to raise it in the bankruptcy court or in
their opening brief. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999). Debtors did not
object to the Trustee’s standing and did not appeal the orders approving the sales,
which are now final.

                                            13
bankruptcy court converted their case, and they received notice of the

conversion order in September 2014. The conversion order was a final

order because conversion “takes control of the estate out of the hands of the

debtor, it seriously affects substantive rights and may lead to irreparable

harm to the debtor if immediate review is denied.” In re Rosson, 545 F.3d at

770 (citing Mason v. Young (In re Young), 237 F.3d 1168, 1173 (10th Cir. 2001)

(“[U]nder Chapter 7, once the debtor’s assets have been liquidated, it is

virtually impossible to reassemble them”); In re Rebeor, 89 B.R. 314, 320-21

(Bankr. N.D.N.Y. 1988) (“[I]mmediate review [i]s necessary to protect

Debtor’s substantive rights to reorganize . . . and to prevent irreparable

harm through the potential loss of his property sold to good faith

purchasers.”)). Despite the clear consequence of conversion, Debtors did

not appeal.

      Even if the bankruptcy court converted the case without due process,

“a motion under Rule 60(b)(4) is not a substitute for a timely appeal.”

United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 270-71 (2010) (citing

Kocher v. Dow Chem. Co., 132 F.3d 1225, 1229 (8th Cir. 1997)). “[I]f a party

fails to appeal an adverse judgment and then files a Rule 60(b)(4) motion

after the time permitted for an ordinary appeal has expired, the motion will

not succeed merely because the same argument would have succeeded on

appeal.” Kocher, 132 F.3d at 1229; see also 11 C. Wright & A. Miller, FEDERAL

PRACTICE AND PROCEDURE, CIVIL, § 2862 (3d ed. 2020).

                                       14
      For approximately five years, Debtors unsuccessfully opposed the

Trustee’s efforts to liquidate and administer assets in their individual case.

They only filed the motion to vacate the conversion order when the sale of

the Thomas Emerald appeared inevitable.

      Debtors cannot use Civil Rule 60(b)(4) as a substitute for a timely

appeal, even if they may have been successful on that appeal. Debtors have

not shown that the bankruptcy court erred by refusing to vacate the

conversion order under Civil Rule 60(b)(4).

                               CONCLUSION

      For the reasons set forth above, we AFFIRM the bankruptcy court’s

order denying Debtors’ motion to vacate.

                                      15