Court Opinion

ID: 9893770
Source: CourtListenerOpinion
Date Created: 2023-10-30 17:01:18.196693+00
Date Added: 2024-06-11T09:05:28.951421
License: Public Domain

NOT FOR PUBLICATION                          FILED
                    UNITED STATES COURT OF APPEALS                       OCT 30 2023
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                            FOR THE NINTH CIRCUIT

In re: OPEN MEDICINE INSTITUTE,
INC.,                                           No. 22-60017

                Debtor.

SPARK FACTOR DESIGN, INC.;                      BAP No. NC-21-1233-FBS
WORKING DIRT R2, LLC,

                Appellants,                     Bk. No. 21-51678

 v.
                                                MEMORANDUM*
FRED S. HJELMESET, Chapter 7 Trustee,

                Appellee.

                          Appeal from the Ninth Circuit
                            Bankruptcy Appellate Panel
             Faris, Brand, and Spraker, Bankruptcy Judges, Presiding

                      Argued and Submitted October 2, 2023
                            San Francisco, California

Before: W. FLETCHER, CALLAHAN, and LEE, Circuit Judges.

      The bankruptcy court approved a settlement agreement between Open

Medicine Institute, Inc.’s (OMI) chapter 7 trustee (Trustee) and Dr. Andreas M.

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
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Kogelnik (a debtor in his own bankruptcy) over the objections of creditors Spark

Factor Design, Inc. and Working Dirt R2, LLC. The Bankruptcy Appellate Panel for

the Ninth Circuit (BAP) affirmed. Spark Factor and Working Dirt now appeal. They

challenge the BAP’s determination that the settlement need not be analyzed under

11 U.S.C. § 363(b), the bankruptcy court’s failure to specifically analyze the

compromise of OMI’s claims against Dr. Kogelnik under § 363(b), and the

bankruptcy court’s analysis of the compromise under Federal Rule of Bankruptcy

Procedure 9019. We have jurisdiction under 28 U.S.C. § 158(d), and we affirm.

      OMI filed for chapter 7 bankruptcy in November 2020. The relevant entities

sharply dispute whose conduct led OMI to insolvency. Dr. Kogelnik, OMI’s founder

and former director, points the finger at Spark Factor, Working Dirt, and their

affiliates (together, the Targeted Parties), who assumed control after he left OMI in

June 2020. In turn, Spark Factor and Working Dirt, current principals and significant

creditors of OMI, pin the blame on Dr. Kogelnik. Both sides argue the other

breached their fiduciary duties.

      The Trustee sought to resolve these claims for the OMI estate. In September

2021, the Trustee filed a motion to settle with Dr. Kogelnik and two of his wholly-

owned companies, Basis Diagnostics, Inc. (Basis) and Open Medicine Clinic, Inc.

(OMCI). Under this proposed compromise, the Trustee would (1) settle the OMI

estate’s claims against Dr. Kogelnik, Basis, and OMCI; (2) sell to Basis all of the

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OMI estate’s rights to the “Litigation Claims” against the Targeted Parties; and

(3) withdraw the Trustee’s proof of claim in Dr. Kogelnik’s bankruptcy case with

prejudice. These Litigation Claims would encompass OMI’s breach of fiduciary

claims against the Targeted Parties and various of OMI’s rights under the Bankruptcy

Code. In exchange, (1) Basis would pay $200,000 to the Trustee; (2) Basis would

pursue, at its own expense, the claims against the Targeted Parties and share 55% of

the net recovery on those claims with the Trustee; and (3) Dr. Kogelnik would

subordinate his claim in OMI’s bankruptcy to the allowed claims of all non-insiders.

      Spark Factor and Working Dirt objected to the compromise. They made a

written counteroffer to the Trustee, asking the Trustee to (1) settle the OMI estate’s

claims against the Targeted Parties; (2) sell the OMI estate’s rights to several

California state court breach of fiduciary duty actions against Dr. Kogelnik to Spark

Factor; and (3) assign the OMI estate’s proof of claim in Dr. Kogelnik’s bankruptcy

case to Spark Factor. In exchange, Spark Factor and Working Dirt offered (1)

$300,000 in cash; and (2) to pursue the California state court actions against

Dr. Kogelnik and share 100% of the net recovery on those claims with the Trustee.

In short, they sought to cut a competing deal with the Trustee. Notwithstanding the

counteroffer, the bankruptcy court approved the Trustee’s proposed compromise

with Dr. Kogelnik.

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      On appeal, Spark Factor and Working Dirt challenge (1) the bankruptcy

court’s failure to apply § 363(b) to the proposed release of OMI’s claims against Dr.

Kogelnik, Basis, and OMCI, which they argue constituted an effective sale; and (2)

the BAP’s holding that the bankruptcy court did not need to apply § 363 to the

proposed sale of claims to Basis. We reject those arguments as applied to this case.

Generally, bankruptcy courts can approve a proposed compromise of the estate’s

claims under Rule 9019 so long as it is fair and equitable. In re A & C Props., 784

F.2d 1377, 1383 (9th Cir. 1986). But this circuit has stated that, at times, a proposed

compromise may also fall under the scope of § 363(b), which authorizes the trustee

to sell an estate asset. See In re Berkeley Del. Ct., LLC, 834 F.3d 1036, 1040–41

(9th Cir. 2016); cf. In re Mickey Thompson Ent. Grp., Inc., 292 B.R. 415, 422 (9th

Cir. BAP 2003).

      This circuit has not articulated a rule for when compromises proposed under

Rule 9019 should also be evaluated under § 363. But based on the specific and

unique facts of this case, including the proposed integrated compromise that

included a mutual release of claims, we agree with the BAP that the bankruptcy court

was not required to apply § 363 to any part of the compromise in order to approve

it. See Mickey Thompson, 292 B.R. at 422 (holding that whether to impose formal

sale procedures of § 363 in the context of a Rule 9019 compromise is ultimately a

matter of discretion that depends on the dynamics of the particular situation). As

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noted by the bankruptcy court, there was no real or robust market for the breach of

fiduciary duty claims, as the targeted insiders were likely the only potential

purchasers. Further, the bankruptcy court reasonably found that Dr. Kogelnik’s offer

to the Trustee was worth more to the OMI estate than Spark Factor and Working

Dirt’s offer.1

       Next, Spark Factor and Working Dirt challenge the bankruptcy court’s

approval of the compromise under Rule 9019. We review this approval for abuse of

discretion. Matter of Walsh Constr., Inc., 669 F.2d 1325, 1328 (9th Cir. 1982).

Under A & C Properties, to determine the “fairness, reasonableness and adequacy”

of a proposed compromise, the bankruptcy court must consider “(a) [t]he probability

of success in the litigation; (b) the difficulties, if any, to be encountered in the matter

of collection; (c) the complexity of the litigation involved, and the expense,

inconvenience and delay necessarily attending it; [and] (d) the paramount interest of

the creditors and a proper deference to their reasonable views in the premises.” 784

F.2d at 1381 (citation omitted). The bankruptcy court found that all four factors

favor granting the compromise, and the BAP affirmed. Spark Factor and Working

Dirt contest the courts’ findings as to the first, second, and fourth factors.

       1
        We read the BAP’s opinion in this case to suggest that bankruptcy courts
have discretion as to when a Rule 9019 compromise should also be evaluated as a
sale under § 363. We believe that any reading of the BAP’s opinion which would
render § 363 categorically inapplicable to transactions containing mutual releases
would be inconsistent with Berkeley Delaware Court, 834 F.3d at 1038, 1040–41.
                                          5
      While the Trustee engaged in cursory analysis of some of the factors, we

cannot say that the bankruptcy court abused its discretion in approving the

compromise. As to the first factor, the Trustee estimated that OMI had a 50% chance

of prevailing on the merits of the claims against Dr. Kogelnik, Basis, and OMCI.

The Trustee’s analysis was thin, but the bankruptcy court still could credit that

estimation and was not required to conduct “an exhaustive investigation into the

validity” of those claims. Matter of Walsh Constr., Inc., 669 F.2d at 1328. As to the

second factor, the Trustee cited enough circumstantial evidence suggesting that any

judgment against Dr. Kogelnik, Basis, or OMCI may be uncollectable.             The

bankruptcy court did not abuse its discretion in deferring to the Trustee on that

exercise of judgment. As to the fourth factor, the Trustee stated that the settlement

would result in a material benefit to creditors through the $200,000 in cash

immediately received by the estate, the subordination of Dr. Kogelnik’s claim, and

the potential of recovery against Spark Factor and Working Dirt. The bankruptcy

court did not abuse its discretion by finding that the paramount interests of OMI’s

creditors would be served by such a transaction. Nor was it required to defer to the

wishes of objecting creditors on this factor solely because they held a majority of

claims in OMI’s bankruptcy. See In re Transcon. Energy Corp., 764 F.2d 1296, 1299

(9th Cir. 1985).

                                         6
      Ultimately, because the bankruptcy court apprised itself of “all facts necessary

for an intelligent and objective opinion of the probabilities of ultimate success should

the claim[s] be litigated,” it did not abuse its discretion in approving the Trustee’s

proposed compromise. A & C Props., 784 F.2d at 1382 (citation omitted).

      AFFIRMED.

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