Bear Tooth Mountain Holdings LP et al v. ML Manager LLC et al, No. 2:2013cv01734 - Document 32 (D. Ariz. 2015)
Court Description: ORDER and OPINION that the Orders of the Bankruptcy Court are AFFIRMED, and the Clerk shall close the case (see attached PDF for further details). Signed by Judge Robert Clive Jones on 6/25/2015. (ACL)
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Bear Tooth Mountain Holdings LP et al v. ML Manager LLC et al Doc. 32 1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 DISTRICT OF ARIZONA 8 9 10 11 12 13 14 15 16 BEAR TOOTH MOUNTAIN HOLDINGS LP et ) ) al., ) ) Appellants, ) ) v. ) ) ) ML MANAGER LLC et al., ) ) Appellees. _______________________________________ ) Case No. Adv. No. 2:13-cv-01734-RCJ 2:12-ap-01849-RJH ORDER AND OPINION 17 18 This is an appeal of an adversary proceeding that arises out of the alleged malfeasance of ML 19 Manager, LLC, a company created under the Confirmation Order in the bankruptcy case of Debtor 20 Mortgages, Ltd. Fifteen Plaintiffs (“Appellants”) sued ML Manager and several of its members and 21 officers (collectively, “ML Manager” or “Appellees”) in Arizona state court on state law claims of 22 breach of fiduciary duty, negligence, conversion, fraud, intentional and negligent misrepresentation, 23 civil conspiracy, and breach of the implied covenant of good faith and fair dealing. Defendant 24 removed under 28 U.S.C. § 1334(b). The Bankruptcy Court denied Appellants’ motion to remand, 25 finding that the claims had a “close nexus” to the bankruptcy case, as required for post-confirmation 26 § 1334(b) jurisdiction under Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1194 27 (9th Cir. 2005), because the claims essentially complained of the way the Confirmation Plan was 28 drafted, negotiated, amended, and confirmed; how the exit financing was obtained; how ML Manager’s board operated; how the troubled real estate assets were liquidated by ML Manager under Dockets.Justia.com 1 the Confirmation Plan; and the assertion of agency authority assigned to ML Manager by the 2 Confirmation Plan. The Bankruptcy Court dismissed all claims except those for fraud and negligent 3 misrepresentation based on claim preclusion, dismissed all claims except that for fraud based on 4 quasi-judicial immunity, and found the fraud claim not to have been pleaded with particularity. The 5 Bankruptcy Court later dismissed the amended fraud claim with prejudice. 6 Appellants appealed, and Appellees elected to have the appeal heard by this Court rather than 7 the Bankruptcy Appellate Panel. Appellants asked the Court to certify the case for direct appeal to 8 the Court of Appeals. The Court granted the motion, but the Court of Appeals exercised its 9 discretion to refuse jurisdiction. The appeal is now ripe for this Court’s determination. Appellants 10 assign four points of error to the Bankruptcy Court: (1) there is no jurisdiction under § 1334(b); (2) 11 claim preclusion does not bar any of the claims; (3) ML Manager is not entitled to quasi-judicial 12 immunity; and (4) the fraud claim was adequately pled in the First Amended Complaint (“FAC”). 13 I. 14 POST-CONFIRMATION JURISDICTION The Bankruptcy Court did not err in finding jurisdiction under § 1334(b). The Court of 15 Appeals has reiterated that post-confirmation “related-to” bankruptcy jurisdiction exists under the 16 “close nexus” test over “matters ‘affecting the “interpretation, implementation, consummation, 17 execution, or administration of the confirmed plan.”’” In re Wilshire Courtyard, 729 F.3d 1279, 18 1287 (9th Cir. 2013) (quoting In re Pegasus Gold Corp., 394 F.3d at 1194 (quoting binder v. Price 19 Waterhouse & Co. (In re Resorts Int’l Inc.), 372 F.3d 154, 166–67 (3rd Cir. 2004))). The acts 20 complained of here concern ML Manager’s execution and administration of the Confirmation Plan, 21 i.e., the liquidation of the assets of Debtor’s estate. Appellants essentially argue that ML Manager 22 was not administering or executing the Confirmation Plan when it engaged in the complained-of acts 23 because the Confirmation Plan did not direct ML Manager’s specific actions. But the detail of the 24 Confirmation Plan’s instruction to ML Manager is not relevant, so long as it is clear ML Manager 25 was acting within the scope of the Confirmations Plan, which is not seriously disputed. An actor 26 does not act outside the scope of a plan simply because a bankruptcy court has given him a wide 27 range of discretion in how he carries out the tasks and objectives listed in the plan. That is not to say 28 that ML Manager may not have abused that discretion or acted wrongly, but it is to say that 2 1 jurisdiction over such claims is supported by § 1334(b). 2 II. 3 CLAIM PRECLUSION Appellants argue that a recent ruling by the Court of Appeals invalidates the Bankruptcy 4 Court’s claim preclusion rationale. The Bankruptcy Court noted that certain claims or issues were 5 precluded: (1) ML Manager could charge all investors an equitable portion of the exit financing costs 6 and could manage the loans and collateral but could not involuntarily encumber non-consenting 7 parties’ beneficial interests; (2) Appellants were bound by certain agency agreements with Debtor to 8 which ML Manager had succeeded and which could not be revoked because the agencies were 9 coupled with an interest; (3) the allocation of exit financing had been approved, affirmed by this 10 Court, and found equitably moot by the Court of Appeals; and (4) many previous sales orders had 11 been approved by the Bankruptcy Court, affirmed by this Court, and found equitably moot by the 12 Court of Appeals. 13 Appellants note that the Court of Appeals has reversed as to the agency issue. See In re 14 Mortgages, Ltd., 771 F.3d 623, 630 (9th Cir. 2014). The Court of Appeals held that Appellants in 15 that case had sufficiently alleged a lack of any signed agency agreements such that the Bankruptcy 16 Court erred in dismissing under Bankruptcy Rule 7008(a), but it did not hold that there was in fact no 17 agency as a matter of law. See id. It remanded for further proceedings. See id. at 632. Appellants are 18 correct that the issue is no longer precluded by virtue of the now-reversed ruling. However, the issue 19 may still be precluded by the other rulings noted above. Appellants note that the Court of Appeals 20 refused to review those rulings as equitably moot and argue that the unavailability of appellate 21 review can in some cases undermine the confidence in the correctness of a ruling such that it should 22 not be given preclusive effect. In this case, however, even assuming that the unavailability of 23 appellate review due to equitable mootness of the issue weakens the preclusive value of the relevant 24 rulings, the Bankruptcy Court ruled on the preclusion issue before the Court of Appeals announced 25 that it would not review the issues based on equitable mootness. The Bankruptcy Court therefore 26 cannot have erred in refusing to find claim preclusion, because it did not know when it ruled that the 27 underlying issues would be held unreviewable on appeal. And this Court cannot readdress the 28 underlying issues now. The Court of Appeals has noted in another opinion that despite the equitable 3 1 mootness issue it would be inequitable to permit Appellants to relitigate the underlying issues of the 2 agency agreements and exit financing. See In re Mortgages, Ltd., 771 F.3d 1211, 1213, 1218 n.5 (9th 3 Cir. 2014). 4 III. QUASI-JUDICIAL IMMUNITY Bankruptcy trustees are entitled to broad immunity from suit when acting within the scope of their authority and pursuant to court order. Additionally, court appointed officers who represent the estate are the functional equivalent of a trustee. 5 6 .... 7 For derived quasi-judicial immunity to apply, the defendants must satisfy the following four elements: (1) their acts were within the scope of their authority; (2) the debtor had notice of their proposed acts; (3) they candidly disclosed their proposed acts to the bankruptcy court; and (4) the bankruptcy court approved their acts. 8 9 10 In re Harris, 590 F.3d 730, 742 (9th Cir. 2009) (citations and internal quotation marks omitted). The 11 Bankruptcy Court did not err in finding these elements to apply. ML Manager’s activities were 12 within the scope of its authority to dispose of assets, the Debtor had notice of the acts (the property 13 sales, exit financing, etc.), and the acts were both disclosed to and approved by the Bankruptcy 14 Court. As the Bankruptcy Court noted in its dismissal order, Appellants did not contest the latter 15 three elements, but only the first, and the Bankruptcy Court did not err in finding that ML Manager 16 was functionally equivalent to a trustee. 17 IV. RULE 9(b) 18 The 32-page FAC contains a single claim for fraud. (See First Am. Compl. 29, ECF No. 2019 1). The general allegations in the FAC concern various complaints about the internal operations and 20 communications of the board of ML Manager, but nowhere in the FAC is there any allegation of any 21 untrue statement of fact (or concealment) to any Appellant by any Appellee, unknown to the 22 Appellant to be false, and reasonable reliance thereupon by the Appellant to his detriment. See 23 Nielson v. Flashberg, 419 P.2d 514, 518–19 (Ariz. 1966). The allegations of fraudulent concealment 24 concern the alleged concealment of certain financial problems of ML Manager in 2010, resulting in 25 ML Manager taking over $1 million in new loans unapproved by the Bankruptcy Court. Pursuant to 26 a “secret forbearance agreement” with the lender not revealed to the Bankruptcy Court or the 27 beneficiaries of the loans, ultimately cost ML Manager $2.2 million. ML Manager then conducted 28 4 1 “fire sales” on the troubled real estate assets to quickly generate enough money to repay the new 2 principle borrowed from the exit financing lender. The Court finds that the Bankruptcy Court did not err in ruling that Appellants failed to plead 3 4 causation, reliance, or damages under Rule 8(a) and that it is therefore not relevant whether they 5 were required to plead those elements under Rule 9(b). At oral argument in the Bankruptcy Court, 6 Appellees argued that Appellants had not alleged they would have done anything in particular had 7 they known of the additional financing, so they could not show reasonable reliance and causation as 8 opposed to mere speculation. There is no allegation of what Appellants would have done had they 9 known of the complained of acts by ML Manager or how their failure to take those acts might have 10 caused them damage. The bankruptcy judge’s comment at oral argument that the allegation of 11 reliance in paragraph 151 of the FAC was conclusory under Iqbal and Twombly was correct. 12 Appellants then pointed the Bankruptcy Court to paragraph 200, which alleges that the concealment 13 prevented Appellants from being able to appose an allocation motion with full knowledge of material 14 facts, implying that they would have done so. But when pressed by the bankruptcy judge to point out 15 any allegation of resulting damages apart from the conclusory statement of damage in paragraph 206, 16 which includes no figure or even method of calculation, Appellants were unable to do so. Also, the 17 Bankruptcy Court noted that even in the absence of the forbearance agreement (or if Appellants had 18 knowledge of the forbearance agreement), ML Manager (or the exit financing lender, via 19 foreclosure) would have sold the properties quickly at large losses anyway, because liquidating the 20 assets was ML Manager’s entire purpose and the market had crashed, and Appellants had not alleged 21 otherwise in the FAC. 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 5 CONCLUSION 1 2 IT IS HEREBY ORDERED that the Orders of the Bankruptcy Court are AFFIRMED, and 3 the Clerk shall close the case. 4 IT IS SO ORDERED. 5 Dated this 25th day of June, 2015. DATED: This 17th day of June, 2015. 6 _________________________________ ROBERT C. JONES United States District Judge 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6
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