Girardi v. Miller (In re Keese)

671 F.Supp.3d 1053

IN RE: Girardi KEESE, Debtor.

Erika Girardi, Appellant, v. Elissa D. Miller, Chapter 7 Trustee, Appellee.

CV 22-5176 DSF

20-BK-21022-BR

21-AP-01155-BR

United States District Court, C.D. California

Signed May 1, 2023

Evan Christopher Borges, Amir A. Shakoorian Tabrizi, David T. Shackelford, Greenberg Gross LLP, Costa Mesa, CA, for Appellant.

Larry Wayne Gabriel, Jenkins Mulligan and Gabriel LLP, Los Angeles, CA, for Appellee.

ORDER REVERSING IN PART THE ORDER OF THE BANKRUPTCY COURT AND REMANDING FOR FURTHER PROCEEDINGS; ORDER GRANTING REQUESTS FOR JUDICIAL NOTICE (Dkts. 17, 30)

Dale S. Fischer, United States District Judge

This appeal arises from the Bankruptcy Court's July 11, 2022 Order granting Chapter 7 Trustee Elissa D. Miller's motion for the turnover of Appellant Erika Girardi's diamond earrings. For the reasons set forth below, the Court REVERSES in part the Bankruptcy Court's Order and REMANDS the case for further proceedings consistent with this Order.

I. BACKGROUND

In December 2020, the creditors of the law firm Girardi Keese filed an involuntary Chapter 7 bankruptcy case against the law firm and an involuntary Chapter 7 bankruptcy case against Thomas (Tom) Girardi. BR 2l-ap-01155, Dkt. 28 (Turnover Mot.) at 4. Upon her appointment, the Trustee began to investigate and scrutinize Girardi Keese's business records. She discovered a suspicious withdrawal from a client trust account Girardi Keese managed in connection with the Rezulin litigation - a mass tort action on behalf of diabetes patients in which Girardi Keese was counsel for certain plaintiffs. Id. at 1. The Trustee found a check drawn on March 2, 2007 from the Girardi Keese Rezulin Trust Account (RTA) in the amount of $750,000, payable to M&M Jewelers. Id. at 5. The ledger entry for the RTA identified the $750,000 payment as "costs" and provided no further description. Id. The check was signed by both Tom Girardi and then-Girardi Keese partner James O'Callahan. Id. at 6. The Trustee also discovered a letter from Tom Girardi indicating that in 2007, he bought Appellant $750,000 earrings to replace a pair of hers that had been stolen. Id.

Upon discovering this information, the Trustee requested that Appellant turn the earrings over to the estate. Dkt. 16 (Appellee Br.) at 9. After Appellant refused, the Trustee filed a motion for turnover of the property under 11 U.S.C. § 542.¹ Id. A hearing was held before Bankruptcy Judge Barry Russell on June 28, 2022. BR 21-ap-01155, Dkt. 53 (Turnover Hr'g. Tr.). On July 11, 2022, Judge Russell granted the Trustee's motion. BR 21-ap-01155, Dkt. 58. This appeal was filed on July 26, 2022.

Appellant never sought a stay of Judge Russell's order, nor did she object to any of the orders authorizing the auction and sale of the earrings. Dkt. 29 (Appellee Suppl. Br.) at 5-6. The earrings were sold at auction on December 7, 2022. Id. at 6. The Trustee has since disbursed the fees and costs to the auctioneer. Id.

Appellant raises two issues: (1) whether the "Bankruptcy Court erred as a matter of law when it determined that the Trustee's claims . . . were not barred by the applicable statutes of limitation and statute of repose," and (2) whether the "Bankruptcy Court erred as a matter of law when it determined that the underlying property . . . was property of the bankruptcy estate" and properly subject to a turnover motion. Dkt. 11 (Appellant Br.) at 8-9.²

II. LEGAL STANDARD

A bankruptcy court's conclusions of law are reviewed de novo. Factual findings are reviewed for clear error. George v. City of Morro Bay (In re George), 177 F.3d 885, 887 (9th Cir. 1999).

III. ANALYSIS

A. REQUEST FOR JUDICIAL NOTICE

The Trustee requests that the Court take judicial notice of the bankruptcy docket for Case No.: 2:20-bk-21022-BR, and print outs of bankruptcy dockets for Case No.: 2:21-ap-01155-BR and Case No.: 2:22-CV-05176-DSF. Dkt. 17. The Trustee also requests that the Court take judicial notice of a motion concerning auctioneer compensation in Case No.: 2:20-bk-21022-BR. Dkt. 30.

The Trustee's unopposed requests are GRANTED.

B. STANDING

The Trustee argues that Appellant lacks standing because the earrings were stolen and Appellant has no valid title to the earrings; therefore, she is merely an involuntary trustee who holds the earrings in a constructive trust and "does not have standing to object to the Trustee's Turnover Motion." Appellee Br. at 10-13. Appellant counters that she has standing as a party in interest. Dkt. 22 (Reply) at 11-12.³

By arguing that Appellant does not have standing because she holds the earrings in a constructive trust, the Trustee is preemptively claiming a substantive victory and then claiming that victory destroys Appellant's standing.⁴

The Court is satisfied that standing is not an issue. Appellant was the defendant below and did not initiate the suit. Standing is a doctrine that limits who can bring suit. It does not limit a party's ability to defend herself when sued. She also has standing to appeal a bankruptcy order that is adverse to her interests. Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999) (holding that to have standing to appeal, "[t]he appellant must be a 'person aggrieved' by the bankruptcy court's order" and an "appellant is aggrieved if 'directly and adversely affected pecuniarily by an order of the bankruptcy court'; in other words, the order must diminish the appellant's property, increase its burdens, or detrimentally affect its rights.")

C. Equitable Mootness

The Trustee maintains that because the sale went forward and Appellant failed to "file an appeal bond, or move to stay the Bankruptcy Court's order," the "authorization of the sale renders Mrs. Girardi's appeal moot." Appellee Br. at 9. Equitable mootness applies when a change in circumstances would make it "inequitable for th[e] court to consider the merits of the appeal." In re Roberts Farms, 652 F.2d 793, 798 (9th Cir. 1981). "The party moving for dismissal on mootness grounds bears a heavy burden." In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) (quotation marks omitted). In the Ninth Circuit,

[The court] look[s] first at whether a stay was sought, for absent that a party has not fully pursued its rights. If a stay was sought and not gained, [the court] then will look to whether substantial consummation of the plan has occurred. Next, [the court] will look to the effect a remedy may have on third parties not before the court. Finally, [the court] will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court.

Id. at 881.

The first factor weighs in favor of equitable mootness. Appellant did not move for a stay, nor did she provide an adequate reason for not doing so. As noted in Rev Op Group v. ML Manager LLC (In re Mortgs. Ltd.), Ninth Circuit precedent is inconsistent in its decisions about whether failing at the first step automatically renders the appeal equitably moot. 771 F.3d 1211, 1215 (9th Cir. 2014) ("When an appellant fails to seek a stay without giving adequate cause, we have held that we dismiss the appeal as equitably moot . . . . We have not consistently followed this helpful and clear rule, though, and have held in at least two cases that, in the instances there described, an appeal is not equitably moot despite the failure to seek a stay.") (citing cases). However, given "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them," Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), the Court finds more persuasive the cases that evaluate the remaining factors even where no stay was sought.

The second factor, whether substantial consummation of the plan has taken place, weighs against equitable mootness. Substantial consummation is defined by the Bankruptcy Code as:

(A) transfer of all or substantially all of the property proposed by the plan to be transferred;

(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and

(C) commencement of distribution under the plan.

11 U.S.C. § 1101(2). Courts find substantial consummation has occurred where the debtor makes plans pursuant to a confirmed plan. Antiquities of Nevada v. Bala Cynwyd Corp. (In re Antiquities of Nevada), 173 B.R. 926, 930 (9th Cir. B.A.P. 1994) ("Since Antiquities has assumed management and control of the property administered under the confirmed plan, and commenced distribution of payments on both short and long term debt on the effective date, we hold that the plan has been 'substantially consummated.' "). The Trustee has not presented any argument that there is a confirmed plan or that distributions have commenced under a plan.

The third and fourth factors, effect on innocent parties and ability to fashion relief, do not weigh in favor of equitable mootness. Here a remedy would entail the Trustee turning over the proceeds of the sale, which would have no impact on an innocent party. The only potential innocent party the Trustee points to is the purchaser of the earrings. The Trustee is concerned that the buyer would be negatively impacted by an unwinding of the sale. See, e.g., Dkt. 33 at 7 (Suppl. Br. Reply). This concern is misplaced. The sale would not be undone. The actual sale of the earrings is statutorily moot under 11 U.S.C. § 363(b). In re Elieff, No. 21-56177, 2022 WL 14476315, at *1 (9th Cir. Oct. 25, 2022) (unpublished) (finding that while the court could not determine if a claim was equitably moot, the appeal was "statutorily moot by operation of 11 U.S.C. § 363(m), which provides that reversal or modification of a sale order on appeal does not affect the validity of a sale...