Hewlett-Packard Fin. Servs. Co. v. Alt. Graphics, Inc. (In re Alt. Graphics, Inc.)

In re: ALTERNATIVE GRAPHICS, INC., Debtor.

HEWLETT-PACKARD FINANCIAL SERVICES COMPANY, Appellant, v. ALTERNATIVE GRAPHICS, INC., Appellee.

BAP No. CC-14-1193-DTaKu

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Argued and Submitted: September 24, 2015

October 29, 2015

NOT FOR PUBLICATION

Bk. No. 9:12-bk-11378

MEMORANDUM¹

Argued and Submitted on September 24, 2015 at Malibu, California

Appeal from the United States Bankruptcy Court for the Central District of California

Honorable Robin L. Riblet,² Bankruptcy Judge, Presiding

Appearances: Amanda Nichole Ferns of Ferns, Adams & Associates argued for Appellant; William Charles Beall of Beall & Burkhardt argued for Appellee.

Before: DUNN, TAYLOR AND KURTZ, Bankruptcy Judges.

Creditor Hewlett-Packard Financial Services Company ("HP Financial") appeals from the bankruptcy court's order confirming the Debtor's chapter 11 plan of reorganization.³ Specifically, HP Financial takes issue with the following: 1) the confirmed plan's characterization of HP Financial's claim; 2) the amount to be paid to HP Financial under the confirmed plan; and 3) the court's denial of HP Financial's motions to alter or amend previous orders awarding sanctions to the Debtor. We DISMISS AS EQUITABLY MOOT the aspects of the appeal concerning plan confirmation generally and the characterization of HP Financial's agreement with the Debtor. Otherwise, we AFFIRM.

I. FACTUAL BACKGROUND

This appeal arises from a dispute involving a creditor who, in the words of the bankruptcy court, "has been fighting tooth and nail every inch to try and prevent the Debtor from getting documents" requested in discovery.

The discovery dispute arose out of a disagreement between the Debtor and creditor HP Financial as to the nature of a transaction between the parties in 2007. The Debtor acquired a piece of printing equipment from HP Financial. HP Financial maintains that it leased the equipment to the Debtor, whereas the Debtor contends (and the bankruptcy court found) that thetransaction was documented as a lease but was actually intended as a security arrangement for a sale.

As explained below, this disagreement was the only issue in need of resolution before the Debtor's chapter 11 plan could be confirmed. Unfortunately, that resolution was delayed six months while the parties waged a heated battle over the Debtor's discovery requests and HP Financial's responses.

The Indigo 5500

The Debtor, Alternative Graphics, Inc., is a corporation operating a commercial printing business in Goleta, California. In December 2007, the Debtor acquired an HP Indigo 5500 digital printing press (the "Indigo 5500") from HP Financial, a subsidiary of Hewlett-Packard, Inc. ("HP Inc."). HP Financial, in turn, had acquired the Indigo 5500 from Indigo America, Inc. ("Indigo America"), also a subsidiary of HP Inc., for $350,000.00. The transaction was governed by a so-called Master Lease and Financing Agreement ("Master Agreement").

The Master Agreement, together with its attached schedule, provided that the value of the Indigo 5500 was $337,002.00. The Debtor was to pay HP Financial $6,517.00 monthly for 60 months, for a total of $391,020.00. At the end of the 60-month term, the Debtor could purchase the Indigo 5500 for an amount equal to its fair market value at that time.

The Chapter 11 Case

On April 2, 2012, the Debtor filed a petition for reorganization under chapter 11. The Debtor's amended plan of reorganization ("Plan") listed the claim of HP Financial as asecured claim, with the collateral being the Indigo 5500.⁴ The Plan proposed to pay HP Financial a total of $90,000.00, plus interest, which the Debtor asserted was the value of the Indigo 5500 as of the filing date. HP Financial objected to the plan, arguing that the Debtor had mischaracterized its claim. More specifically, HP Financial objected to its treatment as a secured creditor, arguing that its status under the Master Agreement was that of a lessor. HP Financial asserted that it held an unsecured claim in the amount of $272,219.33 and that the correct value of the Indigo 5500 was $250,000.00.⁵ A hearing on confirmation of the Plan was set for November 14, 2013.

The Discovery Dispute

On August 14, 2013, the Debtor served HP Financial with a request for production of documents and a set of interrogatories.⁶ These discovery requests were aimed at establishing the true nature of the Master Agreement. The Debtor requested documents and information concerning any leases HP Financial had executed with other customers involving equipment similar or identical to the Indigo 5500. Specifically, the Debtor wanted to know: the prices paid by any customers to acquire their presses at the end of their lease terms; the prices for which such used presses had been sold to third parties; the amount HP Financial had charged its customers to remove presses if the customer did not wish to purchase at the end of the lease term; HP Financial's expectations at the outset of its agreements as to the equipment's value at the end of the lease term; and other related matters.

On September 23, 2013, after requesting and receiving an extension of time to respond to the first set of discovery requests, counsel for HP Financial submitted responses. HP Financial objected that the requests were ambiguous, overly broad, burdensome and oppressive, and that the requests assumed facts not in evidence and were not calculated to lead to the production of admissible evidence. Aside from those very general objections, HP Financial's responses were perfunctory. Itproduced only one document, a copy of the Master Agreement, which the Debtor already possessed.

In addition to its general objections, HP Financial also refused to provide any documents in the possession of HP Inc. or Indigo America.

The First Motion to Compel

On Tuesday, September 24, 2013, The Debtor's attorney, William Beall, e-mailed HP Financial's attorney, Amanda Ferns. Mr. Beall complained that HP Financial's responses were insufficient and threatened to file a motion to compel discovery unless Ms. Ferns called him within one day to discuss the situation. Ms. Ferns responded by e-mail on Wednesday evening, September 25, 2013, stating her willingness to meet and confer with Mr. Beall by telephone, but asking for more specific information regarding the Debtor's grievances. The following morning, Mr. Beall replied by e-mail, providing further details and stating that he planned to telephone Ms. Ferns the next day, Friday, September 27, 2013.

What happened next is a matter of some dispute. Mr. Beall declared that he called Ms. Ferns' office "within normal business hours" on Friday, September 27th, and left a voice mail. Ms. Ferns stated in her declaration that she did not receive Mr. Beall's voice mail until Monday, September 30th. What is undisputed is that at 3:26 p.m. on September 30, 2013, the Debtor filed a motion to compel discovery and for sanctions ("First Motion to Compel"). Ms. Ferns stated that the First Motion to Compel was filed "before [she] was able to return Mr. Beall's telephone call[.]" Mr. Beall retorted that he did not beginworking on the First Motion to Compel until Monday morning, September 30th, and that Ms. Ferns could have called him at any time before 3:26 p.m.

In the First Motion to Compel, the Debtor argued that the First Discovery Responses were so inadequate that the bankruptcy court should treat HP Financial as if it had not responded at all. The Debtor requested sanctions, in the form of either attorney fees or terminating sanctions, i.e., prohibiting HP Financial from voting against or objecting to the Plan. In response, HP Financial argued that the First Motion to Compel was procedurally defective, citing Local Bankruptcy Rule ("LBR") 7026-1. Under LBR 7026-1, HP Financial argued, Mr. Beall was required to send Ms. Ferns a letter requesting a meeting to resolve the discovery dispute and detailing the discovery order to be sought. If Ms. Ferns failed to respond within seven days, only then could the Debtor file a motion to compel. HP Financial also argued that its discovery responses had been sufficient in any event.

The bankruptcy court held a hearing on the First Motion to Compel on October 11, 2013. At the outset of the hearing, the bankruptcy court agreed with HP Financial that the First Motion to Compel was procedurally improper. Nevertheless, the court proceeded with the hearing in the hope of avoiding delay of the November 14 Plan confirmation hearing. The bankruptcy court rejected the argument that HP Financial could not obtain records from HP Inc. or Indigo America, because, as counsel for HP Financial conceded, HP Financial and Indigo America are subsidiaries and affiliates of HP Inc. The bankruptcy court gaveHP Financial until November 1, 2013 to supplement its discovery responses.

After announcing its rulings on the record at the October 11, 2013 hearing, the bankruptcy court entered an order on October 31, 2013 ("First Discovery Order"). In the First Discovery Order, the bankruptcy court denied the Debtor's request for sanctions without prejudice due to the failure to comply with LBR 7026-1. Consistent with the bankruptcy court's oral rulings, the First Discovery Order stated that HP Financial's objections were overruled and that HP Financial was required to respond to discovery requests to which it had not already responded satisfactorily.

On November 14, 2013, HP Financial filed a motion to alter or amend the First Discovery Order ("First Motion to Alter"). HP Financial requested alteration of the First Discovery Order based on purportedly new evidence on two points:

(1) HP Financial could not search its files by asset, making it impossible to find previous leases of equipment similar or identical to the Indigo 5500. In an attached declaration, HP Financial's representative Cindy Roebuck asserted that HP Financial had entered into some 62,000 lease agreements in North America since July 2013. Ms....