In re Douglas J. Roger, M.D., Inc.

393 F.Supp.3d 940

IN RE: DOUGLAS J. ROGER, M.D., INC., APC

Case No. 5:18-cv-01596-SVW

United States District Court, C.D. California.

Signed March 26, 2019

Chad V. Haes, D. Edward Hays, Marshack Hays LLP, Irvine, CA, Franklin R. Fraley, Jr., Sue-Ann L. Tran, Fraley and Associates, Los Angeles, CA, for Appellant.

George Michael Hanover, Summer M. Shaw, Doling Shaw and Hanover, Palm Desert, CA, Robert S. Lampl, Law Offices of Robert S. Lampl, Woodland Hills, CA, Kathryn M.S. Catherwood, Gordon Rees Scully Mansukhani LLP, San Diego, CA, Richard A. Umbenhauer, Roemer and Harnik LLP, Indian Wells, CA, for Appellee.

Summer M. Shaw, Doling Shaw and Hanover APC, Palm Desert, CA, for Douglas J. Roger, M.D., Inc., APC.

Proceedings: ORDER REVERSING AND VACATING BANKRUPTCY COURT'S ORDER DENYING SALE OF DEBTOR'S PROPERTY [38]

The Honorable STEPHEN V. WILSON, U.S. DISTRICT JUDGE

On July 30, 2018, Appellants Arturo Cisneros, Chapter 7 Trustee ("Trustee") of the bankruptcy estate (the "DJRI Estate") of Douglas J. Roger, M.D., Inc., APC ("DJRI"), and Revere Financial Corporation ("RFC"), filed an appeal in this Court of a July 12, 2018 order granting in part and denying in part Trustee's motion for an order authorizing an auction of litigation claims held by the DJRI Estate. See Dkt. 1. For the reasons set forth below, the bankruptcy court's order is REVERSED and VACATED.

I. Factual Background

The history of this dispute is long and complicated. The Court will provide a succinct overview of the pertinent proceedings relating to the underlying bankruptcy action and will then expand on the disputed decisions made by the bankruptcy court leading up to the order that Trustee and RFC appeal. Facts cited to in this Order were taken from the parties' briefing and the extensive appendices filed by Trustee and RFC in this action. See generally Dkts. 18-34.

A. RFC Sues Dr. Roger in State Court

On December 29, 2009, RFC filed a lawsuit against Dr. Roger in California state court in the County of Riverside, captioned Revere Financial Corp. v. Roger , No. INC 092 308 (Cal. Super. Ct.) (the "State Action"). In the State Action, RFC sought to collect balances on two loans made to Dr. Roger.

The first loan, labeled the "Roger Loan," was issued to Dr. Roger by RFC's predecessor in interest. The Roger Loan was guaranteed by DJRI, and both Dr. Roger and DJRI pledged all of their assets as security for the Roger Loan. See App'x X, Dkt. 27, at 1790-1812.

The second loan, labeled the "BLP Loan," was issued to Baleine, LP ("BLP") by RFC's predecessor in interest. Nicole Ebarb was a general partner of BLP, and both Dr. Roger and DJRI guaranteed the BLP Loan. See id. at 1814-26. The Court will refer to Dr. Roger, Ms. Ebarb, DJRI, and BLP as the "Roger Defendants."

The State Action transpired for years, during which the parties engaged in extensive litigation. On the merits of RFC's claims in the State Action, the court ultimately held as a matter of law that the Roger Defendants had defaulted on the Roger Loan and the BLP Loan. See id. at 1895 (state court's order on August 30, 2013 granting RFC's motion for summary adjudication).

The state court in the State Action also addressed discovery violations by the Roger Defendants over the course of the litigation. On March 18, 2013, the state court granted RFC's motion to appoint a receiver over the property of Dr. Roger, DJRI, and BLP (the "Receiver Order"). See id. at 1898-1907. The Roger Defendants failed to comply with the Receiver Order, and in July 2013 the state court charged DJRI, Roger, and BLP with contempt of court. Following a trial on the issue of contempt, on October 16, 2013 the state court issued an order convicting the Roger Defendants of contempt. Id. at 1909-14. The state court incarcerated Dr. Roger and Ms. Ebarb until the Roger Defendants provided all of the documentation to the appointed receiver consistent with the Receiver Order. See id. at 1910.

B. The Roger Defendants Initiate Bankruptcy Proceedings

Shortly after Dr. Roger and Ms. Ebarb were incarcerated for contempt, the Roger Defendants held to be in contempt each filed for bankruptcy:

• DJRI filed for bankruptcy on October 20, 2013. SeeDouglas J. Roger, M.D., Inc., APC , No. 6:13-bk-27344-MH (C.D. Cal. Bankr. Ct.) (the "DJRI Bankruptcy Action").

• BLP filed for bankruptcy on October 24, 2013. SeeIn re Baleine, LP , No. 6:13-bk-27610-MH (C.D. Cal. Bankr. Ct.) (the "BLP Bankruptcy Action").

• Dr. Roger filed for bankruptcy on October 25, 2013. See In re Roger , No. 6:13-bk-27611-MH (C.D. Cal. Bankr. Ct.) (the "Roger Bankruptcy Action" and, together with the DJRI Bankruptcy Action and the BLP Bankruptcy Action, the "Bankruptcy Actions").

Evidently, these bankruptcy actions were initiated as a tactic to avoid compliance with the state court's contempt judgment, as Dr. Roger and Ms. Ebarb remained incarcerated for contempt for over 40 days.

On October 31, 2013, RFC moved to dismiss the Bankruptcy Actions on the ground that the actions were filed in bad faith as an abuse of process, in an attempt to get Dr. Roger and Ms. Ebarb released from jail. See DJRI Bankruptcy Action Dkt. 19; BLP Bankruptcy Action Dkt. 23; Roger Bankruptcy Action Dkt. 27. The bankruptcy court granted only the motion to dismiss the DJRI Bankruptcy Action, and on January 21, 2014, the DJRI Bankruptcy Action was dismissed. See DJRI Bankruptcy Action Dkts. 153, 154. The receiver in the State Action then continued to administer DJRI's assets as part of the receivership estate.

On December 29, 2014, the bankruptcy court sua sponte vacated its prior order dismissing the DJRI Bankruptcy Action and reopened the bankruptcy. See id. Dkt. 229. RFC appealed the bankruptcy court's decision to reopen the case, which was affirmed by the district court. See id. Dkt. 297. RFC appealed the district court's decision to the Ninth Circuit, and RFC's appeal remains pending. See id. Dkt. 313. On January 12, 2015, the bankruptcy court appointed DJRI Trustee as the trustee for the DJRI Estate. See id. Dkt. 246.

C. The DJRI Estate Is Fully Encumbered and Administratively Insolvent

In light of the judgment in the State Action finding that the Roger Defendants defaulted on the Roger Loan and the BLP Loan, RFC claimed a security interest in all of the assets in the DJRI Estate pursuant to the loan agreements. See App'x X, Dkt. 27, at 1799-1805. On July 20, 2015, RFC submitted a proof of claim in the DJRI Bankruptcy Action in an amount of $5,573,992.49, which included $4,768,638.29 as a secured claim and $805,354.20 as an unsecured claim. See id. at 1777-88. RFC's claim against the DJRI Estate continues to grow as time elapses, in light of the accruing interest on the amount owed under the loans.

The only assets held by the DJRI Estate not encumbered by creditors' claims were legal claims the DJRI Estate could bring against third parties to avoid and unwind allegedly fraudulent transfers of assets previously held by the DJRI Estate. These legal claims are also referred to as "avoidance" claims. In the absence of any other assets held by the DJRI Estate, until these avoidance claims are fully resolved on the merits, all of the DJRI Estate's assets are fully encumbered by claims from creditors, with nearly all of the amount claimed coming from RFC. See, e.g. , App'x I, Dkt. 18, at 30 (bankruptcy court labeling RFC as "the 99-percent creditor"); id. at 193 (bankruptcy court identifying the Bankruptcy Actions as "largely a two-party dispute between [RFC] and the Roger entities").

Furthermore, because the DJRI Estate's only assets are avoidance claims, there are no disposable assets available in the DJRI Estate which could be used to pay for Trustee's administrative expenses in handling the DJRI Estate—administrative expenses which are quite substantial, in light of the extensive procedures to date in the DJRI Bankruptcy Action. Thus, the DJRI Estate is administratively insolvent and has no ability to pay for past or future administrative expenses at the present time. See App'x I, Dkt. 18, at 21 (Trustee stating to the bankruptcy court on March 28, 2018 that the DJRI Estate is "not only administratively insolvent – I think insolvent might be an understatement at this point").

D. Trustee Files the First Motion to Approve a Settlement with RFC

During the course of the DJRI Bankruptcy Action, Trustee had engaged in settlement discussions with some of the defendants to the DJRI's avoidance claims. Ultimately, Trustee reached agreements to settle certain avoidance claims with three defendants as follows:

• On April 6, 2016, Trustee filed a motion to approve a compromise between Trustee and Douglas J. Roger, MD, Inc. Defined Benefit Plan (the "DJRI Plan"), in which the DJRI Plan agreed to pay the DJRI Estate $50,000 in exchange for a dismissal with prejudice of the DJRI Estate's avoidance claims against the DJRI Plan, which were already pending in a case captioned Adversary Proceeding Case No. 6:15-ap-01309-MH (C.D. Cal. Bankr. Ct.). See App'x II, Dkt. 19, at 233-36.

• On April 6, 2016, Trustee also filed a second motion to approve a compromise, in which Trustee agreed to dismiss its avoidance claims brought against OIC Medical Corporation, Liberty Orthopedic Corporation, and Universal Orthopaedic Group (the "Corporate Defendants"), captioned Adversary Proceeding Case No. 6:15-ap-01307-MH (C.D. Cal. Bankr. Ct.), in exchange for a payment from the Corporate Defendants of $30,000 to the DJRI Estate. See App'x II, Dkt. 19, at 241-44.

• On April 15, 2016, Trustee filed a motion to approve a compromise with Dr. Eric L. Freedman, in which Dr. Freedman would pay Trustee $14,000 in exchange for Trustee's dismissal with prejudice of the DJRUI Estate's avoidance claims against Dr. Freedman, which Trustee had not yet filed in bankruptcy court. See App'x II, Dkt. 19, at 249-52.

Aside from these three settlement agreements, Trustee had not received "bids" on any other avoidance claims previously brought or not yet filed by Trustee. The...