Simon Chan v. Brady

SIMON CHAN, Appellant, v. LOIS I. BRADY, et al., Appellees.

No. 20-CV-06569-LHK

United States District Court, N.D. California, San Jose Division

August 13, 2021

ORDER AFFIRMING BANKRUPTCY COURT'S ORDER RE APPELLANT'S RICO CLAIMS

RE: DKT. NO. 14

LUCY H. KOH, UNITED STATES DISTRICT JUDGE

Appellant Simon Chan (“Appellant”) appeals the Bankruptcy Court's order regarding Appellant's claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) against Michael Scott Frazer, Alan Miller, William Chan, Michelle Chan, Jeff Chang, Tomas Velken, and Julie Lam (collectively, “the Frazer Creditors”). In that order, the Bankruptcy Court granted Trustee Lois I. Brady's (“bankruptcy trustee”) motion to approve settlement of Appellant's RICO claims and denied Appellant's motion to compel abandonment of Appellant's RICO claims. Having considered the parties' submissions, the relevant law and the record in this case, the Court AFFIRMS the Bankruptcy Court's order regarding Appellant's RICO claims.

I. BACKGROUND

A. The January 24, 2018 Statement of Decision

On March 28, 2014, the Frazer Creditors sued Appellant in California Superior Court for the County of Contra Costa and alleged that Appellant defrauded the Frazer Creditors in connection with a real estate investment venture in Beijing, China. Appellant's ER 80-96, 107; see also Chan v. Frazer, 620 B.R. 106, 108 (N.D. Cal. 2020). According to the Frazer Creditors, Appellant received funds from the Frazer Creditors but never provided an accounting or any records regarding these funds. Appellee's ER at 84-86. Instead, Appellant deposited the funds into his personal bank accounts and placed title to the condominium units in his name. Id. The Frazer Creditors claimed that Appellant concealed this information and made misrepresentations about the status of the investments. Id. at 84-85, 91-92. As a result, the Frazer Creditors alleged causes of action for intentional fraud and deceit, negligent misrepresentation, breach of fiduciary duty, unfair business practice, and unjust enrichment. Id. at 87.

On January 24, 2018, following a bench trial, the California Superior Court issued detailed factual findings and conclusions of law in a 17-page Statement of Decision. Id. at 80-96. The Statement of Decision rejected all of Appellant's cross claims, id. at 93-95, and found in favor of the Frazer Creditors on all their causes of action except their negligent misrepresentation claim. Id. at 87-91. Accordingly, the California Superior Court awarded compensatory damages as follows: $373, 109 for Julie Lam; $263, 371 for Michael Scott Frazer; $131, 686 for Jeff Chang; $131, 686 for William and Michelle Chan; $131, 686 for Tomas Velken; and $131, 686 for Alan Miller. Id. at 93.

B. Appellant's Chapter 7 Bankruptcy Proceedings

On January 25, 2018, one day after the Statement of Decision was issued, Appellant filed a Chapter 7 bankruptcy petition in this district. Id. at 4-5. This automatically stayed the California Superior Court action before the California Superior Court could conduct the punitive damages trial and before the California Superior Court entered judgment. See 11 U.S.C. § 362 (stating that the initiation of bankruptcy proceedings triggers an automatic stay of the continuation of any “judicial, administrative, or other action or proceeding” against the debtor).

On August 9, 2019, the Bankruptcy Court entered an order denying Appellant's motion for summary judgment and granting the Frazer Creditors' motion for summary judgment as to compensatory damages. Chan v. Frazer, 620 B.R. at 110. On August 23, 2019, Appellant filed a notice of appeal of the Bankruptcy Court's order. Id. On August 17, 2020, this Court affirmed the Bankruptcy Court's order granting the Frazer Creditors' motion for summary judgment as to compensatory damages. Id. at 110-14. This Court concluded that Appellant was barred from relitigating compensatory damages by the doctrine of collateral estoppel. Id.

C. Appellant's Potential RICO Claims

On July 8, 2019, more than a year after Appellant filed his petition for bankruptcy, Appellant amended his Schedules A/B, which list property, to include potential RICO, malicious prosecution, and abuse of process claims (collectively, the “RICO claims”) against the Frazer Creditors and their attorneys Hussein Saffouri and James Walsh with a value of $0. Appellee's ER 33, 35. Appellant states that his RICO claims allege that, in the state court litigation between the Frazer Creditors and Appellant, the Frazer Creditors committed perjury when they testified regarding which version of the private placement memorandum they relied on when determining whether to invest in the Beijing project and when they denied any knowledge of a legal opinion that stated that the investment funds had to be held in Appellant's personal account. Appellant's ER 165-70. On October 23, 2019, Appellant amended his Schedules A/B to change the value of the RICO claims from $0 to $2, 500, 000. Appellee's ER 40, 42.

On April 10, 2020, the bankruptcy trustee agreed to settle the RICO claims with the Frazer Creditors for $7, 500, subject to overbids and bankruptcy court approval. Id. at 218-25. On April 13, 2020, the bankruptcy trustee served a Notice of Intent to Compromise Potential RICO Claims. Id. at 187-89. Appellant did not submit an overbid for the RICO claims, and no creditors objected to the settlement of the RICO claims. However, Appellant opposed the settlement of the RICO claims. Appellant's ER 454-78.

On April 10, 2020, Appellant filed a motion to compel abandonment of the RICO claims on the grounds that the RICO claims are burdensome and of inconsequential value. Appellee's ER 61-63. The bankruptcy trustee opposed the motion on the grounds that she had already settled the RICO claims for $7, 500, and accordingly, the RICO claims were neither burdensome nor of inconsequential value. Id. at 66-70.

On June 10, 2020, the Bankruptcy Court entered an order approving the bankruptcy trustee's settlement of the RICO claims and denying Appellant's motion to compel abandonment of the RICO claims. Appellant's ER 2-8. The Bankruptcy Court approved the bankruptcy trustee's settlement of the RICO claims because the Bankruptcy Court concluded that “the likelihood of success on the RICO claims is decidedly cloudy”; the RICO claims were complex and time-consuming to litigate; and the paramount interest of Appellant's creditors is to settle the case and allow the bankruptcy trustee to prepare to disburse funds. Id. at 6-7. Given the bankruptcy trustee's proposed settlement, the Bankruptcy Court denied Appellant's motion to compel abandonment of the RICO claims. Id. at 3.

On September 18, 2020, Appellant filed a timely notice of appeal of the Bankruptcy Court's order regarding the RICO claims. ECF No. 1. On March 18, 2021, Appellant filed an opening brief. ECF No. 14 (“Appellant's Br.”). On April 15, 2021, the bankruptcy trustee filed a response brief. ECF No. 15 (“Appellee's Br.”). On May 14, 2021, Appellant filed a reply brief. ECF No. 18 (“Appellant's Reply”).

II. LEGAL STANDARD

A federal district court has jurisdiction to entertain an appeal from a bankruptcy court under 28 U.S.C. § 158(a), which provides that “[t]he district courts of the United States shall have jurisdiction to hear appeals . . . from final judgments, orders, and decrees[ ] of bankruptcy judges[.]” On appeal, a district court reviews a bankruptcy court's conclusions of law de novo, and the bankruptcy court's factual findings for clear error. In re Greene, 583 F.3d 614, 618 (9th Cir. 2009) (citing In re Raintree Healthcare Corp., 431 F.3d 685, 687 (9th Cir. 2005)); In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005) (“We review the bankruptcy court's conclusions of law de novo and its factual findings for clear error.”).

III. DISCUSSION

Appellant contends that the Bankruptcy Court erred in granting the bankruptcy trustee's motion to approve settlement of Appellant's RICO claims and denying Appellant's motion to compel abandonment of Appellant's RICO claims. The Court discusses in turn each motion that the Bankruptcy Court ruled on.

A. The Bankruptcy Trustee's Motion for Approval of the Settlement of the RICO Claims

Appellant contends that: (1) the Bankruptcy Court erred in approving the settlement; (2) the Bankruptcy Court lacked jurisdiction to approve the settlement; (3) the Bankruptcy Court erred in approving the settlement without a full evidentiary hearing; and (4) the bankruptcy trustee had conflicts of interest in approving the settlement. These arguments lack merit. The Court addresses each argument in turn.

1. The Bankruptcy Court did not err in approving the settlement.

First, Appellant contends that the Bankruptcy Court erred in approving the settlement. After a petitioner files for bankruptcy, any causes of action possessed by the petitioner at the time of the filing of the petition become the property of the estate. See 11 U.S.C. § 541(a)(1) (stating that “legal or equitable interests of the debtor in property as of the commencement of the case” are assets of the estate); Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986) (“The scope of section 541 is broad, and includes causes of action.”). As the representative of the estate, the bankruptcy trustee can administer property of the estate, including liquidating causes of action. See 11 U.S.C. § 704(a)(1).

Federal Rule of Bankruptcy Procedure 9019(a) permits the bankruptcy court to approve settlements. See Fed. R. Bankr. P 9019(a). However, the bankruptcy court's role in approving a settlement is limited. In re Pac. Gas & Elec. Co., 304 B.R. 395, 416 (Bankr. N.D. Cal. 2004). “Rather than an exhaustive investigation or a...