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Bear Tooth Mountain Holdings LP v. ML Manager LLC

United States District Court, D. Arizona

June 25, 2015

ML MANAGER LLC et al., Appellees. Adv. No. 2:12-ap-01849-RJH


ROBERT C. JONES, District Judge.

This is an appeal of an adversary proceeding that arises out of the alleged malfeasance of ML Manager, LLC, a company created under the Confirmation Order in the bankruptcy case of Debtor Mortgages, Ltd. Fifteen Plaintiffs ("Appellants") sued ML Manager and several of its members and officers (collectively, "ML Manager" or "Appellees") in Arizona state court on state law claims of breach of fiduciary duty, negligence, conversion, fraud, intentional and negligent misrepresentation, civil conspiracy, and breach of the implied covenant of good faith and fair dealing. Defendant removed under 28 U.S.C. § 1334(b). The Bankruptcy Court denied Appellants' motion to remand, finding that the claims had a "close nexus" to the bankruptcy case, as required for post-confirmation § 1334(b) jurisdiction under Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1194 (9th Cir. 2005), because the claims essentially complained of the way the Confirmation Plan was 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 the Confirmation Plan; and the assertion of agency authority assigned to ML Manager by the Confirmation Plan. The Bankruptcy Court dismissed all claims except those for fraud and negligent misrepresentation based on claim preclusion, dismissed all claims except that for fraud based on quasi-judicial immunity, and found the fraud claim not to have been pleaded with particularity. The Bankruptcy Court later dismissed the amended fraud claim with prejudice.

Appellants appealed, and Appellees elected to have the appeal heard by this Court rather than the Bankruptcy Appellate Panel. Appellants asked the Court to certify the case for direct appeal to the Court of Appeals. The Court granted the motion, but the Court of Appeals exercised its discretion to refuse jurisdiction. The appeal is now ripe for this Court's determination. Appellants assign four points of error to the Bankruptcy Court: (1) there is no jurisdiction under § 1334(b); (2) claim preclusion does not bar any of the claims; (3) ML Manager is not entitled to quasi-judicial immunity; and (4) the fraud claim was adequately pled in the First Amended Complaint ("FAC").


The Bankruptcy Court did not err in finding jurisdiction under § 1334(b). The Court of Appeals has reiterated that post-confirmation "related-to" bankruptcy jurisdiction exists under the "close nexus" test over "matters affecting the "interpretation, implementation, consummation, execution, or administration of the confirmed plan."'" In re Wilshire Courtyard, 729 F.3d 1279, 1287 (9th Cir. 2013) (quoting In re Pegasus Gold Corp., 394 F.3d at 1194 (quoting binder v. Price Waterhouse & Co. (In re Resorts Int'l Inc.), 372 F.3d 154, 166-67 (3rd Cir. 2004))). The acts complained of here concern ML Manager's execution and administration of the Confirmation Plan, i.e., the liquidation of the assets of Debtor's estate. Appellants essentially argue that ML Manager was not administering or executing the Confirmation Plan when it engaged in the complained-of acts because the Confirmation Plan did not direct ML Manager's specific actions. But the detail of the Confirmation Plan's instruction to ML Manager is not relevant, so long as it is clear ML Manager was acting within the scope of the Confirmations Plan, which is not seriously disputed. An actor does not act outside the scope of a plan simply because a bankruptcy court has given him a wide range of discretion in how he carries out the tasks and objectives listed in the plan. That is not to say that ML Manager may not have abused that discretion or acted wrongly, but it is to say that jurisdiction over such claims is supported by § 1334(b).


Appellants argue that a recent ruling by the Court of Appeals invalidates the Bankruptcy Court's claim preclusion rationale. The Bankruptcy Court noted that certain claims or issues were precluded: (1) ML Manager could charge all investors an equitable portion of the exit financing costs and could manage the loans and collateral but could not involuntarily encumber non-consenting parties' beneficial interests; (2) Appellants were bound by certain agency agreements with Debtor to which ML Manager had succeeded and which could not be revoked because the agencies were coupled with an interest; (3) the allocation of exit financing had been approved, affirmed by this Court, and found equitably moot by the Court of Appeals; and (4) many previous sales orders had been approved by the Bankruptcy Court, affirmed by this Court, and found equitably moot by the Court of Appeals.

Appellants note that the Court of Appeals has reversed as to the agency issue. See In re Mortgages, Ltd., 771 F.3d 623, 630 (9th Cir. 2014). The Court of Appeals held that Appellants in that case had sufficiently alleged a lack of any signed agency agreements such that the Bankruptcy Court erred in dismissing under Bankruptcy Rule 7008(a), but it did not hold that there was in fact no agency as a matter of law. See id. It remanded for further proceedings. See id. at 632. Appellants are correct that the issue is no longer precluded by virtue of the now-reversed ruling. However, the issue may still be precluded by the other rulings noted above. Appellants note that the Court of Appeals refused to review those rulings as equitably moot and argue that the unavailability of appellate review can in some cases undermine the confidence in the correctness of a ruling such that it should not be given preclusive effect. In this case, however, even assuming that the unavailability of appellate review due to equitable mootness of the issue weakens the preclusive value of the relevant rulings, the Bankruptcy Court ruled on the preclusion issue before the Court of Appeals announced that it would not review the issues based on equitable mootness. The Bankruptcy Court therefore cannot have erred in refusing to find claim preclusion, because it did not know when it ruled that the underlying issues would be held unreviewable on appeal. And this Court cannot readdress the underlying issues now. The Court of Appeals has noted in another opinion that despite the equitable mootness issue it would be inequitable to permit Appellants to relitigate the underlying issues of the agency agreements and exit financing. See In re Mortgages, Ltd., 771 F.3d 1211, 1213, 1218 n.5 (9th Cir. 2014).


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.
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.

In re Harris, 590 F.3d 730, 742 (9th Cir. 2009) (citations and internal quotation marks omitted). The Bankruptcy Court did not err in finding these elements to apply. ML Manager's activities were within the scope of its authority to dispose of assets, the Debtor had notice of the acts (the property sales, exit financing, etc.), and the acts were both disclosed to and approved by the Bankruptcy Court. As the Bankruptcy Court noted in its dismissal order, Appellants did not contest the latter three ...

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