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SVP Financial Services Partners LLLP v. Sky Financial Investments LLC

United States District Court, D. Arizona

May 25, 2018

SVP Financial Services Partners LLLP, et al., Debtor.
v.
Sky Financial Investments LLC, et al., Appellees. Theodore M. Seldin, et al., Appellant,

          ORDER

          Honorable Steven P. Logan United States District Judge

         Appellant Theodore M. Seldin, et al., (the “Omaha Seldins”) brings an appeal pursuant to 28 U.S.C. § 158 of a judgment issued by the United States Bankruptcy Court, District of Arizona (the “Bankruptcy Court”), in the chapter 7 bankruptcy cases of SVP Financial Services Partners LLLP, et al., Case No. 2:17-cv-00706. This Court has reviewed the Bankruptcy Court's ruling granting a sale of certain assets of the bankruptcy estate and the Appellees' motion to dismiss this appeal on jurisdictional grounds. The appeal is fully briefed, and for the reasons that follow, the Bankruptcy Court's judgment will be affirmed and the motion to dismiss will be denied.

         I. Background

         This appeal arises from a sale of bankruptcy estate assets, consisting of the avoidance powers vested in a chapter 7 bankruptcy trustee and certain related litigation claims. The Omaha Seldins have equity ownership interests in Sky Financial Investments, LLC (the “Debtor”). (Doc. 18 at 4.) It is alleged that the Debtor's former manager, Sky Colonial II Management, LLC (“Sky Colonial”) improperly transferred approximately $1, 251, 516.00 in “management fees” to itself before resigning from its position. (Doc. 18 at 11.) After a state-court receiver was appointed to preserve the Debtor's remaining assets, the receiver recommended that the Debtor file for bankruptcy protection for the purpose of, among other things, acquiring the benefit of a bankruptcy trustee's avoidance powers for the recovery of preferences and fraudulent transfers (the “Avoidance Powers”). (Doc. 18 at 4.)

         Accordingly, the Debtor filed a voluntary chapter 7 bankruptcy petition with the Bankruptcy Court on September 26, 2014, and David A. Birdsell was appointed chapter 7 trustee (the “Trustee”) soon after. (Doc. 18 at 12.) On October 20, 2014, the Trustee initiated an adversary proceeding against Appellees KCIR Restaurant Management, LLC (“KCIR”) and Sky Colonial, in order to avoid the approximately $1.2 million transfer as a preference. (Doc. 18 at 13.) In almost four years' time, this adversary proceeding has made some progress in discovery, but the matter is far from being resolved. (Doc. 18 at 3.)

         KCIR and Lionel Trust are the only two creditors of the bankruptcy estate. KCIR, as the assignee of Sky Colonial, alleges that it is owed millions of dollars in management fees and expenses from the Debtor. KCIR's proof of claim has also been the subject of lengthy litigation due to challenges from the Omaha Seldins. Lionel Trust filed a proof of claim for approximately $17, 292.73, but this claim is expected to be fully satisfied through a separate, jointly-administered bankruptcy case.

         On December 28, 2016, the Trustee filed a motion (the “Sale Motion”) seeking to sell certain litigation claims and the Trustee's Avoidance Powers to KCI Acquisitions II, LLC (“KCI Acquisitions”) as property of the estate. (Doc. 18 at 4.) KCI Acquisitions shares a manager with Sky Colonial, the entity giving rise to the preferential transfers that are the subject of the preference litigation claims. (Doc. 18 at 4.) After addressing the Omaha Seldins' preliminary objection to the structure and procedure of the sale, the Bankruptcy Court ordered an organized procedure for bidding on the preference litigation claims. KCI Acquisitions was the only party to submit a bid of $65, 000 for certain causes of action brought under the Avoidance Powers of the bankruptcy estate and $7, 500 for derivative claims of the bankruptcy estate (together, the “Avoidance Claims”). (Doc. 18 at 5.)

         The Omaha Seldins filed a substantive objection to the Sale Motion along with a motion under § 503(b)(3)(B) of the Bankruptcy Code (the “503 Motion”) seeking (i) the Bankruptcy Court's authorization to pursue the preference and fraudulent transfer causes of action against KCIR and Sky Colonial on behalf of the Trustee and (ii) reimbursement for the fees and expenses accrued in the process. (Doc. 18 at 5.) The Omaha Seldins argued that their offer to pursue the Avoidance Claims on the Trustee's behalf would preserve approximately $1.6 million in potential recoveries for the bankruptcy estate, and the potential recovery under the 503 Motion would far outweigh the $72, 500 bid from KCI Acquisitions.

         The Trustee compared the benefits of the 503 Motion and the Sale Motion and decided that the certainty of the instant cash payment under the Sale Motion was the preferred outcome in the best interests of the bankruptcy estate. On February 9, 2017, the Bankruptcy Court held a hearing on the Sale Motion and the 503 Motion (the “Sale Motion Hearing”). At no time during the Sale Motion Hearing did the Omaha Seldins express an interest in making a competing bid for the Avoidance Claims. In order to address some of the Bankruptcy Court's concerns, KCIR offered to subordinate its claim to that of Lionel Trust, the only other creditor in the case, thus assuring that Lionel Trust's claim would be paid first from the proceeds of the $72, 500 purchase price if needed.

         At the conclusion of the Sale Motion Hearing, the Bankruptcy Court approved the sale of the Avoidance Claims through the Sale Motion. On February 27, 2017, the Omaha Seldins made a motion for reconsideration of the Bankruptcy Court's decision, but the motion was denied without a hearing. The Bankruptcy Court issued an Order Approving Trustee's Motion To Sell Property of the Estate Free and Clear of Liens, Claims and Interests, pursuant to U.S.C. §363 on March 6, 2017 (the “Sale Order”). The Omaha Seldins timely filed this appeal.

         After this appeal was filed, the Appellees filed a motion to dismiss the appeal on jurisdictional grounds and to stay briefing on the merits pending the resolution of the motion to dismiss. (Doc. 30.) The motion to stay briefing on the merits was denied by the Court. (Doc. 62.) In the motion to dismiss, the Appellees argue that the Omaha Seldins do not have standing to appeal the Sale Order because they transferred their equity interests to an arbitrator during the process of resolving a separate issue between the parties. (Doc. 30 at 2-3.) At the time the Sale Motion was filed, there was an order to show cause why the Omaha Seldins' equity interests should not be returned to them. (Doc. 35 at 5.) At the time of the filing of this appeal, it is this Court's understanding that the equity interests had been returned to the Omaha Seldins.

         II. Standard of Review

         Under 28 U.S.C. § 158(a)(1), the Court has jurisdiction over appeals from “final judgments, orders, and decrees” of bankruptcy judges. The Court reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. Deck v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010); Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990). The Court must accept the Bankruptcy Court's findings of fact unless the Court “is left with the definite and firm conviction that a mistake has been committed[.]” Greene v. Savage (In re Greene), 583 F.3d 614, 618 (9th Cir. 2009.) The Court reviews the evidence in the light most favorable to the prevailing party. Lozier v. Auto Owners Ins. Co., 951 F.2d 251, 253 (9th Cir. 1991). The abuse of discretion test requires the Court to first “determine de novo whether the court identified the correct legal rule to apply to the relief requested, ” and if the court identified the correct legal rule, it abused its discretion only if its “application of the correct legal standard was (1) ‘illogical, ' (2) ‘implausible, ' or (3) without ‘support in inferences that may be drawn from the facts in the record.'” United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009).

         III. ...


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