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7 UNfrED IN THE UNrrED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ARIZONA
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In Re
(JTI 01'1 CAPITAL HOLDINGS, LLC, an Arizona limited liability company dba ROCKLAND MATERIALS, G.H. Goodman Investment Companies, LLC. an LLC, Arizona Limited Liability Company,
Under Chapter In Proceedings UnderChapler 7 0:1Case Nos. 03-07923-SSC through 0]07924-SSC
Jointly Administered
Adv. No. 07-00031 07-D0031
Debtors.
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In Re
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18 DAVID M. REAVES, as the Trustee of OT! CAPITAL HOLDINGS, LLC, an LLC. OTI Arizona limited liability company dba ROCKLAND MATERIALS, G.H. Goodman Investment Companies, LLC. an Invcstment Arizona Limited Liability Company, l,imited
ORDER INCORPORATING Oil MEMORANDUM DECISION 01: AUGUST 30. 2007 (Opinion to Post)
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Plaintiffs, COMERICA COMERJCA BANK-CALIFORNIA, as successor by merger to Impetial Bank, lmpclial Defendant.
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0OO7fli 7 .nm- 70 r- 1(,171
30. Based upon this Court's Memorandum Decision of August 30, 2007. which is
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incorporated herein by reference, incorporated
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IT IS ORDERED denying the Defendant's Motion to Dismiss as to Counts One, Two, Three, and !'our of the Trustee's Complaint. The Defendant shall now setve and file its Two, Answer in the Adversary. Answer as IT IS ORDERED denying the Trustee's Motion for Partial Summary Judgment as
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to liability on the claim of equitable subordination is denied. Although the evidence weighs to strongly in favor of equitable subordination, the facts have not yet revealed the gross and strongly egregious level of misconduct required for the Court to subordinate the Defendant's claim, nor egregious has Ihe Trustt-'e alleged uncompensated damage to creditors of the estate with sufficient has specificity. specificity. IT IS FURTHER ORDERED selling a Rule 7016 hearing on the 4th day of Octoher, 2007, at 1:30 p.m in Courtroom 70 I, United States Bankruptcy Court, 230 N. First Octoher,
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Avenue, Avenue, 7th Hoor, Phoenix, Arizona 85003 DATED this 30th day of August, 2007.
>..vJ.,~~ >..vJ.,~~
Honorable Sarah Sharer Curley U. S. Bankruptcy Judge
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BNC BNC to notice.
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7 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ARIZONA
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9 9 10 10 II II 12 12 In Re In OTI CAPITAL HOLDINGS, LLC, an OTI Alizona limited liability company dba Alizona ROCKLAND MATERIALS, G.H. ROCKLAND e'oodman Investment Companies, LLC, an Arizona Arizona Limited Liability Company, Debtors.
In Proceedings Under Chapter 7 Case Nos. 03-07923-SSC through 0307924-SSC Jointly Administered Adv. No. 07-00ml
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In In Re 16 16 17 17 DA DA VID M. REAVES, as the Trustee of of (HI CAPITAL HOLDINGS, LLC, an Arizona Arizona limited liability company dha ROCKLAND ROCKLAND MATERIALS, G.H. Goodman Goodman Investment Companies, LLC, an Arizona Arizona Limited Liahility Company,
Plaintiffs,
MEMORANDUM DECISION (Opinion to Post)
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vs. vs. COMERICA COMERICA BANK-CALIFORNIA, as successor successor by merger to Imperial Bank,
Defendant.
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I,
Introduction
This matter came before the Court on Defendant ComeJica's Motion to Dismiss,
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filed Marl:h 15,2007. The Plaintiff, Chapter 7 Trustee David M. Reaves,' filed his Response filed 2 2 and Motion tllr Pal1ial Summary Judgment as to Liability on May 14, 2007, and the Defendant and
I{, filed its Reply and Response to Trustee's Cross-Motion on May 29, 2007. On June I{, 2007, the filed
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Trustee med his Reply to the Defendant's Response. Oral argument was held in the matter on Trustee June 13, 2007, at whil:h time the Cou11 took this matter under advisement. In this Dedsion, the June Cou11 has set forth its findings of fact and conclusions of law pursuant to Rule 7052, Rules of Cou11 BanklUptl:Y Prol:edure. The COUl1 has jurisdil:tion over this matter pursuant to 21{ U.S.c. §§ BanklUptl:Y 1334 and 157. (West 2(07). 1334
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II. Factual Discussion Disrn""ion
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On May I{, 2003, cnl Capital Holdings, LLC, an Arizona Limited Liability wmpany dba Rlx.:kland Materials, and G.H. Goodman Investment I:ompanies, LLC, an Arizona wmpany R
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On On Aplil 30, 2007, this I:ase was convel1ed to one under Chapter 7, and David M. Reaves was appointed appointed the Trustee:
As of the Petition Date, the Defendant asserted a elaim in these
Chapter Chapter II prol:eedings of approximately $ I 7,000,000. Sh0l11y after the petition filing date, the Dcli:ndant Dcli:ndant represented to the Court that its claim was sL'Cured by a valid and perlel:ted lien in
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I. On May 7, 2007, the parties filed a Stipulation substituting David M. Reaves, the Chapter Chapter 7 Trustee, for the Debtors as the namL'l1 Plaintiff.
2. Because of the identical interests being presented by the Debtors and their estates in
this this Adversary Prol:eeding, and because after a sale of the Debtors' assets, the proceeds were plal:ed plal:ed into one fund to be distributed to I:I"Cditors, the Court shall hereinafter reter to the Debtors as as "Debtor," with their estates being rcfelTed to in the singular as well.
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3. See Dkt. Entry No. I in Adversary 2:07-ap-00031-SSC (hereinafter "Adversary Case"). Case"). 4. See Dkt. Entry Nos. 1457, 1461 in Administrative case, 2:03-bk-07923-SSC (hereinafter (hereinafter "Administrative Case").
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"substantially all of tbe assets of the Debtors.'" "suhstantially the
This assertion led the'Defendant to proceed
relicf. 19, 2003, based 2 with a number of motions, requesting immediate relief. On June 19,2003, hased on said
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representations and the Debtor's mismanagement of its operations, the Defendant filed a motion Dehtor's
Coun to appoint an examiner, which was opposed by the Debtor. After the Court conducted a hearing
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on the Defendant's Motion, Edward M. McDonough (the "Examiner") was appointed. The Defendant continued to pursue aggressive actions to make sure that it received adequate Dcfendant
protection payments and to ensure that the Examiner's powers were expanded. For instance, c'l:.panded.
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based partially on the Defendant's representations of its security interest, made atthc at the commencement of the case and reasserted by the Defendant, the Court ordered the Debtor in hy Dehtor September 2003 to make montbly adequate protection payments to the Defendant. The monthly Defendant also sought and obtained the expansion of the Examiner's powers so that the
hehalf Examiner had the power to, among other things, prosecute causes of action on behal f of the
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estate, and selltbe Debtor's assets." However, it is also clear, based upon the evidence asscts. 6 evidence. sell the presented at a separate trial, that the Defendant knew hy October 2003 that its claim was 200~ undersecured. 7 undcrsccured. In February 2004, the Examiner sold the Debtor's material tangible assets, ]n tangihle a~scts, including the Defendant's claimed collateral. Thereafter, as a result of a number of proceedings, numher the Court allocatcd the sum 01'$950,000 to the "Deer Valley Property," an asset of the Debtor of $950,000 Property,H Dehtor allocated
which was sold in February 2004 by the Examiner. The Defendant had no lien on the Property,
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even though up to the point of the sale, it had not moditied its rcpresentations to the Court, made modified representations at the commencement of the case, that it had a perfected security interest on substantially all of
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5. Sec Administrative case, "Objection of Comel;ca Bank-CaJifomia to Dehtor's See Comclica Bank-Califomia Debtor's
Dkt. I 0; ~ Emergency Motion for Interim Authol;zation to Use Cash Collateral," Dkl. Entry No. 10; li££. AuthOJization also "Declaralion of Larry King," Dkt. Entry No. 11. II. "Declaration 6. Sec Administrative Case, Dkt. Entry Nos. 73 and 199. See
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7. See Administrative Ca~e, ··Memorandum Decision Regarding Surcharge," Dkt. Entry Case, "Memorandum Surcharge,"
No. 1232, at p. 14.
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the Debtor's assets. the
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In April, 2004, the Examiner filed an adversary proceeding against the Defendant, Defendant, Adversary No. 2:04-ap-00676-SSC, in which he sought to avoid the Defendant's lien in certain Adversary rolling slock (the "Rolling Stock Litigation") worth approximately $1,010,851. Despite having rolling rcpeatedly sought expansion of the Examiner's powers, and despite the Defendant's counsel rcpeatedly having consented to the Examiner's pursuit of the Rolling Stock Litigation on behalf of the having
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estates, the Defendant changed its position, and asserted that the Examiner lacked slanding to estates, initiate the Rolling Stock Litigation. initiate When it became apparent that the Examiner could indeed prosecute an action against the Defendant, the Defendant's internal litigation counsel examined the merits of the against action. Allached as Exhibit "B" to the Complaint in this adversary proceeding is an intemal action. memorandum li'om the Defendant's files, issued on June 25, 2004, approximately one month memorandum arter arter the Dc/endant had tiled its Answer in the Rolling Stock Litigation. However, this mcmorandum mcmorandum did not come to the attention of the Court and the interested p1ll1ies in the hankruptcy hankruptcy proceedings until almost a yelll' later during the course of a lengthy lIial on the surchargc surchargc issuc."· Of concern to the Trustee is that the memorandum slated that the Defendant's ill-housc ill-housc counscl saw "no likelihood of [its] bcing able to defeat [the Rolling Stock Litigation) claim," claim," and advised cel1ain high-ranking ofliccrs of the Defendant that it would be "cheaper" to scllk scllk the Rolling Stock Litigation than to defend it. Despite this intemal memorandum, the Defendant Defendant pursued the litigation, continually denying liability. This Court's Memorandum Decision Decision of January 5, 2005 (the "Rolling Stock Decision"); held in favor of the Examiner, as the the Defendant's internal memomndum had predicted; however, the Defendant appealed the decision decision to the Ninth Circuit Bankruptcy Appellate Panel (the "Panel"), incurring mounting
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8. A detailed discussion of the surcharge litigation is set forth hereinafter.
9. Sec Adversary Case No. 2:04-ap-00676-SSC (hereinafter "Rolling Stock Adversary")
al al Dkt. Entry No. 21.
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litigation costs for the Debtor's estate, although it apparently knew it had no chance of
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prevailing. Iiled During the course of the Rolling Stock Litigation appeal, the Examiner filed a
hasis In-its motion to dismiss the appeal, in part, on the basis of the Defendant's had faith conduct. lnits
Order . that the Ordt.... of April 26, 2005,10 the Bankruptcy Appellate Panel concluded thatthc appeal should proceed, denying the Examiner's motion to dismiss. However, this Court can discern no final conclusions drawn hy the Panel as to the issue of bad faith. Rathcr, the Panel stated that any by had Rather, motion for sanctions was denied without prejudice and might be considered after a ruling on the merits in subsequent litigation. The Panel specifically refused to consider some of the thcy allegations of bad faith, because they were predicated on certain orders of the Bankruptcy Court, which had been entered only after the appeal on the Rolling Stock Litigation had already commenced. For instance, the Defendant's internal memomndum, stating that its counsel knew memorandum, the Rolling Stock Litigation would not end in its favor, was not presented to the Court until
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almost a year later in subsequent litigation. See B.A.P. Order of April 26, 2005, at 2. RA.P.
Ultimately the Court's Decision in the Rolling Stoek Litigation was upheld. Even Stock Ijtigation thc enteK'\l in the Panel's final order, enteK'd on September 7,2006, concerning the appeal, this Court finds
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no analysis by the Panel on the issue of the Dcfendant's bad faith." There was no final judgment Defendant's had on the mel;ts of the Examiner's allegations of the Defendant's inequitable conduct. Furlhennore, Furthermore, although the Defendant never ohtained a stay of judgment in the obtained
Rolling Stock litigation, it objected to the Examiner's efforts to make an interim distrihution of distrihulion the more than $1 million in proceeds representing the rolling stock assets. 'Jne Debtor's estates 'll1e $J
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incurred still higher administrative expenses in responding to this objection, and the ohjection objection
the Defendant filed to the distribution of the proceeds of the Deer Valley Pr0PClly. Property.
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10. St-'C Rolling Stock Adversary, Dkt, Entry No. 42. to. St,,'C Adversary. Dkt. 11. See Rolling Stock Adversary, Dk!. Entry No. 40 Dkt.
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Alier the sale of the Debtor's assets in February 2004, the Defendant consented to
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the I ~xaminer thoroughly analyzing and attempting to resolve the administrative expenses then ~xaminer asscrted against the bankruptcy estate. An extensive protocol was developed by the Examiner asscrted whkh re'1uired the various claimants to discount their claims. The Defendant and its counsel whkh werc kept apprised of the negotiations and the overall process; however, the Defendant never objected to any of thc settlements the Examiner reached. No later than May 14,2004, another of of objected thc Defendant's internal memoranda reflects that it knew that the Debtor's estate had at least thc $2.0 million in post-petition administrative expenses that would dilute the Defendant's recovery recovery $2.0
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Y as a creditor in the case. The May 14 memo indicates that the Defendant was awaiting the Y
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outcome of the Examiner's negotiations with various administrative claimants so that it would outcome know how far diluted its recovery would be. On or about July 1,2004, the Defendant and the Examiner executed a term sheet sheet (the "Term Sheet") that set f0l1h the material terms of an agreement between the Defendant and
~xaminer, II ~xaminer, acting on behalf of the Debtor's estate, regarding settlement of the administrative
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claims. claims. The Defendant later breached the Term Sheet in July 2004, causing extensive litigation in in the Chapter II cases. The Debtor and Examiner almost immediately filed motions to
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surcharge Comel;ca's collateral for certain administrative expenses totaling approximately
$2,700,000 (the "Surcharge Litigation").
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At the September 2, 2004 hearing on the Surcharge Motions, counsel for the Debtor argued that the surcharge and e'1uitable subordination issues were the same and should be be heanl at the same time." The Court stated that the issue of equitable subordination was not
before before it. and that the Court could not, sua sponte, consider an equitable subordination issue when when no complaint had been liIed by any interested party. The Court also concluded that it
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could not render a final decision on an equitable subordination claim as quickly as it could on
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12. SeeTr. of September 2,2004 Hearing at 11-12, 51-52, attached as Exhibit 2 to the Trustee's Response at Adversary Case No. 2:07-ap-00031-SSC Dk!. Entry No.7. Trustee's
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the surcharge issue and that different witnesses and evidence would need to be considcrl~d by thc considcrl~d thc the 2 2 Court. Inasmuch as the creditors of the estate wanted to ascertain, as quickly as possible, Court. whether any administrative expenses could he surcharged against the Defendant's collateral and, and, whether hcncc, whether, and to what cxtent, they would he paid on the settlements that they had entercd hcncc,
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5 into with the Examiner, the Court concluded that if the Debtor, or some other interested pal1y, 5 into
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8 suhordination claim with a motion to consolidate the suhordination claim with the Surcharge 8 suhordination
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Motions. Rather, the Court informed the parties that equitahle subordination was a ditlcrent Motions. issuc that would he dealt with at a different time. Therefore, the parties werc specifically issuc precluded hy the Coul1 from litigating equitahle suhordination in the context of the Surcharge precluded Litigation. Litigation. After a lengthy trial, the Court ruled in favor of the Examiner and thc Dchtor. The The COUl1 issued its November 21, 2005 Memorandum Decision (the "Surcharge Dccision")," which which the Defendant appealed to the Bankruptcy Appellate Panel. Ultimately the Court's Dccision Dccision was affirmed. The Trustee also asserts that the Defendant followed a course or conduct or repeatedly repeatedly objecting to the attorneys' fees and costs of the Examiner and his counscl incurred on on various various tasks that the Defendant requested that the Examiner undertake. Although not dispositivc dispositivc of the issues before this Coul1 in this Advcrsary, the Trustee argues that it rctlccts the the Defendant's Defendant's bad faith during the course of these proceedings. No concern was expressed hy thc Defendant Defendant at the time the initial services were rcndered by the Examiner and his counsel, nor at thc thc time that the Defendant requested that the Examiner's powers he expanded. Rathel', it was only only when the Defendant disavowed tile terms and conditions of the Term Sheet that it started to to
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yuestion the fees and costs incurred by the Examincr and his counsel. There is no doubt that the
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hankruptcy estate has incUiTed suhstantial litigation costs in connection with these fee disputes and other litigation involving the Defendant. The findings of this COUll and the Bankruptcy Appellate Panel rendered in plior litigation form the backbone of thc present Complaint, which alleges four counts: Count One alleges hreach of contract relating to the Tenn Sheet; Count Two alleges breach of the implied covenant of good faith and fair dealing, again in connection with the Telm Sheet; Count Three reyuests that the Defendant's claim be eyuitably subordinated pursuant to 11 U.S.c. § 51O(c); and Count Four reyuests the Defendant return any adequate protection payments it received relating to propelly on which it was later determined that the Defendant lacked a valid lien.
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III. Legal Discussion
The Trustee's Complaint is a lengthy one, and raises serious, disturbing allegations. The Defendant has set forth live grounds on which it assclls the Complaint should he dismissed: I) I;ailure to state a claim with legally sufficient facts; 2) Estoppel; 3) Waiver; 4) Res judicata; and 5) Collateral estoppel. The TlUstee countered with a Response to the Motion
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Dismiss, but also with a Motion for Partial Summary Judgment as to Liability regarding the
eyuitablc suhordination claim in the Complaint.
A. Motion to Dismiss
The Defendant's Motion to Dismiss is under Fed,R.Civ.P. 12(h)(6), Fed.R.Bankr.P. 7012(b), in which "[aJII allegations of material fact [in the Tl1lstee's Complaint) arc taken as true and construed in the light most favorable to the non-moving patly," DeGrassi v, City of (Jlendora, 207 F3d 636 (9th Cir. 200(); Maktab Tarighe Oveyssi Shah Maghsoudi. Inc. v. Kianfar, 17
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this Motion, "it must appear to a certainty that the [Trustee I would not he cntitled to relicf under
2 any set of facts that could bc proved..." Western Reserve Oil of Gas v. New, 765 F.2d 1428,
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1430 (9th Cir. 1985). The Court addresses cach of Comerica' s allegations in tum.
l. Failure to state a claim with Jeli\ally sufficient facts.
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The Dclendant alleges that all four Counl~ in the Complaint fail to state a claim upon which relief could be granted. As to Counts One and Two, the Defendant alleges that in order for a contract and the accompanying covenant of good faith and fairdealing to hI.' breached, a contract must exist. The Delendant argues that the Term Sheet was not a \."Ontra\.1, but was merely a proposed agreement. The Trustee submitted the Term Sheet, signed by both a Vice President of the Defendant and the Examiner, as Exhibit "A" to his Complaint. The document is titled, "Term Sheet for Settlement of Disputes between Edward M. McDonough, in his capacity as the Examiner in the Chapter 11 Cases; and Comerica Bank." It states, "The parties contemplate an agreement containing the following essential terms," and
sel~
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forth such tenns, including the
various actions each parly agfL'Cd 10 take, and Exhihits showing Ihe various claims the Examiner had or would settle. Although the Term Sheet had 10 be noticed oul to the creditors and other interested parties of the bankruptcy estate, at least the Examiner and the Defendant had entered into an agreement to resolve the dispute between themselves. When considering a Rule 12(b) motion to dismiss, the Court musl takc all material allegations in the Complaint - for example, that a contract existed - as true.. In rc Fresher, 846 F,2d 45,46 (9th Cir. 1988). Furthermore, the Defendanl has not shown to a ecrtainty thallhe Trustee would not he entitled to relief under any set of facts that could he proven. The Trustee has presented enough to show that the Defendant entered into an agreement with the Examiner and that the Defendant breached that agreement.'· As such, a claim under a
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See Memorandum Decision of Novemher 21,2005 at 35.
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contact may have existed. See Western Reserve Oil of Gas v. New, 765 F.2d 1428, 1430 (9th contact
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Cir. 1985). Therefore, the Court is unable 10 dismiss Counts One and Two on the basis that the Cir. Trustee has fai led to state a claim therein. Trustee The Defendant asserts that Count Three fails to state a claim because the behavior behavior alleged is not egregious enough to walTant equitahle suhordination. In many instances, the alleged
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Defendant's actions throughout the litigation before this Court and the Panel, and its behavior Defendant's outside the courtroom, were undertaken in bad faith. Although an equitable subonlination claim outside is dirticult to prove, and more than bad faith must be shown, the Defendant has not demonstrated demonstrated is to a cCI1ainty that the Trustee would not be entitled to relief under any set of facts that could be proven. Count Threc cannot he dismissed on the ground that it fails to state a claim. Finally, the Defendant asserts that Count Four should be dismissed because none of the adequate protection payments made to it were allocated to the rolling stock or any other of
equipment. equipment. It bascs this assumption on the Examiner's Declaration that the adequate protection payments payments "appeared" to have been made only "on account of Comerica's claim that its real estate estate (mines) and personal property (non-rolling stock) were depn-'Ciating assets."" In the same Declaration, Declaration, however, the Examiner states the opinion that the Defendant was overpaid for its adequate adequate protection. Indeed, in his Complaint, the Trustee seeks not to recover only adequate protection protection payments made on behalf of the rolling stock, but rather "any and all other overpayments payments of adequate protection." Complaint, ''lI 70. Given that this is a Motion to Dismiss, the lI Court Court is unahle to conclude on this record that therc is no set of facts that would allow the Trustce Trustce to recover all, or a portion of, the adequate protection paid to the Defendant. Although the Defendant asserts that the claim for "any and all other overpayments payments of adequate protcction" is too vague to give fair notice of the claim against it, the
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Court Court will not dismiss Count Four on this ground either. The Defendant has access to the same
15. Sec "Declaration of Edward M. McDonough, Examiner, Regarding Adequate Protection Payments," Docket Entry No. 1163 in the Administrative Case.
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cash collateral orders and Examiner's reports as the Trustee; and presumably, having been the party to have received the adequate protection payments and having access to its own accounting records, it is in a betler position than the Trustee to ascertain whether it has been overpaid and by how much. Thus, it is unclear why the Defendant "is unable to determine whether the claim regarding unidentified adequate protection payments is valid." The Court declines to dismiss Count Four, because the Trustee should have an opportunity to explore to which assets the adequate protection payments were applied and whether those payments were excessive in light of the avoidance of, or the failure to perfect, the Defendant's alleged security interest in the Deer Valley Property and the Rolling Stm:k, and the Trustee's request for a return of any overpayments related to adequate protection is not too vague to give fair notice. 2. Estoppel. The Defendant asserts that the Trustee is estopped from asselting Counts One and Two of the Complaint, because it alleges that the Debtor actually opposed COUIt approval of the Term Sheet, and the Defendant relied, to its detriment, on the Debtor's opposition to the Term Sheet. Equitable estoppel applies when (I) the party to be estopped knows the facts; (2) the party intends its conduct shall be acted on or must so act that the party assclting the estoppel has a right to believe the conduct is so intended; 0) the party asserting the estoppel was ignorant of the true facts; and (4) the party asserting the estoppel relied on the other patty's eondu"t to its detriment. In re Tran, 309 B.R. :BO, 337 (9th Cir. B.A.!'. 20(4); U.S. v Hemmen, 51 )'.3d R83, 892 (9th Cir. 1995). Under Arizona law, a party seeking to estop another must show ( I) conduct by a party that induces another to believe in certain material facts, (2) which inducement results in aets of justifiable reliance thereon, and 0) the resulting acts cause injury. In re Famous Rests.. 1nc., 205 B.R. 922, 938 (Bankr.D.Ariz. 1996), citing Heltzel y. Mecham Pontiac, 152 Ariz. 58, 730 P.2d 235 (1986). Under either standard, the Defendant has not shown a hasis for
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There is no evidence that the Defendant relied to its detriment on any "misleading" conduct of the Debtor. See Walker v. Lightfoot, 124 F.2d 3, 6 (9th Cir. 1941) ('" (", Elstoppel is applied where a patty, by his conduct, misleads another who relies on the facts indicated by such conduct to the latter's disadvantage.") 111e Defendant has not shown that it was ignorant of the true facts, which presumably were that the Debtor believed that the Term Sheet was an actual agreement bctween the Examiner and the Defendant. Nor docs the Defcndant show that it justifiably relied on any conduct by the Debtor and was injured thereby. Also, although it alleges it would have aClL'd differently had it known the Term Sheet would not
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be approved, it was the Defendant's, not the Debtor's, actions which resulled in a breach of the Term Sheet. The Defendant has not shown how the failure of the Term Sheet to receive final Court approval had any effect on the Defendant's course of action or caused the Defendant to altcr its course of action which is never spc'Cifically asse11ed. The Defendant has not demonstrated any injury or detriment to it in any way. The Defendant also states that it is unfair to allow the Trustee to rely on the Term Sheel in alleging breach of an agreement, when the Examiner and Debtor had, at one point in the litigalion, opposed approval of Ihe Term Sheet.'" First, it was the Examiner, not the Defendant, who initially moved for the approval of the Telm Shcet.'7 The record also shows that the Dchlor's opposition to the Court's approval of the Telm Sheet was limited to whether the Term Sheet should constitule the entirety of the COUl1-approved settlement agreemelll. lL was only constitu[e after the Examiner and [he Defendant attempted to place the Term Sheet into a scUlement the agreement, with a concomitalll motion to the Court to approve same, that the Examiner learned essenlial lhat Ihc Defendant wallled 10 change the essemial terms in the agreement. The Examiner then
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]6. See, e.g., Administrative Case, Dkt. Entry No. 813, 838.
]7. See Administrative Case, Dkt. Entry No. 796.
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expressed concern that the Defendant had changed its position, and the settlement was no longer expressed as the Examiner had negotiated. The Debtor never asserted that the Term Sheet was not a as
3 contract, nor did the Debtor oppose the Examiner entering into an agreement with Comclica 3 contract, 4 consisting of the terms the Examiner originally agreed to in the Term Shect. Accordingly, the 4 5 5
6 6 Trustt-'C is not estopped from asserting Counts One and Two, since it is the Defendant's conduct Trustt-'C which lead to a breach of the Term Sheet. which 3. Waiver. The Defendant also alleges that the Trustee waived the ability to bling Counts One and Two when the Debtor opposed the Court's approval of the Term Sheet. As noted One above, the Debtor asserted only a limited objeetion to the Term Sheet, and it was the Defendant's above, conduct that ultimately led to a breach of the agreement reached with the Examiner. Rather, the conduct Debtor requested that a settlement agreement, and a motion thereon, be filed with the Court. Debtor In reviewing the case law, the Court concludes that "A waiver is an intentional relinquishment or abandonment of a known right or privilege." U.S,y. Amwest Surety Ins. Co.,
54 54 F.3d 601, 602-03 (9th Cir. 1995). "An implied waiver of rights will be found where there is 'clear, 'clear, decisive and unequivocal' conduct" indicating an intent to waive certain legal rights. Under shows Under Arizona law, a waiver will he found only when a pally conducts itself in a way that shows clear clear and intentional relinquishment of the light; "ldjoubtful cases will be decided against waiver." waiver." Go~lia v. Bodnar, 156 AJ1z. 12, 19,749 P.2d 921, 928 (AJ1z. App. 1987); sec Meineke v. v. Twin City Fire Ins. Co., 181 Ariz. 576, 581, 892 P.2d 1365, 1370 (Ariz. App. 1994).
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In this case, the Debtor's request for clmification of the Term Sheet in no way
clearly clearly and unequivocally reveals an intention for the bankruptcy estate to abandon the right to
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rely upon the Term Sheet. The Examiner's crforts to place the Term Sheet in a settlement
agreement, agreement, and a motion thereon, to be filed with the Court do not reflect any abandonment or intentional intentional relinquishment of rights. Since the Trustee now seeks to recover damages or other relief relief concerning an agreement originally entered into hy the Examiner on behalf of the estate, 13
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this COUIt sees no basis to conclude that the banktuptcy estate has agreed to some type of waiver waiver this
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of any rights or remedies. The Defendant has inappropriately breached the Term Sheet to place place of itself in a heuer position to recover a greater percentage distribution on its claim from the itself hankruptcy estate. The Defendant's conduct should not be used as a basis to force this hankruptcy hankruptcy estate to forego its claims against the Defendant. hankruptcy 4. Res judicata. The Defendant also requests that the COUlt dismiss Counts One, Two, and Three on the grounds of res judicata. This doctrine, sometimes known as claim preclusion, bars a on suhse'luent action when "the earlier suit ... (I) involved the same 'claim' or cause of action as suhse'luent the later suit, (2) reached a linaljudgment on the merits, and (3) involved identical parties or the privics." Sidhu v. F1ccto Co., 279 P,3d 896, 900 (9th Cir. 20(2). Courts in the Ninth Circuit privics." must consider four criteria in determining whether claims mised in an action were previously must
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adjudicated: adjudicated: (I) whdher the two suits mise out of the same transactional nucleus of facts; (2) whether whether the rights or interests estahlished in the prior judgment could be destroyed or impaired hy hy prosecution of the second action; (3) whether the two suits involved the infringement of the idcmical idcmical right; and (4) whether the same evidence will be presented in the two actions.
',100. ',100.
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!l!. at
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III III
1',1 1',1
The first two Counts of the advt-"I'sary Complaint involve breach of the Tenn
Shect, Shect, specifically: (I) breach of contract and (2) breach of the implied covenant of good faith and and fair dealing. In the Surcharge Litigation, which Comeriea asserts precludes these Counts on on Ihe Ihe hasis of res judicata. six issues were presented to the Court: (1) whether the Examiner had standing standing to prosecute the Surchm'ge Motions; (2) Whether certain professional fees could be surcharged surcharged under the cause/consent standard of Banktuptcy Code Section 506(c); (3) Whether certain certain professional fees could be surchargcd under the objective test of Section 506(c); (4) (4) Whether Whether certain personal property lease claims could he surcharged undcr the subjective or ohjective ohjective tests; (5) Whether the hankruptcy cstates could be reimbursed for celtain
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administrative expense claims that had already been paid; and (6) Whether equity and fairness
2 dictated a different result.l~
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In essence, the Defendant is arguing a position on which it cannot succeed. Let us assume that the Court's previous conclusion that the Defendant breached the Telm Sheet
5 should be given res judicata effect, then the Court would simply enter a judgment in favor of the
6
7 Trustee on the issue of liability, and then take evidence on the issue of damages. However, if the Court proceeded in such a manner, the Defendant would object, noting that the Surcharge Litigation did not include, as one of the issues to be resolved, whether the Term Shl.'Ct was, in fact, a contract on which a suit could be based and on which the covenant of good faith and lair dealing could be incorporated. In essence, forcing the Trustee to litigate this issue is actually to the Defendant's benefit. Moreover, the Court concludes that the better analysis is to review the issues presented and determine whether the Sidhu factors apply. Although a final judgment on the merits was entered in the Surcharge Litigation, and the Trustee is certainly in privity with the Examiner and the Debtor,19 the remaining factor as to whether the claim or cause of action is the thc same in this Adversary as was actually litigated in the Surcharge Litigation must be resolved in resolvcd the Trustee's favor. As noted, the.s.i!!lll! decision requires four factors he considered to determine if a claim or cause of action was actually heard or determined in the pl;or litigation. First, the claims raised in this litigation do not arise out of the same transactional nucleus of facts. During the Surcharge Litigation, thc Examiner and the Debtor prescntcd extensive evidence that the Defendant requested appointment of the Examiner and laler lalcr requested an expansion of his powers to further the Defendant's business purpose of selling the
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25 18, See Administrative Case, Dkt. Entry No. 1232, Memorandum Decision of November Sec 21.2005 at 2-3. 21.200:; 19. See In re Dominelli, 820 F.2d 313, 317 (9th Cir. I987)(holding that for purposes of res judicata, pl;vity exists where parties represent the same interest). 15
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Debtor's husiness operations on a going-concern basis. The Defendant expressly or implicitly Debtor's
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consented to or caused the Examiner's actions for which the Defendant received a direct, consented yuantifiablc benefit. Whcther viewing the issues from an objective or subjective standard, the yuantifiablc Dcbtor's assets upon which the Defendant had a perfected security interest, in pad, should in Dcbtor's fairness and eljUity be utilized to pay the administrative expenses of this estate, administrative fairness expenses which were caused or consented to by the Defendant. As a part of this analysis, the expenses Court concluded that the Defendant had breached the Telm Sheet entered into with the Examiner Examiner Court hy inserting additional terms which were not negotiated with or agreed to by the Examiner. Howcver, thc context of the Court's analysis was whether the Defendant's collateral should be Howcver, surcharged to pay the fees and costs of the Examiner. surcharged In contrast, the nucleus of facts to he considered on a breach of contract claim or a breach of the implied covenant of good faith and fair dealing is very different and may include include a
whether whether there was a meeting of thc minds hctween the parties or what was the parties intent, the terms terms and conditions of said agreement, whcther any additional terms and conditions may be implied implied by law, what actions lead to a hreach of the contmct, whether those actions were taken in in good good faith, and whether the pal1y hreaching the agreement should be responsible for the damages damages flowing a flowing therefrom. I,'or instance, a monetary breach of the contract may be a separate fium a breach breach of the implied covenant of good faith and fair dealing. It is also possible that pal1ies may enter enter into a contract, hut subseyuent external market factors may cause one party to breaeh an agreement agreement even though both parties arc proceeding in good faith. Given these considerations, the the facts to he considered on a hreach of a contract or a hreach of the covcnant of good faith and and fair fair dealing are far different than what would he presented at a trial as to whether certain collateral collateral should he surcharged.
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IS IS
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III III
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Second, the rights or interests established in the Surcharge Litigation will not be
destroyed destroyed or impaircd hy the prosccution of these claims. The Court's conclusion in this Adversary Adversary will not vitiate this Court's conclusion in the Surcharge Litigation. In essence the
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rights or interests of the palties, as a result of the Surcharge Litigation Decision, allow the rcsult pat1ies, cstatc administrative claimants of this estate to be paid from the Defendant's collateral, or the proceeds thereof, or from the unencumbered asscts of this estate. If the TlUstee is successful with Counts assets Trustee One and Two of this Complaint, however, the improper conduct of the Defendant will lead to a assets separatc in personam judgment against the Defendant which will be paid from its assds - not separate
property of this estate. Such direct or personal liability of the Defendant is a completely separate
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and distinct issue.
From such an analysis flows the next concept. l1te TlUstee's Complaint, because Trustee's /lows ce11ain it is seeking a personal judgment against the Defendant, and not just requesting that celtain
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assets of the Debtor, upon which the Defendant claimed it had a perfected security intcrest, be sc<,;urity interest, utilized to pay the administrative expenses which the Defendant caused or to which it consented, Delcndant
cannot involve or infringe on an identical right, which is yct another Sidhu factor. Thc yet The
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banklUptcy estatc has not had an opportunity to litigate the rights and benefits which would havc bankruptcy estate have tlowed from the underlying Tcrm Sheet, as a contract. If thc Examiner and the Defendant had Term the
fully performed under the Term Sheet, as dralied, it is possible that all $8 million in proceeds drafted,
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from the sale of the Debtor's assets would have been immediately distributed to all creditors of this estate, causing this case to be closed in roughly July 2004. What percentage of all claims would have been paid in full at that time? What percentage of the claims will be paid now'! time'? claim'S What expenses have been ereated or continue to acclUe as a result of the hreach of the Term created accrue Tenn
Sheet'! COUll considen...>d Sheet? This Comt has simply not considen.>d or resolved these issues. In the Surcharge
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Litigation, certain administrative expense c1aimant.s pelformed numerous services or took claimant'S pelformcd Of lOok recover concrete action to allow the Defendant to recovef and liquidate its collateral. In faimess and equity, those claimants should bc compensated from the collateral that they recovered for the be Dct'endant, henefit of the Defendant. Now the TlUstee is stating that separate conduct of the Defendant, Trustee which Jirectly whieh has not yet heen fully presented to the Court, walnnts that the Defendant be held directly been be responsihle through a ,separate judgment which may only he paid from the assets of the separate
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Defendant, not Ihe Debtor or Ihis estate. 20
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Finally, and as outlined above, because the Court is now considering whelher the Defendant should be personally liable for its breach of the Term Sheet, Ihe evidence to be presenled by the pal1ics will be completely different. The evidence to be presented on the issue of consent or l:ause, whkh would allow the collateral of Ihe Defendant to be utilized
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pay those
administrative expenses, is far different from Ihe evidence to be presented concerning the intent of the parties, whether the Term Shecl constituted a contract, whelher Ihere was a breal:h of said l:Ontral:t, if one existed, whelher there was any covenant of good faith and fair dealing implied in the Tenn Sheet, whether there was a breach of said l:ovenant, whelher any damages tlowed
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from a breal:h of the l:ontraet and/or the covenant, and whether the Defendant should be personally liable for any such breach. Quite simply, because all of Ihe factors have not been shown, the Court sees no basis to dismiss this Adversary, as to Counts One and Two, on the basis of res judicata. Sidhu v. Hecto Co., 279 F.3d 896, 900 (9th Cir. 2(02). rcs Three, A similar resull peTlains as to Count Thrce, Ihe Trustee's equitable subordination daim. The Defendant alleges that its inequitable conduct was litigated in the Surcharge trial, Thc and relitigation of said conduct should now be baITed by res judicata. Under the Sidhu factors, rclitigation however, it is apparent that the equitable subordination claim is not barred. First, this claim is howcvcr, entirdy different than the surcharge daim. It does not arise out of Ihe same transal:tional cntirdy nudeus of fal:t; rather, the facts at issue in the equitable subordination claim arc mUl:h broader nudcus than those in the Surl:harge Litigation. All aspects of Ihe claims are different, from the applil:able case and statutory precedents to Ihe necessary clements to prove Ihe respective claims. Sel:ond, the rights or interests established in the plior judgment would nOt be destroyed or impaired by prosel:ution of the scl:ond action. In Ihe Surcharge Litigation, the CouTl determined
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20. The Court is mindful that the Trustee believes Ihat Ihe Surcharge Litigation retlects sulTil:ient conduct for which this Court should enter a judgment of liability on the equitable subordination claim. For the reasons set forth hereinafter, the CouTl believes Ihat additional conduct must he shown to enter such a judgment on the merits.
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administrative cxpenscs whether the collateral of the Defendant should be utilized to pay the administrativc expenses
2 which the Defendant caused or to which it consented. In the equitable subonlination claim, thc subordination the Court will determine whether the Defendant's conduct should result in the Defendant heing paid,
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he irrespective of the previous priority of its claims, only alier all other creditors of this estate, lx,
tht.~y heen righL~ thl' tht,y secured, priority, or unsecured, have been paid in full. The interests or righLs in the'
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Surcharge Litigation are separate and distinct and cannot be affected by a judgement on this separatc judgcment he Thinl, claim. Third, the two suits did not both involve the infringement of an identical right. Although
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the Surcharge Litigation addressed certain specific inequitable conduct, an equitahle
suhonlination behavior the suhordination claim necessarily looks at the creditor's hehavior throughout thc hankruptcy case
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broader as a whole, and may examine pre-petition behavior as well. Finally, Ix.-causc of the hroader bt'Cause
sweep of the equitable subordination claim, substantially different evidence must be presented in thc this Adversary versus the Surcharge Litigation. Although there may be some convergence, the he suhonlination Trustee must present new evidence to succeed on the equitable suhordination issue.
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Moreover, this Court expressly rejected the notion that the Surcharge Litigation could include equitable subordination issues. At the September 2, 2004 surcharge hearing,
counsel for the Dehtor argued that the surcharge and equitable subordination issues were the subonlination samc. same.
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The Court noted that equitable subordination was not before it, and that the Court could
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sua not, ~ sponte, raise an equitable suhordination issue when no complaint had been filed. The Court noted that it could not reach an equitable suhordination claim as quickly as it could other
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issues, such as surcharge. It rejected the offer of Debtor's counsel to tile an equitahlc ~iected equitable
subordination claim with a motion to consolidate the suhordination claim with the Surcharge Motions. The Court informed the parties that equitahle suhordination was a different issue that would he dealt with at a different time. Therefore, the patties were specifically precluded hy the be TherefofC, by Court from litigating equitable subordination in the context of the Surcharge Litigation. Because
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21. See 1'1'. of Septemher 2, 2004 Hearing at 11·12, S1-52, attached as Exhihit 2 to the I 1-12, 51-52, Tr.
Trustee's Response at Adversary Case No. 2:07-ap-00031-SSC Dkt. Entry No.7. Dkl. 19
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an eyuitable subordinalion claim was not heard, it cannot possibly be barred by res judicata. 2 The Defendant argues that the issue of ils bad faith was also raised before the Bankruptcy Appellate Panel and considered by that lribunal in the conlext of the Rolling Stock 1.i1igalion, and said issue is barred by res judicala. However, as noted above, the Trustee's eyuitablc subordinalion claim wraps in Ihe allegations made in the Surcharge and Rolling Siock 1.i1igation, but also other allegalions of ineyuilable conduct. It is a global inquiry, nOI one limited to Ihe Delendanl's eonduci al issue in the Surcharge and Rolling Siock Litigation only. I'urthermore, Ihe Defendant's slalement that "[t]he BAr considered the bad faith allegations and did not lind that Comeril:a improperly litigated the Rolling Stock issue, or that COffiClica's action
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was not in bad failh," blatantly misstales the record. The Defendanl cites to the Bankruptcy Appellale Panel's Order of April 26, 2005,21 denying the Examiner's Motion to Dismiss the appeal, as evidence Ihat the issue has been heard and detennined. The Pane!'s April 26 Order is a summary order Ihat draws no conclusions as to had faith or the impropriety of litigation; ralher,
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it summarily refuscs to dismiss the appeal, stating that the motion for sanctions is denied without
prcjudicc and might he presented again after a ruling on the mel;ts. The Panel specifically refused 10 consider some of the allegations of bad faith because they were based on Ihe orders of rdused Ihe Bankruptcy Courl enlered only after the Rolling Siock Litigation Order had been enlered." The Panel's final order in Ihe Rolling Siock Litigation, enlered on Seplember 7,2006, also does nol consider Ihe issue of bad failh." There was no finaljudgmenl on Ihe meJils of the Examiner's allegalions of the Defendant's inequilable conduct. The Court concludes that the Trustee may presenl evidence on the lJefendant's bad faith conduel, including its conduci in Ihe Uefendant's Rolling Stock Litigation.
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22. See ({oiling Siock Adversary, Ok!. Entry No. 42. 23. See, e.li., Rolling Siock Adversary, Dkt. Entry No. 40, a12. 24. Sec Id. Nowhere does the opinion address Ihe issue of bad faith.
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5. Collateral Estoppel Finally, the Defendant argues that Counts One, Two, and Three must be he dismissed as ban-ed by the doctrine of collateral estoppel, or issue preclusion. Issue preclusion coUateral hy prevents rclitigation of issues actually litigated and necessarily decidcd, after a full and fair relitigation decided, rull opportunity for litigation, in a prior proceeding. Shaw v. Hahn, 56 F.3d 1128, 1131 (9th Cir. ell'. 19(5). A prior decision will have preclusive effect when: (I) the issue at stake is identical to an 1995). (1)
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raist...>J litigation~ issue rdist.."<1 in the plior litigation; (2) the issue was actually litigated in the prior litigation; and
(3) the determination of the issue in the prior litigation was a critical and necessary part of the necessal)' judgment in the earlier action. Littlejohn v. U.S., 321 F.3d 915 (9th Cir. 20(3). In deciding U.S" 2(03). whether the issue decided at the previous proceeding is identical to the one now sought to he litigated, the court may look to whether thcre is a substantial overlap in evidence betwcen the there hetween two cases, and whether both suits involve application of the same rule of law. Resolution TJust TlUst Com. v. Kcatint.t, 186 F3d 110, 1116 (9th Cir. 1999). Collateral estoppel docs not attach merely F.3d does Corp. Keating, I] 16 aHach because hecause the same issue is raised in successive suits. Kourtis v. Cameron, 419 F.3d 989 (9th Cir. 2(05). For issue preclusion to apply, "the issues litigated must not he 'merely similar,' hut must but Cir. he 'identical.'" Central Delta Water Agency v. United States, 306 F.3d 938, 953 (9th Cif. 20(2); A~ency Orff v. U.S., 358 [1.3d 1137 (9th Cir. 2(04). The burden is on the party asscI1ing collateral Or1'f U.S" F.3d 2004). asseJ1ing estoppel to show that the issue to be precluded is identical to an issue actually litigated and he decided in the previous action. Poor Water Products v. Olin Corp., 258 F.3d 1024 (9th Cir. Com., 200 I). Furthennore, 2001). Furthen-nore, issue preclusion is inappropriate where the parties have not had a full and
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fair opportunity to litigate the merits of an issue. St.'C Allen v. McCurry, 449 U.S. 90, 94-95, 101
S.C!. 41 1, L.Ed.2d S.Ct. 411, 66 L.gd.2d 308 (1980).
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In the Sureharge Litigation, the Court heard evidence on whether the Defendant Surcharge heam had caused or consented to ccrtain administrative expenses being incurred which should, in ineurred certain fairness, be paid from its collateral. The evidence heard by the Court includt.-xI whether the includt."<1 he coJJateral. Defendant had breached the Term Sheet. However, as noted previously, the Court focused on hreached previously.
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Ihe MOlions hy Ihe Examiner and Ihe Dehlor 10 have administrative expenses of this estale paid paid Ihe hreach 2 rrom hankruplcy eslate assels. Whcther Ihe Defendanl should be personally liable for Ihe hreach rrom
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or Ihe Term Sheel and or Tcrm
1'01' a
breach of the covenant of good faith and fair dealing is not identical identical covcnant
10, nor was it ever considered hy the Court and the parties, in the Surcharge l,itigation. The 10, cvcr considcred
focus of a surcharge motion is whether a pal1y, from an objective or suhjective standard, caused caused focus surchargc or consented 10 having cel1ain work done for ils benefit for which its collateral should be or surehargcd. In re Dehbie Reynolds Hotel and Casino, 255 F,3d 1061, I066-6S ('.lth Cir. 200 I). I). surehargcd. The issues to he considered in the Surcharge Liligation did not focus on the hreach of the Term Term The Sheet, as a conlract, or the Defendant's breach of the covenanl of good failh and fair dealing, for for Sheet, which the Defendant should be personally liahle. As such, the parties did not have thc the Dcfendant which motivalion to, or have a full and fair opp011unity to, litigate the issues of the existelll.:e of a motivalion contract, Ihe intenl of the parties, the breach of the agreemelll, whether the agreement included a included a contract, Ihc
eovenant eovenant of good faith and fair dealing and any breach thereot: whether the estate inculred any damages damages !lowing /i'om either breach, and whether the Defendant should be personally liable for for such such a breach.
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Moreover, although the Court heard some evidence regarding a breach of the
Tcrm Term Sheet as a part of the Surcharge Litigation, the Court did not hear evidence as to whether whether Ihe Ihe Tenn Sheet was a contrael. Furthelmore, the COUl1's finding that a Term Sheet existed and and had had heen hreached was not a critical and necessary pat1 of Ihe judgmelll in the Sureharge l,iligalion. l,iligalion. See Lilllejohn, 321 F.3d at 920. As a resulI, the prerequisites for issue prcelusion are are nol nol satisfied, and Ihe Defendallls cannol he successful in its request to dismiss Counts One and and Two. Two.
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Count Three also is not harred hy issue preclusion. Equitable subordination has has
not not already heen litigated and decided in a prior proceeding. As noted above, equitable suhordination suhordination is a mueh hroader claim than any at issue in the Surcharge or Rolling Stock l.itigalion l.itigalion alone. Equilahle suhordination hears a different standard of proof than docs surcharge surcharge
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or lien avoidance. An equitable subordination claim is made up of an entirely differenl set of elements tban a claim for surcharge or lien avoidance, and involves the application of differenl legal standards. As noted previously, the issue of equitable suhordination claims were not raised in the Rolling Stock Litigation. Indeed, the Court and parties did not discover how frivolous the Defendant's pursuit of that Litigation was until after the Litigation had concluded. Morcover, as noted ahove, this Court expressly precluded equitable suhordination issues from heing raised in the Surcharge Litigation. The Court recognized then, as it does now, thatl.-'tjuitahle subordination is a separate claim than surcharge, necessarily accompanied hy different evidence, and different legal authority. Therefore, Count Three cannot he disposed of under the doctrine of issue preclusion.
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12 R Motion for Partial Summary Judgmenl as to Liability A motion for summary judgment should be granted if the movant has shown that there are no genuine issues of material fact and the movant is enlitled to judgment as a mattcr of law. Fed.R.Bankr.!'. 7056(c). Ruling on a motion for summary judgment necessarily implicatcs that suhstantive evidentiary standard of proof which would apply at trial. Anderson v. l.ihel1y Lobby. Inc., 477 U.S. 242, 252 (1986). A material fact is genuine if the evidence is sUl,h that a reasonable jury could return a verdict in favor of the non-moving party. Id. Procedurally, "the proponent of a summary judgment motion hears a heavy burden to show that there m:e no disputed facts walTanting disposition of the case on the law without trial." In re Ayuaslide "N' Dive COIp., 85 B.R. 545, 547 (9th Cir. RAJ>. 1987). Once that burden has been met, "the opponent must affirmatively show that a material issue of fact remains in dispute." Fredeliek S. Wyle P.e. v. Texaco. Inc., 764 F.2d 604, 608 (9th Cir. 1985). The opponent may not assert the existence of some alleged factual dispute hetween the pal1ies. Libel1y Lobby, 477 U.S. 242 at 252, 106 S.C!. 2505 at 2512, 91 L.Ed.2d 202. Instead, to demonstrate that a genuine factual issue exists, the objector must produce alIidavits which are based on personal knowledge, and
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the facts sct forth therein must be admissible in evidence. Aguaslide, at 547. In addition, the
2 summary judgment must be used with care and restraint, Hutchinson v. United States, 677 F.2d 2 summary
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1322, 1325 (<)th Cir. 19112), and is reviewed in the light most favorable to the non-moving pm1y. 1322, Hifai v. Shell Oil Co., 704 F.2d 1425, 1428 (9th Cir. 1983). Hifai The Trustee requests that this Coul1 enter surrunary judgment as to the Defendant's liability on the equitable subordination claim. Although e<.juitable subordination Defendant's was originally, as its namc suggcsts, a purely equitable remedy, it has since become codified at was
II U.S.c. § 510(c)." Howevcr, because the nature of the remedy remains e<.juitable, the decision II
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whether to grant or deny subordination rests within the Court's discretion. In re First Alliance whether M0I1gage Co., 471 1'.3d 977, 1006 (9th Cir. 20(6). M0I1gage Equitable subordination is a dramatic remedy, and one that is rarely granted. The scminal case for the modern subordination doctrine is often considered to be the Fifth Circuit's scminal decision. decision. In the Maller of Mobile Steel Company, 563 F.2d 692 (5th Cir. 1977), which cstablished cstablished a three-part test for the equitable subordination of claims. Although Mobile Steel was was dccided plior to codification of Section 51 Ok), the Ninth Circuit has adopted the Mobile Steel Steel opinion's three-pronged analysis. The findings required to subordinate a claim are as follows: follows: "( I) that the daimant engaged in some type of inequitable conduct, (2) that the misconduct misconduct injured "1-cditors or conferred unfair advantage on the claimant, and (3) that subordination subordination would not be inconsistent with the Bankruptcy Code." In re First Alliance M0I1cage M0I1cage Co., 471 1'.3d at 1006 (citing In re Mobile Steel Co., 563 F.2d 692, 699-700 (5th Cir.
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23 23 24 24 25. II U.S.c. § 51O(c) provides: the coul1 may( I) under principles of equitable subordination, subordinate for purposes of distrihution all or pal1 of an allowed claim to all or part of another allowed claim or all or part of an allowed intercst to all or part of another allowed interest; or (2) order that any lien securing such a subordinated claim be transferred to the estate. 24
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1977»; ~ also In re Filtercom. Inc., 163 F.3d 570 (9th eir. 1998); In re Lazar. 83 F.3d 306 (9th Cir. 1998)~ Lazar, rc Filterc0lJ!, cert. Cir. 1996); Stoumhus v. Kilimnik. 988 F. 2d 949, 958 (9th Cir. 1993), ceO. den. 510 U.S. 867. Kilimuik, eif. 949.958 ("The bankruptcy court may subordinate a claim if it finds the claimant engaged in fraud, ('The thc dcbtor unfairness or inequity, and the claimant's conduct harmed the debtor or its other creditors"). The inequity. level of egregious conduct necessary for equitahle subordination is high; cven independently equitable even independcntly tOl1ious and fraudulent conduct docs not necessarily rise to the level r<"'quircd for equitahle r<'-'quired tOllious does c4uitahle A1ljance Mortgage subordination in bankruptcy. In 1'1' First Alliance Mort&age Co. at 1007. The Defendant alleges bankruptcy, rc Dcfcndant the that the Trustee has not shown Lhe distinct level of malfeasance required to suhordinate its claim. subordinate the This COUl1 agrees that at least as of this date, Lhe Court has insuflicient evidence to suhordinate COUll insufficient cvidence suhordinatc
the ha.~ suffidcnt the Defendant's thc Defcndant's claim, but thc Trustee has presented sufficient evidence, through prior
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