Opinion
No. CIV 06-2975 PHX RCB, (BK 02-1937-PHS SCC), Adversary No. 02-0576, BAP No. AZ-00-0000.
September 24, 2007
ORDER
On November 13, 2006, the bankruptcy court entered a final judgment against appellant/defendant David A. Petersen ("defendant"), ordering him to pay to the Trustee/appellee, David Birdsell ("Trustee"), $70,462.87. That sum represents debtor Dawn Petersen's share of property from her dissolved marriage to defendant David Petersen. Defendant timely filed a Notice of Appeal from that judgment on November 22, 2006. He also timely filed a Statement of Election, in accordance with 28 U.S.C. § 158(c) and Fed.R.Bank.Pro. 8001(e), electing to have his appeal heard by this district court rather than by a three judge panel of the bankruptcy appellate panel service. Pursuant to 28 U.S.C. § 158(a), this district court has jurisdiction to hear this appeal.
Because debtor's action was commenced prior to October 17, 2005, the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, all chapter and sections references to the Bankruptcy Code, and all rule references to the Federal Rules of Bankruptcy Procedure are as they existed prior to the enactment of that of that Act.
That statute provides in relevant part that "district courts . . . shall have jurisdiction to hear appeals . . . from final judgments . . . of bankruptcy judges[.]" 28 U.S.C. § 158(a)(1).
Background
This is the second time this matter has been before the court. The primary issue continues to be the value of the residence located at 841 East Desert Park Lane, Phoenix, Arizona (the "property" or "subject property") in which the Petersens resided "[d]uring most of their marriage[.]" Rec., exh. 9 thereto at 3. Because Mr. Petersen inherited that house from his mother, it was his "sole and separate property." Rec. (exh. 4 thereto at 2 (citation omitted). At the date of transfer to Mr. Petersen the house had "a value of $180,000.00[,]" which appreciated to $300,000.00 over the course of the marriage. Id., exh. 9 thereto at 3; see also id., exh. 4 thereto at 2 (citation omitted); and exh. 5 thereto at 3, n. 2.
Following the first trial in this matter, "without any explanation or citation[,]" the bankruptcy court "simply declared . . . that this entire [appreciated] amount belonged to the community." Id., exh. 4 thereto at 5. Explaining that "[t]he amount of the community's interest in the house can only be determined once there has been a factual finding of what portion of the $120,000 of appreciation was due to expenditure of community funds and what portion was due simply to the inherent nature of the separate property[,]" this court vacated the bankruptcy court's judgment and remanded, inter alia, for a "factual determination" as to that issue. Id., exh. 4 thereto at 6.
Between the time of this court's decision (March 29, 2004) and the trial on remand (May 9, 2005), Mr. Petersen sold the subject property. Id., exh. 9 thereto at 3 (footnote and citation omitted). During that intervening period the property "increased in value[,]" and sold for $430,000.00 as compared to the "value allocated to it at the initial trial[,]" i.e. $300,000.00. See Rec., exh. 5 thereto at 5. An issue thus arose as to the proper valuation date — the date of dissolution or the sale date. See id. at 2.
Rec., exh. 5 thereto at 3, n. 2.
In its August 15, 2005, order addressing the valuation date issue, the bankruptcy court acknowledged this court's reliance upon Honnas v. Honnas 648 P.2d 1045 (Ariz. 1982), to support a "value-at-dissolution date[.]" Id. at 3. Nonetheless, because the subject property had been sold in the interim, the bankruptcy court "separately researched the issue o[f] the appropriate valuation date." Id. at 4. In so doing, the bankruptcy court expressly found "the analysis provided by" Sample v. Sample, 731 P.2d 604 (Ariz.App. 1986), "to be relevant to the facts currently before it, rather than those set forth in" Honnas. Id. at 5. Reading Sample as "holding that . . . the selection of a valuation date rest[s] within the sound discretion of the trial court," with the "only limitation" being "that the division of assets result in substantial equality[,]" the bankruptcy court held that the date of sale was the proper valuation date. Id. at 5 and 6. As further support for its use of the date of sale, the bankruptcy also relied upon Kelsey v. Kelsey, 918 P.2d 1067 (Ariz.Ct.App. 1996), wherein the court held that "[t]he valuation of assets is a factual determination that must be based on the facts and circumstances of each case." Kelsey, 918 P.2d at 1069 (citation omitted). Based upon the foregoing, the bankruptcy court "conclusively determined" that the property "shall be valued as of the date of sale[,]" rather than as of the dissolution date. Rec., exh. 5 thereto at 6.
In light of that finding, the bankruptcy court "reopen[ed] the evidentiary record on th[e] discrete issue" of the value of the subject property at the date of sale. Id. The bankruptcy court "specifically" sought "expert testimony as to the mortgage payments made on the Property by the community, the repairs that were made to the Property and by whom, and any market forces which would have affected the property from the purchase of the Property to the point of its sale." Id.
After weighing the testimony of the Trustee's expert, Roy E. Morris, III, and defendant's expert, Jan Sell, based upon a 2004 sale price of $430,000.00, the court assigned a value of $87,921.00 as "the appreciation due to market conditions alone (inherent value of the Property)[.]" Rec., exh. 9 thereto at 13. Further, the bankruptcy court found that "the marital community should be entitled to the sum of $162,079 for the increase in the value of the Property over the years and the increase in value due solely to the improvements from community funds." Id. Of that amount, the bankruptcy court held that the bankruptcy estate was only entitled to one-half, "the other half being appreciation that would enure to the benefit of [defendant][.]" Id.
Discussion
On this appeal, defendant assigns ten separate errors to the bankruptcy court's decision, nearly all of which pertain to the property valuation issue. Before addressing those claimed errors, the court must address the Trustee's procedural argument that this appeal should be dismissed due to defendant's supposed failure to adequately cite to the record. At a minimum, the Trustee contends that "statements that are not supported by the record must be stricken." Tr. Brief (doc. 8) at 4.I. Lack of Citations to Record
Rule 8010 mandates, as the Trustee notes, that "[t]he brief of the appellant . . . contain . . . citations to the authorities, statutes and parts of the record relied on." Fed.R.Bankr. 8010(a)(1)(E). The Trustee asserts that defendant did not comply with this Rule because more often than not he did not cite to the record; he "mis-cite[d] the record[;]" or he cited to documents which were not part of the record. Tr. Brief (doc. 8) at 4.
This court is well aware, as the Trustee argues, that case law exists to support dismissal "for failure to provide adequate citations of the record[.]" See In re Tevis, 347 B.R. 679, 686 (BAP 9th Cir. 2006) (citations omitted). Dismissal is not warranted in the present case, however, because in contrast toTevis, defendant's briefs herein are not "entirely deficient in making reference to the evidentiary record." See id. Likewise, also in contrast to Tevis, citations to the record are not "wholly missing" from defendant's briefs. See id. at 687.
To be sure, as the Trustee observes, there are no cites to the record in section A(5) of defendant's "Opening Brief." Def. Brief (doc. 7) at 9-10. Other citations are scattered throughout that brief, however, as well as throughout his reply brief. Thus, although defendant's briefs could have benefitted from additional cites to the record, he has sufficiently "compl[ied] with [the] rules to enable [this court] to examine those materials that bear on [his] arguments." See Everett v. Perez (In re Perez), 30 F.3d 1209, 1217 n. 12 (9th 1994). This is not a situation where "[n]umerous and egregious procedural violations may warrant dismissal of [the] appeal." See Ward v. Circus Circus Casinos, Inc., 473 F.3d 994, 997 (9th Cir. 2007) (citation omitted). Accordingly, the court will not dismiss this appeal due to inadequate cites to the record. Likewise, the court finds no basis for striking statements in defendant's briefs which are "not supported by the record." See Tr. Brief (doc. 8) at 4.
Having resolved this procedural issue, the court is now free to consider the substantive errors which form the basis of defendant's appeal.
II. Standard of Appellate Review
"The bankruptcy court's conclusions of law, . . ., are reviewed de novo and its factual findings are reviewed for clear error."In re International Fibercom, Inc., 2007 WL 2610892, at *4 (9th Cir. Sept. 12, 2007) (citation omitted). "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed."United States v. Gypsum Co., 333 U.S. 364, 395 (1948). "As long as findings are plausible in light of the record viewed in its entirety, a reviewing court may not reverse even if convinced it would have reached a different result." Snider v. Sherman, 2007 WL 1174441, at *18 (E.D. Cal. April 19, 2007) (citing Wardley Int'l Bank, Inc. v. Nasipit Bay Vessel, 841 F.2d 259, 262 n. 1 (9th Cir. 1988)) (footnote omitted).
III. Alleged Errors
A. Valuation Date
The first error which defendant ascribes to the bankruptcy court is its "conclusive determination" that the property should be "valued as of the date of sale[,]" rather than as of the date of dissolution of the marriage. See Rec., exh. 5 thereto at 6. The Trustee's response is two-fold. First he argues, albeit not in precisely this way, that defendant waived his right to object to the date of sale valuation date because he did not object earlier. Second, the Trustee argues that even if the issue of the valuation date is properly before this court on appeal, there is no merit to defendant's challenge to that date.
Procedurally, the defendant retorts that the bankruptcy court's 2005 order setting the sale date as the date of valuation was an interlocutory order. Hence, defendant reasons, the valuation date issue is properly before this court "in conjunction with this appeal of the final judgment in this case." Def. Reply (doc. 9) at 4. Substantively, the defendant responds that the Trustee's analysis of the valuation date (like the bankruptcy court's) fails to take into account the distinction between separate and community property.
1. Scope of Appeal
To support his waiver argument, the Trustee relies upon the "long-standing rule in the Ninth Circuit that, generally," an appellate court "will not consider arguments that are raised for the first time on appeal." Raich v. Gonzales, 2007 WL 754759, at *14 (9th Cir. March 14, 2007) (internal quotation marks and citation omitted). The Trustee further asserts that none of the three exceptions to that rule apply here. Thus, the Trustee concludes that the valuation date issue is "not properly before this Court[.]" Tr. Brief (doc. 8) at 11. Defendant counters, as previously noted, that the valuation date order is "properly on appeal" because it is an interlocutory order.
An appellate court may consider a "new issue if: (1) there are exceptional circumstances why the issue was not raised in the trial court; (2) the new issue arises while the appeal is pending because of a change in the law; or (3) the issue present is a pure question of law and the opposing party will suffer no prejudice as a result of the failure to raise the issue in the trial court." Raich, 2007 WL 754759, at *14 (citation omitted). The Trustee claims that he would be "severely prejudiced" if this court were to invoke this last exception because "re-open[ing] the date of valuation issue now, almost two years after the entry of the Order in question and one year after trial, would require another expert evaluation and another trial." Tr. Brief (doc. 8) at 10.
Defendant has the stronger argument, by far. First of all, the Trustee's waiver argument is wholly misplaced. The valuation date issue is not a new issue, which is being raised for the first time on this appeal. In its 2005 order, the bankruptcy court noted at the outset the "parties['] disagree[ment]" on "two critical points[,]" one of which was the property valuation date.See Rec., exh. 5 thereto at 2. Indeed, after the initial trial on remand, it was the Trustee who raised the valuation date issue, "question[ing]" the bankruptcy court's continued reliance on the value-at-dissolution date in light of the subsequent sale of the property. Id. The fact that it was the Trustee who raised the issue of the valuation date renders particularly disingenuous his contention that that issue was raised for the first time on this appeal.
Not only did this dispute as to the valuation date result in the bankruptcy court's August 2005 order, but the change in valuation date as reflected in that order required a continuance of the trial on remand to allow expert testimony as to the value of the subject property on the date of sale. Plainly then, the issue of the valuation date was before the bankruptcy court. It is not a new issue raised for the first on this appeal. For the Trustee to suggest otherwise strains credulity. Thus, as the foregoing shows, despite the Trustee's assertion to the contrary, the "general rule" that an appellate court "will not consider issues raised for the first time on appeal" does not apply here. See United States v. Carlson, 900 F.2d 1346, 1349 (9th Cir. 1990) (citations omitted).
The Trustee's argument that the August 15, 2005, order "is not subject to appeal" also fails to take into account that that order was interlocutory, not final. That oversight is significant because, as will be more fully discussed below, the interlocutory nature of that August 2005 order brings it within the scope of this appeal.
"[O]nly `final' rulings of the bankruptcy court may be appealed as of right" in accordance with 28 U.S.C. § 158(a). Elliott v. Four Seasons Properties (In re Frontier Properties, Inc.), 979 F.2d 1358, 1362 (9th Cir. 1992). On the other hand, interlocutory orders or decrees require "leave of the court" before they can be appealed. See 28 U.S.C. § 158(a). "The final judgment rule was designed to prevent piecemeal litigation, conserve judicial energy, and eliminate delays caused by interlocutory appeals." Frontier Properties, 979 F.2d at 1362 (citing Catlin v. United States, 324 U.S. 229, 233-34 (1945)). A final decision, as the Supreme Court has defined it, "is one that `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. (quoting Catlin, 324 U.S. at 233) (other citation omitted).
In the bankruptcy context, the Ninth Circuit, "in addition to th[at] conventional test of finality," has adopted a "pragmatic approach[,]" which "focuses on whether the decision appealed from effectively determined the outcome of the case." Id. at 1363. (internal quotation marks and citations omitted). "Specifically," the Ninth Circuit has held that "[a] bankruptcy order is final and thus appealable where it 1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed." Schulman v. Cal. (In re Lazar), 237 F.3d 967, 985 (9th Cir. 2001) (internal quotations marks and citations omitted). So, for example, "[o]rders requiring disgorgement resolve and seriously affect substances rights[,]" and hence are final. Mosier v. United Education Software, 285 B.R. 442, 445 (C.D.Cal. 2002) (citing Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1043-44 (9th Cir. 1997)). In contrast, an order that leaves unresolved the amount of damages, usually is not final. See Frontier Properties, 979 F.3d at 1362-63 (citing cases).
Applying these well-settled principles to the present case mandates the conclusion that the August 15, 2005, bankruptcy court order is not final. Arguably that order did satisfy the second part of the finality test in that it "finally determine[d]" the "discrete issue" of the valuation date. See Frontier Properties, 979 F.2d at 1362. Importantly, however, that August 15, 2005 order did not satisfy the first prong of the finality test. As the court persuasively reasoned in Ashoka Enterprises, Inc. v. Ford Motor Credit Corp., 156 B.R. 343 (S.D. Fla. 1993), a "bankruptcy court's order determining the date of valuation [wa]s not a final order" because:
[it] did not pass title to any property and did not direct delivery of any property. It did not award execution and did not determine the merits of the case or the substantive rights of the parties. Furthermore, the bankruptcy ruling on the issue of the proper date of valuation did not settle liability, [and] [it] did not establish damages[.]Id. at 345. That reasoning applies with equal force here. Rather than "end[ing] the litigation on the merits[,]" Catlin, 324 U.S. at 233), the August 15, 2005, order left unresolved the issue of the amount of damages. Hence, that order required the parties to "`engage in protracted litigation" as to the property value, before that order would "have any direct impact in the case.'"See Mosier, 285 B.R. at 445 (quoting Frontier Properties, 979 F.2d at 1362-63) (other citation omitted). For these reasons, this court has little difficulty finding that that bankruptcy order was not final.
Moreover, adopting the Trustee's argument that the defendant waived his right to object to the valuation date order because he did not immediately appeal it would run afoul of the Ninth Circuit's "flexible approach to finality" in the bankruptcy setting. See Frontier Properties, 979 F.2d at 1363. Significantly, that flexible, "`pragmatic approach' was designed to add an opportunity for appeal in bankruptcy proceedings at the interlocutory stage," not, as the Trustee suggests "to create less opportunity by making interlocutory appeal exclusive." See id. at 1363-64. That pragmatic approach also "is concerned with preventing irreparable harm to the losing party rather than any prejudice to the prevailing party ([the Trustee] here) from delayed appeal." Id. at 1364 (internal quotation marks and citation omitted). In light of the foregoing, there is no basis for the Trustee's suggestion of prejudice arising from defendant's failure to immediately appeal the valuation date order. Indeed, the Ninth Circuit has expressly "reject[ed] an application" of the pragmatic approach to finality "that would require any point that is determined in either party's favor in an interlocutory order in bankruptcy to be appealed immediately or forever waived." Id.
What is more, the Ninth Circuit has "never held that failure to appeal an interlocutory order barred raising the decided issue after entry of a final judgment." Id. "Rather," as that Court explained in Frontier Properties, "where an issue is determined in an interlocutory order and later incorporated into a final order, the determination of the original issue is appealable upon an appeal of the final order thereby providing the district court with an ultimate review on all the combined issues." Id. (internal quotation marks and citations omitted). In the present case, the bankruptcy court's September 20, 2006, memorandum decision incorporated the prior finding of a date of sale valuation date. Rec., exh. 9 thereto at 3. Therefore, that valuation date issue is properly before this court on the appeal from that decision and final judgment entered thereon.
2. Date-of-Sale v. Date-of-Dissolution
Having found that the valuation date issue falls within the scope of this appeal, the next issue is whether, as the defendant contends, the bankruptcy court's use of the date of sale is "reversible error[.]" Def. Br. (doc. 7) at 10. Defendant first asserts that the bankruptcy court improperly relied upon Sample to support using the date of sale to value the subject property because, unlike the present case, Sample involved community property. The bankruptcy court's choice of the date of sale was also error, according to the defendant, because "Arizona case law is clear that the . . . separate real property of one spouse shall be valued as of the dissolution date for determining the community's claims for contributions to the property." Def. Br. (doc. 7) at 11 (citing Drahos v. Drahos, 717 P.2d 927 (Ariz.Ct.App. 1985); and Honnas, supra, 648 P.2d 1045). Defendant is right on both counts.
The bankruptcy court's reliance upon Sample is misplaced because, as just noted, the issue there was the valuation date for community property, not, as here, the valuation date for separate property. Initially in Sample the trial court had awarded shares of stock to the husband as his separate property. The wife appealed, and the court of appeals reversed specifically "mandat[ing] that on remand the shares be treated as community property." Sample, 731 P.2d at 606 (emphasis added). While on appeal, "the stock significantly appreciated in value[.]" Id. On remand the trial court valued some of "the stock as of a date during the pendency of the appeal[,]" but it "chose yet a later valuation date" for other stock. Id.
The husband and wife filed cross-appeals "primarily challeng[ing] the trial court's choice of valuation date regarding the . . . stock." Id. "The husband argue[d] that the stock should be valued as of . . . the date of the original dissolution decree[,]" but the court of appeals disagreed. See id.
The court of appeals began its analysis of the valuation issue by declaring that "the trial court was required to divide community interest in the stock shares pursuant to A.R.S. § 25-318(A)." Id. That statute reads in relevant part as follows:
In a proceeding for a dissolution of the marriage, . . ., the court shall assign each spouse's sole and separate property to such spouse. It shall also divide the community, joint tenancy and other property held in common equitably, though not necessarily in kind[.]Id. at 607, n. 3 (quoting A.R.S. § 25-318(A)) (emphasis added). Based upon that statute, the court of appeals held that the "trial court's choice of valuation date was legally correct[.]"Id. at 606-607.
In so holding, the court in Sample offered the following rationale. Section 25-318(A) vests "broad discretion" in trial courts to "determin[e] the scope of property awards in divorce actions." Id. at 607. So broad is that discretion, in fact, that the Sample court found that the "[t]he only limitation . . . is that the division of community assets results in substantial equality." Id. (citations omitted). Reasoning that "the equitableness of a given distribution is the very touchstone of a proper apportionment[,]" the Sample court opined that "a trial court must be allowed to utilize alternative valuation dates."Id. "Only in th[at] fashion[,]" the Sample Court further opined, can courts "make truly equitable awards as dictated by A.R.S. § 25-318(A)." Id. Finally, the court explained that "it would contravene the very purpose of A.R.S. § 25-381(A) for [it] to develop a general valuation rule, let alone the valuation at dissolution formula proposed by [the] husband." Id. (footnote omitted).
As is evident, critical to the analysis of the valuation issue in Sample was the considerable latitude given to courts under section 25-318(A) when making equitable divisions of community property thereunder. As the defendant in the present case is quick to point out though, the first sentence of that statute, which pertains to separate property such as the property at issue in this case, does not include an "equitable requirement[.]" See Def. Br. (Doc. 7) at 11. Equity only comes into play under section 25-318(A) when the property to be divided is "community, joint tenancy and other property held in common[.]" See A.R.S. § 25-318(A). Thus, because the present case involves solely separate property, the equitable considerations which supported a valuation date other than the date of the dissolution decree inSample are not present here. Equitable considerations are not permitted under A.R.S. § 25-318(A) when assigning separate property upon marital dissolution. Accordingly, the court disagrees with the bankruptcy court that Sample "appears directly on point." See Rec., exh. 5 thereto at 4.
The Trustee attempts to bring this case within the ambit ofSample by asserting that it "revolves around community property — namely the community interest in the subject property." Tr. Brief (doc. 8) at 10. This ignores the fact that the subject property is separate property, and it retains that separate property status regardless of the expenditure of community funds.See Potthoff v. Potthoff, 627 P.2d 708, 715 (Ariz.Ct.App. 1981) (citation omitted) ("[I]f in fact community funds are used to improve separate real property, the underlying real property does not become community property.") The Trustee's position also ignores the fact that because separate property is at issue here, as opposed to community property, this is not a situation likeSample where "[t]he court, in effect, simply returned to the wife that which was already hers." Sample, 731 P.2d at 607 (internal quotation marks and citation omitted). In short, the court finds that the bankruptcy court erred by employing the date of sale, rather than the date of dissolution, as the valuation date for the subject separate property.
The bankruptcy court's reliance upon Kelsey, supra, is similarly misplaced. As recited by the bankruptcy court, Kelsey does provide that "[t]he valuation of assets is a factual determination that must be based on the facts and circumstances of each case." Kelsey, 918 P.2d at 1069 (citation omitted); see also Rec., exh. 5 thereto at 6. Arguably that broad statement, read in isolation, could support using the date of sale to value the property at issue herein.
A close reading of Kelsey shows, however, that not only is it factually distinguishable, but the issue of a valuation date never arose in that case. At issue in Kelsey was whether a hair transplant business should be valued as a service or as a medical practice. In finding that the trial court erred in concluding that that business was a service rather than a medical practice, the court of appeals did recognize that "trial court[s] ha[ve] discretion to rely on various methods of valuing a professional practice[.]" Id. (citation omitted). Nothing in that discussion even remotely suggests that that discretion encompasses use of a valuation date other than the dissolution date where, as here, the community is being reimbursed for community funds expended for the benefit of separate property.
The Kelsey court's silence on that narrow issue is understandable. First, as just noted, the valuation date was not an issue in Kelsey. Second, and perhaps more importantly, as discussed in this court's prior order, the Arizona Supreme Court in Honnas unequivocally "reaffirm[ed]" the value-at-dissolution formula" when "community funds are expended for the benefit of separate [real] property." Honnas, 648 P.2d at 1046-47 (citations omitted). For all of these reasons, upon de novo review the court must conclude that the bankruptcy court's use of the date of sale for valuing the subject property was incorrect as a matter of law.
As an alternative to the date of dissolution, defendant contends that the date of service of the petition for dissolution is appropriate given its effect under Arizona law. More specifically, defendant accurately notes that upon service of such a petition, property acquired thereafter is the separate property of that spouse, provided that the petition results in a decree of dissolution. See A.R.S. §§ 25-211(2); and 25-213(B). In the present case, because debtor Dawn Petersen filed the petition for dissolution on April 10, 2000, defendant is urging use of that date for valuing the subject property. Obviously, as defendant points out, use of that April 10, 2000 date would mean that "the appreciation attributable to the improvements would be substantially less." Def. Brief (doc. 7) at 12. Therefore, defendant maintains that the court should remand this action yet again; this time "for a determination of the value of the improvements as of April 10, 2000." Id.
While the court agrees that remand is proper and, indeed, necessarily, it declines to find that April 10, 2000, is the proper valuation date. The court leaves to the bankruptcy court in the first instance the determination as to the appropriate valuation date consistent with this order.
This court's determination that remand is required on the valuation date issue renders moot the other issues which defendants raise on this appeal.
IT IS ORDERED that the November 13, 2006, judgment of the bankruptcy court (Rec., exh. 10 thereto) is VACATED; and
IT IS FURTHER ORDERED that this case is REMANDED to the bankruptcy court for proceedings not inconsistent with this order.