Opinion
ORDER ON TRUSTEE'S MOTION TO APPROVE COMPROMISE OR SELL ESTATE ASSETS
Robert Kwan, United States Bankruptcy Judge
Pending before the court is the Motion of the Chapter 7 Trustee ("Trustee") to Approve Compromise or Sell Estate Assets. ECF 24. As discussed herein, because the court concludes that a competitive sales process would maximize the value of the assets, which are the subject of the pending motion to the bankruptcy estate and that Debtor may purchase the estate property at issue here, the court will grant Trustee's motion. In granting the motion, the court will treat the Debtor's offer as a qualified overbid, subject to better bids.
1. Factual History and Procedural History
Maria Del Socorro Prado, also known as Maria Del Socorro Prado-Anaya ("Debtor") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C., on April 30, 2012. Debtor did not disclose the existence of a possible employment law claim against her former employer, Rite Aid Corp., as an asset on her bankruptcy schedules as part of her bankruptcy petition. The Chapter 7 Trustee filed a no distribution report on June 8, 2012, after which a discharge of Debtor was entered on August 13, 2012, and this bankruptcy case was closed on August 16, 2012.
On December 6, 2013, Debtor filed a wrongful termination lawsuit in the Superior Court of California against her former employer, Rite Aid Corp., and her former manager, Michael Rodriguez (these parties referred to together as "Rite Aid") (the lawsuit is referred to as "State Court Suit"). The State Court Suit is based on claims for discrimination, harassment, and wrongful discharge arising out of events that occurred before Debtor's bankruptcy petition was filed. The Chapter 7 Trustee became aware of the State Court Suit as an undisclosed prepetition asset belonging to the bankruptcy estate, filed a motion to reopen the bankruptcy case, and began negotiations with Debtor's counsel representing her in the State Court Suit ("Debtor's counsel") about Debtor's counsel continuing to prosecute the State Court Suit on behalf of the bankruptcy estate. Declaration of Richard K. Diamond, Trustee in Support of Trustee's Reply to Debtor's Objection, ECF 28, ¶¶ 3-8. The Chapter 7 Trustee and Debtor and her state court counsel apparently could not come to an agreement about control over the State Court Suit, and the Chapter 7 Trustee began negotiating directly with Rite Aid to settle the State Court Suit in order to realize the value of the lawsuit as an asset of the bankruptcy estate. Id.
On August 29, 2014, Trustee filed a Motion to Approve Compromise pursuant to Federal Rule of Bankruptcy Procedure 9019, asking the court to approve a compromise with Rite Aid which would transfer the rights to the State Court Suit to Rite Aid for a payment of $48,000. Declaration of Richard K. Diamond in Support of Motion to Approve Compromise, ECF 24, ¶ 7.
Debtor filed an opposition to Trustee's Motion to Approve Compromise, arguing that the State Court Suit was worth significantly more than $48,000. ECF 27. Both Rite Aid and the Trustee filed replies to Debtor's opposition, arguing that the Motion to Approve Compromise should be granted because Rite Aid possessed a counterclaim against Debtor and that the State Court Suit was unlikely to succeed on the merits. ECF 28 and 29. Debtor filed an "Objection and Sur-Reply" to Rite Aid's reply, arguing that Rite Aid did not have standing to file a reply and continuing to argue that the State Court Suit was likely to succeed on the merits. ECF 34.
In order to give all parties an opportunity to be fully heard on Trustee's compromise motion, the court granted the parties leave to file additional briefing. Order Continuing Hearing on Trustee's Motion to Approve Compromise with Rite Aid Corporation, Thrifty Payless, Inc., and Michael Rodriguez and Granting Leave to Filed Supplemental Briefing and Evidence, ECF 35. Debtor, Trustee and Rite Aid all filed supplemental briefing in support of their respective positions on the motion. ECF 37, 38 and 39.
The court conducted a hearing on Trustee's Motion to Approve Compromise on October 28, 2014. At this hearing, Debtor raised the possibility that Debtor with the assistance of counsel might put forward money to outbid Rite Aid's settlement offer. Hearing on October 28, 2014, 3:25- 3:35 p.m. In order to allow Trustee to maximize value of the State Court Suit as an asset of the bankruptcy estate, the court continued the hearing to November 18, 2014, to allow Debtor and the Trustee to negotiate possible terms of sale and to allow Debtor's counsel to verify that such a proposal would be allowed pursuant to California's attorneys' rules of ethics. Id. at 4:15-4:18 p.m.
At the November 18, 2014 hearing, Trustee represented that he had received a cashier's check from Debtor, and that he would treat this, along with Debtor's agreement to waive her $26,000 wildcard exemption, as a qualified overbid for $76,000. Transcript of November 18, 2014, Hearing, ECF 45, at 6:1-11. Because Rite Aid did not have adequate notice of Debtor's qualified overbid, the court continued the hearing to December 11, 2014, to allow Rite Aid to file a response to Debtor's qualified overbid, including objections, and to allow Trustee to file a declaration in support of a finding that the purchaser of the asset would be a good faith purchaser under 11 U.S.C. § 363(m). Id, at 20:2-21:3.
The court has considered the objection of Debtor that the Rite Aid parties do not have standing to oppose any sale to her and overrules such objection. "Party in interest" is generally construed broadly under the Bankruptcy Code and has been held to be "one who has an actual pecuniary interest in the case." In re Sobczak, 369 B.R. 512, 517-518 (9th Cir. BAP 2007) (citation omitted).
2. The Chapter 7 Trustee Must Entertain Valid Overbids In Response to a Settlement Under Fed.R.Bankr.P. 9019.
In furtherance of a bankruptcy trustee's duty to maximize value of assets of the estate, the trustee must consider offers to purchase claims that exceed outstanding settlement offers. The Ninth Circuit Bankruptcy Appellate Panel in In re Mickey Thompson Entertainment Group, Inc., 292 B.R. 415, (9th Cir. BAP 2003), addressed a similar situation described as follows:
A Chapter 7 trustee sought approval of a compromise between the bankruptcy estate and certain parties against whom the estate held potential fraudulent transfer claims. A creditor opposed the compromise and a third party offered to purchase the claims for an amount higher than the settlement offer. In response, the trustee changed his strategy, treating his intended action as it really was: a sale of an asset of the bankruptcy estate. At the hearing, however, he renounced that strategy and sought approval of what he once again maintained was a compromise of a controversy. The bankruptcy court agreed with the trustee and approved the compromise.
Id. at 417. In Mickey Thompson Entertainment Group, the Bankruptcy Appellate Panel reversed the bankruptcy court's order approving a settlement and held that in evaluating a motion to approve settlement under Fed.R.Bankr.P. 9019, the bankruptcy court must consider other offers that "might draw a higher price through a competitive process and be the proper subject of a section 363 sale." Id. at 421-422. Similarly, in the case at bar, the court, finding itself with an offer of a nonsettling party which exceeds the settlement amount, determines that consistent with Mickey Thompson Entertainment Group, the value of the subject assets would be maximized through a competitive auction sale and that it has discretion to hold that the causes of action in the State Court Suit are the proper subject of a section 363 sale. Id.
3. Counsel for Debtor May Loan Money to Debtor to Purchase the Claim Without Violating Applicable Ethical Rules.
Rite Aid cites California Business & Professions Code § 6129 as prohibiting Debtor's attorneys from loaning her money to assist her in purchasing the rights in the State Court Suit from Trustee. Rite Aid Corporation and Michael Rodriguez's Brief Re: Objections to 11 U.S.C. § 363 Sale of Debtor's Claims against Them, ECF 46, at 3:6-11. That statute provides: "Every attorney who, either directly or indirectly, buys or is interested in buying any evidence of debt or thing in action, with intent to bring suit thereon, is guilty of a misdemeanor." California Business & Professions Code § 6129.
In response, Debtor argues that this transaction would not violate this statute because her attorneys are not buying anything, but rather, they are merely loaning her money for her purchase of the rights, which they can do if they comply with Rule 3-300 of the California Rules of Professional Conduct. Debtor's Opposition and Objection to Rite Aid's Objection to 11 U.S.C. § 363 Sale of Debtor's Claims against Them, ECF 47 at 4:12-5:15.
For his part, Trustee argues that Debtor's purchase of the asset would not be prohibited by California Business and Professional Code § 6129 because that provision was intended to prevent litigation that would otherwise not exist. Trustee's Response to Rite Aid Corporation and Michael Rodriguez's Brief re Objection to 11 U.S.C. § 363 Sale of Debtor's Claims against Them, ECF 48, at 5:17-6:13.
The court determines that Debtor's argument that there would be no violation of California Business & Professions Code § 6129 is correct because her attorneys are not purchasing the rights to the State Court Suit. As Debtor's attorney, Ebby S. Baktiar, in his declaration states that the transaction provides that Debtor will gain ownership of the rights in the State Court Suit if her bid is chosen by the Trustee as the best bid. Declaration of Ebby S. Bakhtiar, ECF 47 at ¶ 5-6. This means that Debtor could, if she chooses, retain different counsel to pursue the State Court Suit in the future. This would rebut Rite Aid's argument that Debtor is merely a "straw man" purchaser and that her attorneys are the true purchasers of the asset.
For the foregoing reasons, the court concludes that Debtor's counsel is not prohibited from lending Debtor the funds to purchase the rights to the State Court Suit against Rite Aid from the bankruptcy estate under California Business & Professions Code § 6129.
4. California Law Does Not Prohibit the Assignment of a Personal Tort Cause of Action from the Estate to the Debtor.
Rite Aid argues that California law prohibits the assignment of the types of claims that the Chapter 7 Trustee intends to assign in this case. Rite Aid Corp. & Rodriguez's Brief re: Objection to 11 U.S.C. § 363 , ECF 46 at 3:14-23. It is true that California law does not generally allow the assignment of personal tort causes of action. California Civil Code §§ 953 and 954; Essex Insurance Co. v. Five Star Dye House, Inc., 38 Cal.4th 1252, 1257-1263 (2006), citing inter alia, Reichert v. General Insurance Co., 68 Cal. 2d 822, 834 (1968). As the California Supreme Court noted in Essex Insurance Co., citing California Civil Code § 954, an assignment is a commonly used method of transferring a cause of action or claim, and that assignability of claims is the general rule, but excepted from that general rule are tort causes of action "founded upon wrongs of a purely personal nature." 38 Cal.4th at 1263 , citing inter alia, Reichert v. General Insurance Co., 68 Cal. 2d at 834.
California Civil Code § 954 states: "A thing in action, arising out of a violation of a right of property, or out of an obligation, may be transferred by the owner." See also, Essex Insurance Co. v. Five Star Dye House, Inc., 38 Cal.4th 1259-1262.
In support of its position that the assignment of the subject tort claims is prohibited, Rite Aid specifically cites Baum v. Duckor, Spradling & Metzger, 72 Cal.App.4th 54, 71 (1999). In that case, legal malpractice claims had accrued to the bankruptcy estate of two Chapter 7 bankruptcy debtors against their bankruptcy counsel during the bankruptcy proceedings. Id. at 58-59. The Chapter 7 bankruptcy trustee assigned those claims to one of the creditors of the bankruptcy debtors, pursuant to an agreement approved by the bankruptcy court. Id. The state appellate court affirmed the trial court's sustaining a demurrer to the creditor's complaint on the grounds that "(1) the causes of action, though assets of the bankruptcy estates of BIC and PRTC, are claims for legal malpractice, which are personal torts that are not assignable under California law; (2) no bankruptcy or other federal law authorizes such assignment of legal malpractice claims. . . ." Id. at 59.
Debtor argues that a transfer of the causes of action by the bankruptcy estate to her would not be an "assignment" in the same sense as the cases cited by Rite Aid because those cases involve assignment to a third party because this situation would involve the transfer of personal tort causes of action back to her as the real party in interest. Debtor's Opposition and Objection to Rite Aid's Objection to 11 U.S.C. § 363 Sale of Debtor's Claims Against Them, ECF 47, at 5:26-8:4.
California case law supports Debtor's interpretation of the assignability of personal tort causes of action to her as the real party in interest with standing to pursue such claims. For example, in Amstone v. Peninsular Fire Insurance Co., 226 Cal.App.3d 1019 (1991), the court considered the question "do appellants [debtors] have standing to pursue claims for refusal to pay insurance proceeds for the loss of their personal property even though they filed bankruptcy petitions?" and held that they did. The Amstone court analyzed instances where a bankruptcy debtor has standing to bring a suit personally despite the cause of action belonging to the bankruptcy estate as follows:
Persons have standing to sue when they are real parties in interest. (Code Civ. Proc., § 367.) Usually properties and causes of action existing at the time bankruptcy petitions are filed pass to the bankruptcy estate (11 U.S.C. § 541(a)(1); Reichert v. General Ins. Co. (1968) 68 Cal.2d 822, 829-837, 69 Cal.Rptr. 321, 442 P.2d 377; People v. Kings Point Corp. (1986) 188 Cal.App.3d 544, 548, 233 Cal.Rptr. 227) and only the trustee has standing to bring actions related thereto. (Reichert v. General Ins. Co., supra, 68 Cal.2d at p. 830, 69 Cal.Rptr. 321, 442 P.2d 377; see 4 Collier on Bankruptcy (15th ed. 1985) § 541.12, p. 541-75.) However, there are situations in which the bankrupt debtor may also be a party in a state civil action. For example, if the trustee abandons property the bankrupt may bring suit with regard to that property. (Estate of Aldrich (1950) 35 Cal.2d 20, 23, 215 P.2d 724; for further discussions see Wood v. Lowe (1974) 39 Cal.App.3d 296, 114 Cal.Rptr. 69; Highlanders, Inc. v. Olson (1978) 77 Cal.App.3d 690, 697-701, 143 Cal.Rptr. 679; Danielson v. ITT Industrial Credit Co. (1988) 199 Cal.App.3d 645, 655-658, 245 Cal.Rptr. 126.) Further, if a plaintiff has a pending suit and subsequently files for bankruptcy, the debtor is not automatically foreclosed from continuing to prosecute the action. (Code Civ.Proc., § 385; Kaley v. Catalina Yachts (1986) 187 Cal.App.3d 1187, 1193-1196, 232 Cal.Rptr. 384; Robinson v. McGinn (1987) 195 Cal.App.3d 66, 78- 80, 240 Cal.Rptr. 423; ABA Recovery Services, Inc. v. Konold (1988) 198 Cal.App.3d 720, 726, 244 Cal.Rptr. 27.) Debtors may also be authorized by the bankruptcy court to file state civil actions. (Cf. Tarr v. Merco Constr. Engineers, Inc. (1978) 84 Cal.App.3d 707, 713-716, 148 Cal.Rptr. 813.)
Id. at 1023-1024. Although the discussion in Amstone involved the assignment of a cause of action based on tort against personal property and does not address the exact situation here of a Chapter 7 bankruptcy trustee seeking to assign a personal tort cause of action to the bankruptcy debtor, it does hold in a similar situation that a debtor has standing to bring a cause of action that previously belonged to the estate once that cause of action has been abandoned by the trustee. Id. Furthermore, the Amstone court's statement that "persons have standing to sue when they are the real parties in interest, " is directly applicable here, where Debtor is the real party in interest in the State Court Suit. Id. at 1023, citing, California Code of Civil Procedure § 367 ("Every action must be prosecuted in the name of the real party in interest, except as provided by statute.").
In this court's view, personal tort causes of action should be assignable by a bankruptcy trustee to a debtor as the real party in interest because the public policy against assignability of such claims is not implicated where the debtor as the assignee is the real party in interest in being the party allegedly injured by the allegedly tortious conduct. In support of this view, Trustee cites In re Brown, 354 B.R. 100 (Bankr. N.D. W.Va. 2006), in which a Chapter 7 bankruptcy trustee sought court approval to release a debtor's prepetition cause of action against a mortgage lender in exchange for $40,000. The mortgage lender objected to the release of the cause of action to the debtor partially based on the grounds that the cause of action was not assignable under applicable state law (i.e., West Virginia law). Id. at 104. The court in Brown noted that there was no public policy reason to prevent the assignment of the cause of action "[b]ecause the Trustee is transferring the Debtors' own interest in the lawsuit back to the Debtors, any concern relating to the trading in personal injury tort claims is vitiated." Id. at 106. Although Brown involved West Virginia state law, the same logic applies here, and there is no good reason to prevent the transfer of Debtor's personal tort claim back to her as she is the real party in interest as the allegedly injured party.
The cases cited by Rite Aid to show that personal tort claims are not assignable are distinguishable; Baum v. Duckor, Spradling & Metzger, 72 Cal.App.4th at 71, and Integrated Solutions v. Service Support Specialties, 124 F.3d 487 (3d Cir. 1997) were cases which involved an assignment of personal tort claims from a bankruptcy estate to a third party and not the debtor. In contrast, the assignee of the claims in this case would not be a third party, but would be the real party in interest - the debtor.
Likewise, the various cases cited by Rite Aid to show that these types of pre-petition employment-related causes of action belong to the bankruptcy estate are distinguishable because none of those cases involved an attempt by the trustee to assign the cause of action back to the debtor, as is the case here. Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 706, 708-710 and n. 3 (9th Cir. 1986)(debtor and bankruptcy trustee signed stipulation for dismissal of state court action with personal tort claim not deemed abandonment of such claim to debtor; issue of assignability of the claim under state law expressly not decided); M & M Foods, Inc., v. Pacific American Fish Co., 196 Cal.App.4th 554, 561-564 (2011)(accounts receivable claim as asset undisclosed on bankruptcy schedules did not revert to debtor upon abandonment by bankruptcy trustee under 11 U.S.C. § 554(a)); Harris v. St. Louis University, 114 B.R. 647, 648-649 (E.D. Mo. 1990)(same); Williams v. Kaiser Permanente, 2000 WL 1262657 at *3-4 (N.D. Cal. 2000)(same).
Rite Aid's argument, that Trustee may not assign a personal tort cause of action back to the aggrieved party who suffered the alleged wrong of a personal nature is inconsistent with the purpose of California law governing assignability of claims. As the California Supreme Court stated in Reichert, "'the only causes or rights of action which are not transferable or assignable in any sense are those which are founded upon wrongs of a purely personal nature, such as slander, assault and battery … and others of like nature. All other demands, claims and rights of action whatever are generally held to be transferable.'" 68 Cal. 2d at 834. In other words, California law allows transfer and assignment of all claims or rights of action other than personal torts - those it keeps in the hands of the actual party in interest. Id.; see also, California Civil Code § 954; Essex Insurance Co. v. Five Star Dye House, Inc., 38 Cal.4th at 1257-1263. To accept Rite Aid's argument and prevent the Trustee from assigning the claims of a "purely personal nature" back to Debtor as party whose rights of a "purely personal nature" were affected by the alleged wrongs the would elevate form over substance and would not further the purposes of the California law relating to the assignability of causes of action or claims.
5. Debtor Is Not Estopped From Purchasing the State Court Suit
In reply to Debtor's original opposition to the Motion, Trustee had argued that Debtor should be estopped from opposing the settlement with Rite Aid due to Debtor's failure to schedule the prepetition claims against Rite Aid in her bankruptcy petition. Trustee's Reply to Debtor's Objection and Opposition to Motion for Order Approving Compromise, ECF 28, at 6:8-8:3. It seems to the court that this is a factual issue that would be best raised as a defense in the State Court Suit. In Amstone v. Peninsular Fire Insurance Co., the appellate court reversed the trial court's grant of summary judgment to defendant insurance company in a bad faith action on grounds that the debtors did not schedule the potential prepetition bad faith claim against defendant on the bankruptcy petitions. Id. The appellate court reversed the grant of summary judgment because "[t]here are numerous reasons, not amounting to fraud, which could explain why appellants failed to list the policy as an asset on the bankruptcy petitions…" and thus there was a triable issue of fact precluding summary judgment. Id. The Ninth Circuit has also recently held that failure to schedule a potential claim does not automatically estop a debtor from later pursuing that action, but requires factual inquiry into whether the omission was mistaken or inadvertent. See Ah Quin v. County of Kauai Department of Transportation, 733 F.3d 267, 279 (9th Cir. 2013).
6. Both Rite Aid and Debtor Would Appear to Be Good Faith Purchasers for Purposes of 11 U.S.C. §363(m).
The Chapter 7 Trustee asks the court to find that whichever party ends up purchasing the claim is a good faith purchaser under 11 U.S.C. § 363(m). A good faith purchaser is one who buys "in good faith" and "for value." In re Ewell, 958 F.2d 276, 281 (9th Cir. 1992)(citation omitted). "The price achieved by an auction is ordinarily assumed to approximate market value when there is competition by an appropriate number of bidders." In re Fitzgerald, 428 B.R. 872, 883 (9th Cir. BAP 2010)(citation omitted). Here, Trustee has included a declaration that the original compromise agreement between Rite Aid and the Trustee was the result of good faith, arms-length negotiations with no collusion. Declaration of Richard K. Diamond, Trustee, ECF 48 at 11. In light of Trustee's subsequent support of Debtor's attempt to outbid Rite Aid's offer, Trustee's declaration is highly credible. Based on the bidding efforts of all parties in this transaction, the court can find that whoever ultimately purchases the claim, whether it is Rite Aid or Debtor, would be a good faith purchaser under 11 U.S.C. § 363(m) because the bidding has been free of collusion and any auction with Rite Aid and Debtor as bidders should yield the market value for the claim. The court reserves its actual ruling on the good faith of a purchaser until the actual outcome of an auction to be conducted by Trustee.
By separate order, the court has continued the further hearing on the motion scheduled for December 17, 2014 at 2:30 p.m. to December 19, 2014 at 10:30 a.m. At the December 19 hearing, the court will discuss the scheduling of the auction to be conducted by Trustee for the sale of the causes of action, which are estate's assets. In this regard, the court agrees with the Trustee that the sale should be conducted pursuant to the terms and conditions outlined in his response to Rite Aid's supplemental briefing. Trustee's Response to Rite Aid Corporation and Michael Rodriguez's Brief re Objection to 11 U.S.C. § 363 Sale of Debtor's Claims against Them, ECF 48, at 9:25-10:14.
Accordingly, for the foregoing reasons, the court grants Trustee's motion on the terms and conditions set forth in his response to the Rite Aid parties' supplemental briefing. Id. Trustee is ordered to submit a proposed final order granting his motion within seven days of entry of this order, which among other things, sets forth the terms and conditions of the sale.
IT IS SO ORDERED.