In Re Consolidated Freightways Corporation of Delaware et al

Filing 19

ORDER AFFIRMING THE BANKRUPTCY COURT 2016 ORDER by Judge Michael W. Fitzgerald that the Court AFFIRMS the decision of the Bankruptcy Court. (Made JS-6. Case Terminated.) (jp)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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EASTERN DIVISION

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CASE NO. EDCV-16-164-MWF

IN RE: CONSOLIDATED
10 FREIGHTWAYS CORP. ET AL.
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OPINION AFFIRMING THE
BANKRUPTCY COURT’S 2016
ORDER

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Before the Court is a bankruptcy appeal from the United States Bankruptcy
Court (the Honorable Wayne Johnson, United States Bankruptcy Judge) (the
“Bankruptcy Court”). Appellants Crown Enterprises and Hayward Property, LLC
appeal from the Bankruptcy Court’s January 2016 Order Denying Motion to Reopen
Case for the Limited Purpose of Correcting Sale Order and Defective Deed (the
“2016 Order”). (Excerpts of Record (“ER”) Ex. A (Docket No. 10-3)).
On April 27, 2016, Appellants filed their Opening Brief. (Docket No. 10).
No Appellee has appeared in this case, although XPO Logistics Freight, Inc. has
appeared as an Interested Party. On June 24, 2016, XPO filed an Objection to
Bankruptcy Appeal or Alternatively Request for Continuance (“Request”). (Docket
No. 17).
The Court has reviewed the papers filed in this appeal and held a hearing on
June 27, 2016. Counsel for Appellants as well as XPO appeared at the hearing.

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For the reasons stated below, the Court AFFIRMS the 2016 Order. The

2 Bankruptcy Court did not abuse its discretion by refusing to reopen the bankruptcy
3 proceeding. The Bankruptcy Court applied the correct law, and its application of
4 the law to the facts of the case was neither illogical, implausible, nor unsupported by
5 facts in the record.
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Because the Court affirms the Bankruptcy Court’s decision, the Court

7 DENIES as moot XPO’s Request to continue the oral argument.
8 I.

BACKGROUND

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In 2002, Consolidated Freightways filed for bankruptcy protection. (ER Ex.

10 E at 333 (Docket No. 10-7)). In the bankruptcy sale, Appellants purchased the real
11 property located at 2256 Claremont Ct., Hayward, CA 94545 (the “Hayward
12 Property”). (Id. at 340, 356). In the Bankruptcy Court’s order authorizing the sale
13 (“Sale Order”), the Bankruptcy Court retained jurisdiction to “resolve any disputes,
14 controversies or claims arising out of or relating to the Agreement.” (Id. at 361).
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Somehow, when the Quitclaim Deed was recorded, the Quitclaim Deed

16 reflected a different property in Emeryville, rather than Hayward, California. (ER
17 Ex. C at 137 (Docket No. 10-5)). In addition, according to Appellants, the metes
18 and bounds description in the purchase agreement memorializing the sale, which
19 was attached as Exhibit A to the Sale Order, failed to “fully” describe the Hayward
20 Property. (Id. at 131).
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Appellants did not discover these defects until approximately September

22 2015, when a prospective purchaser expressed interest in the Hayward Property.
23 (Id. at 132). Appellants attempted to remedy this issue by contacting counsel for the
24 Trust, but counsel for the Trust indicated that the Trust was dissolved in 2012. (ER
25 Ex. D at 227 (Docket No. 10-6) (“We no longer have a client that we can discuss
26 this with, as there is no longer any Trust in existence and the Trustee’s authority and
27 services terminated in late 2012.”)).
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In December 2015, Appellants filed a Motion to Reopen Case for the Limited

2 Purpose of Correcting Sale Order and Defective Deed (the “Motion”) with the
3 Bankruptcy Court. (See generally ER Ex. B (Docket No. 10-4)). Notice of the
4 Motion was served by email to 104 recipients who had participated in the
5 bankruptcy proceeding, and no oppositions to the Motion were filed. (ER Ex. H at
6 411 (Docket No. 10-10); ER Ex. I at 420-25 (Docket Nos. 10-11)). The Bankruptcy
7 Court held a hearing on January 12, 2016, and denied the Motion. (ER Ex. F at 399
8 (Docket No. 10-8)). Appellants then filed a timely Notice of Appeal to this Court
9 on January 22, 2016. (Id. at 389).
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On June 17, 2016, Appellants filed a supplemental brief notifying the Court

11 that XPO Logistics Freight, Inc. has come forward and “asserted that it, and not
12 Appellants, owns one of the parcels of [Hayward] [P]roperty.” (Notice of
13 Disclosure of Newly-Discovered Claims Relevant to Appeal ¶ 4 (Docket No. 15)).
14 Appellants dispute XPO’s claim and contend that XPO owns only a neighboring
15 property to the Hayward Property. (Id.).
16 II.

DISCUSSION

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Denial of a motion to reopen a bankruptcy case is reviewed for an abuse of

18 discretion. Lopez v. Specialty Res. Corp. (In re Lopez), 283 B.R. 22, 26 (B.A.P. 9th
19 Cir. 2002). To determine whether the Bankruptcy Court abused its discretion, the
20 Court conducts a two-step inquiry: (1) the Court reviews de novo whether the
21 Bankruptcy Court “identified the correct legal rule to apply to the relief requested”;
22 and (2) if it did, the Court considers whether the Bankruptcy Court’s application of
23 the legal standard was illogical, implausible, or “without support in inferences that
24 may be drawn from the facts in the record.” United States v. Hinkson, 585 F.3d
25 1247, 1261-62 & n.21 (9th Cir. 2009) (en banc).
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“Application to have the estate reopened may be made by an ‘interested

27 party’ who would be benefitted by the reopening.” In re Welch, No. BK 11-1827728 LBR, 2015 WL 65307, at *4 (B.A.P. 9th Cir. Jan. 5, 2015) (citation omitted). The
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1 Bankruptcy Court’s decision to reopen or not is discretionary and governed by 11
2 U.S.C. § 350. Id. In exercising this discretion, the Bankruptcy Court may consider
3 numerous factors, including (1) the benefit to creditors, (2) the benefit to debtor,
4 (3) the prejudice to affected parties, (4) the availability of relief in other forums,
5 (5) whether the estate has been fully administered, (6) the length of time between
6 the closing of the case and the motion to reopen, and (7) good faith. See In re
7 Arana, 456 B.R. 161, 172-73 (Bankr. E.D.N.Y. 2011); accord In re Welch, 2015
8 WL 65307, at *4 (“[A] bankruptcy court may consider a number of nonexclusive
9 factors in determining whether to reopen, including (1) the length of time that the
10 case has been closed; whether the debtor would be entitled to relief if the case were
11 reopened; and (3) the availability of nonbankruptcy courts, such as state courts, to
12 entertain the claims. Bankruptcy Courts can also consider whether any parties
13 would be prejudiced were the case reopened or not.” (citations omitted)).
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Here, the Bankruptcy Court found that the first six factors weighed against

15 reopening the case and denied the Motion. (ER Ex. G at 401 (Docket No. 10-9)).
16 The Bankruptcy Court conveyed its uncertainty as to how to weigh the last factor
17 (good faith) under the circumstances. (Id. at 402 (“Element of good faith, I’m not
18 sure how to weigh that factor under these circumstances. [It has] been 14 years
19 since this passed.”)).
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Appellants contend that the Bankruptcy Court abused its discretion in

21 analyzing the third (prejudice to affected parties), fourth (availability of relief in
22 other forums), and sixth (length of time between the closing of the case and the
23 motion to reopen) factors. (Appellants’ Opening Brief at 3–4). Appellants do not
24 contest the Bankruptcy Court’s analysis regarding the other factors.
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A.

Third Factor: Prejudice to Affected Parties
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Prejudice to Appellants

The Bankruptcy Court did not err in concluding that Appellants had not

28 proven they would suffer any prejudice because (1) the Sale Order indicated that the
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1 purchase was covered by title insurance, and (2) an alternate remedy was available
2 in state court through a quiet title action. (ER Ex. G at 3-4).
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First, Appellants do not contest the Bankruptcy Court’s conclusion that

4 Appellants would be indemnified by the title insurance company referenced in the
5 purchase agreement. Therefore, even setting aside the availability of a quiet title
6 action, Appellants’ claims of “severe prejudice” are overstated.
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Second, as the Court discusses below, the Court agrees with the Bankruptcy

8 Court that an alternative remedy is available in Superior Court, and Appellants will
9 therefore not suffer any undue prejudice.
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Prejudice to Other Parties

Appellants contend that the Bankruptcy Court abused its discretion in finding

12 prejudice to other parties given the absence of any opposing parties to the Motion or
13 any affected parties aside from Appellants. (Opening Brief at 11).
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It is true that no parties opposed Appellant’s Motion in the underlying

15 bankruptcy proceeding. However, to the extent that Appellants fault the Bankruptcy
16 Court for considering prejudice to any “hypothetical” affected parties, this argument
17 is without merit. The Bankruptcy Court was free to “consider whether any parties
18 would be prejudiced were the case reopened or not.” In re Welch, 2015 WL 65307,
19 at *4 (emphasis added). Furthermore, the Bankruptcy Court’s concern with
20 prejudice to “other affected parties” is far from hypothetical. XPO’s recent
21 appearance and challenge to Appellants’ interest in the Hayward Property
22 demonstrate that the Bankruptcy Court’s concern was indeed well-founded.
23 Although counsel for Appellants argued at the hearing that XPO’s claim in the
24 Hayward Property is legally defective, these are arguments that are properly heard
25 before the Superior Court in a quiet title action.
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Therefore, applying the two-step test, the Court concludes that the

27 Bankruptcy Court applied the correct legal rule and did not abuse its discretion in
28 considering the prejudice to other affected parties. Furthermore, the multi-factor
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1 test required the Bankruptcy Court to balance all seven factors when deciding
2 whether to reopen the case. Even if the Court were to disregard the prejudice to
3 other affected parties, the Court would still affirm the Bankruptcy Court’s denial of
4 the Motion on the grounds that the availability of a remedy in an alternate forum
5 outweighs any prejudice to Appellants.
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B.

Fourth Factor: Availability of Relief in Other Forums

Appellants contend that the Bankruptcy Court abused its discretion in

8 concluding that alternative relief is available in Superior Court because (1) the
9 Bankruptcy Court’s decision in the Sale Order to retain jurisdiction denied any other
10 court concurrent jurisdiction; and (2) under governing California law, Appellants are
11 precluded, as a matter of law, from the relief sought. (Opening Brief at 13, 16–17).
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State Court Jurisdiction

Although it is true that state courts do not have jurisdiction to alter bankruptcy

14 court orders, see In re McGhan, 288 F.3d 1172, 1179 (9th Cir. 2002), the Court
15 disagrees with the premise of Appellants’ argument that a quiet title action in
16 Superior Court would require a modification of the Sale Order.
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As the Bankruptcy Court noted, the relief Appellants seek is a modification of

18 (1) the purchase agreement, which has no legal effect as an attachment to the Sale
19 Order; and (2) the recorded title. (ER Ex. G at 3). Even the case on which
20 Appellants rely explicitly held that state courts retain concurrent jurisdiction under
21 11 U.S.C. § 1334(b) to take any action other than modifying the Sale Order and to
22 take any action involving property after it is no longer property of the bankruptcy
23 estate. In re Skyline Woods Country Club, LLC, 431 B.R. 830, 835-36 (B.A.P. 8th
24 Cir. 2010).
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The Court therefore concludes that the Bankruptcy Court did not apply an

26 incorrect rule of law when determining that state courts had jurisdiction to hear a
27 quiet title action pertaining to property purchased at the bankruptcy sale.
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Other Obstacles

Appellants further argue that the Bankruptcy Court abused its discretion in

3 concluding that a quiet title action in Superior Court constituted an adequate
4 alternative to reopening the bankruptcy proceeding. (Opening Brief at 16–17).
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As a threshold matter, Appellants’ arguments regarding the adequacy of relief

6 through a quiet title action appear to be waived. These arguments were neither
7 raised in the Motion nor presented at the hearing. (See generally ER Exs. B, G).
8 Furthermore, the Court questions whether Appellants’ arguments regarding the
9 merits of the quiet title action are even proper for this Court or the Bankruptcy
10 Court to consider. In examining the availability of alternative relief, the Court
11 doubts that 11 U.S.C. § 350 would require the Bankruptcy Court to apply California
12 state law and consider Appellant’s likelihood of success on a potential quiet title
13 action. But even if the Court were to reach Appellants’ claims of other obstacles
14 standing in the way of relief through a quiet title action, Appellants’ arguments still
15 fail.
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Appellants first claim that because the Debtor and Trust no longer legally

17 exist, there is “no legal person on whom to serve the summons and complaint in a
18 quiet title action.” (Id. at 16). But even if the adverse parties are unknown or even
19 non-existent, Appellants could bring a quiet title action because California
20 procedural rules allow plaintiffs to plead against and serve by publication
21 pseudonymous adverse parties if the adverse parties are unknown. Cal Code Civ.
22 Proc. §§ 762.020, 763.010; see also S. Shore Land Co. v. Petersen, 226 Cal. App. 2d
23 725, 731, 38 Cal. Rptr. 392 (1964) (example of a plaintiff filing a complaint to quiet
24 title against “five doe defendants and [] all unknown claimants”). Furthermore, if
25 Appellants remain concerned about their ability to sufficiently plead a quiet title
26 action, XPO has felicitously come forward and supplied Appellants with an adverse
27 party to name in a quiet title action.
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Appellants also claim that California law precludes an equitable title holder

2 from maintaining a quiet title action against a legal title holder. (Opening Brief at
3 16–17). Under California law, however, only the legal title holder has standing to
4 assert this argument. Montgomery v. Nat’l City Mortg., No. C-12-1359 EMC, 2012
5 WL 1965601, at *12 (N.D. Cal. May 31, 2012) (holding that the loan servicer rather
6 than the owner of legal title does not have standing to assert this argument).
7 According to Appellants, only dissolved entities hold legal title; therefore, in effect,
8 no entity would be able to assert this argument against Appellants.
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To the extent that Appellants argue that Superior Court would be a less

10 convenient forum to pursue a remedy, a “perceived convenience” of reopening the
11 case as compared to an alternative remedy is not a sufficient reason to reopen this
12 case. In re OORC Leasing, LLC, 359 B.R. 227, 233 (N.D. Ind. 2007) (denying
13 creditor’s request to reopen the bankruptcy case when other non-bankruptcy courts
14 of appropriate jurisdiction are available even if “the bankruptcy court would be a
15 more convenient forum”).
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Therefore, applying the two-step test, the Court concludes that the

17 Bankruptcy Court did not abuse its discretion. The Bankruptcy Court correctly
18 applied the law when holding that a quiet title action in Superior Court was available
19 to Appellants. Furthermore, the Bankruptcy Court drew logical inferences from the
20 facts in the record when holding that a quiet title action was available to Appellants.
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Sixth Factor: Intervening Lapse of Time

Appellants’ final contention is that the Bankruptcy Court abused its discretion

23 in finding that the passage of 14 years weighed against reopening the case.
24 Appellants contend that the passage of time can only weigh against reopening a case
25 insomuch as it causes prejudice.
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First, this argument does not address the fact that the Bankruptcy Court did

27 consider and find that reopening would be prejudicial to other affected parties who
28 may have an interest adverse to Appellants in the Hayward Property. (ER Ex. E at 5
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1 (“[T]he affected parties are entitled to the procedural protections that come from a
2 quiet title action.”).
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Second, this area of law is not as conclusively settled as Appellants suggest.

4 Appellants cite to Second Circuit case law for support, but other Circuits have held
5 that the mere passage of time does weigh against reopening and requires a greater
6 showing of cause to support reopening. See, e.g., Redmond v. Fifth Third Bank, 624
7 F.3d 793, 799 (7th Cir. 2010) (“The passage of time weighs heavily against
8 reopening. The longer a party waits to file a motion to reopen a closed bankruptcy
9 case, the more compelling the reason to reopen must be.”); In re Case, 937 F.2d
10 1014, 1018 (8th Cir. 2005) (“The longer the time between the closing of the estate
11 and the motion to reopen, however, the more compelling the reason for reopening
12 the estate should be.”); Reid v. Richardson, 304 F.2d 351, 355 (4th Cir. 1962) (“Re13 opening removes the element of certainty from the adjudication and settlement of
14 the estates. It is as essential to the creditors as it is desirable to the bankrupt that this
15 element of certainty be destroyed only for the most compelling cause. Accordingly
16 as the time between closing of the estate and its re-opening increases, so must also
17 the cause for re-opening increase in weight.”). Therefore, even if the Bankruptcy
18 Court did not consider prejudice to other affected parties, the Court would not be
19 able to conclude that the Bankruptcy Court applied the incorrect legal rule in the
20 absence of governing Ninth Circuit case law.
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Balancing the Equities

On balance, especially in view of the alternative remedy available in Superior

23 Court, the equities weigh against Appellants’ request to reopen the bankruptcy
24 proceeding. Cf. In re Fuller, 146 B.R. 633, 639 (Bankr. S.D.N.Y. 1992) (“It is
25 questionable whether a desire to clear title is a sufficient ground to reopen a
26 bankruptcy case” when “an alternative remedy in the state” is available . . . .
27 “[T]here appears to be little justification for invoking this court’s jurisdiction to
28 resolve [a] clouded title problem.”).
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The Court’s conclusion is further reinforced by the Ninth Circuit’s decision in

2 Hull v. Powell, 309 F.2d 3, 4 (9th Cir. 1962), which also arose from a petition to
3 reopen a bankruptcy case to clear title. In Hull, a bankruptcy estate was closed
4 without administration in 1935. Id. The estate was reopened in 1958 for the
5 purpose of clearing title in real property the petitioner had purchased when the State
6 of California sold some of the debtor’s property for nonpayment of taxes. Id. The
7 petitioner argued that the closing of the estate without administration left a cloud on
8 his title. Id.
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On appeal, the Ninth Circuit observed that, in other circuits, “[i]t has been

10 held improper to reopen an estate for the purpose of clarifying the title of the
11 bankrupt or his vendee, or even the title of a vendee of the trustee.” Id. (citing Saper
12 v. Viviani, 226 F.2d 608 (2d Cir. 1955); In re Ostermayer, 74 F.Supp. 803 (D.N.J.
13 1947)). Furthermore, the Ninth Circuit found that “[t]he petitioner’s delay in
14 seeking relief was inordinate.” Id. at 6. For 23 years, petitioner and his
15 predecessors in title had “record notice of the existence of the problem [that] is now
16 advanced as cause for reopening but took no action.” Id. (emphasis added).
17 “Moreover, it appears that petitioner and his predecessors in title may have had an
18 alternative remedy in the courts of the State [that] they made no effort to pursue.”
19 Id. After considering other factors, including opposition to further administration
20 from a person who claimed intervening rights in the property, the Ninth Circuit held
21 that the petitioner’s request “that the estate be reopened ‘for the purpose of clearing
22 the title’” should have been denied. Id. at 6–7.
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Many analogies can be drawn between Hull and the facts here. The most

24 salient similarities include (1) the availability of alternative relief in Superior Court
25 to quiet title; (2) the lengthy delay between seeking reopening and the time that the
26 moving party had record notice of its clouded title; and (3) the prejudice to other
27 parties who have now claimed an adverse interest in the property at issue.
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At the hearing, counsel for Appellants emphasized that Appellants were bona

2 fide purchasers who paid the purchase price and have continued to pay property
3 taxes for the Hayward Property. Although the Court is sympathetic to the position
4 in which Appellants find themselves, assuming all their allegations are true, whether
5 the party seeking reopening was a bona fide purchaser did not seem to sway the
6 Ninth Circuit’s holding in Hull that the petitioner’s request was inappropriate in
7 light of the relevant factors. For these reasons, the Hull decision provides further
8 support for this Court’s decision to affirm.
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CONCLUSION

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Accordingly, the Court AFFIRMS the decision of the Bankruptcy Court.

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IT IS SO ORDERED.

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14 DATED: June 28, 2016
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MICHAEL W. FITZGERALD
United States District Judge

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