In Re SK Foods, LP

Filing 21

ORDER signed by Senior Judge Lawrence K. Karlton on 7/8/11 REMANDING CASE to the Bankruptcy Court. Copy of remand order sent to other court. CASE CLOSED. (cc Judge Bardwil and Bankruptcy Clerk) (Matson, R)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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IN RE:
SK FOODS, L.P.,
Debtor.

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/

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SCOTT SALYER,
Plaintiff,

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v.

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CIV. S-10-3467 LKK

SK FOODS, L.P.,

O R D E R

Defendants.

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/
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Before the court are the appeals of two Bankruptcy Court

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orders issued in connection with the Trustee’s motion to approve

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a compromise with a creditor, the Bank of Montreal (“BMO”):1

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(i) the December 7, 2010 order granting BMO’s in limine motion to

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exclude the declaration of John P. Brincko; and (ii) the

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BMO is also the agent for other banks who loaned money to the
debtors prior to the bankruptcy. BMO and the other banks are
referred to, collectively, as “BMO” or the “Secured Lenders.”

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December 13, 2010 order granting the Trustee’s motion to approve

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the compromise.
For the reasons described below, the exclusion motion is

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reversed, and the order approving the compromise is vacated.
I.

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BACKGROUND

A. The Bankruptcy

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This is a return visit of the Chapter 11 consolidated

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bankruptcy case of SK Foods, L.P. and RHM Industrial/Specialty

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Foods, Inc.2

BMO is a principal creditor of the bankruptcy

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estate,3 having loaned the Debtor $193 million about seven

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months before the bankruptcy petitions were filed.

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1.

BMO’s $200 Million Claim

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To secure the $193 million loan, BMO obtained a security

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interest in “substantially all of the Debtors’ assets” (the

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“Pre-petition Collateral”).4

Excerpts of Record (“ER”):24-25;

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This court substantially affirmed the Bankruptcy Court’s
preliminary injunction relating to the disposition of certain
non-debtor assets, Sharp v. Salyer (In re SK Foods, L.P.), 2010
WL 5136187, 2010 U.S. Dist. LEXIS 136178 (E.D. Cal. December 10,
2010); and ordered a stay of all bankruptcy court proceedings
where there was a credible showing that “discovery from or
testimony of Scott Salyer or his criminal counsel is relevant to
the proceedings” Sharp v. SSC Farms 1 (In re SK Foods, L.P.),
2010 WL 5136189, 2010 U.S. Dist. LEXIS 136188 (E.D. Cal.
December 10, 2010), modified on rehearing, 2011 WL 1442332, 2011
U.S. Dist. LEXIS 42766 (April 14, 2011).
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An “estate” is created when a bankruptcy petition is filed.
11 U.S.C. § 541(a). The estate consists of all the property
belonging to the debtor, unless exempt. 11 U.S.C. § 541(a)(1).
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A “security interest” is a “lien” created by an agreement.
11 U.S.C. § 101(51). A “lien” is an interest in property to
secure payment of a debt or performance of an obligation. Id.,
§ 101(37).
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Trustee’s Brief on Appeal at 8.

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all the “proceeds and products” of the Debtor’s assets.

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Bankr. Dkt. No. 193, p.3

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In addition, BMO asserted that all the Debtor’s cash, and all

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the cash proceeds of the secured collateral, were its “Cash

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Collateral” pursuant to 11 U.S.C. § 363(a).5

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The security interest included
See

¶ D (Bankr. Ct. Order, June 22, 2009).

Id.

Based upon this security interest, BMO asserts a claim in

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excess of $200 million against the estate, pursuant to 11 U.S.C.

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§ 506(a) (“Determination of secured status”).

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2.

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BMO’s $26.77 Million “Super-Priority” Claim

In May and June 2009, the Bankruptcy Court issued orders

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providing “adequate protection” to the secured creditors,

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including BMO, pursuant to 11 U.S.C. § 361.

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(“Interim Order”), 30 (“Interim Order”) & 193 (“Final Order”).

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“Adequate protection” is intended to protect a creditor’s

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interest from diminution in the value of its collateral when the

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Trustee uses or sells the creditor’s collateral.

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§ 363(b)(1); see In re Hawaiian Telcom Communications, Inc.,

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430 B.R. 564, 604 (Bkrtcy. D. Hawai‘i 2009) (“An undersecured

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creditor is entitled to adequate protection payments to the

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extent that its collateral suffers from diminution in value”).

Bankr. Dkt. Nos. 20

See 11 U.S.C.

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“Cash collateral” is the cash (and equivalents), “in which the
estate and an entity other than the estate have an interest.”
11 U.S.C. § 363(a). If the pre-petition security interest
includes proceeds of the collateral, then the post-petition
proceeds of the collateral are also subject to the security
interest. 11 U.S.C. § 552(b)(1). The Bankruptcy Court may
authorize the Trustee to use the Cash Collateral for the benefit
of the estate. 11 U.S.C. § 363(c)(1) & (2).
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As adequate protection, the Bankruptcy Court granted BMO

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“valid and perfected, replacement security interests in and

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liens (the ‘Replacement Liens’) on all prepetition and

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postpetition assets and properties ... of the Debtors of any

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kind or nature ....”6

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Bankr. Dkt. No. 193, p.5-6, ¶ 4(a).

On June 17, 2009, the Bankruptcy Court granted the

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Trustee’s motion to approve the “Going Concern Sale of

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Substantially All Operating Assets” of the estate, pursuant to

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11 U.S.C. § 363.7

Bankr. Dkt. No. 325.

BMO asserts that

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pursuant to that authorization, $102 million worth (or as much

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as $129 million) of its secured collateral was sold. ER:12-13

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¶ 16 (Bankr. Ct. Decl. of Stan Speer).

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that the sale realized only $67 million in proceeds.

However, BMO asserts
Id.

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The difference between the value of the collateral and what

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was realized in the sale (less the $3 million to $13 million BMO

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anticipates receiving from the compromise under appeal here), is

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a “diminution in value” in BMO’s collateral, of $22 million to

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$59 million, according to BMO.

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it is entitled to a “super-priority claim”

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diminution in value.8

Id.

BMO therefore asserts that
to the extent of the

After negotiations, BMO and the Trustee

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“Adequate protection” may take the form of replacement liens,
cash payment(s) to the creditor, or other relief. 11 U.S.C.
§ 361.
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The Trustee, Bradley B. Sharp, was appointed on May 18, 2009.
Bankr. Dkt. No. 127.

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If the “adequate protection” proves inadequate to protect the
creditor’s interest, the creditor may assert a “super-priority
claim” in the amount that his interest is left unprotected.
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agreed on a BMO “super-priority claim” of $27.66 million.

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¶ 21.
3.

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ER:16

The Unsecured Claim

BMO’s third claim is an unsecured claim for whatever of the

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Credit Agreement amount is still due after BMO collects on the

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secured claim and the super-priority claim.

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C. The Motion To Approve the Compromise.

ER:3.

On September 29, 2010, the Trustee filed a motion, pursuant

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to Fed. R. Bankr. P. 9019, before the Bankruptcy Court, to

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approve a compromise (the Settlement Agreement) between the

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Trustee and BMO.9

The Bankruptcy Court heard the motion on

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11 U.S.C. § 507(b).

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The Fifth Circuit put it this way:

adequate protection of a secured creditor's collateral and
its fallback administrative priority claim are tradeoffs
for the automatic stay that prevents foreclosure on
debtors' assets: the debtor receives “breathing room” to
reorganize, while the present value of a creditor's
interests is protected throughout the reorganization. ...
A secured creditor whose collateral is subject to the
automatic stay may first seek adequate protection for
diminution of the value of the property, 11 U.S.C. §§
362(d)(1), 363(e), 364(d), and then, if the protection
ultimately proves inadequate, a priority administrative
claim under § 507(b). Section 507(b) of the Bankruptcy Code
allows an administrative expense claim under § 503(b) where
adequate protection payments prove insufficient to
compensate a secured creditor for the diminution in the
value of its collateral. “It is an attempt to codify a
statutory fail-safe system in recognition of the ultimate
reality that protection previously determined the
‘indubitable equivalent’ ... may later prove inadequate.”

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In re Scopac, 624 F.3d 274, 282 (5th Cir. 2010).

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“On motion by the trustee and after notice and a hearing, the
court may approve a compromise or settlement.” Fed. R. Bankr.
P. 9019(a).
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October 27, 2010, whereupon it requested further briefing and

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the submission of “additional evidence.”

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1.

ER:270.

The Revised Settlement Agreement and the Trustee’s
Declaration in Support of the Compromise.

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On November 3, 2010, the Trustee filed his Second

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Supplemental Declaration in support of the motion to approve the

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compromise.

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Settlement Agreement, ER:276, which is the subject of this

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appeal.

ER:271.

The Declaration attached the Revised

Pursuant to the Revised Settlement Agreement, which was

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contingent upon the approval of the Bankruptcy Court, the

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Trustee will “abandon, transfer and convey” to BMO: certain

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accounts receivables, trade receivables and related litigation;

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proceeds from the sale of certain property; the Trustee’s right

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to recover from certain litigation; tax refunds; the Trustee’s

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right to collect pursuant to the Credit Agreement; refunds;

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certain “reserves;” certain reimbursements; and certain

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“Assigned Rights.”

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million payment from sales and proceeds of Estate Assets, plus

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80% of all such proceeds until its super-priority claim is paid

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in full.

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unsecured, non-priority creditors to receive the remainder of

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the money owed to it on the Credit Agreement, out of whatever is

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left of the Estate.

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Declaration, Exh. A).

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///

In addition, BMO will receive a $2.3939

Finally, BMO will get in line with all other

ER:276-82 (Trustee’s Second Supplemental

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2. The Brincko Declaration

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On November 17, 2010, the Objecting Parties filed the

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Declaration of John P. Brincko in support of their Supplemental

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Objection to approving the compromise.10

ER:293, 321.

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3. The Trustee’s Reply

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On November 24, 2010, the Trustee filed his Reply, noting

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that it did “not object” to the bankruptcy court’s considering

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the Brincko Declaration “for the purpose of showing that there

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is a factual dispute over the value of BMO’s collateral as of

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the date of the motion.”

ER:626.

However, the Trustee did “not

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concede that Mr. Brincko is qualified to provide expert

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testimony or that his conclusions and methodology are correct.”

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Id.

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4. The Motion To Exclude the Brincko Declaration.

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On November 24, 2010, The Bank of Montreal filed a motion

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in limine to exclude the Brincko Declaration, arguing that

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(i) his declaration was not properly and timely noticed and

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disclosed under Fed. R. Civ. P 26; and (ii) even if Rule 26

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doesn’t apply,11 Brincko’s opinion is neither reliable nor

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relevant, and thus fails the test of Daubert v. Merrell Dow

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Pharmaceuticals, Inc., 509 U.S. 579 (1993).

ER:630.

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The scope of the Brincko declaration was limited to
establishing “the amount of any super priority claim of the
Lenders pursuant to Section 507(b) of the Bankruptcy Code due to
the diminution in value of the Lenders’ Prepetition Collateral.”
ER:324.

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See Bankr. E.D. Cal. R. 7026-1(b).
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D. The Bankruptcy Court Rulings
On December 6, 2010, the Bankruptcy Court held its second

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hearing on the motion to approve the compromise.

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December 7, 2010, the Bankruptcy Court issued its order granting

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BMO’s in limine motion to exclude the Brincko Declaration.

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December 13, 2010, the Bankruptcy Court issued its order

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granting the Trustee’s Rule 9019 motion to approve the

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compromise, on the grounds that it was “fair and equitable.”

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December 27, 2010, the Objecting Parties timely filed their

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On

On

On

Notice of Appeal.12
II. ANALYSIS

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ER:655.

Mootness13

A.

The Trustee argues that the appeal is moot because the

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Revised Settlement Agreement “has been fully implemented (i.e.

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cash and litigation claims have been transferred to BMO, and

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releases of claims which would now be time-barred have now been

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granted).”

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See Fed. R. Bankr. P. 8002(a).

The Trustee raises mootness in his brief opposing the appeal.
This order will address the mootness issue first because
equitable mootness is considered to be jurisdictional in the
Ninth Circuit. See Sherman v. SEC (In re Sherman), 491 F.3d
948, 965 n.20 (9th Cir. 2007). Section 363(m) mootness presents
similar issues.
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1. Equitable Mootness
a.

The Standard for Equitable Mootness in the
bankruptcy context.

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Bankruptcy appeals may become equitably moot when events

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occur “that make it impossible for the appellate court to

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fashion effective relief.”

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Focus Media, Inc.), 378 F.3d 916, 922 (9th Cir. 2004).

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includes cases where the settlement transaction is too “complex

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or difficult to unwind.”

Focus Media, Inc. V. NBC Inc. (In re
This

See Lowenschuss v. Selnick (In re

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Lowenschuss), 170 F.3d 923, 933 (9th Cir. 1999).

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appellants did not diligently pursue a stay of the objected-to

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order in the bankruptcy court, thus permitting “a comprehensive

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change of circumstances to occur,” it may be “inequitable” to

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consider the appeal.

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“heavy” burden of establishing mootness is on the party

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advocating its application.

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b.

In re Focus Media, 378 F.3d at 923.

The

Id.

The mootness standard is not met here
i.

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Moreover, if

The Trustee has not shown that the Revised
Settlement Agreement has been “fully
implemented”

The Trustee argues that the settlement under appeal has

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been “fully implemented.”

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states that “cash and litigation claims have been transferred to

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BMO, and releases of claims which would now be time-barred have

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now been granted.”

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impossible for a court to restore the status quo that existed

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prior to the entry into and approval of the settlement.”

Id.

Trustee’s Brief on Appeal at 1.

He

Accordingly, he argues, “it would be

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Id.

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In support of these assertions, the Trustee cites his

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Request for Judicial Notice, asserting that documents submitted

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there establish that BMO has been substituted for the Trustee in

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four adversary proceedings within Case No. 09-29162-D-11 (In re

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SK Foods).14

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the rest of the Revised Settlement Agreement, that is, all the

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other Revised Settlement Agreement Items that are not covered by

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the Request for Judicial Notice, namely claims:

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2(A) (unspecified accounts receivable, trade receivables and

However, the Trustee does not address the fate of

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“the related Accounts Receivable litigation”); 2(C) & (I)

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(proceeds of sales); 2(D) (equipment related to the Drum Line

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Litigation);15 2(E) (tax refunds other than those from IRS and

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State tax avoidance actions); 2(F) (BMO’s Cash Collateral

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claims); 2(G) (refunds from “Split Dollar Life Receipts”);

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See Request for Judicial Notice, Tabs 1-4: (i) Sharp v. CSS,
LP, Adv. Proc. No. 09-02543, the “Drum Line Litigation,” which
appears to correspond to Item 2(D) of the Revised Settlement
Agreement; (ii) Sharp v. Salyer, Adv. Proc. No. 10-02015, a
“Breach of Fiduciary Duty Action” which appears to correspond to
an entry in Item 3 of the Revised Settlement Agreement (“Salyer
Breach of Fiduciary Duty Litigation”); (iii) Sharp v. IRS, Adv.
Proc. No. 10-02117, an action to recover $5.1 million in
fraudulent conveyances, which appears to correspond to part of
an entry in Item 3 of the Revised Settlement Agreement (“IRS and
State Tax Avoidance Actions”); and (iv) SK Foods, L.P. ex rel.
Sharp v. Lidestri Foods, Adv. Proc. No. 10-02163, the “Frito Lay
Action,” which appears to correspond to Item 2(B) of the Revised
Settlement Agreement. These judicial documents are "verifiable
with certainty" and Appellant does not challenge them;
accordingly, the court takes judicial notice of them. See U.S.
v. Camp, 723 F.2d 741, 744 (9th Cir. 1984).

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The Tab 1 Adversary Proceeding appears to cover the proceeds,
recovery and right to recovery from the litigation, but it makes
no mention of this equipment.
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2(H) (“Westland Insurance Claims”); 2(J) & (K) (reserves); 2(L)

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(the “BMO Distribution”); 3 (claims against accountants and the

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“New Zealand Claims”).

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Accordingly, the Trustee has simply asserted, but not

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provided any supporting documentation or other evidence, that

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the Revised Settlement Agreement has been “fully implemented.”

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ii.

The Trustee has not shown that the Revised
Settlement Agreement cannot be undone.

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Under the Revised Settlement Agreement, the Trustee

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transferred several assets to BMO, some of which are causes of

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action.

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has already been substituted in as plaintiff in the place of the

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Trustee.

The Trustee asserts that in those causes of action, BMO

But the Trustee does not argue with any specificity that

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any specific aspect of the Revised Settlement Agreement cannot

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be undone.

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Proceedings before the Bankruptcy Court.

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explain why this court is incapable of issuing an order vacating

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the Bankruptcy Court order substituting parties.

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appears that this court has the authority to do so.

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Bankr. P. 8013 (district court may “affirm, modify, or reverse”

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or remand the bankruptcy court order).

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has not identified “specific events or developments in the

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proceedings that preclude relief.”

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378 F.3d at 923-924.

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These substitutions occurred in Adversary

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The Trustee does not

Indeed, it
See Fed. R.

Accordingly, the Trustee

See In re Focus Media,

The Trustee does assert that one of the Adversary

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Proceedings is nearing settlement.

But he does not explain why

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the Trustee cannot be substituted back in as plaintiff prior to

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the settlement.

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re-substitute the Trustee back in, the Bankruptcy Court (under

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direction from this court), could not simply order BMO to pay

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the settlement proceeds over to the Trustee.

Nor does he explain why, if it is too late to

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As for the asserted transfer of items other than causes of

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action, the Trustee similarly does not show why these transfers

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could not be reversed.

There is no explanation, for example, of

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why the Drum Line equipment cannot simply be returned under

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order of the bankruptcy court.

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accounts receivable, trade receivables, reserves, reimbursements

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and causes of action cannot be transferred back, nor why refunds

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and sale proceeds cannot be re-paid.16

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has not shown that any portion of the settlement, even if it has

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been executed, is too “complex or difficult to unwind.”

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re Lowenschuss, 170 F.3d at 933.17

Nor does the Trustee show why

Accordingly, the Trustee

See In

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There may very well be good reasons why these transactions, if
they have already occurred, cannot be undone, but the Trustee
has not met his burden to demonstrate it.

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It is true that the Objecting Parties have not sought a stay
pending appeal, for reasons that are unexplained here. This is
a key factor in considering equitable mootness. See Suter v.
Goedert, 504 F.3d 982, 990 (9th Cir. 2007) (“the cases dealing
with mootness under the bankruptcy code recite the general rule
that an appeal is moot if the appellant fails to obtain a stay
of the order permitting sale of an asset”). However, this
factor only arises if failure to obtain a stay has led to “such
a comprehensive change of circumstances” that considering the
appeal is inequitable. In re Focus Media, 378 F.3d at 923. The
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2. Section 363(m) Mootness.

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The Trustee argues that the appeal is also moot pursuant to

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11 U.S.C. § 363(m).

That bankruptcy provision provides:

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The reversal or modification on appeal of an authorization

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under subsection (b) or (c) of this section of a sale or

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lease of property does not affect [its] validity ... to an

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entity that purchased or leased such property in good

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faith, ... unless such authorization and such sale or lease

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were stayed pending appeal.

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11 U.S.C. § 363(m).

By its terms, the provision applies “when

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an appellant has failed to obtain a stay from an order that

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permits a sale of a debtor's assets.”

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Estate of Richards (In re Onouli-Kona Land Co.), 846 F.2d 1170,

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1171 (9th Cir. 1988) (emphasis added).

Onouli-Kona Land Co. v.

The order appealed from, however, grants a Rule 9019 motion

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to approve a settlement.

Section 363(m) mootness does not, by

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its terms, apply to orders approving compromises, it applies to

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orders granting Section 363(b) or (c) motions to sell assets.

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See 11 U.S.C. § 363(m) (applying stay rule to “authorization

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under subsection (b) or (c) of this section of a sale or lease

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of property”).

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Trustee has not established the predicate “comprehensive change”
in this case. Of course, this ruling is based upon the state of
affairs as they are presented to this court when the appeal was
filed and oral argument was presented. It is not intended to
preclude the same argument on any subsequent appeal, should
Objecting Parties persist in not seeking a stay.
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The Trustee nevertheless argues that “it is well

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recognized” that orders approving compromises under Rule 9019

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are actually orders authorizing asset sales, pursuant to

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Section 363.

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Trustee’s motion to approve this compromise, the motion was not

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identified as a Section 363 asset sale, it was not briefed as

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such a sale, and the Bankruptcy Court did not indicate that it

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was deciding the issue under Section 363.18

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will not hold Objecting Parties to its standards.

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However, it is clear from the record that in the

This court therefore

B. Exclusion of the Brincko Declaration

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1.

Standard of Review

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The bankruptcy court's evidentiary rulings are reviewed for

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abuse of discretion.

California State Board of Equalization v.

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Renovisor’s, Inc. (In re Renovizor's, Inc.), 282 F.3d 1233, 1237

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n.1 (9th Cir. 2002).

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evidentiary ruling was erroneous, the court must conclude not

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only that the bankruptcy court abused its discretion, but also

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that the error was prejudicial.

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Corp., 328 F.3d 1028, 1032 (9th Cir. 2003).

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To reverse on the basis that an

See McEuin v. Crown Equip.

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Clearly, the Trustee knew how to present such a motion. The
Bankruptcy Court record shows that on several occasions, the
Trustee filed applications to conduct a Section 363 sale. They
were clearly identified as such; they were not identified as
Rule 9019 motions. See, e.g., Bankr. Dkt. No. 118
(“Motion/Application for Order Approving Going Concern Sale of
Substantially All Operating Assets Pursuant to 11 U.S.C. Section
363").
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2.

The Brincko Declaration Was Offered In Accordance with
the Scheduling Order

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The Bankruptcy Court excluded the Brincko Declaration on

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the grounds that it was offered after the evidentiary record had

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closed.

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court’s exclusion of the Brincko Declaration was erroneous

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because the evidentiary record had not closed before the

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declaration was offered.

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The Objecting Parties persuasively argue that the

On October 27, 2010, the Bankruptcy Court held a hearing on

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the Trustee’s motion to approve the compromise.

The court

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opened with its views of some of the “fatal” and other flaws in

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the compromise, and ways those flaws could be cured.

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ER:235-37.

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did not believe an evidentiary hearing was called for, it later

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did call for more evidence to be developed.

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clear that the Objecting Parties had a right to take depositions

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of the Trustee and the declarants who gave evidence in support

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of the compromise.

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that the Trustee would submit a revised settlement agreement and

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that other declarations would be filed in advance of the next

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hearing.

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Bankruptcy Court issued a Scheduling Order giving the Trustee

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until November 3, 2010 “to submit supplemental briefs and/or

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declarations and other evidence in support of the Motion.”

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ER:270 (emphasis added).

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Parties until November 17, 2010 to file “supplemental

See

Although the Bankruptcy Court then stated that it

See ER:237-40.

See ER:264.

The court made

The court clearly expected

After the October 27, 2010 hearing, the

The same order gave the Objecting

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objections” to the motion.

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the Trustee could file additional “declarations” and “additional

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evidence” in support of the motion, but that the Objecting

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Parties were precluded from filing declarations or other

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evidence in opposition to the motion.

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Nothing in the order indicated that

The Trustee cites the local bankruptcy rules to argue that

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the evidentiary record closed when he filed his Reply on

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October 20, 2010.

That rule provides:

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Unless the Court determines that an evidentiary hearing is

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necessary, the evidentiary record closes upon expiration of

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the time for the filing of the reply.

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Bankr. E.D. Local R. 9014-1(f)(iii).

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Bankruptcy Court specifically requested the submission of

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“additional evidence.”

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2010 to submit it, and the Brincko Declaration was submitted

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within that time.

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In this case, however, the

It gave the parties until November 17,

The Trustee argues that the supplemental declarations and

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“additional evidence” the Bankruptcy Court was referring to was

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intended to refer solely to the Objecting Parties’ right to

20

depose the Trustee’s declarants, and that the Brincko

21

Declaration was beyond the “limited scope” of the upcoming

22

hearing.

23

order itself or the transcript of the hearing.

24

But this argument does not accord with either the

During the hearing, the Bankruptcy Judge made clear that

25

the Trustee would have to submit a revised agreement and

26

declarations in order to fix the “fatal” and other flaws he saw
16

1

in it.

2

the Trustee filed a new declaration; he did not simply make

3

himself and his other declarants available to be deposed.

4

the Bankruptcy Court must have considered that new evidence from

5

the Trustee, because it is the only place in the record where

6

the Revised Settlement Agreement – the subject of the Bankruptcy

7

Court’s order – appears.

8

Brincko Declaration was submitted to rebut the new declaration

9

submitted by the Trustee, and to rebut the super-priority claim

10

See ER:235-37.

In accordance with those instructions,

And,

Objecting Parties assert that the

contained in the Revised Settlement Agreement.

11

In short, the Bankruptcy Court requested “additional

12

evidence,” and that is what the Objecting Parties submitted.

13

The court cannot schedule the submission of additional evidence,

14

accept evidence submitted by one side, and then simply reject as

15

untimely the timely-filed evidence submitted by the other side

16

in rebuttal.19

17

Court’s discretion to exclude the Brincko Declaration as

18

untimely, when in fact it was timely submitted in accordance

19

with the court’s instructions.20

Accordingly, it was an abuse of the Bankruptcy

20
19

21
22
23
24

The Trustee relies upon Reed v. Anderson (In re Reed),
422 B.R. 214 (C.D. Cal. 2009). In that case, the Bankruptcy
Court excluded evidence because “‘it was not submitted pursuant
to the specified procedure.’” Id. In this case, the Objecting
Parties proffered the Brincko Declaration pursuant to the
procedure specified by the Bankruptcy Court, both at the hearing
and in its subsequent order.
20

25
26

This court takes no position on whether it might be proper for
the Bankruptcy Court to reject the proffered declaration on
other grounds. For example, BMO argued in the Bankruptcy Court
that the Brincko Declaration should be excluded for failure to
17

1

3.

Exclusion of the Brincko Declaration Was Not Harmless.

2

The Trustee argues that the exclusion of the Brincko

3

Declaration was at worst, harmless error, because the only thing

4

the Declaration revealed was that litigation over the super-

5

priority claim would be long, complex and costly.

6

determine whether the exclusion was harmless error, it is

7

necessary to examine the Bankruptcy Court’s decision to approve

8

the compromise, and whether the proffered declaration could

9

reasonably be excluded from that process, given this court’s

10

In order to

ruling, supra, that the declaration was properly offered.
In deciding on the motion to approve the BMO compromise,

11
12

the Bankruptcy Court has “great latitude.”

Woodson v. Fireman’s

13

Fund Ins. Co. (In re Woodson), 839 F.2d 610, 620 (9th

14

Cir. 1988).

15

if it is ‘fair and equitable.’” Id.

16

this determination by considering the following:

Nevertheless, it can approve the compromise “only
The Bankruptcy Court makes

17

“(a) The probability of success in the litigation;

18

(b) the difficulties, if any, to be encountered in the

19

matter of collection; (c) the complexity of the

20

litigation involved, and the expense, inconvenience

21

and delay necessarily attending it; [and] (d) the

22

///

23
24
25
26

meet the requirements of Daubert v. Merrell Dow Pharmaceuticals,
Inc., 509 U.S. 579(1993). However, the Bankruptcy Court did not
make a determination under Daubert, and there has been no
briefing or oral argument regarding the issue on this appeal.
It is for the Bankruptcy Court to make this determination in the
first instance.
18

1

paramount interest of the creditors and a proper

2

deference to their reasonable views in the premises.”

3

Id., quoting Martin v. Kane (In re A & C Properties), 784 F.2d

4

1377, 1380-81 (9th Cir.), cert. denied sub nom. Martin v.

5

Robinson, 479 U.S. 854 (1986).

6

The very first consideration, then, is the probability of

7

success in the litigation.

In the context of the compromise on

8

appeal here, the Bankruptcy Court was required to consider the

9

probability that BMO would be able to establish that its super-

10

priority claim was worth $22 to $59 million, if it had to

11

litigate the issue.

12

1382 (the Bankruptcy Court must apprise itself “‘of all facts

13

necessary for an intelligent and objective opinion of the

14

probabilities of ultimate success should the claim be

15

litigated’”).

16

See In re A & C Properties, 784 F.2d at

The Bankruptcy Court determined that this factor weighed

17

“in favor of the compromise.”

18

conclusion, the Bankruptcy Court considered BMO and the

19

Trustee’s valuation of the claim, noting that “BMO contends the

20

SPC is somewhere between $22 million and $59 million,” and that

21

“the compromise reflects a highly beneficial outcome for the

22

estate.”

23

that BMO was likely to prevail in litigation on the claim, at

24

least at the low end of its estimate.

25

conclusion, the Bankruptcy Court did not consider the Objecting

26

Parties’ position.

ER:734.

ER:733.

In reaching this

Implicitly then, the Bankruptcy Court found

But in reaching this

While noting that the Objecting Parties had
19

1

a different valuation,21 the Bankruptcy Court simply “decline[d]

2

the Salyer entities’ invitation to resolve these disputes.”

3

ER:752.

4

This misconceives the Bankruptcy Court role in ruling on a

5

Rule 9019 motion.

Under the proper standard, the Bankruptcy

6

Court was not called upon to resolve the dispute about the

7

proper valuation of the claim, but it was required to consider

8

the likelihood that BMO would succeed in litigation over it.22

9

It could not give the issue proper considering by relying only

10

on the evidence presented by one side of the litigation.

To

11

illustrate, the Bankruptcy Court considered whether a settlement

12

was fair and equitable if the range of super-priority claim

13

possibilities was from $22 million on the low end, and

14

$59 million on the high end.

Given this range, it determined

15
16

21

18

The Bankruptcy Court did acknowledge Objecting Parties’
position that BMO suffered “no significant loss” on its
collateral, and that they asserted that liquidation value, not
“going concern” value was the appropriate measure of such a
loss.

19

22

17

20
21
22
23
24
25
26

At oral argument, the Trustee relied on In re A & C Properties
and Port O’Call Investment Co. V. Blair (In re Blair), 538 F.2d
849 (9th Cir. 1976) for the proposition that the Bankruptcy
Court was not required to conduct a “mini-trial” on the superpriority claim. It is true that the Bankruptcy Court did not
have to conduct a mini-trial, but it did have to consider what
was the likelihood of success of any litigation over the superpriority claim. This consideration turns on the legal
uncertainty pointed out by counsel at oral argument, the
uncertainty in the valuation of the claim, and possibly other
factors. Since there does not appear to be controlling Ninth
Circuit authority on the issue, it is not simply a legal issue
which this court could resolve here and now. Rather, it is a
factor in the “likelihood of success” consideration, which is
best determined in the first instance by the Bankruptcy Court.
20

1

that it was reasonable to accept BMO’s generous offer to value

2

its own claim at the “lowest end of its own range of values,

3

such that the compromise reflects a highly beneficial outcome

4

for the estate.”

5

whether a settlement is fair and equitable by looking only at

6

the range of outcomes asserted by one side of that litigation.23

7

The only evidence of the other side’s range of outcomes,

8

however, is contained in the Brincko Declaration, which was

9

erroneously excluded from consideration.

10

ER:734-35.

But it cannot be determined

As noted, the Bankruptcy Court did acknowledge that the

11

Objecting Parties asserted a different view of the possible

12

outcome of the litigation.

13

was to include these assertions in its consideration of the

14

probability of success in the litigation.

15

did not do so.

16

conclude that the litigation would be “long, complex, difficult,

17

and costly.”

18

but it does not relieve the Bankruptcy Court of its obligation

19

to consider the likelihood of success in litigation.

But the court’s role at that point

The Bankruptcy Court

Instead, it used those assertions only to

ER:752.

This observation could well be correct,

By erroneously excluding the Brincko Declaration, and by

20
21

further declining to consider which valuation method

22

(liquidation or “going concern”) was likely to prevail in

23

///

24
25
26

23

This is highlighted by the fact that, according to the
evidence offered by Objecting Parties, the low end of the range
of litigation outcomes is $0.00, not $22 million.
21

1

litigation,24 the Bankruptcy Court could not properly consider

2

the “likeliness of success in litigation” factor it was required

3

to consider under In re A & C Properties.

4

that it did not need to determine the value of the super-

5

priority claim, but only whether “the compromise, on balance,

6

falls below the lowest point in the range of reasonableness.”

7

ER:734.

8

the Bankruptcy Court was considering was based upon a possible

9

litigation outcome range of $22 million to $59 million.

The court indicated

The problem here is that the “range of reasonableness”

It may

10

well have reached a different conclusion if the litigation

11

outcome range it considered was from $0.00 to $59 million.25

12

Accordingly, this court cannot say that the error was harmless.

13
14

24

22

There appears to be no controlling authority on the valuation
question, and the non-controlling cases come out on both sides.
See United Missouri Bank v. Federman (In re Modern Warehouse,
Inc.), 74 B.R. 173 (W.D. Mo. 1987) (liquidation value). See
also, In re Scopac, 624 F.3d 274, 285 (5th Cir. 2 010) (“In
general, when valuing a secured claim under 11 U.S.C.
§ 506(a)(1), fair-market value is the appropriate measure”).
The Ninth Circuit in Crocker Nat’l Bank v. American Mariner
Industries, Inc. (In re American Mariner Industries, Inc.),
734 F.2d 426, 435 (1984), seems to hold that the court should
look to “liquidation” value when considering “adequate
protection.” But that case was overruled by United Savings
Ass’n v. Timbers of Inwood, 484 U.S. 365 (1988), on a closely
related point, see Cimarron Investors v. Wyid Properties (In re
Cimarron Investors), 848 F.2d 974, 976 (9th Cir. 1988), and it
is not clear that In re American Mariner can now be relied upon
on this issue.

23

25

15
16
17
18
19
20
21

24
25
26

It is worth noting that the BMO estimate is based, at least in
part, on “reports prepared pre-petition by the debtor’s
financial advisors.” ER:734. However, no party disputes on
appeal that those reports were based upon a “going concern”
valuation, rather than the liquidation valuation that Objecting
Parties claim is the proper valuation for determining the superpriority claim in this case.
22

1

III. CONCLUSION

2

For the foregoing reasons, (i) the appeal of Objecting

3

Parties is not moot; and (ii) the Bankruptcy Court erred by

4

excluding the Brincko Declaration on the basis that it was

5

submitted after the close of the evidentiary period.

6

IT IS ORDERED that the matter is REMANDED to the Bankruptcy

7

Court for further proceedings consistent with this order.

8

IT IS SO ORDERED.

9

DATED:

July 8, 2011.

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
23

Therefore,