Truong v. Crandall et al
Filing
8
Opinion and Order: Upon review, I DENY Appellant's Motion for Leave to Appeal Interlocutory Order 1 . Signed on 11/9/2023 by Judge Michael W. Mosman. (kms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION
MICHAEL BUU TRUONG,
Appellant,
V.
No. 3:23-cv-01063-MO
MARK L. CRANDALL, KENNETH
MERRELL, ECHO MERRELL,
OPINION AND ORDER
Appellees,
and WAYNE GO DARE,
Trustee.
MOSMAN,J.,
This matter comes before me on Appellant's Notice of Appeal and Motion for Leave to
Appeal Interlocutory Order [ECF 1]. Appellee Mark L. Crandall filed a Response in opposition
[ECF 4], and Appellant replied on August 4, 2023. [ECF 5]. Appellees Kenneth Merrell and Echo
Merrell did not file a Response, nor did Trustee Wayne Godare. For the reasons below, I DENY
Appellant's Motion.
BACKGROUND
Appellant Michael Buu Truong owns two properties, which the parties refer to as the
Airbnb Property and the Vacant Lot. Mem. Decision [ECF 1] at 2. Jeff Roberts is an agent of the
Crandall Group and represented the Merrells, who were interested in purchasing the properties. Id.
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at 3. The parties formed a contract, referred to as "the Contract," which was to be signed no later
than 5 :00 p.m. on April 1, 2021. Id The Merrells signed the Contract on March 31, and Mr. Truong
signed it shortly after the 5:00 p.m. deadline. Id. The closing date was scheduled for June 1, 2021.
Id. at 4. By the time of closing, Mr. Truong had second thoughts and communicated his intent to
rescind the Contract to the Merrells, arguing in part that the Contract was invalid because he
executed it late. Id. The Merrells submitted the dispute to arbitration. Id. After the arbitration
hearing, the arbitrator decided that the Merrells were entitled to specific performance of the
Contract, money damages, and costs. Id. at 4-5.
Mr. Truong filed a Chapter 13 petition for bankruptcy on May 12, 2022. Mem. Decision
[ECF 1] at 2. This stayed further arbitration proceedings. Id. at 5. In his proposed plan, Mr. Truong
moved to reject the Contract with the Merrells as an executory contract pursuant to 11 U.S.C. §
365. Id. at 2. The Merrells objected to Mr. Truong's plan, arguing that the Contract is not subject
to rejection as an executory contract and that Mr. Truong's plan was filed in bad faith. Id. Mr.
Crandall also objected to Mr. Truong's plan on various grounds including feasibility. Id. The
bankruptcy court narrowed the questions to one: Whether the Contract was an executory contract
subject to rejection. Id
The bankruptcy court held that the Contract is an executory contract, but rejection is not
warranted because Mr. Truong did not offer any business rationale for rejection. The court
explained that Mr. Truong bears the burden of showing that it should confirm his Chapter 13 plan,
including his proposal to reject the Contract. Id at 12. Under the "business judgment" rule, a
bankruptcy court should approve rejection of an executory Contract unless the debtor's reasoning
behind rejection "is so manifestly unreasonable that it could not be based on sound business
judgment." Id. at 13 (quoting In re Pomona Valley Med. Grp., Inc., 476 F.3d 665, 670 (9th Cir.
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2007)). The court found that Mr. Truong failed to offer any evidence that he was exercising sound
business judgment and rejected his plan. Id.
The bankruptcy court permitted Mr. Truong twenty-eight days to file an amended plan.
Appellant's Mot. [ECF 1] at 2. Mr. Truong filed his amended plan with a declaration regarding his
business reasons for proposing rejection of the Contract, which mentioned the expected cash flow
of the Airbnb Property and the anticipated tax burden of the sale. Id. at 2-3. The Merrells and Mr.
Crandall filed objections, citing the "law of the case" doctrine. Id. at 3. The court concluded that
the business judgment rule applies and applied the law of the case doctrine, holding that Mr.
Truong could not present new evidence justifying rejection of the Contract because it should have
been presented at the confirmation hearing. Appellee's Resp. [ECF 4] at 4.
Mr. Truong seeks leave to appeal two issues in the bankruptcy court's ruling: (1) whether
Mr. Truong is required to show a business justification to reject the Contract; and (2) whether the
bankruptcy court erred in applying the law of the case to prevent Mr. Truong from presenting
evidence of a business justification which he did not provide at the initial confirmation hearing.
Appellant's Mot. at 3. Mr. Crandall responds that Mr. Truong has not shown that "exceptional
circumstances" merit immediate review of those issues. Appellee's Resp. [ECF 4] at 6.
LEGAL STANDARD
Under 28 U.S.C. § 158(a)(3), district courts have jurisdiction to hear appeals from
interlocutory orders with leave from the court. FRBP 8004 provides that a motion for leave to
appeal must include the facts necessary to understand the question presented, the question itself,
the relief sought, the reasons why leave to appeal should be granted, and a copy of the interlocutory
order and related opinion. Fed. R. Bankr. P. 8004(1). The standard for granting a motion for leave
is not included in the Rules, but Ninth Circuit courts have applied a three-factor test requiring "( 1)
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that there be a controlling question of law, (2) that there be substantial grounds for difference of
opinion, and (3) that an immediate appeal may materially advance the ultimate termination of the
litigation." In re Cement Antitrust Litig., 673 F.2d 1020, 1026 (9th Cir. 1981). Courts approach
motions for leave conservatively; a motion for leave "should not be granted unless refusal would
result in wasted litigation and expense" and the three factors are all met. In re NSB Film Corp.,
167 B.R. 176, 180 (9th Cir. B.A.P. 1994).
DISCUSSION
The questions presented by Mr. Truong's motion are:
(1) whether the business judgment rule applies to court approval of a debtor's
proposal to reject a real estate contract under 11 U.S.C. § 365 in a Chapter 13 plan;
and
(2) whether the law of the case doctrine prevents a bankruptcy court from
considering additional evidence where the debtor files a modified plan following a
prior court order denying confirmation of the debtor's initial plan.
I.
Both questions contain controlling questions of law.
The first factor is whether there is a controlling question of law. A "controlling question
of law" is one that "could materially affect the outcome of litigation" if resolved on appeal. In re
Cement, 673 F.2d at 1026.
A. Business Judgment Rule
The applicability of the business judgment rule to proposals in Chapter 13 plans to reject
an executory contract under Section 365 is a pure question of law. Mr. Crandall's argument that
the bankruptcy court made a factual determination when it decided that Mr. Truong did not carry
his burden is unavailing. See Appellee's Resp. [ECF 4] at 6-7. Mr. Truong is not appealing the
bankruptcy court's determination that he did not meet his burden; he is appealing the court's
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characterization of his burden of proof. This question is controlling because it was the basis for
the banlauptcy court's rejection of Mr. Truong's initial plan. See Mem. Decision [ECF 1] at 13.
B. Law of the Case
There are two prisms through which one may consider Mr. Truong's question about the
law of the case doctrine. The first way of characterizing this question is by asking whether the law
of the case may ever be applied in this context in the first place. The second way of characterizing
this question is by asking whether the banlauptcy judge en-ed in his use of discretion to apply the
doctrine here. I will address each in turn. Either way, Mr. Truong's question is a controlling one
because the law of the case was the basis for the bankruptcy court's rejection of his amended plan.
See Hearing Tr. [ECF 7] at 27-28.
The first way of characterizing Mr. Truong's question targets the applicability of the law
of the case doctrine to this context in the first place. This is a pure question of law. It concerns the
tension between the liberal standards for modification of Chapter 13 plans and the policy
underlying the law of the case doctrine, which involves a disinclination to re-open settled issues
during ongoing litigation. See Messenger v. Anderson, 225 U.S. 436, 444 (1912) (law of the case
"expresses the practice of courts generally to refuse to reopen what has been decided").
The second way of characterizing Mr. Truong's question targets the banlcruptcy judge's
decision in this specific case to apply the law of the case doctrine. This is a factual question. The
law of the case should not be applied when "(1) the decision is clearly erroneous and its
enforcement would work a manifest injustice, (2) intervening controlling authority makes
reconsideration appropriate, or (3) substantially different evidence was adduced at a subsequent
trial." Southwest Marine Inc. v. Danzig, 217 F.3d 1128, 1135 n.8 (9th Cir. 2000). The law of the
case should also not be applied when a manifest injustice would result. Thomas v. Bible, 983 F.2d
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152, 155 (9th Cir. 1993). Whether the bankruptcy judge correctly decided that no exceptions apply
is a factual question in part about the nature of the new evidence Mr. Truong adduced. To
determine how I should view this question, I tum to the hearing transcript to confirm whether the
bankruptcy judge truly made a ruling on the exceptions to the law of the case doctrine.
During the confirmation hearing on June 5, 2023, the bankruptcy judge thoroughly
analyzed whether the law of the case should apply in the first place. Then the judge transitioned,
stating that "the next question is whether the Court should decline to apply the doctrine" because
of the exceptions mentioned above. Hearing Tr. [ECF 7] at 27. The judge found that his first
decision was not "clearly enoneous," that "[t]here has been no intervening changes in the law,"
and that Mr. Truong did not adduce substantially different evidence. Id. at 27-28. In so finding,
the judge reviewed and quoted Mr. Truong's offered declaration, stating that "[t]he only asse1tion
that is new or different from Truong' s earlier testimony during the evidentiary hearing on his initial
plan is that he may suffer an undetermined amount of capital gains tax if the sale closes." Id.
Finally, the judge also found that there are no changed circumstances and a manifest injustice
would not arise by applying the doctrine.
I find that the bankruptcy judge did make a ruling on whether he should use his discretion
to apply the law of the case doctrine here. Because an appeal of this decision necessarily includes
a question of fact, Mr. Truong's Motion for Leave fails on this prong.
II.
There is no substantial ground for difference of opinion on either question.
To determine whether there is a substantial ground for difference of opinion, courts "must
examine to what extent the controlling law is unclear." Couch v. Telescope Inc., 611 F.3d 629,633
(9th Cir. 2010). Substantial ground for difference of opinion "exists when the circuits are in dispute
on the question and the court of appeals of the circuit has not spoken on the point, ... or if novel
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and difficult questions of first impression are presented." Id. (internal quotations omitted). It is not
enough for an issue to be one of first impression; it must be novel or difficult, or otherwise be one
"on which fair-minded jurists might reach contradictory conclusions." Id. at 634; Reese v. BP
Exploration (Alaska) Inc., 643 F.3d 681, 688 (9th Cir. 2011).
A. Business Judgment Rule
There is no substantial ground for difference of opinion on whether the business judgment
rnle applies to the rejection of a real estate purchase contract in Chapter 13 because the circuits are
not in dispute on this question and it is not a novel or difficult issue of first impression.
Bankruptcy Code § 1322(b)(7) provides that a Chapter 13 plan may provide for the
assumption, rejection, or assignment of any executory contract or unexpired lease "subject to
section 365 of this title." 11 U.S.C. § 1322(b)(7). Section 365 authorizes a debtor to assume or
reject an executory contract "subject to court approval." 11 U.S.C. § 365(a). The Supreme Court
endorsed use of the business judgment rule under Section 365(a) as early as 1943. Grp. of
Institutional Inv'rs v. Chicago, Milwaukee, St. Paul & Pac. R. Co., 318 U.S. 523, 550 (1943)
("[T]he question whether a lease should be rejected and if not on what terms it should be assumed
is one of business judgment."). And when discussing whether a higher standard should apply to
collective bargaining agreements, the Supreme Court has acknowledged that "the traditional
'business judgment' standard [is] applied by the courts to authorize rejection of the ordinary
executory contract." NL.R.B. v. Bi/disco & Bi/disco, 465 U.S. 513,523 (1984).
Mr. Truong argues that the Ninth Circuit has spoken otherwise in In re Alexander, 670 F.2d
885 (9th Cir. 1982). However, this case was decided before the phrase "subject to section 365 of
this title" was added to the Bankruptcy Code in 1984. In re Safakish, Case No. 18-50769 MEH,
2018 WL 5621783, at *5 (Bankr. N.D. Cal. Oct. 29, 2018). The court in In re Safakish denied a
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debtor's motion to reject a settlement agreement because it found that it would not be in the best
interests of the creditors. In re Safakish, 2018 WL 5621783, at *6. The business judgment rule is
consistently applied under Section 365(a) because of the clause "subject to court approval."
Mr. Truong fmiher argues that reasonable minds can differ on the question of the
applicability of the business judgment rule because courts have issued conflicting decisions.
Appellant's Mot. [ECF 1] at 6-7. He relies on distinguishable cases involving personal property
leases and appears to argue that Section 365(a) should apply differently in Chapter 13 cases than
it does in Chapter 11 cases. First, the cases involving personal prope1iy leases are not applicable
here because a personal prope1iy lease is deemed rejected if not assumed at the conclusion of a
confirmation hearing, which is not the case for real property sales contracts. 11 U.S.C. § 365(p)
("If a lease of personal property is rejected or not timely assumed ... [it] is no longer property of
the estate .... "). Second, there is no indication in the case law that comis treat rejection of
executory contracts differently when they arise under Chapter 11 or Chapter 13 bankruptcy plans.
B. Law of the Case
I assume here, for the purposes of this Opinion, that Mr. Truong's question is limited to
the legal question of whether the law of the case doctrine may be applied in this context in the first
place. There is no substantial ground for difference of opinion on this question because it is not a
novel or difficult issue of first impression.
The law of the case doctrine expresses the practice of courts generally to refuse to reopen
issues that have been decided. Jeffries v. Wood, 114 F.3d 1484, 1489 (9th Cir. 1997), rev 'don
other grounds. It is a jurisprudential doctrine which applies when the issue in question was decided
either expressly, or by necessary implication in the previous disposition. Id., Thomas v. Bible, 983
F.2d at 154. The Ninth Circuit has held that the doctrine applies to interlocutory orders as it was
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created to avoid reconsideration of settled matters during a single continuing lawsuit. Pit River
Home & Agric. Coop. Ass 'n v. United States, 30 F.3d 1088, 1097 (9th Cir. 1994). Here, the
bankruptcy court's decision to reject Mr. Truong's initial plan was an interlocutory decision.
The bankruptcy judge acknowledged, as I do here, the tension between the liberal standards
for modification of Chapter 13 plans and the policy underlying the law of the case doctrine.
Hearing Tr. [ECF 7] at 25. But the policy reasons underlying the doctrine as described in the Ninth
Circuit are fully applicable to Chapter 13 banlauptcy proceedings. Id at 27. Litigants in
bankruptcy proceedings have the same interest in certainty as other litigants, and bankruptcy courts
have the same interest in judicial economy. Other courts have invoked these policy reasons to
support applying the law of the case in the context of an amended plan. E.g., In re Budd, No. 2021419-ABA, 2022 WL 660591, at *7 (D.N.J. Mar. 4, 2022) ("The Debtor had his day in court.").
Therefore, the question of applicability of the law of the case doctrine here is not a novel or difficult
issue of first impression.
I further note that if I take up the second way of characterizing Mr. Truong's question,
whether the banlauptcy judge ened in applying the doctrine in this case, there is still no ground
for substantial difference of opinion. A comi' s decision whether to apply the doctrine is reviewed
for abuse of discretion. Stacy v. Colvin, 825 F.3d 563, 568 (9th Cir. 2016). Here, the judge
acknowledged the exceptions where the doctrine should not be applied. Hearing Tr. [ECF 7] at 27.
The judge acknowledged that Mr. Truong presented new information but found it vague and
hypothetical. Id. at 18. Bearing the relevant standard in mind, a fair-minded jurist could not
conclude that the judge abused his discretion.
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III.
An immediate appeal would likely materially advance the ultimate termination of
the litigation.
To determine whether an immediate appeal would materially advance the ultimate
termination of the litigation, courts focus on whether an interlocutory appeal would facilitate the
disposition of the action or resolve an issue in the case. Hawaii ex rel. Louie v. JP Morgan Chase
& Co., 921 F. Supp. 2d 1059, 1067-68 (D. Haw. 2013). An interlocutory appeal need not have a
final, dispositive effect on the litigation to meet this standard. Reese, 643 F.3d at 688. In Reese, it
was sufficient that reversal "may" have taken the parties' control claims against the defendants
"out of the case." Id. In In re Cement, review of a judge's recusal decision was not granted in part
because it "could in no way materially affect the outcome of the litigation." 673 F.2d at 1027.
Because Mr. Truong's Motion for Leave fails on prongs one and two, I need not reach this
prong. That said, I find for the purposes of this opinion that an immediate appeal would likely
materially advance the ultimate termination of this litigation. I acknowledge that the creditors have
other objections to Mr. Truong's Chapter 13 plan. Hearing Tr. [ECF 7] at 5-6. The bankruptcy
comi noted that these objections "may require another evidentiary hearing, so the parties agreed
to defer consideration of those issues until the Court decided" the issues of the applicability of the
business judgment rule and the law of the case. Id. That said, the standard for this prong is not
whether an interlocutory appeal would certainly resolve the case, but whether it may materially
affect the outcome. Here, if Mr. Truong prevailed on an appeal, he would either not need to meet
the business judgment rule, or the bankruptcy comi would consider his declaration describing the
business reasons for his proposal. This could cause the bankruptcy comi to accept Mr. Truong's
proposal to reject the Contract, bringing a key issue in this litigation closer to resolution.
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CONCLUSION
For the reasons given above, I DENY Appellant's Motion for Leave to Appeal
Interlocutory Order [ECF 1].
IT IS SO ORDERED.
DATED this
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ofNovember, 2023.
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