Rindlesbach v. Jones et al

Filing 60

MEMORANDUM DECISION and Ordergranting 25 Motion to Dismiss ; granting 29 Motion to Dismiss. Signed by Judge Clark Waddoups on 5/27/2015. (jds)

IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION

MARK LEE RINDLESBACH, et al.,
MEMORANDUM DECISION AND
ORDER GRANTING APPELLEES’
MOTIONS TO DISMISS

Appellants,
v.
PHILIP G. JONES, et al.,

Case No. 2:14-cv-00577

Appellees.

Judge Clark Waddoups

INTRODUCTION
Before the court are two Motions to Dismiss filed by Philip G. Jones, Chapter 7 Trustee
for the bankruptcy estate of Mark Lee Rindlesbach (“Trustee”), (Dkt. No. 25); and The Ruth B.
Hardy Revocable Trust, Delcon Corporation Profit Sharing Plan fbo A. Wesley Hardy, Finesse
P.S.P., MJS Real Properties, LLC, Uintah Investments, LLC, David D. Smith, Steven Condie,
David L. Johnson, Berrett PSP, VW Professional Homes PSP, Ty Thomas, and D.R.P.
Management PSP (“Hardy Lenders”), (Dkt. No. 29). The court held oral argument on May 5,
2015, and took the matters under advisement. After carefully considering the parties’ briefs and
oral arguments, the court GRANTS the Trustee’s and the Hardy Lenders’ Motions to Dismiss on
the grounds that this appeal is not justiciable.
BACKGROUND
This appeal arises out of Mark Lee Rindlesbach’s (“Debtor”) bankruptcy, and the
Trustee’s settlement of the Hardy Lenders’ claims. On May 25, 2007, the Hardy Lenders made a

loan of $3.3 million to Eagle Mountain Lots, LLC, for the acquisition of land in Eagle Mountain,
Utah. Debtor, as trustee for the Rindlesbach Construction Inc. Profit Sharing Plan (“Plan”), was
one of the guarantors for the loan. When Eagle Mountain Lots defaulted, the Hardy Lenders filed
suit against the guarantors in July 2008, and after amending the complaint, against Debtor in his
personal capacity, (“Guaranty Action”). Prior to and during the pendency of the suit, Debtor
transferred various parcels of real property from his ownership, as well as from various entities
where Debtor was a partial owner. (Bankr. Dkt. No. 295, pp. 5-10, 35-37). The state trial court
granted summary judgment in favor of Debtor, finding that he was not personally liable on the
guaranty. The Hardy Lenders have appealed that decision, which is now pending in the Utah
Court of Appeals. A jury rendered a verdict in favor of the Hardy Lenders for their claim against
the Plan, and on December 3, 2012, the state court entered a judgment in the amount of
$6,367,203.64.
On November 5, 2012, and January 9, 2013, the Hardy Lenders initiated two fraudulent
transfer actions in state court in Tooele and Salt Lake Counties, contending that after the jury
rendered a verdict in the Guaranty Action, Debtor transferred most of the assets out of the Plan
and personally retained a portion of the sale profits, (“Fraudulent Transfer Actions”). The state
court in the Salt Lake County action ordered Debtor to deposit $2.2 million into the registry of the
court pending resolution of the claims. Debtor failed to surrender the entire amount required by
the court order. In light of that, and for other violations of the court’s orders, an Order to Show
Cause was entered, and an evidentiary hearing was held on August 26, 2013. At the hearing, the
state court made a bench ruling holding Debtor in contempt, and ordered him to deposit the
remaining funds with the court and pay the Hardy Lenders’ expenses for the contempt
proceedings. Instead of complying, Debtor filed a bankruptcy petition under Chapter 11 on

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September 13, 2013. The automatic stay placed the Hardy Lender’s appeal and the Fraudulent
Transfer Actions on hold, and prevented the entry of a written contempt order. The bankruptcy
was converted to a Chapter 7 case on January 13, 2014.
In the bankruptcy proceeding, the Hardy Lenders asserted claims totaling $17,524,705.13,
comprised of $7,030,836.74 (and potentially up to $9,249,535.64) for their Guaranty Action
appeal arguing that Debtor is personally liable for the state court guaranty judgment,
$3,592,703.24 for the claims made in the Fraudulent Transfer Actions,1 and $5,000,000.00 for a
punitive damages claim. On May 21, 2014, the bankruptcy Trustee entered into an agreement
with the Hardy Lenders to settle their outstanding claims against the bankruptcy estate. Under the
settlement, the Hardy Lenders agreed to pay the Trustee $500,000.00, with both parties releasing
each other from any claims or obligations other than those specified in the settlement. In
exchange, the Trustee agreed to allow the Hardy Lenders’ claims in the reduced amount of
$4,000,000.00, subordinated to all other unsecured claims against the estate. Specifically, the
settlement allowed $2,610,000.00 for the personal liability claim, $1,390,000.00 for the
fraudulent transfer claim, and $0 for the punitive damages claim.
The settlement further assigned to the Hardy Lenders “any and all claims and causes of
action of or available to the Trustee or the Estate.” The Hardy Lenders were required to pay 5% of
the net recovery to the holders of unsecured claims in proportion to their allowed amounts, to the
extent that the claims were still outstanding, (“Assignment Provision”). Finally, the settlement
allowed for the modification of the automatic stay to allow prosecution of the pending state court
appeal in the Guaranty Action and to permit the state court to enter findings of fact and
conclusions of law in the contempt proceeding; with an agreement that the Trustee was to

1

Of this amount, $317,533.75 is duplicative with the personal liability claim.

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stipulate to the entry of a consent order in the Utah Court of Appeals reversing or vacating
summary judgment in favor of the Debtor, and to the entry of judgment against Debtor in the
amount of $2,610,000.00 upon remand, (“Judgment Provision”).
Debtor was the only party that objected to the settlement, which was approved by the
bankruptcy court on July 21, 2014, in an Order Granting Trustee’s Motions For Order Approving:
(1) Settlement Between The Trustee and The Hardy Parties and (2) Settlement Between The
Trustee and The Lexon Parties. After Debtor’s discharge was granted on July 30, 2014, he filed a
motion for reconsideration of the order approving the settlement, but this was also denied. Debtor
and two creditors, FFAF Properties (“FFAF”) and Bennet Tueller Johnson & Deere (“BTJD”),
proceeded to appeal to this court the order approving the Hardy Lenders’ settlement.2 Before this
court all appellants object to the Assignment Provision. Debtor also objects to the Judgment
Provision. After filing his notice of appeal, Debtor requested the bankruptcy court enter a stay
pending appeal. When the motion was denied, Debtor did not appeal from the decision or request
a stay from this court. Neither FFAF or BTJD sought a stay from the bankruptcy court or this
court.
In the absence of a stay, the bankruptcy court approved the Trustee’s Final Report on
March 10, 2015, and the Trustee made final distribution of the assets to the allowed claims and as
provided in the settlement agreement. The Trustee now moves the court to dismiss this appeal on
the grounds of constitutional and equitable mootness. The Hardy Lenders also move to dismiss on
the additional grounds that appellants lack standing; that the claims concerning the Assignment
Provision are not ripe; and that the appeal is statutorily, constitutionally, and equitably moot.

2

FFAF filed this appeal as assignee of Claim 12-1, originally filed by creditor Zions First National Bank, (“Zions
Bank”). (Bankr. Dkt. No. 450).

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ANALYSIS
This court has jurisdiction to hear this case pursuant to 28 U.S.C. § 158(a)(1). On appeal,
the bankruptcy court’s findings of fact will not be overturned unless they are clearly erroneous,
while its legal conclusions are reviewed de novo. In re Herd, 840 F.2d 757, 759 (10th Cir. 1988).
However, before the court can reach the merits of the appeal, it must satisfy itself that the case
presents a justiciable controversy and that all issues raised are properly before the court. See
Anderson v. West (In re Anderson), 2015 U.S. App. LEXIS 7088 (10th Cir. Apr. 29, 2015).
I. Standing
Parties appealing from a bankruptcy court order bear the burden of demonstrating that
they possess the requisite standing to bring their challenge before the district court. See Lopez v.
Behles (In re Am. Ready Mix), 14 F.3d 1497, 1500 (10th Cir. 1994). The requirements for such
standing are more stringent than the case or controversy standing requirement of Article III.
Nintendo Co. v. Patten (In re Alpex Computer Corp.), 71 F.3d 353, 357 n.6 (10th Cir. 1995). “As
a general matter, in a Chapter 7 proceeding, the trustee alone has standing to raise issues before
the bankruptcy court and to prosecute appeals.” Flynn v. Finch (In re Colorado Mountain Cellars,
Inc.), 1998 U.S. App. LEXIS 2868, *7 (10th Cir. Feb. 24, 1998) (quoting Richman v. First
Woman’s Bank (In re Richman), 104 F.3d 654, 657 (4th Cir. 1997)).
A. Debtor
For a debtor to have appellate standing, he must qualify as a person aggrieved, with his
rights or interests being directly and adversely affected pecuniarily by the order of the bankruptcy
court. In re C.W. Mining Co., 636 F.3d 1257, 1260 (10th Cir. 2011). “Accordingly, [1] ‘unless the
estate is solvent and excess will eventually go to the debtor, or [2] unless the matter involves
rights unique to the debtor, the debtor is not a party aggrieved by orders affecting the

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administration of the bankruptcy estate.’” Id.
Debtor does not maintain that the estate is solvent or that he will receive an equity
participation in the bankruptcy estate. Instead, he argues that his discharge is compromised by the
Judgment Provision. Specifically, Debtor claims that if judgment is entered, he will be burdened
with post discharge liability that would be reflected on his credit report, that he would be required
to explain that the liability was discharged in bankruptcy whenever he applies for credit, and that
lenders might not offer him credit, or do so on less favorable terms. He also contends that because
the bankruptcy court allowed the Hardy Lenders’ claims, there is no need for them to resume the
Guaranty Action (requiring that he retain counsel and file pleadings) in order to pursue fraudulent
transfer claims. As to the Assignment Provision, Debtor’s only alleged harm is that he will be
subject to discovery and will have to testify as a witness at trial.
Post discharge prosecution of claims is contemplated and permitted by the bankruptcy
code. Section 524(e) allows a creditor to bring or continue an action directly against the debtor for
the purpose of establishing the debtor’s liability when establishing liability is a prerequisite to
recover from another entity. In re Walker, 927 F.2d 1138, 1141-42 (10th Cir. 1991). This
exception to section 524(a)’s post-discharge injunction “hinges ‘upon the condition that the
debtor not be personally liable in a way that would interfere with the debtor’s fresh start in
economic life.’” Id.; see also Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1307-1308 (10th Cir.
2008). Under UTAH CODE ANN. §25-6-6, the transfers in question would only be fraudulent if the
Hardy Lenders had a claim against Debtor that arose before the transfers were made. Because the
state court dismissed Debtor from the guaranty action for lack of personal liability, the entry of
judgment against him may be necessary to avoid preclusion issues that could hinder recovery
from third parties.

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Given that judgments for discharged debts are void pursuant to 11 U.S.C. § 524, it is
improbable that Debtor will be harmed by the entry of a judgment in the Guaranty Action.3 In the
event that the Hardy Lenders were to attempt to collect on the state court judgment, Debtor would
have recourse to seek sanctions for violation of the discharge order. In re Paul, 534 F.3d at 13067. Debtor has also failed to present any evidence that a void post discharge judgment would affect
his credit prospects beyond the impact that his Chapter 7 bankruptcy—which will remain on his
credit report for ten years—has already had, that he will not be able to persuade creditors that the
claims have been discharged, or that he will receive credit on less favorable terms.4 Because
Debtor bears the burden of establishing he has standing, he cannot rely on mere speculative harm.
As such, the court concludes that Debtor lacks standing to appeal from the Judgment Provision.
Debtor also lacks standing to challenge the Assignment Provision because it does not
involve “rights unique to the debtor.” There is no contention that any recovery from the assigned
claims is exempt property, or that debtor will be subject to personal liability, given that said
claims are against third parties. See Weston v. Mann (In re Weston), 18 F.3d 860, 864 n.3 (10th
Cir. 1994). As such, the only rights in question are those of the estate’s creditors, who stand to
receive payment for their outstanding claims based on the outcome of the assigned actions.
Because Debtor “is not relieved of the responsibility [he] has, as do all citizens, to testify at trial
and/or participate in discovery as a witness,” he also fails to allege any cognizable harm suffered
as a result of this provision. In re Paul, 534 F.3d at 1307.

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While the bankruptcy court’s order approving the settlement agreement lifts the automatic stay “to allow the Third
District Court to enter findings of fact and conclusions of law in the contempt proceeding,” it does not permit the
entry or prosecution of a monetary judgment against Debtor. (Dkt. No. 47-1, ¶ 13.A). If Debtor believes that the
Hardy Lenders have acted beyond the scope of the aforementioned provision, his remedy lies with the bankruptcy
court.
4

The harms alleged by Debtor would occur every time a judgment is entered after discharge. Despite that being the
case, such suits have been permitted to allow recovery from third parties.

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B. FFAF and BTJD
“Prerequisites for being a ‘person aggrieved’ are attendance and objection at a bankruptcy
court proceeding.” In re Weston, 18 F.3d at 684 (quoting Matter of Schultz Mfg. Fabricating Co.,
956 F.2d 686, 690 (7th Cir. 1992)). Neither FFAF’s predecessor in interest, Zions Bank, nor
BTJD raised any objections to the settlement with the bankruptcy court or joined in Debtor’s
motion to reconsider. Accordingly, they lack standing to appeal the validity of the Assignment
Provision.
All appellants attempt to sidestep their lack of standing by arguing that the bankruptcy
code does not permit the Trustee’s assignment of the estate’s claims to a creditor, and as such, the
bankruptcy court lacked subject matter jurisdiction to approve a settlement with such a provision.
In essence, their argument is that a bankruptcy court’s order approving a settlement is a question
of subject matter jurisdiction, and not one on the merits of the bankruptcy. The argument fails.
The Trustee’s motion for an order approving the settlement was a core proceeding as defined in
28 U.S.C. § 157(b)(2), because it addressed matters concerning the administration of the estate,
the allowance of claims, the approval of a sale of property, and affected the liquidation of assets
of the estate. It was also consistent with FED. R. BANKR. P. 9019(a), which states that “[o]n
motion by the trustee and after notice and a hearing, the [bankruptcy] court may approve a
compromise or settlement.” Having subject matter jurisdiction, the bankruptcy court was free to
grant or deny the Trustee’s motion. Appellant’s failure to object, and thus preserve their
arguments, prevents them from appealing the correctness of the decision.
II. Mootness
A. Constitutional and Equitable Mootness
An appeal of a bankruptcy court order is constitutionally moot where “the appellee

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demonstrates that a court could order no meaningful relief to the party seeking reversal of the
bankruptcy court’s decision.” Search Mkt. Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327,
1330 (10th Cir. 2009). Even if an appeal is not constitutionally moot, the underlying
circumstances may make it inequitable for the court to grant the requested relief.5 To determine
whether an appeal is equitably moot, the Tenth Circuit considers the following factors:
(1) Has the appellant sought and/or obtained a stay pending appeal? (2) Has the
appealed plan been substantially consummated? (3) Will the rights of innocent
third parties be adversely affected by reversal of the confirmed plan? (4) Will the
public-policy need for reliance on the confirmed bankruptcy plan—and the need
for creditors generally to be able to rely on bankruptcy court decisions—be
undermined by reversal of the plan? (5) If appellant’s challenge were upheld, what
would be the likely impact upon a successful reorganization of the debtor? And (6)
based upon a quick look at the merits of appellant’s challenge to the plan, is
appellant’s challenge legally meritorious or equitably compelling?
Id. at 1339.
Both the Trustee and the Hardy Lenders contend that this appeal is moot because the
bankruptcy court approved the final distribution, and the estate’s funds have been disbursed to
creditors with allowed claims. Appellants reply that they are not challenging the settlement
agreement as a whole, and that they do not seek a reversal of the distributions that have already
been made. Instead, they contend that their appeal is limited to “two isolated and narrow aspects,”
the alleged invalidity of the Judgment and Assignment Provision. (Dkt. No. 47, p. 1). The
requested relief is for the court to strike the objected portions. In effect, appellants are asking the
court to rewrite the settlement agreement.
The settlement agreement, however, contains no severability clause, and the provisions in
5

While the Tenth Circuit has applied equitable mootness in Chapter 11 cases, they have not addressed its
applicability it in Chapter 7 cases. This court has previously applied equitable mootness in the liquidation context,
noting that “no circuit has affirmatively held equitable mootness inapplicable,” and that “[a]fter a thorough review of
the relevant case law, the Court is persuaded that equitable mootness should apply.” ANR Co. v. Rushton, 2012 U.S.
Dist. LEXIS 61795, *11 n.23 (D. Utah May 2, 2012); see also Davis v. Shepard, 2014 U.S. Dist. LEXIS 82804, *2021 n.10 (N.D. Ala. June 18, 2014); but see Liberty Bank, F.S.B. v. D.J. Christie, Inc., 2013 U.S. Dist. LEXIS 177977,
*7-9 (D. Kan. Dec. 19, 2013).

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questions are a central part of the agreement, without which “there would have been no bargain
whatever.” United States v. Bethlehem Steel Corp., 315 U.S. 289, 298-299 (1942); Security
Underground Storage, Inc. v. Anderson, 347 F.2d 964, 967-968 (10th Cir. 1965). This becomes
clear when considering that even if the Hardy Lenders’ bankruptcy claims against Debtor were
allowed, they would not be able to collect on them after his discharge. As such, the provisions
allowing them to prosecute fraudulent transfers against third parties would be the only means of
recovery left to them. This satisfies the court that the settlement provisions are not severable.
The only alternative—reversing the bankruptcy court’s order approving the settlement and
undoing the agreement—is practically impossible at this point. To begin with, the funds that have
been distributed to non-parties to this appeal, including several creditors and the law firm
representing the trustee, cannot be disgorged. See In re Blumer, 66 B.R. 109, 113 (B.A.P. 9th Cir.
1986) (“Effective relief is impossible if funds have been disbursed to persons who are not parties
to the appeal.”). In addition, the Lexon Parties received payment of their reduced claims pursuant
to their settlement with the Trustee. There being no appeal over the bankruptcy court’s approval
of the Lexon Parties’ settlement, the court lacks authority to require a return of the funds paid.6
Even if some sort of relief could be fashioned, there has been a substantial change in
circumstances due to the final distribution of the estate that would make reversal equitably moot.
While Debtor sought a stay from the bankruptcy court, this was denied, and no request for a stay
was made to this court. FFAF and BTJD never even attempted to procure a stay. The result has
been a substantial consummation of the agreement appellants would now like to revise, and the
final distribution of the estate’s assets. A reversal at this stage would adversely affect all creditors.
Not only would it require them to return the funds they received, which they more than likely
6

There are also due process concerns because the Lexon Parties have never been afforded notice or the opportunity to
be heard as to the invalidation of their settlement. Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 313
(1950).

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have already spent, it would also undo the settlement of the Lexon Parties—the second largest
creditor of the estate. Such a result would seriously undermine the ability of parties to rely on the
finality of settlements approved by bankruptcy courts. It is of significant importance that if the
plan were to be set aside, the Trustee has stated that there is no likelihood of reaching a new
settlement. (Dkt. No. 42-3, p. 55-56). With the remaining assets abandoned, creditors would
receive no payment on their claims.
Finally, there is a strong likelihood that the Hardy Lenders would prevail on the merits of
their appeal before this court. As discussed above, the post-discharge judgment in the Guaranty
Action appears to be necessary to prosecute third party fraudulent transfers, and will not
compromise Debtor’s discharge. With regards to the Assignment Provision, the Tenth Circuit has
not directly spoken on the question of whether a creditor may derivatively prosecute estate causes
of action. Addressing whether the Supreme Court’s decision in Hartford Underwriters Ins. Co. v.
Union Planters Bank, N.A., 530 U.S. 1, 7-8 (2000), undermined this Circuit’s previous practice of
allowing those actions, the Tenth Circuit noted that “other circuits have continued to allow
committees to bring avoidance actions.” Hill v. Akamai Techs., Inc. (In re MS55, Inc.), 477 F.3d
1131, 1139 n.9 (10th Cir. 2007). This court agrees with the Bankruptcy Court for the District of
Kansas’ conclusion in Vill. of Overland Pointe, LLC v. Terra Bentley II, LLC (In re Bentley II,
LLC) that there is “no reason to believe the Tenth Circuit would disagree with the unanimous
view of the Circuits that have decided the question.” 2011 Bankr. LEXIS 806, *11 (Bankr. D.
Kan. Mar. 2, 2011) (noting that “[n]o Circuit court appears to have concluded derivative standing
for creditors is never permissible” and discussing applicable precedents); Springs East Land Co.,
LLC v. Goss (In re Ellicott Springs Res., LLC), 485 B.R. 626, 636 (Bankr. D. Colo. 2013).

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B. Statutory Mootness
Under 11 U.S.C. § 363(m), “The reversal or modification on appeal of an authorization
under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity
of a sale or lease under such authorization to an entity that purchased or leased such property in
good faith, whether or not such entity knew of the pendency of the appeal, unless such
authorization and such sale or lease were stayed pending appeal.”
While Debtor contends that no sale has taken place, the Tenth Circuit has held that
“[dispossession] of assets in accordance with [a] compromise and settlement renders [an] appeal
moot under Bankruptcy Rule 8005 and 11 U.S.C. § 363(m).” Weatherford v. Bonney, 1993 U.S.
App. LEXIS 31594, *3-4 (10th Cir. Aug. 12, 1993). The assigned claims constitute assets of the
bankruptcy estate under 11 U.S.C. § 541(a)(1). As §“363(b) is the primary section allowing for
the sale of part of the debtor’s property, other than in the ordinary course of business,” the
bankruptcy court is not required to denote the sale as being made pursuant to § 363(b) for the
protection of § 363(m) to apply. See In re Sax, 796 F.2d 994, 997 n.7 (7th Cir. 1986). However,
the court recognizes that no party made a request for the bankruptcy court to make a specific
finding of good faith. Accordingly, even were the appeal not constitutionally or equitably moot,
the appropriate remedy would be a remand to the bankruptcy court for specific findings with
regards to the Hardy Lenders’ good faith. Guadano v. Holbrook (In re Indep. Gas & Oil
Producers, Inc.), 80 Fed. Appx. 95, 100 (10th Cir. 2003).
CONCLUSION
It is therefore ORDERED that the Trustee’s and the Hardy Lenders’ Motions to Dismiss,
(Dkt. Nos. 25, 29), are GRANTED.

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DATED this 27th day of May, 2015.
BY THE COURT:
______________________________
Clark Waddoups
United States District Court Judge

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