In re SUNNY HILLS AQUATIC CLUB, A CORPORATION
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 20-41077 (9th Circuit, Sep 30,2021) Not Published
- Tag(s):
-
- Ruling:
- In an opinion disposing of two appeals by one creditor, Hadi Zeghuzi (CR), of the Sunny Hills Aquatic Club (DR), the debtor - one of an order issued by the bankruptcy court (BC) sustaining the DR's objection to his claim, the other of an order confirming the DR's amended chapter 11 plan - the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the BC's rulings that the CR was not entitled to a right to payment set in a prepetition stipulated judgment until the DR's dissolution and thus to payment ahead of general unsecured creditors and confirming the DR's liquidation plan.
- Procedural context:
- In the BC, i.e. the U.S. Bankruptcy Court for the Northern District of California, the DR filed a bankruptcy petition in June 2020 under subchapter V of chapter 11 in order to sell its sole real property. Post-petition, it sought and obtained the BC's approval to sell the property free and clear of whatever interest the CR might have in this property as a result of a stipulated judgment. While the CR did not appeal the sale, he did file a proof of claim based on his contention that his claim of $42,307.69 was secured by a lien arising from the recording of the stipulated judgment. The DR objected, contesting the CR's assertions that such a lien existed and that he was entitled to payment before the winding up of the DR's business affairs based on this judgment as well as the valuation as in excess of the pro rata amount each member likely would receive - and to which he was entitled, once more based on the actual text of this stipulated judgment.
A hearing followed this volley. At one point, the DR disclosed its intent to effectuate the dissolution as soon as practicable after completion of its plan and the filing of its final tax return in response to the CR's concern that it might never dissolve. The CR both acknowledged his right to no more than to share in pari passu with the DR's members and claimed priority over $200,000 in secured debt. Ultimately, the BC sustained the DR's objection.
Shortly after this hearing, the DR amended its plan. The plan as amended provided that the $347,485 in net proceeds from the sale of its real property would be used to pay all priority and unsecured creditors in full, except for CR's subordinated claim, and the residue would be paid in pro rata shares to the DR's members and CR as contemplated in the stipulated judgment. As the DR had promised, the amended plan provided for non-subordinated creditor payments to be made on the plan’s effective date and final distributions to members and CR as soon as the DR could wind up its affairs, file its final tax return, and effect its dissolution. It added that the DR's board of directors (the board) had already voted unanimously to dissolve. Certain provisions were made for the payment of attorneys' fees, as to which the CR had previously raised concerns. Nonetheless, the CR objected to the amended plan for various reasons, though only one remained live on appeal: that because his Payment Right was secured by a judgment lien, the amended plan did not provide an adequate distribution on account of his claim. The DR noted that its scheme was consistent with the stipulated judgment, a claim that the BC accepted without ever ruling on whether the CR held a lien.
The CR timely appealed the orders as to the DR's objection to his proof of claim and as to confirmation of the DR's amended plan. The appeal came down to the meaning of a single paragraph, excerpted below, within the stipulated judgment.
- Facts:
- The DR was purportedly formed in 1956 and, at the time of filing, had no more than 12 members, all successors to the original founders. At the time of its bankruptcy filing, its assets consisted of a swimming pool on 1.9 acres of land in Walnut Creek, California. The CR joined the DR as a member in 2001. Henceforth -- or so the CR claimed -- he not only held all positions on the board but also performed all needed repairs, maintenance, and services related to the pool and the surrounding real property.
A row broke out in 2016. In that year, the DR sued the CR for misappropriation of monies and the wrongful transfer of its real property. The state court granted the DR's request for a preliminary injunction against the CR and his company, Swim Shac, LLC. Ultimately, aided by a mediator, the CR and the DR (the parties) reached a settlement in the form of a stipulated judgment that, among other things, incorporated the preliminary injunction.
Most importantly, as the parties agreed, this judgment converted the CR's former membership interest in the DR into a right to payment (Payment Right). In explicit prose, it defined this prerogative as a "pro-rata share of net proceeds after all costs of sales, commissions, [and] expenses of sale/dissolution[,] including debts and encumbrances[,] are paid" engendered "[i]f ... [the DR] is dissolved or sold ...." Notably, in the hearing during which the state court recited the settlement terms and asked each party to assent, a hearing in which the CR appeared pro se, the mediator characterized this provision as applicable if the "pool" was dissolved or sold but, as a correction, replaced "pool" with the DR's full legal name when queried. Neither the DR nor the CR objected to either the first statement or this clarification, though the CR had previously made comments and asked for clarification, and both agreed with the description of the Payment Right in the stipulated judgment and as clarified by the mediator. The CR, however, then sought to add another trigger: a change in ownership. When the mediator noted the absence of any such condition in the agreed terms, the state court asked both parties to agree that no such second predicate would be imposed. Both, again, assented to the existing terms. At the end of the hearing, the DR's counsel sought to pin the CR that his acceptance of the Payment Right would be his only claim or interest with respect to the DR and its limitation to "a pro rata membership share of proceeds if it sells or dissolves." The CR raised no recorded objection.
The state court entered the stipulated judgment in November 2018, and the CR recorded a certified copy in December 2018.
When the board voted to sell its real property and dissolve in 2019 or 2020, its efforts faltered due to the unwillingness of any title insurance company to issue a policy unless the CR executed a quitclaim deed or otherwise surrendered any lien interest based on the stipulated judgment. In the face of the DR's remonstrance, the CR demanded payment of the amount he was owed thereunder at the time of any future sale's closing. As this was a condition that the DR declined to accept, the CR refused to execute any quitclaim deed. Consequently, the DR found itself wholly unable to sell its sole asset.
- Judge(s):
- Gary A. Spraker; Robert J. Faris; and Julia W. Brand
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