In re Douglas J. Roger, M.D., Inc.

Full title: IN RE: DOUGLAS J. ROGER, M.D., INC., APC

Court: United States District Court, C.D. California.

Date published: Mar 26, 2019

393 F. Supp. 3d 940 (C.D. Cal. 2019)

Opinion

Case No. 5:18-cv-01596-SVW

2019-03-26

IN RE: DOUGLAS J. ROGER, M.D., INC., APC

Chad V. Haes, D. Edward Hays, Marshack Hays LLP, Irvine, CA, Franklin R. Fraley, Jr., Sue-Ann L. Tran, Fraley and Associates, Los Angeles, CA, for Appellant. George Michael Hanover, Summer M. Shaw, Doling Shaw and Hanover, Palm Desert, CA, Robert S. Lampl, Law Offices of Robert S. Lampl, Woodland Hills, CA, Kathryn M.S. Catherwood, Gordon Rees Scully Mansukhani LLP, San Diego, CA, Richard A. Umbenhauer, Roemer and Harnik LLP, Indian Wells, CA, for Appellee. Summer M. Shaw, Doling Shaw and Hanover APC, Palm Desert, CA, for Douglas J. Roger, M.D., Inc., APC.

The Honorable STEPHEN V. WILSON, U.S. DISTRICT JUDGE

Chad V. Haes, D. Edward Hays, Marshack Hays LLP, Irvine, CA, Franklin R. Fraley, Jr., Sue-Ann L. Tran, Fraley and Associates, Los Angeles, CA, for Appellant.

George Michael Hanover, Summer M. Shaw, Doling Shaw and Hanover, Palm Desert, CA, Robert S. Lampl, Law Offices of Robert S. Lampl, Woodland Hills, CA, Kathryn M.S. Catherwood, Gordon Rees Scully Mansukhani LLP, San Diego, CA, Richard A. Umbenhauer, Roemer and Harnik LLP, Indian Wells, CA, for Appellee.

Summer M. Shaw, Doling Shaw and Hanover APC, Palm Desert, CA, for Douglas J. Roger, M.D., Inc., APC.

Proceedings: ORDER REVERSING AND VACATING BANKRUPTCY COURT'S ORDER DENYING SALE OF DEBTOR'S PROPERTY [38]

The Honorable STEPHEN V. WILSON, U.S. DISTRICT JUDGE On July 30, 2018, Appellants Arturo Cisneros, Chapter 7 Trustee ("Trustee") of the bankruptcy estate (the "DJRI Estate") of Douglas J. Roger, M.D., Inc., APC ("DJRI"), and Revere Financial Corporation ("RFC"), filed an appeal in this Court of a July 12, 2018 order granting in part and denying in part Trustee's motion for an order authorizing an auction of litigation claims held by the DJRI Estate. See Dkt. 1. For the reasons set forth below, the bankruptcy court's order is REVERSED and VACATED.

I. Factual Background

The history of this dispute is long and complicated. The Court will provide a succinct overview of the pertinent proceedings relating to the underlying bankruptcy action and will then expand on the disputed decisions made by the bankruptcy court leading up to the order that Trustee and RFC appeal. Facts cited to in this Order were taken from the parties' briefing and the extensive appendices filed by Trustee and RFC in this action. See generally Dkts. 18-34.

A. RFC Sues Dr. Roger in State Court

On December 29, 2009, RFC filed a lawsuit against Dr. Roger in California state court in the County of Riverside, captioned Revere Financial Corp. v. Roger , No. INC 092 308 (Cal. Super. Ct.) (the "State Action"). In the State Action, RFC sought to collect balances on two loans made to Dr. Roger.

The first loan, labeled the "Roger Loan," was issued to Dr. Roger by RFC's predecessor in interest. The Roger Loan was guaranteed by DJRI, and both Dr. Roger and DJRI pledged all of their assets as security for the Roger Loan. See App'x X, Dkt. 27, at 1790-1812.

The second loan, labeled the "BLP Loan," was issued to Baleine, LP ("BLP") by RFC's predecessor in interest. Nicole Ebarb was a general partner of BLP, and both Dr. Roger and DJRI guaranteed the BLP Loan. See id. at 1814-26. The Court will refer to Dr. Roger, Ms. Ebarb, DJRI, and BLP as the "Roger Defendants."

The State Action transpired for years, during which the parties engaged in extensive litigation. On the merits of RFC's claims in the State Action, the court ultimately held as a matter of law that the Roger Defendants had defaulted on the Roger Loan and the BLP Loan. See id. at 1895 (state court's order on August 30, 2013 granting RFC's motion for summary adjudication).

The state court in the State Action also addressed discovery violations by the Roger Defendants over the course of the litigation. On March 18, 2013, the state court granted RFC's motion to appoint a receiver over the property of Dr. Roger, DJRI, and BLP (the "Receiver Order"). See id. at 1898-1907. The Roger Defendants failed to comply with the Receiver Order, and in July 2013 the state court charged DJRI, Roger, and BLP with contempt of court. Following a trial on the issue of contempt, on October 16, 2013 the state court issued an order convicting the Roger Defendants of contempt. Id. at 1909-14. The state court incarcerated Dr. Roger and Ms. Ebarb until the Roger Defendants provided all of the documentation to the appointed receiver consistent with the Receiver Order. See id. at 1910. B. The Roger Defendants Initiate Bankruptcy Proceedings

Shortly after Dr. Roger and Ms. Ebarb were incarcerated for contempt, the Roger Defendants held to be in contempt each filed for bankruptcy:

• DJRI filed for bankruptcy on October 20, 2013. See Douglas J. Roger, M.D., Inc., APC , No. 6:13-bk-27344-MH (C.D. Cal. Bankr. Ct.) (the "DJRI Bankruptcy Action").

• BLP filed for bankruptcy on October 24, 2013. See In re Baleine, LP , No. 6:13-bk-27610-MH (C.D. Cal. Bankr. Ct.) (the "BLP Bankruptcy Action").

• Dr. Roger filed for bankruptcy on October 25, 2013. See In re Roger , No. 6:13-bk-27611-MH (C.D. Cal. Bankr. Ct.) (the "Roger Bankruptcy Action" and, together with the DJRI Bankruptcy Action and the BLP Bankruptcy Action, the "Bankruptcy Actions").

Evidently, these bankruptcy actions were initiated as a tactic to avoid compliance with the state court's contempt judgment, as Dr. Roger and Ms. Ebarb remained incarcerated for contempt for over 40 days.

On October 31, 2013, RFC moved to dismiss the Bankruptcy Actions on the ground that the actions were filed in bad faith as an abuse of process, in an attempt to get Dr. Roger and Ms. Ebarb released from jail. See DJRI Bankruptcy Action Dkt. 19; BLP Bankruptcy Action Dkt. 23; Roger Bankruptcy Action Dkt. 27. The bankruptcy court granted only the motion to dismiss the DJRI Bankruptcy Action, and on January 21, 2014, the DJRI Bankruptcy Action was dismissed. See DJRI Bankruptcy Action Dkts. 153, 154. The receiver in the State Action then continued to administer DJRI's assets as part of the receivership estate.

On December 29, 2014, the bankruptcy court sua sponte vacated its prior order dismissing the DJRI Bankruptcy Action and reopened the bankruptcy. See id. Dkt. 229. RFC appealed the bankruptcy court's decision to reopen the case, which was affirmed by the district court. See id. Dkt. 297. RFC appealed the district court's decision to the Ninth Circuit, and RFC's appeal remains pending. See id. Dkt. 313. On January 12, 2015, the bankruptcy court appointed DJRI Trustee as the trustee for the DJRI Estate. See id. Dkt. 246.

C. The DJRI Estate Is Fully Encumbered and Administratively Insolvent

In light of the judgment in the State Action finding that the Roger Defendants defaulted on the Roger Loan and the BLP Loan, RFC claimed a security interest in all of the assets in the DJRI Estate pursuant to the loan agreements. See App'x X, Dkt. 27, at 1799-1805. On July 20, 2015, RFC submitted a proof of claim in the DJRI Bankruptcy Action in an amount of $5,573,992.49, which included $4,768,638.29 as a secured claim and $805,354.20 as an unsecured claim. See id. at 1777-88. RFC's claim against the DJRI Estate continues to grow as time elapses, in light of the accruing interest on the amount owed under the loans.

The only assets held by the DJRI Estate not encumbered by creditors' claims were legal claims the DJRI Estate could bring against third parties to avoid and unwind allegedly fraudulent transfers of assets previously held by the DJRI Estate. These legal claims are also referred to as "avoidance" claims. In the absence of any other assets held by the DJRI Estate, until these avoidance claims are fully resolved on the merits, all of the DJRI Estate's assets are fully encumbered by claims from creditors, with nearly all of the amount claimed coming from RFC. See, e.g. , App'x I, Dkt. 18, at 30 (bankruptcy court labeling RFC as "the 99-percent creditor"); id. at 193 (bankruptcy court identifying the Bankruptcy Actions as "largely a two-party dispute between [RFC] and the Roger entities").

Furthermore, because the DJRI Estate's only assets are avoidance claims, there are no disposable assets available in the DJRI Estate which could be used to pay for Trustee's administrative expenses in handling the DJRI Estate—administrative expenses which are quite substantial, in light of the extensive procedures to date in the DJRI Bankruptcy Action. Thus, the DJRI Estate is administratively insolvent and has no ability to pay for past or future administrative expenses at the present time. See App'x I, Dkt. 18, at 21 (Trustee stating to the bankruptcy court on March 28, 2018 that the DJRI Estate is "not only administratively insolvent – I think insolvent might be an understatement at this point").

D. Trustee Files the First Motion to Approve a Settlement with RFC

During the course of the DJRI Bankruptcy Action, Trustee had engaged in settlement discussions with some of the defendants to the DJRI's avoidance claims. Ultimately, Trustee reached agreements to settle certain avoidance claims with three defendants as follows:

• On April 6, 2016, Trustee filed a motion to approve a compromise between Trustee and Douglas J. Roger, MD, Inc. Defined Benefit Plan (the "DJRI Plan"), in which the DJRI Plan agreed to pay the DJRI Estate $50,000 in exchange for a dismissal with prejudice of the DJRI Estate's avoidance claims against the DJRI Plan, which were already pending in a case captioned Adversary Proceeding Case No. 6:15-ap-01309-MH (C.D. Cal. Bankr. Ct.). See App'x II, Dkt. 19, at 233-36.

• On April 6, 2016, Trustee also filed a second motion to approve a compromise, in which Trustee agreed to dismiss its avoidance claims brought against OIC Medical Corporation, Liberty Orthopedic Corporation, and Universal Orthopaedic Group (the "Corporate Defendants"), captioned Adversary Proceeding Case No. 6:15-ap-01307-MH (C.D. Cal. Bankr. Ct.), in exchange for a payment from the Corporate Defendants of $30,000 to the DJRI Estate. See App'x II, Dkt. 19, at 241-44.

• On April 15, 2016, Trustee filed a motion to approve a compromise with Dr. Eric L. Freedman, in which Dr. Freedman would pay Trustee $14,000 in exchange for Trustee's dismissal with prejudice of the DJRUI Estate's avoidance claims against Dr. Freedman, which Trustee had not yet filed in bankruptcy court. See App'x II, Dkt. 19, at 249-52.

Aside from these three settlement agreements, Trustee had not received "bids" on any other avoidance claims previously brought or not yet filed by Trustee. The bankruptcy court set the three motions to approve the compromises for hearing on February 1, 2017. See App'x VIII, Dkt. 25, at 1585.

On January 31, 2017, the day before the hearing on the motions to approve the compromises, Trustee filed a new motion to approve a compromise reached between Trustee and RFC (the "First RFC Settlement"). See DJRI Bankruptcy Action Dkt. 440; App'x II, Dkt. 19, at 257-82. The First RFC Settlement included the following material terms, among others:

• Trustee would allow RFC's claim against the DJRI Estate in an amount of $5,500,000, with $4,000,000 treated as a secured claim and $1,500,000 treated as unsecured;

• Trustee would withdraw from the three pending settlements with the DJRI Plan, the Corporate Defendants, and Dr. Freedman, and Trustee would halt settlement negotiations with all other defendants to the DJRI Estate's avoidance claims;

• Trustee and RFC would create a liquidating trust, into which Trustee would transfer the DJRI Estate's avoidance claims;

• RFC would act as the liquidating trustee for the liquidating trust, meaning that RFC would prosecute the avoidance actions for the benefit of the DJRI Estate. In acting as the liquidating trustee, RFC would (1) advance all litigation expenses necessary to prosecute the claims, (2) make a priority distribution of net proceeds collected from prosecuting the avoidance claims to the DJRI Estate in an amount of $73,026.05 prior to reimbursing RFC's litigation expenses, and (3) after RFC pays taxes and litigation expenses using the proceeds, allocate any remaining proceeds in a manner such that RFC receives 75% of the net proceeds collected and the DJRI Estate receives the remaining 25% of the proceeds;

• RFC would "carve out" $226,973.95 from RFC's collateral interest in the assets of the DJRI Estate and would provide that money to Trustee, which Trustee would use to pay administrative expenses and/or unsecured claims against the DJRI Estate; and

• RFC would dismiss the appeal of the bankruptcy court's decision to reopen the DJRI Bankruptcy Action, which remains pending before the Ninth Circuit.

See App'x II, Dkt. 19, at 270-75; see also App'x III, Dkt. 20, at 315-46. The effect of the First RFC Settlement would be that Trustee could close the DJRI Estate and conclude the DJRI Bankruptcy Action.

E. The Bankruptcy Court Ignores the First RFC Settlement and Holds an Auction

At the February 1, 2017 hearing regarding the pending motions to approve settlements with the DJRI Plan, the Corporate Defendants, and Dr. Freedman, the bankruptcy court revealed its intent to hold an auction on the three settlement agreements, which would be conducted for the purpose of allowing other creditors or interested parties to "overbid" the amount listed in the settlement agreements. In other words, the bankruptcy court wanted to give other parties the opportunity to pay the DJRI Estate more than the DJRI Plan, the Corporate Defendants, or Dr. Freedman agreed to pay under their respective settlement agreement, and in exchange the third party would be assigned the DJRI Estate's ability to pursue the avoidance claims against those defendants. See App'x VIII, Dkt. 25, at 1586. However, holding overbid auctions for the avoidance claims against the DJRI Plan, the Corporate Defendants, and Dr. Freedman would require the bankruptcy court to ignore or reject the First RFC Settlement, the approval of which would have the effect of withdrawing the other settlements of the avoidance claims and instead would confer those claims to RFC outside of an auction proceeding.

To better assess the competing settlement agreements over these avoidance claims, the bankruptcy court continued the hearings on the motions to approve the settlements of the avoidance claims and the First RFC Settlement until June 28, 2017. See id. At the June 28 hearing, the bankruptcy court expressed its concerns about the First RFC Settlement, including that the First RFC Settlement (1) was ambiguous in certain respects, (2) assigned no value to the avoidance claims at issue in the First RFC Settlement, (3) would have a "chilling effect" on any bidding on the avoidance claims by other creditors to the DJRI Estate or other interested parties, and (4) would present difficulties to the bankruptcy court in attempting to weigh the benefits to the DJRI Estate of the sale of individual avoidance claims, on the one hand, and a global settlement that would resolve the entire bankruptcy case, on the other hand. See id.

In the end, on July 19, 2017, the bankruptcy court decided to put aside the First RFC Settlement for the time being and proceed on August 2, 2017 to an "overbidding" auction of the avoidance claims sought to be settled by the DJRI Plan, the Corporate Defendants, and Dr. Freedman. See id. at 1587. The bankruptcy court ordered Trustee to file a motion for approval of bidding procedures to be used at the auction no later than July 26, 2017. Id. ; see also id. at 1593-1606. The bankruptcy court gave notice of the auction to all creditors in the DJRI Bankruptcy Action. See id. at 1588-92.

At the hearing on August 2, 2017, the bankruptcy court held an auction for the avoidance claims against the DJRI Plan. During the auction, the DJRI Plan placed the highest bid on the avoidance claims against itself, in the amount of $105,000, and RFC placed the second highest bid of $101,000. See App'x XV, Dkt. 32, at 2758. The bankruptcy court also auctioned the avoidance claims against the Corporate Defendants, for which RFC placed the highest bid in the amount of $80,000 (the Corporate Defendants making the second-highest bid for $55,000). See id. at 2761. The bankruptcy court issued final orders approving these auction bids on May 10, 2018, denying the April 2016 settlement agreements between Trustee and the defendants to the respective avoidance claims. See id. at 2757-59, 2760-62. Trustee's motion to approve the settlement with Dr. Freedman was unaffected by the auction and remained pending.

The net result from the auction is that the DJRI Estate received $185,000 for the two avoidance claims sold at the auction (one against the DJRI Plan and the other against the Corporate Defendants), but the DJRI Bankruptcy Action remained open in light of the other avoidance claims maintained by the DJRI Estate¹ and the lack of sufficient assets in the DJRI Estate to satisfy the claims of RFC and the other creditors to the DJRI Estate (including Trustee's administrative expenses, which continued to accrue).

1 As Trustee later represented to the bankruptcy court, the only other avoidance claims at issue were a claim filed by Trustee against American Express Company, a claim filed by Trustee against BWI Consulting, LLC, a non-dischargeability claim by RFC against Dr. Roger in the Roger Bankruptcy Action, and a potential avoidance claim by the DJRI Estate against Dr. Freedman. See App'x XII, Dkt. 29, at 2262-63.

F. Trustee Files the Second Motion to Approve a Settlement with RFC

Following the first auction of avoidance claims, Trustee and RFC negotiated a second settlement agreement that would resolve the outstanding issues in the DJRI Bankruptcy Action (the "Second RFC Settlement"). See App'x IX, Dkt. 26, at 1679-1714. Trustee and RFC filed a joint motion with the bankruptcy court to approve the Second RFC Settlement on January 24, 2018. See id. at 1643-77; see also DJRI Bankruptcy Action Dkt. 521-1.

The terms of the Second RFC Settlement were substantially similar to those in the First RFC Settlement: all avoidance claims would be transferred to a liquidating trust, for which RFC would act as liquidating trustee, and RFC would allocate to the DJRI Estate a certain portion of the proceeds collected by RFC in prosecuting the avoidance claims. Under the Second RFC Settlement, RFC agreed to make a priority distribution of $75,000 to the DJRI Estate and agreed to the same 25% allocation of the remainder of the proceeds to the DJRI Estate, after RFC uses the proceeds to pay taxes and litigation expenses. See App'x IX, Dkt. 26, at 1656. However, in light of the auction of two of the DJRI Estate's avoidance claims, RFC agreed to a reduced carve-out payment of $45,000. Id. The net result of the Second RFC Settlement would be to close the DJRI Bankruptcy Action, terminate all litigation proceedings between RFC and the DJRI Estate (including the pending Ninth Circuit appeal), and allow the DJRI Estate to pay off Trustee's administrative expenses and avoid incurring ongoing expenses.

Interestingly, the Second RFC Settlement was nearly identical to a settlement reached between RFC and the trustee in the Roger Bankruptcy Action, which the same bankruptcy court approved on May 10, 2016. See App'x XI, Dkt. 28, at 2110-30.

G. The Bankruptcy Court Refuses to Approve the Second RFC Settlement and Holds Another Auction

In response to the joint motion to approve the Second RFC Settlement, on February 1, 2018, Dr. Roger filed an opposition to the motion, requesting that the bankruptcy court reject the Second RFC Settlement, or, in the alternative, hold a second auction to allow creditors to bid on the assets of the DJRI Estate (i.e. , the avoidance claims) being sold to RFC under the Second RFC Settlement. App'x XII, Dkt. 29, at 2158-79. Dr. Roger was neither a debtor in the DJRI Bankruptcy Action nor a creditor to the DJRI Estate, and in his opposition Dr. Roger did not make an overbid on any of the avoidance claims being assigned to RFC under the Second RFC Settlement. American Express Company ("American Express"), another non-creditor and a defendant to an avoidance claim brought by Trustee in Adversary Proceeding Case No. 6:15-ap-01303-MH (C.D. Cal. Bankr. Ct.), filed a joinder to Dr. Roger's opposition and indicated a willingness to participate in a bidding process regarding the remaining avoidance claims held by the DJRI Estate. See id. at 2233-35.

On February 7, 2018, Trustee and RFC filed a reply brief, repeating that Trustee used his business judgment to determine that the Second RFC Settlement was in the best interests of the DJRI Estate, moreso than the piecemeal auction of the remaining avoidance claims suggested by the opponents to the Second RFC Settlement. See id. at 2237-59; see also id. at 2260-66 (declaration from Trustee attached to the reply brief). Trustee placed great emphasis on the benefits that would inure to the DJRI Estate from the closing of the DJRI Bankruptcy Action without further administrative expenses and the potential future returns to the DJRI Estate from RFC's prosecution of the DJRI Estate's avoidance claims, with all litigation expenses borne by RFC. See id. at 2264-65. Trustee also noted that some of the avoidance claims previously filed had been ongoing for over two years, and neither Dr. Roger nor American Express ever attempted to negotiate a purchase of those avoidance claims or some other form of compromise. Id. at 2263.

The bankruptcy court held a hearing on the motion to approve the Second RFC Settlement on March 28, 2018. See App'x I, Dkt. 18, at 12-123 (transcript of hearing). After hearing Trustee's position on the cash benefits of the Second RFC Settlement (the $45,000 carve-out and the $75,000 priority distribution of proceeds from the liquidating trust) and the non-cash benefits (the closing of the DJRI Bankruptcy Action without further administrative expenses), the bankruptcy court found that Trustee's view did not properly account for the rights of creditors, which should have the ability to overbid for particular avoidance claims. The bankruptcy court relied on a case from the Ninth Circuit Bankruptcy Appellate Panel titled Goodwin v. Mickey Thompson Entertainment Group, Inc. (In re Mickey Thompson Entertainment Group, Inc.) , 292 B.R. 415 (9th Cir. BAP 2003), reasoning that Mickey Thompson intended to protect the ability of creditors and other interested non-creditor parties to overbid any potential settlements reached between a bankruptcy estate's trustee and another creditor. The bankruptcy court noted that, if creditors had the opportunity to overbid on the avoidance claims but ultimately did not do so, the court would be more inclined to approve the Second RFC Settlement as being in the best interests of the DJRI Estate. See App'x I, Dkt. 18, at 95-96. Thus, the bankruptcy court concluded that holding an auction of the avoidance claims would better serve the DJRI Estate and ordered the parties objecting to the settlement to file a motion for an auction of the avoidance claims. See id. at 88, 90-91. The court did not deny the motion to approve the Second RFC Settlement but instead continued the hearing on the motion to May 9, 2018. See id. at 121.

Following the March 28, 2018 hearing, the parties appeared to be in agreement that the effect of the bankruptcy court's rulings during the hearing was to require Trustee to file a motion to approve bidding procedures for a second auction of avoidance claims. See App'x XV, Dkt. 32, at 2632-33 (Dr. Roger interpreting the March 28 hearing as "requiring the Trustee to, set for bidding, the individual claims that were being sold as part of" the Second RFC Settlement); App'x XIII, Dkt. 30, at 2292 (Trustee's subsequent motion to hold an auction sale stating that the bankruptcy court "instructed the Trustee to ‘sever out’ the Claims and put them up for sale subject to overbid"); id. at 2401 (RFC's objections to the bankruptcy court's decision to hold a second auction of avoidance claims, stating that the bankruptcy court "specifically interpreted Mickey Thompson to require an auction of claims against defendants").

H. Trustee Receives No Overbids and Moves to Sell the Avoidance Claims to RFC, But the Court Insists on Holding a Second Auction of Individual Avoidance Claims

After the March 28, 2018 hearing, Trustee received three bids on avoidance claims from non-creditors, including Dr. Roger, Dr. Freedman, and American Express. Dr. Roger offered $10,000 to purchase (1) the DJRI Estate's claims against BWI Consulting, LLC ("BWI"), (2) the DJRI Estate's claims asserted in an adversary proceeding between RFC and Dr. Roger, captioned Adversary Proceeding Case No. 6:14-ap-01248-MH, including claims asserted in that proceeding by the receiver, and (3) the DJRI Estate's claims against Dr. Freedman. See App'x XIII, Dkt. 30, at 2294. Dr. Freedman offered $14,000 for claims held by the DJRI Estate against Dr. Freedman, money which Trustee already had in possession at the time. Id. at 2295. Lastly, American Express offered $40,000 to purchase the claims by Trustee against American Express in the pending adversary proceeding between those two parties. Id. The total amount of these offers was $63,000,² which was less than the $125,000 cash benefit conferred on the DJRI Estate under the Second RFC Settlement.

2 Dr. Roger attributed $1,000 of his bid on the avoidance claims toward the claim against Dr. Freedman, meaning that the bids by Dr. Roger and Dr. Freedman overlapped by that amount. In light of the overlap, the money the DJRI Estate would have received from the highest bids on the individual avoidance claims would collectively amount to $63,000.

Because Trustee did not receive an overbid on the Second RFC Settlement, on April 18, 2018, Trustee filed a motion for an order authorizing an auction sale of the avoidance claims to RFC under the terms of the Second RFC Settlement. See App'x XIII, Dkt. 30, at 2291-2301. Trustee noticed the hearing on the motion for May 9, 2018 in conjunction with the continued hearing on the Second RFC Settlement. In the motion for sale, Trustee proposed that the bankruptcy court treat the Second RFC Settlement as the highest bid on the avoidance claims and the best offer received by the DJRI Estate. Id. Nevertheless, Trustee's motion acknowledged the bankruptcy court's desire to allow overbidding and proposed a bidding procedure with material terms as follows:

• Any interested party wishing to make an overbid above the Second RFC Settlement must serve an initial bid to Trustee by May 7, 2018;

• The minimum amount Trustee would consider an overbid for all of the avoidance claims as a whole is $130,000;

• Bids for individual avoidance claims would be an overbid only if the aggregate of all bids on individual claims would total at least $130,000; and

• If there is no overbid according to the above procedures, RFC would be deemed as the winning bidder and purchaser of all of the avoidance claims under the terms of the Second RFC Settlement.

Id. at 2295-96.

RFC objected to Trustee's motion for sale, arguing that, because Trustee did not receive any overbids prior to the filing of the motion, the bankruptcy court should simply approve the still-pending Second RFC Settlement without holding another auction. See id. at 2394-2419. Equally displeased with Trustee's bidding process, Dr. Roger filed an emergency motion on April 26, 2018, seeking a continuance of the May 9, 2018 auction and requesting a conference call between the bankruptcy court and the parties. See App'x XV, Dkt. 32, at 2630-35. The bankruptcy court granted Dr. Roger's motion and agreed to hold a status conference on May 9, 2018 to discuss the Second RFC Settlement and the motion for sale by auction. See id. at 2755-56.

At the May 9 hearing, the bankruptcy court reiterated its concerns that, even though Trustee did not receive any overbids to the Second RFC Settlement, under Mickey Thompson , the defendants to the avoidance claims should have a right to place overbids on the individual avoidance claims brought against them. See App'x I, Dkt. 18, at 133-34; see also id. at 143 (construing the Second RFC Settlement as "an inequitable result in part in light of Mickey Thompson "). Trustee responded to the court, stating that the defendants to the avoidance claims did have the opportunity to overbid prior to the filing of Trustee's motion for sale, but the individual bids submitted did not amount to an overbid of the Second RFC Settlement, both in terms of the cash value and non-cash value of the Second RFC Settlement. Id. at 135-36. The bankruptcy court appeared to reject Trustee's position, construing the Second RFC Settlement and the procedures outlined in Trustee's motion for sale as "chilling out all these Defendants from making a meaningful bid" on the avoidance claims brought against them. Id. at 137-38. At the end of the May 9 hearing, the court advised Trustee to file a new motion for sale to auction off the individual avoidance claims piecemeal, and the court continued the hearing on the motion to approve the Second RFC Settlement. See id. at 162, 164.

I. The Second Auction Produces No Overbids, But the Bankruptcy Court Still Rejects RFC's Bid under the Second RFC Settlement

Consistent with the court's position, Trustee filed a renewed motion for sale by auction on May 21, 2018, with the sale to occur on June 11, 2018. See App'x XV, Dkt. 32, at 2796-2806. In the renewed motion, Trustee noted that there had been no further bids on any of the avoidance claims since the May 9 hearing. See id. at 2801-02. In the renewed motion, Trustee still allowed for individual bidding of the avoidance claims in a piecemeal fashion, pursuant to the bankruptcy court's wishes. See id. at 2802. However, Trustee stated that each auction of individual avoidance claims would be "conducted subject to a pre-determined reserve. In other words, if bidding does not satisfy the reserve, then the Trustee reserves the right to reject the offer(s) and proceed with the litigation claims on the merits." Id. at 2801. Trustee did not disclose the amounts of any of the pre-determined reserves in the motion for sale.

RFC filed an opposition and objection to Trustee's motion for sale, again arguing that the Second RFC Settlement should be approved as the best offer received by the DJRI Estate, without further auction procedures. See id. at 2869-84. Dr. Roger similarly filed an opposition to Trustee's motion for sale, arguing that the bidding procedures—specifically Trustee's reliance on an undisclosed reserve—would not benefit the creditors to the DJRI Estate and would chill bidding on the avoidance claims. See id. at 3008-11. American Express joined in the opposition filed by Dr. Roger. See App'x XVI, Dkt. 33, at 3038-39.

On June 11, 2018, the bankruptcy court held a hearing to effectuate an auction of avoidance claims and simultaneously address the motion to approve the Second RFC Settlement. See App'x I, Dkt. 18, at 182-232 (transcript of hearing). In conjunction with the hearing, the court issued a tentative ruling granting Trustee's motion for sale. See id. at 4-11. In the tentative ruling, the court, relying on its interpretation of Mickey Thompson as protecting the rights of non-creditors to overbid on settlements entered into by the trustee, rejected RFC's argument that the court should instead approve the Second RFC Settlement. Id. at 7-8. The bankruptcy court's tentative ruling also rejected Dr. Roger's argument that the undisclosed reserve is legally impermissible. Id. at 8-10.

During the hearing, the parties first agreed to withdraw the motion to approve a settlement between Trustee and Dr. Freedman, which had been pending since April 15, 2016. See id. at 189. Prior to the auction bidding process, the bankruptcy court then indicated to counsel for Trustee that, even if the bids on the individual avoidance claims did not meet the pre-determined reserves set by Trustee, the court would not be inclined to grant the motion to approve the Second RFC Settlement. Id. at 190. The court reasoned that RFC could just as easily submit bids on all of the avoidance claims individually during the auction, because, "as the 99 percent shareholder, what they [ (RFC) ] bid gets funneled back to them as a distribution." Id. at 193.

When the bidding began, counsel for Dr. Roger stated that Dr. Roger did not intend to bid on any of the avoidance claims in light of the undisclosed reserve. Id. at 191. Counsel for Dr. Roger stated that, because Trustee indicated in the motion for sale that Trustee would proceed to litigate all avoidance claims if the undisclosed reserve was not met, Trustee could hold the amount bid by Dr. Roger against him in the ensuing litigation. Id. at 191-92 (counsel for Dr. Roger stating that "we're not putting a number out there, because otherwise we set ourselves up to say, great, now we're going to have to pay you at least this if we go forward with litigating"); see also id. at 194 (counsel for Dr. Roger stating that "at this point, we're just not ready to bid"). The court accepted the fact that Dr. Roger would not make bids on any of the avoidance claims against him, but the court stated that the lack of bids on those claims "does not equate to any sort of a finding or conclusion that those claims have no value." Id. at 194. Ultimately, nobody bid on the avoidance claims against Dr. Roger. The court also received no bids on the claims against Dr. Freedman or the claim against BWI, again reminding the parties that the lack of bids does not constitute "any kind of finding that those claims do not have value or that the motion appropriately put those claims up for bidding and the parties weren't interested in bidding." Id. at 205.

American Express bid on the avoidance claims against it, in the amount of $40,000—the same opening bid American Express made to Trustee after the March 28, 2018 hearing. See id. at 206. No party submitted an overbid on the avoidance claims against American Express, and therefore the court required counsel for Trustee to reveal the pre-determined reserve for those claims, which was $125,000. Id. Counsel for American Express objected to the pre-determined reserve, arguing that Trustee was not proceeding in good faith on the ground that Trustee only would have recovered $125,000 in cash benefits from selling all the claims to RFC under the Second RFC Settlement. Id. at 207. The bankruptcy court noted in apparent agreement that "[t]he amount [of the pre-determined reserve for the American Express avoidance claims] does seem rather high," id. at 209, but the court expressly declined to make any findings regarding the sufficiency of Trustee's reserve, id. at 209-10. As with the other avoidance claims, the court determined that there was no successful bid on the avoidance claims against American Express. Id. at 210. Therefore, the court granted in part and denied in part Trustee's motion for sale by auction. See id. at 210-18.

Notably, on the record at the hearing, counsel for RFC stated to the court that RFC intended to consider the Second RFC Settlement as its "bid" on the avoidance claims subject to the auction process. See id. at 202 (counsel for RFC agreeing with the court's assessment that "your [ (RFC's) ] bid that you previously provided to [Trustee] as part of the [Second RFC Settlement] ... you would argue that is also your bid for all of these claims that are being sold as part of" the auction bidding process). However, following the auction in which no bids were accepted, the court stated, "[i]n no way do I see today's hearing as benefitting or favoring any sort of a compromise" between Trustee and RFC. Id. at 224. Thus, the court concluded the hearing by stating its intent to deny the motion to approve the Second RFC Settlement. Id. at 224-26.

On July 12, 2018, the bankruptcy court issued a formal order granting in part and denying in part Trustee's motion for sale by auction (the "Sale Order"). See id. at 1-2. The motion was granted in the sense that the court approved Trustee's procedures for the sale of individual claims by auction, even though the court repeatedly acknowledged the imperfect process created by the piecemeal sale of avoidance claims. See, e.g. , id. at 192 (stating that the auction is "very much an imperfect process, caused in large part because of the unique dynamic here where [RFC] is the 99 percent claim holder"); id. at 193 (because RFC is the supermajority creditor to the DJRI Estate, "this [auction] process is not perfect"). Trustee's motion was denied in the sense that the court declined to approve the sale of any claims to any bidders, including to RFC per its bid for all of the avoidance claims under the terms of the Second RFC Settlement.

J. Trustee and RFC Appeal the Bankruptcy Court's Refusal to Approve the Second RFC Settlement

On July 26, 2018, Trustee and RFC (together, "Appellants") filed a notice of appeal in the DJRI Bankruptcy Action, stating their intent to appeal the bankruptcy court's decision in the Sale Order to deny a sale of the avoidance claims to RFC under the terms of the Second RFC Settlement. See App'x XVI, Dkt. 33, at 3044-48. The instant action was initiated shortly thereafter on July 30, 2018. See Dkt. 1.

After Appellants appealed the Sale Order, the bankruptcy court held a status conference on August 22, 2018, in which the bankruptcy court declined to issue a final ruling on the motion to approve the Second RFC Settlement and instead continued the matter until this Court issues a decision on the appeal of the Sale Order. See App'x XVII, Dkt. 34, at 3196-97.³

3 The Court GRANTS Appellants' Requests for Judicial Notice, Dkts. 35, 47, for all documents attached to or referenced in the requests that are cited in this Order. The documents are publicly available and not subject to reasonable dispute, and the opposing party has not challenged the authenticity of those documents. See Fed. R. Evid. 201. For all documents in Appellants' Requests for Judicial Notice that are not cited in this Order, the Court finds those documents to be irrelevant or unnecessary to the issues to be decided, and therefore the Court DENIES as moot the requests to take judicial notice of those documents.

II. Jurisdiction

District courts of the United States have jurisdiction to hear appeals from final judgments, orders, and decrees issued by a bankruptcy court. See 28 U.S.C. § 158(a). To determine whether a bankruptcy order is "final," the Ninth Circuit uses a "pragmatic approach," which "emphasizes the need for immediate review, rather than whether the order is technically interlocutory." Rosson v. Fitzgerald (In re Rosson) , 545 F.3d 764, 769 (9th Cir. 2008) (internal quotation marks and citation omitted). In accordance with these principles, a bankruptcy court order is final and appealable if the order "1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed." Bonham v. Compton (In re Bonham) , 229 F.3d 750, 761 (9th Cir. 2000) (internal quotation marks and citation omitted). The Ninth Circuit has nevertheless cautioned that the flexibility in determining whether a bankruptcy order is final should be utilized to "avoid having a case make two complete trips through the appellate process." Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis) , 113 F.3d 1040, 1043 (9th Cir. 1997) (internal quotation marks and citation omitted).

Here, the Sale Order largely resolves the question of whether the Second RFC Settlement would be approved by the bankruptcy court, even though the bankruptcy court has yet to formally rule on the motion to approve the Second RFC Settlement. The court, in issuing the Sale Order, denied a sale of the avoidance claims held by the DJRI Estate to RFC under the terms of the Second RFC Settlement. The bankruptcy court's decision materially affected the rights of RFC to purchase avoidance claims by auction and materially affected Trustee's rights to settle claims by creditors against the DJRI Estate according to Trustee's business judgment. Moreover, the bankruptcy court's decision operated as a final determination on the issue of whether a sale of the avoidance claims to RFC under the terms of the Second RFC Settlement would be in the interests of the DJRI Estate. Therefore, the test for finality articulated by the Ninth Circuit is satisfied in this case.

Other courts have reached the same conclusion and have held that orders approving a sale of a debtor's property, or orders failing to approve the sale of the debtor's property, "are considered final decisions and immediately appealable." In re Sax , 796 F.2d 994, 996 (7th Cir. 1986), overruled on other grounds by Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC , 917 F.3d 599 (7th Cir. 2019) ; see also Sulmeyer v. Karbach Enters. (In re Exennium) , 715 F.2d 1401, 1402-03 (9th Cir. 1983) (finding that an order from the Ninth Circuit Bankruptcy Appellate Panel reversing a sale of debtor's property to a nonparty on the ground that the nonparty was not qualified to purchase the property at issue was a final order subject to review by the Ninth Circuit). Following these authorities, the Court has jurisdiction over the Sale Order, which is a final decision subject to review by the district court under § 158(a).

III. Motion to Strike Appellee's Brief

As an initial matter, before proceeding to the merits of Appellants' appeal, the Court will first address Appellants' motion to strike the appeal brief filed by Appellee Douglas J. Roger for lack of standing. See Dkt. 38. Appellants argue that Dr. Roger is neither the debtor in the DJRI Bankruptcy Action nor a creditor to the DJRI Estate, and even though Dr. Roger is the sole shareholder of the DJRI Estate, that is insufficient to make Dr. Roger an interested party with standing to participate in this appeal.

Under the normal review of a party's standing in an appeal of a bankruptcy court order, a party has standing to file an appeal only if the party is "directly and adversely affected pecuniarily by an order of the bankruptcy court." Fondiller v. Robertson (In re Fondiller) , 707 F.2d 441, 442 (9th Cir. 1983). Put another way, the order from which the appellant appeals "must diminish the appellant's property, increase its burdens, or detrimentally affect its rights." Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.) , 177 F.3d 774, 777 (9th Cir. 1999) (citing In re Fondiller , 707 F.2d at 442 ). Under this "person aggrieved" test, "a hopelessly insolvent debtor does not have standing to appeal orders affecting the size of the estate." In re Fondiller , 707 F.2d at 442.

This "person aggrieved" test constitutes an additional prudential standing requirement a party must satisfy before appealing a bankruptcy court order, making bankruptcy appellate standing more limited than general standing in federal court under Article III. See In re P.R.T.C., Inc. , 177 F.3d at 777 ; see also Sears v. U.S. Tr. (In re AFY) , 734 F.3d 810, 819 (8th Cir. 2013) (citation omitted). The minimum requirements of Article III standing require a plaintiff to demonstrate (1) an injury in fact that is both "concrete and particularized" and "actual or imminent, not conjectural or hypothetical"; (2) that the plaintiff's injury "is fairly traceable to the challenged action of the defendant"; and (3) that "it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision." Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc. , 528 U.S. 167, 180-81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000).

Appellants cite many cases where a non-creditor party, such as Dr. Roger here, was found to lack standing to bring a challenge to a bankruptcy court's order. See, e.g. , Simantob v. Claims Prosecutor, LLC (In re Lahijani) , 325 B.R. 282, 290 n. 13 (9th Cir. BAP 2005) ("[I]n the context of a sale or other disposition of estate assets, creditors have standing to appeal, but disappointed prospective bidders who are not creditors usually do not have standing to appeal.") (citations omitted); Engram v. Manera (In re Engram) , No. AZ-07-1036-JuKPa, 2008 WL 8444806, at *2-3 (9th Cir. BAP Mar. 14, 2008) (finding debtor's daughter and sister lacked standing to object to a proposed compromise that would settle a state court lawsuit filed by the debtor prior to declaring bankruptcy); Turner v. Cook , 362 F.3d 1219, 1225-26 (9th Cir. 2004) (holding that once a debtor files for bankruptcy, "he is no longer a real party in interest in this matter and has no standing to pursue [an] appeal" of a bankruptcy court's order because "all the ‘legal or equitable interests’ he had in his property became the property of the bankruptcy estate and are represented by the bankruptcy trustee").

These cases may stand for the proposition that Dr. Roger, who is certifiably not a creditor to the DJRI Estate and is similarly not a party-in-interest merely in his role as the sole shareholder of DJRI, did not have standing to file objections to any settlement agreements between Trustee and RFC or otherwise participate in the DJRI Bankruptcy Action. But it is unclear to the Court, based on the arguments advanced by Appellants here, whether Appellants actually intend to challenge the bankruptcy court's decision to allow Dr. Roger to participate in the proceedings in the underlying DJRI Bankruptcy Action by filing objections and other motions. While the Court would be inclined to answer that question in favor of Appellants in light of the above case law, the Court construes Appellants' argument in the motion to strike as pertaining solely to Dr. Roger's participation as an appellee in this particular proceeding, regarding the appeal of the Sale Order issued by the bankruptcy court. However, none of the cases cited by Appellants purport to establish that a party that otherwise fails to meet the prudential standing requirements to bring an affirmative appeal of a bankruptcy court order is also precluded from responding to an appeal brought by a party with standing. The focus of the "person aggrieved" test is on the party bringing the appeal and places additional burdens on litigants wishing to initiate new proceedings to review a decision by a bankruptcy court.

Nevertheless, even if the additional prudential standing requirements are not applicable to a party responding to a bankruptcy appeal, Dr. Roger does not even meet the Article III requirements for standing to participate in this appeal of the Sale Order, because Dr. Roger has not shown how he would suffer an injury-in-fact if the Sale Order was reversed or vacated in any way. Dr. Roger is not the debtor in the DJRI Bankruptcy Action, is not a creditor to the DJRI Estate, and did not participate in the auction of avoidance claims which is the subject of appeal before this Court. Because Dr. Roger did not place any bids for avoidance claims at the auction at issue in the Sale Order, an order overturning the bankruptcy court's decision not to sell the avoidance claims to RFC under the terms of the Second RFC Settlement does not affect any avoidance claims Dr. Roger did purchase by auction at the Sale Order. Stated another way, the Sale Order does not impair any of Dr. Roger's rights which Dr. Roger chose not to exercise. Therefore, nothing about the Sale Order materially impacts Dr. Roger at all.

Dr. Roger's status as a non-party defendant to the avoidance claims held by the DJRI Estate does not confer Dr. Roger with standing to challenge a bankruptcy court order that may affect Dr. Roger's ability to bid on the avoidance claims against him. As noted above, when a bankruptcy court issues an order regarding a sale or disposition of assets of the bankruptcy estate, "creditors have standing to appeal [the bankruptcy court's sale order], but disappointed prospective bidders who are not creditors usually do not have standing to appeal." In re Lahijani , 325 B.R. at 290 n. 13 (citations omitted). Dr. Roger is, at best, a "disappointed prospective bidder" in relation to the avoidance claims against Dr. Roger currently being prosecuted by Trustee, and as a prospective bidder Dr. Roger lacks standing to challenge a sale order by the bankruptcy court unless Dr. Roger challenges a bankruptcy sale transaction on the ground of fraud, mistake, or unfairness resulting in a lower bid than the trustee could obtain on the open market. See The Wine Grp. v. Diamante (In re Hat) , 310 B.R. 752, 758 (Bankr. E.D. Cal. 2004) (quoting Kabro Associates v. Colony Hill Associates (In re Colony Hill Associates) , 111 F.3d 269, 273-74 (2d Cir. 1997) ). Dr. Roger does not challenge the Sale Order on these grounds and merely argues that the Sale Order should be affirmed, but even in this particular posture Dr. Roger does not have standing as a non-creditor prospective bidder on avoidance claims held by the DJRI Estate.

Dr. Roger acknowledges that he is not the debtor in the DJRI Bankruptcy Action. Nevertheless, Dr. Roger relies on In re Lona , 393 B.R. 1 (Bankr. N.D. Cal. 2008), for the notion that Dr. Roger should still be considered to have standing as an injured party because of the exceptions to the rule barring standing for a debtor where (1) disallowance of a claim will produce a surplus for the debtor or (2) a claim against the estate will not be discharged. See id. at 4. But In re Lona addresses the exceptions for where a debtor may object to "claims" against the debtor's own estate. In this appeal, the issue is not whether Dr. Roger or DJRI may object to claims against the DJRI Estate but whether Dr. Roger or DJRI may participate in an appeal of a sale order regarding the disposition of the DJRI Estate's assets, a completely unrelated issue from whether claims by creditors against the DJRI Estate are valid.

Assuming the exceptions identified in In re Lona apply in the context of a challenge to the Sale Order—which they do not—Dr. Roger argues that the DJRI Bankruptcy Action and the Roger Bankruptcy Action likely will result in a surplus of assets for the DJRI Estate, which means that any order by the bankruptcy court has the potential to cause financial injury to Dr. Roger as the sole shareholder of DJRI. Dr. Roger is incorrect; the fact that Dr. Roger is the sole shareholder of DJRI does not confer Dr. Roger with standing to participate in this appeal. Shareholders appealing a bankruptcy order lack standing if the alleged direct injury from the bankruptcy order is to the corporation, not the shareholders. See In re Anchorage Nautical Tours, Inc. , 145 B.R. 637, 641 (9th Cir. BAP 1992) (citations omitted); In re AFY , 734 F.3d at 820 ("In the bankruptcy context, courts have relied on the shareholder standing rule in holding that shareholders could not appeal a bankruptcy court decision where they asserted only a derivative interest.") (quotation marks and citations omitted). Dr. Roger's argument that the DJRI Estate may produce a surplus is insufficient to confer Dr. Roger with standing to challenge actions that only derivatively affect Dr. Roger due to Dr. Roger's status as a shareholder of DJRI.

Furthermore, Appellants have attached evidence showing that the DJRI Estate is insolvent. A debtor can have standing to appeal a bankruptcy court order only if the debtor's estate is solvent, because in such a situation the excess assets in the estate would eventually become assets of the debtor after the close of bankruptcy. See In re Maria Vista Estates , No. LA CV 13-05286-VBF, 2014 WL 11972906, at *7 (C.D. Cal. July 30, 2014) (citations omitted). "The burden falls on the debtor whose standing is challenged to provide evidence from which the Court could infer the reasonable possibility of a surplus." In re Benham , 220 F. Supp. 3d 1033, 1041 (C.D. Cal. 2016) (citations omitted).

The DJRI Estate holds no assets except for the avoidance claims, which would be insufficient to satisfy the claims by RFC and other creditors to the DJRI Estate. Even assuming Dr. Roger has standing to step in the shoes of debtor DJRI as a non-party shareholder—which, as articulated above, is incorrect—Dr. Roger has failed to submit evidence showing even a possibility that the DJRI Estate would be solvent and would return a surplus to DJRI. In the absence of evidence suggesting the possibility of a surplus resulting from the DJRI Estate, Dr. Roger has not met the debtor's burden to show how he would be affected by any orders issued in the DJRI Bankruptcy Action. See In re Maria Vista Estates , 2014 WL 11972906, at *7 (finding that the managing member of one of two partners to the debtor partnership lacked standing to appeal a bankruptcy court order in part because the appellant did not provide any evidence to contradict the record showing that the debtor was insolvent); In re Benham , 220 F. Supp. 3d at 1040-41 (holding that the debtor was not directly affected by a bankruptcy court's final order disposing of the debtor estate's assets because "the claims asserted against Appellant's estate substantially exceed the estate's assets" and therefore "there is no reasonable likelihood or even realistic chance that something will remain to trickle down to Appellant").

Lastly, and more importantly, not only is Dr. Roger not the debtor in the DJRI Bankruptcy Action, but Dr. Roger also filed for personal bankruptcy in the Roger Bankruptcy Action. The implication of Dr. Roger's personal bankruptcy is that any assets held by Dr. Roger, or any claims that could be filed against him personally, are administered by the trustee to Dr. Roger's estate. Thus, any possible "surplus" that may be recovered by Trustee for the benefit of the DRJI Estate would not flow to Dr. Roger as the shareholder of DJRI but would instead be considered assets of Dr. Roger's bankruptcy estate. See In re Maria Vista Estates , 2014 WL 11972906, at *7 (finding that the managing member of a partner of the debtor partnership lacked appellate standing because "any recovery which [the appellant] otherwise might have received from such investigation would have inured not to the benefit of [the appellant], but entirely to the benefit of [the appellant's] own bankruptcy estate and that estate's trustee").

Moreover, even if Dr. Roger theoretically could have had standing to object to the Sale Order as a shareholder of the debtor DJRI—which, again, is contrary to authority—Dr. Roger has not presented any evidence that he would be injured directly due to the possibility of a surplus flowing to Dr. Roger from Dr. Roger's bankruptcy estate. In fact, Appellants have provided evidence that Dr. Roger's bankruptcy estate is currently insolvent and is likely to remain as much even after a settlement between the trustee and RFC, Dr. Roger's largest creditor. See Dkt. 47 Ex. 1 (declaration from the trustee for Dr. Roger's bankruptcy estate attesting that "there are not enough funds currently on hand to pay the entirety of the amounts requested" in administrative fees, even after the settlement with RFC in those proceedings); id. Ex. 2 (summary of schedules for Dr. Roger's bankruptcy indicating liabilities of approximately $5.7 million and assets just over $2 million). Dr. Roger's only response is that, if RFC's attempt to seek attorney's fees and costs in an amount over $5 million is disallowed in the underlying state court case, then it is "very likely" that there will be a surplus for the DJRI Estate and/or Dr. Roger's bankruptcy estate. See Dkt. 44 at 3. But such speculation is insufficient to create a "reasonable possibility" of a surplus in either estate; Dr. Roger's burden is to provide evidence of such a possibility, a burden which Dr. Roger has not met. See In re Benham , 220 F. Supp. 3d at 1041. Therefore, even though Dr. Roger is a "co-debtor" regarding the loans by RFC for which RFC has made claims against the DJRI Estate and Dr. Roger's personal bankruptcy estate, without any potential surplus for either the DJRI Estate or Dr. Roger's bankruptcy estate, there is no possibility that Dr. Roger will be personally harmed or aggrieved by any order issued in the DJRI Bankruptcy Action pertaining to RFC's claims as a creditor.

Accordingly, based on the above, Dr. Roger lacks standing to participate in this appeal, and Appellants' motion to strike Dr. Roger's responsive brief, Dkt. 36, is GRANTED. However, even if the Court were to consider Dr. Roger's responsive brief on the merits, the outcome of Appellants' appeal would be the same.

IV. Standard of Review

When a district court is tasked with appellate review of a decision by a bankruptcy court, the district court "functions as an appellate court and applies the standards of review generally applied in federal courts of appeal." Tighe v. Valencia (In re Guadarrama) , 284 B.R. 463, 468 (C.D. Cal. 2002) (citation omitted). "In an appeal from an order of a bankruptcy court, conclusions of law are reviewed de novo and findings of fact are reviewed for clear error." In re Lewin v. Lewin , No. ED CV15-00934 JAK, 2016 WL 6514108, at *1 (C.D. Cal. Mar. 3, 2016) (citing Blausey v. U.S. Tr. , 552 F.3d 1124, 1132 (9th Cir. 2009) ). "Mixed questions of law and fact are reviewed de novo." In re Chang , 163 F.3d 1138, 1140 (9th Cir. 1998) (citation omitted).

The primary issue to resolve in this appeal is the bankruptcy court's interpretation of Mickey Thompson and whether the bankruptcy court properly applied that case to protect the rights of non-creditor defendants to fraudulent transfer claims held by the DJRI Estate. The applicability of Mickey Thompson is a question of law, subject to de novo review.

However, Appellants also request that the Court, in reviewing the bankruptcy court's application of Mickey Thompson , rule that the bankruptcy court erred by refusing to approve the Second RFC Settlement as the best and highest bid at the auction of the DJRI Estate's avoidance claims. A bankruptcy court's decision to accept or reject a compromise is reviewed for abuse of discretion. See In re Amber Hotel Corp. , No. CV 17-2570 FMO, 2017 WL 4990439, at *2 (C.D. Cal. Oct. 30, 2017) ; In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 420.

V. Analysis

A bankruptcy court may approve a compromise or settlement between the trustee and a creditor to the bankruptcy estate. Fed. R. Bankr. P. 9019(a). "The purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims." Martin v. Kane (In re A & C Props.) , 784 F.2d 1377, 1380-81 (9th Cir. 1986). As the Ninth Circuit noted, "[t]he law favors compromise and not litigation for its own sake ... as long as the bankruptcy court amply considered the various factors that determined the reasonableness of the compromise, the court's decision must be affirmed." Id. at 1381 (citation omitted). Thus, to affirm a compromise agreement, the bankruptcy court must find that the proffered compromise agreement is "fair and equitable," considering the following factors:

(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

Id. (citations omitted). These factors should be applied under the guise that the settlement should be in "the best interests of the estate" and should be "fair and equitable for the creditors " to the estate. CAM/RPC Elecs. v. Robertson (In re MGS Mktg.) , 111 B.R. 264, 266–67 (9th Cir. BAP 1990) (emphasis added).

The trustee proposing a compromise has the burden to persuade the bankruptcy court that the proposed compromise is fair and equitable. See In re A & C Props. , 784 F.2d at 1381. On the other hand, courts generally should "give[ ] deference to a trustee's business judgment in deciding whether to settle a matter" for the benefit of the estate. In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 420 (citing In re A & C Props. , 784 F.2d at 1381 ).

In the present case, the bankruptcy court never reached the question of whether the Second RFC Settlement was fair and equitable under the A & C Properties factors. Instead, the bankruptcy court relied on Mickey Thompson as a basis to refuse to rule on the motion to approve the Second RFC Settlement. Instead of addressing the motion, the court ordered an auction of the DJRI Estate's avoidance claims in a piecemeal fashion, with the intent to maximize the possible assets flowing into the DJRI Estate beyond those articulated in the Second RFC Settlement while protecting the rights of non-creditor defendants to the avoidance claims to participate in the bidding process.

A. Mickey Thompson

In Mickey Thompson , the trustee of the bankruptcy estate negotiated a settlement with various third-party defendants to potential legal claims held by the estate, for a total amount of $40,000. See In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 418. After the trustee filed a motion to approve the settlement, the appellant, a creditor, filed an opposition to the motion, arguing that the settlement amount was inadequate and that a third party was willing to make an overbid of $45,000 to settle the same claims. Id. The trustee's reply to the appellant's opposition acknowledged that other prospective purchasers might want to purchase the claims for more than the settlement amount, stating that selling the claims pursuant to an overbid "would be in the best interest of the creditors of the estate." Id. at 418-19 (emphasis removed). The trustee proposed an overbid procedure and requested that the court authorize the trustee to hold an overbid auction, as an alternative to granting the motion to approve the settlement. Id. at 19.

At the ensuing hearing on the motion to approve the settlement, counsel for the trustee acknowledged receipt of a cashier's check for $45,000 for the claims against the third-party defendants, but the trustee maintained the same position that the settlement agreement should be approved because "at the time [the trustee] entered the Agreement, he believed it was in the estate's best interest." Id. Counsel for the creditor appellant then improved the offer of $45,000 to include 15% of all monies collected from the appellant's prosecution of the avoidance claims against the third parties. Id. Ultimately, the bankruptcy court granted the motion and approved the settlement agreement, noting that the proposed $5,000 overbid was not substantial enough to represent the best interests of the creditors and that the parties' willingness to engage in an overbid action was insufficient to overcome the business judgment of the trustee. Id.

On appeal, the Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court's decision to approve the settlement. Id. at 420-22. First, the court concluded that "the disposition by way of ‘compromise’ of a claim that is an asset of the estate is the equivalent of a sale of the intangible property represented by the claim, which transaction simultaneously implicates the ‘sale’ provisions under section 363 as implemented by Rule 6004 and the ‘compromise’ procedure of Rule 9019(a)." Id. at 421 (citations omitted).⁴ In keeping with the treatment of a compromise as a "sale" of assets, the court continued that a trustee's fiduciary duty to maximize the assets of the bankruptcy estate "trumps any contractual obligation that a trustee arguably may incur in the course of making an agreement that is not enforceable unless it is approved by the court." Id. (citation omitted). Thus, the court held that, "[w]hen confronted with a motion to approve a settlement under Rule 9019(a), a bankruptcy court is obliged to consider, as part of the ‘fair and equitable’ analysis [under A & C Properties ], whether any property of the estate that would be disposed of in connection with the settlement might draw a higher price through a competitive process and be the proper subject of a section 363 sale." Id. at 421-22. However, the court noted that the decision whether to implement formal sale procedures in connection with a settlement offer is left to the bankruptcy court's discretion. Id. at 422.

4 "Section 363" refers to 11 U.S.C. § 363, which authorizes a bankruptcy trustee to sell property held by the bankruptcy estate, subject to certain limitations.

Turning to the facts at issue, the Ninth Circuit Bankruptcy Appellate Panel held that the trustee "has not shown how the settlement is in ‘the paramount interest of creditors.’ " Id. at 421 (referencing the four-factor test from A & C Properties ). The court placed weight on the trustee's admission that he had received an overbid on the settlement agreement and the trustee's ambivalence regarding whether the bankruptcy court should approve the motion at the hearing. Id. The court construed the settlement agreement as "in essence a sale of potential claims," because, although the settlement agreement contained a mutual release of claims between the settling parties and the trustee, "no party has identified any claims which the Settling Parties could assert against the estate or Trustee." Id. Since the settlement was simply a sale of potential claims, the court noted that the settling parties "were free to bid against the third party overbidder" at their discretion. Id. The court also emphasized the potential value to the estate from the appellant creditor's willingness to pay the estate 15% of all proceeds recovered in litigation against the settling parties, stating that it is proper for a trustee to transfer its rights to bring avoidance claims against third parties "for a consideration that may include a guaranteed minimum recovery for the estate (a ‘price’) and that may provide for sharing of additional proceeds of the litigation." Id. at 422 n. 8 (citing In re P.R.T.C., Inc. , 177 F.3d at 780-82 ; Briggs v. Kent (In re Prof'l Inv. Props.) , 955 F.2d 623, 625–26 (9th Cir. 1992) ; Wells Fargo Bank, N.A. v. Guy F. Atkinson Co. (In re Guy F. Atkinson Co.) , 242 B.R. 497, 501–02 (9th Cir. BAP 1999) ). Accordingly, the court concluded that the bankruptcy court "committed a clear error of judgment in concluding that the settlement was in the best interests of the estate." Id. at 422.

B. The Court's Application of Mickey Thompson Was Erroneous

In the present case, the bankruptcy court relied on Mickey Thompson to conclude that the non-creditor, third-party defendants to Trustee's avoidance claims should have the right to overbid the amount recoverable by the DJRI Estate pursuant to the Second RFC Settlement. The court misconstrued the holding of Mickey Thompson and erred by using Mickey Thompson to override the business judgment of Trustee.

1. Mickey Thompson Does Not Protect the Bidding Rights of Non-Creditors

Mickey Thompson does not suggest that a bankruptcy court must consider an overbid process regarding a settlement agreement to protect the interests of non-creditors. The court explicitly analyzed whether the settlement agreement at issue was "fair and equitable" under the factors articulated in A & C Properties , of which the most important is the question whether the proposed compromise is in "the paramount interest of the creditors." In re A & C Props. , 784 F.2d at 1381 ; see also In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 420 (noting that a compromise must be "fair and equitable to the creditors " and "should be in the best interests of the estate") (emphasis added) (internal quotation marks omitted) (citing In re MGS Mktg. , 111 B.R. at 266-67 ). When the court held that the settlement agreement was not fair and equitable, the court did so because the trustee had received an overbid on the settlement from a creditor to the bankruptcy estate. In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 419. An overbid from a creditor indicated that the creditors would be better served by a bidding process, which would either force the settling parties to pay more money for the claims against them held by the trustee or would allow the creditors to purchase the claims and litigate them fully for the benefit of the estate. See id. at 421. This was especially true in Mickey Thompson where the parties with whom the trustee reached a settlement agreement were not creditors; in effect, the court ultimately held that the bankruptcy court erred by elevating the wishes of the non-creditor settling parties above the desires of creditors to overbid the settlement amount.

Here, the roles are reversed; it is RFC, a creditor , who reached a settlement agreement with Trustee, and it is Dr. Roger and American Express, non-creditor defendants to Trustee's avoidance claims, who wish to disrupt the settlement efforts by forcing an overbid auction. Under the guidance of Mickey Thompson and A & C Properties , the bankruptcy court should have exhibited "proper deference" to the views of RFC, the supermajority creditor, when determining whether to hold an overbid auction for the benefit of the DJRI Estate. There is no basis, in Mickey Thompson or otherwise, to conclude that Dr. Roger, American Express, or any other non-creditor defendants to Trustee's avoidance claims should have the right to participate in a bidding process that would supplant a reasonable settlement agreement between Trustee and the supermajority creditor to the DJRI Estate, whose interests are intended to be protected above all others in a bankruptcy proceeding.

The bankruptcy court's concern that the Second RFC Settlement would have a "chilling" effect on bidding is not rooted in the holding of Mickey Thompson , which is not concerned with the rights of bidders and instead focuses solely on whether the bidding process itself would be beneficial to the bankruptcy estate—and, by extension, the creditors to the bankruptcy estate. Non-creditor defendants to claims held by a bankruptcy estate simply do not have " Mickey Thompson rights" to place overbids on claims against them; the "rights" conferred by Mickey Thompson inure to the bankruptcy estate and are intended to ensure that any compromises reached between the trustee and creditors or non-creditors are in the best interests of the bankruptcy estate in light of the possibility of overbidding on those compromises.

Based on the above, the bankruptcy court was legally incorrect in applying Mickey Thompson to require a second auction of avoidance claims, in order to protect the rights of non-creditors to overbid on the compromise reached between Trustee and RFC. That being said, as analyzed below, the bankruptcy court nevertheless had an obligation to determine whether an overbidding auction would provide additional benefits to the DJRI Estate than the settlement between Trustee and RFC. Thus, the next issue to address is whether the bankruptcy court actually engaged in such an analysis in denying a sale of the avoidance claims to RFC under the terms of the Second RFC Settlement.

2. The Bankruptcy Court Abused Its Discretion by Denying a Sale of the Avoidance Claims to RFC Pursuant to RFC's Bid on the Ground that Further Auctions May Produce an Overbid

The court in Mickey Thompson found an overbid process necessary in part because the trustee had already received an overbid prior to the hearing on the trustee's motion to approve the settlement agreement. In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 421. The court did not explicitly rule out the possibility that an overbid auction would be appropriate even in the absence of a confirmed overbid by an interested party. See, e.g. , id. at 422 (noting that, because a compromise agreement functions as a "price" in a sale of assets, "[t]he possibility that someone else may be willing to pay a higher price triggers the prospect of an auction that could yield an even higher price" and "entertaining overbids often triggers a bidding sequence that may lead to a much higher price"). However, the overbid from the creditor prior to the hearing provided the court with actual evidence that an overbid auction would better serve the interests of creditors, and the fact that the trustee had received the overbid was essential to the court's conclusion that the bankruptcy court erred by not holding an overbid auction.

In the present case, the bankruptcy court refused to rule on the motions to approve the First RFC Settlement or the Second RFC Settlement, instead holding two separate auctions of the avoidance claims held by Trustee on behalf of the DJRI Estate.

With respect to the First RFC Settlement, the record shows that the settlement between Trustee and RFC was itself an overbid by a creditor of compromises between Trustee and non-creditor third parties. Trustee reached an agreement with RFC after previously reaching tentative compromises with the DRJI Plan, the Corporate Defendants, and Dr. Freedman. For this reason, it may have been appropriate for the bankruptcy court to hold the first auction of avoidance claims to determine if any party might further overbid RFC on the initial compromises between Trustee and the DJRI Plan, the Corporate Defendants, and Dr. Freedman. As Mickey Thompson instructs, when assessing a proposed compromise to determine if it is fair and equitable under the A & C Properties factors, the bankruptcy court should consider whether "any property of the estate that would be disposed of in connection with the settlement might draw a higher price through a competitive process and be the proper subject of a section 363 sale." In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 422. The bankruptcy court appeared to apply this rationale in ordering the first auction, in which two avoidance claims held by the DJRI Estate were sold for a total of $185,000. Regardless, the propriety of the bankruptcy court's decision to hold the first auction of avoidance claims is not before this Court, because the Sale Order at issue was only with regard to the second auction.

Turning to the Second RFC Settlement, the bankruptcy court decided to hold a second auction despite the fact that Trustee had not received any overbids from any creditors or non-creditors above and beyond the sale "price" embodied by Trustee's settlement agreement with RFC. Neither did Trustee receive any overbids on the Second RFC Settlement leading up to or during the second auction. The total bids received by Trustee as part of the second auction amounted to $63,000, which was less than the benefits provided by the Second RFC Settlement as determined by the Trustee exercising his business judgment. In light of the fact that no overbids were received during the auction, Trustee maintained his position that the Second RFC Settlement was the highest and best offer received on the avoidance claims and would be in the best interests of the DJRI Estate.

Following the conclusion of the second auction, the bankruptcy court had no evidentiary basis to conclude that the DJRI Estate likely could obtain a higher price on any of the avoidance claims above the value conferred upon the DJRI Estate by the Second RFC Settlement. The bankruptcy court's continued insistence on a sale of claims by piecemeal auction after the second auction produced no overbids violated the spirit of Mickey Thompson and operated to substitute Trustee's business judgment with the bankruptcy court's own subjective beliefs, without regard to the A & C Properties factors the bankruptcy court must consider in connection with RFC's bid for the avoidance claims under the terms of the Second RFC Settlement. And even if Mickey Thompson did protect the rights of non-creditors to overbid on settlements reached by the trustee, Dr. Roger, American Express, and other non-creditors had ample opportunity to overbid the Second RFC Settlement prior to and during the second auction but did not place an overbid or otherwise indicate a willingness to pay more to the DJRI Estate for an individual avoidance claim than what RFC was offering. Therefore, in the absence of any indication that Trustee might receive an overbid of the Second RFC Settlement through further auctions of avoidance claims, the bankruptcy court erred by relying on Mickey Thompson to deny a sale of the avoidance claims to RFC under the terms of the Second RFC Settlement.

Moreover, as in Mickey Thompson , the bankruptcy court ignored the non-cash benefits of the Second RFC Settlement. In finding that the bankruptcy court erred by failing to consider an overbid of the compromise between the trustee and third-party defendants, the court in Mickey Thompson noted the fact that the proposed overbid "also included an offer to pay the estate fifteen percent of any proceeds to be recovered in litigation against Settling Parties." In re Mickey Thompson Entm't Grp., Inc. , 292 B.R. at 422. The Ninth Circuit Bankruptcy Appellate Panel subsequently held that a bankruptcy court abuses its discretion by deferring to a trustee's judgment to ignore bids on claims held by the bankruptcy estate where those bids included a fixed percentage of net proceeds collected from prosecuting those claims. In re Lahijani , 325 B.R. at 289. The court noted that the trustee's decision to value the fixed percentage of collected proceeds as "zero" for purposes of the bidding process "does not inspire confidence in [the trustee's] business judgment." Id.

Similarly here, the bankruptcy court impermissibly discounted the non-cash benefits to the DJRI Estate from the Second RFC Settlement, including the fact that the DJRI Estate would not incur any future administrative expenses (which constitute an ever-growing "claim" against the DJRI Estate) and the fact that the DJRI Estate would receive 25% of all proceeds from RFC's litigation of the avoidance claims against the non-creditor defendants. See, e.g. , App'x I, Dkt. 18, at 68 (the bankruptcy court referring to the consideration under the Second RFC Settlement as "illusory"); id. at 87 (the bankruptcy court stating that the money received by the DJRI Estate from the first auction of avoidance claims "was more than [what] was going to come to the Trustee, certainly in cash , than the settlement [with RFC] provided") (emphasis added). Trustee determined, exercising his business judgment, that the cash and non-cash value of the settlement agreements with RFC exceeded any potential recovery that the DJRI Estate could receive from a piecemeal auction of avoidance claims, even if a piecemeal auction could produce greater cash value in the short term. Mickey Thompson required the bankruptcy court to defer to Trustee's business judgment, provided that a sale to RFC would be fair and equitable to RFC and the other creditors of the DJRI Estate, and Lahijani precluded the bankruptcy court from ignoring wholesale the non-cash benefits afforded to the DJRI Estate from the Second RFC Settlement when determining whether RFC's bid was the highest and best offer. To the extent that the bankruptcy court's denial of a sale to RFC at the second auction was predicated on the bankruptcy court's refusal to consider the non-cash benefits of RFC's bid, the bankruptcy court's decision was an abuse of discretion under Lahijani.

In conclusion, the bankruptcy court misapplied Mickey Thompson to protect the interests of non-creditor defendants to avoidance claims filed by Trustee on behalf of the DJRI Estate. Instead, the bankruptcy court should have analyzed the Second RFC Settlement under the A & C Properties factors to determine whether RFC's bid at the auction would be fair and equitable to the interests of the creditors to the DJRI Estate, while fully taking into account the non-cash benefits to the DJRI Estate inherent in the Second RFC Settlement. Accordingly, in the Sale Order, the bankruptcy court abused its discretion by denying a sale to RFC pursuant to the Second RFC Settlement without analyzing the factors set forth in A & C Properties to determine whether the Second RFC Settlement was fair and equitable to the creditors of the DJRI Estate.

C. Upon Remand, the Bankruptcy Court Must Analyze the Second RFC Settlement under the A & C Properties Factors

Based on the above, the bankruptcy court abused its discretion by ordering a second auction of avoidance claims in a piecemeal fashion in response to Trustee's motion to approve the Second RFC Settlement. The bankruptcy court's decision in this regard was premised upon a misinterpretation of Mickey Thompson and impermissibly elevated the interests of non-creditor third parties above those of the creditors to the DJRI Estate, particularly in the absence of any evidence suggesting that an overbid of the Second RFC Settlement was likely to result from another auction process. To the extent that the bankruptcy court's decision to hold a second auction relied on the finding that an overbid of the Second RFC Settlement was likely, such a factual finding was clearly erroneous in light of the record before the Court. Therefore, the portion of the Sale Order approving Trustee's proposed bidding procedures for the second auction is REVERSED.

Furthermore, by denying a sale of the avoidance claims to RFC pursuant to the terms of the Second RFC Settlement at the second auction, the bankruptcy court in effect ruled that the Second RFC Settlement was not fair and equitable, even though the court did not explicitly analyze the Second RFC Settlement under the A & C Properties factors. Because the court failed to apply the appropriate legal test to RFC's bid, which was the highest and best offer received by Trustee on the avoidance claims at the second auction, the court's rejection of RFC's bid was an abuse of discretion. Accordingly, the portion of the Sale Order denying a sale of the avoidance claims to RFC under the terms of the Second RFC Settlement is VACATED.

Nevertheless, without the benefit of the bankruptcy court's analysis of the A & C Properties factors, the Court is not in the position to rule as to whether the Second RFC Settlement affirmatively satisfies those factors. See, e.g. , In re Lahijani , 325 B.R. at 291 (finding that the bankruptcy court committed reversible error in approving a sale of assets without considering non-cash offers and remanding to the bankruptcy court to evaluate the ignored offers under the "fair and equitable" standard). The Court finds the disposition in Lahijani particularly appropriate in this case, given the lack of proper analysis from the bankruptcy court. Upon remand, the bankruptcy court must expressly analyze the Second RFC Settlement to determine whether the agreement is fair and equitable to the creditors to the DJRI Estate—which, in a practical sense, appears to be only RFC. The bankruptcy court also must ensure that its decision on the Second RFC Settlement appropriately defers to the business judgment of Trustee as necessary; the court is not permitted to substitute its own judgment for that of the bankruptcy trustee when analyzing the sufficiency of a compromise. See In re Mickey Thompson Entm't Grp. Inc. , 292 B.R. at 420.

To address another issue raised by Appellants in this matter, upon remand, the bankruptcy court must ensure that only parties with proper standing are permitted to participate in the DJRI Bankruptcy Action, specifically in terms of objections to any compromise agreement reached by Trustee. "Only persons who are directly or adversely affected pecuniarily by the compromise have standing to object." In re Engram , 2008 WL 8444806, at *3 (citing In re Fondiller , 707 F.2d at 442 ). In Engram , the Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's order holding that the debtor's daughter and sister lacked standing to challenge a compromise reached by the trustee, because the compromise "did not have any adverse effect" on the objecting parties. Id. Similarly here, the bankruptcy court should not have allowed Dr. Roger and American Express, non-creditor and non-debtor defendants to avoidance claims held by Trustee, to file objections and oppositions to Trustee's efforts to approve the Second RFC Settlement. While this provides a non-substantive basis to reverse the Sale Order,⁵ it is more important that the bankruptcy court consider the standing of all parties appearing in the DJRI Bankruptcy Action on a going-forward basis to ensure that only the proper parties provide input on the fairness and equitableness of the Second RFC Settlement.

5 As stated above, Appellants do not specifically challenge a particular order by the bankruptcy court that held that non-creditors such as Dr. Roger and American Express had standing to object to Trustee's motion to approve the Second RFC Settlement, so it is unclear whether the bankruptcy court actually issued a ruling regarding the standing of these parties.

VI. Conclusion

For the reasons set forth above, the Sale Order issued by the bankruptcy court is REVERSED and VACATED. Because RFC placed a bid at the second auction of avoidance claims pursuant to the terms of the Second RFC Settlement, which Trustee considered to be the best and highest bid for the avoidance claims, the bankruptcy court is instructed to analyze whether the Second RFC Settlement is fair and equitable under the factors set forth in A & C Properties , considering the interests of the creditors to the DJRI Estate and Trustee's exercise of his business judgment.

IT IS SO ORDERED.