In re: Shumate Spokane, LLC

FILED AUG 25 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EW-14-1302-TaPaJu ) 6 SHUMATE SPOKANE, LLC, ) Bk. No. 09-05081-FLK11 ) 7 Debtor. ) Adv. No. 11-80035-FLK ______________________________) 8 ) GEORGE F. LATUS; MICHAEL ) 9 WILHITE; MATT THOMASSON; ) ARIC MUSE, ) 10 ) Appellants, ) 11 ) v. ) MEMORANDUM* 12 ) SHUMATE SPOKANE, LLC; JOHN ) 13 MICHAEL SHUMATE; JENNIFER D. ) SHUMATE; HARLEY-DAVIDSON ) 14 CREDIT CORPORATION; GE CAPITAL) FRANCHISE FINANCE CORPORATION,) 15 ) Appellees. ) 16 ______________________________) 17 Submitted Without Oral Argument** on July 23, 2015 at Pasadena, California [18] Filed – August 25, 2015 [19] Appeal from the United States Bankruptcy Court 20 for the Eastern District of Washington 21 Honorable Frank L. Kurtz, Bankruptcy Judge, Presiding [22] * 23 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 24 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8024-1(c)(2). 25 ** After examination of the briefs and record, in an order 26 entered December 15, 2014, the Panel unanimously determined that oral argument was not needed for this appeal and granted 27 appellants’ motion for submission on the briefs and appellate record. See Fed. R. Bankr. P. 8019(b); 9th Cir. BAP Rule 801928 1. [1] 2 Appearances: Timothy J. Carlson of Carlson Boyd, PLLC on brief for Appellants Aric Muse, Matt Thomasson 3 and Michael Wilhite; Dianna J. Caley of Wong Fleming, PC on brief for Appellee Harley4 Davidson Credit Corporation; Jeffrey T. Wegner and Lisa M. Peters of Kutak Rock LLP on brief 5 for Appellee GE Capital Franchise Finance Corporation [7] Before: TAYLOR, PAPPAS, and JURY, Bankruptcy Judges. [8] 9 INTRODUCTION1 10 This is the second time we consider this appeal, which 11 arises from the bankruptcy court’s judgment against appellants 12 Michael Wilhite, Matt Thomasson, and Aric Muse in their 13 adversary proceeding for the recovery of wages and employee 14 benefits. Previously, we determined that the order subject to 15 appeal was not final and dismissed the appeal for lack of 16 jurisdiction. See BAP No. EW-12-1249-TaPaJu, ECF No. 57. The 17 judgment is now final, and we now AFFIRM. 18 FACTS2 19 The Debtor filed its chapter 11 bankruptcy case on 20 September 9, 2009. Before filing, the Debtor operated [21] 22 1 Unless otherwise indicated, all chapter and section 23 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 . All “Rule” references are to the Federal Rules of Bankruptcy 24 Procedure and all “Civil Rule” references are to the Federal Rules of Civil Procedure. [2] We exercise our discretion to independently review 26 documents filed in the adversary proceeding and the underlying bankruptcy case. See O’Rourke v. Seaboard Sur. Co. (In re E.R. 27 Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227 , 233 n.9 28 (9th Cir. BAP 2003). [2] 1 motorcycle sales and repair shops licensed and franchised 2 through an entity related to Harley-Davidson Motor Company. On 3 June 10, 2010, the bankruptcy court entered an order approving 4 the sale of substantially all of the Debtor’s assets (“Sale 5 Order”). The Sale Order provided for payment in full of the 6 secured claim of Harley-Davidson Credit Corporation (“Harley7 Davidson”), less a $33,333 carve-out and surcharge, and payment 8 of $400,000 to GE Capital Franchise Finance Corporation 9 (“GEFF”) on account of its secured claim, again less a $33,333 10 carve-out and surcharge.3 11 According to the Affidavit of Daniel Small, the GEFF Vice12 President directly responsible for GEFF’s claims against the 13 Debtor, the business appeared to be inoperative at least six 14 months before the sale. Monthly Operating Reports filed by the 15 Debtor are consistent with this assertion as they routinely 16 reported that the Debtor had no employees, $0 in sales revenue, 17 and $0 in repair revenues. 18 On March 2, 2011, the Appellants commenced an adversary 19 proceeding naming five defendants: the Debtor, John Michial 20 Shumate, Jennifer Shumate, GEFF, and Harley-Davidson. They [3] 22 In addition, the buyer agreed to pay into escrow an additional $33,333, to be combined with the surcharge amounts 23 from GEFF and Harley-Davidson and to pay the “reasonable and necessary costs and expenses of disposing of the collateral that 24 benefitted the two secured creditors through the sale process” pursuant to § 506(c). The Appellants assert on appeal that they 25 received no payment from the sale proceeds. On September 20, 2011, however, the bankruptcy court entered a Stipulated Order 26 on Motion for Disbursement of “Carve Out” Contribution Funds, which includes payments as follows from the surcharge proceeds: 27 $8,024.30 to Mike Wilhite, $8,136.25 to Matt Thomasson, and $15,476.33 to Aric Muse, with such payments to be credited 28 against their post-petition compensation. [3] 1 amended their complaint almost immediately. The First Amended 2 Complaint (“FAC”) alleged that the Debtor continued to employ 3 them postpetition in managerial positions and stated “that 4 their help was necessary to keep the business operating so that 5 it could be sold as a going concern which would significantly 6 enhance the purchase price . . . .” First Am. Compl. ¶¶ 26-27. 7 It also alleged that the Appellants were not paid any wages, 8 overtime, retirement, or other benefits for postpetition work 9 that provided benefit to GEFF and Harley-Davidson. 10 The FAC alleged claims for relief including recovery 11 under: (1) § 506(c); (2) quantum meruit or unjust enrichment 12 theories; and (3) the Fair Labor Standards Act. The 13 Appellants’ prayer for relief, as relevant to this appeal, 14 sought to collect the judgment directly from GEFF and Harley15 Davidson. 16 Both GEFF and Harley-Davidson filed motions to dismiss 17 under Civil Rule 12(b)(6) as to all claims asserted in the FAC. 18 GEFF generally argued that, other than identifying GEFF as a 19 corporation doing business in Washington, the FAC did not refer 20 to GEFF in a factual allegation and, in particular, failed to 21 allege that GEFF employed or had any contact with the 22 Appellants. As to the first claim, GEFF also argued that the 23 Appellants lacked standing to seek a § 506(c) surcharge and 24 that the bankruptcy court lacked subject matter jurisdiction as 25 a result of the standing deficiency and because the collateral 26 allegedly subject to § 506(c) surcharge was no longer property 27 of the estate. 28 Harley-Davidson raised similar arguments and further [4] 1 asserted that the Appellants were collaterally estopped from 2 seeking a surcharge based on the final Sale Order, which 3 allocated sale proceeds. It also argued that the FAC did not 4 adequately plead a valid quantum meruit or unjust enrichment 5 claim as Harley-Davidson was a fully secured creditor entitled 6 to payoff of its secured claim. 7 The Appellants next moved for leave to amend the FAC. 8 Following hearings and supplemental briefing on the collective 9 motions, the bankruptcy court dismissed the first claim under 10 § 506(c) with prejudice. It concluded that because the Debtor 11 sold GEFF and Harley-Davidson’s collateral free and clear, it 12 was no longer part of the bankruptcy estate and, thus, could 13 not be surcharged. 14 As to the remaining three claims, the bankruptcy court 15 granted the Appellants’ motion for leave to amend. It advised 16 the parties, however, that it would treat the pending motions 17 to dismiss as motions for summary judgment, so that it could 18 consider material outside the pleadings. 19 Pursuant to deadlines established by the bankruptcy court, 20 the Appellants filed a Second Amended Complaint (“SAC”), and 21 GEFF and Harley-Davidson answered. Both sides filed additional 22 declaratory evidence, and GEFF and Harley-Davidson filed 23 further legal argument. At a specially set hearing, the 24 bankruptcy court orally stated its ruling on the record. 25 First, the bankruptcy court admonished the Appellants for 26 renewing their § 506(c) claim in the SAC and, once again, 27 dismissed it. It then granted summary judgment in favor of 28 GEFF and Harley-Davidson as to the remaining claims. It found [5] 1 that GEFF and Harley-Davidson submitted admissible evidence 2 sufficient to shift the burden on summary judgment to the 3 Appellants, and concluded that the Appellants did not meet 4 their burden to demonstrate the existence of specific and 5 material disputes of fact to be resolved at trial. 6 The bankruptcy court found that the undisputed evidence 7 established that the § 363 sale generated substantially less 8 than the secured debt. It also found that the Appellants did 9 not meet their burden to refute the evidence that the § 363 10 sale liquidated the assets of an inoperative business or that 11 the Appellants were neither employed by nor in communication 12 with GEFF and Harley-Davidson. 13 The bankruptcy court entered an order on May 1, 2012, and 14 the Appellants appealed. This Panel dismissed the appeal after 15 concluding that the May 1, 2012 order was not a final judgment 16 because the claims against the remaining three non-moving 17 defendants were unresolved. Likewise, it determined that leave 18 to appeal was not appropriate. Eventually, the Appellants 19 obtained a bankruptcy court order dismissing the remaining 20 claims against the Debtor, John Michial Shumate, and Jennifer 21 Shumate. 22 On June 10, 2014, the Appellants appealed from the now 23 final judgment and commenced the present appeal. 24 JURISDICTION 25 The bankruptcy court had jurisdiction under 28 U.S.C. 26 §§ 1334 and 157(b)(2)(O). We have jurisdiction under 28 U.S.C. 27 § 158. [6] 1 ISSUES 2 1. Whether the bankruptcy court erred when it dismissed the 3 Appellants’ § 506 claim. 4 2. Whether the bankruptcy court erred when it granted summary 5 judgment in favor of GEFF and Harley-Davidson on the 6 quantum meruit and unjust enrichment claims. 7 3. Whether the bankruptcy court erred when it granted summary 8 judgment in favor of GEFF and Harley-Davidson on the Fair 9 Labor Standards Act claim.4 10 STANDARDS OF REVIEW 11 We review both the bankruptcy court’s grant of the motion 12 to dismiss under Civil Rule 12(b)(6) and its grant of summary 13 judgment de novo. See Johnson v. Fed. Home Loan Mortg. Corp., 14 --- F.3d ----, 2015 WL 4231519, at *2 (9th Cir. July 14, 2015) 15 (motion to dismiss); Bear Valley Mut. Water Co. v. Jewell, [16] 790 F.3d 977, 986 (9th Cir. 2015) (summary judgment). 17 DISCUSSION 18 A. Motions to Dismiss the First Claim 19 1. Legal standards for a motion to dismiss under Civil 20 Rule 12(b)(6) 21 A motion to dismiss under Civil Rule 12(b)(6) 22 (incorporated into adversary proceedings by Rule 7012(b)) 23 challenges the sufficiency of the allegations set forth in the 24 complaint and “may be based on either a lack of a cognizable 25 legal theory or . . . sufficient facts alleged under a [26] 27 4 The Appellants do not appeal from the bankruptcy court’s grant of summary judgment in favor of GEFF and Harley-Davidson 28 as to any of the other claims in the SAC. [7] 1 cognizable legal theory.” Johnson v. Riverside Healthcare 2 Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (internal 3 quotation marks and citation omitted). The court’s review is 4 limited to the allegations of material facts set forth in the 5 complaint, which must be read in the light most favorable to 6 the non-moving party, and together with all reasonable 7 inferences therefrom, must be taken to be true. Pareto v. 8 F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998). 9 Facts properly subject to judicial notice may be used to 10 establish that the complaint does not state a claim for relief. 11 Intri-Plex Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048 , 12 1052 (9th Cir. 2007). Court documents filed in the underlying 13 bankruptcy case are subject to judicial notice in related 14 adversary proceedings. In re E.R. Fegert, Inc., 887 F.2d at 15 957-58. 16 The plaintiff must provide grounds for its entitlement to 17 relief, which requires more than labels and conclusions; and 18 the actions must be based on legally cognizable rights of 19 action. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 , 555 20 (2007). The court need not accept as true threadbare recitals 21 of a cause of action’s elements, supported by mere conclusory 22 statements; and the plausibility of a claim is context-specific 23 on review of which the court may draw on its experience and 24 common sense. See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). 25 The two-part analysis set out in Iqbal requires the court 26 to first identify the conclusory pleadings, which are not 27 entitled to the assumption of truth. See Moss v. U.S. Secret 28 Serv., 572 F.3d 962, 969 (9th Cir. 2009). Then, after [8] 1 discounting those pleadings, if there remain well-pleaded 2 factual allegations, the court should assume their truth and 3 then determine whether they plausibly give rise to an 4 entitlement to relief. Id. 5 2. Section 506(c) claim 6 Both GEFF and Harley-Davidson argued, among other things, 7 that the Appellants lacked standing to prosecute a § 506(c) 8 surcharge claim. The bankruptcy court dismissed the § 506(c) 9 claim, with prejudice, on this ground and others. 10 In pertinent part, § 506(c) states, “[t]he trustee may 11 recover from property securing an allowed secured claim the 12 reasonable, necessary costs and expenses of preserving . . . 13 such property to the extent of any benefit to the holder of 14 such claim.” The Appellants do not expressly argue that they 15 have statutory standing. Instead, they argue that the 16 bankruptcy court should have granted them derivative standing, 17 presumably under § 105(a). We disagree. 18 The Supreme Court held in Hartford Underwriters Ins. Co. 19 v. Union Planters Bank, N.A., that Congress granted the power 20 to seek a § 506(c) surcharge only to the trustee (and in 21 chapter 11 cases, the debtor-in-possession). 530 U.S. 1 , 6 n.3 22 (2000) (citing 11 U.S.C. § 1107 (a)). The bankruptcy court’s 23 powers are limited by the clear language of the Bankruptcy 24 Code, and the general provisions of § 105(a) may not be used to 25 expand standing to seek a § 506(c) surcharge. See Law v. 26 Segal, 134 S. Ct. 1188, 1194 (2014) (“We have long held that 27 ‘whatever equitable powers remain in the bankruptcy courts must 28 and can only be exercised within the confines of’ the [9] 1 Bankruptcy Code.”) (citation omitted); Hamilton v. Lumsden (In 2 re Geothermal Res. Int’l, Inc.), 93 F.3d 648, 651 (9th Cir. 3 1996) (“[T]he court cannot, in the name of its equitable 4 powers, ignore specific statutory mandates”). 5 As the Appellants lacked standing to seek a surcharge 6 against GEFF and Harley-Davidson, they failed to state a claim 7 upon which relief could be granted. Therefore, the bankruptcy 8 court appropriately dismissed the § 506(c) claim. We need not 9 address the Appellants’ alternative arguments regarding 10 surcharge. 11 B. Summary Judgments on the Second and Fourth Claims 12 1. Legal standards for summary judgment under Civil 13 Rule 56 14 On a Civil Rule 12(b)(6) motion, if matters outside the 15 pleadings are presented to and not excluded by the court, the 16 motion must be treated as one for summary judgment under Civil 17 Rule 56 (incorporated into adversary proceedings by Rule 7056), 18 and all parties must be given a reasonable opportunity to 19 present all the material that is pertinent to the motion. Fed. 20 R. Civ. P. 12(d). The party against whom summary judgment was 21 entered under these circumstances must have been “fairly 22 apprised that the court would look beyond the pleadings” and 23 treat the motion to dismiss as one for summary judgment. Olsen 24 v. Idaho St. Bd. of Med., 363 F.3d 916 , 922 (9th Cir. 2004) 25 (internal quotation marks and citations omitted). 26 Here, the bankruptcy court appropriately advised the 27 parties of its intention to treat the motions to dismiss as to 28 the remaining claims as motions for summary judgment, so as to [10] 1 consider matters outside the pleadings. It then set a schedule 2 for the parties to file additional documents and to present 3 additional argument. 4 Civil Rule 56(c) provides that a party may move for 5 summary judgment when there is no genuine dispute of material 6 fact and the moving party is entitled to a judgment as a matter 7 of law. A “genuine dispute” arises where, based on the 8 evidence presented, a fair-minded trier of fact could return a 9 verdict in favor of the nonmoving party on the issue in 10 question. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 , 249 11 (1986); Lang v. Ret. Living Pub. Co., 949 F.2d 576, 580 (2d 12 Cir. 1991). A “material fact” is one for which the resolution 13 could affect the outcome of the case. Anthes v. Transworld 14 Sys., Inc., 765 F. Supp. 162, 165 (D. Del. 1991). 15 All justifiable inferences must be drawn in favor of the 16 non-moving party. Anderson, 477 U.S. at 255 . Likewise, all 17 evidence must be viewed in the light most favorable to the non18 moving party. Lake Nacimiento Ranch v. San Luis Obispo Cty., [19] 841 F.2d 872, 875 (9th Cir. 1987). A party responding to a 20 summary judgment motion may not rest upon mere allegations or 21 denials in its pleadings. Rather the party must present 22 admissible evidence showing that there is a genuine dispute for 23 trial. Fed. R. Civ. P. 56(e). 24 If the non-moving party bears the ultimate burden of proof 25 on an element at trial, that party must make a showing 26 sufficient to establish the existence of that element in order 27 to survive a motion for summary judgment. Celotex Corp. v. 28 Catrett, 477 U.S. 317, 322-23 (1986). [11] 1 As to the quantum meruit and unjust enrichment claims, the 2 bankruptcy court found that, “in the face of the denials 3 contained in the moving defendants’ affidavit, the [Appellants] 4 provide[d] conclusionary statements but [did] not provide 5 specific facts necessary to sustain their burden.” Hr’g Tr. 6 (Feb. 3, 2012) at 14:20-23. As to the Fair Labor Standards Act 7 claim, it similarly found that the Appellants had “not come 8 forward with specific facts showing that the defendants 9 qualif[ied] as an employer.” Id. at 22:10-12. We agree in 10 both instances. 11 2. Quantum meruit and unjust enrichment claims 12 “Unjust enrichment is the method of recovery for the value 13 of the benefit retained absent any contractual relationship 14 because notions of fairness and justice require it.” Young v. 15 Young, 191 P.3d 1258, 1262 , 164 Wash. 2d 477, 484 (2008). 16 There are three elements that must be established to prevail on 17 such a claim: (1) benefit conferred upon defendant by 18 plaintiff; (2) defendant’s knowledge and appreciation of the 19 benefit; and (3) defendant’s retention or acceptance of the 20 benefit under circumstances making it inequitable for defendant 21 to retain the benefit without payment. Id. at 1262, 484-85. 22 Quantum meruit “is the method of recovering the reasonable 23 value of services provided under a contract implied in fact.” 24 Id. at 1262, 485. The elements of an implied in fact contract 25 are: (1) defendant requested the work; (2) plaintiff expected 26 payment for the work; and (3) defendant knew or should have 27 known that the plaintiff expected payment for the work. Id. at 28 1263, 486. [12] 1 Here, both GEFF and Harley-Davidson submitted affidavits 2 denying knowledge of either the Appellants’ alleged services or 3 that the Appellants looked to GEFF or Harley-Davidson for 4 payment. They likewise denied that the Appellants contacted or 5 communicated with them in any way. The bankruptcy court found 6 that the Appellants did not show that either GEFF or Harley7 Davidson communicated with them and that the Appellants 8 conceded in their affidavits that the Debtor hired them in 9 managerial positions and induced them to work by promising to 10 pay them for their work. The Appellants did not allege 11 specific communications by either GEFF or Harley-Davidson that 12 could be reasonably construed as a promise to pay them for 13 their work or services as employees of the Debtor. The record, 14 thus, supports the bankruptcy court’s conclusion. 15 The Appellants argue that their work allowed GEFF and 16 Harley-Davidson to purchase the Debtor as a going concern. 17 However, the bankruptcy court appropriately considered the 18 Debtor’s monthly operating reports, which reflected no 19 employees, no receipts, and no ongoing business in the months 20 leading up to the § 363 sale. The Appellants did not meet 21 their burden to refute the information in the reports or to 22 show that the Sale Order sold the Debtor’s business as a going 23 concern. 24 As to the unjust enrichment claim, the unrefuted evidence 25 established that the sale of the Debtor’s assets generated 26 substantially less than the secured debt. Neither GEFF nor 27 Harley-Davidson received more than they were due. 28 Instead, the Appellants did nothing more than provide [13] 1 conclusory statements in support of their unjust enrichment and 2 quantum meruit claims. Summary judgment was appropriate as 3 they failed to show the existence of a genuine dispute of 4 material fact to be resolved at trial. 5 3. Fair Labor Standards Act claim 6 The Fair Labor Standards Act provides that “[e]very 7 employer shall pay . . . [its] employees” no less than minimum 8 wage. 29 U.S.C. § 207 (a)(1). The FLSA also provides that “no 9 employer should employ any of its employees . . . for a 10 workweek longer than forty hours unless such employee receives” 11 overtime compensation. Id. Under section 215(a)(2) of the 12 act, it is “unlawful to fail to comply with the minimum wage 13 and overtime pay requirements” of the FLSA. Individual 14 employees may bring a private cause of action against their 15 employer if their employer violates the provisions. Id. “By 16 its terms, section 16(b) applies only to employers,” where 17 “‘[e]mployer’ includes any person acting directly or indirectly 18 in the interest of an employer in relation to an employee 19 . . . .” USM Workers’ Comm. v. Decker (In re USM Tech. Corp.), [20] 158 B.R. 821, 824 (Bankr. N.D. Cal. 1993) (citation omitted). 21 The Appellants, as private claimants under the FLSA, had 22 the burden of proving that they were employed by GEFF or 23 Harley-Davidson and performed work for which they were not 24 properly compensated. See Warren-Bradshaw Drilling Co. v. 25 Hall, 317 U.S. 88, 90 (1942). Again, they presented no 26 evidence that either GEFF or Harley-Davidson qualified as their 27 employer or promised to pay their wages. 28 The Appellants do not question this conclusion; rather, [14] 1 they argue they possessed rights to recover from collateral 2 held by GEFF and Harley-Davidson under the theory that such 3 collateral included “hot goods.” The Appellants argue that the 4 statute is broadly applied, as it states that “it shall be 5 unlawful for any person . . . to transport, or sell in commerce 6 . . . any goods . . . the production of which” was in violation 7 of the FLSA. 29 U.S.C. § 215 (a)(1). However, even broadly 8 construed, the Appellants offered no specific evidence to 9 support their argument that any of Debtor’s inventory or assets 10 were produced by the Appellants or otherwise met the definition 11 of “hot goods.” 12 Further, even if there was a sale of “hot goods,” the 13 Appellants would not have a right to collect from the proceeds 14 of the assets that were sold. See, e.g., In re USM Tech. 15 Corp., 158 B.R. at 825-27 (unpaid workers did not have rights 16 in the proceeds of “hot goods”). 17 Finally, the Debtor’s assets, GEFF and Harley-Davidson 18 collateral, were sold pursuant to the § 363 sale. The 19 Appellants did not appeal from the Sale Order, and it is final. 20 It is worth emphasizing that GEFF and Harley-Davidson 21 agreed to carve outs from the sale proceeds that directly 22 benefitted the Appellants as part of the Sale Order. To the 23 extent the Appellants’ “hot goods” argument is a collateral 24 attack on this order, it appropriately fails. 25 The Appellants failed to establish the existence of a 26 genuine dispute of material fact as to the Fair Labor Standards 27 Act claim and summary judgment on this claim was appropriate. [15] 1 CONCLUSION 2 Based on the foregoing, we AFFIRM.