In re: Consolidated Nevada Corporation Paul A. Morabito

FILED DEC 21 2017 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. NV-17-1210-FLTi ) 6 CONSOLIDATED NEVADA ) Bk. No. 3:13-bk-51236-GWZ CORPORATION, ) 7 ) Debtor. ) 8 _____________________________ ) ) 9 In re: ) BAP No. NV-17-1211-FLTi ) 10 PAUL A. MORABITO, ) Bk. No. 3:13-bk-51237-GWZ ) 11 Debtor. ) _____________________________ ) 12 ) PAUL A. MORABITO; ) 13 CONSOLIDATED NEVADA ) CORPORATION, ) 14 ) Appellants, ) 15 ) v. ) MEMORANDUM* 16 ) JH INC.; JERRY HERBST; BERRY- ) 17 HINCKLEY INDUSTRIES; WILLIAM ) A. LEONARD, JR., Chapter 7 ) 18 Trustee, ) ) 19 Appellees. ) ______________________________) 20 Argued and Submitted on December 1, 2017 21 at Reno, Nevada 22 Filed – December 21, 2017 23 Appeal from the United States Bankruptcy Court for the District of Nevada 24 Honorable Gregg W. Zive, Bankruptcy Judge, Presiding 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 28 9th Cir. BAP Rule 8024-1.

1 2 Appearances: David B. Shemano of Robins Kaplan LLP argued for appellants Consolidated Nevada Corporation and 3 Paul A. Morabito; Gerald M. Gordon of Garman Turner Gordon LLP argued for appellees JH, Inc., 4 Jerry Herbst, and Berry-Hinckley Industries; John Francis Murtha of Woodburn & Wedge argued for 5 appellee William A. Leonard, Jr., Chapter 7 Trustee. 6 7 Before: FARIS, LAFFERTY, and TIGHE,** Bankruptcy Judges. 8 INTRODUCTION 9 Chapter 71 debtors Paul A. Morabito and Consolidated Nevada 10 Corporation (“CNC”) (collectively, “Morabito Parties”) have long 11 been embroiled in a contentious dispute with creditors JH, Inc., 12 Jerry Herbst, and Berry-Hinckley Industries (collectively, 13 “Herbst Parties”). In this latest iteration of their battle, 14 the Morabito Parties - forced into involuntary bankruptcy because 15 of their failure to pay a substantial stipulated judgment against 16 them in the Herbst Parties’ favor - sued the Herbst Parties for 17 alleged fraud on the state court. The bankruptcy court denied 18 their request to prosecute the fraud claims on behalf of their 19 respective estates or, in the alternative, to compel chapter 7 20 trustee William A. Leonard, Jr. (“Trustee”) to abandon those 21 claims. On appeal, the Morabito Parties argue that, because the 22 Trustee refused to administer the claims, they should be able to 23 24 ** The Honorable Maureen A. Tighe, U.S. Bankruptcy Judge for the Central District of California, sitting by designation. 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal 28 Rules of Civil Procedure.

1 prosecute the claims. We discern no error and AFFIRM. 2 FACTUAL BACKGROUND2 3 A. Prepetition events 4 In 2007, JH, Inc. agreed to purchase the stock of 5 Berry–Hinckley Industries from P.A. Morabito & Co. Ltd. (the 6 predecessor in interest to CNC). Mr. Herbst guaranteed 7 JH, Inc.’s obligations, and Mr. Morabito was the guarantor for 8 P.A. Morabito & Co. To induce the Herbst Parties to purchase 9 certain development sites as a part of the purchase agreement, 10 Mr. Morabito agreed to serve as the construction manager. He 11 also represented that Berry-Hinckley Industries had $3.1 million 12 of working capital. 13 Thereafter, a dispute arose between the parties, and the 14 Morabito Parties filed suit against the Herbst Parties in Nevada 15 state court. The Herbst Parties filed numerous counterclaims 16 against the Morabito Parties, arguing that Mr. Morabito defrauded 17 them by promising to provide construction management services 18 that he never actually intended to render and that Mr. Morabito’s 19 representation about Berry-Hinckley Industries’ working capital 20 was fraudulently inflated. 21 The state court appointed an independent accountant to 22 examine the working capital issue. In order to show that the 23 Morabito Parties’ working capital estimate was inflated, the 24 Herbst Parties prepared their own estimate; the Morabito Parties 25 26 2 We borrow heavily not only from the bankruptcy court’s 27 findings of facts and conclusions of law but also from our previous decision, Morabito v. JH, Inc. (In re Morabito), BAP No. 28 NV-14-1593-FBD, 2016 WL 3267406 (9th Cir. BAP June 6, 2016).

1 disputed that estimate. The independent accountant reported that 2 no evidence supported the Morabito Parties’ working capital 3 estimate, and the state court approved and adopted the 4 independent accountant’s working capital report. 5 The state court conducted a bench trial in May 2010. It 6 found that the Morabito Parties breached the stock sale agreement 7 and engaged in fraud in the inducement and misrepresentation. It 8 found that Mr. Morabito never intended to render the construction 9 management services that he had promised; that he made those 10 false representations to induce the Herbst Parties to purchase 11 certain development sites; that the Herbst Parties relied upon 12 those representations; and that the Herbst Parties were damaged 13 in the amount of $19,869,159. The state court further concluded 14 that the working capital estimate prepared by Mr. Morabito 15 contained false representations (including the amount of accounts 16 payable); that the Herbst Parties would not have purchased Berry- 17 Hinckley Industries if they knew that the representations were 18 false; and that the Herbst Parties were damaged in the amount of 19 $66,002,205.75. In total, the state court awarded the Herbst 20 Parties over $149 million in compensatory and punitive damages. 21 The Morabito Parties appealed to the Nevada Supreme Court, 22 and the Herbst Parties cross-appealed. While the case was on 23 appeal, the parties executed a settlement agreement wherein the 24 parties agreed to dismiss the state court action with prejudice 25 and the Morabito Parties agreed to pay the Herbst Parties more 26 than $13 million over time. To support their obligation to pay 27 the settlement amount, the Morabito Parties agreed to execute a 28 Confession of Judgment in the amount of $85 million and

1 Stipulation to Confession of Judgment. Mr. Morabito admitted 2 that he had acted in bad faith and committed fraud, including 3 fraudulently inducing JH, Inc. to purchase Berry–Hinckley 4 Industries. The Morabito Parties agreed that if they failed to 5 pay the settlement amount or otherwise breached the settlement 6 agreement, the Herbst Parties could file the Confession of 7 Judgment in state court. 8 The Morabito Parties defaulted under the settlement 9 agreement by failing to make timely payments. They also 10 defaulted on a subsequent forbearance agreement. The Herbst 11 Parties filed the Confession of Judgment in the state court. 12 B. Involuntary chapter 7 proceedings 13 The Herbst Parties filed involuntary chapter 7 petitions 14 against Mr. Morabito and CNC. Relying on the Confession of 15 Judgment and the Stipulation to Confession of Judgment, the 16 Herbst Parties asserted that they held claims totaling 17 $77 million. 18 After extensive litigation, the bankruptcy court granted 19 summary judgment and entered orders for relief. Mr. Morabito 20 appealed the order for relief in his case. We affirmed. 21 C. Complaint against the Herbst Parties 22 The Morabito Parties filed a complaint (“Complaint”) in the 23 state court against the Herbst Parties for fraud on the court, 24 fraud, fraudulent inducement, and fraudulent misrepresentation 25 (the “Fraud Claims”). They sought a declaration that the 26 Confession of Judgment was unenforceable because it was procured 27 by fraud. They alleged that the Herbst Parties fraudulently 28 omitted several million dollars of receivables owed to Berry-

1 Hinckley Industries from the financial statements and working 2 capital calculations that they submitted to the independent 3 accountant. They claimed that they did not become aware of the 4 omissions until late 2016. 5 The Herbst Parties removed the case to the bankruptcy court. 6 The bankruptcy court denied the Morabito Parties’ motion to 7 remand the case to the state court. 8 D. The motion for authority to prosecute claims or to compel abandonment 9 10 The Morabito Parties filed a Motion for Authority to File 11 and Prosecute Claims on Behalf of Bankruptcy Estate or, in the 12 Alternative, to Compel Abandonment of Claims (“Motion”) in their 13 respective bankruptcy cases. They requested that the bankruptcy 14 court authorize them to prosecute the Complaint or force the 15 Trustee to abandon the Fraud Claims, which they concede are 16 property of the estates. 17 Following a hearing on the Motion, the bankruptcy court 18 entered detailed findings of fact and conclusions of law and 19 denied the Motion. It found Mr. Morabito’s story not credible 20 and was unconvinced that the Morabito Parties only recently 21 discovered the alleged discrepancy, given their counsel’s 22 “pattern of meticulous attention regarding all issues” in the 23 underlying litigation. 24 Regarding the Morabito Parties’ request for derivative 25 standing to prosecute the Fraud Claims, the bankruptcy court held 26 that the Morabito Parties did not present a colorable claim and 27 that prosecution of the claims would not benefit their estates. 28 It cited the Sixth Circuit’s four-part test articulated in

1 Canadian Pacific Forest Products, Ltd. v. J.D. Irving, Ltd. 2 (In re Gibson Group, Inc.), 66 F.3d 1436, 1438-46 (6th Cir. 3 1995), whereby derivative standing is appropriate where: (1) a 4 demand is made upon trustee or debtor-in-possession to act; 5 (2) the demand is declined; (3) the claim is colorable and would 6 benefit the estate based on a cost-benefit analysis; and (4) 7 inaction is an abuse of discretion. 8 First, it held that the Morabito Parties did not make a 9 demand on the Trustee to prosecute the Fraud Claims. Second, it 10 held that the Trustee did not refuse any demand. Nevertheless, 11 because the Trustee acknowledged that he could not prosecute the 12 Fraud Claims, the first and second factors were irrelevant. 13 Third, the court held that the Fraud Claims were not 14 colorable and would not survive a Civil Rule 12(b)(6) motion to 15 dismiss (made applicable in bankruptcy through Rule 7012(b)). It 16 found that it is “implausible that Morabito could not have 17 discovered the ‘newly discovered evidence’ through reasonable 18 diligence.” The court also stated that there were several bases 19 for the state court decision, including Mr. Morabito’s failure to 20 comply with the contract management agreement and his 21 misrepresentations in that agreement; Mr. Morabito’s attempt to 22 control or distort the documents and Berry-Hinckley Industries’ 23 accountant’s financial analysis; and Mr. Morabito’s 24 misrepresentations on a number of other subjects. It further 25 stated that the Morabito Parties’ premise that the working 26 capital report was at the heart of the state court decision was 27 “supposition and speculation.” The court concluded that it is 28 “plausible that a court would find that the assertions of fraud

1 in the Complaint have nothing to do with the nearly $20 million 2 awarded as damages for Morabito’s fraud with respect to the CMA.” 3 It held that prosecution of the claims would be expensive and 4 time-consuming (and Mr. Morabito told the court that he does not 5 have any financial resources), such that it would not benefit the 6 estates. Additionally, the court found that Mr. Morabito’s 7 declaration contained hearsay and legal argument; it also found 8 the declaration not credible. 9 Regarding the request for abandonment, the bankruptcy court 10 held that the Morabito Parties did not satisfy the requirements 11 of § 554. It stated that the statute provides that the 12 bankruptcy court “may” order abandonment, which implies the 13 exercise of discretion. The court noted that “the Debtors failed 14 to disclose the Claims to the Trustee, and the Court held that 15 the Claims were implausible, not colorable, and could not survive 16 a Rule 12 motion. Thus, there is no possibility of a benefit to 17 the estate from abandonment. The evidence does not present a 18 situation where the Court should apply the exception to the 19 rule.” Finally, the court held that the estates’ retention of 20 the Fraud Claims is not burdensome and confers a value and 21 benefit on the estates by “aiding in the efficient and timely 22 administration of the cases. . . . As such, the Trustee should 23 be permitted to retain the Claims for timely dismissal to prevent 24 a further delay in the Trustee’s administration of the cases.” 25 The bankruptcy court entered its order denying the Motion, 26 and the Morabito Parties timely appealed. 27 E. The motion to dismiss 28 The Herbst Parties and the Trustee (collectively,

1 “Appellees”) filed a motion to dismiss these appeals, arguing 2 that subsequent events had mooted the appeals. Specifically, on 3 October 3, 2017, the Trustee dismissed the Fraud Claims in state 4 court and filed a notice of dismissal in the bankruptcy court. 5 The Morabito Parties opposed the motion to dismiss, arguing 6 that they had appealed from the notice of dismissal and denial of 7 the motion for remand (BAP No. NV-17-1304), which preserved the 8 instant appeal. 9 JURISDICTION 10 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 11 §§ 1334 and 157(b)(2)(A). Subject to our discussion of mootness 12 below, we have jurisdiction under 28 U.S.C. § 158. 13 ISSUES 14 (1) Whether this appeal is moot. 15 (2) Whether the bankruptcy court abused its discretion in 16 refusing to compel the Trustee to abandon the Fraud Claims. 17 (3) Whether the bankruptcy court abused its discretion in 18 denying the Morabito Parties’ request for authority to prosecute 19 the Fraud Claims. 20 STANDARDS OF REVIEW 21 We review de novo questions regarding mootness. Giesbrecht 22 v. Fitzgerald (In re Giesbrecht), 429 B.R. 682, 687 (9th Cir. BAP 23 2010). De novo review requires that we consider a matter anew, 24 as if no decision had been rendered previously. United States v. 25 Silverman, 861 F.2d 571, 576 (9th Cir. 1988). 26 We review for abuse of discretion the bankruptcy court’s 27 decision to grant derivative standing to pursue claims of the 28 estate. PW Racing Enters., Inc. v. N.D. Racing Comm’n

1 (In re Racing Servs., Inc.), 540 F.3d 892, 901 (8th Cir. 2008) 2 (“the bankruptcy court’s decision whether to grant a creditor 3 derivative standing will be reviewed for an abuse of 4 discretion”). We also review abandonment orders for an abuse of 5 discretion. Johnston v. Webster (In re Johnston), 49 F.3d 538, 6 540 (9th Cir. 1995). 7 To determine whether the bankruptcy court has abused its 8 discretion, we conduct a two-step inquiry: (1) we review de novo 9 whether the bankruptcy court “identified the correct legal rule 10 to apply to the relief requested” and (2) if it did, whether the 11 bankruptcy court’s application of the legal standard was 12 illogical, implausible, or without support in inferences that may 13 be drawn from the facts in the record. United States v. Hinkson, 14 585 F.3d 1247, 1262–63 & n.21 (9th Cir. 2009) (en banc). 15 DISCUSSION 16 A. These appeals are not moot. 17 We must first satisfy ourselves that these appeals are not 18 moot and that we have jurisdiction over these appeals. An appeal 19 is moot if events have occurred that prevent an appellate court 20 from granting effective relief. Ederel Sport, Inc. v. Gotcha 21 Int’l L.P. (In re Gotcha Int’l L.P.), 311 B.R. 250, 253–54 (9th 22 Cir. BAP 2004). The “party moving for dismissal on mootness 23 grounds bears a heavy burden.” Motor Vehicle Cas. Co. v. Thorpe 24 Insulation Co (In re Thorpe Insulation Co.), 677 F.3d 869, 880 25 (9th Cir. 2012) (quoting Jacobus v. Alaska, 338 F.3d 1095, 1103 26 (9th Cir. 2003)). 27 The Appellees first argue that the appeals are 28 constitutionally moot because the Trustee dismissed the Complaint

1 and filed a notice of dismissal in the bankruptcy court. We 2 think that the Morabito Parties’ appeal from the notice of 3 dismissal keeps these appeals from becoming moot. If we reverse 4 in both these appeals and the NV-17-1304 appeal, then the 5 Morabito Parties could pursue the Fraud Claims. Thus, it is 6 possible to provide the Morabito Parties with some form of 7 relief, and these appeals are not constitutionally moot. Cf. 8 United States v. Sprint Commc’ns, Inc., 855 F.3d 985, 989 (9th 9 Cir. 2017) (in the context of a denial of a motion to intervene, 10 if neither party had appealed the underlying judgment that was 11 subsequently settled and dismissed, then a court could not grant 12 any effective relief on an appeal of a motion to intervene); 13 Canatella v. California, 404 F.3d 1106, 1109 n.1 (9th Cir. 2005) 14 (an appeal would not be moot if the appellant “has kept the 15 underlying action alive by filing a notice of appeal . . . ”). 16 The Appellees also argue that the appeals are equitably moot 17 because it is “impractical” to revive the Fraud Claims. Under 18 the equitable mootness doctrine, we may “dismiss appeals of 19 bankruptcy matters when there has been a ‘comprehensive change of 20 circumstances . . . so as to render it inequitable for this court 21 to consider the merits of the appeal.’” Rev Op Grp. v. ML 22 Manager LLC (In re Mortgages Ltd.), 771 F.3d 1211, 1214 (9th Cir. 23 2014) (quoting In re Thorpe Insulation Co., 677 F.3d at 880). 24 “An appeal is equitably moot if the case presents ‘transactions 25 that are so complex or difficult to unwind’ that ‘debtors, 26 creditors, and third parties are entitled to rely on [the] final 27 bankruptcy court order.’” Id. at 1215 (quoting In re Thorpe 28 Insulation Co., 677 F.3d at 880).

1 We do not view the voluntary dismissal of a lawsuit as a 2 particularly complex or hard-to-unwind transaction, and we fail 3 to see how anyone has properly relied on that transaction. There 4 are no considerations of fairness that prevent us from ruling on 5 these appeals. These appeals are not moot. 6 B. The bankruptcy court did not err in refusing to compel the Trustee to abandon the Fraud Claims. 7 8 The Morabito Parties argue that the bankruptcy court should 9 have compelled the Trustee to abandon the Fraud Claims. They 10 contend that the Trustee unequivocally stated that he would not 11 administer the Fraud Claims, so they should be allowed to 12 prosecute the Complaint. We disagree. 13 A bankruptcy trustee is the representative of the bankruptcy 14 estate and has exclusive standing to enforce the estate’s legal 15 claims. See § 323(a) (“The trustee in a case under this title is 16 the representative of the estate.”). He has the “authority to 17 act for the benefit of the estate and may sell the cause of 18 action, prosecute it in nonbankruptcy court, settle it, or 19 abandon it to the debtor as of inconsequential value to the 20 estate.” Lopez v. Specialty Restaurants Corp. (In re Lopez), 21 283 B.R. 22, 32–33 (9th Cir. BAP 2002). It follows that a 22 trustee may simply dismiss a claim if doing so would further the 23 estate’s interests. The bankruptcy trustee must determine, in 24 his sound business judgment, what disposition is in the best 25 interests of the estate. In re Moore, 110 B.R. 924, 927 (Bankr. 26 C.D. Cal. 1990). The trustee’s authority is discretionary. Id. 27 at 928. 28 Section 554(b) provides that, “[o]n request of a party in

1 interest and after notice and a hearing, the court may order the 2 trustee to abandon any property of the estate that is burdensome 3 to the estate or that is of inconsequential value and benefit to 4 the estate.” However, an order compelling abandonment is “the 5 exception, not the rule.” Viet Vu v. Kendall (In re Viet Vu), 6 245 B.R. 644, 647 (9th Cir. BAP 2000) (citing Morgan v. K.C. 7 Mach. & Tool Co. (In re K.C. Mach. & Tool Co.), 816 F.2d 238, 245 8 (6th Cir. 1987)). “The only issue before the court in an 9 application for abandonment is whether there is a reason that the 10 estate’s interest in the property should be preserved or, 11 instead, whether the property is so worthless or burdensome to 12 the estate that it should be removed therefrom.” In re K.C. 13 Mach. & Tool Co., 816 F.2d at 246. 14 There is no dispute that the Fraud Claims are property of 15 the debtors’ estates, and the Morabito Parties do not contend 16 that the Fraud Claims are burdensome. Therefore, we must 17 consider whether the Fraud Claims are “of inconsequential value 18 and benefit to the estate.” 19 The Morabito Parties argue that once the bankruptcy court 20 found that prosecution of the Fraud Claims “could not plausibly 21 benefit the estate[,]” it lost its discretion to deny the Motion 22 and had to order abandonment. While the bankruptcy court made 23 that finding concerning the Morabito Parties’ derivative 24 standing, the court also found that abandonment conferred no 25 benefit to the estate, and that instead the Fraud Claims should 26 be dismissed: “the estates’ retention of the implausible and 27 colorless Claims is not burdensome and confers a value and 28 benefit upon the estates by aiding the efficient and timely

1 administration of the cases.” 2 Retention of the Fraud Claims so that the Trustee could 3 dismiss them would confer value on the estates by aiding in the 4 prompt resolution of the bankruptcy cases. The bankruptcy court 5 correctly observed that litigation of the Fraud Claims would 6 delay the closing of the estates. As long as the Fraud Claims 7 were pending, a potential asset (however speculative) would 8 remain unliquidated, and the claims of the Herbst Parties would 9 remain undetermined. Adjudicating the Fraud Claims could have 10 taken years. There would be litigation over the validity of the 11 Fraud Claims, followed, if successful, by relitigation and 12 possibly retrial of the underlying dispute between the Morabito 13 Parties and the Herbst Parties, interspersed with an unknown but 14 probably large number of appeals and collateral controversies. 15 Eliminating this source of potentially extensive delay is 16 sufficient “reason that the estate’s interest in the property 17 should be preserved . . . .” Id.3 18 19 3 Allowing the Morabito Parties to pursue the Fraud Claims 20 on behalf of the estates would not only delay the administration of the estates and this never-ending litigation, but possibly 21 expose the estates to sanctions. This is a salient risk in light of the bankruptcy court’s finding that the claims are not 22 colorable and Mr. Morabito’s admission that he is judgment-proof. 23 Mr. Morabito “has told the Court that he does not have financial resources . . . [sufficient to] fund prosecution of the 24 Complaint.” In the previous appeal, we noted that Mr. Morabito was not paying 98 percent of his debts as they came due and that 25 he had no way to pay his debts other than through the generosity 26 of his former companion, who covers Mr. Morabito’s “living expenses” totaling $50,000 to $75,000 per month, including 27 $11,000 per month in rent, $2,700 per month for lease of a Bentley, legal fees, and seven credit card balances. See 28 In re Morabito, 2016 WL 3267406, at *3, 10.

1 The Morabito Parties attack the Trustee’s discretion to 2 administer the Fraud Claims. They argue that he represented that 3 he would not administer the Fraud Claims under any circumstance. 4 This is false: the Trustee never stated that he would not 5 administer the Fraud Claims, just that he is unable and unwilling 6 to prosecute the Fraud Claims. The Trustee has, in fact, 7 administered the Fraud Claims by dismissing them. 8 Moreover, we are loathe to second-guess a trustee’s business 9 judgment. The Trustee analyzed the Fraud Claims and determined 10 that, even accepting all of the Morabito Parties’ allegations, 11 there were no colorable claims against the Herbst Parties. Based 12 on the weakness of the Fraud Claims and the estates’ lack of 13 funds, the bankruptcy court did not err when it found that it was 14 reasonable for the Trustee to dismiss the Fraud Claims rather 15 than prosecute them. 16 The Morabito Parties also misunderstand the bankruptcy 17 court’s discretion in compelling abandonment. They argue that 18 once the court determines that the claims are burdensome or of 19 inconsequential value or benefit, the court loses all discretion 20 and must compel abandonment. But § 554(b) clearly states that 21 the court may compel abandonment, and the Morabito Parties fail 22 to cite any authority that the court is ever divested of its 23 discretion.4 Even if it is correct (as the Morabito Parties 24 25 4 The Morabito Parties cite Brown v. Locke (In re Brown), 26 BAP No. NC-06-1101-MaMeRy, 2006 WL 6810938 (9th Cir. BAP Sept. 28, 2006), where we vacated and remanded the bankruptcy 27 court’s order denying the debtor’s request for abandonment because the bankruptcy court did not make proper findings 28 (continued...)

1 argue) that “may” can mean “must,” we are not convinced that 2 “may” has anything other than its ordinary meaning in § 554(b). 3 We also reject the Morabito Parties’ argument that refusing 4 abandonment would increase the burden on the Trustee. The 5 Trustee dismissed the Complaint with no fuss or difficulty. 6 Accordingly, the bankruptcy court did not abuse its 7 discretion in refusing to compel abandonment of the Fraud Claims. 8 C. The bankruptcy court did not err in refusing to allow the Morabito Parties to assume and prosecute the Fraud Claims. 9 10 The Morabito Parties argue that they should be allowed to 11 assume the Fraud Claims and prosecute them. We again disagree. 12 In Gibson Group, the Sixth Circuit considered whether 13 creditors had standing to pursue claims on behalf of the 14 chapter 11 bankruptcy estate. It examined the tests from other 15 jurisdictions and concluded: 16 a creditor or creditors’ committee may have derivative standing to initiate an avoidance action where: 1) a 17 demand has been made upon the statutorily authorized party to take action; 2) the demand is declined; 3) a 18 colorable claim that would benefit the estate if 19 4 20 (...continued) regarding the value or benefit to the estate. The Morabito 21 Parties argue that, if a bankruptcy court has discretion to decide abandonment, we would not have remanded for further 22 findings in Brown, because courts have discretion to deny relief 23 even if there is no value or benefit to the estate. But a court’s discretion is never unfettered and is always reviewed for 24 abuse. Discretion does not permit a court to make any decision unsupported by the record. It must actually consider the 25 evidence before it and articulate a decision with reasoning that 26 is logical, plausible, and supported by inferences from the facts in the record. In Brown, we held that the court did not receive 27 any relevant evidence and did not make any holding regarding the value of the asset. In the present case, the bankruptcy court 28 weighed the evidence and made an informed decision.

1 successful exists, based on a cost-benefit analysis performed by the court, and 4) the inaction is an abuse 2 of discretion (“unjustified”) in light of the debtor-in-possession’s duties in a Chapter 11 case. A 3 creditor has met its burden to show standing to file an avoidance action if it has fulfilled the first three 4 requirements and the trustee or debtor-in-possession declined to take action without stating a reason. The 5 burden then shifts to the debtor-in-possession to establish, by a preponderance of the evidence, that its 6 reason for not acting is justified. 7 66 F.3d at 1446. Bankruptcy courts within the Ninth Circuit have 8 adopted a version of this test. See, e.g., In re Alaska Fur 9 Gallery, Inc., No. A09-00196-DMD, 2010 WL 7765571, at *1 (Bankr. 10 D. Alaska May 21, 2010); In re Yellowstone Mountain Club, LLC, 11 No. 08-61570-11, 2009 WL 982207, at *6 (Bankr. D. Mont. Jan. 16, 12 2009). 13 Here, the bankruptcy court followed the Yellowstone Mountain 14 Club version of this test: 15 1. A demand has been made upon the statutorily authorized party to take action; 16 2. The demand is declined; 17 3. A colorable claim that would benefit the estate if 18 successful exists, based on a cost-benefit analysis performed by the court; and 19 4. The inaction is an abuse of discretion 20 (“unjustified”) in light of the debtor-in-possession’s duties in a Chapter 11 case. 21 22 2009 WL 982207, at *6. 23 First, the Morabito Parties argue that the Gibson Group test 24 applies only to a chapter 11 case, not chapter 7, and that the 25 difference is crucial because a chapter 11 trustee is not charged 26 with liquidating the estate’s property. We fail to see why a 27 different test should apply to a chapter 7 case. Although a 28 chapter 11 debtor-in-possession (or trustee) is not charged with

1 liquidating the debtor’s estate, its basic duty is the same: to 2 maximize the economic value of the estate. Further, the Morabito 3 Parties offer no alternative test for granting derivative status 4 in a chapter 7 case. We conclude that the court did not err in 5 adopting the Gibson Group/Yellowstone Mountain Club test. 6 Second, the Morabito Parties contend that the bankruptcy 7 court erred in finding that the Fraud Claims were not colorable 8 because it speculated about the success of the Fraud Claims in 9 the state court. The bankruptcy court did not err. A court may 10 choose to evaluate the colorability of a claim through the lens 11 of Civil Rule 12(b)(6): a claim that could not even withstand a 12 motion to dismiss is one example of a claim that is not 13 colorable.5 To survive a motion to dismiss, “a complaint must 14 contain sufficient factual matter, accepted as true, to state a 15 claim to relief that is plausible on its face. A claim has 16 17 5 Although Gibson Group and the other cases do not explicitly use the Civil Rule 12(b)(6) standard, Gibson Group 18 determined whether the claims were colorable by looking at “the 19 face of the complaint[.]” 66 F.3d at 1446. This standard is analogous to a Civil Rule 12(b)(6) inquiry. Many courts have 20 explicitly adopted Civil Rule 12(b)(6) as the test for colorability. See, e.g., In re Sabine Oil & Gas Corp., 547 B.R. 21 503, 515 (Bankr. S.D.N.Y. 2016), aff’d, 562 B.R. 211 (S.D.N.Y. 2016) (“The inquiry [for derivative standing] as to whether a 22 claim is ‘colorable’ . . . is similar to that undertaken by the 23 court on a motion to dismiss.”); Walnut Creek Mining Co. v. Cascade Inv., LLC (In re Optim Energy, LLC), 527 B.R. 169, 173 24 (D. Del. 2015) (“The first element of that test [for derivative standing] — whether a party has asserted a colorable claim — 25 requires ‘the court [to] undertake the same analysis as when a 26 defendant moves to dismiss a complaint for failure to state a claim.’”); In re Dzierzawski, 518 B.R. 415, 419 (Bankr. E.D. 27 Mich. 2014) (“other courts have held that a creditor’s claims are ‘colorable’ in this context if they would survive a motion to 28 dismiss under [Civil Rule] 12(b)(6)”).

1 facial plausibility when the plaintiff pleads factual content 2 that allows the court to draw the reasonable inference that the 3 defendant is liable for the misconduct alleged.” Ashcroft v. 4 Iqbal, 556 U.S. 662, 678 (2009) (internal citations and quotation 5 marks omitted). To determine whether a claim is plausible, a 6 court must use its experience and judgment to predict the 7 possible outcome of the claim. Id. at 679. The test of 8 “colorability” is similar. Neither is speculative. To hold 9 otherwise would essentially require the court to hold a minitrial 10 on the substantive issues before granting a motion to dismiss or 11 determining the colorability of a claim. 12 The Morabito Parties did not provide any plausible account 13 of the Herbst Parties’ fraud, falsity, or an intent to deceive; 14 any misrepresentations (other than their own) in the working 15 capital calculation; or anyone’s reliance on the supposed 16 falsity. The bankruptcy court was appropriately skeptical of 17 Mr. Morabito’s statement that he only recently discovered new 18 evidence by happenstance. The bankruptcy court did not need to 19 accept as true unreasonable inferences or conclusory legal 20 allegations cast in the form of factual allegations. See Bell 21 Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (“While a 22 complaint attacked by a Rule 12(b)(6) motion to dismiss does not 23 need detailed factual allegations, a plaintiff’s obligation to 24 provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires 25 more than labels and conclusions, and a formulaic recitation of 26 the elements of a cause of action will not do.”). It also 27 accurately noted that much of the Complaint is “simply an attempt 28 to relitigate what either was or should have been litigated” in

1 the state court. 2 The bankruptcy court was also correct that the state court 3 judgment was not based solely on the fraud concerning the working 4 capital estimate. Rather, the court found that the judgment was 5 based on Mr. Morabito’s “lack of credibility, his failure and 6 lack of intention to comply in any fashion with the [construction 7 management agreement], his intentional false representations 8 . . . and his lack of truth regarding the working capital and the 9 value of [Berry-Hinckley Industries].” The court found it 10 plausible that the Fraud Claims, even if true, would not affect 11 the state court judgment.6 12 In sum, the bankruptcy court looked at a number of factors 13 to determine whether the Fraud Claims were colorable. It drew 14 reasonable inferences and articulated reasons that the Fraud 15 Claims were unlikely to be successful if prosecuted. We discern 16 no error. 17 Third, the Morabito Parties argue that the bankruptcy court 18 erred in making factual findings without holding an evidentiary 19 hearing. But the Morabito Parties did not request an evidentiary 20 hearing before the bankruptcy court. See Team Spirit Am., LLC v. 21 Kriegman (In re LLS Am., LLC), BAP No. EW-11-1524-DHPa, 2012 WL 22 2042503, at *9 (9th Cir. BAP June 5, 2012) (“By not making a 23 request for an evidentiary hearing on the Substantive 24 Consolidation Motion, . . . [appellant] waived its right to 25 6 26 The Morabito Parties imply that the bankruptcy court held that a claim cannot be colorable unless it results in a positive 27 monetary recovery for the estate (as opposed to just a reduction of the state court judgment). The bankruptcy court made no such 28 statement.

1 complain about the lack of an evidentiary hearing.”). 2 More importantly, the court was not required to hold an 3 evidentiary hearing. As we have noted, it is appropriate to 4 analogize the colorability standard with the plausibility 5 standard under Civil Rule 12(b)(6). A procedural analogy is 6 equally sound. No rule requires an evidentiary hearing on a 7 Civil Rule 12(b)(6) motion; indeed, because such a motion tests 8 the facial sufficiency of the complaint, it would be anomalous to 9 permit, let alone require, additional evidence. Likewise, a 10 court should not be required to hold an evidentiary hearing to 11 determine the colorability of a complaint, which is also based on 12 the face of the pleading. Here, the bankruptcy court properly 13 determined that the Morabito Parties failed to allege any 14 plausible instance of fraud. It did not err in denying the 15 Motion without holding an evidentiary hearing. 16 Therefore, the bankruptcy court did not abuse its discretion 17 in declining to grant the Morabito Parties authority to prosecute 18 the Fraud Claims.7 19 CONCLUSION 20 For the foregoing reasons, we AFFIRM. 21 22 23 7 At oral argument, the Morabito Parties raised various 24 issues not previously argued on appeal and not supported by the record. We do not consider any of these new arguments in the 25 first instance. See Yamada v. Nobel Biocare Holding AG, 825 F.3d 26 536, 543 (9th Cir. 2016) (“[g]enerally, an appellate court will not hear an issue raised for the first time on appeal”); Ezra v. 27 Seror (In re Ezra), 537 B.R. 924, 932 (9th Cir. BAP 2015) (“Ordinarily, federal appellate courts will not consider issues 28 not properly raised in the trial courts.”).