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In re Tower Park Props., LLC

United States Court of Appeals, Ninth Circuit

September 28, 2015

IN THE MATTER OF: TOWER PARK PROPERTIES, LLC, Debtor, ALEXANDER HUGHES, Sole Non-Contingent Beneficiary of the Mark Hughes Family Trust, Appellant,
v.
TOWER PARK PROPERTIES, LLC, Appellee

Argued and Submitted, Pasadena, California, June 3, 2015.

Appeal from the United States District Court for the Central District of California. D.C. No. 2:13-cv-01006-GHK. George H. King, Chief District Judge, Presiding.

SUMMARY[**]

Bankruptcy

The panel affirmed the district court's judgment dismissing for lack of standing Alexander Hughes' appeal from the bankruptcy court's order approving a settlement agreement in the Chapter 11 bankruptcy of Tower Park Properties, LLC.

The panel held that a beneficiary of a trust who disagrees with the way the trust was administered by former trustees is not a " party in interest" under 11 U.S.C. § 1109(b) with standing to object to the bankruptcy court's approval of a settlement agreement between a debtor, creditor entities held by the trust, and the former trustees, at least where the beneficiary's interests are adequately represented by a party-in-interest trustee.

Scott D. Bertzyk (argued), Eric V. Rowen, Howard J. Steinberg, Kevin P. Garland, Karin Bohmholdt, and Matthew R. Gershman, Greenberg Traurig, LLP, Los Angeles, California, for Appellant.

Jeremy V. Richards (argued) and Dean A. Ziehl, Pachulski, Stang, Ziehl & Jones LLP, Los Angeles, California; David B. Golubchik and Daniel H. Reiss, Levene, Neale, Bender, Yoo & Brill L.L.P., Los Angeles, California, for Appellee.

Before: Raymond C. Fisher and Jay S. Bybee, Circuit Judges and Elizabeth E. Foote,[*] District Judge. Opinion by Judge Bybee.

OPINION

Page 451

BYBEE, Circuit Judge:

The Bankruptcy Code confers a " right to be heard" with respect to " any issue in a

Page 452

case under [Chapter 11]" on any " party in interest." 11 U.S.C. § 1109(b). We have previously held that party-in-interest status is a necessary prerequisite to bankruptcy standing. In re Thorpe Insulation Co., 677 F.3d 869, 884 (9th Cir. 2012). In this case, we consider whether a beneficiary of a trust who disagrees with the way the trust was administered by former trustees is a " party in interest" with standing to object to the bankruptcy court's approval of a settlement agreement between a debtor, creditor entities held by the trust, and the former trustees.[1] We hold that the trust beneficiary does not have party-in-interest standing under § 1109(a) to object to the settlement, at least where his interests are adequately represented by a party-in-interest trustee. We thus affirm the judgment of the district court dismissing this case for lack of standing.

I

A. The Facts

Appellant Alexander Hughes (" Hughes" ) is the only son of Mark Hughes, the founder of Herbalife who passed away in 2000, and is the sole, non-contingent beneficiary of the Mark Hughes Family Trust (" Trust" ). Mark Hughes' estate had an estimated worth of over $300 million at the time of his death, and the bulk of his estate was placed in the Trust. See Hughes v. Klein, 2015 WL 1455981, at *1 (Cal. Ct.App. Mar. 30, 2015) (unpublished). The Trust principal must remain in the Trust, per Mark Hughes' instructions, until Alexander turns 35 in 2026. Id. Before his death, Mark Hughes named three successor trustees to the Trust: Conrad Lee Klein, Christopher Pair, and Jack Reynolds. Id. Once they assumed responsibility for the Trust, the trustees agreed that Klein would act as the lead, full-time trustee and manager of the Trust's various corporate holdings. Id. The Trust owns two LLC's relevant here: Hughes Investment Partnership, LLC (" HIP" ) and MH Holdings II H, LLC (" MH II" ) (together, the " Hughes Entities" ). Virtually all of the Trust's assets are held either by one of the Hughes Entities or another LLC owned by the Trust.

At the time of Mark Hughes' death, MH II owned a real property asset called " Tower Grove" --a 157-acre undeveloped residential property located on a hill overlooking Beverly Hills, California. In 2004, the trustees authorized the sale of the Tower Grove property to Tower Park Properties, LLC (" Tower Park" ), the debtor and appellee. Notably, the sale was entirely seller-financed; MH II loaned Tower Park the $23.75 million required to purchase the property. HIP advanced additional funding to Tower Park for the purpose of developing Tower Grove. Through that transaction, MH II and HIP became the two largest secured creditors of Tower Park.[2]

Page 453

B. Bankruptcy Court Proceedings

Tower Park soon defaulted on its obligations and, in July 2008, filed for Chapter 11 bankruptcy. As of 2009, HIP and MH II's aggregate claims, which included the purchase, construction, and development financing plus interest, amounted to approximately $57 million. Tower Park's proposed plan of reorganization restructured the Hughes Entities' loans, modifying the interest rates and conditionally reducing the principal balance on certain loans. The proposed plan further provided that HIP would provide Tower Park with $7 million in exit financing. The bankruptcy court entered an order confirming Tower Park's Chapter 11 plan in April 2010. After the confirmation of the plan, however, disputes arose between the trustees, the Hughes Entities, and Tower Park over the implementation of the plan provisions. For two years, the parties litigated various disputes in bankruptcy court and, in at least one adversary proceeding, Tower Park named Klein individually as a defendant, alleging various claims of personal misconduct.

Consequently, Tower Park entered into negotiations with the trustees and Hughes Entities to settle the disputes. After six weeks of negotiations and two full-day mediation sessions, Tower Park and its various associated entities entered into a Settlement Agreement with HIP, MH II, Conrad Klein (individually and as trustee), and Jack Reynolds (individually and as trustee).[3] The Agreement was signed in early January 2013. The day after the Agreement was signed, Tower Park filed a motion seeking bankruptcy court approval of the Agreement. See Fed. R. Bankr. Proc. 9019(a) ( " On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." ). Tower Park requested and received an expedited hearing date, which the court set for later that month.

Meanwhile, Hughes had just completed a several months long trial in California probate court concerning a petition he had filed back in 2010 to remove the three trustees. The petition alleged that each of the trustees had committed various breaches of fiduciary duty with respect to the sale of Tower Grove and other trust management decisions. The parties were still awaiting a final decision by the probate court when Tower Park filed its motion for approval of the Settlement Agreement. Six days after the Agreement was filed, Hughes filed an ex parte application with the probate court seeking the immediate suspension of the trustees and the appointment of a successor trustee. The probate court granted the motion the same day. In place of the trustees, the probate court appointed Fiduciary Trust International of California (" FTIC" ) as trustee ad litem. The court ordered FTIC to " analyze . . . and independently ...


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