[00:00:00] Speaker 01:
Good morning.

[00:00:01] Speaker 01:
Would you like to reserve some time for rebuttal?

[00:00:03] Speaker 01:
I would, please.

[00:00:03] Speaker 04:
How much?

[00:00:04] Speaker 04:
Five minutes.

[00:00:05] Speaker 04:
Very good.

[00:00:05] Speaker 04:
Go ahead, please.

[00:00:06] Speaker 04:
May it please the court?

[00:00:07] Speaker 04:
Can you hear me?

[00:00:08] Speaker 04:
Yes.

[00:00:09] Speaker 04:
My name is Lauren Kiva.

[00:00:11] Speaker 04:
I represent the appellant, E. Lynn Shainman.

[00:00:15] Speaker 04:
It's my privilege to be in this court.

[00:00:16] Speaker 04:
I clerked for two federal judges on three courts, including the Ninth Circuit, a number of years ago.

[00:00:23] Speaker 04:
It is in my experience, both on the clerk's side and on the appellate argument side,

[00:00:29] Speaker 04:
that this is a time for us to discuss the issues that you see and that concern you.

[00:00:35] Speaker 04:
I'll start by the preface that Lynn Shaman was a bankruptcy trustee with an unblemished record for 27 years.

[00:00:43] Speaker 04:
She served as president of the American Association of Bankruptcy Trustees with great distinction and with great honor.

[00:00:50] Speaker 04:
This has been a tremendous miscarriage of justice from start to finish.

[00:00:55] Speaker 04:
Started in the probate court over in Marin County,

[00:00:58] Speaker 04:
where a probate judge found that a post-marital agreement that was entered into freely between her and her husband was somehow tainted by fraud.

[00:01:07] Speaker 04:
That is a tentative decision.

[00:01:09] Speaker 04:
It has not been appealed, and that is what it is entitled to.

[00:01:12] Speaker 04:
The bankruptcy court took that tentative decision and Ms.

[00:01:17] Speaker 04:
Shademan's concession that solely for purposes of the bankruptcy proceeding, the post-marital agreement was not valid.

[00:01:25] Speaker 04:
That was the only thing that she agreed to.

[00:01:27] Speaker 04:
The bankruptcy court then turned that into a series of conjuries of errors that went spiraling down to the point where the U.S.

[00:01:36] Speaker 04:
trustee relied upon those errors to disqualify her from service as a U.S.

[00:01:42] Speaker 04:
trustee.

[00:01:43] Speaker 04:
That's part one of our argument.

[00:01:45] Speaker 04:
Part two of our argument is that she applied for a, at the request of the Small Business Administration, who sent her a notice saying, please apply for the loan.

[00:01:57] Speaker 04:
She applied for the loan.

[00:01:59] Speaker 04:
It had a form.

[00:02:00] Speaker 04:
It had contingent liabilities, period.

[00:02:03] Speaker 04:
Didn't tell her what that meant.

[00:02:05] Speaker 04:
She did not believe that there was any contingent liability associated with the probate court proceeding.

[00:02:10] Speaker 04:
Her lawyers had submitted a brief that told her there was no liability.

[00:02:13] Speaker 01:
And if you look at the pills... There's no liability.

[00:02:16] Speaker 01:
There's no contingent liability or two very different things.

[00:02:20] Speaker 01:
There could be a liability contingent on her losing the case, right?

[00:02:23] Speaker 04:
There could be a contingent liability, but you have to take a look at Judge Posner's decision cited in our ruling.

[00:02:29] Speaker 04:
A contingent liability depends on a whole bunch of contingencies.

[00:02:32] Speaker 04:
And if you don't believe that actually it's going to occur, you have no obligation to do it.

[00:02:37] Speaker 04:
And the SBA knows that because their other forms make it quite clear when asking for other information.

[00:02:44] Speaker 04:
Are there any judgments against you?

[00:02:46] Speaker 04:
Is there any civil liability?

[00:02:48] Speaker 00:
If you fill out a bankruptcy schedule, you only have to list judgments.

[00:02:54] Speaker 00:
Under your definition, you wouldn't have to list anything that's even a contingent liability.

[00:03:00] Speaker 04:
You, first of all, I have to apologize.

[00:03:03] Speaker 04:
I am not a bankruptcy practitioner, so any advice I give you on bankruptcy... But Ms.

[00:03:07] Speaker 00:
Donovan has been a bankruptcy trustee for, as you said, many, many years, right?

[00:03:11] Speaker 04:
Correct.

[00:03:13] Speaker 04:
Okay.

[00:03:13] Speaker 04:
The point is that she did not believe that she had an obligation to put that down, and there's no indication in the record whatsoever that the SBA actually relied on that one way or the other.

[00:03:24] Speaker 04:
And so my point is that to disqualify somebody for filling out a very opaque form, contingent liabilities, and failing to put that pending bankruptcy, excuse me, probate court litigation on it, should not be deemed to be a knowing falsehood that would disqualify her from her bankruptcy proceeding.

[00:03:46] Speaker 04:
Then you go to her expenditure of the EIDL funds.

[00:03:51] Speaker 04:
She spent her funds.

[00:03:53] Speaker 04:
Chapter 11 bankruptcy.

[00:03:55] Speaker 04:
That's a business bankruptcy.

[00:03:56] Speaker 04:
She was being attacked at her business by her stepson, former stepson.

[00:04:03] Speaker 04:
And as a matter of law, if you take a look at the cases we've cited, I believe she had every right, indeed an obligation, to spend those funds on bankruptcy counsel, to defend herself in that.

[00:04:15] Speaker 04:
And the Supreme Court has made it quite- Object to bankruptcy court approval.

[00:04:24] Speaker 01:
You can't, you can't, a debtor in possession can't hire a lawyer or pay a lawyer without bankruptcy court approval.

[00:04:30] Speaker 04:
You're absolutely right and she did obtain bankruptcy court approval to retain her lawyers and obviously lawyers are going to get paid and so the funds as a matter of law were fungible.

[00:04:40] Speaker 04:
There was no restriction on her ability to use those funds.

[00:04:43] Speaker 01:
The bankruptcy court did say that you must not use these loan proceeds for any prohibited, any unpermitted purpose, right?

[00:04:51] Speaker 04:
That was after.

[00:04:52] Speaker 04:
a question was raised as to her expenditure.

[00:04:55] Speaker 04:
As a matter of fact, the U.S.

[00:04:57] Speaker 04:
trustee or somebody raised the issue, and her own counsel approached the bankruptcy court and said, we would like some guidance on this.

[00:05:03] Speaker 04:
And the bankruptcy court itself said, the regulation

[00:05:07] Speaker 04:
quote, working capital is less than clear.

[00:05:09] Speaker 04:
And there was an extensive discussion between Ms.

[00:05:12] Speaker 04:
Shainman, the U.S.

[00:05:13] Speaker 04:
trustee, and the bankruptcy court who said, I can't give you any further advice or advice.

[00:05:19] Speaker 04:
They simply quote, working capital.

[00:05:21] Speaker 04:
Well, I believe as a matter of law, you can spend working capital to hire lawyers to defend yourself in a court of law if that's part of your business.

[00:05:30] Speaker 01:
Period.

[00:05:33] Speaker 01:
I mean, you've sort of made the point that this wasn't part of her business, that this was a personal matter between her and her late husband and his children by a former marriage.

[00:05:42] Speaker 01:
The point is that litigation didn't have to do with her work as a trustee, right?

[00:05:46] Speaker 04:
They were attacking her business.

[00:05:48] Speaker 04:
The probate court entered an order at the request of her stepson that valued her bankruptcy practice at $1 million, and he sought to take that over.

[00:05:58] Speaker 04:
Now, that was clearly erroneous because you can't value a bankruptcy business.

[00:06:02] Speaker 04:
It's a personal attribute.

[00:06:04] Speaker 04:
And so, but the bottom line, she was in, as I understand it, and I apologize because I'm not a bankruptcy lawyer, but my understanding is Chapter 11 is a business bankruptcy.

[00:06:14] Speaker 04:
And if you're in a Chapter 11 business bankruptcy,

[00:06:16] Speaker 04:
you have a right to retain counsel and to pay counsel from funds that you have.

[00:06:23] Speaker 04:
And so what we are asking this court to do is to take a careful look at the record.

[00:06:32] Speaker 04:
I'm also a member of the New York Bar, and there's a rule in the New York Supreme Court, the level court, that says that you put everything in your brief

[00:06:41] Speaker 04:
And when you get to court, you don't argue anything in your brief.

[00:06:44] Speaker 04:
At which point, I would ask the judge, well, why am I here?

[00:06:47] Speaker 04:
Because it's all in my brief.

[00:06:49] Speaker 04:
It is all in my brief.

[00:06:51] Speaker 04:
And unless the court has any further questions of me at this point, I would like to reserve the rest of my time.

[00:06:56] Speaker 03:
There was sort of a second argument that I thought you were making, too.

[00:07:00] Speaker 03:
Could you speak?

[00:07:00] Speaker 03:
I'm sorry.

[00:07:03] Speaker 03:
Here, you seem to be arguing there was no cause.

[00:07:08] Speaker 03:
And in your briefs, though, you were arguing that the cause had to be, if there was cause, it would have to be related to her role as a trustee.

[00:07:20] Speaker 04:
I'm actually making two points.

[00:07:23] Speaker 04:
The first point is the one you just stated, Your Honor.

[00:07:26] Speaker 04:
It has to be related to her actions as a trustee.

[00:07:29] Speaker 04:
And there is nothing in this record

[00:07:31] Speaker 04:
The U.S.

[00:07:32] Speaker 04:
trustee has conceded that there is nothing in her unblemished record.

[00:07:35] Speaker 03:
that would cause the bankruptcy court, who itself admitted there is not, this is a case of... Let's go to this point, whether there is cause, but does the cause have to be related to her duties as a trustee?

[00:07:50] Speaker 03:
But aren't you in essence asking us in that case to interpret the language of Section 324A so the unqualified term cause should be applied in only limited circumstances?

[00:08:06] Speaker 03:
Yes and no.

[00:08:09] Speaker 04:
Yes in the sense that I believe the cases are uniform.

[00:08:13] Speaker 04:
There has been disqualification, removal only when the conduct and issue fundamentally affected the trustee's duties, character as a trustee.

[00:08:26] Speaker 03:
But those cases don't say, that's because those were the facts that the parties were presented with.

[00:08:34] Speaker 03:
maybe this fact pattern hasn't come up before, but where on the statute, how do you get from the statute that doesn't define cause or doesn't limit cause to say that it should be limited?

[00:08:46] Speaker 04:
I believe you take the gloss applied to the statute by the courts and you apply the fact situations there.

[00:08:52] Speaker 04:
I will concede, Your Honor,

[00:08:56] Speaker 04:
I can think of all sorts of things outside of trustees duties as a trustee that would be quote cause under the statute.

[00:09:04] Speaker 04:
My point is that under the facts here inside or outside of her duties as a trustee there is no cause and frankly the bankruptcy court despite its distinguished career got it wrong.

[00:09:19] Speaker 01:
All right.

[00:09:20] Speaker 01:
Thank you.

[00:09:20] Speaker 01:
We'll let you reserve.

[00:09:21] Speaker 01:
Thank you.

[00:09:24] Speaker 01:
Mr. Golden.

[00:09:34] Speaker 02:
Good morning.

[00:09:35] Speaker 02:
May it please the court.

[00:09:36] Speaker 02:
My name is Cameron Golden, appearing on behalf of APLE, the United States trustee.

[00:09:41] Speaker 02:
Removal of a trustee for the general term of cause is left to the sound discretion of the bankruptcy court under a broad totality of the circumstances test.

[00:09:55] Speaker 02:
And here,

[00:09:57] Speaker 02:
We have a Chapter 7 trustee who was a fiduciary, like all Chapter 7 trustees are, held to the highest standard of conduct and required to possess integrity and good moral character.

[00:10:11] Speaker 02:
In this case, either the misconduct of Ms.

[00:10:13] Speaker 02:
Shaman involving her late husband and his estate or her misconduct related to the COVID loan

[00:10:20] Speaker 01:
Nine hundred and twenty four thousand dollars obtained from the SBA were sufficient grounds for cause Let me let me stop you and focus first of all on the probate court decision the Bankruptcy court didn't make any independent findings along the lines of what the probate court found correct.

[00:10:38] Speaker 01:
That is correct judge it relied on the probate courts and

[00:10:42] Speaker 01:
And I have a real problem with the preclusive effect because it's a tentative decision.

[00:10:47] Speaker 01:
And actually, the California Rules of Court say it's not even a judgment, let alone a final judgment.

[00:10:52] Speaker 01:
So how can a non-final tentative decision have issue preclusive effect?

[00:11:00] Speaker 02:
A few points on that, Your Honor.

[00:11:02] Speaker 02:
First of all, we do feel it was final for purposes of issue preclusion as we state in our brief.

[00:11:09] Speaker 02:
Not final and appealable, but final meaning sufficiently firm so as to be accorded preclusive effect.

[00:11:16] Speaker 02:
It was the result of a ten day trial with witnesses exhibits including testimony of Ms.

[00:11:21] Speaker 02:
Shaman herself.

[00:11:23] Speaker 02:
And it would have become final had Ms.

[00:11:26] Speaker 02:
Shaman not two days before it would have become final.

[00:11:30] Speaker 02:
filed bankruptcy to invoke the automatic stay.

[00:11:32] Speaker 01:
Well, you know, the concern I have about that is the probate court under the California court rules specifically said, let me know if you have a problem with any of this.

[00:11:41] Speaker 01:
You know, there's this opportunity to object.

[00:11:44] Speaker 01:
So it's almost like on its face the California court wasn't done.

[00:11:49] Speaker 02:
It was following the court rule 3.1590 that gives parties 15 days to object.

[00:11:55] Speaker 02:
Ms.

[00:11:55] Speaker 02:
Shaman did not object, but instead she filed bankruptcy.

[00:12:00] Speaker 02:
In any event, the district court did affirm on the issue of issue preclusion regarding the quiet title action.

[00:12:09] Speaker 02:
So it's already went through all the analysis except for the one that you raised, Judge Ferris, finality.

[00:12:17] Speaker 02:
And the district court found that

[00:12:20] Speaker 02:
Their failure to raise the finality issue was consistent with their position below where Ms.

[00:12:26] Speaker 02:
Shaman agreed to be bound by the probate decision for her own benefit.

[00:12:31] Speaker 01:
She was actually very careful about that.

[00:12:34] Speaker 01:
She agreed to be bound by the result.

[00:12:38] Speaker 02:
She did agree to be bound by the results for her benefit when the heirs attempted to have the automatic stay lifted for the decision to become final.

[00:12:46] Speaker 02:
And in any event, even if this court were determined, issue of preclusion doesn't apply.

[00:12:51] Speaker 02:
The bankruptcy court didn't abuse its discretion in considering the underlying facts as part of its totality of circumstances analysis.

[00:13:05] Speaker 02:
In regards to the COVID loan, this court picked up on a couple of key points in terms of, first of all, contingent liabilities.

[00:13:17] Speaker 02:
Ms.

[00:13:18] Speaker 02:
Shamen as a trustee certainly reviewed many schedules EF for contingent liabilities where you check the box contingent.

[00:13:26] Speaker 02:
In fact, in her own bankruptcy case, she listed contingent liabilities.

[00:13:30] Speaker 02:
And in fact, she listed these exact contingent liabilities, though she did not list them when applying for the COVID loan.

[00:13:41] Speaker 02:
There are two parts I'll refer to generally as the expenditure of the

[00:13:47] Speaker 02:
COVID loan.

[00:13:49] Speaker 02:
The first 419,000 she used to pay her professionals, her probate attorneys, accountants, her retainer to file her own bankruptcy case had absolutely nothing to do with any business.

[00:14:05] Speaker 02:
So not only was the application itself untruthful, the loan agreement whereby she agreed to use these public funds

[00:14:13] Speaker 02:
solely as working capital to alleviate the economic effects of disaster of COVID-19, she did not use them for that purpose.

[00:14:24] Speaker 02:
She used them to litigate and to file bankruptcy, at least $419,000.

[00:14:30] Speaker 02:
And as Judge Montale said, when she attempted to argue that that was working capital,

[00:14:42] Speaker 02:
He found that those excuses were unavailing and not the least bit convincing.

[00:14:49] Speaker 02:
It sounds like counsel for the appellant has conceded the cause can be for actions outside of the trustee's job, which makes sense.

[00:15:00] Speaker 02:
As Judge Montale said, could she be a bank robber convicted and still be a trustee?

[00:15:06] Speaker 02:
Clearly, we would say not.

[00:15:11] Speaker 02:
And also, as Judge Montale said, if Congress had wanted to limit it to conduct only in the trustee's role, it could have done so.

[00:15:18] Speaker 02:
Instead, it basically did the opposite and left cause very broad, as the statute itself says.

[00:15:26] Speaker 01:
Let me ask you about the mootness point.

[00:15:30] Speaker 01:
She's resigned from future assignments, right?

[00:15:34] Speaker 01:
Correct, she's resigned.

[00:15:35] Speaker 01:
I think it's fair to say that the chances the U.S.

[00:15:37] Speaker 01:
trustee would put her back on the panel are fairly low.

[00:15:42] Speaker 02:
Should this court reverse and find that Judge Montale abused his discretion, Ms.

[00:15:47] Speaker 02:
Shaman could be reinstated in the three cases and it would not be moved.

[00:15:51] Speaker 02:
I'm talking about more assignments going into the future.

[00:15:54] Speaker 01:
I'm breaking it into two pieces.

[00:15:56] Speaker 01:
For those, she is resigned from the panel of her own volition.

[00:15:59] Speaker 01:
And if she were to reapply?

[00:16:01] Speaker 01:
that would be to the U.S.

[00:16:03] Speaker 01:
trustee's discretion whether to grant that application, right?

[00:16:06] Speaker 01:
Yes, your honor.

[00:16:07] Speaker 01:
Okay, so for the cases she's in, there's three cases she's still in now, is that it?

[00:16:11] Speaker 01:
Yes, sir.

[00:16:12] Speaker 01:
This one and there's two others, is that right?

[00:16:15] Speaker 01:
It's actually not this one.

[00:16:17] Speaker 01:
Not this one.

[00:16:17] Speaker 02:
It's ACH, Cezanne, and Zerker Trust.

[00:16:23] Speaker 02:
Zerker Trust had the Cabo property where the judge allowed her to stay in as part of his order until the

[00:16:31] Speaker 01:
The property was sold, which it was.

[00:16:34] Speaker 01:
And you're not complaining about the court allowing her to stay in those cases, correct?

[00:16:38] Speaker 01:
No, Your Honor.

[00:16:40] Speaker 01:
Okay.

[00:16:40] Speaker 01:
So what happens if the removal, what effect does the removal have?

[00:16:44] Speaker 01:
What real world effect does the removal order have at this point?

[00:16:50] Speaker 02:
Well, she was removed from three cases.

[00:16:53] Speaker 02:
Yeah.

[00:16:53] Speaker 02:
So if this court reversed, she could be put back in those cases.

[00:16:59] Speaker 02:
In addition to the two you've mentioned?

[00:17:02] Speaker 02:
Yes, three total.

[00:17:05] Speaker 01:
Two, yes.

[00:17:07] Speaker 01:
Was it five total?

[00:17:08] Speaker 01:
Nope, sorry.

[00:17:08] Speaker 01:
Three, Circuit Trust, ACAH, and Cezanne.

[00:17:12] Speaker 01:
So she'd be put back into one of those cases if we were to reverse?

[00:17:16] Speaker 01:
Or she could be put back in all three.

[00:17:20] Speaker 01:
I understand.

[00:17:20] Speaker 01:
Thank you.

[00:17:21] Speaker 01:
OK, sorry for any confusion.

[00:17:24] Speaker 01:
Only got so many fingers.

[00:17:26] Speaker 02:
And I don't know.

[00:17:27] Speaker 02:
It was totally unclear by the briefs.

[00:17:33] Speaker 02:
It would only become moot then if she was saying, regardless of this court's decision, even if this court reverses, she will not accept such reappointment.

[00:17:44] Speaker 02:
I don't know if that's the case.

[00:17:46] Speaker 00:
Does that really make it moot?

[00:17:48] Speaker 00:
Because she says that today, but then in two weeks she could say, well,

[00:17:53] Speaker 00:
I'm changing my mind.

[00:17:54] Speaker 00:
I would want to go back on the, you know, be on the panel again.

[00:17:59] Speaker 00:
It's in her control, so, right?

[00:18:02] Speaker 02:
Yes, Your Honor, it could happen.

[00:18:04] Speaker 00:
That may not make it moot.

[00:18:06] Speaker 02:
Right.

[00:18:06] Speaker 00:
All right.

[00:18:06] Speaker 02:
So we just don't know.

[00:18:08] Speaker 02:
But since we've gone down this road of mootness, I would be amiss not to at least mention vacatur.

[00:18:15] Speaker 02:
If this court does determine that it's moot,

[00:18:20] Speaker 02:
Vacature would not be the appropriate remedy because that's only appropriate when mootness occurs by happenstance or by the unilateral action of the prevailing party below.

[00:18:29] Speaker 02:
Here it would be made potentially moot by her own actions, so vacature would not be appropriate.

[00:18:38] Speaker 02:
If there are no further questions, I'd just like to conclude the way Judge Montale concluded his analysis, which I will say was very measured

[00:18:49] Speaker 02:
The record reflects very patient, six months between the filing of our motion and his ruling.

[00:18:56] Speaker 02:
12 cases when Ms.

[00:18:57] Speaker 02:
Shaman was in, when we filed it, only three by the time he ruled, which reflects to me great use of discretion, the opposite of an abuse of discretion.

[00:19:08] Speaker 02:
But he said any of the actions described, and certainly in tandem,

[00:19:13] Speaker 02:
paint a picture in which any reasonable debtor or acquirer would be forced to question whether Ms.

[00:19:19] Speaker 02:
Shaman will make financial decisions for the benefit of the estate she administers or for the ultimate benefit of herself.

[00:19:28] Speaker 02:
The integrity of the bankruptcy system cannot be so questioned.

[00:19:32] Speaker 02:
Obviously, the U.S.

[00:19:33] Speaker 02:
trustee unequivocally agrees with that, and I believe the total circumstances demonstrate that Judge Montale did not abuse his discretion in finding cause for removal from the three cases.

[00:19:45] Speaker 01:
Okay.

[00:19:45] Speaker 01:
Any more questions?

[00:19:46] Speaker 01:
Thank you.

[00:19:48] Speaker 01:
Thank you very much.

[00:19:49] Speaker 01:
Mr. Keeva, you've got fiveish minutes.

[00:19:53] Speaker 01:
There we go.

[00:19:53] Speaker 01:
Almost six minutes.

[00:19:56] Speaker 04:
Unless the court has any further questions, we wait for their argument.

[00:20:00] Speaker 04:
And thank the court.

[00:20:01] Speaker 01:
Okay.

[00:20:01] Speaker 01:
Thank you very much.