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In re Younessi

United States Bankruptcy Appellate Panel of the Ninth Circuit

July 10, 2019

MICHAEL YOUNESSI, Appellee. DIAMOND ENTERPRISES, LTD., LP Appellant, Adv. Pro. 8:18-ap-01150-MW

          Argued and Submitted on June 20, 2019 at Pasadena, California

          Appeal from the United States Bankruptcy Court for the Central District of California Honorable Mark S. Wallace, Bankruptcy Judge, Presiding

          M. Douglas Flahaut of Arent Fox LLP argued for appellant

          Diamond Enterprises, Ltd., LP; Michael Jones of M Jones & Associates, PC argued for appellee Michael Younessi.

          Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges




         The bankruptcy court confirmed debtor Michael Younessi's chapter 11[1] plan, then granted (in part) creditor Diamond Enterprises, Ltd., LP's ("Diamond") motion to modify the confirmation order. Over 180 days after the original confirmation order, but less than 180 days after the modification, Diamond filed a complaint to revoke confirmation, contending that the original confirmation order was procured by fraud. Mr. Younessi filed a motion to dismiss the complaint, arguing that it was barred by the 180-day deadline in § 1144. The bankruptcy court agreed with Mr. Younessi, and Diamond appealed.

         The narrow question on appeal is whether the modification order reset the 180-day deadline for Diamond to seek revocation of the plan confirmation. We agree with Diamond that, on the facts of this case, the 180-day period ran from the order modifying the plan confirmation order. Accordingly, we REVERSE and REMAND.


         A. Prepetition events

         Mr. Younessi was close friends with Dr. Bruce Houman, Diamond's manager, and solicited investments from Dr. Houman to develop commercial real estate. Dr. Houman, through Diamond, contributed over $2 million toward the purchase of real estate and interests in Mr. Younessi's companies.

         Mr. Younessi and Dr. Houman obtained a $1.2 million line of credit secured against the investment properties. Almost immediately, Mr. Younessi began unilaterally withdrawing money for personal use without Dr. Houman's knowledge or permission.

         In July 2009, Diamond sued Mr. Younessi and his company in California superior court for fraud, breach of fiduciary duty, securities violations, and other claims. Following a trial, the state court ruled against Mr. Younessi and in favor of Diamond. The court found that Mr. Younessi made material misrepresentations to Dr. Houman regarding his and his companies' finances and net worth and the nature and value of some of the companies and real properties. It entered judgment totaling $3, 979, 242.68 plus attorneys' fees. The court of appeal affirmed.

         B. Mr. Younessi's chapter 11 case and confirmed plan

         Mr. Younessi filed his chapter 11 petition on December 27, 2016.

         Diamond filed an adversary complaint seeking a determination that the state court judgment was nondischargeable under §§ 523(a)(2), (4), (6), and (19). Diamond also filed a proof of claim for $7, 220, 122.60 based on the state court judgment debt.

         Mr. Younessi filed his proposed chapter 11 plan and disclosure statement on July 30, 2017. He filed a first amended plan (the "Plan") and first amended disclosure statement on September 1, 2017. The bankruptcy court approved the amended disclosure statement.

         The Plan classified Diamond as a Class 7 Creditor, acknowledging that the judgment debt was "potentially non-dischargeable." The Plan proposed three options for treatment of Diamond's claim. Treatment A provided that Diamond would receive a single payment of $22, 000 in full satisfaction of its claims, that Diamond would "consent" to the discharge of Mr. Younessi's liability to it and Dr. Houman, and that "Houman will provide a statement to Debtor that Houman no longer believes the actions of Debtor forming the basis of Diamond's claim were improper, and Diamond's claim ultimately arose because of a business deal that went bad without malfeasance of any of the parties." Treatment B required Mr. Younessi to "pay Diamond 5% of his annual earnings between $250, 000 and $350, 000, and 10% of his annual earnings in excess of $350, 000.00 until Claim 7 is paid in full, the debt is discharged, or the Debtor's obligations to continue with these payments is otherwise terminated." Treatment C provided that Mr. Younessi would pay Diamond a lump-sum distribution of $80, 000 in exchange for Diamond conveying certain property interests to Mr. Younessi. If Diamond selected none of the options, "Class 7 Treatment A will be the default treatment for Class 7."

         Diamond was the only voting creditor to cast a ballot rejecting the Plan. It did not choose any of the proposed treatments.

         Diamond also objected to the Plan. It argued that the Plan did not satisfy the statutory requirements for plan confirmation and sought to compel Diamond to make false and misleading statements regarding the state court action. It contended that Mr. Younessi did not disclose all material information, assets, and risks in the Plan, including prior bankruptcy proceedings, related bankruptcy proceedings, and interests in various companies.

         The bankruptcy court entered an order confirming the Plan ("Confirmation Order") on December 21, 2017. It stated that "nothing in the Chapter 11 Plan shall have any effect on Diamond's pending non-dischargeability action against Debtor except to the extent that Diamond is determined to have actually or constructively consented to such effect or as otherwise provided by law, and except to the extent, if any, that Diamond's ineligibility to vote on the Chapter 11 Plan has a bearing on these matters."[3]

         In its findings of fact and conclusions of law, the court found that the Plan complied with the applicable provisions of the Bankruptcy Code. The court found that Diamond selected Treatment A by not picking either Treatment B or C. It stated that "Diamond elected this treatment by its own decision, and as such Diamond effectively waived its objections by agreeing to that treatment by consent."

         C. Motion for reconsideration

         Diamond filed a motion for reconsideration of the Confirmation Order under Rules 9023 and 9024. It requested that the bankruptcy court either decline to confirm the Plan or modify the Confirmation Order to make clear that the Confirmation Order and Plan shall not "have any effect on Diamond's pending Nondischargeability Action against the Debtor and, in the event Diamond prevails in that action, such nondischargeable judgment in favor of Diamond (if any) will not be adversely affected or discharged pursuant to the [Plan] . . . ." It argued that it did not consent to plan confirmation or its treatment under the Plan, and that the Plan did not satisfy the requirements for confirmation.

         Mr. Younessi opposed the motion for reconsideration. He argued that Diamond waived its objections by not raising them until after the deadline for objections had passed. He argued that Diamond had consented to its ...

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