FILED JUN 28 2023 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP Nos. AZ-22-1130-SFL ANDREA GROVES, AZ-22-1131-SFL Debtor. (Related Appeals)

A&D PROPERTY CONSULTANTS, LLC, Bk. No. 2:18-bk-14761-BKM Appellant, v. OPINION A&S LENDING, LLC, Appellee.

Appeal from the United States Bankruptcy Court for the District of Arizona Brenda K. Martin, Bankruptcy Judge, Presiding

APPEARANCES: Ronald J. Ellett of Ellett Law Offices, P.C. argued for Appellant; David Lee Allen of Jaburg & Wilk, P.C. argued for Appellee.

Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.

SPRAKER, Bankruptcy Judge:

INTRODUCTION

These appeals call into question a debtor’s ability to sell property co-

owned with a nondebtor free and clear of liens against the nondebtor’s interests under

(f). 1 The chapter 13 debtor, Andrea Groves

(“Groves”), moved to sell real property jointly owned with her wholly

owned limited liability company, appellant A&D Property Consultants,

LLC (“Consultants”), under § 363(h). Groves sought to sell the jointly

owned property free and clear of the deed of trust encumbering

Consultants’ interest securing a joint debt owed to appellee A&S Lending,

LLC (“A&S”). She argued that A&S had forfeited its secured claim by

failing to bring a compulsory counterclaim under Civil Rule 13(a), made

applicable by Rule 7013, in a prior adversary proceeding.

Consultants joined the sale motion. A&S did not oppose the sale but

insisted that Consultants’ net sale proceeds be paid to A&S on its secured

claim at closing. The bankruptcy court approved the sale but agreed with

A&S that Consultants’ interest remained subject to A&S’s deed of trust.

The court ordered that Consultants’ proceeds be disbursed to A&S at

closing. The court also entered a separate order stating that A&S had not

forfeited its counterclaims under the promissory note.

These appeals are far astray from the sale motion presented to the

bankruptcy court, which has now faded into the background. Consultants

has appealed both orders but only challenges the court’s ruling that A&S

did not forfeit its underlying claim and its interest in Consultants’ share of

1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure. 2 the net sale proceeds. Consultants miscomprehends the limited nature of

the underlying motion to sell; it is not a vehicle for nondebtors to challenge

encumbrances against their interests in the jointly owned property being

sold under § 363(h). Consultants’ interest in the property remained subject

to A&S’s recorded deed of trust.

We hold that Groves could not use § 363(f)(4) to sell Consultants’

interest in real property free and clear of A&S’s lien. Accordingly, A&S was

entitled to payment of its lien from Consultants’ share of the proceeds. To

challenge A&S’s secured claim, Consultants should have sought to enjoin

the distribution of the sale proceeds. It failed to do so. Accordingly, the

bankruptcy court properly required that Consultants’ net sale proceeds be

distributed to A&S pursuant to its recorded deed of trust.

At the parties’ urging, the bankruptcy court went beyond the motion

to sell and considered the validity of A&S’s secured claim against

Consultants’ interest in the real property. However irregularly raised, all

parties consented to the court’s determination of the issue. We, therefore,

hold that any procedural error in determining the question as part of the

motion to sell was harmless and conclude that the bankruptcy court had

jurisdiction to determine the question presented. We agree with the

bankruptcy court that A&S did not forfeit its secured claim against

Consultants by failing to seek any recovery against Consultants in Groves’

prior adversary proceeding to determine the validity of the deed of trust.

Accordingly, we AFFIRM.

3 FACTS2

Groves and Consultants jointly owned two parcels of real property in

Phoenix, Arizona as tenants in common. One was an investment property

located on Rancho Drive (“Rancho Property”). The other was Groves’

residence located on 44th Street (“Residence”). Groves and Consultants

borrowed money from Merchants Funding AZ, LLC (“Merchants”) and

jointly executed a promissory note secured by a deed of trust covering both

properties. Though A&S claimed that Merchants meant to encumber both

owners’ interests in the properties, that is not what the deed of trust said.

Instead, the deed of trust only encumbered Consultants’ interest in the

Rancho Property and Groves’ interest in the Residence.

Merchants assigned its interest in the loan and deed of trust to A&S,

though Merchants continued to service the loan.

A. Groves files for bankruptcy and sues A&S for declaratory relief.

Groves filed her chapter 13 bankruptcy petition in December 2018.

She scheduled Merchants as a secured creditor but listed the claim as

disputed. A&S objected to Groves’ proposed plan, claiming its deed of

2 Many of the facts set forth below are taken from our decision in the prior appeal involving the same parties concerning the scope of A&S’s deed of trust. See A&S Lending, LLC v. Groves (In re Groves),

(9th Cir. BAP July 13, 2022). We also exercise our discretion to take judicial notice of documents electronically filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),

, 233 n.9 (9th Cir. BAP 2003). 4 trust encumbered all interests in the Rancho Property and the Residence.

However, neither A&S nor Merchants filed a proof of claim.

Groves then filed an adversary complaint against A&S seeking

declaratory relief “to determine the validity, priority, or extent of a lien or

other interest in property.” Consultants was not named as a party. Yet,

Groves sought a declaratory judgment that A&S’s deed of trust only

encumbered Consultants’ interest in the Rancho Property, and not her

interest. Conversely, she also sought a judgment that A&S’s deed of trust

only encumbered her interest in the Residence, and not Consultants’

interest.

A&S obtained leave to amend its original answer to state a

“counterclaim” against Groves, and to bring a “cross-claim” against

Consultants, for reformation of the deed of trust. A&S’s reformation claims

sought to confirm that the deed of trust encumbered all interests in both

properties. A&S did not seek any monetary recovery or foreclosure. In

response, Groves filed a second amended complaint to add an avoidance

claim directed at A&S’s reformation counterclaim. Consultants’ only role in

the adversary proceeding was as a third-party defendant to A&S’s

reformation claim.

After a two-day trial, the bankruptcy court entered judgment in favor

of Groves and Consultants. The court ruled that the A&S deed of trust

encumbered only Consultants’ interest in the Rancho Property and Groves’

interest in the Residence. The court dismissed with prejudice A&S’s

5 reformation claims. A&S appealed, but we affirmed. In re Groves,

, at *6.

B. The motion to sell the Rancho Property.

Having obtained her declaratory judgment as to the scope of the

deed of trust, Groves moved to sell the Rancho Property under § 363(h).

Groves stated that she consented to the proposed sale on behalf of

Consultants. She sought to sell both her interest and Consultants’ interest

in the Rancho Property free and clear of all liens under § 363(f). She

recognized that A&S continued to assert in the pending appeal that its

deed of trust encumbered her interest in the Rancho Property. Groves

contended that, having prevailed in the prior adversary, she established a

bona fide dispute, at a minimum, that the A&S deed of trust did not

encumber her interest. 3

As to Consultants’ interest in the Rancho Property, A&S’s lien was

unchallenged in the prior adversary proceeding. In fact, the adversary

judgment specifically acknowledged it by stating: “the lien of [A&S] only

attaches to the undivided interest of [Consultants] in the [Rancho

Property].” Still, Groves sought to sell the Rancho Property free and clear

of the lien against Consultants’ interest under § 363(f)(4). Groves argued

that a bona fide dispute existed whether A&S had forfeited its claim

against Consultants when it failed to assert its loan rights in the adversary

3 The motion treated her share of the net sale proceeds as unencumbered and proposed to turn them over to her chapter 13 trustee at closing. 6 proceeding as a compulsory counterclaim under Rule 7013. Groves

reasoned that this left A&S with “only tenuous, disputed claims against the

property.” The motion requested that the court order any liens to attach to

the sale proceeds and for the sales proceeds to be held in trust pending a

resolution of the dispute and further court order.

A&S opposed the sale but exclusively focused on the argument that it

had forfeited its claim for the outstanding loan balance and, therefore, had

no secured claim against Consultants’ interest. It pointed out that Groves

had sought, and the judgment declared, that A&S’s lien encumbered only

Consultants’ interest in the Rancho Property. It did not, however, address

whether the parties’ arguments created a bona fide dispute for purposes of

selling the Rancho Property free and clear of its deed of trust. Indeed, the

opposition did not address at all the bankruptcy estate’s asserted right to

sell both its interest and Consultants’ interest in the Rancho Property free

and clear of the deed of trust under § 363(f). Rather, A&S requested that

“upon the sale of the Rancho Property one-half of the net sales proceeds be

paid to A&S as the secured lien holder of [Consultants’] one-half interest in

the Rancho Property.”

In her reply to A&S’s opposition, Groves noted that A&S did not

object to the sale of the Rancho Property or deny that its secured claim

against her was subject to a bona fide dispute. Groves maintained that the

court should recognize that a bona fide dispute existed under § 363(f)(4)

and should determine in a future proceeding whether A&S retained its

7 secured claim. Consistent with this argument, Groves requested that the

court “enter an order granting the Motion to Sell in all respects and

providing that A&S’s lien, if any, shall attach to half of the net sales

proceeds. The Court should then entered [sic] a second order ruling that

A&S waived its claims under the Promissory Note by failing to bring them

as required by Rule 13.”

At the hearing on the sale motion, Groves began by noting that there

was no opposition to the sale, only to the distribution of the proceeds. The

parties discussed the bankruptcy court’s jurisdiction to decide whether

A&S held a valid, secured claim against Consultants. They then proceeded

to argue the merits of Groves’ claim that A&S had forfeited its claim

against Consultants.

The bankruptcy court agreed that a bona fide dispute under

§363(f)(4) existed as to any lien against Groves’ interest in the Rancho

Property that remained on appeal. It then ruled that A&S’s underlying

claim against Consultants was not a compulsory counterclaim to Groves’

challenge to the deed of trust in the prior adversary proceeding.

Accordingly, it required that Consultants’ interest in any net proceeds from

sale of the Rancho Property be paid in partial satisfaction of A&S’s deed of

trust.

On June 22, 2022, the bankruptcy court entered an order approving

the sale and a separate order rejecting Groves’ and Consultants’ request

that the court deem A&S’s loan and lien rights forfeited. Consultants

8 timely appealed both orders.

JURISDICTION

We have jurisdiction under

. Explaining the

bankruptcy court’s subject matter jurisdiction is slightly more complex.

A. The bankruptcy court had subject matter jurisdiction.

The contested matter before the bankruptcy court was limited to the

approval of the proposed sale under § 363(f) and (h). Because the motion to

sell “arose under” title 11,4 the court had subject matter jurisdiction under

to determine the sale motion, a core bankruptcy matter

pursuant to

(b)(2)(N).5 Accordingly, the bankruptcy court

had subject matter jurisdiction over the sale motion.

At the hearing on the motion to sell, the court also rejected the

4 See Battle Ground Plaza, LLC v. Est. of Jessen (In re Ray),

, at *8 (9th Cir. BAP Dec. 31, 2008) (indicating that § 363 sales “arise under” title 11), rev'd on other grounds and remanded sub nom., Battle Ground Plaza, LLC v. Ray (In re Ray),

(9th Cir. 2010). Notwithstanding Ray, courts seem to struggle over whether § 363 sales “arise under” title 11 or “arise in” a case under title 11. See, e.g., New England Power & Marine, Inc. v. Town of Tyngsborough (In re Middlesex Power Equip. & Marine, Inc.),

(1st Cir. 2002). Compare In re McLendon,

(Bankr. N.D. Miss. 2013) (identifying § 363 sale as “a core proceeding arising under [t]itle 11”), with In re Murchison,

(Bankr. N.D. Tex. 1985) (indicating that § 363 sales are proceedings “arising in the Code”). At bottom, it makes no difference to the resolution of this appeal whether the instant § 363 sale “arose under” or “arose in” Groves’ bankruptcy case. 5 Consultants’ sale proceeds were also to be distributed at closing under § 363(j).

Accordingly, the distribution of Consultants’ net sale proceeds also “arose under” title 11, and the bankruptcy court had the jurisdiction to enter the order requiring distribution of those proceeds to A&S pursuant to its recorded deed of trust under

. 9 argument that A&S had forfeited its secured claim. It entered a separate

order denying Consultants’ “request for an Order ruling that A&S Lending

waived its counterclaims under the promissory note.” Consultants raised

the question of the bankruptcy court’s jurisdiction to decide the validity of

A&S’s secured claim against it within its notice of issues on appeal. It did

not, however, address the question in its appellate briefing. Still, we have

an independent obligation to consider whether the bankruptcy court had

jurisdiction. Arizonans for Off. Eng. v. Arizona,

(1997) (citing

Bender v. Williamsport Area Sch. Dist.,

(1986)).

At a minimum, the bankruptcy court had “related to” jurisdiction to

decide whether Consultants’ share of the sale proceeds was encumbered by

A&S’s deed of trust. A&S’s loan rights were secured by Groves’ interest in

the Residence and Consultants’ interest in the Rancho Property. If A&S

retained its secured claim against Consultants’ interest in the Rancho

Property, the amount of Groves’ debt to A&S would decrease. Of course, if

A&S had forfeited its claim against Consultants, then Groves would have

been liable for the entirety of the joint debt. Because the enforceability of

A&S’s underlying claim against Consultants had the potential to materially

impact Groves’ bankruptcy, the bankruptcy court had “related to”

jurisdiction to consider the question. Fietz v. Great W. Savings (In re Fietz),

, 457 (9th Cir. 1988).

B. Consultants has standing to appeal.

A&S contends that Consultants is not a “person aggrieved” and lacks

10 standing to appeal the bankruptcy court’s orders. The person aggrieved

standard is a prudential rule of appellate standing. See Harkey v. Grobstein

(In re Point Ctr. Fin., Inc.),

(9th Cir. 2018). Appellants are

persons aggrieved for appellate standing purposes when the order on

appeal diminishes their property, increases their burdens, or detrimentally

affects their rights.

The Ninth Circuit recently has questioned the continued validity of

the prudential concept of bankruptcy appellate standing and the “person

aggrieved” standard. Clifton Cap. Grp., LLC v. Sharp (In re E. Coast Foods,

Inc.),

, 1218 (9th Cir. 2023). In East Coast Foods, the court

concluded that it did not need to decide its continuing validity because the

appellant there lacked Article III standing, which requires the appellant to

show that it has: “(1) suffered an injury in fact that is concrete,

particularized, and actual or imminent, (2) the injury is fairly traceable to

the defendant's conduct, and (3) the injury can be redressed by a favorable

decision.”

(cleaned up); see

at 1222 n.11.

Regardless of whether one couches the analysis in terms of Article III

standing or person aggrieved standing, Consultants has standing to pursue

this appeal. The sale order required payment of Consultants’ 50% share of

any net sale proceeds to A&S. As for the Civil Rule 13(a) order, it

determined that A&S’s lien was valid and enforceable against Consultants’

interest in the Rancho Property. As such, the relief granted by the order

caused Consultants concrete, particularized, and immediate injury that we

11 could redress if we were to reverse on appeal. It also was aggrieved by the

court’s orders for the same reasons.6

ISSUES

1. Did the bankruptcy court correctly determine that Groves and

Consultants could not sell the Rancho Property free and clear of A&S’s lien

against Consultants’ interest in the property?

2. Did the bankruptcy court err when it declined to apply Civil Rule

13(a) to A&S’s claim against Consultants?

3. Did the bankruptcy court abuse its discretion by not imposing

judicial estoppel against A&S?

STANDARDS OF REVIEW

The controlling issues raised by these appeals require us to construe

both bankruptcy statutes and the federal rules of practice and procedure.

These present questions of law that we review de novo. See Collect Access

LLC v. Hernandez (In re Hernandez),

(9th Cir. BAP 2012).

When we review a matter de novo, we give no deference to the bankruptcy

court’s decision. Francis v. Wallace (In re Francis),

(9th Cir.

BAP 2014).

6We recognize that Consultants ultimately acquiesced to entry of the sale order that required payment of its share of the sale proceeds to A&S. But we see these circumstances as indistinguishable from those in Giesbrecht v. Fitzgerald (In re Giesbrecht),

, 688–89 (9th Cir. BAP 2010). There, we held that a chapter 13 debtor who was denied confirmation of its original plan but then confirmed an alternate plan had standing to appeal the denial of the first plan he/she proposed. Accordingly, we conclude that Consultants has satisfied its burden to demonstrate its standing. 12 The bankruptcy court’s decision not to apply judicial estoppel is

reviewed for an abuse of discretion. See Hamilton v. State Farm Fire & Cas.

Co.,

(9th Cir. 2001). The bankruptcy court abused its

discretion if it applied an incorrect legal rule or its factual findings were

illogical, implausible, or without support in the record. TrafficSchool.com v.

Edriver Inc.,

(9th Cir. 2011).

We may affirm on any ground supported by the record. In re

Hernandez,

.

DISCUSSION

Consultants contends that the bankruptcy court erred when it

rejected the argument that A&S forfeited the underlying debt by failing to

assert it in Groves’ prior adversary proceeding. Alternately, it argues that

the bankruptcy court erred when it failed to apply judicial estoppel to

prevent A&S from asserting its secured claim.

Although we will address Consultants’ arguments, we note that the

validity of A&S’s secured claim against a nondebtor’s property was beyond

the scope of the motion to sell. Consultants should have raised that

challenge by filing an adversary proceeding, see Rule 7001(2), or in a

separate action in a court of competent jurisdiction.7 In either instance, it

should have sought to enjoin distribution of the net sale proceeds based on

7 To the extent that there was any procedural error in asking the bankruptcy court to rule on the validity of A&S’s secured claim as part of the motion to sell, it was harmless error given the parties’ clear consent. 13 the recorded deed of trust. Instead, Groves sought to avoid the

consequences of A&S’s deed of trust as to Consultants’ interest through her

motion to sell. Consultants now appeals the court’s substantive decision,

including the order approving the sale of the Rancho Property, because it

required the distribution of Consultants’ proceeds to A&S on its deed of

trust. Based on the motion to sell as presented, this was all that should have

been accomplished.

A. The Bankruptcy Code does not permit the bankruptcy court to authorize a sale free and clear of liens and interests attaching to a nondebtor co-owner’s share of the property being sold under § 363(h).

Groves assumed that she could use § 363 to sell the Rancho Property

free and clear of A&S’s deed of trust encumbering Consultants’ interest.

Under § 363(b)(1), after notice and a hearing, the bankruptcy court may

authorize a trustee or debtor in possession to sell property of the estate

outside the ordinary course of business. See Citicorp Mortg., Inc. v. Brooks (In

re Ex-Cel Concrete Co.),

(9th Cir. BAP 1995). In turn, § 363(f)

permits the sale of estate property to be made free and clear of liens and

other interests, with any such liens and interests to attach to the proceeds

of sale, if one of several criteria are met. The relevant provisions in this

instance were creditor consent or where such interest is in bona fide

dispute. § 363(f)(2) and (4); see also Clear Channel Outdoor, Inc. v. Knupfer (In

re PW, LLC),

(9th Cir. BAP 2008).

The ability to sell property, however, is generally limited to property 14 of the estate. With one relevant exception, the bankruptcy court lacks

authority under either § 363(b) or (f) to approve a sale of property that is

not property of the estate. See Moldo v. Clark (In re Clark),

, 171-

72 (9th Cir. BAP 2001) (rejecting trustee’s argument that exempt property

could be sold pursuant to either § 363(b) or (f)); see also Darby v. Zimmerman

(In re Popp),

(9th Cir. BAP 2005) (recognizing

that the bankruptcy estate must have an interest in the property to be sold

for any sale to occur under § 363(b) or (f) (citing Warnick v. Yassian (In re

Rodeo Canon Dev. Corp.),

, 608–09 (9th Cir. 2004), opinion

withdrawn and superseded on other grounds,

(9th Cir. 2005))).

Section 363(h) provides the sole statutory exception to the property of

the estate requirement. Hey v. Silver Beach, LLC (In re Silver Beach, LLC),

, at *6 (9th Cir. BAP Nov. 3, 2009). When the estate jointly

owns property with a nondebtor entity as tenants in common, joint tenants,

or tenants by the entirety, § 363(h) permits the trustee or debtor in

possession to sell both the estate’s undivided interest and the nondebtor

co-owner’s interest in the subject property in certain situations. Groves

moved to sell the Rancho Property under § 363(h) and Consultants agreed

to the sale of its interest together with the estate’s interest.

Because A&S appealed the judgment in the prior adversary

proceeding that its deed of trust did not encumber Groves’ interest in the

Rancho Property, Groves moved to sell her interest free and clear of A&S’s

deed of trust under § 363(f)(4) based on the ongoing bona fide dispute. But

15 she also sought to sell Consultants’ interest free and clear of A&S’s lien

based on § 363(f)(4). The motion argued that a bona fide dispute existed as

to whether A&S’s claim against Consultants survived the adversary

proceeding. The bankruptcy court did not address the specific question as

to whether there was a bona fide dispute under § 363(f)(4). Instead, it ruled

that A&S had not forfeited its claim against Consultants. The initial

question remains, however, whether § 363(f) can be applied to the sale of

the nondebtor’s interest in co-owned property under § 363(h).

We have found only two cases that generally discuss the application

of § 363(f) to sales under § 363(h). Compare Hull v. Bishop (In re Bishop),

(Bankr. D. Me. 2016), with In re Marko,

(Bankr.

W.D.N.C. Mar. 11, 2014). In Bishop, the trustee filed an adversary complaint

to avoid a mortgage and declare the residence of the debtor and her

nondebtor husband free and clear of the disputed mortgage as to both

interests held as joint tenants. In re Bishop,

. The trustee sued

the mortgagee under § 544 based on a defective notarial acknowledgment

certifying the spouses’ signatures on the mortgage. Id. The trustee

persuaded the court that the mortgage should be avoided as against the

debtor’s interest in the property but the lien on her nondebtor husband’s

interest remained. Id. at 566, 567 & n.6.

Citing to § 105(a) rather than § 363(f), Bishop held that the nondebtor

husband’s interest in the residence could be sold free and clear of the

16 mortgagee’s lien. As Bishop reasoned:

TD Bank is correct that section 363(f) authorizes sales free and clear, and that section 363(h), on its face, does not. But this does not compel the result that TD Bank seeks. If the property were jointly owned, but not encumbered by a mortgage lien, the trustee could sell both ownership interests using a combination of subsections 363(b), (f), and (h). In those circumstances, the co-owner would be protected by subsections 363(i) and (j). See

(i) (granting, in a sale under subsection (h), a right of first refusal to the co-owner); 11 U.S.C § 363(j) (directing, in a sale under subsection (h), the trustee to distribute the net proceeds to the co-owner according to its interest in the property). There is no good reason why the result should be different here.

Id. at 567 (emphasis added).8

In Marko, the debtors jointly owned a lake house with the husband’s

parents, holding title in joint tenancy. In re Marko,

, at *1.

The property was subject to a secured debt that exceeded its value.

.

Debtor-husband purported to sell the lake house to a third party, David

Reule. But the other three owners disputed the sale. They claimed that they

neither had knowledge of, nor consented to, the sale. Debtors filed

bankruptcy. The chapter 7 trustee sought to sell all of the interests in the

lake house.

. Both the nondebtor co-owners and the lienholder

consented to the sale as proposed.

But Reule asserted that he owned the

8 In Bishop, the trustee had not proposed a sale within the adversary proceeding but only sought to declare its rights.

. 17 lake house and opposed the sale on multiple grounds.

The bankruptcy court ultimately agreed with Reule’s opposition and

denied the trustee’s sale motion. Id. at *3. However, the court also

questioned whether the co-owners’ interest in the lake house could be sold

free and clear of Reule’s disputed interest under § 363(f)(4). 9 The Marko

court reasoned it was unlikely that a trustee could “use § 363(f)(4) in

connection with § 363(h) . . . to sell the non-debtor co-owners’ interests free

and clear along with the Debtors’.” Id. at *4 (emphasis added). Marko

explained that to hold otherwise risked impermissibly overextending

bankruptcy relief to nondebtor parties, when the Bankruptcy Code only

afforded such relief to debtors and the bankruptcy estate. Id. Marko further

expressed concern that the bankruptcy court’s jurisdictional reach

ordinarily did not include disputes concerning only nondebtor parties, and

a dispute not involving the debtors presumably would be insufficient to

justify application of § 363(f)(4). Id. Ultimately, the court chose not to

decide the question in light of other deficiencies with the proposed sale. Id.

at *5.

Of these two decisions, we find Marko more persuasive. Section

The Marko court cited Austien v. Schwartz (In re Gerwer),

, 733 (9th 9

Cir. 1990), as evidence of the conflicting results reached in the few cases to consider the outer limits of § 363(f)(4). Gerwer considered whether the bankruptcy estate could sell interests in promissory notes free and clear of a dispute between the secured creditors. There, the dispute affected the property of the estate but did not involve a nondebtor’s separate joint interest sold under § 363(h). 18 363(h) enables the bankruptcy court to authorize the sale of property the

debtor jointly owns with nondebtors, but it does not permit the trustee or

debtor-in-possession to sell free and clear of liens on the nondebtor party’s

interest in that jointly owned property. Section 363(f) expressly provides

when an estate may sell property free and clear of liens and it, like § 363(b),

is limited to the sale of property of the estate. In re Popp,

;

In re Clark,

. Neither Popp nor Clark are outliers. The Ninth

Circuit Court of Appeals and this Panel have issued numerous decisions

reaffirming that these provisions only affect estate property. See, e.g., Citi

Inv. Cap., Inc. v. Ehrenberg (In re Elieff),

, at *1 (9th Cir.

Oct. 25, 2022); Richards v. Marshack (In re Richards),

, at *4

(9th Cir. BAP Nov. 7, 2022), appeal docketed, No. 22-60058 (9th Cir. Dec. 15,

2022); Fontaine v. Conn (In re Fontaine),

, at *12 (9th Cir.

BAP Nov. 26, 2010), aff’d,

(9th Cir. 2012); In re Silver Beach,

LLC,

, at *6-7. Though the estate may sell jointly owned

property, the nondebtor co-owner’s interest in the property does not

become property of the estate, and the sale is subject to any liens or

interests against the nondebtor’s interest.

Silver Beach is instructive. In Silver Beach, the chapter 11 debtor-in-

possession moved under § 363(b) and (f) to sell certain vacant property to

which it held title.

, at *2. The property’s title was clouded

by timeshare interests that one of debtor’s predecessors in interest had

granted to roughly 150 individuals.

Debtor asserted that it could sell

19 free and clear of the timeshare holders’ interests under § 363(f). Four of the

timeshare holders objected Id. Among other things, the objecting timeshare

holders argued that the sale should be postponed until the parties’

respective interests in the property were adjudicated. Id. at *3-4. The

bankruptcy court approved the proposed auction sale over the timeshare

holders’ objections.

On appeal, the objecting timeshare holders argued that their interests

in the property were not property of estate and could not be sold by the

bankruptcy court. Id. at *5. This Panel agreed with the objecting timeshare

owners and reversed the sale order. As we explained:

Section 363(b) states the general rule that only “property of the estate” may be sold pursuant to its authority. The single statutory exception to the rule is section 363(h), which authorizes the sale of specified co-owned property. A section 363(f) sale cannot be used to transform property of others into property of the estate.

Id. at *6.

Unlike the case at bar, Silver Beach did not involve an attempted sale

under § 363(h). Even so, Silver Beach stands for the proposition that § 363(b)

and (f) extend only to sales of estate property. Though § 363(h) enables the

bankruptcy court to authorize a trustee or debtor in possession to sell a co-

owner’s interest in property, it is necessarily subject to liens or interests

against the nondebtor’s interest. To hold otherwise would be at odds with

the Bankruptcy Code’s carefully crafted statutory scheme, which

specifically limits those statutory powers. For this reason, § 363(f) did not

20 apply to the sale of Consultants’ interest, and the bankruptcy court could

not authorize the sale of the Rancho Property free and clear of A&S’s

recorded deed of trust under § 363(f)(4). Accordingly, the court properly

required the net proceeds from the sale of Consultants’ interest in the

Rancho Property under § 363(h) to be turned over to A&S in partial

satisfaction of its deed of trust.10 See § 363(j).

B. A&S did not forfeit its secured claim under Civil Rule 13(a).

Consultants adopts Groves’ arguments before the bankruptcy court

that under Rule 7013, A&S forfeited its underlying debt by failing to bring

a compulsory counterclaim in Groves’ adversary proceeding. It contends

10 We are aware of the prefatory language at the beginning of § 363(h) stating “[n]otwithstanding subsection (f) of this section . . . .” The simplest explanation for this language is that it recognizes that subsections (f) and (h) are distinct means of dealing with various interests of nondebtor parties in property subject to sale under § 363(b). This explanation is consistent with our decision in Moore v. Elder (In re Hatfield),

, at *6-7 (9th Cir. BAP Mar. 17, 2009). In Hatfield, we examined this prefatory phrase and held that “[s]ection 363(h) . . . does not supplant § 363(f) when co-owned property is being sold, but rather permits a sale which might not otherwise be possible under § 363(f).” Id. at *7. Considering both context and common sense, we cannot ascribe any alternative or greater meaning to this prefatory language. In Hatfield, the debtor’s real property was subject to an equitable interest of a nondebtor who challenged the trustee’s sale of the property under § 363(h) for lack of evidence that equity existed, which she believed barred the estate from selling the property under § 363(h). Id. at *6. We stated that when “there is no bona fide dispute about a co-owner’s interest in property, the co-owner does not consent to the sale, and state law will not permit a ‘money partition’ of the property, § 363(f) will not provide a trustee with the power to sell the co-owned property.” Id. at *7. Yet, we recognized that “[i]f the trustee satisfies the requirements of § 363(h), then a sale can be pursued under §§ 363(b) and (f).” Hatfield involved the ability to compel a sale of jointly owned property under § 363(h). It did not address the use of § 363(f)(4) to sell that joint interest free and clear of liens against property that is not property of the estate. 21 that, because there was no underlying debt, there was no secured claim

that encumbered its interest in the Rancho Property, and the bankruptcy

court erred by ordering that its sale proceeds be disbursed to A&S.

Rule 7013 adopts Civil Rule 13 in adversary proceedings, “except that

a party sued by a trustee or debtor in possession need not state as a

counterclaim any claim that the party has against the debtor, the debtor’s

property, or the estate, unless the claim arose after the entry of an order for

relief.”11 In turn, Civil Rule 13(a) requires that a counterclaim must be pled

against an opposing party if it arises out of the same transaction or

occurrence as the opposing party’s claim and if it does not require adding

another party over whom the court cannot acquire jurisdiction. “If a

defendant fails to bring a compulsory counterclaim, he is barred from

asserting that claim in a future proceeding.” Barrios v. Equifax Info. Servs.,

LLC,

, at *3 (C.D. Cal. Feb. 14, 2020) (citing Civil Rule 13(a)

and Sams v. Beech Aircraft Corp.,

(9th Cir. 1980)).

11 A&S believes that that the bankruptcy exception in Rule 7013 is dispositive because “regardless of whether A&S’s counterclaim would be against Groves or [Consultants] the Rancho Property is property of the bankruptcy estate.” A&S cites Winters ex rel. McMahon v. George Mason Bank,

(4th Cir. 1996), in support of this proposition. However, Winters says: “Most courts find that the debtor’s interest in property jointly held by a nondebtor becomes property of the estate upon the filing of the bankruptcy petition, but that the nondebtor’s interest is not property of the estate.”

(emphasis added) (citing Gorman v. Cochrane (In re Gorman),

(9th Cir. BAP 1993)); see also Morgan v. Brady (In re Mitchell),

, at *7 (9th Cir. BAP Apr. 14, 2005). Accordingly, A&S’s lien against Consultants’ interest in the Rancho Property does not impact property of the estate for purposes of Rule 7013. 22 1. Consultants was not an “opposing party” for purposes of Civil Rule 13(a).

Civil Rule 13(a) requires a party to assert “as a counterclaim any

claim that – at the time of its service – the pleader has against an opposing

party” if that claim meets certain criteria. (Emphasis added.) Consultants

was not a party to the adversary proceeding at all until A&S filed its

crossclaim against it. Groves commenced her adversary proceeding against

A&S for declaratory relief regarding the validity and extent of A&S’s deeds

of trust. Groves did not include Consultants as a party in her complaint

although she raised a challenge to A&S’s lien against Consultants’ interest

in the Residence. Therefore, Consultants was not an “opposing party” to

A&S against which A&S was required to assert any compulsory

counterclaims. 12

We acknowledge that the Ninth Circuit in Albright v. Gates,

(9th Cir. 1966), applied a broad definition of compulsory counterclaims

beyond a defendant’s claims against a plaintiff. Albright ruled that certain

claims asserted by the defendant against the plaintiff also could be asserted

against certain non-diverse third parties without undermining the district

12Groves did challenge A&S’s deed of trust lien against her interest in the Rancho Property. But, as previously noted, Rule 7013 generally excuses a party sued by a debtor-in-possession from the compulsory counterclaim requirement. Accordingly, A&S was not required to bring any counterclaims against Groves—the only party to have asserted a claim against A&S and the only person to state any claim against the Rancho Property.

23 court’s diversity jurisdiction. The court also said, in a single sentence and

without any reference to the text of the rule or other analysis, that “under

Rule 13(a), Federal Rules of Civil Procedure, the counterclaim was a

compulsory one both as to [the plaintiff] and as to the new parties.”

. Shortly after Albright was decided, Civil Rules 13(h), 19, and 20 were

amended to make clear that Civil Rules 19 and 20, and not Civil Rule 13,

specify when a new party may be joined in the litigation by virtue of a

counterclaim. See 8-E Rutter Grp. Prac. Guide: Fed. Civ. Proc. Before Trial

(Nat’l Ed.) ¶ 8:1107 (“Although a counterclaim lies only against an

‘opposing party,’ the court may order joinder of additional parties whose

presence would facilitate determination of the counterclaim (‘necessary’ or

‘proper’ parties under [Civil] Rules 19 and 20).”); see also Civil Rule 13(h)

and the accompanying Advisory Committee Notes from the 1966

amendments (“The amendment of Rule 13(h) supplies the latter omission

by expressly referring to Rule 20, as amended, and also incorporates by

direct reference the revised criteria and procedures of Rule 19, as

amended.”). Accordingly, there is no such thing as a compulsory

counterclaim against a non-party; rather, Civil Rule 19 determines when

and whether an additional party must be joined.

2. A&S’s claims for money or foreclosure were not logically related to Groves’ challenge to the validity of A&S’s lien.

Even if Consultants were treated as an “opposing party” in the

adversary proceeding, A&S’s counterclaim against it would still not be

24 compulsory. A counterclaim is compulsory under Civil Rule 13(a) if a

“logical relationship” exists between the prospective counterclaim and the

adverse party’s claim. See Aetna U.S. Healthcare, Inc. v. Madigan (In re

Madigan),

(9th Cir. BAP 2001) (citing Pinkstaff v. United States

(In re Pinkstaff),

(9th Cir. 1992)). Federal courts liberally

interpret what constitutes a “logical relationship” when determining

whether claims arise out of the same “transaction or occurrence.” Pochiro v.

Prudential Ins. Co. of Am.,

(9th Cir. 1987). “This

flexible approach to [Civil] Rule 13 problems attempts to analyze whether

the essential facts of the various claims are so logically connected that

considerations of judicial economy and fairness dictate that all the issues be

resolved in one lawsuit.”

at 1249 (quoting Harris v. Steinem,

(2d Cir. 1978)). The Ninth Circuit has instructed:

[a] logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant.

In re Pinkstaff,

(citations omitted).

The note and deed of trust clearly arose out of the same transactions.

In this instance, however, they do not bear the necessary logical

relationship that would compel A&S to seek relief on the debt as a

compulsory counterclaim. As noted above, Groves’ adversary proceeding

never called into question A&S’s lien against Consultants’ interest in the

25 Rancho Property, Consultants’ personal liability, or the amount of the debt.

Indeed, it is unclear exactly what Consultants now believes A&S was

required to assert as a so-called compulsory counterclaim in the adversary

proceeding: a claim for relief for a money judgment or for judicial

foreclosure against Groves, Consultants, or both.

Consultants relies heavily on Sanders v. First National Bank in Great

Bend,

(M.D. Tenn. 1990), aff’d sub nom, Sanders v. First National

Bank. & Trust Co. in Great Bend,

(6th Cir. 1991), for the

proposition that liens and the underlying debt arise from the same

transaction and are, therefore, compulsory counterclaims. Sanders is

inapposite. It involved a husband and wife who were liable on various

debts related to their businesses. The wife and husband filed separate

bankruptcy cases. The creditor first sued the husband to liquidate his debt

as nondischargeable. Id. at 511. The husband stipulated to the amount of

the debt but unsuccessfully challenged the nondischargeability claim. The

creditor liquidated the wife’s debt prior to bankruptcy and obtained a

default judgment establishing her debt as nondischargeable. Id. Shortly

before judgment was entered in the husband’s nondischargeability case,

both debtors sued the creditor for various claims including lender liability.

Id. at 511-12.

The defendants in the lender liability case argued that the debtors

failed to raise lender liability claims when they were sued on the debt. The

debtors argued that the lender liability claims were not compulsory

26 counterclaims to the nondischargeability claims because they arose from a

security agreement created after their notes and guarantees were executed.

Id. at 513-14. The court rejected this argument because “garden variety

lender liability claims alleging wrongful lending or collections practices

arise out of the same transaction as the lenders’ causes of actions to collect

on the loans.” Id. at 513. Accordingly, it held that the lender liability claims

were compulsory counterclaims in the prior actions because the security

agreement was logically related to the notes and only meaningful in

relation to the debts the creditor sought to collect. Id.

The claims in Sanders were for lender liability, not foreclosure. As the

Sanders court explained, the prior action against the wife and the

nondischargeability claims raised the debtors’ underlying liability and

necessarily involved all “obligations created by the underlying loan

agreement(s).” Id. at 514. In contrast, Groves’ adversary proceeding only

challenged the scope of A&S’s lien in the two properties, but it never

placed at issue Consultants’ interest in the Rancho Property. Nor did she

ever raise, much less challenge, the underlying debt. As Sanders

recognized, “a claim and counterclaim may arise out of the same

transaction within the literal terms of [Civil] Rule 13(a), yet not bear a

logical relationship making the counterclaim compulsory.” Id. (citing

Maddox v. Ky. Fin. Co.,

(6th Cir. 1984)). In short, any action

by A&S to enforce the underlying debt was not logically related to Groves’

challenge of the liens against the real property securing that debt.

27 3. Consultants’ argument would violate the Rules Enabling Act.

The bankruptcy court held that Groves (now Consultants) could not

use Civil Rule 13(a) to deprive A&S of its statutory right to nonjudicial

foreclosure under Arizona law. By its very nature, no such cause of action

exists for nonjudicial foreclosure. 13 Consultants’ interpretation of Civil Rule

13(a) would negate A&S’s statutory rights in violation of the Rules

Enabling Act,

. The Act provides in relevant part that rules

of practice and procedure “shall not abridge, enlarge or modify any

substantive right.”

Citing the Rules Enabling Act, courts in several jurisdictions have

held that Civil Rule 13(a)’s compulsory counterclaim rule cannot be

applied in a manner that abridges or modifies a secured creditor’s

substantive right under state law to elect between a judicial and a

nonjudicial foreclosure. 14 Douglas v. NCNB Tex. Nat'l Bank,

,

13 “In Arizona, non-judicial foreclosure sales, or trustees’ sales, are governed by statute. When parties execute a deed of trust and the debtor thereafter defaults, A.R.S. § 33–807 empowers the trustee to sell the real property securing the underlying note through a non-judicial sale.” Hogan v. Wash. Mut. Bank, N.A.,

, 782–83 (2012), as amended (July 11, 2012) (citations omitted). 14 The Ninth Circuit Court of Appeals has not considered the Rules Enabling Act

in the context of compulsory counterclaims and foreclosure rights. But it has recently and repeatedly invoked the Act in class actions to ensure the parties’ substantive rights are not effectively modified by improper application of Civil Rule 23. See, e.g., Wit v. United Behav. Health,

(9th Cir. 2023) (holding that district court violated the Act when it “improperly allowed Plaintiffs to use [Civil] Rule 23 as a vehicle for enlarging or modifying their substantive rights” under ERISA); see also Olean Wholesale Grocery Coop., Inc. v. Bumble Bee Foods LLC,

, 664–65 (9th Cir. 2022) (en banc) (holding that Civil Rule 23’s class certification standards need only be proven 28 1130 (5th Cir. 1992); see also Adelson v. Ocwen Loan Servicing, LLC,

, at *6 n.9 (E.D. Mich. Aug. 20, 2020), report and recommendation

adopted,

(E.D. Mich. Nov. 10, 2020); Fnbn-Rescon I LLC v.

Citrus El Dorado LLC,

, at *5 (C.D. Cal. Feb. 6, 2015); In re

Draffen,

(N.C. Ct. App. 2012). For this reason, the

Fifth Circuit, construing Texas law in a nonbankruptcy case, held:

The federal counterclaim rule, Fed. R. Civ. P. 13(a), is inapplicable if it abridges, enlarges, or modifies the plaintiff’s or defendant’s substantive rights. Under Texas law, lenders have a substantive right to elect judicial or nonjudicial foreclosure in the event of a default, and debtors have no right to force the lender to pursue a judicial foreclosure remedy. Application of rule 13(a) in the instant case would abridge the lender’s substantive rights and enlarge the debtor’s substantive rights. Thus, we believe it is appropriate in this case to follow the state’s practice of permitting a lender to refrain from filing a counterclaim on overdue notes and to wait to pursue either a judicial or nonjudicial foreclosure remedy.

Douglas, 979 F.2d at 1130.

Several other courts following similar principles have held under

Civil Rule 13(a), or state law analogues, that compulsory counterclaim

rules cannot bar state law nonjudicial foreclosure proceedings. See, e.g.,

Threadgill v. Wells Fargo Bank, N.A.,

, at *3 (Tenn. Ct. App.

Aug. 1, 2017); Deschamps v. Treasure State Trailer Ct., Ltd.,

, 569

by a mere preponderance of the evidence, rather than by clear and convincing evidence, because class action practice and procedure is “substantively neutral” and cannot modify the parties’ substantive rights without running afoul of the Act). 29 (Mont. 2011); Belote v. McLaughlin,

, 30–31 (Mo. 1984).

Arizona, like most states, allows real property secured lenders to

choose between judicial and nonjudicial foreclosure remedies and does not

allow the borrower to change the lender’s choice. See

-

807(a); see also Hogan,

; Steinberger v. McVey ex rel. Cnty. of

Maricopa,

(Ariz. Ct. App. 2014). As recognized by Douglas

and its progeny, Consultants’ proposed application of Civil Rule 13(a)

would give primacy to a procedural rule at the expense of A&S’s

substantive statutory rights in violation of the Rules Enabling Act. And as

recognized by the bankruptcy court and Deschamps, given the right to

nonjudicial foreclosure, there is no “counterclaim” to bring in satisfaction

of Rule 13(a). Both lines of cases reflect a judicial unwillingness to utilize

federal and state rules of practice to permit a borrower to deprive its lender

of its choice of remedies. See Douglas, 979 F.2d at 1130 & n.3.

We agree with the bankruptcy court that Consultants may not use

Civil Rule 13(a) to deprive A&S of its statutory right to seek nonjudicial

foreclosure of its deed of trust encumbering Consultants’ interest in the

Rancho Property.

C. A&S was not judicially estopped from asserting its lien rights.

Consultants contends that A&S is judicially estopped from disputing

that it forfeited its claim against Consultants under Civil Rule 13(a). It relies

on A&S’s prior amendment of its answer in Groves’ adversary proceeding

in which it successfully argued for leave to amend to assert a compulsory 30 counterclaim for reformation. Consultants believes that it is unfair for A&S

now to “reverse course” when it previously sought leave to amend to plead

a compulsory counterclaim. According to Consultants, it is contradictory

for A&S to be allowed to amend its answer in the adversary proceeding to

assert a compulsory counterclaim for reformation of the deeds of trust and

now argue that its claims for the underlying debts were not also

compulsory counterclaims.

The Ninth Circuit has cautioned against reducing judicial estoppel to

a single set of factors. See Ah Quin v. Cnty. of Kauai Dep't of Transp.,

(9th Cir. 2013). Even so, it also has observed that three factors

typically inform a court’s decision as to whether it should apply the

doctrine: (1) the party takes “clearly inconsistent” positions; (2) the party’s

success in persuading the first court to accept the former position is such

that “judicial acceptance of [the] inconsistent position in a later proceeding

would create the perception that either the first or the second court was

misled[;]” and (3) the party would “derive an unfair advantage or impose

an unfair detriment on the opposing party” absent application of judicial

estoppel.

(citing New Hampshire v. Maine,

-51 (2001)).

Critical to any claim of judicial estoppel, the adverse party must

assert “clearly inconsistent” positions during the course of litigation in a

manner that suggests that the litigant has misled the court. Kobold v. Good

Samaritan Reg'l Med. Ctr.,

(9th Cir. 2016) (citing

Hamilton,

). There is simply no inconsistency between A&S’s

31 former position that its reformation claims were subject to the compulsory

counterclaim rule and its current position that the enforcement of the

underlying debt was not a compulsory counterclaim. A&S previously

argued that its claim for reformation of the deeds of trust at issue was a

compulsory counterclaim to Groves’ lien challenge in the adversary

proceeding. That is a far cry from disputing Consultants’ present argument

that the underlying debt also was a compulsory counterclaim. For the same

reasons that compel our finding that there was no logical relationship

between the determination of the validity of the deeds of trust and

collection of the underlying debt, there is nothing inconsistent concerning

A&S’s positions in treating the former but not the latter as a compulsory

counterclaim.

Accordingly, we reject as meritless Consultants’ judicial estoppel

argument.

CONCLUSION

For the reasons set forth above, we AFFIRM. 15

15 In its responsive brief, A&S requests an award of attorney’s fees it has incurred on appeal on multiple grounds. The request is not set forth in a separate motion and is not supported by any detailed presentation of the facts and law justifying a fee award. See generally De Jesus Gomez v. Stadtmueller (In re De Jesus Gomez),

(9th Cir. BAP 2018) (citing Rule 8020 and explaining how and when the Panel routinely awards fees for a frivolous appeal); ZTE Elecs. Corp. v. Joseph (In re Amoroso),

, at *4 n.9 (9th Cir. BAP July 11, 2008) (same). A&S’s request for attorney’s fees is hereby ORDERED DENIED without prejudice for failure to present its request in a separate motion detailing the facts and law supporting the fee request. In any such motion, A&S must be clear who it claims is liable for the attorney’s fees and cite the specific statutes, rules, or contract provisions from which its fee claim(s) arise. 32