FILED
MAY 01 2014
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP Nos. CC-13-1045-DKiTa
) CC-13-1257-DKiTa
6 EDWARD J. STOUT, ) (related appeals)
)
7 Debtor. ) Bk. No. 09-17134-ES
______________________________)
8 ) Adv. Nos. 11-01026-ES
DOLORES STOUT; KAUFMANN ) 09-01669-ES
9 GROUP, INC. )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 RICHARD A. MARSHACK, Chapter 7)
Trustee; STEVEN ROOT; JAMES )
13 KERCHNER; QUALTECH BACKPLANES,)
INC.; ELECTRONIC CONNECTOR )
14 SERVICE; DYNAMIC STAMPING, )
)
15 Appellees. )
______________________________)
16 )
STEVEN ROOT; JAMES KERCHNER, )
17 )
Appellants, )
18 )
v. )
19 )
EDWARD J. STOUT, )
20 )
Appellee. )
21 ______________________________)
22 Argued and Submitted on March 20, 2014
at Pasadena, California
23
Filed - May 1, 2014
24
25
26 1
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.
28 See 9th Cir. BAP Rule 8013-1.
1 Appeals from the United States Bankruptcy Court
for the Central District of California
2
Honorable Erithe A. Smith, Bankruptcy Judge, Presiding
3
4 Appearances: Richard Edwin Masson, Esq. of Masson & Fatin, LLP
argued for Dolores Stout and Kaufman Group, Inc.,
5 appellants in 13-1045; John Robert Armstrong, II,
Esq. of Horwitz Cron & Armstrong LLP argued for
6 Richard A. Marshack, Chapter 7 Trustee, appellee
in 13-1045 and for James Kerchner and Steven Root,
7 appellees in 13-1045 and appellants in 13-1257;
Michael S. Winsten, Esq. of Winsten Law Group
8 argued for Edward J. Stout, appellee in 13-1257.
9
10 Before: DUNN, KIRSCHER and TAYLOR, Bankruptcy Judges.
11
12 We consider two related appeals arising out of the same set
13 of facts involving the debtor, Edward Stout, his mother, Dolores
14 Stout (“Dolores”), and her company, Kaufman Group, Inc. (“Kaufman
15 Group”), and three of the debtor’s creditors, Jim Kerchner
16 (“Kerchner”), Steve Root (“Root”) and Qualtech Backplanes, Inc.
17 (“Qualtech”)(collectively, “Creditors”).
18 The two appeals concern transfers of assets by the debtor to
19 Dolores. One of the appeals (BAP No. CC-13-1045) involves an
20 adversary proceeding (AP No. 11-1026) initiated by the chapter 72
21 trustee (“Trustee”) and Creditors (who joined as co-plaintiffs)
22 against Dolores and Kaufman Group (together, “Dolores”) under
23 §§ 547(b), 548(a) and 550 (“Preference Adversary”). Trustee and
24
25
2
Unless otherwise indicated, all chapter and section
26 references are to the federal Bankruptcy Code, 11 U.S.C.
27 §§ 101-1532, and all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of
28 Civil Procedure are referred to as “Civil Rules.”
2
1 Creditors later moved for partial summary judgment on their
2 §§ 547(b) and 548(a)(1) claims against Dolores and Kaufman Group.
3 The bankruptcy court granted partial summary judgment in favor of
4 Trustee and Creditors on their § 547(b) claim (“§ 547(b) partial
5 summary judgment order”). Dolores appeals the bankruptcy court’s
6 grant of partial summary judgment.
7 The second appeal (BAP No. CC-13-1257) involves an adversary
8 proceeding (AP No. 09-1669) initiated by Creditors against the
9 debtor seeking to except their debt from discharge under
10 § 523(a)(6) and to deny the debtor’s discharge under
11 § 727(a)(2)(A)(“Discharge Adversary”). There, the bankruptcy
12 court ultimately ruled in the debtor’s favor on both claims.
13 Creditors subsequently moved to set aside the findings or for a
14 new trial (“motion for new trial”) under Civil Rules 52(a) and
15 59(a)3 and Rules 9013-4(a)(2), (7) and (8) of the Local
16 Bankruptcy Rules for the Central District of California.4 The
17 bankruptcy court denied the motion for new trial (“new trial
18 order”); the Creditors now appeal. Creditors moreover appeal the
19 bankruptcy court’s judgment in the debtor’s favor on their
20 § 727(a)(2)(A) claim (“§ 727(a)(2)(A) judgment”).
21 For the reasons set forth below, we AFFIRM the § 547(b)
22 partial summary judgment order, the new trial order to the extent
23
24 3
Civil Rule 52 is made applicable through Rule 7052. Civil
25 Rule 59 is made applicable through Rule 9023.
26 4
Creditors did not specify in their motion for new trial
27 the subsections of Civil Rules 52(a) and 59(a) that apply. Based
on our review of the record and briefs before us, we assume that
28 Creditors intended Civil Rules 52(a)(6) and 59(a)(1)(B) to apply.
3
1 it dealt with Creditors’ § 523(a)(6) claim, and the
2 § 727(a)(2)(A) judgment.
3
4 FACTS
5 A. Events prior to the debtor’s chapter 7 bankruptcy
6 Prepetition, the debtor wholly owned and operated Dynamic
7 Stamping, Inc. (“Dynamic”), Electronic Connector Service, Inc.
8 (“Electronic”), and Qualtech Applied Engineering Corp.
9 (“Applied”)(collectively, “businesses”).5 Dynamic, Electronic
10 and Applied designed, made and/or assembled specialized
11 electronic components.
12 Kerchner and Root owned and operated Qualtech, a company
13 that made and sold various electronic connectors. It leased from
14 Lapco Industrial Parks (“landlord”) its manufacturing and office
15 facilities (“facility”) located in Santa Ana, California.
16 On September 18, 2006, the debtor and Creditors entered into
17 an asset purchase agreement (“Asset Purchase Agreement”) whereby
18 Creditors sold Qualtech’s business to the debtor (“Qualtech
19 sale”). Specifically, under the Asset Purchase Agreement, the
20 debtor purchased substantially all of Qualtech’s assets
21 (“Qualtech Assets”)6 for $250,000 cash.
22
23 5
Applied formerly was known as Zip-Tron Corp. (“ZTC”). ZTC
24 was incorporated in Nevada on May 1, 2000. It qualified to do
business in California on April 16, 2001. ZTC changed its name
25 to “Qualtech Applied Engineering Corp.” on October 10, 2006.
26 6
We use the term “Qualtech Assets” in the very limited and
27 specific sense of the Qualtech assets sold in the Qualtech sale.
Assets of the debtor, Dynamic, Electronic and Applied, as
28 continue...
4
1 However, the debtor did not intend to own the Qualtech
2 Assets. He expressed his intent in the Asset Purchase Agreement
3 to assign his rights and obligations under the Asset Purchase
4 Agreement to Applied.
5 Specifically, Article 2, Section 2.01 of the Asset Purchase
6 Agreement provided:
7 [The debtor] plans to assign his rights, and delegate
his obligations, under this [Asset Purchase Agreement],
8 to a legal entity to be formed. Such legal entity may
be a corporation or a limited liability company so long
9 as it is wholly owned and controlled by [the debtor].
In connection with such assignment and delegation, [the
10 debtor] and such legal entity shall execute and deliver
an Assignment and Assumption Agreement [(“Assignment”)]
11 . . . .
12 The Assignment named Applied as the assignee. Article 1,
13 Section 1.01 of the Assignment provided:
14 [The debtor] hereby assigns to [Applied] all of his
rights, and hereby delegates to [Applied] all of his
15 duties, under the Asset Purchase Agreement. [Applied]
hereby accepts such assignment and delegation.
16
17 The Assignment further provided that Applied “will own and
18 operate [Qualtech’s] Business after the [sale] Closing (as
19 defined in the Asset Purchase Agreement).” Qualtech consented to
20 the assignment.7
21
22
6
...continue
23 relevant to this disposition, are referred to collectively as the
24 “Business Assets.”
7
25 We have taken some of the facts from a joint pretrial
order filed and entered on December 29, 2011, in the docket of
26 AP No. 09-1669. We exercise our discretion to take judicial
27 notice of documents electronically filed in the adversary
proceeding. See Atwood v. Chase Manhattan Mortg. Co.
28 (In re Atwood),
293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
5
1 Although the debtor assigned to Applied all of his rights
2 and obligations under the Asset Purchase Agreement, “[s]uch
3 assignment and delegation shall not act as a release of [the
4 debtor] and [he] shall remain legally responsible for the
5 performance of all of the obligations of Buyer (as defined in the
6 Asset Purchase Agreement) under the Asset Purchase Agreement.”
7 The debtor also entered into a sublease with Qualtech to
8 lease its facility (“sublease”), agreeing to pay all of the rent
9 for the facility. He agreed to hold Qualtech harmless from any
10 liability arising from any failure to perform under the sublease.
11 The landlord consented to the sublease.
12 The debtor further entered into separate consulting
13 agreements with Root and Kerchner whereby they each agreed to
14 provide consulting services relating to Applied’s business in
15 exchange for consulting fees totaling $375,000 each. The debtor
16 was to pay the consulting fees in equal monthly installments over
17 five years.
18 Qualtech expressed its intent in the Asset Purchase
19 Agreement to cease all business activities following the sale.
20 However, Qualtech would continue to remain obligated as the
21 master tenant for the facility. Qualtech became inactive on
22 April 1, 2008. However, Qualtech later obtained a certificate of
23 revivor effective August 23, 2010.
24 For several years, the debtor operated the businesses out of
25 the facility. The debtor’s mother, Dolores, took care of various
26 administrative matters for the businesses. She also was an
27 officer and director of the businesses.
28 Dolores helped the debtor and the businesses in other ways
6
1 as well. Under two separate loan agreements, both dated June 20,
2 2005,8 Dolores loaned the debtor and the businesses a total of
3 $250,000. According to the debtor, he needed the funds “to close
4 out the deal with [Root] and [Kerchner].” As noted above, the
5 purchase price for the Qualtech Assets under the Asset Purchase
6 Agreement was $250,000.
7 On November 1, 2006, Applied, Electronic and the debtor
8 obtained a $1 million loan from Vineyard Bank. Vineyard Bank
9 filed UCC-1 financing statements perfecting its security
10 interests in the assets of Applied and Electronic in November
11 2006.
12 Pursuant to the loan agreements, Dolores sent the debtor a
13 written notice of demand, dated January 8, 2008 (“demand
14 letter”), requiring the debtor to make full payment by March 15,
15
16 8
The debtor and Dolores entered into a loan agreement,
17 dated June 20, 2005, wherein Dolores loaned the debtor $250,000,
payable within 60 days of Dolores providing a written notice of
18 demand. The debtor personally guaranteed the loan, granting
19 Dolores a security interest in “his assets and properties until
this Loan is paid in full.”
20 The businesses (i.e., Dynamic, Electronic and Applied) and
Dolores entered into their own loan agreement, also dated
21 June 20, 2005, wherein Dolores loaned the businesses $250,000,
22 payable within 60 days of Dolores providing a written notice of
demand. The loan to the businesses was “secured by the following
23 equipment (the Security): All current and future assets of the
[businesses].” The businesses granted Dolores a security
24
interest in “the Security until this Loan is paid in full.” As
25 president and CEO of the businesses, the debtor signed the loan
agreement on their behalf.
26 Notably, the two loan agreements contained nearly identical
27 provisions. The record reflects that the two loan agreements
encompassed a single $250,000 loan. Dolores did not file a UCC-1
28 financing statement to perfect her security interest at the time.
7
1 2008.9 When the debtor failed to comply with the demand letter,
2 she sent another letter, dated March 26, 2008, advising him that
3 she was exercising her right under the loan agreements to
4 repossess the Business Assets.10
5 The debtor and Dolores thereafter entered into a loan
6 resolution agreement, dated March 31, 2008. Under the loan
7 resolution agreement, Dolores was to take immediate possession of
8 her collateral.11 No mention was made in the loan resolution
9 agreement of Dolores foreclosing her security interest in the
10 Business Assets. The loan resolution agreement further does not
11 provide for any transfer of title or ownership of the Business
12 Assets, and the Business Assets apparently remained in place.
13 Dolores agreed to lease the equipment to the debtor on certain
14 conditions, including: 1) Dolores making payments on the
15
9
16 In the demand letter, Dolores stated that she had made a
$250,000 loan to Dynamic. She listed both the debtor and Dynamic
17 as addressees. However, she addressed the debtor directly and
sought repayment from him.
18
10
19 In the March 26, 2008 letter, Dolores advised the debtor
that she was going to “exercise her rights under section 6 of the
20 agreement and take possession of the security items defined in
our agreement.” Dolores also stated that she was “disappointed
21
that [the debtor] did not comply with her request of January 8,
22 2008 for repayment of the $250,000 [she] loaned [the debtor] on
June 20, 2005.”
23 In the March 26, 2008 letter, Dolores addressed the debtor
24 directly (i.e., as the recipient). As in the demand letter, she
also listed both the debtor and Dynamic as the addressees.
25
11
The loan resolution agreement stated that it was between
26 the debtor and Dolores. It also stated that “[i]n exchange for
27 the option to use this equipment, [Dolores would] lease use of it
to [the debtor] . . . .” The debtor did not list any equipment
28 among his personal property assets on Schedule B.
8
1 debtor’s line of credit; and 2) the debtor paying Dolores $6,000
2 per month, starting in April 2009.
3 In a letter dated June 19, 2008, Dolores informed the debtor
4 that she was “unhappy” with the “direction and results of the
5 company.” She advised him that she was “exercising her right to
6 demand payment in full of $165,000.” However, to make repayment
7 easier for him, Dolores declined to collect interest on the loan.
8 She purportedly obtained a lien securing future repayment of the
9 loan, recognizing that “the current economic conditions of the
10 company” made immediate repayment difficult. There is no
11 evidence in the record that Dolores took any action to have the
12 “lien” attach or to perfect it; she only referenced the lien in
13 her letter.
14 Thereafter, on January 1, 2009, Applied defaulted under the
15 lease by failing to pay the rent for the facility. After
16 notifying Applied and the debtor of the default, the landlord
17 initiated an unlawful detainer action against Creditors, Applied
18 and the debtor. On March 23, 2009, the landlord obtained a
19 $205,470.84 judgment against Creditors for past due rent and
20 rental value damages and attorney’s fees and costs (“landlord
21 judgment”).
22 Contributing to the flurry of collection activity against
23 the debtor and the businesses, Dolores sent the debtor a letter,
24 dated April 30, 2009 (“breach of contract letter”). In the
25 breach of contract letter, Dolores notified the debtor that she
26 would take immediate possession of all of Dynamic’s equipment,
27 tools, etc., as the debtor had failed to make the monthly loan
28 payments in breach of the loan agreement. Again, apparently all
9
1 of the Business Assets remained in place.
2 Due to the landlord judgment against them, on May 8, 2009,
3 Creditors initiated a state court action against the debtor and
4 Applied for breach of the sublease, declaratory relief as to the
5 right of indemnity from Applied and the debtor on the landlord
6 judgment and breach of guaranty against the debtor (“state court
7 action”).
8 On June 8, 2009, the debtor and Dolores entered into a
9 “voluntary foreclosure and repossession agreement” (“turnover
10 agreement”). Under the turnover agreement, Dolores took all of
11 the debtor’s right, title and interest in and possession of the
12 Business Assets, which included Dynamic’s and Electronic’s
13 machines, tools and equipment. Specifically, the turnover
14 agreement provided:
15 [The debtor] hereby continuously and irrevocably
tenders to [Dolores] without need of judicial
16 proceedings, all right, title and interest, and full
possession of, in and to all of its Asset Collateral,
17 which [the debtor] now owns or will own as a result of
the daily operation of its business. All such Asset
18 Collateral not now in [Dolores’] possession shall be
deemed received and held by [the debtor] in trust for
19 and subject to the sole discretion of [Dolores] until
[her] acceptance of such tender of possession.
20
21 Notably, the turnover agreement included a list of various
22 machines and a list of equipment. Applied was not a party to the
23 turnover agreement.
24 At the time she entered into the turnover agreement, Dolores
25 was doing business as Kaufman Group. She soon transferred the
26 Business Assets acquired under the turnover agreement to Kaufman
27 Group. Using the Business Assets, Dolores began operating out of
28 the facility, making and selling the same products previously
10
1 made and sold by the businesses.
2 Dynamic filed a certificate of dissolution with the
3 California Secretary of State on June 22, 2009. Electronic and
4 Applied filed certificates of dissolution with the California
5 Secretary of State on July 10, 2009.
6 B. The debtor’s chapter 7 bankruptcy and adversary proceedings
7 On July 15, 2009, the debtor filed his chapter 7 bankruptcy
8 petition. He listed his interests in Applied, Electronic and
9 Dynamic on Schedule B, but noted that they were no longer in
10 business. He did not list any of the Business Assets as his own.
11 The debtor named Applied, Electronic and Dynamic as co-debtors on
12 his Schedule H. He listed Dolores on Schedule F with a $250,000
13 general unsecured claim based on business debt.
14 The debtor also scheduled Kerchner and Root with general
15 unsecured claims each in the amount of $605,000, both based on
16 business debts. He also listed Vineyard Bank with a $1,165,000
17 general unsecured claim based on trade debt. Two months after
18 the initial § 341(a) meeting, Trustee filed a no asset report on
19 October 7, 2009.12
20 1. Preference Adversary
21 On January 1, 2011, Trustee and Creditors filed a complaint
22 against Dolores (AP No. 11-1026) under §§ 547, 548, 550 and 551
23 to commence the Preference Adversary.
24 In their complaint, Trustee and Creditors highlighted the
25 lack of documentation for the following in their allegations:
26 1) attachment and perfection of Dolores’ security interests and
27
12
28 The debtor received his discharge on March 25, 2013.
11
1 liens in the Business Assets; 2) the provision of the loan funds
2 to the debtor and the businesses; 3) the transfer of the Qualtech
3 Assets to Applied; and 4) the repossession of the Business Assets
4 by Dolores. They also pointed out that the debtor, the
5 businesses and/or Dolores did not provide any third party notice
6 of the transfer of the Business Assets to Dolores.
7 Trustee and Creditors further alleged that there was such a
8 unity of interest between the debtor and Dolores and the
9 businesses, the businesses were their alter egos. They cited
10 numerous examples in support, including allegations that:
11 1) funds were moved between the businesses without regard to the
12 source or obligations; 2) the businesses had the same officers
13 and directors (i.e., the debtor and Dolores); 3) Kaufman Group
14 continued to use the trade names of Applied and Electronic and to
15 service the same customers; and 4) the debtor received
16 compensation (in the form of payment for his rent and the use of
17 a Mercedes Benz for his wife) for providing consultation services
18 to Kaufman Group.
19 They also pointed out that the debtor scheduled Dolores as a
20 general unsecured creditor, even though she took possession of
21 the Business Assets prepetition and supposedly had a valid
22 security interest in them. Moreover, even though the debtor
23 transferred the Business Assets to Dolores as a form of payment
24 on the $250,000 loan, he did not characterize the transfer in his
25 bankruptcy schedules as a credit against the debt owed to
26 Dolores.
27 Given these facts, Trustee and Creditors argued that the
28 debtor and Dolores fraudulently transferred the Business Assets
12
1 to Dolores through their alter egos in order to thwart Creditors’
2 attempts to obtain judgment against the debtor, and to continue
3 the operations of the businesses.
4 Seven months after Dolores filed her answer, Trustee and
5 Creditors moved for partial summary judgment against them on the
6 §§ 547(b) and 548(a)(1) claims (“partial summary judgment
7 motion”).
8 With respect to their § 547(b) claim, Trustee and Creditors
9 averred that they met all of the elements for establishing an
10 avoidable preferential transfer. They focused on one element in
11 particular: the Business Assets as property of the debtor and/or
12 the bankruptcy estate.
13 Trustee and Creditors contended that because the debtor
14 wholly owned the businesses, they became assets of the bankruptcy
15 estate when he filed for bankruptcy. Under Cal. Corp. Code
16 § 2004, corporate assets are distributed to shareholders upon
17 dissolution of the corporation. Here, had the debtor not
18 transferred the Business Assets to Dolores, they would have been
19 distributed to him as the sole shareholder. The Business Assets
20 then would have become part of the bankruptcy estate when he
21 filed for bankruptcy.
22 Alternatively, Trustee and Creditors claimed that the debtor
23 owned the Qualtech Assets, not Applied. He never produced
24 documents showing that he transferred the Qualtech Assets to
25 Applied pursuant to the Asset Purchase Agreement and Assignment.
26 Moreover, he treated the Business Assets as his personal assets
27 when he pledged them as security on the personal loan.
28 Trustee and Creditors further argued that the debtor
13
1 actually owned the Business Assets because the businesses were
2 his alter egos. Under California law, although a corporation
3 typically is an entity separate and distinct from its
4 stockholders, it is considered an individual’s alter ego when
5 there is such a unity of interest between the individual and the
6 corporation as to negate the corporation’s separateness. In
7 other words, the corporation is considered the individual’s alter
8 ego when he uses it for convenience to transact his business in
9 such a way that amounts to fraud or injustice against third
10 parties.
11 Here, the debtor admitted at the § 341(a) meeting that he
12 moved funds between the businesses without regard to the source
13 or obligations, even though he maintained separate bank accounts.
14 Also, the debtor was the sole shareholder of the businesses. He
15 and Dolores were the only officers and directors of the
16 businesses.
17 As for the § 548(a)(1) claim, Trustee and Creditors
18 contended that the debtor received less than reasonably
19 equivalent value in exchange for the transfer of the Business
20 Assets to Dolores. Specifically, although he owed Dolores only
21 $250,000, he transferred all of the Business Assets, which were
22 worth more than $560,000.
23 They also argued that, based on circumstances surrounding
24 the transfers, the debtor had actual intent to hinder, delay or
25 defraud creditors when he transferred the Business Assets to
26 Dolores. Several badges of fraud existed, demonstrating the
27 debtor’s fraudulent intent, including: 1) as an officer and
28 director of the businesses, Dolores was an insider; 2) the debtor
14
1 concealed the transfer by failing to provide public notice to
2 creditors and by failing to comply with California bulk sales
3 law; 3) the debtor transferred the Business Assets to Dolores
4 less than a month after being served with Creditors’ state court
5 complaint; and 4) the debtor became insolvent after he
6 transferred the Business Assets to Dolores.
7 Dolores opposed the partial summary judgment motion
8 asserting that Trustee and Creditors failed to show that no
9 material factual issues existed as to their §§ 547(b) and 548(a)
10 claims.
11 With respect to the § 547(b) claim, Dolores contended that
12 Trustee and Creditors could not show that no material factual
13 issue existed as to whether the transfer involved property of the
14 debtor. She claimed that evidence showed that the debtor never
15 personally owned the Business Assets. Under the Asset Purchase
16 Agreement, Applied was the intended purchaser of the Qualtech
17 Assets. The debtor simply was the placeholder, holding the
18 Qualtech Assets until Applied could be established. The
19 Assignment further supports this intent.
20 Also, the Business Assets did not belong to the debtor
21 because Dolores took possession of the Business Assets on
22 March 31, 2008, then leased them back to the debtor and the
23 businesses. Neither the debtor nor the businesses owned the
24 Business Assets after March 31, 2008; they simply were leasing
25 them. In other words, they held a leasehold interest in the
26 Business Assets only, similar to holding the Business Assets in
27 trust for Dolores.
28 Moreover, the transfer of the Business Assets to Dolores
15
1 occurred outside of the statutory preference period under
2 § 547(b). Section 547(b)(4)(B) requires that the transfer take
3 place up to one year prepetition. Here, Dolores took possession
4 of the Business Assets on March 31, 2008.
5 She also disputed Trustee and Creditors’ allegation that the
6 businesses were her and the debtor’s alter egos. Each of the
7 businesses filed its own tax returns, conducted separate
8 operations and maintained separate books and records. Funds were
9 transferred between the businesses because goods and services
10 were exchanged between them. Further, Dolores made loans to each
11 of the businesses and the debtor separately. The debtor did not
12 use all of the loans for his personal benefit. Additionally,
13 Dolores was not paying the debtor a consulting fee; she simply
14 was helping his family with its expenses.
15 Dolores further argued that Trustee and Creditors failed to
16 show that no material factual issue existed as to whether Dolores
17 received more than she would have under a chapter 7 liquidation.
18 She was a secured creditor who was entitled to repayment of the
19 entire loan. Payment to a fully secured creditor is not
20 preferential because it does not deplete the bankruptcy estate as
21 such payment reduces the secured creditor’s lien in an equal
22 amount.
23 Dolores also raised the new value defense under § 547(c)(1),
24 claiming that she and the debtor intended that the transfer of
25 the Business Assets be a contemporaneous exchange for new value
26 given to him.
27 The bankruptcy court held a hearing on the partial summary
28 judgment motion on September 18, 2012. It concluded that the
16
1 debtor’s ownership interests in the businesses constituted
2 property of the estate within the meaning of § 541. The
3 bankruptcy court referenced the loan agreements, the loan
4 resolution agreement and the turnover agreement. It pointed out
5 that all of these agreements had been between the debtor and
6 Dolores. The bankruptcy court acknowledged that
7 [S]ome other entities that [the debtor] controlled also
had an interest in all those assets. But it [was]
8 pretty clear that – you look at the agreements between
Dolores Stout and Edward Stout, and the reference to
9 the assets is the reference to him. It’s only to him
individually, in the body of the actual document.
10
11 Tr. of Sept. 18, 2012 hr’g, 6:7-12.
12 The bankruptcy court also determined that the perfection of
13 Dolores’s security interests, through the filing of a UCC-1
14 financing statement on May 27, 2009, was within the preference
15 period. At the summary judgment hearing, the bankruptcy court
16 wondered, “[i]f [Dolores] was the owner of the property, why on
17 earth would she file a UCC-1 in 2009, on her own property?”
18 Tr. of Sept. 18, 2012 h’rg, 2:22-25. It also noted that Dolores
19 took further steps to perfect her security interest by executing
20 the turnover agreement, which allowed her to take possession of
21 the Business Assets immediately.
22 The bankruptcy court also concluded that Dolores was an
23 insider within the meaning of § 101(31) as she was the debtor’s
24 mother. Consequently, the one-year reach back period of
25 § 547(b)(4)(B) applied. It thus granted summary judgment on the
26 § 547(b) claim, concluding that no genuine triable factual issues
27 existed as to that claim.
28 The bankruptcy court denied summary judgment on the
17
1 § 548(a)(1) claim. It found that triable issues of material fact
2 existed as to the § 548(a)(1) claim.13
3 On January 23, 2013, the bankruptcy court entered the
4 § 547(b) partial summary judgment order in favor of Creditors.
5 Dolores timely appealed the § 547(b) partial summary judgment
6 order. The bankruptcy court entered a Rule 54(b) certification
7 thereafter.
8 2. Discharge Adversary
9 On October 20, 2009, before the Preference Adversary was
10 filed, Creditors filed a complaint (“Discharge Complaint”)
11 against the debtor, initially asserting a claim under
12 § 727(a)(2)(A) only. Under a stipulation entered February 9,
13 2010, the debtor agreed to allow Creditors to amend their
14 complaint to include a claim under § 523(a)(6). AP No. 09-1669
15 Docket Nos. 9 and 10. Creditors filed their amended complaint on
16 March 16, 2010, including a claim under § 523(a)(6).
17 With respect to their § 523(a)(6) claim, Creditors asserted
18 that the businesses were the debtor’s alter egos. They then
19 alleged that the debtor “conspired” with Dolores “to thwart” the
20 pending state court action and to hinder, delay and defraud them
21 by fraudulently transferring the Business Assets to Dolores
22 and/or Kaufman Group. Finally, they alleged that such acts
23 willfully and maliciously injured Creditors.
24 Alternatively, they argued that the debtor’s discharge
25 should be denied under § 727(a)(2)(A) because, within one year
26
13
27 Since disposition of the § 548(a)(1) claim has no
relevance to the disposition in this appeal, we will not refer to
28 it further herein.
18
1 prior to filing for bankruptcy, he transferred the Business
2 Assets to Dolores and/or Kaufman Group with the intent to prevent
3 Creditors from obtaining and collecting a judgment against him in
4 the state court action.
5 Several months after he filed his answer to the Discharge
6 Complaint, the debtor moved for summary judgment (“debtor summary
7 judgment motion”), asserting that Creditors failed to establish
8 the elements of their § 727(a)(2)(A) and § 523(a)(6) claims.
9 With respect to the § 727(a)(2)(A) claim, the debtor argued
10 that he never owned the Qualtech Assets at any time. At the time
11 of the Qualtech sale, the debtor merely held the Qualtech Assets
12 for Applied.14 The Asset Purchase Agreement specifically
13 contemplated that a business entity would be the “true” purchaser
14 of the Qualtech Assets; the debtor simply was a placeholder.
15 Moreover, Applied owned the Qualtech Assets until March 2008,
16 when Dolores allegedly foreclosed on the Business Assets.
17 Because the debtor never truly owned the Qualtech Assets, there
18 could not have been a transfer within the meaning of
19 § 727(a)(2)(A).
20 He also maintained that the businesses never were his alter
21 egos. The businesses filed their own tax returns and maintained
22 separate books and records. They also maintained separate bank
23 accounts; they did not commingle any funds with the debtor.
24 The debtor further contended that the transfer of the
25 Business Assets to Dolores occurred outside the one-year period
26
14
27 The debtor advanced a number of arguments in his summary
judgment motion, but we focus only on those relevant to the
28 appeal.
19
1 under § 727(a)(2)(A). Although Dolores did not file her UCC-1
2 financing statement until May 27, 2009, the debtor alleged that
3 she had a perfected security interest. The transfers of the
4 Business Assets to Dolores through the attachment of her security
5 interest became effective on June 20, 2005 when she signed the
6 loan agreements.
7 He also contended that Creditors failed to show that he had
8 actual intent to hinder, delay or defraud them at the time he
9 transferred the Business Assets to Dolores. She had a valid
10 security interest in the Business Assets pursuant to the loan
11 agreements. Dolores acquired the Business Assets because the
12 debtor failed to repay his debt to her, not because the debtor
13 intended to prevent Creditors from obtaining a state court
14 judgment against him.
15 As to the § 523(a)(6) claim,15 the debtor argued that
16 Creditors failed to show that he had a subjective intent to
17 injure them when he transferred the Business Assets to Dolores.
18 She had a valid security interest in the Business Assets; Dolores
19
20
15
The debtor also argued that Creditors could not assert
21 their § 523(a)(6) claim because it was time-barred under
22 Rule 4007(c).
Rule 4007(c) provides that the deadline to file a complaint
23 to except a debt from discharge, including under § 523(a)(6), is
60 days after the first date set for the § 341(a) meeting of
24
creditors. The initial § 341(a) meeting of creditors in the
25 debtor’s bankruptcy case was scheduled for August 21, 2009.
According to Form B9A, the “Notice of Commencement of Case under
26 the Bankruptcy Code, Meeting of Creditors and Deadlines,” that
27 was filed and entered on July 20, 2009 in the debtor’s bankruptcy
case (main case docket no. 3), the deadline to file
28 dischargeability complaints was October 20, 2009.
20
1 simply exercised her right to repossess them pursuant to the loan
2 agreements.
3 He also argued that the debt owed to Creditors arose out of
4 a breach of contract, which is not recognized as a debt excepted
5 from discharge under any of the provisions of § 523(a).
6 The debtor further sought to dismiss Qualtech as a
7 plaintiff. When Creditors filed the Discharge Complaint,
8 Qualtech was suspended for failing to pay taxes. Qualtech
9 therefore lacked the capacity to commence and prosecute the
10 Discharge Adversary against him.
11 Creditors filed an opposition to the debtor’s summary
12 judgment motion. They opposed it on procedural grounds only,
13 contending that the debtor filed his summary judgment motion
14 untimely. They also argued that notice of the hearing on the
15 summary judgment motion was defective as the notice was served
16 untimely.
17 Before the December 16, 2010 hearing on the summary judgment
18 motion,16 the bankruptcy court issued a tentative ruling. In its
19 tentative ruling, the bankruptcy court indicated an intent to
20 grant the debtor’s summary judgment motion as to the § 523(a)(6)
21 claim, but to deny the summary judgment motion as to the
22 § 727(a)(2)(A) claim. At the summary judgment hearing, the
23 bankruptcy court adopted its tentative ruling.
24
25
16
Within the Central District of California, a hearing
26 automatically is scheduled on a motion for summary judgment,
27 whether or not an opposition is filed. See Rule 7056-1(a) and
Rule 9013-1(a)(5) of the Local Bankruptcy Rules for the
28 Bankruptcy Court of the Central District of California.
21
1 On March 21, 2011, the bankruptcy court entered the
2 § 523(a)(6) partial summary judgment order. It granted summary
3 judgment in the debtor’s favor as to the § 523(a)(6) claim on two
4 grounds: first, concluding that the § 523(a)(6) claim was not
5 timely filed and, further, determining that Creditors did not
6 raise any material factual issue concerning the debtor’s intent
7 to cause injury within the meaning of § 523(a)(6).
8 The bankruptcy court denied summary judgment on the
9 § 727(a)(2)(A) claim, determining that genuine material factual
10 issues existed as to the following: 1) the significance and
11 legal effect of the transfer of the Qualtech Assets to Applied;
12 2) the existence of alter ego; 3) the circumstances concerning
13 Dolores’ taking possession of the Business Assets; and 4) the
14 debtor’s intent to hinder, delay or defraud Creditors.
15 The bankruptcy court further determined that there was
16 insufficient admissible evidence as to Qualtech’s legal status as
17 of the filing of the Discharge Complaint. It also determined
18 that the debtor failed to address the issue involving Qualtech’s
19 certificate of revivor.
20 The remaining claim in the Discharge Complaint proceeded to
21 trial. In preparation for the trial, the debtor and Creditors
22 submitted a joint pretrial order.
23 In the joint pretrial order, they agreed and admitted to
24 several facts, including that: 1) the debtor wholly owned and
25 controlled the businesses by June 20, 2005; 2) Dolores was an
26 officer and director of the businesses by June 20, 2005; 3) the
27 debtor and the businesses entered into the loan agreements with
28 Dolores; 4) the debtor or his allowed assignee was the purchaser
22
1 under the Asset Purchase Agreement; 5) the debtor personally
2 guaranteed performance under the Asset Purchase Agreement, the
3 sublease and the consulting agreements; 6) Dolores took
4 possession of the Business Assets two months before the debtor
5 filed his chapter 7 petition; and 7) Qualtech was under
6 suspension from April 1, 2008 until August 23, 2010, when it
7 filed its certificate of revivor.
8 The debtor and Creditors also listed several factual issues
9 remaining to be litigated, including: 1) whether the debtor was
10 the alter ego of the businesses; 2) whether the debtor acted to
11 transfer, conceal, destroy or remove the Business Assets; and
12 3) whether the debtor had actual intent to defraud, delay or
13 hinder Creditors through his actions within one year prepetition.
14 Before the trial, the bankruptcy court addressed several
15 pretrial motions filed by the debtor. In one pretrial motion,
16 the debtor again sought to dismiss Qualtech as a plaintiff for
17 lack of standing to prosecute the Discharge Complaint (“pretrial
18 motion”). AP No. 09-1669 Docket No. 82. Following a hearing,
19 the bankruptcy court granted the pretrial motion, entering the
20 order on May 15, 2012. AP No. 09-1669 Docket No. 138. It
21 concluded that Qualtech lacked capacity to prosecute the
22 Discharge Adversary because at the time it was filed on
23 October 20, 2009, Qualtech was under suspension.
24 The bankruptcy court held a four-day trial. It issued its
25 ruling orally on March 1, 2013 (“Trial Findings Hearing”).
26 At the outset of the Trial Findings Hearing, the bankruptcy
27 court stressed that it reviewed all admissible evidence
28 independent from any other pending adversary proceeding, i.e.,
23
1 the Preference Adversary. It then went on to state that
2 Creditors had established all but one of the elements of
3 § 727(a)(2)(A).
4 It found that the debtor transferred all of the Business
5 Assets to Dolores within one year of his bankruptcy filing with
6 the actual intent to hinder, delay and defraud Creditors. The
7 bankruptcy court noted that the evidence showed that the transfer
8 of the Business Assets to Dolores “was designed to ensure
9 protection of [her] interest as a creditor to the detriment of
10 [Creditors].” Tr. of March 1, 2013 hr’g, 6:7-8.
11 It inferred that the debtor had fraudulent intent in
12 transferring the Business Assets to Dolores based on the
13 circumstances surrounding the transfer. The bankruptcy court
14 pointed out that Dolores had a close relationship with the debtor
15 because she was his mother. It also noted that the debtor made
16 the transfer very shortly after Creditors initiated the state
17 court action. The bankruptcy court further pointed out that the
18 debtor transferred substantially all of the Business Assets to
19 Dolores which left “other creditors with little from which to
20 recover on their claims.” Tr. of March 1, 2013 hr’g, 6:23-24.
21 However, it found that Creditors failed to show that the
22 Business Assets were the property of the debtor. The bankruptcy
23 court noted that Creditors seemed to rely on its earlier
24 determination in the Preference Adversary. There, in its partial
25 summary judgment order entered January 23, 2013, the bankruptcy
26 court had found that the debtor’s transfer of the Business Assets
27 to Dolores under the turnover agreement constituted a
28 preferential transfer under § 547(b). It explained to Creditors
24
1 that its holding in the Preference Adversary had “no bearing on
2 [its] ruling in this matter” because: 1) the debtor was not a
3 party to the Preference Adversary so he could not raise a defense
4 or submit evidence and legal argument regarding the property
5 transfer’s characterization; 2) the evidence and legal arguments
6 presented in the Preference Adversary “were far more extensive
7 and compelling” than the Creditors’ presentation in the Discharge
8 Adversary; 3) Creditors provided no evidence showing that the
9 debtor was the alter ego of the businesses, even though a joint
10 pretrial order had listed this as an issue to be determined at
11 trial. Tr. of March 1, 2013 hr’g, 7:10-25, 8:1-18. See
12 Discussion infra. The bankruptcy court concluded that, “absent a
13 finding of alter ego, property belonging to a debtor’s wholly-
14 owned corporation is property of that entity and not property of
15 the debtor within the meaning of 727(a)(2).” Tr. of March 1,
16 2013 hr’g, 10:8-11.
17 On March 25, 2013, the bankruptcy court entered judgment in
18 favor of the debtor on the § 727(a)(2)(A) claim (“§ 727(a)(2)
19 judgment”). Two weeks later, Creditors filed the motion for new
20 trial.
21 They contended that they established all of the elements of
22 § 727(a)(2)(A). In particular, Creditors averred that the
23 Business Assets were property of the estate within the meaning of
24 § 727(a)(2)(A). Under California law, when a corporation is
25 dissolved, all of its assets automatically are transferred to its
26 shareholders. When an individual files for bankruptcy, the
27 chapter 7 trustee acquires all of his rights and interests in
28 property. Any property belonging to the debtor thus becomes part
25
1 of the bankruptcy estate.
2 Here, the debtor owned all of the stock in the businesses.
3 When the debtor dissolved the businesses shortly before he filed
4 his bankruptcy petition, all of their assets went to the
5 businesses’ shareholder – i.e., the debtor. When he filed for
6 bankruptcy, Trustee succeeded to the debtor’s rights and
7 interests, including his ownership interest in the Business
8 Assets. The Business Assets thus became part of the bankruptcy
9 estate.
10 Creditors further argued that, under § 727(a)(7), a debtor’s
11 discharge shall be denied if he is an insider of a corporation
12 and had fraudulently transferred the corporation’s assets within
13 the meaning of § 727(a)(2). Here, the debtor was an officer and
14 director and sole shareholder of the businesses, which qualified
15 him as an insider. Because he fraudulently transferred the
16 Business Assets to Dolores when he was an insider of the
17 businesses, his discharge must be denied.
18 Creditors also maintained that the businesses were the
19 debtor’s alter egos under California law. In California, a
20 person is the alter ego of his corporation if: 1) he owns all of
21 the corporation’s stock; 2) there is such a unity of interest and
22 ownership that the separateness of the person and the corporation
23 has ceased; and 3) an adherence to the fiction of the separate
24 existence of the corporation would sanction a fraud or promote
25 injustice. Here, Creditors averred, all three elements of alter
26 ego were met: 1) the debtor wholly owned and controlled the
27 businesses; 2) the debtor admitted at the § 341(a) meeting that
28 he co-owned with the businesses the Business Assets and
26
1 commingled his personal assets in the Business Assets in such a
2 way that he could not separate them; and 3) adhering to the
3 fiction of the separate existence of the businesses would condone
4 fraud and promote injustice.
5 Creditors further asked the bankruptcy court to reconsider
6 its grant of partial summary judgment on the § 523(a)(6) claim.
7 Creditors contended that the facts proven at trial showed that
8 the debtor intended “to strip the value” from his corporate stock
9 by transferring the sale assets to Dolores, an insider. In doing
10 so, the debtor caused Creditors willful and malicious injury
11 within the meaning of § 523(a)(6).
12 Following a hearing on May 7, 2013 (“new trial hearing”),
13 the bankruptcy court denied the motion for new trial. It noted
14 that Creditors did not provide any substantive analysis as to how
15 Civil Rules 52 and 59 and Local Rule 9013-4(a) applied.
16 The bankruptcy court determined that Creditors misapplied
17 § 727(a)(7). It explained that § 727(a)(7) ties together related
18 cases so that misconduct in one case by an individual may be
19 chargeable against him in other related cases. Here, the
20 businesses never filed for bankruptcy; they were nonbankruptcy
21 insiders.
22 Moreover, the bankruptcy court reasoned, even if § 727(a)(7)
23 applied to nonbankruptcy insiders such as the businesses,
24 Creditors never included their § 727(a)(7) claim in the joint
25 pretrial order as a claim to be litigated.
26 As for their arguments regarding alter ego, the bankruptcy
27 court found that Creditors failed to address the lack of evidence
28 of alter ego at trial. They also failed to proffer appropriate
27
1 analysis of alter ego under Civil Rules 59 and 52.
2 The bankruptcy court further found unpersuasive Creditors’
3 argument that the debtor’s dissolution of the businesses shortly
4 before his bankruptcy filing required the denial of his
5 discharge. It pointed out that Creditors failed to provide any
6 analysis as to how the assets of the debtor’s dissolved
7 businesses (if any at the times that the businesses were
8 dissolved) legally reverted to the debtor, as shareholder,
9 prepetition.
10 The bankruptcy court denied Creditors’ request to reconsider
11 its grant of partial summary judgment on their § 523(a)(6) claim
12 because they failed to present any grounds for reconsideration.
13 It moreover mentioned that Creditors were seeking reconsideration
14 of an order that it issued more than two years before.
15 On May 15, 2013, the bankruptcy court entered the new trial
16 order. Creditors timely appealed the new trial order.
17
18 JURISDICTION
19 The bankruptcy court had jurisdiction under 28 U.S.C.
20 §§ 1334 and 157(b)(2)(F) and (J). We have jurisdiction under
21
28 U.S.C. § 158.
22
23 ISSUES
24 1) Did the bankruptcy court err in granting partial summary
25 judgment on the § 547(b) claim by determining that the debtor’s
26 transfer of the Business Assets to Dolores constituted a
27 preferential transfer?
28 2) Did the bankruptcy court err in granting judgment in the
28
1 debtor’s favor on Creditor’s § 523(a)(6) claim?
2 3) Did the bankruptcy court err in granting judgment in the
3 debtor’s favor on Creditors’ § 727(a)(2)(A) claim?
4
5 STANDARDS OF REVIEW
6 We review the bankruptcy court’s legal conclusions de novo.
7 Goodrich v. Briones (In re Schwarzkof),
526 F.3d 1032, 1034 (9th
8 Cir. 2010). We also review de novo the bankruptcy court’s grant
9 of partial summary judgment. White v. City of Sparks,
500 F.3d
10 953, 955 (9th Cir. 2007). “Summary judgment is appropriate only
11 if, taking the evidence and all reasonable inferences drawn
12 therefrom in the light most favorable to the non-moving party,
13 there are no genuine issues of material fact and the moving party
14 is entitled to judgment as a matter of law.” Smith v. Clark
15 Cnty. Sch. Distr.,
727 F.3d 950, 955 (9th Cir. 2013)(quoting
16 Furnace v. Sullivan,
705 F.3d 1021, 1026 (9th Cir. 2013)). The
17 moving party has the initial burden of demonstrating that no
18 material fact issues exist. Soremekun v. Thrifty Payless, Inc.,
19
509 F.3d 978, 984 (9th Cir. 2007).
20 Generally, a court cannot grant summary judgment based on
21 its assessment of the credibility of the evidence presented.
22 Barboza v. New Form, Inc. (In re Barboza),
545 F.3d 702, 707 (9th
23 Cir. 2008)(quoting Agosto v. INS,
436 U.S. 748, 756 (1978)). At
24 the summary judgment stage, the bankruptcy court’s function is
25 not to weigh the evidence and determine the truth of the matter.
26 Barboza,
545 F.3d at 707 (quoting Anderson v. Liberty Lobby,
27 Inc.,
477 U.S. 242, 249 (1986)). Rather, it simply must
28 determine whether there is a genuine issue for trial. Barboza,
29
1
545 F.3d at 707 (quoting Anderson,
477 U.S. at 249).
2 We review the bankruptcy court’s factual findings under the
3 clearly erroneous standard. United States v. Hinkson,
585 F.3d
4 1247, 1252 & n.20 (9th Cir. 2009)(en banc). Determinations of
5 alter ego typically are factual findings, which we review for
6 clear error. Schwarzkof, 526 F.3d at 1034 (citing Towe Antique
7 Ford Found. v. IRS,
999 F.2d 1891, 1897 (9th Cir. 1993)). We
8 must affirm the bankruptcy court’s factual findings unless we
9 conclude that they are “(1) ‘illogical,’ (2) ‘implausible,’ or
10 (3) without ‘support in inferences that may be drawn from the
11 facts in the record.’” Hinkson, 585 F.3d at 1252. Clear error
12 exists when, on the entire evidence, the reviewing court is left
13 with the definite and firm conviction that a mistake was made.
14 Oney v. Weinberg (In re Weinberg),
410 B.R. 19, 28 (9th Cir.
15 2009); Hoopai v. Countrywide Home Loans, Inc. (In re Hoopai),
16
369 B.R. 506, 509 (9th Cir. BAP 2007).
17 We may affirm on any ground supported by the record. White,
18 500 F.3d at 955.
19
20 DISCUSSION
21 A. Preference Adversary
22 1. Motion to Supplement Record
23 Before we begin our analysis, we must address a procedural
24 matter: Dolores’ motion to supplement the record on appeal
25 (“supplement record motion”). All of the supplemental documents
26 submitted for our review concern Trustee’s application to employ
27 Creditors’ adversary counsel as his special counsel in the
28
30
1 underlying bankruptcy case.17
2 Having reviewed the supplemental documents, we conclude that
3 the supplemental documents would not be helpful in our
4 determination of Dolores’ appeal. We thus deny the supplement
5 record motion.18
6 2. Appeal of the § 547(b) partial summary judgment order
7 Under § 547(b), the transfer of a debtor’s interest in
8 property made to an insider within one year prior to the debtor’s
9 bankruptcy filing may be avoided as a preference if six elements
10 are met. Sigma Micro Corp. v. Healthcentral.com
11 (In re Healthcentral.com),
504 F.3d 775, 788 (9th Cir. 2007). A
12 preferential transfer consists of the following six elements:
13 1) a transfer of the debtor’s interest in property; 2) that was
14 to or for a creditor’s benefit; 3) that was for or on account of
15 an antecedent debt; 4) that was made while the debtor was
16 insolvent; 5) that was made up to one year prepetition, if such
17 creditor was an insider; and 6) that was a transfer that enables
18 the creditor to receive more than such creditor would receive in
19 a chapter 7 liquidation of the bankruptcy estate. Hansen v.
20 MacDonald Meat Co. (In re Kemp Pac. Fisheries, Inc.),
16 F.3d
21
17
22 This same counsel also represented Creditors in the state
court action.
23
18
Shortly before oral argument, the debtor, Creditors and
24
Dolores each submitted additional authorities in support of their
25 briefs. The debtor and Dolores objected to Creditors’
submissions and moved to strike them. We deny the debtor’s and
26 Dolores’ motions to strike. After considering all of these
27 submissions, however, we conclude that the supplemental
authorities cited by the debtor, Creditors and Dolores do not
28 assist us materially in our dispositions of these appeals.
31
1 313, 315 n.1 (9th Cir. 1994). All six of these elements must be
2 met, Wind Power Sys., Inc. v. Cannon Fin. Group, Inc. (In re Wind
3 Power Sys., Inc.),
841 F.2d 288, 290 (9th Cir. 1988)(en banc)
4 (citation omitted), and each must be proven by a preponderance of
5 the evidence. Arrow Elecs., Inc. v. Justus (In re Kaypro),
6
218 F.3d 1070, 1073 (9th Cir. 2000).
7 Dolores claims that she provided sufficient evidence to
8 raise genuine material factual issues as to three of these
9 elements: 1) whether the transfer involved the debtor’s
10 property; 2) whether the transfer was made within the preference
11 period; and 3) whether Dolores, as a secured creditor, received
12 more than she would have received in a chapter 7 liquidation.
13 a. Property of the debtor
14 Dolores first argues that she submitted evidence raising
15 questions as to whether the Business Assets ever constituted the
16 debtor’s property. Dolores asserts that the debtor never
17 intended to own the Business Assets. She references the Asset
18 Purchase Agreement and the Assignment, both of which provided
19 that Applied would own the Qualtech Assets when the debtor
20 assigned his rights under the Asset Purchase Agreement and made
21 the Assignment to Applied.
22 Dolores contends that she presented further evidence raising
23 material factual issues as to whether the debtor owned the
24 Business Assets under the alter ego theory. She provided
25 evidence that the businesses each kept separate books and
26 records, even though they operated out of the same facility.
27 Dolores also submitted evidence showing that the businesses did
28 not transfer funds between themselves without regard to source or
32
1 obligation, as Creditors alleged. The businesses exchanged funds
2 for various goods and services they provided to one another.
3 However, Dolores seeks to manufacture a genuine issue of
4 fact out of her subjective intent, which is belied by the reality
5 of her documented transactions with respect to the Business
6 Assets. As the bankruptcy court pointed out, Dolores relies on
7 documents that indicated that the debtor owned the Business
8 Assets. The loan resolution agreement was between Dolores and
9 the debtor only. None of the businesses was a party to the loan
10 resolution agreement. The loan resolution agreement further
11 allowed Dolores to take immediate possession of collateral under
12 her loan agreement with the debtor, but the loan resolution
13 agreement did not provide for any transfer of title or ownership.
14 In fact, the loan resolution agreement left the Business Assets
15 in place with the debtor.
16 Dynamic and Electronic along with the debtor, Dolores and
17 Kaufman Group were parties to the turnover agreement, but Applied
18 was not. Two lists of transferred assets were attached to the
19 turnover agreement, without any indication or division of
20 respective ownership interests among the debtor, Dynamic and
21 Electronic. If the subject lists included any of the Qualtech
22 Assets, to the extent Applied owned them, it was not a party, and
23 the subject assets were not transferred, unless the debtor had a
24 continuing ownership interest in them.19
25 At the summary judgment hearing, the bankruptcy court
26
19
27 Nothing in the record indicates that any interest in the
Qualtech Assets ever was assigned or transferred from Applied to
28 either Dynamic or Electronic.
33
1 highlighted certain language in the turnover agreement indicating
2 that the Business Assets belonged to the debtor. The relevant
3 provision of the turnover agreement stated that the debtor
4 “continuously and irrevocably tender[ed] . . . all right, title
5 and interest and full possession of, in and to all its asset
6 collateral not [now] in [Dolores’] possession . . . .” Such
7 language, the bankruptcy court reasoned, indicated that the
8 debtor owned the Business Assets collateral, lists of which were
9 attached to the turnover agreement. Further, the bankruptcy
10 court concluded that the turnover agreement was more “explicit,
11 in terms of what it says,” than the loan resolution agreement.
12 Tr. of Sept. 18, 2012 hr’g, 11:6-7.
13 Dolores maintains that the actual transfer of the Business
14 Assets occurred on March 31, 2008, more than a year before the
15 debtor filed for bankruptcy protection. Following the transfer
16 on March 31, 2008, she asserts that she owned the Business
17 Assets, which she then leased back to the debtor. The debtor
18 thus did not own the Business Assets during the preference
19 period.
20 As the bankruptcy court noted, if Dolores actually owned the
21 Business Assets outside of the preference period, then it made no
22 sense (or, as the bankruptcy court put it, was “illogical”) for
23 Dolores to file the UCC-1 financing statement on May 27, 2009.
24 Like the bankruptcy court, we too wonder if she truly owned the
25 Business Assets during the preference period, “why on earth would
26 [Dolores] file a UCC-1 in 2009, on her own property?”
27 On the record before us and then before the bankruptcy
28 court, there is no genuine issue that the debtor owned at least
34
1 some interest in the Business Assets during the insider
2 preference period. However, even if the businesses owned some of
3 the Business Assets to an unspecified extent, as conceded by
4 Dolores’ counsel at oral argument, the debtor’s transfer of all
5 the Business Assets to Dolores drained the stock that he wholly
6 owned in the businesses of all value, thus constituting a
7 preferential transfer.
8 We ultimately conclude, as did the bankruptcy court, that
9 Dolores did not raise a genuine issue of material fact as to
10 whether the debtor had a property interest of some type either in
11 or with respect to the transferred Business Assets for purposes
12 of a determination of preferential transfer under § 547(b).
13 b. Preference period
14 Dolores next argues that she provided evidence raising
15 material factual issues as to whether the debtor transferred the
16 Business Assets to her within one year prepetition. She points
17 to the loan resolution agreement, dated March 31, 2008, under
18 which she allegedly took possession of the Business Assets.
19 According to Dolores, the loan resolution agreement proves that
20 the transfer occurred more than one year before the debtor filed
21 for bankruptcy protection on July 15, 2009.
22 We give no credence to this argument. As noted above, and
23 as the bankruptcy court reasoned at the partial summary judgment
24 hearing, if Dolores truly owned the Business Assets before the
25 preference period began, why would she file the UCC-1 financing
26 statement on her property on May 27, 2009, and enter into the
27 subsequent turnover agreement that transferred title and
28 ownership of the Business Assets? Such actions indicate that the
35
1 debtor had not yet transferred the Business Assets to Dolores
2 before the preference period began. Also, the loan resolution
3 agreement does not mention foreclosure by Dolores on the Business
4 Assets, and no notice of the purported transfer was provided at
5 that time to any third parties.
6 We thus conclude that Dolores did not raise a genuine issue
7 of material fact as to whether the transfer occurred outside of
8 the preference period.
9 c. Secured creditor status
10 Dolores finally contends that she raised a genuine issue of
11 material fact as to whether, as a secured creditor, she received
12 more than she would have in a chapter 7 liquidation. She points
13 out that payments to a fully secured creditor are not
14 preferential because such payments do not deplete the bankruptcy
15 estate. They do not diminish the value of the bankruptcy estate
16 because, while funds are removed from the bankruptcy estate, the
17 secured creditor’s lien is reduced in equal amount.
18 Dolores claims that she submitted evidence showing that she
19 was a fully secured creditor. However, the uncontradicted
20 evidence before the bankruptcy court established that her claimed
21 security interests were unperfected until she filed the UCC-1
22 financing statement on May 27, 2009 – well within the preference
23 period. Sheehan v. Valley Nat’l Bank (In re Shreves),
272 B.R.
24 614, 622 (Bankr. N.D.W. Va. 2001)(“The trustee is granted the
25 right under the Code to avoid transfers within the preference
26 period, and the perfection of a lien within the preference period
27 is a transfer avoidable by the trustee.”); Rouse v. Chase
28 Manhattan Bank (In re Brown),
226 B.R. 39, 45 (W.D. Mo.
36
1 1998)(“The perfection of a lien within the preference period is
2 considered a transfer, which is avoidable by the trustee.”).
3 Dolores also presented evidence to raise questions as to
4 whether the Business Assets had a value that exceeded her secured
5 claim. However, because her security interests were not
6 perfected until late in the preference period, such evidence was
7 ineffectual to raise a genuine issue of material fact.
8 Based on the foregoing, we determine that Dolores did not
9 present sufficient evidence to raise genuine factual issues as to
10 the three contested elements for a preferential transfer under
11 § 547(b). We thus conclude that the bankruptcy court did not err
12 in granting summary judgment on the § 547(b) claim.
13 B. Discharge Adversary
14 According to their notice of appeal, Creditors appeal the
15 new trial order. But, in their appellate briefs, Creditors
16 appear to be appealing both the § 523(a)(6) partial summary
17 judgment order and the § 727(a)(2)(A) judgment.
18 1. Section 523(a)(6) claim
19 Creditors contend that the bankruptcy court erred in
20 refusing to except their debt from discharge under § 523(a)(6).
21 They argue that they successfully established that the debtor
22 intentionally and fraudulently transferred to Dolores the
23 Business Assets because the bankruptcy court expressly found that
24 he transferred the Business Assets to diminish his bankruptcy
25 estate thereby defrauding his creditors. Creditors maintain that
26 the debtor’s intentional and fraudulent transfer constituted a
27 “willful and malicious injury” within the meaning of § 523(a)(6).
28 As noted above, the bankruptcy court granted summary
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1 judgment in the debtor’s favor on Creditors’ § 523(a)(6) claim
2 for two reasons: First, the § 523(a)(6) claim was not timely
3 filed. Although the parties had stipulated to allow Creditors to
4 amend the Discharge Adversary complaint, there was no agreement
5 that the debtor could not assert an untimeliness defense to any
6 new claims that Creditors might assert in an amended complaint.
7 The deadline to file exception to discharge claims was
8 October 20, 2009. The amended complaint asserting a § 523(a)(6)
9 claim for the first time was not filed until March 16, 2010. The
10 Creditors missed the deadline to assert their § 523(a)(6) claim.
11 Rule 4007(c) provides that, “On motion of any party in interest
12 after hearing on notice the court may for cause extend the time
13 fixed under this subdivision. The motion shall be filed before
14 the time has expired.” No such motion was filed by the Creditors
15 to extend the deadline to file their § 523(a)(6) claim. On this
16 record, we perceive no error in the bankruptcy court dismissing
17 the Creditors’ § 523(a)(6) claim as not timely filed.
18 In addition, Creditors misapprehend § 523(a)(6).
19 Section 523(a)(6) essentially encompasses intentional torts.
20 Creditors’ claims arise out of breach of contract. Under
21 controlling Ninth Circuit case law, “‘a simple breach of contract
22 is not the type of injury addressed by § 523(a)(6).’” Petralia
23 v. Jercich (In re Jercich),
238 F.3d 1202, 1205 (9th Cir.
24 2001)(quoting Snoke v. Riso (In re Riso),
978 F.2d 1151, 1154
25 (9th Cir. 1992)). The Ninth Circuit has held that “‘an
26 intentional breach of contract is excepted from discharge under
27 § 523(a)(6) only when it is accompanied by malicious and willful
28 tortious conduct.’” Jercich,
238 F.3d at 1205 (quoting Riso,
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1
978 F.2d at 1154 (emphasis in original)). Creditors only have
2 breach of contract claims with an after-the-fact argument that
3 the debtor’s alleged fraudulent transfer of the Business Assets
4 to Dolores constitutes a willful and malicious injury. Their
5 embellished breach of contract claim does not support a willful
6 and malicious injury claim within the meaning of § 523(a)(6).
7 See Jercich,
238 F.3d at 1206. We thus conclude that the
8 bankruptcy court did not err in determining, on an alternative
9 basis, that Creditors’ debt was not excepted from discharge under
10 § 523(a)(6) due to a lack of evidence of the required subjective
11 tortious intent.
12 2. Section 727(a)(2)(A) claim
13 We now turn to Creditors’ appeal of the bankruptcy court’s
14 determination on their § 727(a)(2)(A) claim. Section
15 727(a)(2)(A) provides that the bankruptcy court must deny the
16 debtor’s discharge if the debtor, with intent to hinder, delay or
17 defraud a creditor, transferred property of the debtor within one
18 year prepetition. Aubrey v. Thomas (In re Aubrey),
111 B.R. 268,
19 273 (9th Cir. BAP 1990). The creditor must demonstrate by a
20 preponderance of evidence that: 1) the debtor transferred or
21 concealed property; 2) the property belonged to the debtor;
22 3) the transfer occurred within one year of his bankruptcy
23 filing; and 4) the debtor made the transfer with the intent to
24 hinder, delay or defraud a creditor.
Id. (citations omitted).
25 The only element at issue on appeal is whether the Business
26 Assets were property of the debtor.
27 The bankruptcy court found in the Discharge Adversary that
28 Creditors did not meet their burden of proof to establish that
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1 the debtor owned the Business Assets for § 727(a)(2)(A) purposes.
2 The fact that the bankruptcy court concluded upon the more
3 extensive evidentiary record and legal arguments presented in the
4 Preference Adversary that a property interest of the debtor had
5 been transferred for preference purposes is not dispositive here.
6 Creditors argue that they established that the Business
7 Assets belonged to the debtor. Creditors contend that the
8 businesses were the alter egos of the debtor. Specifically, they
9 argue that: 1) the debtor jointly owned the Business Assets with
10 the businesses; and 2) under California law, the shareholders of
11 a dissolved corporation hold legal and equitable title to the
12 dissolved corporation’s property, subject to the superior claims
13 of its creditors.
14 In determining whether alter ego liability applies, we must
15 look to the law of the forum state. Schwarzkopf, 626 F.3d at
16 1037. Here, California law applies.
17 California recognizes alter ego liability: 1) “where ‘there
18 is such a unity of interest and ownership that the individuality,
19 or separateness, of the said person and corporation has ceased’”
20 and 2) “where ‘adherence to the fiction of the separate existence
21 of the corporation would . . . sanction a fraud or promote
22 injustice.’” Id. at 1038 (quoting Wood v. Elling Corp.,
572 P.2d
23 755, 761 n.9 (1977)). This is a highly fact-intensive
24 determination. Factors suggesting an alter ego relationship
25 include “‘[c]ommingling of funds and other assets [and] failure
26 to segregate funds of the separate entities . . .; the treatment
27 by an individual of the assets of the corporation as his own
28 . . .; the disregard of legal formalities and the failure to
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1 maintain arm’s length relationships among related entities . . .’
2 [and] the diversion [of assets from a corporation by or to a]
3 stockholder or other person or entity, to the detriment of
4 creditors, or the manipulation of assets . . . between entities
5 so as to concentrate the assets in one and the liabilities in
6 another.’” Schwarzkopf, 626 F.3d at 1038 (quoting Associated
7 Vendors, Inc. v. Oakland Meat Co., Inc.,
26 Cal. Rptr. 806,
8 813-15 (1962)).
9 The bankruptcy court found that Creditors presented no
10 evidence establishing that the businesses were the debtor’s alter
11 egos, even though the joint pretrial order expressly listed this
12 as an issue to be determined at trial. We agree.
13 Creditors also contend that upon dissolution of a
14 corporation, its shareholders retain and own its assets. But
15 here, the dissolution of the businesses occurred after the
16 Business Assets already had been transferred to Dolores. By the
17 time the businesses dissolved, they had no assets to distribute
18 to the debtor.
19 Based on our review of the record, we do not have a firm and
20 definite conviction that the bankruptcy court clearly erred in
21 finding that the Creditors had not met their burden of proof to
22 establish that the Business Assets were the debtor’s property in
23 the Discharge Adversary for purposes of their § 727(a)(2)(A)
24 claim.
25
26 CONCLUSION
27 Both Dolores and Creditors contend on appeal that the
28 bankruptcy court erred in its determinations in the adversary
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1 proceedings. Based on our review of the record, we conclude that
2 the bankruptcy court did not err. Accordingly, we AFFIRM the
3 bankruptcy court’s rulings on appeal.
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