In re: Paul A. Morabito ( 2020 )

FILED
SEP 29 2020
NOT FOR PUBLICATION
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 No. NV-19-1267-GTaB
PAUL A. MORABITO,
Debtor. Bk. No. 3:13-bk-51237-GWZ
EDWARD BAYUK; SNOWSHOE
PROPERTIES, LLC, Adv. No. 3:16-ap-05041-GWZ
Appellants,
v.
WILLIAM A. LEONARD, JR., Chapter 7 MEMORANDUM*
Trustee,
Appellee.
Appeal from the United States Bankruptcy Court
for the District of Nevada
Gregg W. Zive, Bankruptcy Judge, Presiding
Before: GAN, TAYLOR, and BRAND, Bankruptcy Judges.
INTRODUCTION
Appellants Edward Bayuk (“Bayuk”) and Snowshoe Properties, LLC
(“Snowshoe” and together “Appellants”) appeal the bankruptcy court’s
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
order granting chapter 71 trustee William A. Leonard, Jr.’s (“Trustee”)
motion for summary judgment on his adversary complaint to recover a
preference. Trustee asserted that prepetition, Bayuk owed debtor Paul A.
Morabito (“Debtor”) $1,617,050 and, in partial satisfaction of that debt,
Bayuk paid $732,124 to Bank of America, N.A., (“BofA”) to satisfy Debtor’s
obligation. The payment extinguished the guaranty liability of Snowshoe,
which was wholly owned by Bayuk through his trust. Trustee alleged that
Bayuk’s payment to BofA was a transfer of Debtor’s interest in property
which benefitted insiders Snowshoe and Bayuk.
Trustee argued that factual findings made by the Nevada state court
in related fraudulent transfer litigation were preclusive of issues asserted in
the preference litigation. Appellants did not dispute the facts alleged by
Trustee but instead argued that the bankruptcy court should not give
preclusive effect to the state court findings. Appellants have not
demonstrated that the bankruptcy court erred by granting summary
judgment. We AFFIRM.
FACTS
A. Prepetition Events
In September 2010, the Nevada state court rendered oral findings 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
fact and conclusions of law, finding Debtor and Consolidated Nevada
Corporation (“CNC”) liable to JH, Inc, Jerry Herbst, and Berry-Hinckley
Industries (the “Herbst Parties”) in the amount of $85,871,364.75. After
further proceedings on claims for punitive damages and attorneys’ fees, the
state court entered final judgment against Debtor and CNC in the amount
of $149,444,777.80. Immediately after the oral ruling in the state court case,
Debtor engaged in a series of transactions to divest most of his assets.
Prior to the oral ruling, Debtor and Bayuk each owned a 50% interest
in a real estate holding company called Baruk Properties, LLC. In October
2010, Debtor transferred his 50% interest in Baruk Properties to Bayuk
pursuant to a Membership Interest Transfer Agreement (“Transfer
Agreement”). Baruk Properties held four real properties, including a
commercial property located at 570 Glenneyre, Laguna Beach, CA (“570
Glenneyre”). Based on the appraised values of the four properties, Debtor’s
50% interest in Baruk Properties had a value of at least $1,654,550. After the
transfer, Bayuk merged Baruk Properties into Snowshoe which was wholly
owned by the Edward William Bayuk Living Trust (the “Bayuk Trust”).
Under the terms of the Transfer Agreement, Bayuk was required to
deliver a promissory note to Debtor in the principal amount of $1,617,050
(the “Baruk Note”). There was no evidence that Bayuk made any payments
according to the terms of the Baruk Note.
In September 2012, Debtor and BofA entered into a settlement
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agreement to resolve Debtor’s defaults under a 2009 loan agreement. As
part of the settlement agreement, Snowshoe executed a limited guaranty,
secured by a first position deed of trust on 570 Glenneyre.
In December 2012, Bayuk paid BofA $732,124.75 to satisfy Debtor’s
obligations under the BofA settlement agreement and to resolve
Snowshoe’s liability under the limited guaranty. Bayuk treated the
payment to BofA as a payment on the Baruk Note and Debtor admitted
that the payment to BofA reduced his claim against Bayuk on the Baruk
Note by $732,124.75.
B. The Bankruptcy and The SuperPumper Action
In June 2013, the Herbst Parties commenced an involuntary
bankruptcy petition against Debtor. The bankruptcy court denied Debtor’s
motion to dismiss the petition and in December 2014 granted summary
judgment against Debtor, adjudicating him a chapter 7 debtor. An interim
trustee was appointed in December 2014 and, in January 2015, Trustee was
elected.
In December 2013, the Herbst Parties filed a fraudulent conveyance
action in state court against SuperPumper, Inc., Debtor, Bayuk, Salvatore
Morabito, and Snowshoe Petroleum, Inc. (the “SuperPumper Action”). The
Herbst Parties sought to avoid several transfers including the transfer of
Debtor’s ownership interest in Baruk Properties.
In May 2015, the parties in the SuperPumper Action stipulated to
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remove the Herbst Parties and substitute Trustee as plaintiff. The parties
also stipulated to remove Debtor as a defendant. Trustee then filed an
amended complaint on behalf of the bankruptcy estate. The state court
conducted a six-day bench trial and entered its findings of fact and
conclusions of law in March 2019.
As part of the judgment, the state court avoided the transfer of
Debtor’s interest in Baruk Properties and awarded damages to the estate
and against Bayuk in the amount of $1,654,550. The court held that Debtor
transferred his interest in Baruk Properties with actual intent to hinder,
delay, or defraud creditors. In finding actual intent, the court relied on
multiple “badges of fraud,” including the court’s determination that Bayuk
was an insider of Debtor.
The state court determined that the transfer was not for reasonably
equivalent value because the Baruk Note was “illusory, and certainly did
not result in tangible assets available for [Debtor’s] creditors.”
C. The Preference Action
In December 2016, Trustee filed an adversary complaint alleging
avoidable preferences to Appellants resulting from Bayuk’s payment to
BofA. In January 2017, Bayuk filed a motion to dismiss. The parties
stipulated to allow Trustee to file an amended complaint, which he filed in
June 2017.
Appellants then filed a motion to dismiss the amended complaint.
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They asserted that Trustee had not alleged sufficient facts to state a prima
facie case and that neither Bayuk nor Snowshoe were insiders. Appellants’
attorney withdrew as counsel of record, and in March 2019, substitute
counsel filed an amended motion to dismiss on behalf of Appellants. In the
amended motion to dismiss, Appellants argued that because Bayuk had an
obligation to Debtor under the Baruk Note, he did not acquire any
indemnification rights by making the BofA payment and neither Bayuk nor
Snowshoe were insiders.
In April 2019, Trustee filed a motion for summary judgment. Trustee
provided a statement of facts which included stipulated facts from related
proceedings and the state court’s findings and conclusions in the
SuperPumper Action. Trustee also opposed the amended motion to dismiss
and argued that the state court’s findings conclusively decided the issue of
insider status. Trustee also argued that because the state court found that
the Baruk Note was a sham, Bayuk had recourse rights against Debtor.
Appellants opposed the motion for summary judgment and, for the
first time, argued that the bankruptcy court lacked constitutional authority
to enter a final order on the preference action under Stern v. Marshall, 564
U.S. 462 (2011). Appellants reiterated their arguments that they were not
insiders and that Bayuk lacked recourse against Debtor, and additionally
argued that there was a material issue of fact regarding whether BofA
received more than it would have under a hypothetical chapter 7.
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Appellants did not dispute any of the facts asserted by Trustee in the
statement of facts. Instead, they argued that the factual findings made by
the state court in the SuperPumper Action were not preclusive under
Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir. 2000)
and that the state court judgment was entered without jurisdiction and in
violation of the automatic stay. They provided a declaration of their
attorney which stated that there was a question of fact about whether BofA
received more than it would have under a hypothetical chapter 7.
However, Appellants did not provide any testimony or documentary
evidence to demonstrate a genuine dispute of material fact on this issue or
any other.
After a hearing, the bankruptcy court denied the amended motion to
dismiss and granted the motion for summary judgment. The bankruptcy
court entered written findings of fact and conclusions of law in August
2019 in which it determined that issue preclusion applied to issues decided
in the SuperPumper Action. The bankruptcy court concluded that the state
court had jurisdiction over the SuperPumper Action and its order did not
violate the automatic stay. Based on the findings in the SuperPumper
Action and Trustee’s statement of facts, the bankruptcy court concluded
that Trustee had established Appellants were non-statutory insiders, and
because the Baruk Note was illusory, Bayuk maintained a right of
indemnification from Debtor. The bankruptcy court entered a written
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judgment on November 1, 2019. Appellants timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(F). We have jurisdiction under 28 U.S.C. § 158(a).2
ISSUE
Whether the bankruptcy court erred by granting Trustee’s summary
judgment motion.
STANDARD OF REVIEW
We review the bankruptcy court’s grant of summary judgment de
novo. Lewis v. Kaelin (In re Cresta Tech. Corp.), 583 B.R. 224, 227 (9th Cir. BAP
2018). We also review questions of issue preclusion de novo. Pike v. Hester,
2
Appellants initially argued that the bankruptcy court lacked constitutional
authority to enter a final order under Stern v. Marshall, 564 U.S. 462 (2011). If the
preference action was a Stern claim and Appellants did not consent to entry of final
orders by the bankruptcy court, we would lack jurisdiction under 28 U.S.C. § 158(b). See
Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 36 (2014) (Stern claims are treated as
non-core matters); 28 U.S.C. § 157(c) (unless parties consent to entry of final orders,
bankruptcy court may only enter proposed findings of fact and conclusions of law on
non-core matters with any final order to be entered by the district court after de novo
review). Appellants arguably consented to the bankruptcy court’s entry of final orders
by failing to raise the issue in their motions to dismiss as required by Local Rule
7012(b). See Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1949 (2015) (bankruptcy
court has constitutional authority to enter final orders with the express or implied
consent of all parties). Furthermore, by electing to have this Panel hear the appeal,
Appellants likely waived any right to review by an Article III court. See id. at 1944 (“The
entitlement to an Article III adjudicator is a ‘personal right’ and thus ordinarily ‘subject
to waiver.’”) (quoting Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 848
(1986)). Any question in this regard was resolved at oral argument when Appellants
expressly waived the Stern issue.
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891 F.3d 1131, 1137 (9th Cir. 2018). Under a de novo review, we look at the
matter anew, giving no deference to the bankruptcy court’s determinations.
In re Cresta Tech. Corp., 583 B.R. at 227.
DISCUSSION
Appellants argue that the bankruptcy court erred by granting
summary judgment because the bankruptcy court improperly applied
issue preclusion, and there were material issues of fact.
A. The Bankruptcy Court Did Not Err By Giving Preclusive Effect To
State Court Findings
“A bankruptcy court may rely on the issue preclusive effect of an
existing state court judgment as the basis for granting summary
judgment.” Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 462 (9th
Cir. BAP 2015). In determining the issue-preclusive effect of a state court
judgment, the bankruptcy court must apply the law of the court that
rendered judgment. Pike, 891 F.3d at 1138. Because the judgment was
entered by the Nevada state court, we apply Nevada law.
Under Nevada law, issue preclusion requires that (1) an issue be
identical; (2) the initial ruling was on the merits and final; (3) “the party
against whom the judgment is asserted” was a party in the prior case, or in
privity with a party in the prior case; and (4) the issue was actually and
necessarily litigated. Five Star Capital Corp. v. Ruby, 194 P.3d 709, 713 (Nev.
2008).
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For preclusion purposes, it is not relevant that the prior decision was
appealed, Edwards v. Ghandour, 159 P.3d 1086, 1090 (Nev. 2007) abrogated on
other grounds by Five Star Capital Corp., 194 P.3d 709, or wrongly decided.
Holt v. Reg’l Tr. Servs. Corp., 266 P.3d 602, 608 (Nev. 2011). Issue preclusion
applies to both issues of law and fact. Univ. of Nev. v. Tarkanian, 879 P.2d
1180, 1191 (Nev. 1994).
Appellants do not dispute that the requisite elements of issue
preclusion were present in this case. Instead, they argue that the findings
are not binding because the state court lacked subject matter jurisdiction
and Trustee lacked standing to pursue the claims. They also argue that the
bankruptcy court failed to conduct the necessary preclusion analysis.
1. The State Court Had Jurisdiction
Appellants argue that the state court findings are not binding on the
bankruptcy court under the holding of In re Gruntz, 202 F.3d 1074. In
Gruntz, the Ninth Circuit held that a state court judgment entered in
violation of the automatic stay was not binding on the bankruptcy court
because the state court did not have the power to modify or dissolve the
automatic stay. Id. at 1087. General preclusion rules do not apply to state
court judgments involving matters that come within the bankruptcy court’s
exclusive jurisdiction. Odd-Bjorn Huse v. Huse-Sporsem, A.S. (In re Birting
Fisheries, Inc.), 300 B.R. 489, 498 (9th Cir. BAP 2003).
In the SuperPumper Action, Trustee asserted fraudulent transfer
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claims under Nevada law. These claims were not within the exclusive
jurisdiction of the bankruptcy court, and the state court’s jurisdiction over
state law claims was not preempted by Congress’s grant of “original but
not exclusive jurisdiction” to the bankruptcy court. See 28 U.S.C. § 1334(b);
Hopkins v. Plant Insulation Co., 349 B.R. 805, 812 (N.D. Cal. 2006) (holding
that state courts retain concurrent jurisdiction over claims brought
pursuant to § 544(b)). The state court had subject matter jurisdiction over
the state law fraudulent transfer claims.
Appellants have not provided any credible argument that Trustee
lacked standing to pursue the fraudulent transfer claims. Appellants’
reliance on Williams v. California 1st Bank, 859 F.2d 664 (9th Cir. 1988) is
misplaced. The Williams court held that a bankruptcy trustee does not have
standing to assert general causes of action on behalf of individual creditors.
Id. at 667. Here, Trustee asserted the fraudulent transfer claims, not on
behalf of individual creditors, but on behalf of the estate. Section 544(b)
empowers Trustee to assert state law avoidance actions on behalf of the
estate, and § 541(a)(3) provides that recovery on such claims becomes
property of the estate.
Although the Herbst parties initiated the SuperPumper Action, once
Trustee was appointed, he intervened as the plaintiff and filed an amended
complaint asserting claims on behalf of the estate. Appellants did not object
to Trustee’s standing and instead stipulated to substitution of Trustee as
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plaintiff. Therefore, they waived the issue. See Contrail Leasing Partners, Ltd.
v. Exec. Serv. Corp., 688 P.2d 765, 767 n.2 (Nev. 1984) (lack of standing must
be affirmatively pleaded and failure to do so constitutes waiver).
2. The Bankruptcy Court Properly Applied Issue Preclusion
Appellants argue that the bankruptcy court improperly applied
“offensive” issue preclusion and failed to conduct the analysis required by
Weddell v. Sharp, 350 P.3d 80 (Nev. 2015), where the parties in the present
action were not identical to those in the SuperPumper Action.
Offensive issue preclusion “occurs when the plaintiff seeks to
foreclose the defendant from litigating an issue the defendant has
previously litigated unsuccessfully in an action with another party.”
Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 n.4 (1979). The
bankruptcy court did not apply offensive issue preclusion here because
Trustee was the plaintiff in both actions.
To the extent that Appellants argue issue preclusion can only be used
as a defense under Nevada law, we disagree. Other than the Weddell court’s
discussion of the “defenses” of claim preclusion and issue preclusion,
Appellants cite no authority to support their position. Contrary to
Appellants’ argument, the Ninth Circuit, applying Nevada law, has held
that issue preclusion may be asserted by a plaintiff. See Pike, 891 F.3d at
1138.
Appellants’ argument that the bankruptcy court was required to
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conduct a “Weddell analysis” is equally inapposite. In Weddell, the Nevada
Supreme Court modified Nevada law to allow non-mutual claim
preclusion where a defendant was not a party or in privity with a
defendant in the prior action. 350 P.3d at 85. Under the holding of Weddell,
a defendant who was not a party or in privity with a party in a prior suit
can still use claim preclusion to bar subsequent litigation if it can show that
it should have been included as a defendant in the prior suit and the
plaintiff fails to provide a good reason for not having done so. Id.
The analysis required by Weddell is not applicable here because
Appellants were parties, or in privity with parties, in the SuperPumper
Action.
Nevada law “limit[s] the application of issue preclusion to those who
were a party in the prior case or who were in privity with a party in the
prior case.” Bower v. Harrah’s Laughlin, Inc., 215 P.3d 709, 717 (Nev. 2009)
(citing Paradise Palms Cmty. Ass’n v. Paradise Homes, 505 P.2d 596, 598-99
(Nev. 1973)). “To be in privity, the person must have ‘acquired an interest
in the subject matter affected by the judgment through . . . one of the
parties, as by inheritance, succession, or purchase.’” Id. at 718 (quoting
Paradise Palms Cmty. Ass’n, 505 P.2d at 599).
Bayuk and the Bayuk Trust were parties in the SuperPumper Action.
Snowshoe acquired an interest in the subject matter affected by the
judgment through Bayuk and the Bayuk Trust, and therefore was in privity
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with those parties under Nevada law. The bankruptcy court did not err in
its application of issue preclusion.
B. The Bankruptcy Court Did Not Err By Granting Summary
Judgment
Civil Rule 56(a), made applicable by Rule 7056, provides that
summary judgment is appropriate when “there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of
law.” We must view the evidence in the light most favorable to the
non-moving party and draw all justifiable inferences in favor of the
non-moving party. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d
1119, 1125 (9th Cir. 2014) (citing Cty. of Tuolumne v. Sonora Cmty. Hosp., 236
F.3d 1148, 1154 (9th Cir. 2001); Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
255 (1986)). “A fact is ‘material’ only if it might affect the outcome of the
case, and a dispute is ‘genuine’ only if a reasonable trier of fact could
resolve the issue in the non-movant’s favor.” Fresno Motors, 771 F.3d at
1125.
Appellants argue that there were disputed material facts about
whether BofA received more than it would have under a hypothetical
chapter 7, and whether Bayuk’s obligation under the Baruk Note prevented
his preference liability under the holding of Stahl v. Simon (In re Adamson
Apparel, Inc.), 785 F.3d 1285 (9th Cir. 2015).
Although the question of whether BofA received more than it would
14
have under a liquidation is a question of fact, Appellants did not provide
any evidence to demonstrate a genuine dispute. The “mere existence of
some alleged factual dispute between the parties will not defeat an
otherwise properly supported motion for summary judgment.” Anderson,
477 U.S. at 247-48. Appellants were required to provide “sufficient
evidence favoring the nonmoving party for a jury to return a verdict for
that party.” Id. at 249. Without providing some evidence to contravene
Trustee’s factual assertions, Appellants did not demonstrate a genuine
issue of material fact on the question of whether BofA received more than it
would have under a hypothetical liquidation.
Additionally, the bankruptcy court rejected Appellants’ argument
that the Baruk Note prevented liability under Adamson Apparel by giving
preclusive effect to the state court’s determination that the Baruk Note was
illusory. Because the bankruptcy court properly applied issue preclusion
on this issue, there was no genuine dispute of material fact.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
entry of summary judgment against Appellants.
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