RGW Constructions, Inc. v. Weinstein ( 2023 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 RGW CONSTRUCTIONS, INC., Case No. 23-cv-00255-BLF 8 Plaintiff-Appellant, ORDER ON APPEAL REVERSING 9 v. BANKRUPTCY COURT’S ORDER SUSTAINING DEFENDANT- 10 WEINSTEIN, APPELLEE’S OBJECTION TO PLAINTIFF-APPELLANT’S CLAIM Defendant-Appellee. 11 12 13 In late 2022, the United States Bankruptcy Court for the Northern District of California 14 (the “Bankruptcy Court”) sustained an objection by Defendant-Appellee Marlene G. Weinstein 15 (“BAD Chapter 7 Trustee” or “Trustee”), made on behalf of the estate of Bay Area Drilling Inc. 16 (“BAD”), to Plaintiff-Appellant RGW Constructions, Inc.’s (“RGW” or “Appellant”) claim in a 17 Chapter 11 bankruptcy petition filed by Mark F. Lucido, the owner of BAD. Opening Br., ECF 18 No. 5; see Objection to Claim 10 (“Objection”), Appellant’s Excerpts of Record (“AER”), ECF 19 Nos. 5-1, 5-2, at 1705–11; Order Sustaining Objection to Claim 10 (“Order”), AER 1660–62.1 20 RGW now appeals the Order sustaining the Objection. See Opening Br. The Trustee answered 21 the appeal, and RGW filed a reply. See Ans. Br., ECF No. 6; Reply Br., ECF No. 8. The Court 22 finds the matter to be appropriate for disposition without oral argument. See Civ. L.R. 7-1(b). For 23 the reasons discussed below, the Court REVERSES the Bankruptcy Court Order. 24 I. BACKGROUND 25 A. RGW’s Relation to Bay Area Drilling Inc. and Mark F. Lucido 26 RGW was the California Department of Transportation’s prime contractor for certain work 27 1 on the I-880 freeway in Oakland, California. AER 83. One of RGW’s subcontractors for the 2 project was Bay Area Drilling Inc. (“BAD”). Id.; see also, e.g., id. at 713. BAD was solely 3 owned and controlled by its president, Mark F. Lucido (“Mr. Lucido”). See id. at 206–08, 744. 4 B. Arbitration Award and Judgment 5 After BAD allegedly breached its subcontracts with RGW, the two companies began 6 arbitration proceedings in 2018. Id. at 73. The arbitration panel issued RGW an award, after 7 which RGW petitioned for and in January 2020 obtained from Alameda County Superior Court a 8 judgment against BAD for $1,781,538.79. AER 59, 73. 9 C. BAD’s Chapter 7 Bankruptcy Petition 10 In December 2020, BAD filed for Chapter 7 bankruptcy (the “BAD Chapter 7 Action”). 11 See id. at 18.2 Appellee was appointed the trustee in BAD’s bankruptcy proceeding. See id. 12 D. RGW’s Motion for Relief from Automatic Stay in BAD Chapter 7 Action 13 In February 2021, RGW filed a motion in the BAD Chapter 7 Action seeking relief from 14 the automatic stay imposed by bankruptcy proceedings so that RGW could take certain actions in 15 the Alameda County proceedings in which RGW’s judgment against BAD had been entered. See 16 id. at 21.3 Specifically, RGW sought to (1) enforce subpoenas and a court order for certain 17 business records; (2) enforce a court order to compel BAD to respond to written discovery 18 requests; (3) propound additional written discovery requests upon BAD; (4) enforce the judgment 19 in the case by filing a motion to add Mr. Lucido and MFE to that judgment as BAD’s alter egos; 20 (5) take a debtor examination of BAD in support the planned motion to add Mr. Lucido and MFE 21 to the judgment; (6) apply for an order to take the debtor examinations of Mr. Lucido and MFE in 22 support of the motion to add them to the judgment; and (7) enforce two orders for monetary 23 sanctions against Mr. Lucido. See AER 21–23. The BAD Chapter 7 Trustee opposed RGW’s 24 motion. Id. at 559–65. 25 The Bankruptcy Court in the BAD Chapter 7 Action denied without prejudice RGW’s 26 2 RGW asserts that the BAD’s Chapter 7 bankruptcy petition is excerpted at AER 2–16, see ECF 27 No. 5-1, at 3, but that excerpt is Mr. Lucido’s later-filed Chapter 11 bankruptcy petition. 1 requests for leave to (1) enforce the order compelling BAD to respond to written discovery 2 requests; (2) propound additional discovery to BAD; (3) file a motion to add Mr. Lucido and MFE 3 to the judgment as BAD’s alter egos; and (4) and take the debtor examination of BAD. See id. at 4 616–21. The Bankruptcy Court otherwise granted RGW’s requests for relief from the automatic 5 stay with respect to its desired course of action in the Alameda County proceedings. See id. 6 E. Mr. Lucido’s Chapter 11 Bankruptcy Petition, RGW’s Claim, and RGW’s Adversary Proceeding 7 In April 2021, Mr. Lucido filed for Chapter 11 bankruptcy (the “Lucido Chapter 11 8 Action”). See id. at 1–16. The BAD Chapter 7 Trustee filed a claim in the Lucido Chapter 11 9 Action on behalf of the BAD bankruptcy estate on June 10, 2021. Appellee’s Excerpts of Record 10 (“APP”), ECF No. 7, at 1–4. On June 30, 2021, RGW filed its own claim in the Lucido Chapter 11 11 Action, based on “[a]lter ego liability, interest, sanctions, attorney’s fees and costs.” AER 12 702–49. As part of its claim, RGW asserted Mr. Lucido was liable as an alter ego of BAD for 13 RGW’s $1,781.538.79 judgment against BAD. Id. at 705. Mr. Lucido objected to RGW’s claim 14 on August 24, 2021. Id. at 797–802. 15 RGW also brought an adversary proceeding in the Lucido Chapter 11 Action (the 16 “Adversary Proceeding”), in which it sought the addition of Mr. Lucido to its state court judgment 17 as an alter ego of BAD, a denial of discharge, and an accounting. Id. at 760–96. The operative 18 complaint in the Adversary Proceeding is RGW’s Second Amended Complaint (the “SAC”). Id. 19 at 864–904. 20 F. BAD Chapter 7 Trustee’s Objection to RGW’s Claim 21 At an October 25, 2022 status conference for the Lucido Chapter 11 Action and the 22 Adversary Proceeding, counsel for RGW noted that RGW anticipated filing an objection to the 23 claim in the Lucido Chapter 11 Action filed by the BAD Chapter 7 Trustee, or otherwise “trying 24 to work something out.” APP 16–17. Counsel for RGW did not contact counsel for the BAD 25 Chapter 7 Trustee in the following seven days. AER 1907. On November 2, 2022, the BAD 26 Chapter 7 Trustee filed its Objection to RGW’s claim in the Lucido Chapter 11 Action, arguing 27 that “the alter ego claims belong to the [BAD] estate and RGW’s assertion of them is a violation 1 of the automatic stay” and that RGW’s claim was duplicative of the Trustee’s earlier-filed claim. 2 AER 1707, 1907. RGW filed an opposition to the Objection, and the Trustee filed a reply. AER 3 1716–43, 1898–1908. 4 G. Hearing and Order on BAD Chapter 7 Trustee’s Objection to RGW’s Claim in Lucido Chapter 11 Action 5 The Bankruptcy Court heard oral argument on the Objection on December 21, 2022. See 6 AER 1938–59. The Trustee rested on its papers, and after a brief argument from RGW, the 7 Bankruptcy Court read into the Lucido Chapter 11 Action record certain allegations from the 8 SAC—filed in the Adversary Proceeding—that enumerated the various acts Mr. Lucido took to 9 evade the judgment against BAD, such as engaging in fraudulent transfers.4 See AER 1940–46. 10 The Bankruptcy Court noted that the allegations described generalized injury to BAD, so that they 11 gave rise to a cause of action owned by the Trustee, and that it had never granted RGW leave from 12 the automatic stay to pursue an alter ego claim. Id. at 1946. Accordingly, the Bankruptcy Court 13 sustained the Trustee’s Objection, except as to RGW’s sanctions claim. Id. at 1948. The Order 14 followed, citing the reasons stated on the record. See Order. 15 On appeal, RGW challenges the Order sustaining the BAD Chapter 7 Trustee’s Objection. 16 II. ISSUES PRESENTED 17 RGW identifies the following related issues for the instant appeal: 18 1. Did the bankruptcy court err in sustaining the objection by the 19 Trustee to the claim filed by RGW Construction in the [Lucido Chapter 11 Action]? 20 2. Did the bankruptcy court err in ruling that RGW 21 Construction’s claim to enforce the judgment it obtained against Bay Area Drilling by adding Debtor Mark F. Lucido 22 [] to that judgment pursuant to California Code of Civil Procedure section 187 in the adversary proceeding styled as 23 RGW Construction, Inc. v. Mark F. Lucido, United States Bankruptcy Court Case No. 21-04031 belongs to the 24 bankruptcy estate of Bay Area Drilling rather than RGW Construction? 25 26 4 The transcript attributes this section of the hearing to the Trustee’s counsel. See AER 1942. The 27 Trustee notes this error, and RGW does not dispute it. Ans. Br. 7–8; see Reply Br. It is evident 3. Did the bankruptcy court err when it failed to rule on or 1 consider the issue of whether the Trustee’s objection to the claim filed by RGW Construction in this matter is barred by 2 the doctrine of laches? 3 Opening Br. 6–7. Although RGW presents the three questions independently, its argument makes 4 clear that RGW’s first presented issue is entirely dependent on the determination of the other two 5 issues. That is, RGW argues that the Bankruptcy Court made the two errors described in the 6 second and third issues presented, so that if the Court finds for RGW on either argument, then the 7 first issue presented—whether there was any error in sustaining the Objection—is necessarily 8 answered in the affirmative. See id. at 30–38. 9 III. JURISDICTION 10 Under 28 U.S.C. § 158(a)(1), federal district courts have jurisdiction to hear appeals from 11 final judgments and orders in bankruptcy actions. The Bankruptcy Court’s Order sustaining the 12 BAD Chapter 7 Trustee’s Objection to RGW’s claim (except as to a sanctions award) is a final 13 order, and the Court therefore has jurisdiction over this bankruptcy appeal. See In re Condor Sys., 14 Inc., 125 F. App’x 797, 799 (9th Cir. 2005) (noting bankruptcy court’s order sustaining objection 15 to claim was a final order) (citing In re Garner, 246 B.R. 617, 619 (9th Cir. BAP 2000)). 16 Additionally, “[i]n reviewing an order or judgment of the Bankruptcy Court, the Court has 17 the ‘power to consider any issue presented by the record even if the issue was not presented to the 18 bankruptcy court.’” Love v. Wiseman, 614 F.R. 573, 580 (N.D. Cal. 2020) (quoting In re Pizza of 19 Haw., Inc., 761 F.2d 1374, 1379 (9th Cir. 1985)). 20 IV. LEGAL STANDARD 21 A district court reviews a bankruptcy court’s findings of fact for clear error and 22 conclusions of law de novo. See In re Mortg. Store, Inc., 773 F.3d 990, 994 (9th Cir. 2014) (citing 23 In re Lazar, 83 F.3d 306, 308 (9th Cir. 1996)). The question of whether RGW’s claim belongs to 24 the Trustee is a matter of law and thus subject to de novo review. See In re Mwangi, 432 B.R. 25 812, 818 (9th Cir. BAP 2010) (“Whether property is property of the estate is a question of law 26 reviewed de novo.”), abrogated on other grounds, City of Chicago, Ill. V. Fulton, 141 S. Ct. 585, 27 589–90, 590 n.1 (2021). 1 particular kind of action is a question of law reviewed de novo.” In re Beaty, 306 F.3d 914, 920 2 (9th Cir. 2002) (citation omitted); see also id. at 923 (holding laches available as a defense in a 3 nondischargeability complaint brought under 11 U.S.C. § 523(a)(3)(B) and Fed. R. Bankr. P. 4 4007(b)). But the “determination of whether laches applies in a particular case” is reviewed for 5 abuse of discretion. Id. at 921. 6 V. DISCUSSION 7 RGW argues that the Order sustaining the BAD Chapter 7 Trustee’s Objection to RGW’s 8 claim in the Lucido Chapter 11 Action should be reversed because the Bankruptcy Court erred in 9 two ways. First, RGW contends that the Bankruptcy Court erroneously ruled that RGW could not 10 assert its claim because the BAD Chapter 7 Trustee had exclusive standing to pursue claims based 11 on Mr. Lucido’s fraudulent diversions of assets away from BAD. Opening Br. 30–35. Second, 12 RGW argues that the Bankruptcy Court erred by failing to address whether the doctrine of laches 13 barred the Trustee’s Objection. Id. at 35–38. The Court addresses the arguments in turn. 14 A. Whether RGW Asserted a Claim Belonging to the BAD Chapter 7 Trustee 15 1. Analytical Framework 16 A bankruptcy trustee “stands in the shoes of the bankrupt corporation and has standing to 17 bring any suit that the bankrupt corporation could have instituted.” Smith v. Arthur Andersen LLP, 18 421 F.3d 989, 1002 (9th Cir. 2005) (citation omitted). However, a trustee “has no standing 19 generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by 20 the bankrupt corporation itself.” Id. (citation omitted). State law determines the owner of the 21 claim, which is a property interest. Ahcom, Ltd. v. Smeding, 623 F.3d 1248, 1250 (9th Cir. 2010) 22 (citing Butner v. United States, 440 U.S. 48, 54–55 (1979)). The parties do not dispute that 23 California law applies. See Opening Br. 30–31; Ans. Br. 11–13. 24 Under California law, a claim against a defendant based on that defendant’s alleged status 25 as an alter ego is “not itself a claim for substantive relief,” but is instead a procedural mechanism 26 to assert the substantive claim, such as a complaint to set aside a fraudulent conveyance. Id. at 27 1251 (quoting Hennessey’s Tavern, Inc. v. Am. Air Filter Co., 204 Cal. App. 3d 1351, 1359 1 to be liable for all a company’s debts.” Id. at 1252. A trustee can maintain an action against a 2 defendant based on an alter ego theory “if there is some allegation of injury to the corporation that 3 gives the corporation a right of action against the defendant.” Shaoxing Cnty. Huayue Import & 4 Export v. Bhaumik (“Bhaumik”), 191 Cal. App. 4th 1189, 1198–99 (2011) (citing Stodd v. 5 Goldberger, 73 Cal. App. 3d 827, 833 (1977)). When a trustee has standing to assert a debtor’s 6 claim, that standing is “exclusive and divests all creditors of the power to bring the claim.” 7 Ahcom, 623 F.3d at 1250 (citation omitted). 8 2. Application 9 The Court first notes that the Bankruptcy Court and both parties impute RGW’s allegations 10 in the SAC—filed in the Adversary Proceeding—to RGW’s claim in the Lucido Chapter 11 11 Action. See, e.g., Opening Br. 27–30 (describing Bankruptcy Court’s discussion of SAC 12 allegations at hearing on Objection and presenting argument under same analysis); Ans. Br. 12–14 13 (same). The Court will thus assume RGW’s claim in the Lucido Chapter 11 Action is based on or 14 supported by relevant allegations in the SAC filed in the Adversary Proceeding. 15 RGW’s primary claim in the Lucido Chapter 11 Action is for “[l]iability as alter ego of 16 [BAD] on judgment entered against [BAD] on January 7, 2020.” AER 705; see id. at 702–49. As 17 expanded upon in the SAC, RGW seeks to add Mr. Lucido to its judgment against BAD, on the 18 basis that Mr. Lucido is BAD’s alter ego. Id. at 877, 880. The claim in the Lucido Chapter 11 19 Action also seeks interest on the judgment and related attorney’s fees and costs. Id. at 705. RGW 20 argues that its claim is based in RGW’s particularized judgment against BAD, and that RGW’s 21 allegations—made in support of its alter ego argument—that Mr. Lucido engaged in fraudulent 22 transfers and asset conversions did not cause the claim to become the Trustee’s property. See 23 Opening Br. 30–35. The Trustee counters that Mr. Lucido’s fraudulent transfers and the other acts 24 he allegedly took to evade the judgment—i.e., the acts on which RGW’s claim is based— 25 constitute nothing more than acts against BAD generally, so that the Trustee has exclusive 26 standing to bring the claim. See Ans. Br. 10–14. 27 In evaluating the question of ownership of RGW’s claim, the Court finds instructive the 1 breach of contract and common counts and, after the entity filed for Chapter 7 bankruptcy, filed a 2 trial brief addressing the defendant’s alter ego liability for the entity’s breach of contract. 191 Cal. 3 App. 4th at 1193–94. The defendant argued that any action against him based on alter ego liability 4 should be stayed because only the entity’s bankruptcy trustee had standing to pursue the claim. Id. 5 at 1194. The trial court took the matter under submission, and one week later issued an order 6 finding the entity was obligated to pay invoices to the plaintiff, and that the defendant was liable 7 for the amount as the entity’s alter ego. Id. at 1195. On appeal, the court held that the plaintiff’s 8 alter ego allegations were not stayed because they were related to the defendant’s liability “with 9 respect to money that [the entity] owed for breach of contract and common counts,” rather than a 10 “right of action belonging to the corporation.” Id. at 1199. 11 Here, RGW’s judgment confirmed an arbitration award arising out of BAD’s breach of its 12 subcontracts with RGW. See AER 59, 72–81. In its claim in the Lucido Chapter 11 Action, RGW 13 seeks to hold Mr. Lucido liable for the judgment as BAD’s alter ego. Id. at 702–705. The Trustee 14 does not assert a right to enforcing RGW’s judgment against BAD. Ans. Br. 10. The question, 15 then, is whether RGW’s alter ego allegations in the SAC—e.g., that “Lucido caused [BAD] to 16 incur debts to himself and to [MFE] not only to render [BAD] insolvent and unable to satisfy a 17 judgment, but also to set up a pretext for a series of fraudulent transfers that he caused Bay Area 18 Drilling to make to himself,” AER 871—divest RGW of its ownership of the claim, as the Trustee 19 contends. 20 The court in Bhaumik expressly noted that the defendant had not “argued that the alter ego 21 allegations constituted a substantive right of action belonging to the corporation.” 191 Cal. App. 22 4th at 1199. But in Ahcom—which Bhaumik cited approvingly, see id.—the Ninth Circuit rejected 23 exactly this argument. The plaintiff there filed a complaint asserting two substantive claims, 24 including breach of contract, against individual defendants based on their alter ego status for a 25 bankrupt entity. 623 F.3d at 1250. The alter ego allegations stated that the defendants “diverted 26 funds and other asserts of [the entity] for other than corporate uses,” “treated the [entity’s] assets . 27 . . as their own,” and “diverted asserts from [the entity] to themselves to the detriment of 1 usurping the trustee’s right to sue for general conduct harming all creditors, the court held there 2 was “no reason why [the plaintiff’s] claims against [the defendants] cannot proceed.” Id. at 1252. 3 RGW’s alter ego allegations that Mr. Lucido improperly divested BAD of funds, like those 4 in Ahcom, are made to show Mr. Lucido’s alter ego status, rather than to form the basis of a 5 substantive claim. See Kayne v. Ho, No. LA CV09-06816, 2013 WL 12120081, at *6 (C.D. Cal. 6 Nov. 4, 2013) (permitting individual creditors to bring lawsuit for liability of defendants as alter 7 egos based on alleged fraudulent conveyances because “[t]he alleged transfers are not the basis for 8 Plaintiffs’ claim; rather, they are evidence that Defendants are the alter ego of [the entity]”). 9 Because the alter ego allegations are not substantive, and RGW seeks to bring a claim as to Mr. 10 Lucido’s liability for BAD’s breach of contract, RGW’s claim does not belong to the Trustee. 11 The Trustee argues that “Stodd, Ahcom, and [] Bhaumik all make clear that a trustee can 12 bring an alter ego claim when there is ‘some allegation of injury to the corporation.’” Ans. Br. 12. 13 In making this argument, however, the Trustee does not account for the first part of the quoted 14 sentence, which in its entirety reads: “A trustee ‘cannot maintain an action against defendants on 15 an alter ego theory absent some allegation of injury to the corporation giving rise to an action in it 16 against defendants.’” Stodd, 73 Cal. App. 3d at 833; see Ans. Br. 11. As clarified by Ahcom and 17 Bhaumik, the inquiry turns not on the mere existence of alter ego allegations suggesting some 18 injury to the corporation, but rather on the substantive action brought via the procedural alter ego 19 mechanism. Here, the substantive action at issue is RGW’s claim for Mr. Lucido’s liability on its 20 judgment arising from BAD’s breach of contract, which under Bhaumik is not stayed and not the 21 property of the Trustee. See Bhaumik, 190 Cal. App. 4th at 1199. 22 Based on the foregoing analysis, this Court finds upon de novo review that the Bankruptcy 23 Court erred to the extent it disallowed any part of RGW’s claim in the Lucido Chapter 11 Action, 24 and accordingly reverses the Order. 25 B. Laches 26 Laches is an equitable doctrine involving an “inexcusable delay in exercising a known 27 right.” In re Than, 215 B.R. 430, 435 (9th Cir. BAP 1997). RGW argues that the Trustee’s 1 on this argument. Opening Br. 35-38. The Trustee counters that the Objection is not barred by 2 || laches, so that RGW has not “identified any error by the Bankruptcy Court” in its consideration of 3 the Objection. Ans. Br. 9-10. Because the Court finds the claim at issue belongs to RGW,, it need 4 || not reach the questions of whether the Bankruptcy Court implicitly ruled on the laches issue by 5 making a ruling on the merits, and whether there was any error in such a ruling. 6 || VI. ORDER 7 For the foregoing reasons, the Court hereby ORDERS that the Bankruptcy Court’s Order 8 Sustaining Objection to Claim 10, AER 1660-62 (ECF No. 5-2, at 902-04), is reversed, except as 9 to the following phrase: “RGW Construction, Inc., shall have an allowed claim in the amount of 10 $3,450 based on a sanctions award against Debtor Mark Lucido.” 11 The Clerk shall close the file in this case. 12 13 IT IS SO ORDERED. 14 Dated: September 6, 2023 fitinfdactian ETH LABSON FREEMAN = 16 United States District Judge 18 19 20 21 22 23 24 25 26 27 28