In re: Leslie Lopez Roman and Donna Barahona Roman

FILED
NOV 20 2017
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. CC-17-1112-TaLS
) CC-17-1133-TaLS
6 ) (Cross Appeals)
LESLIE LOPEZ ROMAN and DONNA )
7 BARAHONA ROMAN, ) Bk. No. 6:13-bk-22482-MH
)
8 Debtors. ) Adv. No. 6:14-ap-01183-MH
________________________________)
9 )
ROBERT S. WHITMORE, Chapter 7 )
10 Trustee, )
)
11 Appellant/Cross-Appellee, )
)
12 v. ) MEMORANDUM*
)
13 INNOVATION VENTURES, LLC; )
INTERNATIONAL IP HOLDINGS, LLC, )
14 )
Appellees/Cross-Appellants.)
15 ________________________________)
16 Argued and Submitted on September 29, 2017
at Pasadena, California
17
Filed – November 20, 2017
18
Appeal from the United States Bankruptcy Court
19 for the Central District of California
20 Honorable Mark D. Houle, Bankruptcy Judge, Presiding
21
Appearances: Thomas J. Eastmond of Best Best & Krieger LLP
22 argued for appellant and cross-appellee;
Beverly Ann Johnson of Johnson & Bertram LLP
23 argued for appellees and cross-appellants.
24
Before: TAYLOR, LAFFERTY, and SPRAKER, Bankruptcy Judges.
25
26 *
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 8024-1(c)(2).
1 INTRODUCTION
2 We don’t know what ingredients chapter 71 debtors Leslie
3 and Donna Roman used to make their energy drink, but we know
4 they marketed it as 5-Hour ENERGY. No doubt the name sounds
5 familiar; Innovation Ventures, LLC and International IP
6 Holdings, LLC (“5-Hour ENERGY Owners”) make a well-known product
7 bearing that name. Debtors’ labeling and packaging duplicated
8 the trade dress of the better known product. Not surprisingly,
9 they enjoyed some marketing success until the 5-Hour ENERGY
10 Owners got wind of Debtors’ enterprise.
11 Prepetition, the 5-Hour ENERGY Owners brought a federal
12 anti-counterfeiting lawsuit and obtained orders freezing
13 Debtors’ bank accounts. But, more than 90 days prepetition,
14 they agreed to lift the freeze; Debtors concurrently agreed to
15 deposit all of the funds in their bank accounts into an account
16 owned by their attorney, pending final resolution of the lawsuit
17 or the parties’ further agreement. Then, only six days
18 prepetition, Debtors and the 5-Hour ENERGY Owners settled the
19 lawsuit. Debtors got a release and avoided a potentially
20 nondischargeable judgment; the 5-Hour ENERGY Owners got all the
21 money.
22 Debtors’ chapter 7 trustee, who examined the transaction
23 with an eye toward the interests of unpaid creditors, brought a
24 preference action to recover the funds. On cross-motions for
25
26 1
Unless otherwise indicated, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
All “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure.
2
1 summary judgment, the bankruptcy court entered judgment in favor
2 of the 5-Hour ENERGY Owners.
3 On the current record, we conclude that the bankruptcy
4 court’s reasoning was erroneous in part. Accordingly, we AFFIRM
5 in part, REVERSE in part, VACATE the judgment, and REMAND for
6 further proceedings consistent with this decision.
7 FACTS
8 The majority of the facts are undisputed.
9 In October 2012, the 5-Hour ENERGY Owners brought an anti-
10 counterfeiting lawsuit in the United States District Court for
11 the Eastern District of New York. They eventually amended the
12 complaint to add Debtors as defendants and promptly obtained
13 orders freezing Debtors’ assets, including Bank of America
14 accounts containing about $426,030.53 (the “Funds”).
15 More than 90 days prepetition, Debtors and the 5-Hour
16 ENERGY Owners entered into a stipulation (the “First Agreement”)
17 to resolve the asset freeze order. In relevant part, the First
18 Agreement stated:
19 The [Debtors] and [5-Hour ENERGY Owners] have agreed
that, in exchange for [5-Hour ENERGY Owners’]
20 agreement to release the Bank Accounts, the [Debtors]
will transfer all assets from the Bank Accounts into
21 the attorney trust account of their undersigned
counsel, the Law Office of Barry K. Rothman (the
22 “Attorney Escrow Account”) pending either final
resolution of this action or written agreement between
23 [5-Hour ENERGY Owners] and [Debtors].
24 Bankruptcy Court’s Memorandum Decision and Order Denying
25 Trustee’s Motion for Summary Judgment and Granting Defendants’
26 Motion for Summary Judgment (“Mem. Dec.”), April 7, 2017 at 2.
27 That same day, the district court entered an order approving the
28 First Agreement.
3
1 Still more than 90 days prepetition, Debtors transferred
2 the Funds to Mr. Rothman’s account. The parties describe the
3 account differently: the 5-Hour ENERGY Owners call it an
4 “attorney escrow account,” while the Trustee calls it a “client
5 trust account.” We call it simply: the Account.
6 Six days prepetition, Debtors and the 5-Hour ENERGY Owners
7 settled the district court action, contingent “upon the payment
8 by” Debtors to the 5-Hour ENERGY Owners of $426,030.53, “the
9 amount currently held in the escrow account . . . .” July 16,
10 2013 Agreement (the “Settlement Agreement”) at 2. Three days
11 prepetition, Mr. Rothman transferred the Funds to an attorney
12 for the 5-Hour ENERGY Owners.
13 Bankruptcy proceedings. Debtors then filed a chapter 7
14 bankruptcy petition. The Trustee later brought a preference
15 action against the 5-Hour ENERGY Owners to avoid and recover the
16 Funds.
17 The parties filed cross motions for summary judgment to
18 resolve the crux of the dispute: which transfer deprived Debtors
19 of their interest in the Funds, the transfer into the Account
20 per the First Agreement or the transfer from the Account per the
21 Settlement Agreement. The former is outside the 90-day
22 preference period; the latter is well within it. The bankruptcy
23 court considered briefing and heard argument at hearings. It
24 also issued two tentative rulings.
25 The first tentative ruling is not in the record or
26 available from the docket, but we located the second tentative
27 ruling as an exhibit to another document. It concluded that the
28 Trustee was entitled to summary judgment because the operative
4
1 transfer was the later one. Discussing the parties’ legal
2 theories, the bankruptcy court reasoned that the transfer into
3 the Account did not deprive Debtors of their interest in the
4 Funds because the First Agreement did not create an escrow under
5 either California or New York law; it also concluded that the
6 Funds were not placed in custodia legis. The bankruptcy court
7 thus tentatively determined that the Funds were transferred
8 immediately before the petition date under the Settlement
9 Agreement. As all the other elements for a preferential
10 transfer were met, the bankruptcy court tentatively concluded
11 that the transfer of the Funds was avoidable.
12 After oral argument, the bankruptcy judge took the matter
13 under submission and, some time later, requested supplemental
14 briefing: “After reviewing the record, and the cross motions for
15 summary judgment, it appears as though a genuine issue of
16 material fact exists . . . .” June 17, 2016 Order Requesting
17 Supplemental Briefing at 2. More particularly: “it appears that
18 this Court must interpret the First Agreement to decide whether
19 the parties entered into either an agreement to create an escrow
20 account . . . or an agreement to place $426,030.53 of contested
21 funds . . . into an account that would serve as a mere
22 depository . . . .” Id. The order then discussed the
23 conflicting evidence.
24 The parties submitted supplemental briefing. Later, the
25 bankruptcy court issued a memorandum decision, reaching a
26 conclusion different from both its second tentative ruling and
27 the view suggested by its order requesting supplemental
28 briefing. In a consolidated memorandum decision and joint
5
1 order, it denied the Trustee’s motion for summary judgment and
2 granted the 5-Hour ENERGY Owners’ motion. It then entered a
3 final separate judgment in the 5-Hour ENERGY Owners’ favor.2
4 The parties timely appealed and cross-appealed. We address both
5 appeals in this decision.
6 JURISDICTION
7 The bankruptcy court had jurisdiction under 28 U.S.C.
8 §§ 1334 and 157(b)(2)(F). We have jurisdiction under 28 U.S.C.
9 § 158.
10 ISSUES
11 Did the bankruptcy court err in granting the 5-Hour ENERGY
12 Owners’ motion for summary judgment?
13 Did the bankruptcy court err in denying the Trustee’s
14 motion for summary judgment?
15 STANDARD OF REVIEW
16 We review the bankruptcy court’s grant or denial of summary
17 judgment de novo. Fresno Motors, LLC v. Mercedes Benz USA, LLC,
18 771 F.3d 1119, 1125 (9th Cir. 2014). And we may affirm on any
19 ground supported by the record, regardless of whether the
20 bankruptcy court relied upon, rejected, or even considered that
21 ground. Id.22
23
2
24 In an abundance of caution given that no party disputes
the bankruptcy court’s ability to enter a final judgment in this
25 case, we reviewed the record for evidence of express consent to
entry of this final judgment. We could not locate a statement
26 of consent in the record on appeal. We assume, however, that
27 consent was provided in some fashion or that consent can be
implied. Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct.
28 1932, 1948 (2015).
6
1 DISCUSSION
2 This dispute is about which transfer divested Debtors of
3 their interest in the Funds. Before the trial court, the 5-Hour
4 ENERGY Owners argued that the First Agreement (and accompanying
5 order) placed the Funds either in custodia legis or in escrow.
6 The bankruptcy court found that in custodia legis did not apply
7 and declined to enter summary judgment on the escrow theory.
8 But in the final event, the bankruptcy court concluded that the
9 5-Hour ENERGY Owners were entitled to judgment in their favor
10 based on federal law.
11 On appeal and cross-appeal, the 5-Hour ENERGY Owners:
12 first, reargue the in custodia legis theory; second, reargue the
13 escrow theory; third, raise new legal theories never ventilated
14 to the trial court; and, only fourth, defend the bankruptcy
15 court’s ruling. For his part, the Trustee contends the
16 bankruptcy court should not have entered summary judgment in the
17 5-Hour ENERGY Owners’ favor but instead should have entered
18 judgment for him.
19 We conclude that the bankruptcy court properly decided that
20 the Funds were not in custodia legis and properly declined to
21 enter summary judgment for either party on the escrow theory.
22 We also conclude that on this record the 5-Hour ENERGY Owners’
23 new theories do not support summary judgment in its favor. We
24 also determine, however, that the bankruptcy court erred in one
25 respect: it could not enter judgment in the 5-Hour ENERGY
26 Owners’ favor without first consulting relevant state law.
27 Because it did not, we reverse.
28
7
1 A. Relevant law.
2 Summary judgment. Summary judgment is appropriate when
3 “there is no genuine dispute as to any material fact and the
4 movant is entitled to judgment as a matter of law.” Fed. R.
5 Civ. P. 56(a) (applied in adversary proceedings by Rule 7056).
6 The bankruptcy court “views the evidence in the light most
7 favorable to the non-moving party” and “draws all justifiable
8 inferences in favor of the non-moving party.” Fresno Motors,
9 LLC, 771 F.3d at 1125 (citing Cnty. of Tuolumne v. Sonora Cmty.
10 Hosp., 236 F.3d 1148, 1154 (9th Cir. 2001) and Anderson v.
11 Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). “A fact is
12 ‘material’ only if it might affect the outcome of the case, and
13 a dispute is ‘genuine’ only if a reasonable trier of fact could
14 resolve the issue in the non-movant’s favor.” Id. Finally,
15 summary judgment “is improper where divergent ultimate
16 inferences may reasonably be drawn from the undisputed facts.”
17 Id. (quotation marks omitted).
18 Preference actions. Section 547(b) permits a bankruptcy
19 trustee to avoid “any transfer of an interest of the debtor in
20 property” if a number of conditions are met. 11 U.S.C.
21 § 547(b). Relevant here is the condition that the transfer was
22 made either “on or within 90 days before the date of the filing
23 of the petition . . . .” 11 U.S.C. § 547(b)(4)(A).
24 The Code does not define “an interest of the debtor in
25 property . . . .” Taylor Assocs. v. Diamant (In re Advent Mgmt.
26 Corp.), 104 F.3d 293, 295 (9th Cir. 1997). But the Supreme
27 Court “has interpreted the term to mean ‘that property that
28 would have been part of the estate had it not been transferred
8
1 before the commencement of bankruptcy proceedings.’ ” Id.
2 (quoting Begier v. I.R.S., 496 U.S. 53, 58 (1990)).
3 Property of the estate, under § 541(d), includes “all
4 property in which the debtor has legal title except ‘to the
5 extent of an equitable interest in such property that the debtor
6 does not hold.’” Id. (quoting 11 U.S.C. § 541(d)).
7 B. The bankruptcy court properly concluded that the funds were
not in custodia legis.
8
9 Black’s Law Dictionary defines in custodia legis as “[i]n
10 the custody of the law.” Black’s Law Dictionary (10th ed.
11 2014). “The phrase is traditionally used in reference to
12 property taken into the court’s charge during pending litigation
13 over it.” Id.14 Before the bankruptcy court, the 5-Hour ENERGY Owners
15 asserted that when the Funds were transferred into the Account
16 by the First Agreement and the district court’s accompanying
17 order, they were placed in custodia legis and thus were beyond
18 the reach of the Trustee’s § 547 avoidance powers. The
19 bankruptcy court disagreed; it reasoned that the funds were not
20 in the custody of the district court (i.e., in custodia legis)
21 because “they could be released by agreement of the parties.”
22 Mem. Dec. at 4.
23 On appeal, the 5-Hour ENERGY Owners’ only argument on this
24 point is based on Keller v. Keller (In re Keller), 185 B.R. 79625 (9th Cir. BAP 1995). In Keller, a judgment of dissolution from
26 the California family law court allowed the husband to remain in
27 the family residence pending its sale. Id. at 797. Each spouse
28 was to receive “an initial equal share of the [sale proceeds
9
1 from a blocked account], with ultimate distribution subject to
2 various adjustments provided for in the dissolution judgment and
3 as necessary by subsequent orders of the court.” Id. When the
4 residence sold, the family court, based on its retained
5 jurisdiction over the sale proceeds, adjusted the husband’s
6 share of the proceeds to account for his failure to pay child
7 support and sanctions. Id. at 798. The husband then filed
8 bankruptcy, and the chapter 7 trustee successfully obtained
9 avoidance of the adjustments as preferential transfers. Id. On
10 appeal, the Panel reversed, determining that where the family
11 court both ordered the residence sold and retained jurisdiction
12 to approve disbursement of the proceeds, the “proceeds were for
13 all practical purposes held in custodia legis by that court.”
14 Id. at 800.
15 Here, neither the First Agreement nor its accompanying
16 order say that the district court retains exclusive jurisdiction
17 over the Funds or the Account. Instead, they allow the parties
18 to release the Funds by written agreement. This latitude
19 contrasts starkly with In re Keller, where the state court had
20 exclusive control over disbursement of the proceeds.
21 Accordingly, In re Keller does not support the 5-Hour
22 ENERGY Owners’ position, nor does it suggest that we should
23 affirm the grant of summary judgment for the 5-Hour ENERGY
24 Owners on this basis. Here, Debtors and the 5-Hour ENERGY
25 Owners contracted around an in custodia legis result by
26 reserving joint control over the Funds exclusive of the district
27 court’s jurisdiction. In sum, we affirm the bankruptcy court’s
28 determination that the Funds were not being held in custodia
10
1 legis once they were deposited into the Account.
2 C. The bankruptcy court correctly declined to enter summary
judgment for either party on the escrow theory.
3
4 The parties agree that funds properly in escrow, generally,
5 are not considered estate property. 5 Collier on Bankruptcy
6 ¶ 541.09[2] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.).
7 They disagree, however, about whether the First Agreement
8 created an escrow that divested Debtors of their interest in the
9 Funds. On appeal, they discuss California escrow law.3
10 In its memorandum decision, the bankruptcy court did not
11 decide the escrow issue. And in its order directing
12 supplemental briefing, the bankruptcy court identified the
13 parties’ intent in entering into the First Agreement as a
14 genuine issue of material fact that precluded entry of summary
15 judgment for either party on this theory.
16 The 5-Hour ENERGY Owners’ motion: the 5-Hour ENERGY Owners
17 conceded that a factual dispute existed on the escrow theory.
18 We treat the 5-Hour ENERGY Owners’ argument that they are
19 entitled to summary judgment on an escrow theory as explicitly
20 waived. In their July 1, 2016 supplemental brief, they conceded
21 that a genuine issue of material fact existed about whether the
22 funds were in escrow and asserted that neither party was
23 entitled to summary judgment on that subject. They are free to
24 change their position in front of the trial judge, but we
25 decline to allow such a seismic shift on appeal. United States
26
3
27 The parties argue the issues on appeal under California
law. In this memorandum, we thus assume, without deciding the
28 issue, that California law applies.
11
1 v. Patrin, 575 F.2d 708, 712 (9th Cir. 1978) (“As a general
2 rule, a federal appellate court does not consider an issue not
3 passed upon below. It is immaterial whether the issue was not
4 tried in the district court because it was not raised or because
5 it was raised but conceded by the party seeking to revive it on
6 appeal.” (citations omitted) (emphasis added)).
7 We acknowledge an exception where the issue is one of law
8 and the facts are fully developed by the trial court. Id. at
9 712. But to invoke the exception, we must determine that the
10 Trustee would not be prejudiced if we allow the 5-Hour ENERGY
11 Owners to change position on appeal. Id. We cannot make such a
12 determination on this record.
13 The Trustee’s motion: The Trustee is not entitled to
14 summary judgment because there is a dispute of material fact.
15 The Trustee argues that the 5-Hour ENERGY Owners’ escrow theory
16 fails because the First Agreement does not specify a grantee; he
17 then asserts that it is not necessary to decide intent. The
18 5-Hour ENERGY Owners cite no case saying that an escrow may
19 exist without a specified grantee, nor do they squarely address
20 the issue. We nevertheless conclude that the Trustee was not
21 entitled to summary judgment.
22 In California, escrow agreements and instructions need not
23 be in writing. Claussen v. First Am. Title Guar. Co., 186 Cal.
24 App. 3d 429, 436 (1986) (“We also recognize that escrow
25 instructions may be oral, even when some are in writing and that
26 some escrow instructions may be implicit in the express
27 instructions given.” (internal citations omitted)); Zang v. Nw.
28 Title Co., 135 Cal. App. 3d 159, 168 (1982) (“We cannot find a
12
1 sound basis for concluding that the Financial Code sections were
2 intended to abrogate the principles of contract and agency law
3 which allow for binding oral agreements.”). And the First
4 Agreement does not contain a merger clause disclaiming the
5 existence of oral agreements.
6 The 5-Hour ENERGY Owners submitted declaratory evidence
7 from Debtors’ attorney, Mr. Rothman, suggesting that the parties
8 intended to create an escrow account. As the bankruptcy court
9 wrote:
10 In the Rothman Declaration, Rothman argues that the
parties clearly intended for the Account to be an
11 escrow account because the parties characterized the
Account as the “Attorney Escrow Account,” the Funds
12 were irrevocably transferred into the Account, and
Rothman believed himself to be serving as the escrow
13 agent of the Account at the time the First Agreement
was executed.
14
15 June 17, 2016 Order Requesting Supplemental Briefing at 4.
16 As we must on de novo review of a ruling on the Trustee’s
17 summary judgment motion, we draw all reasonable inferences in
18 the 5-Hour ENERGY Owners’ favor. Doing so, we must acknowledge
19 the possibility that the parties may have orally agreed that the
20 5-Hour ENERGY Owners would be the specified grantee. And if so,
21 the intent issue identified by the bankruptcy court remains
22 unresolved.
23 In sum, a genuine dispute of material fact prevents summary
24 judgment on the escrow theory for both parties.
25 D. We cannot affirm the judgment in the 5-Hour ENERGY Owners’
favor based on the legal theories they first raise on
26 appeal.
27 The 5-Hour ENERGY Owners also assert new trust law theories
28 on appeal. The Trustee contends that they waived these
13
1 arguments by not raising them before the bankruptcy court; the
2 5-Hour ENERGY Owners counter that they may raise them on appeal
3 because we may affirm for any reason.
4 “[I]n general, ‘a federal appellate court does not consider
5 an issue not passed upon below.’” Mano-Y&M, Ltd. v. Field
6 (In re Mortg. Store, Inc.), 773 F.3d 990, 998 (9th Cir. 2014)
7 (quoting Singleton v. Wulff, 428 U.S. 106, 120 (1976)). And a
8 “litigant may waive an issue by failing to raise it in a
9 bankruptcy court.” Id. That said, we “have discretion to
10 consider arguments raised for the first time on appeal, but do
11 so only if there are ‘exceptional circumstances.’” Id. (quoting
12 El Paso City of Tex. v. Am. W. Airlines, Inc. (In re Am. W.
13 Airlines), 217 F.3d 1161, 1165 (9th Cir. 2000)). As the Ninth
14 Circuit explained:
15 We will address a waived issue (1) when review is
required to “prevent a miscarriage of justice or to
16 preserve the integrity of the judicial process,”
(2) “when a new issue arises while appeal is pending
17 because of a change in the law,” and (3) “when the
issue presented is purely one of law and either does
18 not depend on the factual record developed below, or
the pertinent record has been fully developed.”
19 In re Mercury Interactive Corp. Sec. Litig., 618 F.3d
988, 992 (9th Cir. 2010) (quoting Bolker v.
20 Commissioner, 760 F.2d 1039, 1042 (9th Cir. 1985)).
21 Id.22 The 5-Hour ENERGY Owners seem to rely on the third
23 exception. Given the fact that we may affirm on any ground
24 supported by the record, we consider the arguments under this
25 exception but conclude that the present summary judgment record
26 does not support these new theories; accordingly, we cannot
27 affirm on alternate grounds.
28 Trust theories. When a debtor does not have an equitable
14
1 interest in property, such as property held in trust, the
2 property is not estate property. Mitsui Mfrs. Bank v. Unicom
3 Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321, 324
4 (9th Cir. 1994). Accordingly, if Debtors held the Funds as a
5 trustee for the 5-Hour ENERGY Owners, the transfer of the Funds
6 could not be avoided as a preference. We look to state law to
7 determine if a trust exists. Danning v. Bozek (In re Bullion
8 Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir. 1988).
9 Constructive trust. The 5-Hour ENERGY Owners argue
10 that the Funds were in a constructive trust that existed by at
11 least the time of the First Agreement. “A constructive trust is
12 an equitable remedy imposed to prevent unjust enrichment.”
13 Taylor Assocs. v. Diamant (In re Advent Mgmt. Corp.), 178 B.R.
14 480, 486 (9th Cir. BAP 1995), aff’d, 104 F.3d 293 (9th Cir.
15 1997). To impose a constructive trust, three conditions must be
16 shown: “(1) a specific, identifiable property interest, (2) the
17 plaintiff’s right to the property interest, and (3) the
18 defendant’s acquisition or detention of the property interest by
19 some wrongful act.” Higgins v. Higgins, 11 Cal. App. 5th 648,
20 659 (2017), review denied (July 26, 2017).
21 The present summary judgment record does not support a
22 constructive trust theory. The 5-Hour ENERGY Owners’ other
23 legal theories rely on the First Agreement or freeze order as
24 the source of their interest in the Funds. But here the 5-Hour
25 ENERGY Owners rely on the rights they asserted in their anti-
26 counterfeiting lawsuit. The facts relevant to its new theory
27 were not developed below, and the summary judgment record is
28 devoid of admissible facts about the parties’ pre-lawsuit
15
1 interests in the funds.4 The Trustee has also not had an
2 opportunity to develop a position on the argument. Both are
3 reasons to deny summary judgment.5
4 In sum, we decline to affirm the summary judgment on an
5 alternate, undeveloped, and incomplete constructive trust theory
6 first argued on appeal.
7 Express trust. The 5-Hour ENERGY Owners next argue
8 that the First Agreement placed the Funds into an irrevocable
9
4
10 The 5-Hour ENERGY Owners ask us to take judicial notice
of a variety of documents. In particular, they want us to know
11 that one of the debtors was criminally prosecuted for the
12 counterfeiting scheme alleged in the complaint and “plead [sic]
guilty to conspiracy to commit criminal copyright infringement
13 and to introduce misbranded food into interstate commerce.”
Appellees’ Request for Judicial Notice at 5. And they assert,
14 with authority, that we can take judicial notice of the truth of
15 the matters asserted therein. Nevertheless, we deny the request
because, as noted above, the focus of the parties’ briefing and
16 the bankruptcy court’s ruling was on the Debtors’ interest in
the Funds after the First Agreement was signed, not before. The
17 5-Hour ENERGY Owners are free to apprise the bankruptcy court of
18 these facts and to make appropriate arguments about them on
remand.
19
5
We also note that the 5-Hour ENERGY Owners application
20 of constructive trust law is incomplete. In bankruptcy cases
21 where a party seeks to impose a constructive trust, “while state
law must be the starting point in determining whether a
22 constructive trust may arise in a federal bankruptcy case, that
law must be applied in a manner not inconsistent with federal
23 bankruptcy law.” In re Unicom Computer Corp., 13 F.3d at 325
24 n.6. The bankruptcy court, thus, must consider whether imposing
a constructive trust is against the federal bankruptcy policy
25 favoring a ratable distribution to all creditors. Toys “R” Us,
Inc. v. Esgro, Inc. (In re Esgro, Inc.), 645 F.2d 794, 798
26 (9th Cir. 1981) (Bankruptcy Act case). In their opening brief,
27 where they first articulate a constructive trust theory, the
5-Hour ENERGY Owners never discuss the second part of the
28 analysis.
16
1 express trust. “Under California law an express trust requires
2 five elements: 1) present intent to create a trust, 2) trustee,
3 3) trust property, 4) a proper legal purpose, and 5) a
4 beneficiary.” Honkanen v. Hopper (In re Honkanen), 446 B.R.
5 373, 379 n.6 (9th Cir. BAP 2011) (citing Cal. Prob. Code
6 §§ 15201-15205 and Keitel v. Heubel, 103 Cal. App. 4th 324, 337
7 (2002)).
8 The summary judgment record does not support an express
9 trust theory. The bankruptcy court identified intent as a
10 genuine dispute of material fact. The record on summary
11 judgment does not suggest to the contrary. Accordingly, we
12 decline to affirm on that ground.
13 E. The bankruptcy court erred in granting summary judgment in
favor of the 5-Hour ENERGY Owners when it declined to apply
14 relevant state law to determine the estate’s interest in
the Funds.
15
16 We finally turn to the bankruptcy court’s reason for
17 granting the 5-Hour ENERGY Owners summary judgment. The
18 bankruptcy court, side-stepping the escrow issue, determined
19 that choice of state law was immaterial because “the material
20 language of the First Agreement Order is unambiguous and the
21 only remaining law to apply is federal bankruptcy law.” Mem.
22 Dec. at 3-4. It continued:
23 The operative legal question is whether the Funds would
have been property of the estate if Debtors had filed
24 bankruptcy ninety days earlier, at which time the Funds
were held in the Account. If the Funds would not have
25 become property of the estate if Debtors filed
bankruptcy while the Funds were held in the First
26 Account, then it necessarily follows that no transfer
of property of the estate occurred.
27
28 Mem. Dec. at 4. The bankruptcy court determined that, although
17
1 the First Agreement divested Debtors of some interest in the
2 Funds, it did not “divest Debtors of all interest in the Funds.”
3 Mem. Dec. at 6. Accordingly, “while Debtors retained some
4 interest in the Funds ninety days prior to the filing of the
5 bankruptcy petition, that interest was limited.” Id.6 To determine the boundaries of that interest, the
7 bankruptcy court looked at two cases, Pixton v. B&B Plastics,
8 Inc. (In re B&B Plastics, Inc.), 2005 WL 3198656, at *1 (Bankr.
9 S.D. Fla. Aug. 10, 2005), and Dzikowski v. NASD Regulation, Inc.
10 (In re Scanlon), 239 F.3d 1195 (7th Cir. 2001). And it reasoned
11 that the present facts fell somewhere between the two but that
12 they were closer to those in In re Scanlon. Mem. Dec. at 8. It
13 explained: “While appearing to lack the degree of disbursement
14 specificity present in Scanlon, this case similarly presents a
15 situation in which [Debtors] were divested of any meaningful
16 oversight or unilateral control over the Funds.” Id.17 It continued: “11 U.S.C. § 541(a) . . . restricts the
18 bankruptcy estate’s assumption of the debtor’s interests to the
19 interests that are held by the debtor.” Id. Thus, to the
20 extent Debtors’ interest was limited, so also was the Trustee’s.
21 Here, “[w]hile the Funds were held in the Account, Debtors did
22 not have the legal authority to utilize or direct the Funds.”
23 Id. As a result, “the consensual release of the Funds from the
24 Account to the [the 5-Hour ENERGY Owners] was not a transfer
25 that deprived the bankruptcy estate of value to be distributed
26 to creditors, and, therefore, it cannot be avoided under the
27 ‘diminution of estate’ doctrine.” Id. For this proposition,
28 the bankruptcy court cited Adams v. Anderson, (In re Superior
18
1 Stamp & Coin Corporation), 223 F.3d 1004, 1007 (9th Cir. 2000);
2 Carlson v. Farmers Home Administration (In re Newcomb), 744 F.2d
3 621, 625 (8th Cir. 1984); and Collier on Bankruptcy
4 ¶ 547.03[2][b] (16th ed. 2015)).
5 We conclude that this reasoning is in error.
6 First, the bankruptcy court wrongly concluded that the only
7 law left to apply was federal bankruptcy law and that state law
8 was immaterial. As the bankruptcy court recognized, the
9 operative legal question is whether the Funds were property of
10 the estate. True, determining “whether an interest claimed by
11 [a] debtor is ‘property of the estate’ is a federal question to
12 be decided by federal law . . . .” McCarthy, Johnson & Miller
13 v. N. Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1078
14 (9th Cir. 2000). But the contours of the estate’s and debtor’s
15 interest in property are determined by reference to
16 nonbankruptcy, usually state, law. Travelers Cas. & Sur. Co. of
17 Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 451 (2007) (citing
18 Butner v. United States, 440 U.S. 48, 54–55 (1979));
19 In re Pettit, 217 F.3d at 1078 (“[B]ankruptcy courts must look
20 to state law to determine whether and to what extent the debtor
21 has any legal or equitable interests in property as of the
22 commencement of the case.”). Accordingly, the bankruptcy
23 court’s conclusion that it need not apply state law was
24 erroneous.
25 The cases the bankruptcy court relied on underscore this
26 point. Both In re B&B Plastics, Inc. and In re Scanlon apply
27 state law: Florida law. See In re Scanlon, 239 F.3d at 1197
28 (“The extent and validity of the debtor’s interest in property
19
1 is a question of state law. Under Florida law . . . .”)
2 (citations and internal quotation marks omitted); In re B&B
3 Plastics, Inc., 2005 WL 3198656, at *4 (quoting In re Scanlon,
4 239 F.3d at 1197). Both cases involved alleged or actual
5 escrows and escrow agreements (In re B&B Plastics, Inc. also
6 discusses in custodia legis). As a result, the In re B&B
7 Plastics, Inc. and In re Scanlon analyses of property interests
8 under Florida law do not dictate the result of an analysis of
9 property interests under the law of another state.6
10 The “diminution of the estate” doctrine does not compel a
11 different result. Under it,
12 a transfer of an interest of the debtor in property
occurs where the transfer “diminish[es] directly or
13 indirectly the fund to which creditors of the same
class can legally resort for the payment of their
14 debts, to such an extent that it is impossible for
other creditors of the same class to obtain as great a
15 percentage as the favored one.”
16 Adams, 223 F.3d at 1007 (quoting Hansen v. MacDonald Meat Co.
17 (In re Kemp Pacific Fisheries Inc.), 16 F.3d 313, 316 (9th Cir.
18 1994)). Here, the bankruptcy court’s analysis assumes that
19 because Debtors were divested of exclusive control over the
20 Funds, they were divested of all leverage over the Funds. They
21 were not. They could, and did, negotiate a settlement with the
22 5-Hour ENERGY Owners. That settlement involved Debtors awarding
23 all interest in the Funds to the 5-Hour ENERGY Owners. But we
24 can safely assume that Debtors’ motivations in settling differed
25
26 6
True, if the substantive law of the various states are
27 similar or identical, then the cases may be persuasive. But it
is for the trial court to make this determination in the first
28 instance.
20
1 from the motivations of their creditors and the Trustee.
2 Debtors risked a nondischargeable judgment; the Trustee would
3 not be burdened with fears of nondischargeability if he were
4 negotiating resolution. The Trustee may have been able to
5 negotiate a different result, one in which the 5-Hour ENERGY
6 Owners did not receive all of the Funds.7
7 Thus, the bankruptcy court incorrectly concluded that it
8 did not need to identify and apply relevant state law in order
9 to determine the estate’s interest in the Funds. Accordingly,
10 we REVERSE in part.
11 CONCLUSION
12 For the reasons set forth above, we conclude that although
13 the bankruptcy court was correct in denying summary judgment on
14 various theories, it erroneously granted summary judgment in the
15 5-Hour ENERGY Owners’ favor. Accordingly, we AFFIRM all denials
16 of summary judgment, REVERSE the grant of summary judgment,
17 VACATE the judgment, and REMAND for further proceedings.
18
19
20
21
22
23
24
25
7
The other cases cited by the bankruptcy court are not
26 applicable. Adams involved the application of the earmarking
27 exception to the diminution of the estate doctrine. 223 F.3d at
1009-11. That exception does not apply here. And In re Newcomb
28 involved an escrow under Missouri law. 744 F.2d at 625-26.
21