GERALDINE MUND, Bankruptcy Judge.
Plaintiff Stephen M. Speier (the "Trustee"), as chapter 11 trustee for debtor SunCal Marblehead, LLC (the "Debtor"), has brought a motion for partial summary adjudication of his restitution and/or unjust enrichment claim for relief against defendant SunCal Management, LLC ("SCM" and with Argent Management, Inc. ("Argent"), the "Defendants").
This motion for partial summary adjudication is made in one of twelve related adversary proceedings now before this Court. The twelve debtors involved in these adversary proceedings are in turn part of a larger related group of twenty-six debtors (the "SunCal Debtors") that were formed to develop residential real estate projects in the Western United States (the "Projects"). (The Debtor's project was located in Orange County and is known as the "Project" or the "Marblehead Project.")
Defendant SCM was formed to provide development management services to the SunCal Debtors. Defendant Argent allegedly also provided management services to the Debtors and is allegedly a successor-in-interest, alter ego, etc. of SCM.
Each of the Projects had received funding from Lehman Brothers Holding, Inc. and related entities (collectively "Lehman"), which had first-priority deeds of trust and equity interests in each Project, and had also agreed to provide continuing funding. Lehman's failure to provide that funding appears to have precipitated the chapter 11 filings (seventeen voluntary and nine involuntary) of the SunCal Debtors in November 2008.
The Trustee had been appointed the chapter 11 trustee for each of the involuntary SunCal Debtors, including the Debtor, and — through two plans of reorganization governing various SunCal Debtors that were each confirmed in January 2012 — was appointed the liquidating trustee of most of the SunCal Debtors, including the Debtor.
In May 2012, the Trustee filed the twelve subject complaints (which were twice subsequently amended) against the Defendants seeking to recover substantial payments for management fees and expenses made by the twelve relevant SunCal Debtors to SCM during the four-year period prior to each SunCal Debtor's bankruptcy, by asserting claims for breach of contract, restitution/unjust enrichment, fraudulent transfer, and preferential transfer. (The operative Second Amended Complaint (the "SAC") in this proceeding was filed on May 14, 2014.)
In this adversary proceeding, these management fees and expenses were invoiced by SCM pursuant to a Development Management Agreement dated June 10, 2005 ("DMA") between SCM and SCC JV Ventures, LLC ("SCC JV Ventures"). [Ex. B to Ex. 3 of Request for Judicial Notice in support of the Motion (dkt. 435; "Motion RJN")]
SCC JV Ventures is the operating member and 15% owner of SunCal Master JV, LLC ("Grandparent"), which in turn is the sole owner/member of SunCal Marblehead Mezz Borrower, LLC ("Parent"), which in turn is the sole owner/member of the Debtor. (Lehman was the owner of the remaining 85% of the Grandparent. Lehman and SCC JV Ventures entered into a "Grandparent Operating Agreement," governing the operation of the Grandparent.
In this motion, the Trustee is seeking adjudication of his unjust enrichment/restitution claim against SCM seeking the return of $9,163,489 paid by the Debtor to SCM between June 10, 2005 and the Debtor's November 2008 petition date. Although the parties' legal arguments are varied and complex, the Trustee is essentially arguing that the Debtor has no legal responsibility for these fees: the DMA is the exclusive document governing the fees and the DMA provides for the payment of the fees by SCC JV Ventures, not the Debtor. SCM is essentially arguing that the management fees were for developing the Marblehead Project, which was the Debtor's property, so these fees were the Debtor's responsibility and the parties' course of dealing and other contracts support this understanding.
• The DMA vested SCM with the responsibility of performing certain development management services for the Marblehead Project, providing in part:
[DMA [Ex. B to Ex. 3 of Motion RFN] Recitals A, B & C; §1.1]
• The DMA establishes the amount of management fees SCC JV Ventures was to pay SCM for its management services, providing in part:
[DMA §5.1]
• The DMA provides for the payment of two-thirds of the Operating Management Fee during the development of the Marblehead Project:
[DMA §5.1]
• Bruce Cook signed the DMA on SCM's and SCC JV Ventures' behalf in his capacity as General Counsel for both entities.
• The DMA contains a California choice of law provision.
• From the time that SCM first provided Development Management Services on June 10, 2005, through November 2008, when the Debtor's bankruptcy case was commenced by the filing of an involuntary bankruptcy petition, SCM issued invoices to the Debtor for Development Management Services. The Debtor routinely paid invoices when presented until October 2007. From June 2005 through the Petition Date, the Debtor paid SCM $9,163,489 in management fees.
• The Court granted the Trustee's Motion for Partial Summary Adjudication of His Breach of Contract Claim for Relief, finding that "the Debtor is a third party beneficiary of the [DMA]." [Dkt. 422 & Ex. 11 to Motion RJN]
• The Trustee filed a motion for partial summary adjudication of his declaratory relief cause of action on August 21, 2015, requesting that the Court enter two specific findings (the "Declaratory Relief MSA"). The Court granted the Declaratory Relief MSA, finding that
• The Trustee filed a motion for correction of the Court's order asking the Court to enter the specific findings the Trustee had requested in the Declaratory Relief MSA (the "Motion to Correct"). The Court granted the motion and corrected the language of Finding (2) in the First Declaratory Relief Order to read:
[Dkt. 427 and Ex. 10 to Motion RJN; the "Correction Declaratory Relief Order" and with the First Declaratory Relief Order, the "Declaratory Relief Orders"]
SCM and SCC JV Ventures entered into the DMA, which provides that
SCM, SCC JV Ventures, and the Debtor shared the same general counsel (Bruce Cook, who executed the DMA on behalf of both SCM and SCC JV Ventures), so SCM had to be aware of the provisions making SCC JV Ventures responsible for the payment of SCM's Management Fee. In fact, SCM entered into Development Management Agreements with other SunCal Debtors that specifically identify the respective SunCal Debtors as responsible for paying SCM's management fee. These facts indicate that if SCM had intended to contractually obligate the Debtor to pay the Management Fee, it could and would have done so.
Notwithstanding the specific language of the DMA, the Debtor paid SCM's management fees from June 10, 2005 until the November 16, 2008 petition date for a total of at least $9,163,489. SCM issued invoices, which were routinely paid. (As the Debtor had no employees, SCM's employees processed the invoices on SCM's behalf and issued the Debtor's payments to SCM.)
This Court has already held that the DMA's existence precludes SCM from receiving the Management Fee from the Debtor under applicable law, pursuant to the Declaratory Relief Orders (as quoted above).
Under Fed. R. Civ. P. 56, a court should grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The movant bears the initial burden of informing the court of the basis for its motion and identifying the evidence demonstrating the absence of a genuine issue of material fact. The burden then shifts to the non-moving party, who must come forward with specific facts showing that there is a genuine issue for trial. This burden is not a light one.
The Court should apply California substantive law, as it is adjudicating state law claims over which it has supplemental jurisdiction. The DMA provides for the application of California law. California courts have held that where two sophisticated commercial entities agree to a choice of law clause, the most reasonable explanation is that they intend it to apply to all causes of action regarding their contract. The Court has found that the Debtor is a third-party beneficiary of the DMA. Furthermore, the Marblehead Project is located in California and SCM's management services were performed in California.
Under California law, a claim for unjust enrichment and restitution requires: receipt of a benefit and unjust retention of that benefit at the expense of another. SCM clearly received a benefit — $9,163,489 in Management Fees — from the Debtor. SCM's retention of these Management Fees is unjust on two independent grounds: (i) there is no legal justification for SCM to retain these Management Fees so they cannot conscientiously be retained and (ii) SCM knows the circumstances giving rise to the Debtor's unjust enrichment claim.
First, SCM is not legally entitled to receive these fees from the Debtor, because the basis for the payment of Management Fees to SCM is the DMA, which expressly provides for the payment of the Management Fees by SCC JV Ventures, not the Debtor. In its oral ruling in support of the First Declaratory Relief Order, the Court roundly rejected SCM's argument that the DMA obligated the Debtor to pay these Management Fees to SCM:
August 30, 2016 Oral Ruling ("Oral Ruling"), which is attached to and incorporated in the First Declaratory Relief Order [Dkt. 378 and Ex. 8 to Motion RJN], at 6-9.
Oral Ruling at 16-17.
The Court's findings operate as law of the case, and cannot be reconsidered.
SCM's knowledge of the circumstances giving rise to the Debtor's unjust enrichment claim is a second basis for finding SCM's retention of the Management Fees to be unjust. SCM knew or should have known that the Debtor was not responsible for paying for SCM's management fees. Bruce Cook, general counsel for SCM, submitted a declaration showing his knowledge of the relevant provisions of the DMA. [Ex. 6 to Motion RJN at 27, ¶10]
As SCM has received $9,163,489 in Management Fees from the Debtor and it would be unjust for SCM to retain these funds, SCM must restore the $9,163,489 to the Trustee.
While the Debtor did not have a contractual obligation to pay SCM directly, it did have the obligation to be the source of the payments to SCM. Over the course of years, the Debtor directly paid SCM for the extraordinary amount of work that SCM performed on the Debtor's Marblehead Project, including grading, construction of a bridge and exterior roads, and establishment of a migration habitat. By requesting that this money be refunded, the Trustee is requesting that the Debtor receive SCM's work for free, which is unjust.
The Motion conveniently leaves out the provision of the DMA that establishes that the Debtor was the source of the payments to SCM.
DMA §5.1. The DMA does not provide that SCM cannot seek payment from the Debtor or that it would be unjust for SCM to retain such payments.
It should be noted that the DMA was a starting point, but — as set forth in the Grandparent Operating Agreement — a business plan and the "Project Budgets" memorialized periodic agreements of the Debtor, Lehman, and SCM regarding every project expense. SCM was only paid after Lehman agreed to a Project Budget and approved the relevant draw request.
The testimony from knowledgeable persons at each of the Debtor, Lehman, and SCM is unanimous that the stakeholders agreed and approved that the Debtor would pay SCM. [The Opposition then quotes from the declarations of Bruce Cook, the general counsel of SCM and SCC JV Ventures and the preparer of the DMA), Bruce Elieff (manager and owner of SCM and president of the Debtor), Danielle Harrison (asset manager at SCM and former employee of Lehman's agent Trimont), Thomas Rollins (Chief Accounting Officer for SCM), Frank Cappello (former VP at Lehman), and Brad Lebovitz (former head of North American Asset management for three Lehman funds).] This testimony repeatedly states that
The Debtor's agreement to pay its development costs, including SCM's fees, is also evidenced by:
In contrast, there is no evidence that SCC JV Ventures ever paid SCM directly. From the complex, evolving relationship, it is impossible to conclude that it is unjust for the Debtor to pay SCM for the development of its own Project. The relief requested by this motion would rewrite the parties' relationship.
Numerous decisions in fraudulent transfer law (which the Restatement notes is "obviously based on principles of unjust enrichment and associated equitable remedies") in analogous fact circumstances show that courts are not constrained by the form of a transaction and look to the net effect — whether the debtor received value. Just like those cases, the Debtor received value from SCM in SCM's development work on the Marblehead Project.
In interpreting the parties' relationship, the Court should be guided by the following principles:
The Trustee argues that the DMA clause requiring that modifications be in writing bars this evidence of the parties' conduct. However, this argument has no support in the law — even for an integrated contract, but more so for the DMA, which is not integrated even between the signatories SCC JV Ventures and SCM. Course of performance in this case demonstrates that the Debtor agreed that the Debtor would pay SCM.
There is no cause of action for unjust enrichment in California. Further, a plaintiff may recover for unjust enrichment only where there is no contractual relationship between the parties, including a third-party beneficiary relationship. Here, the Debtor's claim is nullified by the existence of the DMA, whether the Debtor is viewed as a direct contracting party or as a third-party beneficiary.
The voluntary payment doctrine also bars recovery of this money, which was voluntarily paid with knowledge of the facts. SCM performed work for the Management Fees and the Debtor received the benefit of that work and — as all the parties understood — was ultimately responsible for paying the Management Fees. The Debtor received the exchange that it expected.
The Debtor paid SCM without objection from 2005-2008. Equitable estoppel and laches bar the Debtor from asserting that it is unjust for SCM to retain these payments.
Equitable estoppel requires (i) the party to be estopped to know the facts and intend for its conduct to be acted upon or act in a manner that the other party has the right to believe it so intended and (ii) the party asserting estoppel be ignorant of the true facts and rely on the conduct to its detriment. The Debtor knew it was paying SCM and never objected. It also knew SCM would accept these payments. SCM was ignorant to the extent that the Debtor believed the payments were unjust and would later seek their return.
Laches requires (i) unreasonable delay in filing suit, based on when the claimant knew or should have known of the allegedly infringing conduct, and (ii) prejudice to the defendant. SCM relied to its detriment on the Debtor's conduct while the Debtor unreasonably waited seven years, until May 2012, to assert a claim for restitution. SCM accepted the payments and did not demand that they come from SCC JV Ventures. Had the Debtor objected in 2005, SCC JV Ventures could have paid SCM. Now the Debtor lacks the funds to pay SCC JV Ventures, who thus lacks the funds to pay SCM.
The Trustee's claim for restitution is also time-barred, whether a two-year statute for obligations not based on a written instrument (Cal. Civ. Proc. Code §339), a three-year statute for fraud or mistake (Cal. Civ. Proc. Code §338), or a four-year statute for written contracts (Cal. Civ. Proc. Code §337). All payments were made prior to May 2008.
Res judicata bars this claim. The Court allowed SCM's claims seeking additional Management Fees under the same relationship that gave rise to the already-paid Management Fees that the Trustee now seeks to recover.
The Declaratory Relief Orders do not render SCM's retention of the Management Fees unjust. The Trustee relies on ambiguous language that "the DMA's existence precluded and precludes SCM from receiving management fees from the Debtor under applicable law based on an oral or implied contract or a theory of unjust enrichment . . . or another similar `equitable' theory.
Interpretation of ambiguous orders follows the same rules used to interpret other legal documents. Courts should consider the entire relevant legal record and adopt a construction that is consistent with the law and reasonable in light of the facts. Ambiguity is construed against the drafter, in this case the Trustee.
Under these principles, the Declaratory Relief Orders mean only that SCM could not have legally forced the Debtor to pay the Management Fees directly to SCM. They do not necessarily mean that it would be unjust for SCM to retain the Management Fees that had already been paid.
Furthermore, the Declaratory Relief Orders should be narrowly construed. Both the Court and the Trustee have stated that the relief sought and the relief given in the Declaratory Relief Orders do "not provide that the Debtor was precluded from paying management fees to SCM under any conceivable theory or as a gift or that it was `illegal for SCM to be paid by the Debtor.'" October 20, 2016 Tentative Ruling [Ex. 63 to Gustafson Dec.] at 42 of 88 (emphasis in the original)(quoting Trustee's Reply [Ex. 61 to Gustafson Dec.] at 1:10-13).
The Defendants' "factual background" is lifted virtually verbatim from the factual background in their unsuccessful opposition to the Trustee's Declaratory Relief MSA. The Court necessarily considered and rejected that background in granting the Declaratory Relief MSA and entering the Declaratory Relief Orders. Issues that a court determines during pre-trial motions become law of the case. Law of the case doctrine prevents the court from reconsidering that issue. United States v. Phillips, 367 F.3d 846, 856 (9th Cir. 2004)("The law of the case doctrine precludes a court from reconsidering an issue that it has already resolved."), cert. denied, 543 U.S. 980 (2004).
Unjust enrichment/restitution is a viable claim under California law.
Contrary to the Defendants' assertions, unjust enrichment/restitution claims are available even where there is a contractual relationship between the parties. This argument may be irrelevant because the Court has already ruled that the Debtor is not a party to any written agreement requiring it to pay management fees to SCM and is not otherwise contractually obligated to do so. The Defendants' assertion that this principle also applies to third-party beneficiaries (which the Court has found the Debtor to be) is not supported by the law.
This Court has already considered and rejected the Defendants' argument that the statute of limitations bars the Trustee's unjust enrichment/restitution claim. In their Rule 12(b)(6) Motion to Dismiss the First Amended Complaint in this action, the Defendants argued that the Trustee's unjust enrichment/restitution claim was barred by the statute of limitations. [Dkt. 64] The Court rejected that argument except as to expense reimbursement payments made to SCM prior to May 2008 (which are no longer at issue in this proceeding). [RJN Ex. 5, p. 1 ¶3] In any event, the Court entered an order extending and tolling the statute of limitations established by §546(a) — which governs actions brought under §544(a) — against SCM until June 1, 2012. [RJN Ex. 2 p. 2:17-3:4] Under §544(a), the Trustee is granted all rights and powers of a judicial lien creditor, which includes the right to pursue choses in action belonging to the debtor, such as breach of fiduciary duty and other state law claims.
The Defendants do not directly address the Trustee's assertion that it is unjust for a party to retain a benefit where there is no legal basis for that party's enrichment. They return to their "law governing the interpretation of relationships" doctrine, i.e., that the words and actions of the parties demonstrated agreement that the Debtor would pay SCM for the work done on the Marblehead Project. But the Court expressly rejected this argument in the Declaratory Relief Orders and supporting Oral Ruling. [Ex. 8 to Motion RJN [Dkt. 378] Ex. A at 8, 14, 16] These findings are law of the case and not subject to reconsideration. Thus, the Court must reject express or implied contract or an equitable theory as the legal basis for SCM's retention of payments from the Debtor.
The Defendants do not dispute that is it unjust for a party to retain a benefit where they know the circumstances giving rise to the unjust enrichment claim. Instead they claim (in a footnote), that SCM had no notice that the Debtor found its direct payments to be unjust in any way. This argument is absurd, as the Debtor had no employees and SCM processed the payments for the Debtor. It is also irrelevant as SCM's general counsel prepared the DMA and knew that SCC JV Ventures, not the Debtor, was responsible for the payments.
The Defendants' voluntary payment doctrine argument — that the Debtor voluntarily made the payments and got the exchange it expected — is inconsistent with the facts that the Debtor had no employees and these payments were actually made by SCM. Lehman, the majority owner of the Debtor's grandparent, did not consent to the Debtor's payments to SCM. [June 10, 2015 Deposition of Frank Cappello, Ex. A to Dec. of Kiara Gebhart at 10:3-8] Lehman also moved to disallow SCM's claim for Management Fees in the bankruptcy case on the grounds that the Debtor was not a party to the DMA and SCC JV Ventures was obligated to pay the fees. [Ex. 1 to Reply RJN at 11-12, 17-27]. While the Defendants rely on Tom Rollins' statement that Lehman knew of all of the Management Fees that were disbursed by the Debtors to SCM and affirmatively approved their disbursement, Mr. Rollins' testimony indicates that, when Lehman only partially funded draw requests, it did not indicate which invoices were to be paid and which were not. Mr. Rollins and his staff never contacted Lehman to clarify which invoices to pay.
The fraudulent transfer cases cited by the Defendants — to the effect that courts may ignore the form of transactions and should look at the net effect on the debtor — are not relevant to an unjust enrichment/restitution claim, which requires only "receipt of a benefit" and "unjust retention of the benefit."
The Court should ignore the Defendants' "straw man" arguments regarding the Declaratory Relief Orders. First, the Trustee does not, as the Defendants assert, rely completely on the Declaratory Relief Orders. The Court's findings in these orders are part, but not all, of the argument for relief in this motion. This is one of several mischaracterizations of the Trustee's arguments made in the Opposition. Second, the Declaratory Relief Orders are not ambiguous, and the Court specifically rejected the Defendants' contention that the First Declaratory Relief Order was ambiguous at the hearing on the Trustee's Motion to Correct. [Transcript of October 20, 2016 hearing, which is attached to Reply Declaration of Gary Pemberton as Ex. B] The Defendants' Opposition mischaracterizes the Declaratory Relief Orders as intended to mean only that the Debtor had no affirmative legal obligation to pay SCM, but they cite no language in support of this interpretation.
The Court's holding in California Med. Ass'n, Inc. v. Aetna U.S. Healthcare, 94 Cal.App.4th 151, 172 (Cal. Ct. App. 4
The Defendants' laches argument, premised on the fact that the Debtor "knew it was paying SCM directly, did so voluntarily, and never objected" and that "SCM relied on the Debtor's conduct to its prejudice" is also untenable. Being without employees, the Debtor cannot be said to "voluntarily" or "knowingly" make payments. SCM made these payments on the Debtor's behalf.
The Court has already rejected the Defendants' res judicata arguments: on May 12, 2016 the Court denied SCM's motion for summary judgment that was based on the argument that res judicata bars the Trustee's claims. [Ex. 6 to Reply RJN at 2:12-13] It subsequently denied SCM's motion for reconsideration. [Ex. 8 to Reply RJN at 2:15-16] Law of the case precludes the Defendants from relitigating this issue and it is unfortunate that they have wasted the time of the Court and the Trustee by raising this issue without even mentioning this procedural history.
Contrary to the Defendants' assertion, the Trustee does not seek partial summary adjudication as to Argent. This language of this motion is limited to SCM.
Summary judgment is proper when the pleadings, discovery, and affidavits show that there is "no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Material facts are those which may affect the outcome of the proceedings. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is genuine where the evidence is such that a reasonable jury could return a verdict for the non-moving party. Id. The party moving for summary judgment bears the burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of a material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 249; Masson v. New Yorker Magazine, 501 U.S. 496, 520 (1991).
A claim based on unjust enrichment — whether titled unjust enrichment or restitution — may be brought under California law.
ESG Capital Partners, LP v. Stratos, 828 F.3d 1023, 1038 (9th Cir. 2016).
Unjust enrichment under California law requires "receipt of a benefit and unjust retention of the benefit at the expense of another." Hirsch v. Bank of Am., 107 Cal.App.4th 708, 717 (Cal. Ct. App. 1
The California Supreme Court's statement of the law of restitution indicates that retention of a windfall (i.e., a benefit conferred on a party who had no legal right to that benefit) is unjust.
Ghirardo v. Antonioli, 14 Cal.4th 39, 51 (Cal. 1996); see also Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4
There is no issue that SCM received a benefit from the Debtor in the form of payments of $9,163,489 for Management Fees. [UF 15, which is not disputed]
The Court (pursuant to rulings by Judge Smith, prior to the transfer of these proceedings to Judge Mund) has made the following findings in the Declaratory Relief Orders:
Declaratory Relief Orders [Dkt. 378, 427 & Exs. 8, 10 to Motion RJN]. Taken as a whole, the Declaratory Relief Orders determined that SCM was not entitled to receive management fees from the Debtor under any written agreement, oral or implied contract, or theory of unjust enrichment, quantum meruit or another similar `equitable' theory.
It is correct, as the Defendants argue, that the Court interpreted its Declaratory Relief Orders as stopping short of holding that "the Debtor was precluded from paying management fees to SCM under any conceivable theory. . . ."
The parties in these cases have clearly contemplated that the Court's rulings granting summary judgment/adjudication would have some binding effect. Collectively, these twelve adversary proceedings are an unusually large and complicated piece of litigation. The parties have brought a number of motions for summary judgment and/or summary adjudication (and plan to bring quite a few more) in order to resolve issues and to narrow the scope of the litigation.
The Ninth Circuit has recently held that (i) law of the case does not require a court to follow rulings on pre-trial motions, such as the Declaratory Relief Orders, if it has reason not to and (ii) in any event rulings denying summary judgment/adjudication are never binding law of the case.
Considering both Peralta and the parties' use of motions for summary judgment/adjudication to narrow the scope of litigation, the Court will treat rulings granting summary judgment/adjudication as binding law of the case, unless the Court is presented with good reason not to follow that prior ruling. This reason can be in the form of changes in law, legal or factual errors, or further factual developments. The Defendants have not cited any changes in law, errors, or factual developments that would give the Court reason not to follow the findings in the Declaratory Relief Orders.
The Defendants argue that these findings are nonetheless not relevant to this motion, because the Court intended these findings to be limited to the issue of SCM's claim against the Debtor's estate and not applied to the Trustee's action to recover from SCM. In fact, Judge Smith quite clearly stated that her findings would be applied to the Trustee's unjust enrichment claim:
Oral Ruling [Ex. A to First Declaratory Relief Order [Dkt. 378 & Motion RJN Ex. 8]] at 5.
The findings in the Declaratory Relief Orders compel the conclusion that SCM had no legal entitlement to the payments of Management Fees it received from the Debtor: no written agreement or other contractual obligation; no oral or implied contract; and no theory of unjust enrichment, quantum meruit, or similar equitable theory. The Defendants have presented no other theory giving SCM legal entitlement to receive Management Fees from the Debtor.
This lack of legal entitlement to the Management Fees satisfies Ghirardo's standard for "unjust." Underlying the California Supreme Court's statement in Ghirardo is the idea that a benefit conferred (such as money paid) on a party who had no legal right to that benefit is unjust.
Thus, the Trustee has established both elements of a claim for unjust enrichment under California law: benefit conferred and unjust retention.
Although the Trustee has established the elements of unjust enrichment, the Defendants have raised five legal doctrines that arguably prevent SCM's receipt and retention of the Management Fee payments from constituting actionable unjust enrichment under California law. Three of these doctrines are not applicable, as a matter of undisputed fact, but the applicability of the final two doctrines raises genuine issues of fact that prevent this Court from granting summary judgment to the Trustee.
Three of the Defendants' cited legal doctrines — the existence of a contract covering the same subject matter, the Debtor receiving the exchange it expected, and principles of equity from fraudulent transfer law — are not applicable to this case.
The Defendants argue that a plaintiff may not recover for unjust enrichment/restitution in the face of a valid contract governing the rights of parties.
Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1167 (9th Cir. 1996); see also, e.g., Daniel v. Wayans, 8 Cal. App. 5th 367, 399 (Cal. Ct. App. 2
In this case, there is no contract between the parties.
This Court has held that the Debtor is a third party beneficiary of the DMA [UF 19, which is undisputed] and the Defendants cite one case (from outside the Ninth Circuit) that ruled that the existence of a contract precluded an unjust enrichment claim by a third-party beneficiary of the contract. Peterson v. Atradius Trade Credit Ins. (In re Lancelot Inv'rs Fund), 451 B.R. 833, 842 (Bankr. N.D. Ill. 2011).
However, even if this rule were applied to third party beneficiaries, the DMA does not bar this unjust enrichment/restitution claim because the DMA does not cover the same subject matter as this claim. For a contract to preclude an unjust enrichment/restitution claim, the contract and the claim must cover the same subject matter. See, e.g., Buss v. Superior Court, 16 Cal.4th 35, 49-50 (Cal. 1997); California Med. Ass'n v. Aetna U.S. Healthcare, 94 Cal.App.4th 151, 172 (Cal. Ct. App. 4
Courts in the Ninth Circuit have interpreted the "subject matter" requirement to allow unjust enrichment/restitution claims where the contract does not provide the specific recovery sought in restitution. See, e.g., Leyvas v. Bank of Am. Corp. (In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Practices Litig.), 601 F.Supp.2d 1201, 1220-1221 (S.D. Cal. 2009); see also Yang v. Dar Al-Handash Consultants, 250 Fed. App'x 771, 773 (9th Cir. 2007)(unjust enrichment claim barred: "unjust enrichment claim thus sought the same incentive payments governed by the [contracts]"). Another court has stated the issue as "whether this action derives solely from the agreements alleged." Stitt v. Citibank, 942 F.Supp.2d 944, 960 (N.D. Cal. 2013). A district court explained why relief should turn on whether the contract provides the same remedy sought in restitution:
Cheatham v. ADT Corp., 161 F.Supp.3d 815, 833 (D. Ariz. 2016).
The Debtor's third-party beneficiary rights under the DMA do not include any right to recover money from SCM. The DMA obliges SCM to develop the Project, and the Debtor as third party beneficiary might have sued to enforce that contractual duty. The DMA did not require any payments by SCM, so the Debtor's restitution claim for the return of the Management Fee paid to SCM is not (as the Cheathem court put it) "subject to vindication in an action to enforce the contract." Thus, the existence of the DMA does not preclude the Trustee's unjust enrichment/restitution claim.
The Defendants argue that it is not unjust enrichment if the plaintiff receives the exchange it expected. They cite Comet Theatre Enters. v. Cartwright, 195 F.2d 80, 81 (9th Cir. 1952), where the Ninth Circuit refused recovery of money the plaintiff had paid to an unlicensed contractor for construction work, even though California law makes construction contracts with unlicensed contractors illegal and void and bars the unlicensed contractor from suing to enforce such contracts. However, Comet Theater has typically been relied upon in the context of contracts made void by one party's unlicensed status. For example,
State Farm Auto. Ins. Co. v. Newburg Chiropractic, 741 F.3d 661, 665 (6th Cir. 2013)(plaintiff denied recovery of fees paid to unlicensed contractor). Other cases cited by the Defendants have been in this context of an existing contract, whether enforceable or not. See Peterson v. Cellco P'ship, 164 Cal.App.4th 1583, 1596 (Cal. Ct. App. 4
Finally, the fraudulent transfer case precedent cited extensively in the Opposition is just that — fraudulent transfer case law. It is not directly relevant to the specific question of whether SCM's retention of the Debtor's payments is unjust for the purposes of an unjust enrichment/restitution claim.
As these three doctrines are not applicable to this case as a matter of undisputed fact, they do not change the conclusion that SCM's retention of the Management Fees constitutes unjust enrichment under California law.
The Defendants offered two more legal doctrines that, if applicable, would prevent SCM's receipt and retention of the Management Fees payments from being actionable unjust enrichment: the "voluntary payment" and "incidental benefit" doctrines.
The Defendants argue that the voluntary payment doctrine precludes the Debtor's payment of management fees from being an unjust enrichment of SCM.
66 Am. Jur. 2d Restitution and Implied Contracts § 92.
Rodman v. Safeway Inc., 125 F.Supp.3d 922, 941 (N.D. Cal. 2015); see also Ellsworth v. U.S. Bank, 908 F.Supp.2d 1063, 1083 (N.D. Cal. 2012)("The voluntary payment doctrine is an affirmative defense. . . .").
The Trustee argues that, given that the Debtor had no employees and was managed by SCM, it cannot be said that payments were truly voluntary and the Debtor received the exchange that it expected. However, the Court cannot accept this "no employees, no intent" argument. Otherwise, the Debtor would lack responsibility for any action and would effectively cease to be a legal entity.
While the Debtor had no employees and SCM performed the Debtor's day-to-day functions [Defendants' Additional Facts ("AF") Nos. 9, 11; MSJ at 5:1], the Debtor did have members. At the parent and grandparent level, these were various SunCal-related entities, but Lehman owned the majority of member interests in the Grandparent, (while SunCal entity SCC JV Ventures owned the remainder.) [AF Nos. 2, 3; MSJ at 2:11-14] As a result, both parties have offered evidence on Lehman's knowledge of and consent to the payment of the Management Fees by the Debtor. [MSJ at 12:1-15 and evidence cited therein; Declaration of Danielle Harrison ¶¶ 5, 8-19; Declaration of Bruce Cook ¶ 35; Declaration of Jeffrey Cook 3, 6-16; Declaration of Tom Rollins ¶¶ 7-11, 13-14; Declaration of Bruce Elieff ¶ 37] At the hearing on this motion, the Defendants pointed to voluminous evidence that Lehman was aware of and consented to the Debtor's payment of management fees. The Trustee argued that the Defendants had presented no evidence that Lehman knew of the DMA provision that provided that the Grandparent — not the Debtor — was obligated to pay management fees to SCM.
The Defendants have also shown that the Debtor had officers, such as Bruce Elieff. Mr. Elieff's declaration states that he was the President of the Debtor and that he monitored, participated in, or oversaw the participation of others in the negotiation, execution and effectuation of agreements between SCM, Lehman, and the Debtor [which presumably included the DMA]. [Elieff Dec. ¶ 7, 9] Furthermore, Bruce Cook was an authorized signatory for the Parent [see, e.g., Debtor's LLC Agreement [Cook Dec. ex. 2 [dkt. 440-6], which is signed by Cook on behalf of the parent] and Mr. Cook drafted the DMA.
Thus, at the very least, it is a matter of disputed fact whether the Debtor knew that it had no obligation to pay the management fees directly to SCM but consented to such payment nonetheless.
Similarly, the Defendants argue that benefitting another in the performance of one's own duties or in the improvement of one's property is not unjust enrichment, but merely an incidental benefit, citing Durell v. Sharp Healthcare, 183 Cal.App.4th 1350, 1371 (Cal. Ct. App. 2010), and California Medical, 94 Cal. App. 4th at 172-73. As Durrell stated:
183 Cal.App. 4
The language of California Medical has been repeatedly cited by each side, so it is important to consider the facts of the decision. The California Medical Association (as the assignee of claims held by its member physicians (the "Physicians") sued certain health care plan providers (the "Plan Providers"). The Physicians had contracted — through certain intermediaries (the "Intermediaries") — to provide health care to enrollees in the Plan Providers' plans and had agreed to look solely to the Intermediaries for payment for such services. The Intermediaries also contracted with the Plan Providers: agreeing to provide health care services to the enrollees (through the Physicians) and receiving payment for the services from the Plan Providers (payment which the parties understood would be used to pay the Physicians).
The lawsuit arose because the Plan Providers continued to pay the Intermediaries for services rendered by the Physicians (as the contracts provided) even though the Plan Providers knew that the Intermediaries were financially unstable. The Intermediaries' insolvency ultimately resulted in the Physicians not being paid for numerous services provided to the enrollees. The lawsuit, among other things, asserted a quasi-contract claim to recover the value of the Physicians unpaid services from the Plan Providers.
The California Medical court ruled that the CMA was not entitled to payments from the Plan Providers to cover services rendered by the Physicians under unjust enrichment because, among other reasons, any benefit conferred upon the Plan Provider by the Physicians was incidental to the Physicians' performance of their own obligations to the Intermediaries under the Intermediary-Physician Agreements.
1 Witkin, Summary 10th Contracts § 1020 (2005). But see Hartford Cas. Ins. Co. v. J.R. Mktg., 61 Cal.4th 988, 1000 (Cal. 2015) (describing the incidental benefits principle from California Medical in more limited terms).
Like California Medical, the parties in this case do not have contractual obligations to one another, but they do have payment and performance obligations to third parties.
There are genuine issues of material fact as to whether one or both of these legal doctrines — the voluntary payment doctrine and the incidental benefit doctrine — are applicable to this case. The potential applicability of these doctrines prevents the Court from granting summary judgment to the Trustee.
The Defendants argue that the statute of limitations, equitable estoppel, laches, and res judicata bar the Trustee's unjust enrichment/restitution claim. These are all affirmative defenses, enumerated in Fed. R. Civ. P. 8(c)(which is applicable pursuant to Fed. R. Bankr. P. 7008), and the Defendants, as the parties asserting the defense, accordingly carry the burden of proof for each of these defenses. See, e.g., Payan v. Aramark Mgmt. Servs. Ltd., 495 F.3d 1119, 1122 (9th Cir. 2007)("Payan is correct that because the statute of limitations is an affirmative defense, the defendant bears the burden of proving that the plaintiff filed beyond the limitations period."); Tovar v. U.S.P.S., 3 F.3d 1271, 1284 (9th Cir.1993) ("In every civil case, the defendant bears the burden of proof as to each element of an affirmative defense."); Howard v. Green, 555 F.2d 178, 181 (8th Cir. 1977)("Res judicata is of course an affirmative defense, Fed. R. Civ. P. 8(c), and the burden of proof is upon the party asserting it.")
These defenses do not, as a matter of undisputed fact, bar the Trustee's unjust enrichment claim.
The Defendants argue that the Court's allowance of their claims for additional, unpaid Management Fees bars the Trustee's claims in this proceeding for the return of Management Fees already paid.
This Court has previously rejected this res judicata argument by SCM when it denied SCM's motion for summary judgment that was based on res judicata (and subsequently denied SCM's motion for reconsideration of that ruling). [Dkt. 289, 417 & Reply RJN Exs. 6, 8] As the Court stated in its tentative ruling that was incorporated in the order denying SCM's Motion for Summary Judgment: "SCM has failed to meet its burden that the merits of each claim alleged in the SAC was previously decided by the Plans, Confirmation Orders, and/or the allowance of the Claims." [Dkt. 285 at 21] SCM has not offered any additional evidence on this point, relying on the same allowance of its claims, pursuant to a court-approved stipulation, the Trustee and Lehman's withdrawal of their objections, the Plan, and the Confirmation Order.
This ruling is not binding on this Court. As discussed above, under Peralta a denial of a motion for summary judgment and/or adjudication, such as Judge Smith's ruling on res judicata, is not binding law of the case.
However, the Court finds Judge Smith's thorough analysis of the res judicata issue [dkt. 285 at 921] persuasive on this point. Judge Smith also found it persuasive and relied upon it in her subsequent ruling granting the Trustee's Motion for Summary Adjudication [dkt. 378 at 8 (ex. A at 18)]. In fact, the Defendants have not introduced any evidence or argument on this issue to change the Court's conclusions that (i) the merits of these claims were not previously decided by the Plans, Confirmation Orders and/or allowance of the claims and (ii) the claims were reserved pursuant to the Plans. While the Defendants argue that the burden of proof has shifted, they have not pointed to any facts that controvert the facts relied upon in Judge Smith's ruling.
Schafer v. City of Los Angeles, 237 Cal.App.4th 1250, 1261 (Cal. Ct. App. 2
Thus, neither res judicata nor equitable estoppel are applicable to bar the Trustee's unjust enrichment claim.
However, it remains an issue of disputed fact whether the affirmative defenses of statute of limitations or laches bars the Trustee's unjust enrichment claim.
Magic Kitchen v. Good Things Int'l, 153 Cal.App.4th 1144, 1157 (Cal. Ct. App. 2
The delay from late 2008 until 2012 does not appear to have prejudiced SCM. Given the shut-down of the Marblehead Project, the bankruptcy of Lehman and Lehman's decision not to further fund the Project, the absence of any available funds, and the automatic stay arising from the Debtor's November 2008 chapter 11 case, there was nothing that SCM did or could have done. It did not receive further payments, or perform work. It could not have pursued the Debtor for payments, except through filing a proof of claim. Seeking to compel SCC JV Ventures to pay the Management Fees that the Debtor "wrongfully" paid would be fruitless because the documents provide that the money that SCC JV Ventures would use to pay the Management Fees would come from Lehman through the Debtor
On the other hand, the delay from 2005 until the Debtor's November 2008 petition date did prejudice SCM. Had the Debtor asserted that the Management Fees were not its direct responsibility, refused to pay, and demanded the return of payments already made prior to November 2008, SCM could have properly requested payment from SCC JV Ventures (which then could have sought payment from the Debtor).
Thus, the issue is whether that delay from 2005 to the 2008 petition date was reasonable or excusable. The Trustee has argued that, without its own employees, the Debtor lacked the ability to "knowingly" or "voluntarily" do anything. As discussed above, the Trustee's "no employees, no intent" argument is not well-taken. The Trustee also argued that the Defendants have presented no evidence that the delay was unreasonable. However, this three-year delay in asserting the Debtor's contractual rights is unreasonable on its face, unless the Trustee can present reason or excuse for the delay. The question of whether the delay from 2005 to 2008 is reasonable or excusable is an issue for trial.
The Trustee is correct that the Defendants' have already raised a statute of limitations defense in their motion to dismiss the FAC and the Court has ruled that the statute of limitations is not a bar to the unjust enrichment/restitution claim seeking (i) Management Fees and (ii) expenses paid in or after May 2008. [Order Partially Granting Defendants Motion to Dismiss ("FAC Dismissal Order"; Dkt. 90 & Reply RJN Ex. 5)] However, as discussed above, the law of the case doctrine does not require that the Court follow a decision made by the Court at the motion to dismiss stage of the proceedings. However, the Court may elect to follow such rulings if relevant and persuasive.
The FAC Dismissal Order concluded that the statute of limitations was four years (apparently in response to the Trustee's argument that the underlying cause of action is based on the Debtor's third-party beneficiary status under the DMA [Opposition to Motion to Dismiss ("Opposition"; Dkt. 75) at 19-20]), so the four-year statute of limitations under Cal. Civ. Proc. Code §337 for written contracts applied. The FAC Dismissal Order then dismissed the Trustee's unjust enrichment/restitution action for expenses paid before May 2008 only, allowing the remainder of the Trustee's unjust enrichment/restitution claim to proceed. The Trustee had argued that the Management Fees did not become subject to restitution until the Marblehead Project was transferred to Lehman in March 2012 [Opposition at 17, 20]; the Court appears to have accepted this argument, given its ruling that all claims for Management Fees were timely. The Trustee had also argued that the "adverse domination doctrine" tolled the statute of limitations [Opposition at 18-19], but doesn't appear to have won that argument, given the dismissal of the claim for pre-May 2008 expenses.
The Court will not follow this statute of limitations ruling from the FAC Dismissal Order. As discussed above, the Ninth Circuit in Peralta has held that pre-trial rulings are not binding as law of the case. The rationale for this holding is even stronger for motions to dismiss (as opposed to the motions for summary judgment at issue in Peralta): motions to dismiss test allegations rather than evidence. Furthermore, the FAC Dismissal Order is not persuasive because it does not provide analysis in support of its conclusions and the Court's reasoning can only be presumed from the arguments made by the Trustee. That level of analysis was appropriate in the context of asking whether the Trustee's allegations were sufficient for this proceeding to continue, but this motion asks for judgment in favor of the Trustee and demands both evidence and fuller analysis. Finally (and as discussed more fully below), the FAC Dismissal Order's conclusion that the Trustee's unjust enrichment/restitution claim is governed by the four-year the statute of limitations for written obligations is inconsistent with this Court's conclusion above that the DMA and this unjust enrichment/restitution claim do not share the same subject matter. The Court will accordingly consider the statute of limitations issue afresh.
This action was commenced in May 2012.
The statute of limitations is either (i) the two years provided under §339 for obligations not founded upon a writing (see, e.g., Iverson, Yoakum, Papiano & Hatch v. Berwald, 76 Cal.App.4th 990, 996, (Cal. Ct. App. 2
Dintino, 167 Cal.App. 4
Applying these periods (and ignoring any applicable discovery delay discussed below), the unjust enrichment claim would need to have accrued on or after either May 2009 (under a three-year statute of limitations) or May 2010 (under a two-year statute of limitations.
With respect to accrual, unjust enrichment requires receipt of a benefit and unjust retention of the benefit at the expense of another. Clearly, the benefit was received by SCM each time it received a payment from the Debtor over the course of many months from 2005 to 2008. Thus, the unjust enrichment claims would arise whenever SCM's retention of the fees became unjust; but when this occurred is not a simple question. The D.C. Circuit has decided a number of cases on this issue, determining that the retention became unjust when the defendant first refused to pay for the benefit. Bregman v. Perles, 747 F.3d 873, 876-77 (D.C. Cir. 2014) and the cases cited therein. But the Debtor never requested the return of this money. Holding that the statute did not run until the Trustee demanded payment would delay accrual indefinitely and would essentially allow the plaintiff Trustee to control the start of the limitations period. Thus, there is no clear cut date when SCM refused to return the management fees or SCM's retention otherwise became unjust.
Furthermore, the accrual of a claim based on mistake under Cal. Civ. Code §338 can be delayed until the plaintiff's discovery or reason to discover the mistake. See, e.g., Dintino, 167 Cal.App. 4
At this point (the resolution of a motion for summary judgment brought by the plaintiff), it suffices to say that the Trustee has not shown that — as a matter of undisputed fact — his unjust enrichment claim is timely. Cf. Bregman, 747 F.3d at 875 ("statute of limitations issues often depend on contested questions of fact").
The Trustee also argues that the Court entered an order extending and tolling the statute of limitations established by §546(a) for actions against SCM until June 1, 2012 and that §544(a), which is governed by §546(a) and under which the Trustee is granted all rights and powers of a judicial lien creditor, includes the right to pursue choses in action belonging to the Debtor. This argument does not appear to be well taken.
The extent of the Trustee's powers under §544(a) is set by the powers granted to a judicial lien creditor under state law. See, e.g., In re Michael, 49 F.3d 499, 500 (9th Cir. 1995)("Section 544(a) of the Bankruptcy Code, the `strong arm clause,' grants the trustee certain powers under state law with respect to the debtor's property"). The cases cited by the Trustee in support of §544(a) giving a trustee the power to pursue choses in action were all decided under non-California law. California law specifically provides that a judgment creditor may take a lien on causes of action that are the subject of a pending action. Cal. Civ. Proc. Code §696.030; §708.410. I have not found any cases allowing the judgment creditor to create a lien against choses of action that had not yet been asserted in court and the specificity of §696.030 and §708.410's reference to "that is the subject of a pending action" strongly suggests that a judicial creditor cannot levy on such not-yet asserted choses in action. Thus, the Trustee's powers under §544(a) do not appear to include the right to pursue choses in action.
As genuine issues of fact remain as to the applicability of both laches and the statute of limitations, each of these affirmative defenses prevents the Court from granting summary judgment to the Trustee on his unjust enrichment claim.
Motion granted in part and denied in part. The Court cannot grant summary judgment to the Trustee on his unjust enrichment/restitution claim, but can grant summary adjudication that:
The Trustee has interposed numerous objections to the numerous declarations filed by the Defendants in support of their Opposition.
However, the Court's ruling is based primarily on the express terms of the DMA, the prior rulings of this Court, and a limited number of other facts. Accordingly, the Court will consider only the evidentiary objections to the testimony that the Court considered in reaching its conclusions (not including Undisputed Facts proposed by the Trustee that were not disputed by the Defendants), which is testimony regarding the following issues:
Any evidentiary objections not listed below addressed facts that were not relevant to the Court's ruling herein.
(In particular, the vast majority of the Defendants' "Additional Facts" support the Defendants' argument that the course of dealing and other contracts governing the Marblehead Project gave rise to an obligation by the Debtor to pay SCM. However, as discussed above, the Court has already rejected this argument with the Declaratory Relief Orders. Thus, the Court did not consider testimony supporting these Additional Facts.)
Oral Ruling at 7.
It held that the express terms of the contracts governing payment among the parties precluded an action for unjust enrichment. (It is here that the court quoted the California Supreme Court:
94 Cal. App. 4th at 172-73.) In this case, there are no express contract terms barring or even covering the payments sought by the Trustee (as set forth above).
It also held that the Physicians were strangers to the Plan Provider-Intermediary Agreements and the Plan Provider-Enrollee Agreements, and so could not use unjust enrichment to affirm or void any portion of those contracts. In this case, the Court has previously found that the Trustee is a third-party beneficiary to the DMA.
