VIRGINIA A. PHILLIPS, Chief District Judge.
Michael Bello ("Bello") was the sole shareholder, sole director, and president of Walldesign, Inc. ("Walldesign"), a California corporation. (
Walldesign filed its Chapter 11 petition for relief on January 4, 2012. The Official Committee ("the Committee") of Unsecured Creditors of the Estate of Walldesign was appointed on January 26, 2012.
Appellee filed a motion for summary judgment against Appellants on April 13, 2016. The bankruptcy court granted Appellee's motion for summary judgment and Appellants timely filed the instant appeal.
After consideration of the papers filed by the parties in this appeal, the Court AFFIRMS the bankruptcy court's decision in part and REVERSES the bankruptcy court's decision in part.
The Bankruptcy Court held that Appellants received actual and constructive fraudulent transfers from Walldesign and that both David Ehren Jordan and Ehren Jordan Wine Cellars, LLC were the initial transferees. (
In this appeal, Appellants filed their opening brief on May 12, 2016. (
A "district court functions as an appellate court in reviewing a bankruptcy decision and applies the same standards of review as a federal court of appeals."
The bankruptcy court's decision to grant summary judgment is reviewed
The following facts are not in dispute.
Walldesign is a California corporation that was established in 1983. (Responsive Br. at 4.) Until 2012, it installed drywall, insulation, acoustical material, and plaster, and provided construction-related services to single and multi-family housing projects in California, Nevada, and Arizona. (
On November 1, 2002, Bello opened a bank account in Walldesign's name at Preferred Bank in Irvine, California ("the Secret Account"). (Responsive Br. at 5.) He used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him authority as an agent of Walldesign to open the Secret Account. (
Walldesign purchased materials for its business in bulk, and its suppliers occasionally issued rebates or refunds for these purchases. (
Bello used the money in the Secret Account to cover expenses unrelated to Walldesign, including operating costs for Bello Family Vineyard, a winery, and Michael Bello LLC, a horseracing stable, as well as other entities he controlled; his Las Vegas casino bills; his personal expenses charged on his American Express credit card; and his homeowners' association and country club fees for two private golf courses. (
David Ehren Jordan is a wine maker in Napa, CA and the owner of Ehren Jordan Wine Cellars, LLC ("Wine Cellars"). (Opening Br. at 3.) In 2007, Bello hired Wine Cellars to provide wine production services for Bello Family Vineyard. (
Wine Cellars sent monthly invoices to Bello on Wine Cellars letterhead that contained the Wine Cellars corporate address and contact information. (
Although the invoices were always sent on Wine Cellars letterhead, Bello issued one check to "Ehren Jordan." (Opening Br. at 5.) Despite the payee variation on this check, it was endorsed by Wine Cellars and deposited into the Wine Cellars corporate bank account. (
Appellants assert that Appellee failed to provide any direct evidence, or sufficient circumstantial evidence, to establish that Bello's payments to Wine Cellars were made with the intent to hinder, delay, or defraud his creditors. (Opening Br. at 12-19.) Thus, Appellants contend that the bankruptcy court erred in finding that a number of Bello's payments to Wine Cellars were actual fraudulent transfers and granting summary judgment to Appellee.
California Civil Code section 3439.04 provides that:
Cal. Civ. Code § 3439.04(a)(1).
In cases of fraudulent transactions, where the real intent of the parties is solely within their own knowledge, "[d]irect proof of a transfer and of a fraudulent intent is often an impossibility. Hence proof indicative of a transfer and of fraud may come by inference from circumstances surrounding the transaction, the relationship and interest of the parties."
Cal. Civ. Code §§ 3439.04(b)(1)-(11).
This list of relevant factors "provides neither a counting rule, nor a mathematical formula."
Here, three badges of fraud are particularly relevant: the transfers were concealed from Walldesign; Walldesign did not receive reasonably equivalent value in exchange for the transfers; and the transfers and Secret Account were concealed from Walldesign's creditors.
As explained below, the Secret Account was a Walldesign account. Further, Bello did not disclose the Account in Walldesign's general ledger or other books and records, and did not disclose the Secret Account to Walldesign's management or creditors. (Responsive Br. at 3,5.) Further, no evidence has been presented to suggest that the services provided by Appellants to Bello Family Vineyard provided any value to Walldesign.
There is no minimum number of factors required for a court to make a finding of fraudulent intent.
Appellants also contend that the bankruptcy court erred in finding that the transfers made to Appellants after October 31, 2008 were constructive fraudulent transfers because there is a genuine dispute regarding Walldesign's insolvency date. (Opening Br. at 19-20.
Under California Civil Code § 3439.05, a transfer may be set aside and recovered as a constructive fraudulent transfer if the debtor was insolvent at the time of the transfer, or became insolvent as a result of the transfer, and the debtor did not receive reasonably equivalent value in exchange for the transfer.
The bankruptcy found that Walldesign was insolvent by no later than October 31, 2008, which was the opinion of Appellee's expert. (
Under California law, the solvency of a debtor can be determined by the application of one of three tests. "A debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets." Cal. Civ. Code § 3439.02(a). Additionally, "[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent. Cal. Civ. Code § 3439.02(c). The third test for insolvency requires a determination of whether the debtor "was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction." Cal. Civ. Code § 3439.04(a)(2)(A).
Here, Appellee's expert's methodology addressed the "Balance Sheet Test" under California Civil Code §3439.02(a), and determined that the sum of Walldesign's debts was greater than all of its assets by no later than October 31, 2008. (
Appellants rely solely on Walldesign's balance sheets, which were created using generally accepted accounting principles ("GAAP") in order to demonstrate that Walldesign was solvent through 2010. (Opening Br. at 19.) California Civil Code section 3439.02(a) is clear that "fair valuation" rather than GAAP is the appropriate methodology to employ in a determination of insolvency. Cal. Civ. Code § 3439.02(a);
As explained above, Appellants have failed to provide any evidence indicating that Appellants services provided any value to Walldesign. Therefore, the transfers from Walldesign to Appellants after October 31, 2018 were constructive fraudulent transfers because they occurred after Walldesign was insolvent and Appellants have provided no evidence of any value to Walldesign. Accordingly, the bankruptcy court did not err in holding the same.
Appellants assert that the bankruptcy court erred in finding that Appellants were the initial transferees as a matter of law. (Opening Br. at 20.)
Under the Bankruptcy Code, a trustee of the debtor may recover a fraudulent transfer of estate property from either "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee."
The distinction between an "initial transferee" and a subsequent transferee is critical.
"Section 550(a) does not define the phrase `initial transferee.'"
"Under the dominion test, a transferee is one who has dominion over the money or other asset, the right to put the money to one's own purposes."
The leading case on the dominion test,
In its most recent statement on the issue, the Ninth Circuit Court of Appeals echoed these considerations.
The
This notion is not novel. The Ninth Circuit in
The
As these cases demonstrate, a corporation's principal who effects a transfer from the corporation in his representative capacity does not have dominion over those funds in his personal capacity, and therefore does not constitute an initial transferee of those funds under the Bankruptcy Code.
Applying this definition of "initial transferee," the Court holds that Bello was not the initial transferee. Bello did not have dominion over the funds in the Secret Account except in his capacity as a Walldesign representative. Moreover, he was the sole shareholder and president of Walldesign, and he therefore did not have the proper incentives to monitor Walldesign for fraud. Considering him the initial transferee of a transfer from Walldesign would undermine the structure of § 550(a)(1).
Courts have suggested that a corporate principal's transfer of corporate funds into a personal bank account may afford the principal dominion over those funds.
Appellants point to several facts to show that the Secret Account was Bello's personal account: Bello used his personal address to open the Secret Account; the account was never included on Walldesign's financial statements; and Bello's wife — who was not a Walldesign employee — was a signatory to the Account. (Opening Br. at 24).
On the other hand, Bello used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him signing authority as an agent of Walldesign to open the Secret Account. (
Although the transfers Bello made from the Secret Account were improper and breached his duty to the corporation, he effected them in his capacity as a Walldesign representative. He did not, therefore, have dominion over the funds in the Secret Account in his personal capacity,
As explained above, the payments from Walldesign for services rendered by Wine Cellars were the initial fraudulent transfers. Appellants contend that, even if Wine Cellars was the initial transferee, the bankruptcy court erred by holding David Ehren Jordan personally liable for a check payable to "Ehren Jordan" because, by issuing that check, Bello intended to pay Wine Cellars for services that it provided to Bello Family Vineyards. (Opening Br. at 9-10.)
Under section 3110(a) of the California Commercial Code:
Cal. Com. Code § 3110.
The check made payable to "Ehren Jordan" referenced "Invoice 282" and was made for an identical amount to what was invoiced by Wine Cellars on invoice 282. (
Appellee asserts that Bello's intent is not material because the dominion test is concerned purely with David Ehren Jordan's legal rights. (Responsive Br. at 26.)
As explained by the Ninth Circuit in
Hence, there is a genuine issue as to whether Bello intended to pay David Ehren Jordan or Wine Cellars when he issued checks to "Ehren Jordan" for services rendered by Wine Cellars, and this fact is material to whether or not Jordan took dominion over the funds in his personal capacity.
Appellants contend that the bankruptcy court erred in its application of available affirmative defenses under the California Uniform Fraudulent Transfers Act and the Bankruptcy Code.
As written at the time of the relevant transfers,
Here, Appellants do not contend that Walldesign received any value from the work done by Wine Cellars on Bello Family Vineyards. Appellants merely assert that the statute, as previously written, did not expressly require that reasonably equivalent value be determined from the perspective of the debtor. (Opening Br. at 28.) The Ninth Circuit's statement in
Section 3439.08 (a) requires that the transfer be taken in both good faith and for reasonably equivalent value. The bankruptcy court did not err in its finding that Appellants did not provide reasonably equivalent value to Walldesign, and thus did not err in finding that Appellants were not entitled to the affirmative defense set forth in section 3439.08 (a). This Court does not address the bankruptcy court's analysis of whether or not Appellants received the transfer in good faith.
In addition, as explained above, the bankruptcy court did not err in finding that Appellant Wine Cellars was the initial transferee. Thus, the bankruptcy court did not err in finding that Appellants were not entitled to affirmative defenses under California Civil Code section 3439.08(b) and Bankruptcy Code Section 550(b) because Appellants were not subsequent transferees.
Appellants assert that the bankruptcy court erred in admitting the declarations of Jack Reitman and Brian Weiss. (Opening Br. at 34-35.) Further, Appellants contend that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without citing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (
A district court reviews a "bankruptcy court's evidentiary rulings for an abuse of discretion."
Appellants contend that the bankruptcy court abused its discretion in admitting the declarations of Jack Reitman and Brian Weiss because they contain material that is based upon information and belief as well as impermissible hearsay. (Opening Br. at 34-35.) Appellee asserts that the declarations were admissible as summaries of voluminous documents under Federal Rule of Evidence 1006.
Federal Rule of Evidence 1006 provides that:
Fed. R. Evid. 1006.
This court has reviewed Appellants' evidentiary objections and agrees with the bankruptcy court that the Reitman and Weiss declarations were properly admissible under Rule 1006. It appears that these declarations were summaries of the case background and shortened the record by several hundred pages. (Responsive Br. at 30.) This court finds that the bankruptcy court did not abuse its discretion in admitting the Reitman and Weiss Declarations, and even if it did, any potential abuse of discretion was not prejudicial.
Appellants contend that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without providing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (Opening Br. at 35-36.)
Under California law, an action to void an actual fraudulent transfer requires the existence of a creditor whose claim "arose before or after the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.04. An action to void a constructive fraudulent transfer requires the existence of "a creditor whose claim arose before the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.05.
Here, Appellants contend that Appellee failed to include any admissible evidence indicating the existence of these claims in the materials submitted in support of his motion for summary judgment. (Opening Br. at 35.) Appellee argues that he did prove the existence of these claims with the proof of claims filed on the main bankruptcy docket. (Responsive Br. at 43.)
Federal Rule of Evidence 201 provides that a court may take judicial notice on its own of an adjudicative fact that "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. Thus, the bankruptcy court could have taken judicial notice of the existence of proofs of claim filed by Walldesign creditors on the main bankruptcy docket.
Further, even if the bankruptcy court did abuse its discretion in taking judicial notice of the existence of claims, Appellants have not asserted that these claims did not in fact exist. Thus, Appellants have failed to show that they were prejudiced in any way. Therefore, the bankruptcy court did not err by taking judicial notice of the existence of claims against Walldesign by creditors prior to October 31, 2008.
Appellants contend that the bankruptcy court erred in its determination that Walldesign was insolvent as of October 31, 2008 despite Appellants' contention that there was a genuine issue of material fact concerning the date of Walldesign's insolvency. (Opening Br. at 36.)
As explained above, Appellants have failed to provide sufficient evidence to demonstrate a genuine dispute regarding the date of Walldesign's insolvency. Thus, the bankruptcy court did not err in finding that Walldesign was insolvent by no later than October 31, 2008.
The bankruptcy court has discretion to award prejudgment interest on avoided fraudulent transfers.
California Civil Code section 3287 governs the award of prejudgment interest in this action. Subsection (a) of that statute provides that "[a] person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that day. . . ." Cal. Civ. Code § 3287. "The rate of seven percent per annum is appropriate on the claims under state law, asserted by virtue of 11 U.S.C. § 544(b)."
Here, there is no dispute about the amount of damages because the subject transfers are definite in nature. Thus, the damages vested at the time that the transfers were made, and prejudgment interest should be calculated from the date of transfer. Accordingly, the bankruptcy court did not abuse its discretion by awarding prejudgment interest from the date of transfer, and did not err in finding that seven percent per annum is the appropriate interest rate.
The Court holds that the bankruptcy court did not err in finding that the transfers to Wine Cellars prior to October 31, 2008 were actual fraudulent transfers and that the transfers to Wine Cellars after October 31, 2008 were constructive fraudulent transfers. The Court also holds that the bankruptcy court did not err in finding that Wine Cellars was the initial transferee, but that there is still a genuine issue of material fact as to whether David Ehren Jordan was also an initial analysis of the available affirmative defenses, did not err in its evidentiary holdings, and did not err in awarding prejudgment interest. The Court