BETH LABSON FREEMAN, District Judge.
Appellant True Traditions, LC ("Appellant" or "TT") appeals the judgment of the bankruptcy court avoiding a fraudulent conveyance of real property located at 415-417 Tehama Street, San Francisco, California ("Tehama Property"). For the reasons stated herein, the judgment of the bankruptcy court is AFFIRMED.
This adversary proceeding stems from two bankruptcy cases involving a debtor, Richard ("Rick") Louie, Jr.,
On May 3, 2013, Appellee Carol Wu, the chapter 7 trustee for the individual bankruptcy estates of Rick and his wife, Stephanie Chan, filed the originating complaint in the underlying adversary proceeding in bankruptcy court seeking declaratory relief and to avoid fraudulent transfer. Appellees' App. (hereinafter "ER"), ECF 24, Exh. 1. The complaint asserted that Rick and Stephanie had failed to disclose as their personal assets a brokerage account at Merrill Lynch; that funds from the Merrill Lynch account had been used to purchase the Tehama Property in the name of Rick's mother, Mary Louie; that Mary then executed a grant deed transferring her fee title interest in the Tehama Property to Appellant True Traditions, LC, a purported New Mexico limited liability company, for no consideration; and that Rick, Stephanie, Mary, or TT might claim ownership over the Tehama Property. Id. ¶¶ 8-13. Appellee Wu accordingly sought a declaration that the Tehama Property belonged to the bankruptcy estate and to, among other things, avoid any transfer of interests in the Merrill Lynch account and Tehama Property made within two years of the filing of the complaint.
On June 28, 2013, Appellee Linda Green, the chapter 11 trustee for the bankruptcy estate of Homer Ventures LLC, a limited liability company formed and controlled by Rick, filed a motion to intervene in the Tehama Property action. ER Exh. 2. That motion was granted, and the two trustees filed their combined complaint-in-intervention on August 1, 2013 naming Rick, Stephanie, Mary, and TT as defendants. ER Exh. 3. The trustees eventually entered into a settlement whereby trustee Green would prosecute this lawsuit and agree to split any recovery with trustee Wu. See ER Exh. 16 (Bankruptcy Court's Order Following Trial (hereinafter "Trial Order")) at 2. On January 15, 2014, the bankruptcy court also approved a joint stipulation of partial dismissal, through which the trustees agreed to dismiss Rick, Stephanie, and Mary without prejudice and pursue their declaratory relief and fraudulent transfer claims solely against Appellant TT. ER Exh. 6.
Appellant and Mary — represented by the same counsel — filed several motions thereafter. Appellant moved to dismiss the action for "lack of jurisdiction/authority" on January 27, 2014. ER Exh. 7.
3/31/14 Hr'g Tr. 6:9-18. On that basis, the bankruptcy court denied Appellant's motion to dismiss. ER Exh. 9. As to Mary's motion to intervene, the bankruptcy court considered Mary's arguments for intervention as of right and permissive intervention and rejected them both. In so doing, the court found that Mary's application was untimely, 3/31/14 Hr'g Tr. 11:6-10, and that intervention would complicate the proceedings — which were close to trial — and prejudice the plaintiff-trustees, id. 11:11-12. Furthermore, the court found that Mary had no "protectable interest" in the Tehama Property:
Id. 13:10-19. The court also rejected Mary's alternative argument that she has an equitable interest in the Tehama Property arising out of a constructive trust, explaining:
Id. 13:21-14:15. In sum, the court found that any interest Mary personally had in the Tehama Property was, "[a]t best, ... an interest in True Traditions as the member of that company." Id. 14:22-24. On the basis of that reasoning, the bankruptcy court concluded that any interest Mary had in the property could be adequately represented by TT and its counsel. Id.
The parties then filed cross-motions for summary judgment, with Appellant affirmatively seeking judgment as a matter of law that "at least 89.3% of the Tehama property is equitably owned by True Traditionis, L.C. [sic] and/or Mary Louie" and that "as of October 1, 2009, 89.3% of the monies in the Merrill Lynch Account was not an `interest in the debtor [Rick Louie] in property." ER Exh. 12 at 2. The bankruptcy court granted summary adjudication for Appellees on certain facts not in material dispute. ER Exh. 13 (Order on Cross Mots. for Summary J. (hereinafter, "MSJ Order")) at 9-10. The court denied Appellant's cross-motion, finding that there were disputed "material issues of fact" on Appellant's tracing evidence that may require the testimony of expert witnesses. Id. at 9.
The case then proceeded to two-day bench trial on June 9 and 10, 2014. On July 14, 2014, the bankruptcy court entered its post-trial order finding for Appellees and ordering that title to the Tehama Property be reformed and placed in the name of the chapter 7 estate of Rick and Stephanie for administration by the trustee-Appellees. ER Exh. 16 (Order Following Trial (hereinafter, "Trial Order")). On July 28, 2014, the bankruptcy court entered its Judgment Avoiding Fraudulent Transfer. ER Exh. 17. This appeal followed.
A little background on the origins of the Tehama Property is necessary to understand the convoluted arguments in this case. The essential facts are set forth in the bankruptcy court's Trial Order, are largely undisputed, and are well-founded in the record.
In May 2003, Mary Louie and Richard Louie, Sr. sold a grocery store they owned and operated in Williams, California ("Sav-Mor Grocery") for $280,000. Out of the proceeds of that sale, Mary and Richard Sr. purchased two investment properties at 965 Amherst Street and 241 West Utica Street, Buffalo, New York (collectively, "The Buffalo Properties"). The properties were purchased for $695,000 through a 1031 tax free exchange. This meant the sale deferred Richard Sr.'s and Mary's gains on the sale of the grocery store until the Buffalo Properties were sold. Title to both of the Buffalo Properties was taken in the names of four individuals: Richard Sr., Mary, Rick (Richard Sr.'s and Mary's only child), and Stephanie.
Even before the sale of the Sav-Mor Grocery, on February 27, 2003, Richard Sr., Mary, Rick, and Stephanie entered into a Partnership Agreement, supposedly in connection with the purchase of the Buffalo Properties. Pl. Trial Exh. 9.
On June 15, 2003, Richard Sr. and Mary executed grant deeds transferring ownership of the Buffalo Properties to Rick and Stephanie. The deeds state that consideration of $1.00 was paid. Richard Sr. passed away in October 2003. The grant deeds were not recorded until June 11, 2007.
In the bankruptcy court's words, "[w]hatever the chain of title on the Buffalo Properties, the next steps were conducted solely by Rick Louie and Stephanie Chan." Trial Order at 4. On July 17, 2007, Rick and Stephanie sold the two Buffalo Properties to a third party for $690,000. They alone executed the warranty deed to the buyer, which was recorded on September 21, 2007. Pl. Trial Exh. 28. The buyer paid for the properties by assuming $473,541.64 in existing debt, executing a new promissory note for $146,458.76, and assuming $70,000 in liabilities. In September 2009, after refinancing the properties and paying off the loans, the buyer sent a check for $190,751 payable to Rick only. Pl. Trial Exh. 37.
Rick deposited the check from the buyer of the Buffalo Properties into a Merrill Lynch account ending in 70343, which was held in both Rick's and Mary's name. See Trial Order at 4; Pl. Trial Exhs. 39. The bankruptcy court found that "Rick Louie exercised substantial control over the Merrill Lynch Account." Trial Order at 4. As the evidence showed, Rick and Stephanie used the Merrill Lynch account as their own personal account. On August 26, 2009, Rick and Stephanie deposited a $42,722.20 federal income tax refund into the account. Pl. Trial Exhs. 35, 39 at 5. Beginning in 2011, Rick and Stephanie deposited $15,000 a month into the account and wrote numerous checks on the account for personal or family expenses. Pl. Trial Exhs. 1 at 8, 85. By contrast, Mary had minimal involvement with the Merrill Lynch account, receiving about $1,200 per month through checks written on the account that were signed by Rick. Pl. Trial Exh. 1 at 575-95; see Trial Order at 4-5.
In October 2007, Rick and Stephanie purchased an investment property at 580 Parkson Road, Henderson, Nevada ("Parkson Property") through a limited liability company called Waiyan Ventures. Waiyan Ventures borrowed $2,650,000 to complete the purchase. In April 2009, Waiyan Ventures defaulted on the loan and the lender instituted foreclosure proceedings. On January 15, 2010, the property was sold in foreclosure. Thereafter, on January 19, 2010, the lender filed a complaint against Rick and Stephanie to recover a deficiency judgment. The lender ultimately recovered a judgment on this claim in the amount of $1,725,489.19. Trial Order at 5.
On October 1, 2009, while the foreclosure on the Parkson Property was in progress, Rick negotiated the purchase of a promissory note from an unrelated entity called True Traditions, Inc. secured by a lien on the Tehama Property. Pl. Trial Exhs. 40, 42. In the Loan Sale Agreement, Rick designated an entity called Homer Ventures, LLC, to complete the purchase of the note.
On May 5, 2011, Rick and Stephanie each filed petitions for chapter 7 bankruptcy. Pl. Trial Ex. 78. Neither spouse disclosed the Merrill Lynch account as an asset. On July 20, 2011, the holder of the Parkson Property loan filed an adversary action against Rick and Stephanie to deny their discharge for fraud. See 580 Parkson Road LLC v. Louie, U.S. Bank. Ct. N.D. Cal. A.P. No. 11-5217 SLJ. On August 17, 2012, Homer Ventures, LLC filed a separate chapter 11 bankruptcy petition in the Santa Rosa division of the Northern District of California.
The 580 Parkson Road court held a two day trial on January 7 and 8, 2013 to determine whether Rick and Stephanie should be denied a discharge. ER Exh. 1 (Compl.) Exh. A. That court ultimately ruled that Stephanie would be allowed to discharge her debt but that Rick and Homer Ventures should be denied a discharge due to Rick's "false oaths" in connection with both his own bankruptcy case and that of Homer Ventures. Id. at 19-21. Critical to the court's consideration was Rick's failure to disclose the Merrill Lynch account and the Tehama Property, both indicative of a broader pattern of engaging in "countless transactions and in countless ways ... to make his interests and those of Homer Ventures opaque." Id. at 20.
On January 19, 2013, days after 580 Parkson Road court tried the case but before it had rendered its decision, Rick, in another bid to hide assets, prepared another grant deed whereby Mary transferred
The bankruptcy court reviewed this sequence of events and concluded that "[t]he timing, the use of related entities, and the transparent attempt to keep his name off the property all show fraudulent intent." Trial Order at 13.
In addition to extensive documentary evidence, the parties presented four witnesses in the two-day bench trial before the bankruptcy court. Appellees introduced the testimony and expert reports of Jay Douglas Crom, an expert on accounting and insolvency issues, and M. Patricia Fisher, a handwriting expert. Pl. Trial Exh. 1 (Crom Report), Exh. 2 (Fisher Report).
Mr. Crom testified and confirmed his opinion from his report that he could not conclude that the money used to purchase the Tehama Note came from the proceeds of the sale of Richard Sr.'s and Mary's Sav-Mor Grocery in 2003. Trial Tr. 15:21-16:10. He explained that there had been "extensive commingling" of funds between Rick, his wife, and his parents and that the funds used to purchase the Tehama Note came from "numerous transactions that involved title changes" as well as sources of money that were solely belonged to Rick and Stephanie. Id. 16:11-17:1. Furthermore, Mr. Crom testified that he examined the transaction papers that led to Mary being recorded as the title owner of the Tehama Property and opined that there was no evidence Homer Ventures received lawful consideration for that transfer. Id. 17:4-18. The bankruptcy court found his report "helpful in laying out a factual background for the case" but disregarded Mr. Crom's factual conclusions, which were "the court's province." Trial Order at 7.
Ms. Fisher testified only long enough to be qualified as an expert and to authenticate her report. Trial Tr. 66:7-70:9. In her report, Ms. Fisher opined regarding 28 signatures on documents purported to be those of Mary Louie and concluded that the "vast majority" were not her signature, but rather facsimiles or copies. Trial Order at 7; Pl. Trial Exh. 2. The only question that Appellant asked on cross-examination was whether Ms. Fisher requested originals of the documents that she examined and she acknowledged that she requested the originals but never received them. Trial Tr. 70:3-7.
Appellant introduced the testimony of William Higgins, the New York attorney who represented the Louie family in the acquisition of the Buffalo Properties, as well as the testimony and report of Howard Grobstein, an experienced chapter 7 trustee, who opined that the proceeds from the sale of the Sav-Mor Grocery could be traced to the purchase of the Tehama Property.
Mr. Higgins identified and explained certain documents involved in the 1031 exchange involving the Sav-Mor Grocery and the Buffalo Properties. He admitted that he never spoke to Mary, did not know who made the money transfers involved in
Mr. Grobstein conducted tracing analysis to demonstrate that a significant portion of the funds for the purchase of Tehama Property came from the proceeds of the sale of the Sav-Mor Grocery. See Trial Tr. 119:19-129:21. He opined from his tracing analysis that Mary had an equitable interest of approximately 83% to 85% in the Tehama Property. Id. 131:2-6. On cross-examination, Mr. Grobstein admitted that he reviewed only the documents that Rick provided him and that he had not seen the 2003 grant deed transferring interest in the Buffalo Properties from Mary and Richard Sr. to Rick and Stephanie, nor had he seen the monthly checks that Rick wrote to Mary from the Merrill Lynch account. Id. 136:22-5, 143:8-144:8, 159:3-161:10. The bankruptcy court credited Mr. Grobstein's testimony but concluded that he was wrong. Trial Order at 7.
Neither Rick nor Mary testified at trial. Appellees did enter into evidence the transcripts from their prior depositions, including two depositions of Mary conducted on November 19, 2012 and March 6, 2014. Pl. Trial Exhs. 73 (11/19/12 Mary Louie Dep. Tr.), 74 (3/6/14 Mary Louie Dep. Tr.).
Appellant charges the bankruptcy court with a number of errors. The questions presented in this appeal, quoted from Appellant's opening brief, are as follows:
Appellant Br. at ii ("Questions Presented"), ECF 18. The applicable standard of review on appeal depends on whether the bankruptcy court properly entered final judgment. As such, the Court must address Appellant's fourth question — which this Court construes as a threshold challenge to the bankruptcy court's authority
In ruling on the parties' cross-motions for summary judgment, the bankruptcy court concluded that Appellant had impliedly consented to the court's authority to enter final judgment by (1) not objecting to Appellees' summary judgment motion based on the court's lack of authority to enter final judgment and (2) filing its own cross-motion for final judgment in its favor. MSJ Order at 4-5. Appellant challenges that finding of implied consent on appeal.
The Court begins by observing that despite raising the issue in its "Questions Presented," Appellant's opening brief contains no argument addressing whether the bankruptcy court had consent to enter a final judgment. See Appellant Br. 14-20. Appellant moreover fails to engage with the different standards of review to explain what difference, if any, there would be in the outcome of this appeal if the bankruptcy court did not have consent to enter final judgment.
Fraudulent conveyance claims are "core proceedings" under 28 U.S.C. § 157(b)(2) that bankruptcy courts are expressly authorized to "hear and determine." Id. § 157(b)(1). While § 157(b)(1) also authorizes bankruptcy courts to enter final judgment on such proceedings, Article III of the Constitution proscribes that authority. Thus, bankruptcy courts may not, as a constitutional matter, enter final judgment in proceedings — even core ones — that do not "stem[ ] from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011); In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 565 (9th Cir.2012) aff'd sub nom. Executive Benefits Ins. Agency v. Arkison, ___ U.S. ___, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014) (bankruptcy courts do not have "the general authority to enter final judgments on fraudulent conveyance claims asserted against noncreditors to the bankruptcy estate."). Such so-called Stern claims may, however, be heard and determined "in a manner consistent with the strictures of Article III." Bellingham, 702 F.3d at 565. This means that bankruptcy courts can hear Stern claims and submit proposed findings of fact and recommendations of law to the district court or enter
Consent need not be express. Because the authority of a bankruptcy court to enter final judgment is not an issue of subject matter jurisdiction but rather one of constitutional limitations, a party can waive its right to adjudication by an Article III court by impliedly consenting to the bankruptcy court's jurisdiction. See Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1942-45, 191 L.Ed.2d 911 (2015). "[T]he implied consent standard articulated in [Roell v. Withrow, 538 U.S. 580, 590, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003)] supplies the appropriate rule for adjudications by bankruptcy courts under § 157." Id. at 1948. The consent must be knowing and voluntary, as "Roell makes clear that the key inquiry is whether `the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case' before the non-Article III adjudicator." Id. (quoting Roell, 538 U.S. at 590, 123 S.Ct. 1696); see also Bellingham, 702 F.3d at 567-70.
As recognized by a Ninth Circuit Bankruptcy Appeal Panel, "passive and unwitting participation is not sufficient for a finding of voluntary consent." In re Pringle, 495 B.R. 447, 461 (9th Cir. BAP 2013). "The Ninth Circuit, for example, has rejected implied consent where a pro se plaintiff's initial act was to demand a hearing in the district court; the plaintiff proceeded with the magistrate judge only because she thought it was her only choice to obtain relief." Id. (citing Anderson v. Woodcreek Venture Ltd., 351 F.3d 911, 919 (9th Cir.2003)). On the other hand, the right to seek Article III adjudication can also invite litigation hijinks. Courts confronted with the thorny issue of implied consent to enter final judgment are finely attuned to the concerns of litigation misconduct and sandbagging identified in Stern. Stern, 131 S.Ct. at 2608. This concern is particularly acute where, as here, a party seeks affirmative relief from the bankruptcy court believing it might win and then cries foul over the court's entry of final judgment when it loses. Bellingham, 702 F.3d at 570; see also In re Carter, 506 B.R. 83, 88-89 (Bankr. D.Ariz.2014); In re G & S Livestock Co., 478 B.R. 906, 917-18 (S.D.Ind.2012); In re Washington Coast I, L.L.C., 485 B.R. 393, 409-11 (9th Cir. BAP 2012).
Here, Appellant answered the original complaint admitting that the bankruptcy court had jurisdiction. Only after Appellees stipulated to dismiss Rick, Stephanie, and Mary from the action did Appellant file its motion to dismiss claiming a purported lack of jurisdiction. As the bankruptcy court properly found — a finding unchallenged by Appellant — jurisdiction was not in issue, only whether Appellant had consented to the bankruptcy court's entry of final judgment. See 3/31/14 Hr'g Tr. 6:9-18.
Appellant then filed a cross-motion for summary judgment affirmatively seeking judgment in its favor. The motion did not raise the issue of consent. See ER Exh. 12. Indeed, no party mentioned consent until the bankruptcy court revived the issue sua sponte on the record at the May 5, 2014 hearing on the parties' cross-motions for summary judgment. There, the bankruptcy court queried whether Appellant had impliedly consented to the bankruptcy court's entry of final judgment by filing a cross-motion for summary judgment. When Appellant's lawyer hedged, the bankruptcy court asked:
5/5/14 Hr'g Tr. 4:9-22. Appellant's response was twofold. First, it argued that it felt it had to bring a motion for summary judgment because Appellees filed one. This argument was properly rejected by the bankruptcy court because Appellant sought affirmative relief in its cross-motion rather than merely oppose Appellees' motion. Id. 4:23-6:15. Second, Appellant appeared to suggest that the bankruptcy court could enter proposed findings of fact and conclusions of law on the parties' cross-motions for summary judgment. The bankruptcy court properly rejected that notion on the basis of In re Healthcentral.com, 504 F.3d 775 (9th Cir.2007), and the bankruptcy court's authority to dispose of pre-trial matters. Id. 7:9-8:13. The only evidence of its continued objection to the bankruptcy court's authority to enter of final judgment that Appellant is able to point to is this colloquy from the summary judgment hearing. Appellant Reply 14-15.
The bankruptcy court did not err in concluding that Appellant's actions constituted implied consent to its authority to enter final judgment. Appellant was aware of the need to consent and challenged the bankruptcy court's jurisdiction earlier in the proceeding (after initially admitting the court's jurisdiction). When it came time for summary judgment, however, Appellant sought final judgment in its favor without ever mentioning consent. Appellant argues that "if not allowed to bring a Cross-Motion for Summary Judgment, how else could Appellant True Traditions, L.C. seek a summary decision on the findings of fact? There is no statutory basis to file a Cross-Motion for Summary Judgment for findings of fact?" Appellant Reply 15. Indeed, there is no such thing as a motion for summary judgment for findings of fact, as the summary judgment standard requires that the facts not be in dispute. Fed. R. Civ. P. 56(a), as incorporated by Fed. R. Bankr. P. 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). More fundamentally, Appellant did not seek a finding that certain facts were not in dispute. Rather, it sought judgment as a matter of law in its favor that the funds used to purchase the Tehama Property could be traced to the proceeds from the sale of Richard Sr.'s and Mary's Sav-Mor Grocery. See ER Exh. 12 at 2.
The unmistakable implication from Appellant's motion is that it sought an entry of final judgment in its favor. See 5/5/14 Hr'g Tr. 5:20-6:15. Courts confronted with this situation have time and again concluded that the movant had impliedly consented to the bankruptcy court's authority to enter final judgment. Bellingham, 702 F.3d at 570; Carter, 506 B.R. at 88-89; G & S Livestock, 478 B.R. at 917-18; Washington Coast I, 485 B.R. at 409-11. Without a doubt, had Appellant prevailed, it would have been happy to see the bankruptcy court enter final judgment in its favor. Instead, Appellant lost. "Having lost before the bankruptcy court, [Appellant] cannot assert a right it never thought to pursue when it still believed it might win." Bellingham, 702 F.3d at 570.
That Appellant asked the bankruptcy court to enter proposed findings of fact and conclusions of law after the court raised the issue of consent sua sponte does not detract from this conclusion. By filing an affirmative motion for summary judgment, Appellant had already consented to entry of final judgment by the bankruptcy court. In order to maintain its objection to the bankruptcy court's authority, Appellant could have withdrawn its motion for summary judgment. After the bankruptcy court's summary judgment order issued, Appellant could have filed a motion to withdraw its consent. Appellant remained silent, proceeding through trial and post-trial briefing without raising the issue of consent again until this appeal. See ER Exhs. 15, 18. As such, Appellant's reliance on the colloquy from the summary judgment hearing to demonstrate an absence of consent is inapposite. If anything, it is merely more evidence of Appellant's adoption of a series of inconsistent positions when it suited its purpose: first admitting jurisdiction, then challenging it; seeking judgment from the bankruptcy court in its favor, then claiming lack of consent only when the bankruptcy court raised the issue; finally proceeding to trial on the merits (again without raising consent) and then seeking relief from this Court based on 15 a purported lack of consent after losing on the merits. Given this course of conduct, Appellant has waived the right to seek final judgment by an Article III court.
In sum, the Court finds that the bankruptcy court did not err in concluding that Appellant, through the filing of an affirmative motion for summary judgment in its favor, had impliedly consented to that court's entry of final judgment. Thus, to the extent this appeal implicates any of the bankruptcy court's findings of fact, those findings are subject to the "clear error" standard of review.
District courts employ the same standard of review of bankruptcy court decisions as do circuit courts in reviewing the decisions of the district court. See, e.g., Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir.1997). Findings of fact are reviewed for clear error, while conclusions of law are reviewed de novo. In re Strand, 375 F.3d 854, 857 (9th Cir.2004). On a clear error review of the bankruptcy court's findings of fact, those findings should not be disturbed unless "the court is left with the definite and firm conviction
Mixed questions of law and fact are reviewed de novo. In re Chang, 163 F.3d 1138, 1140 (9th Cir.1998); see generally In re JTS Corp., 617 F.3d 1102, 1109 (9th Cir.2010). Because the bulk of Appellant's appeal implicates conclusions of law or mixed questions of law and fact, the Court has reviewed the bankruptcy court's findings and conclusions de novo.
Appellant does not challenge the bankruptcy court's findings of undisputed facts at summary judgment, which includes the finding that Appellant is not a "good faith transferee" as the term is used in 11 U.S.C. § 550(b). MSJ Order at 10. Nor does it appear to challenge the court's ultimate conclusion that the transfer of the Tehama Property from Homer Ventures to Appellant was conducted with actual intent to defraud and, as such, constituted an avoidable fraudulent conveyance. Trial Order at 13-14. Instead, Appellant first, fifth, and sixth arguments on appeal can best be characterized as evidentiary challenges to the bankruptcy court's conclusion that the Tehama Property was purchased using funds that were an "interest of the debtor [Rick] in property." Id. at 12-13. If that conclusion was proper, then the Bankruptcy Court's determination that the subsequent transfer in ownership is an avoidable fraudulent conveyance stands.
Thus properly focused, Appellant advances three challenges to the bankruptcy court's determination that the Tehama Property was acquired using funds from the debtor's (Rick's) estate: (1) that the court held Appellant to the wrong burden of proof to prove tracing (Question 5); (2) that the court should have applied a presumption of undue influence to the 2003 grant deed concerning the Buffalo Properties (Question 1); and (3) that the court should have enforced the 2003 Partnership Agreement among Rick, Stephanie, Richard, and Mary (Question 6). The Court rejects each of these challenges.
Funds from a commingled bank account in the debtor's control are presumed to be property of the debtor's estate. Danning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, 1217 (9th Cir.1988). However, "funds held by a debtor in constructive trust for another person" wherein "the equitable interest in the trust funds belongs to the trust beneficiary, not the debtor" are not part of the bankruptcy estate. In re Advent Mgmt. Corp., 104 F.3d 293, 295 (9th Cir. 1997) (citing In re Unicom Computer Corp., 13 F.3d 321, 324 (9th Cir.1994)). "State law determines whether a trust exists in federal bankruptcy proceedings." Bullion Reserve, 836 F.2d at 1217. Under California law, an express trust can be created in several ways but requires the settlor to "properly manifest[ ] an intention to create a trust." Cal. Prob. Code § 15201. A constructive trust may also be imposed on property if that property is "wrongfully detain[ed]," Cal. Civ. Code § 2223, or gained "by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act," id. § 2224. In either instance, a party asserting an equitable interest in property that presumptively belongs to the debtor's estate bears the burden of "tracing the alleged trust property `specifically and directly'" back to the act that created the trust. Advent, 104 F.3d at 296; Bullion Reserve, 836 F.2d at 1218; see also In re Goldberg, 158 B.R. 188, 196 (Bankr.E.D.Cal.1993) aff'd, 168 B.R. 382 (9th Cir. BAP 1994) ("Strict tracing requires a creditor to demonstrate
At trial, Appellant's main defense to Appellees' claim under 11 U.S.C. § 548 to avoid the fraudulent transfer of the Tehama Property to Appellant was its argument that the funds used to purchase the Tehama Property were not "an interest of the debtor [Rick] in Property" and thus not subject to the trustees' avoidance power. This was because, as argued by Appellant, the money used to purchase the Tehama Note actually belonged to Mary and could be traced to the proceeds from the sale of the Sav-Mor Grocery store in 2003.
Appellant contends that the bankruptcy court applied an incorrect burden of proof on tracing based solely on one sentence from the court's post-trial order. After explaining that Appellees had demonstrated Rick's interest in the Tehama Property sufficient to shift the burden to Appellant to prove tracing, the court stated: "In other words, [Appellant] must show conclusively that the money in the account belonged to Mary Louie." Trial Order at 12 (emphasis added). Appellant takes from this verbiage that the bankruptcy court placed on it a greater burden of proving tracing than by a preponderance of the evidence. Appellant Br. 16-17. That contention is meritless.
"Conclusively" is not an evidentiary standard found in modern legal usage, as demonstrated by Appellant's reliance on Black's Law Dictionary and cases from before the turn of the 20th century. See Appellant Br. 17 (citing "The Law Dictionary Featuring Black's Law Dictionary Free Online Legal Dictionary 2nd Ed. Law Dictionary"; Hoadley v. Hammond, 63 Iowa 599, 19 N.W. 794 (1884); and Bixler's Appeal, 59 Cal. 550 (1881)
Other than the quoted sentence from the bankruptcy court's order, Appellant identifies nothing else in the record to suggest that the bankruptcy court deviated from the preponderance of the evidence standard and instead applied the archaic "conclusive evidence" standard. Appellant moreover does not attempt to demonstrate in any way that the outcome should have been different had the bankruptcy court applied a preponderance of the evidence standard. Nor can it, because the record amply supports the bankruptcy court's conclusion that Appellant failed to carry its burden of demonstrating strict and direct tracing.
At trial, the issue came down to a battle of the experts. Appellees' expert, Jay Crom, submitted a report that detailed "Rick Louie's financial empire" and opined that he could not conclude that the money used to purchase the Tehama Note came from the proceeds of the sale of Richard Sr.'s and Mary's Sav-Mor Grocery in 2003. Pl. Trial Exh. 1; Trial Tr. 15:21-16:10. The bankruptcy court found this testimony credible but properly reserved for itself the actual factual conclusions that could be drawn from the evidence. Trial Order at 7. By contrast, the testimony of Appellant's expert, Howard Grobstein, was determined by the bankruptcy court to be creditable but wrong. Id. Notably, at trial, Appellees elicited admissions from Mr. Grobstein that he formed his opinion regarding tracing based upon documents provided to him by Rick, that Rick had not shown him the two grant deeds executed by Mary and Richard Sr. transferring their interests in the Buffalo Properties to Rick and Stephanie, and that Rick never told him about Rick's monthly payments to Mary from the Merrill Lynch account. Trial Tr. 136:22-5, 143:8-144:8, 159:3-161:10. These admissions significantly undermine the accuracy of Mr. Grobstein's opinion, and the bankruptcy court appropriately afforded his opinion no weight.
Ultimately, the bankruptcy court concluded that Appellant's tracing argument was "inconsistent with the record developed at trial" and proceeded to detail all of the evidence adduced at trial showing that "whatever interest Mary Louie had in the Buffalo Properties was terminated sometime between 2003 (when she executed the first deed) to 2009 ...." Trial Order at 12-13. Appellant does not challenge this conclusion on appeal.
Appellant next charges the bankruptcy court with error in refusing to apply
First and foremost, Appellant did not raise the undue influence argument until its closing remarks after the presentation of evidence. See Appellee Br. 20; Trial Tr. 193:10-22. The theory that Appellant asserted and presented at trial was that the funds from the Merrill Lynch account used to purchase the Tehama Property could be traced back to Mary's and Richard Sr.'s sale of the Sav-Mor Grocery store and that Rick held those funds in trust. See ER Exh. 5 (Answer to Complaint-in-Intervention); Exh. 12 (TT's Cross-Mot. for Summary J.); Exh. 15 (TT's Trial Brief); see also Defendants' Case Management Statement, A.P. No. 13-5062 SLJ, ECF 21 (filed 9/19/2013) ("Mary's Monies Purchased Tehama Property. Debtors/Defendants core theory is that a straightforward accounting will show that Mary's Louie's [sic] monies from the $280,000 sale of her Grocery Store in Williams, CA were transferred into a Merrill Lynch account. Monies were then transferred out of the Merrill account to purchase the subject San Francisco Tehama property."). Rick's purported exercise of undue influence over Mary in securing the transfer of the Buffalo Properties or in any other transaction was not raised or even hinted at until the close of evidence at trial. This new theory rests not on the contention that the funds to purchase the Tehama Property were always Mary's, but rather on an implicit concession that she did relinquish her interest to Rick, but that the grant should be voided as a matter of public policy. See 6/9/14 Trial Tr. 191:19-24. The bankruptcy court appropriately pointed out that Appellant's undue influence argument presented "a totally different lawsuit." Id. 195:23. As even Appellant's own cited authority explains, it is highly improper for an appellant to advance a new theory after trial where the facts essential to the theory are in dispute. Strasberg v. Odyssey Grp., Inc., 51 Cal.App.4th 906, 920-21, 59 Cal.Rptr.2d 474 (1996). As such, the bankruptcy court would not have abused its discretion had it simply refused to consider Appellant's untimely undue influence argument. Accord Strasberg, 51 Cal.App. at 920, 59 Cal.Rptr.2d 474.
Furthermore, Appellant introduced no evidence at trial that would warrant the imposition of an evidentiary presumption based upon elder abuse or undue influence. Appellant cites to California Civil Code § 1575 and a bevy of case law discussing the presumption of undue influence in will contests. In the case of conveyances inter vivos, a party seeking the presumption of undue influence must present evidence of "the susceptibility to imposition, the extreme age and infirmity, of the grantor," together with "slight evidence of circumstances from which it may be inferred that the instrument was the product of coercion." O'Neil v. Spillane, 45 Cal.App.3d 147, 155, 119 Cal.Rptr. 245 (Cal.App.1975) (citing Longmire v. Kruger, 80 Cal.App. 230,
Mary was in her early seventies when she executed the 2003 grant deed transferring her interest in the Buffalo Properties to Rick and Stephanie.
Appellant's argument that the bankruptcy court found wrongdoing by finding that "Rick Louie took the proceeds from the sale" of the Buffalo Properties is unpersuasive. See Appellant Br. 15 ("The badges of fraud identified by the Court in its Trial Ruling also point to Rick's taking Mary's Buffalo properties assets, since the Bankruptcy Court found he took her assets." (emphasis in original)); Trial Order at 13. The bankruptcy court made no such finding. A fair reading of the bankruptcy court's order following trial indicates that it merely found, on the basis of the numerous opaque transactions that Rick engaged in using his mother as a
Insofar as Appellant contends that it was entitled to a presumption of undue influence based upon the evidence, a presumption merely shifts the burden to the grantee or beneficiary to prove the absence of undue influence. See Appellant Br. 14. The "grantee" of the Buffalo Properties in this instance was Rick, who clearly has no interest in assisting Appellees to void his own fraudulent transfer. More to the point, even had it been appropriate to apply such a presumption to place the burden on Appellees to demonstrate Rick's lack of undue influence over his mother, Appellees had no opportunity to present any rebuttal evidence at trial because it had no notice of the argument until after trial. It would thus be fundamentally unfair to hold, as Appellant urges, that "Appellees failed to overcome the presumption that the transfers of Mary [sic] assets to others were the result of fraud, undue influence, and presumptively void."
In conclusion, the bankruptcy court did not err in rejecting Appellant's untimely and unwarranted attempt to bring what would essentially be a "totally different lawsuit" in the guise of an evidentiary presumption. As explained below, regardless of the (questionable) merits of the undue influence and constructive trust arguments, the bankruptcy court likewise did not err in concluding that Appellant-a New Mexico company-could not bring such a claim on Mary's behalf. See Trial Order 14.
In challenging the bankruptcy court's conclusion that the Tehama Property was purchased using funds from Rick's bankruptcy estate, Appellant also ascribes error to the bankruptcy court's decision to disregard the one-page Partnership Agreement dated February 27, 2003 and signed by Richard Sr., Mary, Rick, and Stephanie. Pl. Trial Exh. 9; see Appellant Br. 18-19. It is not clear what relevance the Partnership Agreement has in light of the bankruptcy court's conclusion, affirmed by this Court, that the subsequent grant deed in June 2003 terminated Mary's interest in the Buffalo Properties. In any case, the bankruptcy court did not err in disregarding the Partnership Agreement because the undisputed evidence established that Mary did not sign the agreement. See Trial Order at 3-4.
Appellant contends that "[t]here was no evidence [Mary's] signature was a forgery" and that "Appellees' Expert Handwriting Expert [sic] did not opine that any of the documents with Mary's name signed on them were forgeries." See Appellant Br. 18. The record wholly belies these contentions. Ms. Fisher opined in her report that "Q-1 through Q-8 are fabricated documents
In conclusion, the bankruptcy court did not apply an incorrect burden of proof in concluding that Appellant had failed to demonstrate strict and direct tracing of the proceeds from the sale of the Sav-Mor Grocery to the funds used to purchase the Tehama Property. Nor did the bankruptcy court err in disregarding the 2003 Partnership Agreement urged by Appellant or in rejecting Appellant's dilatory assertion of undue influence. Because there was no error in the bankruptcy court's findings of fact and conclusions of law, the Court AFFIRMS the bankruptcy court's conclusion that the funds used to purchase the Tehama Property were an "interest of the debtor [Rick Louie] in property."
Finally, the Court turns to Appellant's argument that the bankruptcy court erred in denying Mary Louie's motion to intervene as a plaintiff in this case and that the court further erred in refusing to allow Appellant to assert a constructive trust claim on Mary's behalf. Appellant Br. 17-18.
The Court, as an initial matter, agrees with Appellees that Appellant does not have standing to appeal the denial of Mary's motion to intervene. Appellee Br. 1-2. That Appellant has inexplicably identified Mary as an "appellant" in this case does not make her one. In any event, even assuming that Mary is a proper appellant in this action, her appeal is untimely because the bankruptcy court denied her motion to intervene on April 1, 2014, a final order that she did not appeal within the time proscribed by the Federal Rules of Bankruptcy Procedure. ER Exh. 10; Fed. R. Bankr. P. 8002(a). Appellant has no rejoinder to Appellees' standing and timeliness arguments. As such, the Court concludes that the bankruptcy court's denial of Mary's motion to intervene is barred from appellate review. Wiersma v. Bank of the West (In re Wiersma), 483 F.3d 933, 938 (9th Cir.2007).
Turning to Appellant's contention that the bankruptcy court improperly refused to allow Appellant to assert a constructive trust claim on Mary's behalf, that argument rests on an imperfect understanding of the bankruptcy court's order denying Mary's motion to intervene. Appellant appears to believe that it is "law of the case" that it could "adequately present Mary Louie's claims." Appellant Br. at ii (Question 2). There is no such law of the case. Appellant in its opening brief quotes
Appellant ignores all of these findings to focus solely on the bankruptcy court's conclusion that "there is no evidence that Mary has presented that her interests would not be protected by [Appellant's counsel]." Id. 15:22-24. That "interest," however, is merely the "same ultimate objective of keeping the property, the Tehama property, out of the bankruptcy estate and the hands of the Plaintiff Trustees." Id. 15:13-17. As such, the bankruptcy court made no ruling that Appellant could bring claims on Mary's behalf, only that Appellant and Mary shared the same objective. As the bankruptcy court itself explained during trial, this was not leave for Appellant to bring, for example, a tort claim on Mary's behalf. Trial Tr. 193:5-9. Mary's constructive trust claim would be hers individually, not that of Appellant True Traditions.
There was thus no error or inconsistency in the bankruptcy court's conclusion that Appellant could not assert a constructive trust in the Tehama Property on Mary's behalf. Trial Order at 14. That claim must be left for "a totally different lawsuit." Trial Tr. 195:23.
For the foregoing reasons, the findings and conclusions in the bankruptcy court's July 14, 2014 Order Following Trial, as well as the bankruptcy court's July 28, 2014 Judgment Avoiding Fraudulent Transfer are AFFIRMED. The Clerk of the Court shall enter judgment and close the case file.
