TERRY L. MYERS, CHIEF U.S. BANKRUPTCY JUDGE.
Before the Court is a motion for summary judgment filed by Dan Kerslake ("Kerslake") one of the two defendants in this § 549 avoidance action.
The undisputed facts are established by the parties' submissions, and by the record in this adversary proceeding, the underlying bankruptcy case, and a related adversary proceeding.
Jay Clark ("Debtor") was a chapter 12 debtor, having filed his petition for relief on March 27, 2012. During the chapter 12 case, Debtor remained in possession of the property of the estate. Debtor was also the de facto "manager" (though neither a member nor a managing member) of an Idaho limited liability company, Clark's Crystal Springs Ranch, LLC ("CCSR"). Though Debtor had improperly filed his case as Jay Clark "dba Crystal Springs Ranch," CCSR was not a bankruptcy debtor.
During the time the chapter 12 case was pending, Kerslake completed the purchase of a Massey-Ferguson 1105 Tractor ("Tractor") from CCSR for $11,400.00. The May 10, 2013 check, issued in payment for the Tractor, was made payable to "Clarks Crystal Springs Ranch LLC" and was endorsed by "Clark's Crystal Springs Ranch LLC by J.P. Clark Manager." Doc. No. 11-2.
On May 31, 2013, the Court converted Debtor's case to a chapter 7 liquidation under § 1208(d) based on its finding that Debtor had committed fraud in connection with the case, and Trustee was appointed.
Under that judgment, the assets of CCSR and/or the Trust were to be considered as assets of Debtor's estate and administered by Trustee. Any creditors of CCSR and/or the Trust were to be treated as if they were creditors of the Debtor. And the judgment also provided that Trustee retained any chapter 5 avoidance powers. It did not, though, address the extent of those powers or anything about their exercise.
In that adversary proceeding, Trustee's June 7, 2013 complaint named several "John Doe" defendants. He alleged:
Adv. No. 13-06016-TLM, Doc. No. 1 at 3, ¶ 11. He also alleged: "Upon information and belief, the Company [CCSR] has been selling certain assets during the pendency of the Debtor's Chapter 12 proceeding." Id. at 4, ¶ 22. However, Trustee never amended the complaint, as he had indicated in ¶ 11 he would, to identify any of the John Doe defendants that were believed to have received transfers from CCSR. Trustee also never issued any notice to Kerslake — as a party in interest in the chapter 7 case, or otherwise — indicating Trustee's intent to assert substantive consolidation theories nunc pro tunc or pursue transfer avoidance actions based on retroactive consolidation.
Following entry of the substantive consolidation ruling on December 30, 2014 and judgment on January 5, 2015, Trustee promptly initiated the instant action, filing the complaint on March 13, 2015, a little more than two months after the judgment.
This Court has summarized:
Gugino v. Clark's Crystal Springs Ranch, LLC (In re Clark), 2014 WL 2895428, *2 (Bankr.D.Idaho Jun. 25, 2014) (footnotes omitted).
As noted, the issues are framed by the parties' submissions in this case, and by the events in the underlying chapter 7 case and the substantive consolidation adversary proceeding. Not only are the facts largely undisputed, the critical, material facts are not subject to genuine dispute. The arguments are legal.
Kerslake's Motion is based on equity. He contends Trustee should not benefit
Trustee asserts that, though the undisputed evidence "shows Kerslake's `good faith' in purchasing the tractor," this is insufficient to provide a defense to a § 549(a) cause of action. In addition, Trustee discounts Kerslake's appeal to equity as nothing more than an improper "collateral attack" on the judgment granting nunc pro tunc substantive consolidation of CCSR in the underlying bankruptcy case.
Section 549 states:
As many courts have recognized, there is no good faith exception to the transfer of personal property in a § 549(a) avoidance action. See Fursman v. Ulrich (In re First Prot. Inc.), 440 B.R. 821, 833 (9th Cir. BAP 2010) ("Since Congress chose to protect only good faith transferees of real property under § 549(c) and failed to mention good faith transferees of personal property, it must have intended that postpetition transfers of personal property be avoidable regardless of the knowledge or good faith of the transferee.").
Kerslake makes a slightly different argument. Analogizing the situation here regarding CCSR as akin to an involuntary petition, Kerslake suggests that the good faith protection afforded by § 549(b) should be applied here to insulate the challenged transaction. He submits that the time from the filing of the petition to the entry of a substantive consolidation judgment
Section 549(b) recognizes that there is a "gap period" in involuntary cases where a debtor remains in possession of its property and is capable of disposing of it. Id. see also § 303(f) (providing that, unless the court orders otherwise, the business of the debtor may operate following the filing of an involuntary petition and before entry of an order for relief, "and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced."); 2 Collier on Bankruptcy ¶ 303.22 at 303-22 (Alan N. Resnick & Henry J. Sommer eds., 16th ed) ("Section 303(f) was designed to make sure that the involuntary filing does not affect the debtor or its business."). If in making a gap period transfer the debtor receives value, the estate and its creditors are not harmed to the extent of that value. Thus, § 549(b) provides that "the trustee may not avoid" such a transfer in the gap period "to the extent any value ... is given ... in exchange for such transfer."
There is a persuasiveness in Kerslake's analogy. The same policy concerns surrounding the enactment of § 303(f) and § 549(b) are present when a non-debtor operates a business after an affiliated entity files bankruptcy, a filing that may or may not result in the non-debtor being pulled into that bankruptcy through substantive consolidation. But the instant case does not fit neatly into the "involuntary petition-gap period" provisions of the Code. The underlying concept, however, is considered in the Court's evaluation of the equities below.
Kerslake notes, and Trustee does not dispute, that the purchase from CCSR was made in good faith and without notice
Kerslake points out the obvious inequity of avoiding an arm's-length transaction with a good faith purchaser when CCSR was not in bankruptcy at the time of the transfer, even if such strict liability would attend such a transfer of personal property with a debtor who is in a bankruptcy case. He also focuses on Trustee's failure to provide any notice to the John Doe transferee defendants that substantive consolidation of CCSR was sought nunc pro tunc, and that Trustee did so with intent that through such retroactive effect such defendants could (and would) be pursued for avoidable "post" petition transfers.
Other courts have expressly allowed anyone without notice to argue the validity and applicability of a nunc pro tunc ruling if pursued in a subsequent adversary proceeding. See Goldstein v. BRT, Inc. (In re Universal Mktg., Inc.), 460 B.R. 828, 831 n. 7 (Bankr.E.D.Pa.2011) (noting that it had placed a provision within its nunc pro tunc substantive consolidation order that "[i]n connection with any adversary proceeding, any party without notice ... may contest the applicability of this [nunc pro tunc] paragraph ... on the basis of due process." (citing Case. No. 09-15404, Doc. No. 410)). While this Court did not expressly provide for the ability of a party without notice to contest the applicability of its nunc pro tunc ruling, neither did it prohibit it.
Trustee responds that such an argument is an improper collateral attack on this Court's substantive consolidation judgment. Under the circumstances here, it is not. When a party does not receive notice of actions affecting its rights, that party fails to receive due process. The fundamental requirement of due process, the right to be heard, is meaningless without notice. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). As stated in Mullane: "An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all of the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Id. at 314, 70 S.Ct. 652. Thus, where due process is lacking, any resulting judgment is open to attack.
In 2014, Trustee did not provide the Court with details regarding any specific transfers by CCSR that would potentially be subject to § 549(a) avoidance actions. While he alluded to improper transfers in his complaint, and even alleged the existence of John Doe defendants receiving such transfers, he never amended the complaint to name the initial transferees. Nor did he provide the Court with details regarding the extent, scope or circumstances of any of those alleged transactions. And Trustee never provided those potential defendants, including Kerslake, with notice or an opportunity to weigh in on the requested remedy of nunc pro tunc consolidation that would expose them to the strict liability of § 549(a).
Trustee's request for substantive consolidation, and for nunc pro tunc effect, appealed to the Court's equitable powers. See Clark, 525 B.R. at 126-28 (discussing this "uncodified, equitable doctrine" and "the historical precursors of, and the equitable
Gugino v. Turner (In re Clark), 2015 WL 5545258, at *6.
In discussing the application of equitable principles in bankruptcy cases and before bankruptcy courts as "courts of equity"
Id. at 821 (citations omitted); see also Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 868-69 (9th Cir.2005).
The Court appreciates that, unlike in Gugino v. Turner, here it is not Trustee who seeks equitable relief; rather, it is a defendant, Kerslake, who urges it in defense to the statutory action. However, the right that Trustee now asserts (avoidance of a transfer by CCSR to Kerslake that was made almost 2 years prior to the adjudication and entry of the substantive consolidation judgment) was acquired in pressing for nunc pro tunc effect of the judgment without ever notifying parties, such as Kerslake, who would be impacted by that retroactivity. As noted in Turner v. Turner, 147 Md.App. 350, 809 A.2d 18, 58 (Md.Ct.Spec.App.2002), "there must be a nexus between the misconduct and the transaction [at issue], because `what is material is not that the plaintiff's hands are dirty, but that [she] dirties them in acquiring the right [she] now asserts.'" (citations omitted).
Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 65 S.Ct. 993, 89 L.Ed. 1381 (1945), stated:
Id. at 814-15, 65 S.Ct. 993 (emphasis added); see also Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 244-45, 54 S.Ct. 146, 78 L.Ed. 293 (1933) ("The governing principle is `that whenever a party who, as actor, seeks to set the judicial machinery in motion and obtain some remedy, has violated conscience, or good faith, or other equitable principle, in his prior conduct, then the doors of the court will be
The inequitableness here was the lack of notice to John Doe defendants, despite the complaint's representation that such parties would be named and provided notice, and the seeking of the nunc pro tunc effectiveness of the judgment followed almost immediately by § 549(a) suits against those non-notified parties.
As explained in Van Curen v. Great Am. Ins. Co. (In re Hat), 363 B.R. 123 (Bankr.E.D.Cal.2007), "[n]ot every wrongful act constitutes unclean hands. But the misconduct need not be a crime or an actionable tort. Any conduct that violates conscience, or good faith, or other equitable standards of conduct is sufficient cause to invoke the doctrine." Id. at 139 (citations omitted). Trustee failed to name Kerslake as a John Doe defendant, or to provide Kerslake as a potential transfer avoidance target with notice and an opportunity to be heard in regard to the nunc pro tunc aspects of the requested judgment. The Court does not ascribe motive nor opprobrium to these failures. They could have been the result of negligence or thoughtlessness rather than intentional. But the inequitableness of that conduct is sufficient, under the jurisprudence, to constitute unclean hands.
Section 105(a) codifies the Court's equitable powers. While the Court may not use those powers to contravene express provisions of the Code, see Law v. Siegel, ___ U.S. ___, 134 S.Ct. 1188, 1197, 188 L.Ed.2d 146 (2014), "where the proposed action is not expressly circumscribed and instead is in harmony with other provisions of the Bankruptcy Code as well as its overriding purpose, Section 105(a) provides a bankruptcy court power to act." In re Escalera Res. Co., 2015 WL 7351396, *4 (Bankr.D.Colo. Nov. 9, 2015). The Court concludes such a situation is presented under the circumstances of this case. The granting of summary judgment to Kerslake on these equitable grounds is, in the Court's view, consistent with § 105(a) and furthers, rather than contravenes, the provisions of the Code. It must be recalled that, while § 549(a) is a Code provision, its assertion here is solely the result of, and rooted in, Trustee's invocation of the equitable doctrine of substantive consolidation nunc pro tunc.
The Court's ability to consider the application of the retroactive aspects of the judgment — as to this defendant and his Motion and under the record here presented
Wood & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 730 (9th Cir. BAP 2008).
For the reasons set out in this Decision, the Court finds the Motion meritorious. Though the Court granted Trustee relief under the equitable doctrine of substantive consolidation, and imposed nunc pro tunc effect, the Court is not deprived of the ability to address and rectify the inequities established by Trustee's failure to provide notice to Kerslake under all the circumstances. Kerslake's Motion will be granted. His counsel may submit an appropriate form of order.
Further, the equitable considerations addressed in this Decision support negating the retroactive aspects of the judgment as to Kerslake. Whether such considerations will apply to other creditors, parties in interest and/or adversary defendants will depend on the facts, and any contravening equities, regarding such parties.
