In re: Uc Lofts on 4th, LLC Uc Lofts on 5th, LLC Halifax Investments, LLC John Scafani ( 2015 )

FILED
SEP 04 2015
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. SC-14-1287-JuKlPa
) BAP No. SC-14-1320-JuKlPa
6 UC LOFTS ON 4TH, LLC; UC LOFTS) (related appeals)
ON 5TH, LLC; )
7 ) Bk. No. 05-15409-CL7
Debtors. )
8 ______________________________) Adv. No. 07-90139-CL
LESLIE T. GLADSTONE, Chapter 7)
9 Trustee, )
)
10 Appellant, )
)
11 v. ) M E M O R A N D U M*
)
12 FRANK SCHAEFER; FRANK SCHAEFER)
CONSTRUCTION CO.; FRANK )
13 SCHAEFER CONSTRUCTION, INC. )
PENSION PLAN; SHEILA LEMIRE, )
14 )
Appellees. )
15 ______________________________)
HALIFAX INVESTMENTS, LLC; )
16 JOHN SCAFANI, )
)
17 Appellants, )
)
18 v. )
)
19 LESLIE T. GLADSTONE, Chapter 7)
Trustee, )
20 )
Appellee.** )
21 ______________________________)
22 Argued and Submitted on July 23, 2015
at Pasadena, California
23
24
*
This disposition is not appropriate for publication.
25 Although it may be cited for whatever persuasive value it may
26 have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8024-1.
27
**
NOTE TO CLERK: please change the caption to reflect the
28 above.
-1-
1 Filed - September 4, 2015
2 Appeal from the United States Bankruptcy Court
for the Southern District of California
3
Honorable Christopher B. Latham, Bankruptcy Judge, Presiding
4 _________________________
5 Appearances: Jeffry A. Davis of Mintz Levin Cohn Ferris
Glovsky & Popeo argued for appellant/appellee
6 Leslie T. Gladstone, Chapter 7 Trustee; Gregg A.
Johnson argued for appellant Halifax Investments,
7 LLC and appellant John Scafani; James Jay Stoffel
of Beberman Stoffel & Beberman argued for
8 appellees Frank Schaefer, Frank Schaefer
Construction Co., and Frank Schaefer
9 Construction, Inc. Pension Plan.***
______________________________
10
11 Before: JURY, Klein,**** and PAPPAS, Bankruptcy Judges.
12 Chapter 71 trustee, Leslie A. Gladstone (Trustee), filed an
13 adversary proceeding against Frank Schaefer, Frank Schaefer
14 Construction, Inc., Frank Schaefer Construction, Inc. Pension
15 Plan (collectively, the Schaefer Entities), John Scafani, Sheila
16 Lemire, Halifax Investments, LLC, and others,2 seeking to avoid
17
***
18 Appellee Sheila Lemire has not participated in this
appeal.
19
****
Hon. Christopher M. Klein, Chief United States
20 Bankruptcy Judge for the Eastern District of California, sitting
by designation.
21
1
22 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
23 “Rule” references are to the Federal Rules of Bankruptcy
Procedure and “Civil Rule” references are to the Federal Rules of
24 Civil Procedure.
25 2
Trustee named others as defendants in the adversary
26 proceeding including Charles McHaffie who is mentioned below. On
March 23, 2011, the bankruptcy court approved Trustee’s
27 settlement with James Warner and the Law Offices of James Warner,
and with Broadsmore Capital, LLC, Centaur Construction, Matthew
28 (continued...)
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1 several transfers arising out of a series of loan transactions
2 to finance the acquisition and initial development of real
3 property held by debtors, UC Lofts on 4th, LLC and UC Lofts on
4 5th, LLC (Debtors or UC Lofts). Trustee also asserted claims
5 against the Schaefer Entities seeking to avoid preferential
6 transfers and equitable subordination of the proof of claim
7 filed by Frank Schaefer Construction, Inc. (Schaefer
8 Construction).
9 The bankruptcy court bifurcated the issues for trial into
10 (1) insolvency; and (2) all others. The court held a trial in
11 February 2012 on insolvency and issued a memorandum decision
12 finding that Trustee failed to prove debtors were insolvent on
13 February 12, 2004.3 The bankruptcy court later conducted an
14 eight day bench trial in which it considered the issue of
15 Debtors’ insolvency at the time of the various transfers and all
16 remaining issues.
17 After trial, the court issued its findings of fact and
18 conclusions of law in a single judgment. The bankruptcy court
19 granted judgment in favor of the Schaefer Entities, Scafani, and
20 Lemire on the ground that Trustee had failed to meet her burden
21 of proof on all claims against them. As to Halifax, the
22 bankruptcy court awarded judgment in Trustee’s favor on the
23
24 2
(...continued)
Gordon and Peter Kostopoulous. On October 24, 2011, the
25 bankruptcy court approved Trustee’s settlement with McHaffie
26 which included a stipulated judgment in the sum of $375,000.
Other defendants were dismissed.
27
3
This decision was issued by Judge Meyers who has since
28 retired from the bench.
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1 fraudulent transfer claim in the amount of $1,100,000 plus
2 $537,734.25 in prejudgment interest.
3 Trustee appeals from the bankruptcy court’s ruling in favor
4 of the Schaefer Entities, Scafani, and Lemire, contending that
5 the court erred in numerous ways relating to her various claims
6 (BAP No. 14-1287). Halifax appeals from the judgment against it
7 on the fraudulent transfer claim (BAP No. 14-1320). For the
8 reasons set forth below, we AFFIRM the judgment in all respects.
9 I. FACTS4
10 A. Charles McHaffie’s Purchase of Urban Coast
11 Urban Coast, LLC (“Urban Coast”) was the sole owner and
12 managing member of Debtors. The sole asset of each debtor was
13 contiguous real property near downtown San Diego, California
14 (Lofts Property), which was to be developed for mixed use and
15 known as the Atmosphere Project. McHaffie acquired 100% of the
16 membership interests of Urban Coast in two contemporaneous
17 transactions.
18 He purchased forty-nine percent of Urban Coast from Halifax
19 for $1,600,000 which was evidenced by a sale agreement (Halifax
20 Sale Agreement) and a promissory note secured by a deed of trust
21 on the Lofts Property. The Halifax Sale Agreement listed
22 McHaffie as the “Buyer,” Scafani as the “Broker,” Urban Coast as
23 the “Company” and Halifax as the “Seller.” The terms of the
24 sale agreement required McHaffie and Urban Coast to execute the
25 promissory note. McHaffie executed the promissory note on
26
27
4
We borrow heavily from the facts set forth in the
28 bankruptcy court’s memorandum decision entered March 27, 2014.
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1 behalf of Urban Coast but did not sign in his individual
2 capacity. Although McHaffie pledged the Lofts Property as
3 collateral for the note, the UC Lofts entities were not parties
4 to the Halifax Sale Agreement. Halifax and Scafani promised to
5 refrain from recording the deed of trust until Urban Coast
6 obtained construction financing. McHaffie signed the deed of
7 trust against the Lofts Property but never delivered it to
8 Halifax, so it remained unrecorded.
9 Scafani, a licensed real estate broker, wholly owned and
10 managed Halifax. Under the terms of the sale agreement, Scafani
11 was to receive real estate brokerage representation rights in
12 connection with offering the finished condominium units for sale
13 and preferential rights in purchasing condominium units in the
14 Atmosphere Project.
15 A consortium known as the Broadsmore Group owned the
16 majority fifty-one percent interest in Urban Coast. McHaffie
17 paid $2,452,803 for the Broadsmore Group’s interests:
18 $1,899,625 in cash and $552,803 in a promissory note secured by
19 a deed of trust on real property held by La Bella Vida, L.P.
20 To fund the purchase of Urban Coast, McHaffie caused
21 Debtors to obtain a $4,000,000 loan from the Barth Family (Barth
22 Loan) which was evidenced by a promissory note and secured by a
23 first priority trust deed on the Lofts Property. Debtors also
24 obtained a loan from the Frank Schaefer Construction Inc.
25 Pension Plan (Schaefer Pension) in the amount of $1,750,000
26 which was evidenced by a promissory note and secured by a junior
27 trust deed on the Lofts Property (Schaefer Initial Loan).
28 McHaffie applied $4,527,600 from the Barth and Schaefer
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1 Loans to purchase Urban Coast and pay various loan fees,
2 appraisal fees, commission, taxes and other expenses. He
3 deposited $1,222,400 into a fund control account (First Fund
4 Control) controlled by the Schaefer Pension. Around the same
5 time, the parties entered into an agreement to govern
6 disbursements out of the fund control account (Fund Control
7 Agreement). Under the agreement, funds would be disbursed to
8 McHaffie upon written order for payment of items relating to the
9 development of the Lofts Property. The $1,222,400 amount was
10 based on a proposed budget for the project which consisted of
11 various line item costs related to, among other things, shoring
12 and concrete, excavation, equipment rental, and the like.
13 When McHaffie acquired Urban Coast there were two deeds of
14 trust against the Lofts Property which were unrecorded. One
15 deed of trust allegedly secured a $3,400,000 obligation to Urban
16 Coast (UC DOT) and the other allegedly secured a $100,000
17 obligation to SD Lofts, LLC (SD Lofts DOT).5 Those debts were
18 not paid off with the Barth and Schaefer Loans.
19 McHaffie’s transactions for the purchase of Urban Coast
20 closed on February 12, 2004. At that time, Debtors’ total
21 assets were the Lofts Property and $1,224,900 held in the First
22 Fund Control account.
23 Between February 12, 2004 and April 2, 2004, Debtors made
24 numerous transfers from the First Fund Control: $20,000 on
25 February 23, 2004 to the Schaefer Pension Plan for
26
5
27 As further discussed below, whether or not these deeds of
trust secured valid and enforceable obligations of Debtors was a
28 contested issue at trial relating to the issue of insolvency.
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1 “Reimbursement–Management;” $5,000 on March 5, 2004 to James
2 Warner, Esq. for “Legal;” $20,000 on March 5, 2004 to
3 Charlemagne McHaffie6 for “Funds to Borrower;” $50,000 on
4 March 8, 2004 to Ron Bedell for “Commission;” and $20,000 on
5 April 1, 2004 to Charlemagne McHaffie with no stated purpose.
6 B. The Schaefer Construction April 2, 2004 loan for $1,200,000
7 On April 2, 2004, Debtors borrowed $1,200,000 from Schaefer
8 Construction (April 2, 2004 Loan) which was evidenced by a
9 straight note and secured by a third position deed of trust on
10 the Lofts Property. The UC and SD Lofts DOTs were subordinated
11 to the April 2, 2004 Loan.
12 McHaffie used the April 2, 2004 Loan proceeds to exercise
13 an option to purchase a Nevada limited liability company,
14 Tropicana Partners, LLC (Tropicana). Tropicana’s primary asset
15 was commercial real property in Las Vegas, Nevada. Debtors made
16 the following additional payments to acquire Tropicana:
17 $100,000 on May 20, 2004 to Santoro, Driggs for legal fees;
18 $1,000 on May 24, 2004 to Lawyer’s Title for title fees; $50,000
19 on May 26, 2004 to Fred Young for “Deposit, per borrower;”
20 $5,010 on June 17, 2004 to Santoro, Driggs for legal fees;
21 $10,000 on July 21, 2004 to Santoro, Driggs for legal fees;
22 $300,000 on July 21, 2004 to Joy Turner for “Deposit, per
23 borrower;” and $60,000 on July 21, 2004 to Santoro, Driggs for
24 legal fees.
25 During this time period, Debtors also made the following
26 transfers from the First Fund Control that were unrelated to the
27
28 6
Charlemagne was evidently Charles’ son.
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1 Tropicana acquisition or the Atmosphere Project: $10,000 on
2 May 14, 2004 to James Warner for legal fees; $46,666.67 on
3 July 8, 2004 to Pacific Horizon Financial for “Interest payment,
4 1st TD;” and $20,416.67 on July 8, 2004 to Action Loan Servicing
5 for “Interest payment; 2nd TD.” The last two transfers went to
6 pay down interest on McHaffie’s personal residence.
7 On August 17, 2004, Debtors made a $36,000 interest payment
8 toward the April 2, 2004 Loan.
9 On August 20, 2004, Schaefer Construction initiated a
10 nonjudicial foreclosure on the Lofts Property by recording a
11 notice of default and sale. The notice of sale was subsequently
12 rescinded in January 2005.
13 C. The Schaefer Entities September 24, 2004 loan for
$2,500,000
14
15 On September 24, 2004, the Schaefer Entities loaned Debtors
16 another $2,500,000 (Second Loan). The Second Loan was secured
17 by an assignment of the $3,400,000 UC DOT which was property of
18 Urban Coast, not Debtors. Frank Schaefer later testified that
19 there was no note in connection with the UC DOT: “[i]t was a
20 bogus deal. That note actually didn’t exist. The deed of trust
21 did, but there was no note. So there was nothing owing on it.
22 So I took something of no value.”
23 The Schaefer Entities initially funded the Second Loan
24 with $500,000 and charged $35,312 as a loan origination fee.
25 Debtors directed $100,000 of the Second Loan proceeds to pay
26 Hawkins & Hawkins Architects, Inc. to maintain the necessary
27 building permits on the Lofts Property and deposited the
28 remaining $365,688 into a second fund control account (Second
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1 Fund Control).
2 After receiving the Second Loan proceeds, Debtors made the
3 following transfers from the First Fund Control: $37,000 on
4 October 8, 2004 to Charlemagne Ed. Trust for “Funds to
5 Borrower;” $35,000 on October 8, 2004 to WH-TH for “Funds to
6 Borrower;” $10,000 on October 8, 2004 to Charlemagne McHaffie
7 Trust for “Funds to Borrower;” and $4,097.83 on October 15, 2004
8 to the City of San Diego to fund a bond. After these transfers,
9 the First Fund Control was overdrawn by $2,179.50.
10 D. The Schaefer Entities November 19, 2004 loan for $4,000,000
and Halifax Settlement for $1,100,000
11
12 Scafani discovered that the Schaefer Entities trust deed in
13 relation to the April 2, 2004 Loan had been recorded on
14 April 10, 2004, making it senior to Halifax’s yet-to-be
15 delivered and recorded deed of trust. Because this was contrary
16 to the terms of the parties’ agreement, on June 25, 2004,
17 Halifax and Scafani filed a lawsuit against McHaffie and Urban
18 Coast for breach of contract and fraud seeking rescission of the
19 Halifax Sale Agreement. Halifax did not name Debtors as
20 defendants. Halifax and Scafani also recorded a lis pendens
21 against the Lofts Property in connection with the state court
22 lawsuit.
23 On November 18, 2004, McHaffie, Halifax, Scafani, Urban
24 Coast, the Schaefer Entities, and others entered into a
25 settlement agreement and mutual release (Halifax Settlement
26 Agreement). According to the settlement, Halifax and Scafani
27 agreed to dismiss the lawsuit against McHaffie and Urban Coast
28 and withdraw the lis pendens against Debtors. In exchange, they
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1 would receive payment of $1,100,000 million which reflected a
2 $500,000 discount on the promissory note executed by McHaffie on
3 behalf of Urban Coast.
4 By mid-November 2004, the First Fund Control displayed a
5 negative balance, the Schaefer Entities had filed a notice of
6 default related to the April 2, 2004 Loan, and Debtors had no
7 other sources of capital. At the time, Schaefer and McHaffie
8 were negotiating the transfer of the Tropicana property to
9 satisfy the April 2, 2004 Loan and they also discussed a
10 possible new loan. Eventually, McHaffie agreed to assign the
11 interest in the Tropicana property to Schaefer Construction in
12 full payment and cancellation of the April 2, 2004 note executed
13 in the sum of $1,200,000.
14 These events converged to precipitate an immediate need for
15 capital. On November 19, 2004, Schaefer Construction loaned
16 Debtors an additional $4,000,000 (Third Loan), which was
17 evidenced by a promissory note and secured by the Lofts
18 Property. This loan was arranged by a licensed real estate
19 broker, Edward Spooner of Lending Associates, and funded in the
20 initial amount of $1,165,000. The escrow instructions routed
21 $1,100,000 of the loan proceeds directly to Halifax, charged a
22 $210,500 loan origination fee and charged $52,500 as an
23 extension fee for the Schaefer Initial Loan. Scafani testified
24 at trial that Halifax disbursed the $1,100,000 to its creditors.
25 The withdrawal of the lis pendens was also part of the escrow
26 agreement. When the funds were distributed by escrow, the
27 Notice of Withdrawal of the Notice of Pendency Of Action was
28 recorded.
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1 The Third Loan also extinguished the Second Loan. Debtors
2 transferred $206,552.65 from the Second Fund Control and
3 $299,447.35 from the Third Loan proceeds to pay off the $500,000
4 funded under the Second Loan. This transfer left the Second
5 Fund Control with a zero balance. Schaefer Construction
6 advanced another $111,600 under the Third Loan on November 22,
7 2004 to replenish the deficiency. This left a $6,413.69 balance
8 in the Second Fund Control. After the Third Loan, the Schaefer
9 Entities made no new loans to Debtors.
10 On December 30, 2004, at McHaffie’s request, Schaefer
11 Construction assigned the April 2004 note and deed of trust to
12 Lemire.7 On April 18, 2005, Lemire executed and recorded a
13 Substitution of Trustee and Full Reconveyance of the April 2,
14 2004 deed of trust.
15 E. The April 2005 global settlement
16 In April 2005, Debtors and Schaefer Construction entered
17 into a workout agreement whereby Schaefer Construction agreed to
18 provide $1,130,000 in additional funding under the terms of the
19 Third Loan. The agreement reinstated and extended the Third
20 Loan’s maturity date and paid delinquent real property taxes.
21 Under the agreement, Debtors were also required to reconvey all
22 deeds of trust junior to the Third Loan, which included the
23 deeds of trust securing the $3,400,000 debt owed to Urban Coast,
24 the $100,000 debt owed to SD Lofts, and the April 2, 2004 Loan
25 deed of trust that Schaefer had assigned to Lemire. The only
26
7
27 Trustee argues that this assignment of the deed of trust
made Lemire a subsequent transferee liable for $1,200,000 arising
28 out of the April 2, 2004 Loan.
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1 advances that the Schaefer Entities made after April 15, 2004
2 under the Third Loan went to pay off the $1,750,000 Schaefer
3 Initial Loan.
4 F. The sale of Tropicana by Lemire
5 In September of 2005, Lemire paid Schaefer Construction
6 $70,000 for a lease option to purchase the Tropicana property.
7 In April 2006, after substantial work in repairing and releasing
8 the individual units, Lemire was able to generate approximately
9 $200,000 to $500,000 in net income on the sale of the Tropicana
10 property.
11 G. Involuntary Chapter 11
12 On October 25, 2005, three unsecured creditors of Debtors
13 filed involuntary chapter 11 petitions against them. Debtors
14 initially contested the petition. In January 2006, they
15 withdrew their answers to the involuntary petitions and an order
16 for relief was entered.
17 On April 17, 2006, Gladstone was appointed the chapter 11
18 trustee for both debtors. The bankruptcy court later entered an
19 order directing the joint administration of the related
20 chapter 11 cases.
21 In early September 2006, the bankruptcy court entered an
22 order terminating the automatic stay in favor of Schaefer
23 Construction. Schaefer Construction foreclosed on the Lofts
24 Property and became the owner. Schaefer then sold the Lofts
25 Property through an LLC to Alpha and Omega Development, LLC for
26 $6,000,000 and paid $5,312,330.37 out of escrow to First
27 National Bank, the successor beneficiary to the Barth note. The
28 Schaefer Pension Plan also made an additional $1,250,000 hard
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1 money loan to Alpha and Omega Development, LLC secured behind a
2 purchase money loan from Dunham & Associates of $3,700,000
3 secured by a first deed of trust. Ultimately, the holder of the
4 first trust deed foreclosed out the Schaefer Entities’ interest
5 in the Lofts Property.
6 Schaefer Construction filed a secured proof of claim in
7 Debtors’ case alleging that the amount it was owed on account of
8 the Third Loan was $5,678,351.50.
9 On October 20, 2006, Debtors’ cases were converted to
10 chapter 7 and Gladstone was appointed the chapter 7 trustee.
11 H. The Adversary Proceeding
12 On April 2, 2007, Trustee filed the adversary complaint
13 which is the subject of this appeal. Trustee asserted claims
14 against the Schaefer Entities for: (1) avoidance and recovery of
15 fraudulent transfers; (2) avoidance and recovery of preferential
16 transfers; (3) aiding and abetting breach of fiduciary duty;
17 (4) declaratory relief that Frank Schaefer was a partner of
18 Debtors; (5) equitable subordination of Schaefer Construction's
19 claims; (6) breach of fiduciary duty to Debtors; and
20 (7) conversion.8 Trustee also sought to avoid allegedly
21 fraudulent transfers to, or for the benefit of, defendants
22
8
23 The Schaefer Entities filed a motion for summary judgment
which was granted in part and denied in part. The bankruptcy
24 court granted summary judgment in their favor as to Trustee’s
eleventh and thirteenth claims for relief on usury relating to
25 the first loan, first loan extensions and the third November 2004
26 loan of $4,000,000. Trustee withdrew the twelfth claim for usury
in connection with the September 24, 2004 loan for $2,500,000
27 which was funded in the amount of $500,000. Trustee also
withdrew her tenth claim for relief for alter ego prior to the
28 hearing on the motion for summary judgment.
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1 Lemire, Scafani and Halifax.
2 The adversary proceeding was assigned to Judge James M.
3 Meyers. Judge Meyers bifurcated the trial, with the initial
4 session on whether Debtors were insolvent as of February 12,
5 2004 (the date McHaffie acquired 100% membership interest in
6 Urban Coast). At the trial on insolvency, Judge Meyers
7 concluded that the value of Debtors’ assets on that date was “in
8 the range of $8 million to $9.5 million,” and the liabilities
9 were $6,154,531. The bankruptcy court did not explain how it
10 reached its decision. In an April 17, 2012 status report,
11 Trustee requested the court to issue a supplemental decision
12 with specific findings regarding the value. No supplemental
13 decision was issued. Judge Meyers retired and the case was
14 reassigned to Judge Christopher Latham.
15 Following an eight day trial, the bankruptcy court issued
16 its memorandum decision on March 27, 2014. The court found that
17 the value of the Lofts Property was $7,366,306 as of April 2004,
18 and $8,225,954 as of November 24, 2004. The court also found
19 that the Schaefer Entities were not insiders of the Debtors. In
20 ruling on the fraudulent transfer claims, the court found that:
21 (1) after the April 2, 2004 Loan, Debtors’ liabilities were
22 $7,118,385.52 and, therefore, Debtors’ assets9 exceeded their
23 debts by $1,205,920.48; (2) the Third Loan and the $1,100,000
24 payment to Halifax ultimately rendered Debtors insolvent because
25 by November 22, 2004, Debtors’ liabilities greatly exceeded
26
27
9
Debtors’ assets also included monies in the First Control
28 Fund.
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1 their assets and they were balance sheet insolvent by at least
2 $964,797.33; (3) the Third Loan and the $1,100,000 payment to
3 Halifax left Debtors with unreasonably small assets;
4 (4) transfers related to Tropicana and the April 2, 2004 Loan
5 were not fraudulent as to the Schaefer Entities; (5) transfers
6 related to the Second and Third Loans and Halifax payment were
7 not fraudulent as to the Schaefer Entities; (6) Trustee failed
8 to meet her burden that Lemire was a subsequent transferee of
9 the Tropicana property or that she did not provide reasonably
10 equivalent value; (7) the payment to Halifax was constructively
11 fraudulent and should be avoided; and (8) neither Scafani nor
12 Halifax provided reasonably equivalent value for the $1,100,000
13 transfer.
14 Trustee had also sought to avoid as preferential transfers
15 two payments totaling $506,000 made by Debtors to the Schaefer
16 Entities. The bankruptcy court found the Schaefer Entities were
17 not insiders and thus the extended preference period did not
18 apply. Therefore, the transfers were not recoverable as
19 preferences.
20 Finally, on the equitable subordination claim, the
21 bankruptcy court found Trustee had not met her burden to
22 equitably subordinate Schaefer Construction’s proof of claim.
23 Since the court found that none of the Schaefer Entities were
24 insiders or partners of Debtors, the burden remained with
25 Trustee to prove circumstances justifying subordination. In the
26 end, the court found that the evidence did not establish
27 inequitable conduct.
28 The bankruptcy court entered judgment on the adversary
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1 complaint on the same date it issued its memorandum decision,
2 awarding judgment as to all claims in favor of the Schaefer
3 Entities, Scafani, and Lemire and awarding judgment against
4 Halifax in the amount of $1,100,000, plus interest.
5 Trustee filed a motion to amend the judgment on April 10,
6 2014. The Schaefer defendants filed a response.
7 On June 6, 2014, the bankruptcy court issued an order on
8 Trustee’s motion resulting in a two page revision of the
9 memorandum decision with no change in the judgment. On the same
10 day, Trustee filed her notice of appeal.10 On June 20, 2014,
11 Halifax filed its related appeal.
12 II. JURISDICTION
13 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
14 §§ 1334 and 157(b)(2)(A) and (H). We have jurisdiction under
15 28 U.S.C. § 158.
16 III. ISSUES
17 FRAUDULENT TRANSFER CLAIMS: SCHAEFER ENTITIES AND LEMIRE
18 1. Did the bankruptcy court err by considering parol
19 evidence to explain or construe the payment provision in the
20 November 2004 Halifax Settlement Agreement which stated that
21 Frank Schaefer Construction “shall pay” to Halifax the sum of
22 $1,100,000?
23 2. Did the bankruptcy court err by not including the
24 $3,400,000 Urban Coast obligation and $100,000 SD Lofts
25 obligation in its insolvency analysis as of April 2, 2004 when
26
27
10
Trustee subsequently filed two amended notices of appeal
28 with no substantive changes.
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1 those obligations were “stipulated facts” in the pretrial order?
2 3. Did the bankruptcy court err by determining that
3 Schaefer Construction gave reasonably equivalent consideration
4 for the April 2, 2004 Loan?
5 4. Did the bankruptcy court err by failing to place the
6 burden of proof on Sheila Lemire to establish her good faith
7 defense as a subsequent transferee?
8 FRAUDULENT TRANSFER CLAIM: HALIFAX
9 1. Did the bankruptcy court err by determining that the
10 $1,100,000 payment from Debtors to Halifax was a fraudulent
11 transfer because Halifax was not a secured creditor based on the
12 filing of the lis pendens?
13 2. Did the bankruptcy court err in determining that
14 Halifax did not give reasonably equivalent value for the
15 $1,100,000 payment by releasing its $1,600,000 note, dismissing
16 its lawsuit, and withdrawing the lis pendens against the Lofts
17 Property?
18 3. Did the bankruptcy court err in determining that
19 Scafani was not liable for receiving a fraudulent transfer
20 because the entire $1,100,000 transfer went to Halifax’s
21 creditors and Scafani did not receive any of the funds?
22 AIDING AND ABETTING BREACH OF FIDUCIARY DUTY: SCHAEFER ENTITIES
23 Did the bankruptcy court err by finding that the Schaefer
24 Entities did not have actual knowledge of McHaffie’s
25 defalcations as they occurred for purposes of aiding and
26 abetting McHaffie’s breach of fiduciary duty under California
27 law?
28
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1 PREFERENTIAL TRANSFER CLAIM: SCHAEFER CONSTRUCTION
2 Did the bankruptcy court err by determining that the
3 Schaefer Entities were not “insiders” within the meaning of
4 §§ 101(1) and 547?
5 EQUITABLE SUBORDINATION: SCHAEFER CONSTRUCTION
6 Did the bankruptcy court err by determining that the
7 Schaefer Entities had not engaged in inequitable conduct?
8 IV. STANDARDS OF REVIEW
9 We review findings of fact for clear error and conclusions
10 of law and mixed questions of law and fact de novo. Banks v.
11 Gill Distrib. Ctrs., Inc., 263 F.3d 862, 867 (9th Cir. 2001).
12 A bankruptcy court’s factual determination is clearly
13 erroneous if it is illogical, implausible, or without support in
14 the record. United States v. Hinkson, 585 F.3d 1247, 1261-62 &
15 n.21 (9th Cir. 2009) (en banc) (quoting Anderson v. City of
16 Bessemer City, N.A., 470 U.S. 564, 577 (1985)) (explaining that
17 the clearly erroneous standard of review is an element of the
18 clarified abuse of discretion standard). Where there is
19 admitted evidence in the record to support the bankruptcy
20 court’s fact findings, an appellate court cannot substitute its
21 views of the facts for those of the bankruptcy court. Anderson,
22 470 U.S. at 573. “Where there are two permissible views of the
23 evidence, the factfinder’s choice between them cannot be clearly
24 erroneous.” Id. at 574.
25 The determination of insider status is a question of fact
26 to be reviewed under the clearly erroneous standard. Friedman
27 v. Sheila Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63,
28 67 (9th Cir. BAP 1991).
-18-
1 The bankruptcy court’s decision regarding equitable
2 subordination is reviewed for abuse of discretion. Paulman v.
3 Gateway Venture Partners III (In re Filtercorp, Inc.), 163 F.3d
4 570, 587 (9th Cir. 1998). A court abuses its discretion when it
5 fails to identify and apply “the correct legal rule to the
6 relief requested,” or if its application of the correct legal
7 standard was “(1) ‘illogical,’ (2) ‘implausible,’ or (3) without
8 ‘support in inferences that may be drawn from the facts in the
9 record.’” Hinkson, 585 F.3d at 1262-63.
10 We may affirm the bankruptcy court’s decision on any ground
11 supported by the record. Olsen v. Zerbetz (In re Olsen),
12 36 F.3d 71, 73 (9th Cir. 1994).
13 V. DISCUSSION
14 A. Fraudulent Transfers: Schaefer Entities and Lemire
15 Section 544(b)(1) provides that a trustee “may avoid any
16 transfer of an interest of the debtor in property or any
17 obligation incurred by the debtor that is voidable under
18 applicable law by a creditor holding an unsecured claim . . . .”
19 Trustee, acting in her capacity as an unsecured creditor, seeks
20 to avoid certain transfers to the Schaefer Entities and Lemire
21 under California’s Uniform Fraudulent Transfer Act (UFTA). See
22 Cal. Civ. Code § 3439 et. seq.; see also Gen. Elec. Capital Auto
23 Lease, Inc. v. Broach (In re Lucas Dallas, Inc.), 185 B.R. 801
24 (9th Cir. BAP 1995) (noting that the California UFTA “only
25 confers standing upon a ‘creditor’ of the debtor” citing Cal.
26 Civ. Code § 3439.07(a)).
27 Under California’s UFTA, a transfer is constructively
28 fraudulent if the debtor made the transfer without receiving
-19-
1 reasonably equivalent value in exchange and the debtor either:
2 (1) was engaged or was about to engage in a business or a
3 transaction for which the remaining assets of the debtor were
4 unreasonably small in relation to the business or transaction;
5 or (2) intended to incur, or believed or reasonably should have
6 believed that he or she would incur, debts beyond his or her
7 ability to pay as they became due; or (3) was insolvent at the
8 time, or was rendered insolvent by the transfer or obligation.
9 Cal. Civ. Code §§ 3439.04(a), 3439.05.
10 1. The bankruptcy court did not err by considering parol
evidence to construe the payment provision contained
11 in the November 2004 Halifax Settlement Agreement.
12 The Halifax Settlement Agreement provides in relevant part:
13 SETTLEMENT TERMS: CASH. In full and final settlement
of all claims, whether or not said claims have been
14 set forth in the LITIGATION, SCHAFFER [sic]
[Construction] shall pay to HALIFAX, in cash, the sum
15 of One Million One Hundred Thousand Dollars
($1,100,000).
16
17 “Schaefer” is defined in the settlement as “Frank Schaefer
18 Construction, Inc.” and the agreement contained an integration
19 clause.
20 Trustee contends on appeal, as she did at trial, that
21 Schaefer Construction did not pay the $1,100,000 as required
22 under the settlement agreement, instead requiring Debtors to use
23 proceeds from the Third Loan to pay Schaefer Construction’s
24 obligation. According to Trustee, because Debtors were
25 insolvent on the date of the transfer, the payment of $1,100,000
26 by Debtors to Halifax to satisfy the debt of Schaefer
27 Construction was fraudulent. In addressing these arguments, the
28 bankruptcy court found:
-20-
1 The Trustee contends that this provision shifts the
obligations owed by Urban Coast and McHaffie under the
2 Halifax Sale Agreement onto Schaefer. The court
disagrees. None of the Schaefer Entities was a party
3 to either the Halifax Sale Agreement or the lawsuit
filed by Scafani and Halifax. Rather than imposing a
4 legal obligation on the Schaefer Entities, the court
interprets this provision—which, like the rest of the
5 document, was quite loosely drafted—as merely
recognizing the source of payment.
6
7 Trustee contends that the court’s ruling was erroneous because
8 an unambiguous contract is interpreted as a matter of law
9 without the use of parol evidence. Trustee argues that the
10 payment provision here was unambiguous and susceptible to only
11 one interpretation — Schaefer Construction was the party
12 obligated to pay the $1,100,000 — “pay means pay.” In finding
13 otherwise, the court had inappropriately relied on evidence not
14 on the face of the agreement.
15 The parol evidence rule has no applicability in this case
16 for two reasons. First, Trustee stepped into the shoes of an
17 unsecured creditor of the estate by invoking § 544(b). The
18 parol evidence rule does not apply to disputes with third
19 parties.
20 In an action between a party to a contract and a third
party the rule that parol evidence cannot be received
21 to contradict or vary a written contract does not
apply, as the estoppel on which the rule rests must be
22 mutual, and, since the third person is not bound by
the contract as written, neither is his adversary in
23 the action.
24 Penberthy v. Vahl, 101 Cal. App. 2d 1, 4 (1950); see also Alberts
25 v. HCA Inc. (In re Greater Se. Cmty. Hosp. Corp. I), 365 B.R.
26 315, 318–19 (Bankr. D.D.C. 2007) (noting that a creditor would
27 be “a third person, not a party to, nor representing a party to,
28 the act.”). Second, regardless of whether this rule applies in
-21-
1 this case, “the ‘very essence’ of a fraudulent transfer suit is
2 to identify the ‘true nature’ of a transaction, and ‘the parol
3 evidence rule can[not] function as a false prophet to preclude
4 consideration of evidence of the true nature of the transaction
5 in question.” In re Greater Se. Cmty. Hosp. Corp. I, 365 B.R.
6 at 318 (citing Gaudet v. Babin (In re Zedda), 103 F.3d 1195,
7 1206 (5th Cir. 1997) (holding that trustee could not use parol
8 evidence to exclude evidence in fraudulent conveyance suit
9 brought under § 548)). Accordingly, this assignment of error is
10 not grounds for reversal.
11 2. The bankruptcy court did not err by determining that
Debtors’ assets exceeded their liabilities as of
12 April 2, 2004.
13 Under Cal. Civ. Code § 3439.02(a), “[a] debtor is insolvent
14 if, at fair valuations, the sum of the debtor’s debts is greater
15 than all of the debtor’s assets.” For purposes of the
16 fraudulent transfer claims, the bankruptcy court examined
17 Debtors’ financial condition from February 13, 2004 to
18 November 24, 2004 (Relevant Period).11 Regarding Debtors’
19 liabilities, the bankruptcy court found:
20 Defendant Scafani testified credibly that no
accompanying note existed to support the UC DOT. Nor
21 did Plaintiff provide any evidence of a signed note.
Further, McHaffie signed for SD Lofts, LLC in all
22 relevant transactions. Ultimately, both the SD Lofts
DOT and the UC DOT were reconveyed. Neither SD Lofts,
23 LLC nor Urban Coast ever demanded payment on these
purported obligations during the relevant period
24 between February 13, 2004 and November 24, 2004. The
court therefore finds that the UC DOT and SD Lofts DOT
25 were not liabilities owed by Debtors. Nevertheless,
26
11
27 This period starts the day after McHaffie’s purchase of
100% of Urban Coast closed and ends on the date the Schaefer
28 Entities made their last loan to Debtors.
-22-
1 to facilitate the First Loan transaction, Urban Coast
and SD Lofts, LLC agreed to subordinate their
2 respective trust deeds.
3 Accordingly, the bankruptcy court did not include the UC or SD
4 Lofts debts when calculating Debtors’ liabilities at the time of
5 the April 2, 2004 Loan and found Debtors were solvent.
6 Trustee argues on appeal that the bankruptcy court’s
7 decision to exclude these debts from its solvency calculation
8 was based on her not producing any signed notes. Trustee
9 asserts that she did not need to produce the notes because the
10 pretrial order contained stipulated facts which conclusively
11 established the existence of both a loan and note in favor of
12 Urban Coast in the amount of $3,400,000 and a loan and note in
13 favor of SD Lofts in the amount of $100,000. Therefore,
14 according to Trustee, the bankruptcy court was required as a
15 matter of law to consider these obligations in its insolvency
16 analysis. Finally, Trustee maintains there was a “mountain of
17 evidence” establishing these debts.
18 The undisputed facts in the pretrial order relied upon by
19 Trustee are:
20 (10) On February 11, 2004, SD Lofts, LLC executed a
Subordination Agreement, subordinating a note in its
21 favor in the sum of $100,000 dated October 16, 2003,
in favor of Urban Coast and secured by the UC Lofts
22 Real Property to the Barth Note.
23 (11) On February 11, 2004, Urban Coast executed a
subordination agreement, subordinating a note held by
24 it and secured by the UC Lofts Real Property in the
amount of $3,400,000 dated August 1, 2003 to a
25 $4,000,000 [sic] by the Barths.
26 (12) On April 2, 2004, Schaefer Construction extended
UC Lofts a loan in the amount of $1,200,000, secured
27 by a junior deed of trust on the UC Lofts Real
Property . . . .
28
-23-
1 . . . .
2 (14) On April 13, 2004, Urban Coast executed a
Subordination Agreement, subordinating a loan in the
3 amount of $3,400,000 dated August 1, 2003, in favor of
Urban Coast and secured by UC Lofts Real Property, to
4 the April 2, 2004 Note in favor of Schaefer
Construction.
5
(15) On April 13, 2004, SD Lofts executed a
6 Subordination Agreement, subordinating a loan in the
sum of $100,000 dated as of October 16, 2003, in favor
7 of Urban Coast and secured by UC Lofts Real Property
to the April 2, 2004 Note in favor of Schaefer
8 Construction.
9 Generally, “parties are bound by stipulated facts in a
10 pretrial order.” E.H. Boly & Son, Inc. v. Schneider, 525 F.2d
11 20, 23 n.5 (9th Cir. 1975) (citing Civil Rule 16). But here
12 the language used in the stipulated facts does not clearly show
13 that the parties agreed that there were underlying and
14 enforceable debts owed by Debtors to Urban Coast and SD Lofts.
15 Rather, under a plain language interpretation these stipulated
16 facts at most show that the parties acknowledged the four
17 recorded subordination agreements. Indeed, the pretrial order
18 preserved the issue of Debtors’ insolvency, and facts and
19 evidence supporting the parties’ positions were before the
20 bankruptcy court. Trustee had an opportunity to rebut the
21 evidence which refuted the existence of the UC and SD Lofts
22 obligations. Moreover, she did not refer us to any portion of
23 the record where she objected to the court’s consideration of
24 this evidence, asserting it was not relevant because the debt
25 was “admitted” in the pretrial order. Accordingly, nothing in
26 the record shows Trustee was relying on the pretrial order to
27 establish the existence of these obligations.
28 The record shows that Scafani testified that the
-24-
1 transaction that would have resulted in the $3,400,000
2 obligation was never consummated and the bankruptcy court found
3 his testimony credible. “When factual findings are based on
4 determinations regarding the credibility of witnesses, we give
5 great deference to the bankruptcy court’s findings, because the
6 bankruptcy court, as the trier of fact, had the opportunity to
7 note ‘variations in demeanor and tone of voice that bear so
8 heavily on the listener’s understanding of and belief in what is
9 said.’” Anderson, 470 U.S. at 575. We thus defer to the
10 bankruptcy court’s reasonable assessment of Scafani’s
11 credibility. In addition, although the Schaefer Entities
12 acknowledged the existence of the Urban Coast and SD Lofts debts
13 each time they made a loan to Debtor, this acknowledgment does
14 not show that such debts were valid. Frank Schaefer also
15 testified that there was no note in connection with the
16 $3,400,000 million Urban Coast obligation. In short, other than
17 the subordination agreements regarding the UC DOT, there is no
18 evidence in the record that refutes Scafani’s or Schaefer’s
19 testimony.
20 Trustee also points to no evidence in the record - other
21 than the subordination agreements - that establishes the
22 SD Lofts debt. The bankruptcy court noted that McHaffie had
23 signed the deed of trust on behalf of SD Lofts but there was no
24 demand for payment on the underlying note between February 12,
25 2004 and November 24, 2004.
26 Simply put, Trustee’s “mountain of evidence” is not in the
27 record. Accordingly, the bankruptcy court committed no clear
28 error by excluding the Urban Coast or SD Lofts debts when
-25-
1 calculating Debtors’ liabilities during the Relevant Period.
2 3. The transfer of the deed of trust in connection with
the April 2, 2004 Loan was not fraudulent.
3
4 Under Cal. Civ. Code § 3439.04(a)(2)(A), “[a] transfer made
5 or obligation incurred by a debtor is fraudulent as to a
6 creditor . . . if the debtor made the transfer or incurred the
7 obligation [w]ithout receiving a reasonably equivalent value in
8 exchange for the transfer or obligation, and the debtor . . .
9 [w]as engaged or was about to engage in a business or a
10 transaction for which the remaining assets of the debtor were
11 unreasonably small in relation to the business or transaction.”
12 Trustee seeks to avoid as fraudulent transfers the deed of
13 trust Debtors gave to Schaefer Construction in connection with
14 the April 2, 2004 Loan and the later transfers of Tropicana to
15 Schaefer and Lemire. Trustee contends that because the loan
16 funds went to purchase Tropicana, the deed of trust given to
17 Schaefer Construction was a “transfer” of Debtors’ property for
18 no consideration and thus was fraudulent. Trustee further
19 asserts that “since proper recognition of the stipulated Urban
20 Coast and SD Lofts debts establishes that Debtors were insolvent
21 as of April 2, 2004, the granting of a deed of trust on the
22 Lofts Property was without question a fraudulent transfer that
23 should be avoided.”
24 As previously discussed, the bankruptcy court did not err
25 by omitting the Urban Coast and SD Lofts debts when determining
26 Debtors’ assets and liabilities at the time of the April 2, 2004
27 Loan. Therefore, as the bankruptcy court found, Debtors were
28 balance sheet solvent on and after the April 2, 2004 Loan and
-26-
1 were not left with unreasonably small assets as a result.
2 Because Trustee failed to prove an essential element of her
3 fraudulent transfer claim related to the April 2, 2004 Loan, the
4 claim fails and we need not resolve the other related elements,
5 including whether reasonably equivalent value existed.
6 Accordingly, there is no basis to reverse the bankruptcy court’s
7 judgment in favor of Schaefer Construction on this fraudulent
8 transfer claim.
9 4. The bankruptcy court did not err by misapplying the
burden of proof with respect to the fraudulent
10 transfer liability of Lemire.
11 Cal. Civ. Code § 3439.08(a) states that “[a] transfer or an
12 obligation is not voidable under subdivision (a) of [Cal. Civ.
13 Code section] 3439.04, against a person who took in good faith
14 and for a reasonably equivalent value. . . .” Thus, a showing
15 of good faith and reasonably equivalent value is all that is
16 required to defeat a creditor’s action based on Cal. Civ. Code
17 § 3439.04(a). Obviously, if a transfer is made both in good
18 faith and for a reasonably equivalent value, then the transfer
19 is not a fraudulent transfer under Cal. Civ. Code § 3439.04(b)
20 either, since subdivision (b) applies only to transfers made
21 without receipt of reasonably equivalent value. Cal. Civ. Code
22 § 3439.08(b)(2) authorizes the creditor to obtain judgment
23 against a subsequent transferee.
24 In its memorandum decision, the bankruptcy court found:
25 The Trustee's remaining fraudulent transfer claim
against Lemire derives from her claim against the
26 Schaefer Entities arising out of the Tropicana
transaction. Specifically, the Trustee seeks to
27 recover whatever profit Lemire gained from her sale of
the Tropicana property.
28
-27-
1 As noted above, the Tropicana LLC interests or the
underlying real property never belonged to the
2 Debtors. Further, Lemire contributed value for the
property. She paid $70,000 for an option to purchase
3 it from Schaefer. She then borrowed funds to improve
the property and reduced the vacancy rate through her
4 own labors. Lemire sold the Tropicana real property
for $5,750,000. But she could not state with
5 certainty the amount she received from the transaction
after accounting for payments to Schaefer and the
6 liens against property. And the Trustee did not offer
any evidence on the amount Lemire may have personally
7 profited from the sale.
8 The court therefore finds that the Trustee has failed
to meet her burden of showing that Lemire was a
9 subsequent transferee of property of the Debtors or
that she did not provide reasonably equivalent value.
10 The court will enter judgment in Lemire's favor.
11 As discussed above, Trustee asserted Debtors’ transfer of
12 the deed of trust to Schaefer Construction was fraudulent.
13 Schaefer Construction later assigned the April 2, 2004 note and
14 deed of trust to Lemire on December 30, 2004. Therefore,
15 Trustee contends that Lemire is a subsequent transferee who is
16 liable, the same as Schaefer Construction, for the fraudulent
17 transfer of the $1,200,000 trust deed. Trustee further argues
18 that Lemire had the defense, if she could establish it, that she
19 took the transfer for value and in good faith. Cal. Civ. Code
20 § 3439.08(b)(2). Trustee asserts that the bankruptcy court
21 improperly placed the burden on her, rather than Lemire, to
22 prove value and good faith.
23 The bankruptcy court found that the deed of trust recorded
24 on April 14, 2004, in connection with the April 2, 2004 Loan by
25 Schaefer Construction, could not be avoided as a fraudulent
26 transfer since Debtors were balance sheet solvent on and after
27 the April 2, 2004 Loan and were not left with unreasonably small
28 assets as a result. Thus, Trustee failed to prove an essential
-28-
1 element of her fraudulent transfer claim against Schaefer
2 Construction. If Trustee could not avoid the transfer of the
3 deed of trust as to Schaefer Construction on this ground,
4 Trustee could not recover from Lemire as a subsequent
5 transferee. It follows that there was no need for Lemire to
6 prove that she took the transfer for value and in good faith
7 when there was no fraudulent transfer in the first place.
8 Accordingly, to the extent the bankruptcy court misapplied the
9 burden of proof, it is harmless error.
10 B. Fraudulent Transfer - Halifax
11 Trustee successfully avoided the fraudulent transfer of
12 $1,100,000 from Debtors to Halifax as constructively fraudulent
13 under Cal. Civ. Code § 3439.04(a)(2), which Halifax challenges
14 on appeal. Under this section, there must be a transfer of
15 property of the debtor; constructive fraud is defined simply as
16 transactions in which the debtor receives less than reasonably
17 equivalent value for this transfer at a time when the debtor is
18 insolvent. Trustee bears the burden of proving all these
19 elements.
20 In its memorandum decision, the bankruptcy court found that
21 the $1,100,000 payment from Debtors to Halifax was
22 constructively fraudulent and should be avoided: “The Halifax
23 payment left the Debtors with [unreasonably small assets] and
24 rendered them insolvent. Moreover, neither Halifax nor Scafani
25 provided reasonably equivalent value for this transfer.”
26 1. The lis pendens did not make Halifax a fully secured
creditor.
27
28 Halifax argues on appeal, as it did at trial, that it was
-29-
1 fully secured by virtue of recording the lis pendens. Thus,
2 because it received payment from Debtors as a fully secured
3 creditor, the transfer was not fraudulent under the holding in
4 Henry v. First All. Mortg. Co. (In re First All. Mortg. Co.),
5 471 F.3d 977, 1008 (9th Cir. 2006)(“‘[r]epayments of fully
6 secured obligations—where a transfer results in a dollar for
7 dollar reduction in the debtor’s liability—do not hinder, delay,
8 or defraud creditors because the transfers do not put assets
9 otherwise available in a bankruptcy distribution out of their
10 reach.’”).
11 Halifax offers no persuasive authority to support its
12 argument that its notice of lis pendens operated as an
13 “encumbrance” which made it a fully secured creditor. This is
14 not surprising since, under California law, a notice of lis
15 pendens does not make the person who recorded it a secured
16 creditor. Cal–Western Reconveyance Corp. v. Reed,
17 152 Cal. App. 4th 1308, 1318-19 (2007) (citing Campbell v. Super.
18 Ct., 132 Cal. App. 4th 904, 914 (2005) (“true purpose of the lis
19 pendens statute is to provide notice of pending litigation and
20 not to make plaintiffs secured creditors of defendants nor to
21 provide plaintiffs with additional leverage for negotiating
22 purposes.”)); see also Cal. Code Civ. Proc. § 405.20 (lis
23 pendens serves as notice that litigation regarding the property
24 is being pursued).
25 Halifax’s reliance on Hurst Concrete Products, Inc. v. Lane
26 (In re Lane), 980 F.2d 601 (9th Cir. 1992) is misplaced. The
27 facts in Lane are distinguishable. The issue in Lane was
28 whether the filing of a lis pendens was a transfer within the
-30-
1 definition of transfer set forth in § 547(e)(1)(A). The
2 question of whether the filing of a lis pendens creates a lien
3 is missing from the court’s analysis.
4 In sum, the filing of the lis pendens did not make Halifax
5 fully secured. Therefore, the rule espoused in In re First All.
6 Mortg. Co. has no applicability to this case. Accordingly, the
7 bankruptcy court did not err on this basis.
8 2. The bankruptcy court did not err in determining that
Halifax did not give reasonably equivalent value for
9 payment of $1,100,000 by releasing its $1.6 million
note, dismissing its lawsuit, and withdrawing the lis
10 pendens against the Lofts Property.
11 Under Cal. Civ. Code § 3439.04(a), a transfer is avoidable
12 if the debtor made the transfer without receiving a reasonably
13 equivalent value in exchange for the transfer and the debtor
14 intended to incur, or believed or reasonably should have
15 believed that it would incur debts beyond its ability to pay as
16 they became due. See also Cal. Civ. Code § 3439.05.
17 With respect to the reasonably equivalent value
18 requirement, the bankruptcy court found:
19 In this case, McHaffie, Urban Coast, Halifax and
Scafani executed the Halifax Sale Agreement. One
20 component of this agreement required Urban Coast or
McHaffie to pay $1,600,000 to Halifax. This secured
21 McHaffie's acquisition of Urban Coast and through it,
the UC Lofts Real Property. McHaffie and Urban Coast
22 also owed brokerage rights and purchase options to
John Scafani. The Debtors were not signatories to the
23 Halifax Sale Agreement. That the UC Lofts Real
Property secured those obligations did not transform
24 them into the Debtors' liabilities. Nor is it
apparent that the change in leadership from Scafani to
25 McHaffie provided any value to the Debtors to support
granting a security interest in their property. Thus,
26 under the indirect benefit rule stated in Northern
Merchandise and Pajaro Dunes, Defendants must
27 demonstrate that Debtor's received a direct, tangible
benefit from paying Urban Coast and McHaffie's
28 obligation.
-31-
1 Defendants offered substantial testimony emphasizing
that Scafani agreed to relinquish his purchase options
2 and brokerage rights and that Halifax agreed to a
$500,000 reduction on its note. But the testimony
3 from Warner and Schaefer established that they
believed the lis pendens was improperly recorded and
4 could have been expunged for a fraction of the
settlement price. The court accepts this
5 characterization. Thus, the Debtors can hardly be
said to have received reasonably equivalent value by
6 paying $1,100,000 for its removal. Moreover, the
upstream benefit Urban Coast and McHaffie received by
7 being relieved from obligations under the Halifax Sale
Agreement did not provide a sufficiently tangible
8 benefit to the Debtors to allow the court to conclude
they received reasonably equivalent value.
9
10 Halifax challenges these findings on appeal and argues that
11 we should review these findings under a de novo standard of
12 review rather than a clearly erroneous standard. In support of
13 this contention, Halifax relies on Maddox v. Robertson
14 (In re Prejean), 994 F.2d 706, 708 (9th Cir. 1993).
15 In Prejean, the Ninth Circuit considered whether California
16 case law which held that the release of time-barred debt was
17 consideration to avoid a fraudulent transfer was abrogated in
18 light of California’s recent adoption of the California
19 Fraudulent Transfer Act (CFTA). The CFTA substituted the term
20 “reasonably equivalent value” for “fair consideration.” As
21 noted by the Ninth Circuit, the facts in Prejean were
22 undisputed. Id. at 707. Ursula Maddox lent her brother, Joseph
23 Prejean, $40,000 between 1968 and 1971 to assist him in
24 attending medical school. The two did not memorialize the loan
25 in writing. Between 1974 and 1984, Maddox also cared for
26 Prejean’s child. Nothing was set down in writing during that
27 period either to value those services or to establish terms of
28 payment. Maddox and Prejean agreed in 1985 upon a figure of
-32-
1 $200,000 as representing the aggregate value of the child care
2 services and the loan. They did not record that figure in
3 writing. In September 1987, Prejean gave Maddox a $100,000 note
4 that he secured with a deed of trust upon his home. The deed
5 was recorded in January 1988.
6 Seventeen months later Prejean filed a chapter 7 bankruptcy
7 petition. The trustee brought an action in the bankruptcy court
8 to set aside the transfer of the interest in Prejean's home
9 under § 544. The trustee alleged that the transfer of the home
10 violated the CFTA. The primary issue was whether the
11 satisfaction of a time-barred debt was “reasonably equivalent
12 value” for a transfer, thus precluding the transfer from being
13 avoidable under Cal. Civ. Code § 3439.04.
14 The bankruptcy court refused to set aside the transfer. It
15 found that the note and transfer had been made in good faith,
16 and that finding was not challenged on appeal. Citing United
17 States Fid. & Guar. Co. v. Postel, 64 Cal. App. 2d 567 (Cal. Ct.
18 Ohio App. 1944), the bankruptcy court reasoned that the discharge of
19 a moral obligation is “reasonable consideration” for a new
20 promise to repay a time-barred debt. In United States Fidelity,
21 the California Court of Appeal determined that the payment of an
22 antecedent debt that is partially time-barred is “fair
23 consideration.” United States Fidelity had been decided under
24 the California Fraudulent Conveyance Act, the predecessor of the
25 CFTA.
26 The BAP reversed the judgment of the bankruptcy court. It
27 held, among other things, that United States Fidelity was no
28 longer good law. Analogizing Cal. Civ. Code § 3439.04 to § 548,
-33-
1 the federal “strong-arm” statute that contains “reasonably
2 equivalent value” language, the BAP said:
3 The switch from ‘fair consideration’ to ‘reasonably
equivalent value’ directs attention away from what is
4 fair as between the parties and instead measures
consideration in terms of its objective worth to all
5 the transferor’s creditors.
6 Maddox appealed. On appeal the Ninth Circuit couched the
7 issues as legal ones requiring de novo review. The court first
8 considered the question whether California’s recent adoption of
9 the UFTA, which substituted “reasonably equivalent value” for
10 “fair consideration,” implied a rejection of the rule set forth
11 in United States Fidelity. The Ninth Circuit held that the
12 Panel had read United States Fidelity too narrowly:
13 We discern nothing in the language or history of the
CFTA that would lead us to conclude that a time-barred
14 debt that was a ‘fair equivalent’ from the viewpoint
of the creditors under the prior law is not also
15 ‘reasonably equivalent value’ under the CFTA. There
has been no showing that the California legislature
16 intended to abrogate the rule of United States
Fidelity in enacting the current statute.
17
18 The Ninth Circuit noted that under both prior law and the CFTA
19 reasonably equivalent value must be determined from the
20 creditors’ standpoint, not the debtor’s.
21 The court observed that Prejean gave Maddox a security
22 interest in satisfaction of an antecedent obligation, arising
23 from cash loans and valuable services, that, but for the statute
24 of limitations, was enforceable. Therefore, since United States
25 Fidelity remained good law, the court concluded that the
26 transfer satisfied the requirement of “reasonably equivalent
27 value” contained in the CFTA and reversed the Panel’s decision.
28 As this recitation shows, the issue before the Ninth
-34-
1 Circuit in Prejean was not a factual one where consideration for
2 a transfer was to be weighed, but rather was a determination of
3 whether a type of consideration — release of time-barred debt —
4 was still to be considered of value after a change in California
5 law. The Ninth Circuit appropriately applied de novo review to
6 its determination of this legal issue. However, we are not
7 persuaded that the Ninth Circuit held that a factual
8 determination of reasonably equivalent value requires de novo
9 review. See Ehrenberg v. Tenzer (In re Heartbeat of the City,
10 N.W., Inc.), 2006 WL 6810939, at *5 (9th Cir. BAP April 6, 2006)
11 (stating that there was no clear statement in the Ninth Circuit
12 case law concerning whether determining if reasonably equivalent
13 value has been given for a transfer for purposes of § 548 is a
14 question of law).
15 Indeed, the Ninth Circuit later applied the clearly
16 erroneous standard of review to the bankruptcy court’s
17 determination of reasonably equivalent value in Decker v.
18 Tramiel (In re JTS Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010).
19 In JTS, after the district court reversed the bankruptcy court’s
20 determination that the defendant had paid reasonably equivalent
21 value when purchasing real property, the Ninth Circuit found
22 error in the District Court’s ruling. It determined that the
23 bankruptcy court’s finding of reasonably equivalent value “was
24 not clearly erroneous” since the evidence supported that
25 conclusion, clearly applying this deferential standard of review
26
27
28
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1 to the trial court’s factual finding. Id. at 1109-10.12
2 Accordingly, because we are not convinced otherwise, we
3 follow the clearly erroneous standard adopted in JTS and the
4 weight of authority in other circuits and consider the issue a
5 question of fact. In re Heartbeat of the City, 2006 WL 6810939,
6 at *5 n.8 (noting that eight other circuits and a leading
7 treatise consider the issue a question of fact).13
8 We now reach the merits of Halifax’s various arguments.
9 Halifax contends that the $1,100,000 payment it received matched
10 more than a dollar for dollar benefit to Debtors. Halifax
11 asserts that in addition to having the $1,600,00 lien against
12 the Lofts Property extinguished, “they” obtained a discount of
13
14 12
California case law is in accord. See Patterson v.
15 Missler, 238 Cal. App. 2d 759, 766-67 (Cal. Ct. App. 1966).
13
16 Tex. Truck Ins. Agency v. Cure (In re Dunham), 110 F.3d
286, 288–89 (5th Cir. 1997) offered the following survey of
17 circuit cases determining whether reasonable equivalency is a
question of law, subject to de novo review, or a question of
18 fact: Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982
19 (1st Cir. 1983) (factual issue to be reviewed for clear error);
Klein v. Tabatchnick & Emmer, 610 F.2d 1043, 1047 (2nd Cir. 1979)
20 (fairness of consideration is generally a question of fact);
Morrison v. Champion Credit Corp. (In re Dewey Barefoot),
21 952 F.2d 795, 800 (4th Cir. 1991)(factual determination that can
only be set aside if clearly erroneous); Bundles v. Baker
22
(In re Bundles), 856 F.2d 815, 825 (7th Cir. 1988)(great
23 deference to the district court); Jacoway v. Anderson
(In re Ozark Rest. Equip. Co., Inc.), 850 F.2d 342, 344 (8th Cir.
24 1988) (question of fact reversible only if clearly erroneous);
Clark v. Sec. Pac. Bus. Credit, Inc. (In re Wes Dor, Inc.),
25 996 F.2d 237 (10th Cir. 1993)(suggesting fact question); and
26 Nordberg v. Arab Banking Corp. (In re Chase & Sandborn Corp.),
904 F.2d 588, 593 (11th Cir. 1990)(fair consideration is largely
27 a question of fact). The Dunham court noted that in the Ninth
Circuit, according to Prejean, reasonable equivalency is subject
28 to de novo review.
-36-
1 $500,000 on the lien, and the withdrawal of the lis pendens
2 which allowed Debtors to resume development of the Lofts
3 Property.
4 Halifax also maintains that the only defect in the lis
5 pendens was that it was recorded against the property of a
6 non-party. However, James Warner testified unequivocally that
7 this minor defect could be corrected by amending the complaint
8 to add Debtors as named defendants, an amendment which the trial
9 judge would “never, never” deny. Halifax points out that Warner
10 was the attorney of record for Debtors at the time of the
11 Halifax Settlement Agreement and thus he was in a position to
12 value the settlement and agreed that withdrawing the lis pendens
13 and discounting the note constituted valuable consideration to
14 Debtors.
15 Contrary to Halifax’s assertion, we discern no error with
16 the bankruptcy court’s analysis. The reasonably equivalent
17 value analysis “is directed at what the debtor surrendered and
18 what the debtor received irrespective of what any third party
19 may have gained or lost.” Wyle v. C.H. Rider & Family
20 (In re United Energy Corp.), 944 F.2d 589, 597 (9th Cir. 1991);
21 see also Frontier Bank v. Brown (In re N. Merch., Inc.),
22 371 F.3d 1056, 1059 (9th Cir. 2004)(the “primary focus . . . is
23 on the net effect of the transaction on the debtor’s estate and
24 the funds available to the unsecured creditors.”); Roosevelt v.
25 Ray (In re Roosevelt), 176 B.R. 200, 206 and 208 (9th Cir. BAP
26 1994) (same).
27 “Beyond looking at what is exchanged in a quid pro quo
28 transaction, it is important to examine the value of all
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1 benefits inuring to a debtor by virtue of the transaction in
2 question, directly or indirectly.” In re Fox Bean Co., Inc.,
3 287 B.R. 270 (Bankr. D. Idaho 2002)(citing Pummill v.
4 Greensfelder, Hemker & Gale (In re Richards & Conover Steel,
5 Co.), 267 B.R. 602, 612–13 (8th Cir. BAP 2001); see also
6 In re N. Merch., Inc., 371 F.3d at 1058 (“It is well settled
7 that reasonably equivalent value can come from one other than
8 the recipient of the payments, a rule which has become known as
9 the indirect benefit rule.”). “Under [the indirect benefit
10 rule], some clear and tangible benefit to the debtor must still
11 consequently result from the payment by the transferee.” Pajaro
12 Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental
13 Agency, Inc.), 174 B.R. 557, 579 (Bankr. N.D. Cal. 1994).
14 There is a two step process required to determine whether a
15 debtor received a reasonably equivalent value. Greenspan v.
16 Orrick (In re Brobeck, Phleger, & Harrison, LLP, 408 B.R. 318,
17 341 (Bankr. N.D. Cal. 2009). First, it must be determined that
18 the debtor received value. Id. Value is defined under Cal.
19 Civ. Code § 3439.03 as follows:
20 Value is given for a transfer or an obligation if, in
exchange for the transfer or obligation, property is
21 transferred or an antecedent debt is secured or
satisfied, but value does not include an unperformed
22 promise made otherwise than in the ordinary course of
the promisor’s business to furnish support to the
23 debtor or another person.
24 Value is similarly defined for purposes of § 548. Id. (citing
25 In re United Energy Corp., 944 F.2d at 595). Second, the court
26 must determine whether that value was reasonably equivalent to
27 what the debtor gave up. Id. Reasonable equivalence can
28 include the elimination of claims or litigation. In re United
-38-
1 Energy, 944 F.2d at 595-96. Finally, the determination of
2 reasonable equivalence must be made as of the time of the
3 transfer. BFP v. Resolution Trust Corp., 511 U.S. 531, 546
4 (1994). Trustee had the burden of showing that Debtors did not
5 receive reasonably equivalent value in exchange. In re Pajaro
6 Dunes Rental Agency, Inc., 174 B.R. at 578.
7 Here, the bankruptcy court considered what Debtors received
8 and what they gave up when determining whether there was
9 reasonably equivalent value. As noted by the bankruptcy court,
10 Debtors were not obligated on the underlying note. Therefore,
11 reducing the amount owed on the note by $500,000 cannot be said
12 to have benefitted Debtors directly or indirectly. Generally
13 speaking, a debtor’s payment of the debt of another does not
14 constitute a reasonably equivalent value when the debtor is not
15 obligated on the debt. Wood v. Delury, Pomares & Co.
16 (In re Fair Oaks, Ltd.), 168 B.R. 397, 402 (9th Cir. BAP 1994).
17 Further, while the $1,100,000 payment to Halifax satisfied
18 the lien against the Lofts Property, the bankruptcy court found
19 that Debtors had received no value in connection with the
20 transfer of the deed of trust in the first place; i.e., they
21 were not obligated on the loan. Additionally, the court found
22 no indirect benefit to Debtors since the transfer in leadership
23 from Scafani to McHaffie did not provide any value for the
24 security obligation. Halifax does not point to any evidence in
25 the record that would contradict the bankruptcy court’s finding
26 of no value.
27 Further, although Debtors transferred $1,100,000 to Halifax
28 in settlement of the litigation, Debtors were not named as
-39-
1 defendants in the litigation. It follows that none of the
2 claims were asserted against them. Nor is it apparent from the
3 record that Debtors’ future was dependent upon the resolution of
4 the lawsuit rather than on the withdrawal of the lis pendens.
5 Although the withdrawal of the lis pendens was beneficial to
6 Debtors so they could resume development, the bankruptcy court
7 quantified that benefit as being worth at most $10,000. Thus,
8 Debtors payment of $1,100,000 to Halifax for that benefit cannot
9 be reasonably equivalent. See BFP, 511 U.S. at 540 n.4 (“. . .
10 the phrase ‘reasonably equivalent’ means ‘approximately
11 equivalent,’ or ‘roughly equivalent.’”). Accordingly, the
12 bankruptcy court properly found that Debtors did not receive
13 reasonably equivalent value for the $1,100,000 payment and that
14 finding was not clearly erroneous.
15 3. The bankruptcy court did not err in determining that
John Scafani was not liable for receiving a fraudulent
16 transfer because the entire $1,100,000 transfer went
to Halifax’s creditors and Scafani did not receive any
17 of the funds.
18 Scafani’s unrebutted testimony was that the $1,100,000
19 payment from Debtors to Halifax went to Halifax’s creditors.
20 Trustee did not trace the funds nor has she pointed out any
21 evidence in the record showing otherwise. See In re Pajaro
22 Dunes Rental Agency, Inc., 174 B.R. at 583 (“Tracing of funds
23 has often been a part of fraudulent transfer litigation.”).
24 Accordingly, the bankruptcy court’s finding that Scafani did not
25 receive any of the $1,100,000 from Debtors was supported by
26 inferences drawn from the facts in the record. We thus discern
27 no error.
28
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1 C. Aiding and abetting breach of fiduciary duty: Schaefer
Entities
2
3 In connection with Trustee’s claim against the Schaefer
4 Entities for aiding and abetting McHaffie’s breach of fiduciary
5 duty, the bankruptcy court found:
6 Under California law, “[l]iability may ... be imposed
on one who aids and abets the commission of an
7 intentional tort if the person ... knows the other's
conduct constitutes a breach of a duty and gives
8 substantial assistance or encouragement to the other
to so act.'” In re First All. Mortg Co., 471 F.3d at
9 993 (quoting Casey v. U.S. Bank Nat'l Assn.,
127 Cal. App. 4th 1138, 1144 (2005)); see also Fiol v.
10 Doellstedt, 50 Cal. App. 4th 1318, 1325–26 (1996).
“[A]iding and abetting liability ... requires a
11 finding of actual knowledge, not specific intent.”
In re First All. Mortg. Co., 471 F.3d at 993.
12
In First Alliance Mortgage, a jury found Lehman
13 Brothers, Inc. and its subsidiary (“Lehman”) liable
for aiding and abetting the debtor's fraudulent
14 lending practices. Id. at 983. The finding relied on
Lehman’s eventual relationship as the debtor's only
15 lender, its intimate knowledge of the debtor's lending
practices and its substantial assistance in furthering
16 the scheme by continuing to lend. Id. at 986–87,
994–95. In fact, Lehman warned the debtor that if it
17 did “not change its business practices, it [would] not
survive scrutiny.” Id. at 994.
18
Here, the Schaefer Entitles, like Lehman, at some
19 point became the Debtors' only source of financing
such that they provided substantial assistance.
20 Further, it is apparent that Schaefer at least had the
opportunity to scrutinize each disbursement from the
21 fund controls. But distinct from the situation in
First Alliance, Schaefer credibly testified that his
22 primary, if not sole, focus was the equity in the
property—not the Debtors’ progress on the Atmosphere
23 Project. Moreover, the Fund Control Agreement gave
him the contractual right to presume that each
24 disbursement request was actually what the borrower
requested and related to the project. Finally, the
25 proposed budget negotiated between the Schaefer
Entities and McHaffie contemplated management and
26 contingency line items, for which they allotted over
$400,000.
27
Thus, the court cannot conclude that the Schaefer
28 Entities had actual knowledge of McHaffie's
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1 defalcations as they occurred. The Trustee has
therefore failed to meet her burden on this claim, and
2 judgment for the Schaefer Entities is appropriate.
3 Trustee argues that the bankruptcy court’s finding that the
4 Schaefer Entities did not have actual knowledge of McHaffie’s
5 defalcations as they occurred was clear error. According to
6 Trustee, the court’s conclusion ignores “substantial amounts of
7 uncontroverted evidence and the court’s own findings.”
8 Specifically, the court found that “the Schaefer Entities
9 possessed a significant degree of control over the Debtors” and
10 “Schaefer had the opportunity to scrutinize each disbursement
11 from the fund controls.” These findings, Trustee argues, show
12 that Schaefer could not have been unaware that $570,000 or more
13 taken out of the First Fund Control account was misdirected
14 towards Tropicana. Trustee also asserts that the Fund Control
15 Agreement does not allow the Schaefer Entities to avoid
16 liability. The agreement provides:
17 Control shall conclusively presume that any written
order of an authorized person is (1) given for the
18 purposes stated in the order; and (2) authorized by
the owner and contractor.
19
20 Because Schaefer failed to produce any written order for the
21 misdirected payments, Trustee argues that he may not rely upon
22 any presumption that these payments were intended for completion
23 of the Atmosphere Project.
24 We disagree that this constitutes error. The bankruptcy
25 court’s finding that the Schaefer Entities had no actual
26 knowledge of McHaffie’s breach of fiduciary duty is plausible in
27 light of the evidence presented. Although the court found that
28 the Schaefer Entities exercised a significant degree of control
-42-
1 over Debtors and that they had the opportunity to scrutinize
2 each disbursement from the fund control accounts, the bankruptcy
3 court also relied on Schaefer’s testimony in making its ruling.
4 Schaefer testified that his primary focus was on the equity in
5 the Lofts Property and not Debtors’ progress on the completion
6 of the Atmosphere Project. Thus, even if Schaefer was aware
7 that McHaffie was not using the April 2, 2004 loan proceeds for
8 the development of the Lofts Property, a reasonable inference
9 from his testimony is that he did not make a conscious choice to
10 make loans to Debtors knowing that McHaffie was engaging in
11 improper conduct. See Lomita Land & Water Co. v. Robinson,
12 154 Cal. 36, 47 (1908) (The defendant must have acted to aid the
13 primary tortfeasor “with knowledge of the object to be
14 attained.”). Moreover, “[m]ere knowledge that a tort is being
15 committed and the failure to prevent it does not constitute
16 aiding and abetting.” Fiol v. Doellstedt, 50 Cal. App. 4th 1318,
17 1326 (1996).
18 In short, the bankruptcy court was free to accept
19 Schaefer’s testimony and draw any reasonable inferences
20 therefrom to support its ruling. It is not the province of the
21 appellate court to reweigh the evidence and choose between
22 competing inferences. See Anderson, 470 U.S. at 573–74 (“[i]f
23 the [trial] court’s account of the evidence is plausible in
24 light of the record viewed in its entirety, the court of appeals
25 may not reverse it even though convinced that had it been
26 sitting as the trier of fact, it would have weighed the evidence
27 differently”). Despite Trustee’s argument to the contrary, we
28 see nothing that requires a difference result.
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1 D. Preferential Transfer Claim: Schaefer’s Insider Status
2 Section 547(b) authorizes a trustee to avoid preferential
3 transfers made by a debtor within certain periods of time before
4 the bankruptcy filing. Miller v. Schuman (In re Schuman),
5 81 B.R. 583, 585 (9th Cir. BAP 1987). Where a creditor is an
6 insider, the preference period is one year. Id.
7 Trustee seeks to recover a $506,000 payment on the Second
8 Loan to Schaefer Construction within one year of the
9 commencement of the bankruptcy case. The trustee bears the
10 burden of proof to establish each and every element under
11 § 547(b) in order to avoid a transfer as a preference. Batlan
12 v. TransAmerica Commercial Fin. Corp. (In re Smith’s Home
13 Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir. 2001).
14 The bankruptcy court found:
15 The court accepts Schaefer's testimony as credible in
all respects and finds that neither he nor Frank
16 Schaefer Construction, Inc. nor Frank Schaefer
Construction, Inc. Pension Plan was an insider of the
17 Debtors. The Schaefer Entities exerted considerable
control over Debtors and McHaffie. But this control
18 never extended beyond that of a secured
lender-to-borrower relationship.
19
Significantly, the court notes that Schaefer
20 faithfully acted according to the terms of the various
promissory notes and deeds of trust. He also never
21 refused a disbursement request from McHaffie. And
with the exception of the Halifax payment, Schaefer
22 did not advocate that the Debtors pay certain
creditors or forego payments to others. Ultimately,
23 the evidence did not establish that Schaefer was ever
able to pressure Debtors in such a way as to
24 substitute his own decision making power for
McHaffie’s.
25
26 Trustee challenges these findings, contending that the
27 bankruptcy court applied the wrong legal test for determining
28 non-statutory insider status. According to Trustee, there are
-44-
1 different legal standards applied when considering statutory
2 insiders under § 101(31) and non-statutory insiders. While the
3 “person in control” test may apply to statutory insiders,
4 Trustee argues that with non-statutory insiders actual control
5 is not required: “it is not necessary that a non-statutory
6 insider have actual control; rather the question is whether
7 there is a close relationship [between debtor and creditor] and
8 . . . anything other than closeness to suggest that any
9 transactions were not conducted at arm’s length.” See Shubert
10 v. Lucent Techs. Inc. (In re Winstar Comm’ns, Inc.), 554 F.3d
11 382, 396-97 (3d Cir. 2009).
12 First of all, we are not bound by Third Circuit case law,
13 but by Ninth Circuit case law and our own prior decisions. See
14 State v. Rowley (In re Rowley), 208 B.R. 942, 944 (9th Cir. BAP
15 1997) (stating that we are bound by prior Panel decisions).
16 Second, our reading of the relevant legal authorities indicates
17 that the bankruptcy court did not apply the wrong legal test as
18 demonstrated below.
19 The Bankruptcy Code provides a definition of insider that
20 varies based on the type of debtor and includes different
21 individuals who are insiders depending on whether the debtor is
22 a person, corporation, partnership, or municipality.
23 § 101(31).14 However, “the respective insider definitions do not
24
25 14
Section (31) provides in relevant part:
26 The term “insider” includes--
(A) if the debtor is an individual--
27 (i) relative of the debtor or of a general partner of
the debtor;
28 (continued...)
-45-
1 attempt or purport to be all inclusive.” In re Friedman,
2 126 B.R. at 69. An insider can either fall into one of these
3 per se classifications listed in the statute, or be a
4 non-statutory insider who has a “professional or business
5 relationship with the debtor . . . where such relationship
6 compels the conclusion that the individual or entity has a
7 relationship with the debtor, close enough to gain an advantage
8 attributable simply to affinity rather than to the course of
9 business dealings between the parties.” Id. at 70. A
10 non-statutory insider is one “who has a sufficiently close
11 relationship with the debtor that his conduct is made subject to
12 closer scrutiny than those dealing at arms [sic] length with the
13
14 14
(...continued)
15 (ii) partnership in which the debtor is a general
partner;
16 (iii) general partner of the debtor; or
(iv) corporation of which the debtor is a director,
17 officer, or person in control;
(B) if the debtor is a corporation--
18 (i) director of the debtor;
19 (ii) officer of the debtor;
(iii) person in control of the debtor;
20 (iv) partnership in which the debtor is a general
partner;
21 (v) general partner of the debtor; or
(vi) relative of a general partner, director, officer,
22
or person in control of the debtor;
23 (C) if the debtor is a partnership--
(i) general partner in the debtor;
24 (ii) relative of a general partner in, general partner
of, or person in control of the debtor;
25 (iii) partnership in which the debtor is a general
26 partner;
(iv) general partner of the debtor; or
27 (v) person in control of the debtor;
28 . . . .
-46-
1 debtor.” Vill. at Lakeridge, LLC v. United States Bank N.A.
2 (In re Vill. at Lakeridge, LLC), 2013 WL 1397447, at *5 (9th
3 Cir. BAP Apr. 5, 2013) (citing In re Friedman, 126 B.R. at 70);
4 see also Miller Ave. Prof’l & Promotional Servs. v. Brady
5 (In re Enter. Acquisition Partners, Inc.), 319 B.R. 626, 631
6 (9th Cir. BAP 2004) (citing Wilson v. Huffman, 712 F.2d 206, 210
7 (5th Cir. 1983)).
8 In determining whether a creditor qualifies as a
9 non-statutory insider, courts look at “the closeness of the
10 parties and the degree to which the transferee is able to exert
11 control or influence over the debtor.” In re Vill. at
12 Lakeridge, LLC, 2013 WL 1397447, at *5 (citing In re Enter.
13 Acquisition Partners, Inc., 319 B.R. at 626 and Miller v.
14 Schuman (In re Schuman), 81 B.R. 583, 586 (9th Cir. BAP 1987)).
15 The primary test of a non-statutory insider is whether the
16 creditor “exercises such control or influence over the debtor as
17 to render their transaction not arms-length.” Id.
18 Here, the bankruptcy court implicitly applied the legal
19 test for determining whether the Schaefer Entities were non-
20 statutory insiders espoused in our precedent. The court
21 determined that there was “closeness” because the Schaefer
22 Entities exerted considerable control over Debtors. However,
23 the bankruptcy court quantified that control by stating that it
24 never extended beyond a secured lender to borrower relationship.
25 In addition, the court implicitly found no other evidence to
26 suggest the transactions were not conducted at arm’s length:
27 (1) Schaefer faithfully acted according to the terms of the
28 various promissory notes and deeds of trust; (2) Schaefer never
-47-
1 refused a disbursement request from McHaffie; and (3) with the
2 exception of the Halifax payment, Schaefer did not advocate that
3 the Debtors pay certain creditors or forego payments to others.
4 Again, the bankruptcy court’s findings came down to Schaefer’s
5 credibility: “[w]hen factual findings are based on
6 determinations regarding the credibility of witnesses, we give
7 great deference to the bankruptcy court’s findings . . . .”
8 Anderson, 470 U.S. at 575. Accordingly, we discern no error in
9 the bankruptcy court’s decision that the Schaefer Entities were
10 not insiders for purposes of § 547.
11 E. Equitable subordination of Schaefer Construction’s proof of
claim
12
13 “The subordination of claims based on equitable
14 considerations generally requires three findings: ‘(1) that the
15 claimant engaged in some type of inequitable conduct, (2) that
16 the misconduct injured creditors or conferred unfair advantage
17 on the claimant, and (3) that subordination would not be
18 inconsistent with the Bankruptcy Code.’” In re First All.
19 Mortg. Co., 471 F.3d at 1006. “Where non-insider, non-fiduciary
20 claims are involved, as is the case here, the level of pleading
21 and proof is elevated: gross and egregious conduct will be
22 required before a court will equitably subordinate a claim.”
23 Id. “Although equitable subordination can apply to an ordinary
24 creditor, the circumstances are ‘few and far between.’” Id.
25 Here, the bankruptcy court found no inequitable conduct.
26 The Schaefer Entities were not insiders and the relationship
27 between Debtors and the Schaefer Entities never extended beyond
28 those of a borrower-lender relationship. Furthermore, because
-48-
1 the Halifax payment was not an obligation of the Schaefer
2 Entities, Trustee did not show how their conduct depleted or
3 otherwise adversely impacted Debtors’ assets. Trustee points to
4 no evidence in the record which the bankruptcy court allegedly
5 overlooked which would demonstrate an abuse of discretion.
6 Accordingly, there is no basis for reversal on this assignment
7 of error.
8 VI. CONCLUSION
9 For the reasons stated above, we AFFIRM the judgment in all
10 respects.
11
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