In the Matter Of: Fitness Holdings International ( 2013 )

FILED
NOT FOR PUBLICATION APR 30 2013
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U .S. C O U R T OF APPE ALS
FOR THE NINTH CIRCUIT
In the Matter of: FITNESS HOLDINGS No. 11-56677
INTERNATIONAL, INC.,
D.C. No. 2:10-cv-00647-AG
Debtor,
MEMORANDUM *
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS, of the
ESTATE OF FITNESS HOLDINGS
INTERNATIONAL, INC.,
Appellant,
v.
HANCOCK PARK CAPITAL II, L.P., a
Delaware Limited Partnership; PACIFIC
WESTERN BANK; KENTON VAN
HARTEN; MICHAEL FOURTICQ, Sr.;
HANCOCK PARK ASSOCIATES, III;
HANCOCK PARK ASSOCIATES,
Appellees.
Appeal from the United States District Court
for the Central District of California
Andrew J. Guilford, District Judge, Presiding
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Argued and Submitted February 4, 2013
Pasadena, California
Before: CALLAHAN, IKUTA, and HURWITZ, Circuit Judges.
In this Chapter 7 bankruptcy case, the bankruptcy court dismissed all the
trustee’s claims against defendants under Rule 12(b)(6) of the Federal Rules of
Civil Procedure. The district court affirmed. We have jurisdiction under 28 U.S.C.
§§ 158(d)(1) and 1291, and now affirm in part, reverse in part, and vacate and
remand in part. 1
1
As explained in our opinion in In re Fitness Holdings Int’l, the district court
erred in concluding that the trustee’s argument that Hancock Park’s loan to Fitness
Holdings should be recharacterized as equity was not cognizable as a matter of
law. No. 11-56677, Slip op. at ___. Because of this legal error, the district court
failed to consider whether the trustee plausibly alleged that the $11,995,500
transfer from Hancock Park to Fitness Holdings should be recharacterized as
creating an equity interest rather than debt. As a result, the district court failed to
1
We address trustee’s claim that the complaint sufficiently alleged that
Fitness Holdings’ transfer to Hancock Park was avoidable under 11 U.S.C.
§ 548(a)(1)(B) (Claims 2 and 7 of the First Amended Complaint) in an opinion
filed concurrently with this disposition.
2
apply the correct standard in considering whether the trustee’s allegations that
Fitness Holdings made its transfer to Hancock Park without reasonably equivalent
value plausibly gave rise to an entitlement to relief. Fitness Holdings, No. 11-
56677, slip op. at __. Accordingly, we vacated the district court’s dismissal of the
11 U.S.C. § 548(a)(1)(B) constructive fraudulent conveyance claim and remanded
for further proceedings. Fitness Holdings, No. 11-56677, slip op. at __.
The district court’s legal error also infected its analysis of many of the
trustee’s other claims. First, because the district court erred in failing to consider
whether applicable state fraudulent conveyance law allowed a court to
recharacterize a loan as an equity interest, it failed to apply the correct standard in
considering whether the trustee’s allegations that Fitness Holdings transferred
$11,995,500 to Hancock Park without receiving reasonably equivalent value
plausibly alleged a claim for relief under 11 U.S.C. § 544(b)(1), which incorporates
applicable state law (claims 3, 4 and 5 of the First Amended Complaint).
Second, the district court’s erroneous assumption that a court lacked
authority to recharacterize Hancock Park’s $11,995,500 as equity rather than debt
prevented the court from properly evaluating the trustee’s allegations (claim 1 of
the First Amended Complaint) that Fitness Holdings’ transfer of $11,995,500 to
3
Hancock Park in return for an equity investment was actually fraudulent for
purposes of 11 U.S.C. § 548(a)(1)(A).
Third, because the court failed to properly address the fraudulent transfer
claims, it also did not properly address the claim for recovery of an avoided
transfer under 11 U.S.C. § 550(a) (claim 6 of the First Amended Complaint).
Finally, the court’s erroneous assumption prevented it from properly
evaluating the trustee’s allegations (in claims 9 and 10 of the First Amendment
Complaint) that Hancock Park, Van Harten and Forticq breached their fiduciary
duties and aided and abetted the breach of fiduciary duties by causing Fitness
Holdings to transfer of $11.9 million to Hancock Park.
Because the district court did not review these claims (claims 1, 3, 4, 5, 6, 9,
and 10 of the First Amended Complaint) under the correct standard, we vacate
dismissal of these claims and remand them to the district court to consider them in
the first instance. See Salmon Spawning & Recovery Alliance v. Gutierrez, 545
F.3d 1220, 1230 n.6 (9th Cir. 2008).
2
We affirm the district court’s dismissal of the trustee’s claims that Fitness
Holdings’ transfer of a security interest in its assets to Pacific Western should be
avoided as an actually fraudulent transfer (claims 10, 11, and 13 of the original
4
complaint). The complaint asserts only that Fitness Holdings conveyed a security
interest to Pacific Western in order to obtain a $25 million loan. We cannot
reasonably infer that Fitness Holdings was attempting to “hinder, delay, or
defraud” its creditors, § 548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1), simply
because it took on secured debt to replace unsecured debt; borrowers regularly give
security interests to obtain financing. Because the complaint fails to plausibly
allege any other facts showing that the trustee has an entitlement to relief, the
district court properly dismissed the claims alleging an actually fraudulent transfer
to Pacific Western.
The district court also properly dismissed the trustee’s claims that Fitness
Holdings’ transfer of a security interest in its assets to Pacific Western should be
avoided as a constructively fraudulent transfer (claims 12 and 14 of the original
complaint). Because the complaint alleges that Fitness Holding granted Pacific
Western the security interest in exchange for a $25 million loan, and does not
allege that the value of the security interest exceeded the value of the loan, the
trustee failed to plausibly allege that the security interest was given for less than
reasonably equivalent value, which is a necessary element of a claim for a
constructively fraudulent transfer under both the Bankruptcy Code and state law.
§§ 548(a)(1)(B)(i); 548(d)(2)(A)(i); § 544(b)(1); Cal. Civ. Code § 3439.04(a)(2).
5
Because the district court properly dismissed the trustee’s claims for
constructively and actually fraudulent transfers, the dismissal of the trustee’s claim
for avoidance of these transfers (claim 15 of the original complaint) was also
correct. See 11 U.S.C. § 550.
3
The trustee’s allegations (in claim 8 of the First Amended Complaint) that
insiders “contrived” to benefit themselves by knowingly funneling money to
themselves out of a failing company plausibly alleged the elements of a claim for
equitable subordination, namely: “‘(1) that the [defendants] engaged in some type
of inequitable conduct, (2) that the misconduct injured creditors or conferred unfair
advantage on the claimant, and (3) that subordination would not be inconsistent
with the Bankruptcy Code.’” In re First Alliance Mortg. Co., 471 F.3d 977, 1006
(9th Cir. 2006) (quoting In re Lazar, 83 F.3d 306, 309 (9th Cir. 1996)). We
therefore reverse the district court’s dismissal of this claim. Each party will bear
its own costs on appeal.
AFFIRMED IN PART, REVERSED IN PART, VACATED IN PART, AND
REMANDED.
6