Grassi Construction v. Bello CA1/2 ( 2022 )

Filed 9/19/22 Grassi Construction v. Bello CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
GRASSI CONSTRUCTION, INC.,
Plaintiff and Respondent, A163719
v.
(Napa County Super. Ct.
MICHAEL RU BELLO,
No. 19CV000679)
Defendant and Appellant.
Defendant Michael Ru Bello was the sole shareholder, sole director,
and president of Walldesign, Inc. (Walldesign). Bello issued checks from a
Walldesign account to pay for personal expenses, including services provided
by plaintiff Grassi Construction, Inc. (Grassi) to Bello for his family winery.
After Walldesign filed for bankruptcy, the Official Committee of Unsecured
Creditors (Committee) commenced an adversary proceeding against Grassi to
recover those payments as fraudulent transfers. The bankruptcy court
entered judgment against Grassi for $304,657.53.
Grassi then sued Bello in state court asserting causes of action for
intentional misrepresentation, concealment, and unjust enrichment. Bello
filed a motion in limine to dismiss the action, arguing that the bankruptcy
court had original and exclusive jurisdiction of such disputes. The trial court
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denied the motion. The matter proceeded to trial, where the jury found in
favor of Grassi on its three claims and awarded Grassi $304,000 in damages.
Bello now appeals the denial of his motion in limine and the
subsequent judgment against him, arguing that the trial court lacked subject
matter jurisdiction to hear the case. We affirm.
BACKGROUND
A. The Parties
Bello served as the sole shareholder, director, and president of
Walldesign, a California corporation that installed drywall, acoustical
material, and plaster for construction projects. Walldesign maintained a
primary bank account at Comerica Bank. In 2002, Bello opened a different
account in Walldesign’s name at Preferred Bank. This secondary account
was funded with rebates and refunds Walldesign received from suppliers for
unused products or materials. Bello apparently directed these suppliers to
issue checks for rebates and refunds (instead of deducting the difference from
Walldesign’s invoices), and then deposited the checks into the secondary
account.
Bello used the funds in this secondary Walldesign account to pay for
various personal expenses, including expenses related to his family winery,
horseracing stable, casino bills, and credit card charges. Bello paid nearly
$8 million to roughly 130 individuals or entities from this account. (In re
Walldesign, Inc. (2017) 872 F.3d 954, 960 (Walldesign, Inc.).) Grassi was one
such entity. In 2006 and 2007, Bello issued three checks totaling $183,407.78
to Grassi for construction services related to Bello’s family winery. Each of
these checks bore the name “WALLDESIGN INCORPORATED.”
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B. Bankruptcy Proceedings
Walldesign experienced significant financial decline over the next
several years and in 2012, Walldesign filed a Chapter 11 bankruptcy petition.
The Committee subsequently brought 96 separate adversary proceedings to
recover payments Bello made from the secondary Walldesign account as
fraudulent transfers subject to turnover pursuant to title 11 of the United
States Code1 sections 544(b) and 550(a).2 (Walldesign, Inc., supra, 872 F.3d
at p. 960.) In 2013, the Committee filed an adversary proceeding against
Grassi.3 In 2016, the bankruptcy court entered judgment against Grassi for
$304,657.53 ($183,407.78 principal and $121,249.75 prejudgment interest)
plus any postjudgment interest.
C. Grassi’s State Court Action
In 2019, Grassi filed a complaint in Napa County Superior Court
against Bello4 that included causes of action for (1) intentional
misrepresentation, (2) concealment, and (3) unjust enrichment. It alleged
Bello had misrepresented that he would pay for Grassi’s services, and
1 Further undesignated section references are to title 11 of the United
States Code.
2 Section 544(b) provides that a bankruptcy trustee “may avoid any
transfer of an interest of the debtor in property or any obligation incurred by
the debtor that is voidable under applicable law by a creditor holding an
unsecured claim that is allowable under section 502 of this title or that is not
allowable only under section 502(e) of this title.” Section 550(a) provides, in
relevant part, that the trustee may recover transferred property from the
“initial transferee” to the extent a transfer is avoided under section 544.
3 The trustee of the liquidation trust established by Walldesign’s
confirmed Chapter 11 plan subsequently succeeded the Committee as the
real party in interest.
4Grassi also sued Bello’s son, but those claims were subsequently
dismissed.
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concealed that he had paid Grassi using funds improperly diverted from
Walldesign’s creditors in a secret account.
A month before trial, Bello filed a motion in limine to dismiss the action
on the ground that the bankruptcy court had original and exclusive
jurisdiction of such disputes. He argued that Grassi’s claims were barred
under section 544(b), which affords the bankruptcy trustee the exclusive right
to pursue actions to avoid fraudulent transfers. Grassi opposed the motion,
arguing that it was procedurally improper5 and failed on the merits because
Grassi was not a creditor of Walldesign. The trial court denied the motion.
The matter proceeded to jury trial in August 2021. The jury found in
favor of Grassi on each of its three causes of action. It awarded Grassi
$304,000 in damages on the concealment claim. Judgment was entered on
September 3, 2021. This appeal followed.
DISCUSSION
In this appeal, Bello challenges the denial of his motion in limine and
judgment following the jury verdict on the ground that the trial court lacked
subject matter jurisdiction to hear the case. Before turning to the merits of
this argument, however, we address Grassi’s preliminary response that the
motion in limine was procedurally improper.
I. Motion in Limine for Lack of Subject Matter Jurisdiction
Grassi contends that Bello’s motion in limine was procedurally
improper because such motions should only be used to exclude evidence that
could be objected to at trial. We agree that motions in limine “are designed to
facilitate the management of a case, generally by deciding difficult
5 In the trial court, Grassi argued that Bello’s motion in limine was
barred by the law of the case doctrine because it raised issues identical to
those rejected in Bello’s unsuccessful motion for summary judgment. Grassi
has not raised the law of the case argument on appeal.
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evidentiary issues in advance of trial.” (Amtower v. Photon Dynamics, Inc.
(2008) 158 Cal.App.4th 1582, 1593.) A motion in limine, however, can also
function as “an objection to any and all evidence” on the grounds that the
pleadings “were fatally defective and had failed to state a cause of action.”
(Edwards v. Centex Real Estate Corp. (1997) 53 Cal.App.4th 15, 27.) In these
circumstances, the motion can operate as a general demurrer or motion on
the pleadings. (Ibid.) Entertaining such a “nontraditional” motion in limine,
as the trial court did here, falls within the court’s “inherent equity,
supervisory and administrative powers, as well as inherent power to control
litigation and conserve judicial resources.” (Amtower, at p. 1593; Lucas v.
County of Los Angeles (1996) 47 Cal.App.4th 277, 284.) We have, however,
cautioned trial courts “to be wary when choosing to decide an in limine
motion that, no matter how captioned, functions as a nonstatutory motion for
judgment on the pleadings, particularly when the motion is filed on the eve of
trial” because under certain circumstances, it can be “a recipe for reversal.”
(Tung v. Chicago Title Co. (2021) 63 Cal.App.5th 734, 740.)
We are not persuaded that the trial court’s consideration of Bello’s
motion constituted an abuse of discretion here. Grassi relies on McMillin
Companies, LLC v. American Safety Indemnity (2015) 233 Cal.App.4th 518,
which reversed an order granting motions in limine to preclude certain
evidence and argument because in so doing, the trial court essentially
granted summary adjudication on an element of plaintiff’s claim and nonsuit
on the issue of damages, without requiring the statutory procedural
protections associated with summary judgment and nonsuit proceedings. (Id.
at pp. 553, 541.) Applying these summary judgment and nonsuit standards,
McMillin concluded that the trial court had erred in granting the motions
and precluding the parties from trying and proving their respective case and
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defense. (Ibid.) Here, unlike McMillin, Grassi offers no argument or
authority that the consideration of Bello’s motion led to a prejudicial
deprivation of procedural protections or standards. We see no basis for such
an assertion, particularly given that “[t]he lack of subject matter jurisdiction
cannot be waived and may be raised at any time, even for the first time on
appeal.” (Alliance for California Business v. State Air Resources Bd. (2018)
23 Cal.App.5th 1050, 1060.)
II. Subject Matter Jurisdiction
We now turn to the merits of Bello’s argument that the trial court erred
in denying his motion in limine and entering judgment because it lacked
subject matter jurisdiction to hear the case. We ordinarily review a motion in
limine ruling for abuse of discretion, but when the motion “strays beyond its
traditional confines and results in the entire elimination of a cause of action
or a defense, we treat it as a demurrer to the evidence and review the motion
de novo[.]” (County of Glenn v. Foley (2012) 212 Cal.App.4th 393, 398.)
“The jurisdiction of the bankruptcy courts, like that of other federal
courts, is grounded in, and limited by, statute.” (Celotex Corp. v. Edwards
(1995) 514 U.S. 300, 307.) Title 28 of the United States Code section 1334(a)
provides that “the district courts shall have original and exclusive jurisdiction
of all cases under title 11.” District courts also have original but not
exclusive jurisdiction of “all civil proceedings arising under title 11, or arising
in or related to cases under title 11.” (28 U.S.C. § 1334(b).) “The district
courts may, in turn, refer ‘any or all proceedings arising under title 11 or
arising in or related to a case under title 11 . . . to the bankruptcy judges for
the district.” (Celotex, at p. 308, quoting 28 U.S.C. § 157(a).)
Here, Bello argues that the claims raised by Grassi in the state court
action fall under the original and exclusive jurisdiction of the district and
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bankruptcy courts pursuant to the provisions of sections 544(b) and 550(a).
We address each section in turn.
A. Section 544(b)
Section 544(b) permits the trustee in a Chapter 11 bankruptcy
proceeding to recover fraudulent conveyances in order to restore that
property to the debtor’s estate. (In re Agricultural Research and Technology
Group, Inc. (9th Cir. 1990) 916 F.2d 528.) It states that the trustee may
“avoid” any such transfer “that is voidable under applicable law by a creditor
holding an unsecured claim . . . .” (§ 544(b)(1).) In other words, section
544(b) “allows the bankruptcy trustee to step into the shoes of a creditor for
the purpose of asserting causes of action under state fraudulent conveyance
acts for the benefit of all creditors[.]” (In re Pacific Gas & Electric Co. (Bankr.
N.D.Cal. 2002) 281 B.R. 1, 14.) Moreover, because a fraudulent conveyance
claim to recover assets of the bankrupt belongs to the estate, the trustee has
exclusive standing to bring such claims and “divests all creditors of the power
to bring the claim.” (Ahcom, Ltd. v. Smeding (2010) 623 F.3d 1248, 1250.)
Courts have explained that the equitable distribution of a bankruptcy estate
is dependent upon this principle: “[a]ny other result would produce near
anarchy where the only discernible organizing principle would be first-come-
first-served.” (In re Pacific Gas & Electric Co., at p. 14, italics omitted.)
Bello argues that the bankruptcy trustee’s authority to pursue
avoidance actions under section 544(b) precludes Grassi’s state court claims.
That argument, however, incorrectly assumes that Grassi is a creditor of
Walldesign (or its estate). Here, Grassi alleged that it had an agreement
with Bello himself—not Walldesign—to provide services to Bello’s family
winery. Bello offers no evidence that Walldesign had any obligation to pay
for these services. Indeed, the bankruptcy court rejected a creditor claim by
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another entity in Grassi’s position. (In re Walldesign, Inc. (Bankr. 9th Cir.
Aug. 2, 2018, No. CC-17-1290) 2018 Bankr. Lexis 2283.) Like Grassi, wine
barrel company Francois Freres was paid by Bello for barrels used at the
family vineyard with a check from Walldesign’s account. (Id. at p. *2.) After
the bankruptcy court entered judgment against Freres to recover the
fraudulent transfer, Freres filed a general unsecured claim against
Walldesign for the same amount. (Id. at p *3.) In re Walldesign, Inc.
determined that Freres’ creditor claim was unenforceable because Freres had
provided nothing of value to Walldesign in exchange for the payment:
“Simply put, the French oak barrels went to [Bello Family Vineyards], not
[Walldesign], and thus there was no underlying debt.” (Id. at pp. *10, *13.)
Nor had Freres provided any value to the bankruptcy estate, as it was
returning fraudulently transferred monies over which it had no claim. (Ibid.)
So too here.
The section 544(b) authorities cited by Bello are thus inapposite
because, unlike this case, each involved creditors of the debtor or the debtor’s
estate. In re Tessmer (Bankr. M.D.Ga. 2005) 329 B.R. 776 (Tessmer) involved
a debtor who had killed her husband and, after being convicted of murder,
transferred a property interest to her parents. (Id. at p. 778.) The victim’s
mother filed a wrongful death action against the debtor in state court. (Ibid.)
The debtor subsequently filed for Chapter 7 bankruptcy and shortly
thereafter, her mother-in-law filed a fraudulent conveyance action against
the debtor’s parents. (Ibid.) Tessmer concluded that because the mother-in-
law was a creditor based on her pending action against the debtor’s parents,
her action was barred under section 544(b) as an attempt to circumvent the
bankruptcy proceedings and infringe on the trustee’s exclusive right to
pursue avoidance actions. (Tessmer, at pp. 779–780.)
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Similarly, in Sears Petroleum & Transportation Corp. v. Burgess
Construction Services (D. Mass. 2006) 417 F.Supp.2d 212 (Sears), Sears filed
an action against Burgess Construction and Gregory Burgess after they had
failed to pay a $562,912.35 judgment against them, seeking to recover
allegedly fraudulent conveyances of Burgess Construction funds made by
Burgess to his wife Anne. (Id. at pp. 214–215.) Burgess Construction
subsequently filed for Chapter 7 bankruptcy. (Ibid.) The district court
concluded that Sears, a creditor, could not maintain the same fraudulent
transfer claims as the trustee under section 544(b). (Sears, at p. 221.) It
reasoned that if Sears prevailed on its claims, it would be recovering money
that rightfully belonged to the estate and would constitute an impermissible
“ ‘end-run’ around the proper bankruptcy channels.” (Id. at p. 222.)
Here, unlike Tessmer and Sears, there is nothing to suggest that Grassi
is a creditor of Walldesign or its estate. Section 544(b) does not preclude a
non-creditor like Grassi from pursuing its state court claims against Bello.
B. Section 550(a)
Section 550 “dictates who must reimburse the trustee and, through the
trustee, the debtor’s creditors, for those fraudulent and ‘avoided’ transfers.”
(Walldesign, Inc., supra, 872 F.3d at p. 960.) Section 550(a) provides that a
trustee may recover a transfer avoided under section 554 from an “initial
transferee.” The Bankruptcy Code “draws a critical distinction between
initial and subsequent transferees when it comes to the recovery of
fraudulent transfers.” (Walldesign, Inc., at pp. 961–962.) Initial transferees
are “strictly liable” to the trustee for such transfers. (Id. at p. 959.)
Subsequent transferees, however, may avail themselves of the “safe-harbor”
provision of section 550(b)(1), which precludes recovery where a subsequent
transferee accepted the property “for value,” “in good faith,” and “without
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knowledge of the voidability of the transfer avoided.” (Walldesign, Inc., at
p. 959.)
Here, Bello argues that Grassi’s status as an “initial transferee”
precludes its state court action. His preliminary contention that Grassi is an
“initial transferee” under section 550(a) is uncontroverted. In Walldesign,
Inc., supra, 872 F.3d at pages 961–962, other entities in Grassi’s position
were determined to be “initial transferees” of fraudulent transfers from
Walldesign’s secondary account. For example, interior design firm owner
Lisa Henry was paid by Bello for design services on a building he owned with
checks from that Walldesign account. (Id. at p. 961.) Similarly, the Bureshes
sold property to another Bello-controlled entity (RU Investments) but
received checks from Walldesign’s secondary account. (Ibid.) The Committee
filed adversary proceedings to recover these payments. (Ibid.) Walldesign,
Inc. concluded that the Bureshes and Henry qualified as “initial transferees”
because each transfer “was a classic ‘one-step transaction’—with funds
moving from Walldesign (the transferor) to the Bureshes and Ms. Henry (the
initial transferees), on behalf of Bello (the party for whose benefit the
transfers were made).” (Id. at p. 967.) It concluded that this outcome was
fair and consistent with the policy concerns underlying section 550, as the
Bureshes and Henry received checks bearing the name “WALLDESIGN
INCORPORATED,” “providing at least some indication of an irregularity in
the payments.” (Walldesign, Inc., at p. 968.) The same is true here, as Grassi
was paid with Walldesign funds and each check bore the name
“WALLDESIGN INCORPORATED.”
We disagree, however, with Bello’s ultimate assertion that Grassi’s
status as an initial transferee means that it was a creditor. An initial
transferee can be a creditor of the debtor or bankruptcy estate. Pursuant to
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section 502(h), a transferee may make a claim against the bankruptcy estate
after the recovery of property under section 550. But Bello provides no
authority to support his underlying assumption that an initial transferee
must be a creditor. As explained above, there is no basis to conclude that
Grassi is a creditor of Walldesign or the estate. There is nothing to show that
Walldesign owed any debt to Grassi. Walldesign’s estate obtained a
judgment requiring Grassi to return fraudulently transferred monies over
which it had no claim. (In re Walldesign, Inc., supra, 2018 Bankr. Lexis 2283
at p. *13.) Because Grassi was not a creditor of Walldesign, neither section
544(b) nor section 550(a) precluded Grassi from pursuing its state court
claims against Bello.
In sum, we conclude that the trial court did not err in denying Bello’s
motion in limine and reject Bello’s challenge to the judgment and entry of
judgment for the same reasons.
DISPOSITION
The September 3, 2021 judgment is affirmed. Grassi is entitled to its
costs on appeal.
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_________________________
Mayfield, J.*
We concur:
_________________________
Richman, Acting P.J.
_________________________
Miller, J.
Grassi Construction, Inc. v. Bello et al. (A163719)
* Judge of the Mendocino Superior Court, assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.
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