Opinion
A164544
02-03-2023
DAVID ABREU et al., Plaintiffs and Respondents, v. MICHAEL RU BELLO, Defendant and Appellant.
NOT TO BE PUBLISHED
Napa County Super. Ct. No. 26-67606.
WHITMAN, J.[*]
Defendant Michael Ru Bello appeals a default judgment entered in favor of plaintiffs David Abreu and David Abreu Vineyard Management (collectively Abreu) on Abreu's complaint for, among other things, fraudulent concealment, intentional misrepresentation and unjust enrichment, and awarding Abreu approximately $1 million in damages. On appeal, Bello contends the trial court lacked jurisdiction to enter judgment on Abreu's complaint because a bankruptcy court had exclusive jurisdiction over the parties' dispute. We find no merit to Bello's argument and shall affirm the judgment.
Background
Walldesign, Inc. (Walldesign) is a construction company owned by Bello. Bello is also part-owner of the Bello Family Vineyard. Abreu was hired by Bello to manage the vineyard. In 2012, Walldesign filed for chapter 11 bankruptcy protection. In that proceeding, the "Official Committee of Unsecured Creditors" (committee) filed a complaint against Abreu seeking to avoid and recover, under among other statutes 11 United States Code sections 544, subdivision (b) and 550, subdivision (a) numerous fraudulent conveyances from Walldesign to Abreu. The committee alleged that in the years preceding the bankruptcy filing, Abreu was paid with checks drawn from an account held by Walldesign and that the payments that Bello caused Walldesign to make to Abreu were for the sole benefit of Bello and the vineyard, not for the benefit of Walldesign or its creditors. In July 2015, the bankruptcy court entered judgment in favor of the committee and ordered Abreu to return the approximately $1 million in payments made from the Walldesign account.
In October 2015, Abreu filed a complaint against Bello seeking to recover the funds that had been returned in the bankruptcy proceedings.The complaint alleges that Abreu performed services for Bello at the vineyard and that Bello promised to pay for those services. It further alleges that Bello never represented that the payments would be made from a non-affiliated account and that Abreu had no reason to believe that Bello was using funds from other unrelated bank accounts to facilitate his payments. Had he known so, Abreu would not have agreed to perform work for Bello. A second amended complaint was filed in June 2018.
The complaint also named Bello's wife and son as defendants. They ultimately settled the action with Abreu and are not parties to the present appeal.
In November 2018, Bello's default was entered on the second amended complaint. In July 2021, Bello and his wife filed a joint motion for relief from default. They argued, among other things, that the trial court lacked jurisdiction to enter his default because Abreu's claim came within the exclusive jurisdiction of the bankruptcy court. The court denied the motion.
On December 30, 2021, following a prove-up hearing, the court entered a default judgment in favor of Abreu in the amount of $1,277,900.30. Bello timely filed a notice of appeal.
Discussion
Defendant contends the judgment must be set aside because the trial court lacked subject matter jurisdiction over Abreu's complaint. We disagree."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, subdivision (a) provides that "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Title 11 of the United States Code section 544, subdivision (b)(1) permits the trustee in a chapter 11 bankruptcy proceeding to recover fraudulent conveyances in order to restore that property to the debtor's estate. Section 544, subdivision (b)(1) of this title" '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 Company (Bankr. N.D.Cal. 2002) 281 B.R. 1, 14.) Because a fraudulent conveyance claim to recover assets of the bankrupt belongs to the estate, the trustee has exclusive standing to bring such claim and "divests all creditors of the power to bring the claim." (Ahcom, Ltd. v. Smeding (9th Cir. 2010) 623 F.3d 1248, 1250.)
Initially, Abreu asserts that Bello is collaterally estopped from relitigating the issue of whether the trial court lacked jurisdiction over his case. He cites two unpublished decisions in which Division Two of this court rejected Bello's identical arguments. (See Ehren Jordan Wine Cellars, LLC v. Bello (Sept. 19, 2022, A163720 [nonpub. opn.]) and Grassi Construction, Inc. v. Bello (Sept. 19, 2022, A163719 [nonpub. opn.].) We note that Bello's opening brief was filed before these decisions were filed and that he has not filed a reply brief responding to Abreu's collateral estoppel argument. Nonetheless, we need not rely on collateral estoppel, and reject Bello's argument on the merits.
United States Code section 544, subdivision (b)(1) reads: "Except as provided in paragraph (2), the 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."
Bello argues that the bankruptcy trustee's authority under United States Code section 544, subdivision (b) precludes Abreu's state court claims. His argument, however, incorrectly assumes that Abreu is a creditor of Walldesign. To the contrary, Abreu's complaint alleged that it had an agreement with Bello, not Walldesign, to provide services to Bello's vineyard. As set forth above, the committee agreed in the bankruptcy proceeding that Abreu provided no services for the benefit of Walldesign.
As Abreu notes, the bankruptcy court has rejected a creditor claim by another entity in Abreu's position. (In re Walldesign, Inc. (Bankr. 9th Cir. 2018) 2018 Bankr. Lexis 2283.) In that case, a wine barrel company was paid by Bello for barrels used at the family vineyard with a check from Walldesign's account. (2018 Bankr. Lexis 2283 at p. *2.) After the bankruptcy court entered judgment against the barrel company to recover the fraudulent transfer, the barrel company filed a general unsecured claim against Walldesign for the same amount. (Id. at p. *3.) The court determined that the barrel company's creditor claim was unenforceable because it 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 p. *13.) For the same reason, Abreu is not a creditor of Walldesign and could not have filed a claim in the bankruptcy proceeding.
Contrary to Bello's argument, In re Walldesign, Inc. (9th Cir. 2017) 872 F.3d 954 (Henry) does not support his argument that Abreu was a creditor of Walldesign. In that case, the court held that payments from Walldesign for vineyard-related services were subject to recovery because the recipients were "initial transferees" rather than "subsequent transferee[s]." (Id. at pp. 961-962, 966-968.) The court explained, "Sections 544 and 548 of the Bankruptcy Code empower a liquidating trustee to enlarge the debtor's estate by invalidating fraudulent transfers of property, including money, thereby making the property a part of the debtor's estate again. [Citation.] [¶] Section 550, in turn, dictates who must reimburse the trustee and, through the trustee, the debtor's creditors, for those fraudulent and 'avoided' transfers." (Id. at p. 959.) If the payments were made to "initial transferees" under section 550, subdivision (a)(1) the transferees are strictly liable to the committee. But if the payments were made to "subsequent transferees," the transferees may avail themselves of the safe-harbor provision of section 550, subdivision (b)(1). (Id. at pp. 961-962.)
In Henry, the transferees argued that they were subsequent transferees because the funds transferred first from Walldesign to Bello since he controlled the Walldesign account and then to them. (Henry, supra, 872 F.3d at p. 972.) The court disagreed, finding that the transferees were initial transferees, reasoning that "Bello may have exercised de facto control over those funds as a corporate principal, but he never exercised legal control over them, as required for initial-transferee status." (Id. at p. 967.) Accordingly, the funds moved from Walldesign directly to the initial transferees, on behalf of Bello. (Ibid.) The court acknowledged that "the equities seem harsh at first glance," but reasoned that that "[b]y enacting 11 U.S.C. § 550, Congress assigned liability for repaying voidable transfers to both the 'good guys' (initial transferees, like the appellants) and the 'bad guys' (those for whose benefit the transfer was made, like corporate cheats), because 'good guys' who are party to those transfers generally stand in a better position to guard against corporate fraud than do unsuspecting creditors." (Id. at p. 959.) Nothing in this case, however, establishes that the initial transferees who were paid by Walldesign for services rendered for the benefit of Bello were creditors of Walldesign.
In In re Walldesign, Inc. (9th Cir. 2020) 816 Fed.Appx. 71, the court upheld the bankruptcy court's finding that Abreu was an initial transferee under 11 United States Code section 550.
Bello also relies upon In re Tessmer (Bankr. M.D.Ga. 2005) 329 B.R. 776, 779-780, and Sears Petroleum &Transportation Corp. v. Burgess Construction Services (D. Mass. 2006) 417 F.Supp.2d 212, 221-222. These cases merely apply the well-established rule that section 544, subdivision (b) bars a creditor from attempting to circumvent bankruptcy proceedings by seeking to directly recover allegedly fraudulent conveyances from a debtor. Because Abreu is not a creditor of Walldesign, section 544, subdivision (b) does not preclude him from pursuing his state court claims against Bello. Accordingly, the court had jurisdiction to enter the present judgment against Bello.
Disposition
The judgment is affirmed. Abreu shall recover costs on appeal.
WE CONCUR: STREETER, Acting P.J. BROWN, J.
[*] Judge of the Superior Court of California, County of Alameda, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.