Opinion
Case No. 2:17-bk-21018-RK Adv. No. 2:19-ap-01332-RK
2020-07-07
IN RE: PROTOTYPE ENGINEERING & MANUFACTURING, INC., Debtor. Wesley H. Avery, Chapter 7 Trustee, Plaintiff, v. Leya Technologies, LLC ; Bahram Bordbar, Individually, and as Trustee of the Bordbar Family Trust; Malahat Bordbar, Individually, and as Trustee of the Bordbar Family Trust; Sara Bordbar; and Does 1-10, Inclusive, Defendants.
Carmela Pagay, Irving M. Gross, Levene, Neale, Bender et al., Los Angeles, CA, for Plaintiff Wesley H. Avery. Kevin M. Davis, Todd E. Phillips, Caplin & Drysdale Chartered, Washington, DC, for Plaintiffs Cameron and Michelle Witzler, Colette Carpenter, and Jon and Maria Ternstrom. Todd L. Turoci, The Turoci Firm, Riverside, CA, for Defendants.
Carmela Pagay, Irving M. Gross, Levene, Neale, Bender et al., Los Angeles, CA, for Plaintiff Wesley H. Avery.
Kevin M. Davis, Todd E. Phillips, Caplin & Drysdale Chartered, Washington, DC, for Plaintiffs Cameron and Michelle Witzler, Colette Carpenter, and Jon and Maria Ternstrom.
Todd L. Turoci, The Turoci Firm, Riverside, CA, for Defendants.
MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO EXPUNGE LIS PENDENS
Robert Kwan, United States Bankruptcy Judge
Pending before the court in this adversary proceeding is the motion of defendants Bahram and Malahat Bordbar (the "Bordbars"), individually and as Trustees of the Bordbar Family Trust (collectively, "Defendants"), to expunge the Notices of Pendency of Action filed by Plaintiff Wesley H. Avery, Chapter 7 Trustee (the "Trustee"), Electronic Case Filing ("ECF") 63 (the "Motion"). The Trustee and intervening plaintiffs Jon and Maria Ternstrom, Cameron and Michelle Witzler, and Colette Carpenter, both individually and in her capacity as administrator of the estate of Clayton O. Carpenter (collectively, the "Crash Victim Claimants," and together with the Trustee, "Plaintiffs") opposed the Motion (the "Opposition"). Plaintiffs’ Opposition to Motion to Expunge Lis Pendens, ECF 77, filed on March 27, 2020. Defendants filed their consolidated reply to Plaintiffs’ Opposition on April 7, 2020 (the "Reply"). Defendants’ Reply in Support of Motion to Expunge, ECF 79. A hearing on the Motion was conducted on April 30, 2020. Brian L. Davidoff, of the law firm of Greenberg Glusker Fields Claman & Machtinger LLP, appeared for Defendants, the moving parties. Kevin M. Davis, of the law firm of Caplin & Drysdale, Chartered, and Carmela T. Pagay, of the law firm of Levene, Neale, Bender, Yoo & Brill, L.L.P., appeared for Plaintiffs, the responding parties.
I. BACKGROUND
On September 6, 2019, the Trustee commenced this adversary proceeding by filing a complaint alleging fraudulent transfer, breach of fiduciary duty, and unjust enrichment claims, among others. ECF 1. On September 19, 2019, the Trustee filed an amended complaint. Plaintiff's Amended Complaint, ECF 9 (the "Amended Complaint"). In the Amended Complaint, the Trustee alleged twenty-one claims for relief, including a claim for substantive consolidation pursuant to 11 U.S.C. § 105(a) (the "Substantive Consolidation Claim"). ECF 9 at 31 ("Claim for Relief XX").
On September 24, 2019, the Trustee recorded a "Notice of Pendency of Action [Lis pendens] [ Cal. Civ. Proc. Code § 405.20 ]" on two pieces of real property allegedly owned by Defendants. Notice of Recordation of Notice of Pendency of Action [Lis Pendens], ECF 7, 8. The Trustee alleges that the first property, 140 E. 162nd Street, Gardena, CA 90248 (the "Gardena property"), was the business premises of debtor Prototype Engineering & Manufacturing, Inc. ("Debtor"). ECF 9 at 3 (¶ 6); see also Debtor's Petition and Schedules, ECF 1 at 1 (listing Gardena property as Debtor's principal place of business). The Bordbar Family Trust (the "Bordbar Trust") leased the Gardena property to Debtor. ECF 1 at 25 (listing Debtor as lessee and the Bordbar Trust as lessor of the Gardena property). The Trustee alleges that the second property, 21600 Brisbane Way, Yorba Linda, CA 92887 (the "Yorba Linda property") is the Bordbars’ residence and the address for the Bordbar Trust. ECF 9 at 11 (¶ 44); see also ECF 1 at 21 (listing Yorba Linda property as mailing address of Bordbar Trust); ECF 1-1 at 4 (listing Yorba Linda property as mailing address of Bahram Bordbar). Together with the Gardena property, these two parcels of real property are referred to herein as "the Properties."
The court takes judicial notice of its files and records under Federal Rule of Evidence 201.
Defendants filed a motion to dismiss the Amended Complaint. Defendants’ Motion to Dismiss Claims Pursuant to Rule 12(b)(6), ECF 10, filed on October 7, 2019; Defendants’ Supplemental Motion to Dismiss the Twenty-First Claim for Relief, ECF 37, filed on November 12, 2019. On December 12, 2019, the court granted in part and denied in part the motion to dismiss the Amended Complaint, specifically dismissing the Substantive Consolidation Claim without prejudice, with leave to amend, but without any time limit for amendment of that claim. Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss Plaintiff's First Amended Complaint , ECF 57 at 15 (¶ 1) (the "December 2019 Order").
On February 4, 2020, the Crash Victim Claimants filed a complaint in intervention, joining the Trustee as Plaintiffs in this adversary proceeding pursuant to the court's Order Re: Stipulation Conveying Standing And Motion Of Crash Victim Claimants To Substitute Trustee As Plaintiff Or, In The Alternative, To Intervene, ECF 43. Complaint in Intervention, ECF 60. Because the court had dismissed the Trustee's Substantive Consolidation Claim in its December 2019 Order, the Crash Victim Claimants did not include a substantive consolidation claim in the Complaint in Intervention filed in the adversary proceeding. ECF 60 at 2 (¶ B.). The Complaint in Intervention does not otherwise substantively differ from the Amended Complaint, ECF 9. Thus, the court refers to Plaintiffs, instead of only the Trustee, when discussing the Substantive Consolidation Claim and the Amended Complaint. On February 27, 2020, Defendants filed the Motion, which requests that the court expunge the two notices of pendency of action on the Properties.
California Code of Civil Procedure § 405.20 provides that "a party to an action who asserts a real property claim may record a notice of pendency of action in which that real property claim is alleged." A notice of pendency of action is commonly referred to as a lis pendens. At common law, "[a] lis pendens is a recorded document giving constructive notice that an action has been filed affecting title or right to possession of the real property described in the notice." Kirkeby v. Superior Court , 33 Cal.4th 642, 647, 15 Cal.Rptr.3d 805, 93 P.3d 395 (2004) (hereinafter " Kirkeby ") (citation omitted). Defendants assert that no claim in the Amended Complaint that survived their motion to dismiss is a "real property claim" within the meaning of California Code of Civil Procedure § 405.4, and therefore, the lis pendens must be expunged under California Code of Civil Procedure § 405.31. Defendants’ Motion to Expunge Lis Pendens, ECF 63 at 12. Defendants further contend that pursuant to California Code of Civil Procedure § 405.38, the Trustee filed the lis pendens without "substantial justification" and is liable to pay Defendants’ their attorneys’ fees and costs for bringing the Motion. Id. at 13-14.
Hereinafter, the court's use of the term lis pendens encompasses the singular and the plural.
In their Opposition to the Motion, Plaintiffs argue that although dismissed, the Substantive Consolidation Claim provides a basis for maintaining the lis pendens as they have leave to amend and add such a claim. Plaintiffs specifically contend that the Substantive Consolidation Claim is a "real property claim" under California Code of Civil Procedure § 405.4 and the California Supreme Court's Kirkeby decision. Plaintiffs’ Opposition to Motion to Expunge Lis Pendens, ECF 74 at 4 (citing Amended Complaint , ECF 9 at 11, 16, 31 and 33 (¶¶ 44, 66, 180, and the Prayer for Relief at ¶ G)). As discussed above, in the December 2019 Order, the court dismissed the Substantive Consolidation Claim without prejudice, with leave to amend, and without any time limit on amendment. ECF 57 at 15 (¶ 1). Plaintiffs assert in the Opposition that they intend to pursue the Substantive Consolidation Claim and that it is premature to expunge the lis pendens where, as here, leave to amend has been granted. ECF 74 at 5-6.
In their Reply to Plaintiffs’ Opposition, Defendants argue that the Substantive Consolidation Claim is not a "real property claim" under California Code of Civil Procedure § 405.4 because the claim is a mechanism for making property available to satisfy claims, not a direct claim to title or possession of real property. Defendants’ Reply in Support of Motion to Expunge, ECF 79 at 6 (citing Kirkeby, 33 Cal.4th at 647, 649-650, 15 Cal.Rptr.3d 805, 93 P.3d 395 ). Pursuant to California Code of Civil Procedure § 405.20, Defendants also contend that the lis pendens must be expunged because the court stated that if Plaintiffs amend the Substantive Consolidation Claim, they should do so by separate motion or adversary proceeding. Defendants’ Reply in Support of Motion to Expunge, ECF 79 at 10-11.
On April 10, 2020, the court on its own motion ordered Plaintiffs to file a sur-reply to further address the issue of whether a substantive consolidation claim can be considered a "real property claim" within the meaning of California Code of Civil Procedure § 405.4. The court ordered that any response of Defendants to Plaintiffs’ sur-reply could be made orally at a continued hearing on the Motion set for April 30, 2020.
On April 23, 2020, Plaintiffs filed their sur-reply, ECF 85 (the "Sur-reply"). In the Sur-reply, Plaintiffs contend that the Substantive Consolidation Claim is a "real property claim" because a substantive consolidation order would pass title to and right to possession of the Properties from a non-debtor to the bankruptcy estate. Plaintiffs therefore assert that the Substantive Consolidation Claim unquestionably "affect[s] ... title to, or the right to possession of" real property. Plaintiffs’ Sur-reply to Defendants’ Reply in Support of Motion to Expunge, ECF 85 at 2-3 (quoting Cal. Civ. Proc. Code § 405.4 ).
On April 30, 2020, the court conducted a hearing on the Motion. During the hearing, Defendants’ counsel raised a new argument in support of the Motion, referring to the recent decision of the United States Supreme Court in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ––– U.S. ––––, 140 S.Ct. 696, 206 L.Ed.2d 1 (2020) (hereinafter " Acevedo "), which casts doubt on the authority of courts to enter nunc pro tunc orders. Defendants’ counsel contended that under Acevedo, the court may not grant substantive consolidation nunc pro tunc to the petition date, and therefore, a substantive consolidation order would not make the Properties part of the bankruptcy estate, and the court must expunge the lis pendens. April 30, 2020 Hearing on Defendants’ Motion to Expunge Lis Pendens at 11:47–11:49, Adv. No. 2:19-ap-01332-RK (argument of Defendants’ counsel). In response, the court ordered the parties to file supplemental briefing addressing Acevedo .
On May 7, 2020, Defendants filed a Supplemental Brief on Plaintiff's Request for Nunc Pro Tunc Substantive Consolidation Order, ECF 86 ("Defendants’ Supplemental Brief"). On May 14, 2020, Plaintiffs filed a Joint Response to Moving Defendants’ Supplemental Brief, ECF 87 ("Plaintiffs’ Supplemental Brief"), and the court took the matter under submission.
Accordingly, Defendants’ Motion presents five issues for resolution: (i) whether the Substantive Consolidation Claim is a "real property claim" under California Code of Civil Procedure § 405.4 ; (ii) if so, whether the court should nevertheless grant the Motion because the Substantive Consolidation Claim is dismissed without prejudice; (iii) whether the lis pendens must be expunged under California Code of Civil Procedure § 405.20 because any amended substantive consolidation claim may not be filed in this adversary proceeding; (iv) whether the Trustee recorded the lis pendens on the Properties without "substantial justification," and the court should award Defendants’ their attorneys’ fees and costs as a prevailing party pursuant to California Code of Civil Procedure § 405.38 ; and; (v) whether Acevedo precludes Plaintiffs from asserting that the Properties could be property of the estate nunc pro tunc pursuant to a future substantive consolidation order, in order to support the filing of the lis pendens.
Having considered all of the oral and written arguments of the parties, the court now rules as follows.
II. DISCUSSION
Under California law, a court's evaluation of whether a party has alleged a "real property claim" supporting a lis pendens is a "demurrer-like analysis" that should be limited to an examination of the allegations as pled. Kirkeby, 33 Cal.4th at 648-649, 15 Cal.Rptr.3d 805, 93 P.3d 395. Thus, the court must first discuss the allegations in the Amended Complaint and the court's December 2019 Order Granting in Part and Denying in Part Defendant's Motion to Dismiss the Amended Complaint.
Undefined capitalized terms included herein have the meaning ascribed to them as set forth in the Amended Complaint, ECF 9.
The Amended Complaint alleged that it was a:
proceeding to avoid and recover certain prepetition transfers, to substantively consolidate most of the Defendants into Prototype's estate, and to obtain other relief, all for the benefit of Prototype's estate and creditors, pursuant to 11 U.S.C. §§ 105, 544, 548, and 550, and applicable non-bankruptcy law.
Amended Complaint, ECF 9 at 4 (¶ 15).
In the Amended Complaint, Plaintiffs allege that before filing for bankruptcy protection, Debtor repaired and manufactured aviation parts and components for the U.S. Army, Navy, and Air Force. Id. (¶ 16). Plaintiffs allege that Debtor operated its business under the "sole direction" of defendant Bahram Bordbar. Id. Plaintiffs also allege that Bahram Bordbar caused Debtor "to certify that a U.S. Army helicopter [that Debtor] was supposed to overhaul contained a critical cotter pin, when, in fact, it did not." Id. at 5 (¶ 18). They further allege that on January 15, 2014, the U.S. Army helicopter Debtor had overhauled tragically crashed, resulting in the death of co-pilot Captain Clayton Carpenter, U.S. Army, and substantial physical injuries to the other servicemen on board. Id. Plaintiffs allege that following the helicopter crash, the United States began investigating Debtor, which led to Bahram Bordbar being incarcerated and liable to the United States for nearly $1 million in civil and criminal penalties. Id. at 5 (¶ 19).
In the Amended Complaint, Plaintiffs allege that Debtor, not Bahram Bordbar, "paid all the fines resulting from the civil settlement and plea agreement with the United States Government" that arose from the investigation and subsequent charges brought against Bahram Bordbar and Debtor. Id. at 5-6 (¶¶ 19-22). Plaintiffs also allege that between 2011 and 2017, Bahram Bordbar caused Debtor to transfer substantial amounts of cash and other assets from Debtor to, or for the benefit of, Defendants, including assets of the Debtor that were either transferred to the Bordbar Trust, or used to purchase assets that were subsequently transferred to the Bordbar Trust. Id. (¶¶ 23-24). Plaintiffs essentially allege that Defendants regularly removed valuable assets from Debtor and used those assets as their own: transferring funds between Defendants and Debtor, entangling the affairs of Defendants and Debtor, and attempting to keep Debtor's assets out of the hands of creditors. Id. at 6-7 (¶¶ 22-28).
Specifically, Plaintiffs allege in the Amended Complaint that "[Bahram Bordbar] Routinely Removed Assets from [Debtor] to Keep the Assets from Creditors," id. at 10, including transferring substantial cash sums from Debtor to Defendants Bahram and Malahat Bordbar, id. (¶ 43), which funds the Bordbars
either transferred ... to the Bordbar Trust or used ... to purchase real estate or other assets, which they then transferred to the Bordbar Trust. Indeed, following the helicopter crash and after commencement of the government's investigation concerning the crash, Barry and Molly transferred three pieces of real property to the Bordbar Trust without consideration, including the Gardena Property, which was leased to the Debtor and was the Debtor's business location; the real property located at 21600 Brisbane Way, Yorba Linda, California, which is the Bordbars’ residence and the address for the Bordbar Trust; ....
Id. at 11 (¶ 44). Plaintiffs additionally allege that at the time of the alleged cash transfers described above, Defendants’ finances were entangled with Debtor's such that even though the funds "no longer appeared in [Debtor's] accounts, Debtor effectively maintained control over the funds. [Debtor] has never received any consideration for these transfers." Id. at 11 (¶ 46).
As defined in the Amended Complaint, ECF 9, "Barry" and "Molly" are Defendants Bahram and Malahat Bordbar. Id. at 3 (¶¶ 7-8).
Similarly, Plaintiffs allege that Defendants Bahram and Malahat Bordbar "Commingled Their Personal Finances with [Debtor's] to an Astounding Degree," id. at 14, contending that
[i]ndeed, the affairs of Barry and Molly and, by extension, the Bordbar Trust, are so entangled with Prototype's that consolidation will benefit all creditors. The time and cost of reconstructing the books and records of the Debtor to determine what each transaction was for, to whom it is attributable, and whether it was properly recorded therein, would be very expensive and extremely difficult. As such, identifying or allocating assets between Prototype, Barry, Molly, and the Bordbar Trust would not be possible without threatening the ultimate distribution to creditors from Prototype's estate.
Id. at 16 (¶ 66). See also id. at 14-16 (¶¶ 56-67).
Plaintiffs in their Substantive Consolidation Claim against Defendants in the Amended Complaint specifically allege:
Plaintiff repeats and re-alleges all of the allegations of paragraphs 1 through 76.
The affairs of Barry and Molly Bordbar, the Bordbar Trust, and Leya are so entangled with those of the Debtor that consolidation will benefit all creditors.
Substantial time and expense would be required to even attempt to unscramble
the financial and other commingling between the Debtor and Barry and Molly Bordbar, the Bordbar Trust, and Leya such that no identification or allocation of assets is possible.
In the alternative, any such effort will threaten realization of any net assets for all creditors. Substantive consolidation of these entities is necessary to avoid inequitable diminution of the Debtor's estate and to protect the Debtor's creditors.
It is, therefore, necessary and appropriate that the business affairs of Barry and Molly Bordbar, the Bordbar Trust, and Leya be administered and resolved in conjunction with the affairs of the Debtor in its bankruptcy estate.
Id. at 31 (¶¶ 179-183). As indicated above, the Substantive Consolidation Claim includes all of the foregoing substantive allegations regarding the Debtor's alleged involvement in the helicopter crash and the alleged fraudulent transfer of Debtor's assets to Defendants. Id. (¶ 179). In the Prayer for Relief in the Amended Complaint, Plaintiffs requested the following relief from the court on the Substantive Consolidation Claim:
On [the Substantive Consolidation Claim], that Barry and Molly Bordbar, the Bordbar Trust, and Leya be substantively consolidated into the Debtor's bankruptcy estate nunc pro tunc to the Petition Date, or such other date that the Court deems appropriate, and for substantive consolidation of such Defendants’ assets and liabilities with those of the Debtor's estate;
Amended Complaint, ECF 9 at 33 (Prayer For Relief, ¶ G).
In its December 12, 2019 Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss the Amended Complaint, the court specifically granted Defendants’ request to dismiss the Substantive Consolidation Claim because Plaintiffs "did not give notice of the claim for substantive consolidation to the creditors of Defendants, who and which are nondebtor parties[.]" ECF 57 at 2 (citing Leslie v. Mihranian (In re Mihranian), 937 F.3d 1214, 1218 (9th Cir. 2019) ("A party moving for substantive consolidation must provide notice of the motion to the creditors of a putative consolidated non-debtor."). Because the court was dismissing the Substantive Consolidation Claim on insufficiency of service grounds, the court expressly declined to reach the merits of whether the Substantive Consolidation Claim should be dismissed for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF 57 at 2. The court also recommended that Plaintiffs file any amended substantive consolidation claim as a separate proceeding. Id. The court's order dismissed the Substantive Consolidation Claim without prejudice and with leave to amend, and the court did not set any time limit on Plaintiffs’ amendment of the Substantive Consolidation Claim. Id. at 15. Accordingly, although the Substantive Consolidation Claim has been dismissed, it is not finally resolved since Plaintiffs may still file an amended claim.
As noted above, the five questions presented by the Motion before the court are: (i) whether the Substantive Consolidation Claim is a "real property claim" under the California expungement statutes; (ii) if so, whether the court should grant the Motion, even though the to-be-amended Substantive Consolidation Claim was dismissed without prejudice; (iii) whether the lis pendens must be expunged because any amended substantive consolidation claim may not be filed in this action; (iv) whether the Trustee recorded the lis pendens on the Properties without "substantial justification," and Defendants should be awarded fees and costs; and (v) whether Acevedo precludes Plaintiffs from asserting that the Properties could be property of the estate. The court addresses each of these questions in turn.
i. PLAINTIFFS’ SUBSTANTIVE CONSOLIDATION CLAIM IS A "REAL PROPERTY CLAIM"
Whether a substantive consolidation claim may be a "real property claim" supporting a lis pendens under California law is apparently an issue of first impression. The parties agree that California law governs this court's evaluation of the Motion. See, e.g. , In re Gonzalez , BAP No. CC-11-1162-MkCaPa, 2012 Bankr. LEXIS 673, 2012 WL 603747, at *5 (9th Cir. BAP Feb. 2, 2012) (affirming bankruptcy court's expungement of lis pendens pursuant to California Code of Civil Procedure § 405.30 ). The most recent pronouncement of California law addressing the state's expungement statutes, the California Supreme Court decision in Kirkeby v. Superior Court , 33 Cal.4th 642, 15 Cal.Rptr.3d 805, 93 P.3d 395 (2004) (holding that fraudulent transfer claim was a "real property claim") governs the court's analysis.
As set forth below, the court determines that Plaintiffs’ Substantive Consolidation Claim is a "real property claim" within the meaning of California Code of Civil Procedure § 405.4 because the effect of an order for substantive consolidation of a non-debtor entity is the combining of that entity's assets and liabilities with the bankruptcy estate. A substantive consolidation cause of action is a request that the bankruptcy court ignore legal forms and marshal assets into the court's jurisdiction because the property belonging, in form, to the putative consolidated entity is, in substance, property of the estate, 11 U.S.C. § 541(a). Moreover, similar to the fraudulent transfer claim in Kirkeby, the ostensible "real property claim" here is an equitable remedy of substantive consolidation that disregards the corporate form by bringing non-debtor assets into the estate to satisfy creditors’ claims. The court therefore concludes that an order consolidating a non-debtor's real property into the bankruptcy estate is more akin to the avoidance and recovery of real property by a fraudulent transfer claim, Kirkeby , 33 Cal.4th at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395, than the imposition of a constructive trust or equitable lien on real property, Urez Corp. v. Superior Court, 190 Cal.App.3d 1141, 1149, 235 Cal.Rptr. 837 (1987) (holding that constructive trust and equitable lien claims may not support a lis pendens). Additionally, the precise impact of a substantive consolidation order—pooling assets and liabilities previously held by separate legal entities into a single body—is not diminished when a case involves substantive rights relating to title of real property. Thus, an order granting a substantive consolidation claim would "affect" title to and possession of real property within the meaning of California Code of Civil Procedure § 405.4 because the consolidated property becomes property of the bankruptcy estate available to satisfy the claims of all creditors.
Below, the court discusses the California expungement statutes and related authorities, and the nature and effect of substantive consolidation, before returning to examining the Amended Complaint in order to undertake the "demurrer-like analysis" that Kirkeby requires, 33 Cal.4th at 648, 15 Cal.Rptr.3d 805, 93 P.3d 395.
1. The California Lis Pendens Regime
A lis pendens is a "notice of the pendency of an action in which a real property claim is alleged." California Code of Civil Procedure § 405.2. A "real property claim" is defined, in pertinent part, as "a cause or causes of action in a pleading which would, if meritorious, affect ... title to, or the right to possession of, specific real property[.]" California Code of Civil Procedure § 405.4. If an underlying action does not assert a "real property claim," as defined by California Code of Civil Procedure section 405.4, the owner of the subject property may move to expunge the lis pendens. California Code of Civil Procedure §§ 405.30 and 405.31. The party opposing a motion to expunge lis pendens has the burden to demonstrate the existence of a "real property claim." California Code of Civil Procedure § 405.30.
The court deciding a motion to expunge lis pendens based on the absence of a real property claim "shall order the notice expunged if the court finds that the pleading on which the notice is based does not contain a real property claim." California Code of Civil Procedure § 405.31. The limited determination of whether a complaint contains a "real property claim" is a "demurrer-like analysis," as stated in Kirkeby , 33 Cal.4th at 647-648, 15 Cal.Rptr.3d 805, 93 P.3d 395. Because "the purpose of a lis pendens is to notify ‘the world’ as to a claim on specific real property," at a minimum, a "real property claim" must identify the specific real property that is the subject of the lis pendens. Gale v. Superior Court , 122 Cal.App.4th 1388, 1396, 19 Cal.Rptr. 3d 554 (2004) ("it is most assuredly not enough ... merely to give notice to one's adversary. Adversaries in all likelihood already know about any claims. It is third parties—potential buyers or moneylenders—who need to be able to ascertain from the pleadings the nature of any claim to specific real property.").
There are two lines of California lis pendens cases that the parties rely on: those analyzing constructive trust and equitable lien causes of action, and those interpreting fraudulent transfer claims. In Kirkeby , the California Supreme Court discussed many authorities examining whether a claim for constructive trust or equitable lien may support a lis pendens but left that particular question unresolved. 33 Cal.4th at 650 n.7, 15 Cal.Rptr.3d 805, 93 P.3d 395 ("Because it is not presented in this case, we do not address the question of whether a claim that seeks to impose a constructive trust or equitable lien may be a basis for a lis pendens.").
Before Kirkeby, the California courts evaluating expungement actions generally adopted the view that "allegations of equitable remedies, even if colorable, will not support a lis pendens if, ultimately, those allegations act only as a collateral means to collect money damages." La Paglia v. Superior Court, 215 Cal.App.3d 1322, 1329, 264 Cal.Rptr. 63 (1989) (quoting Urez Corp. v. Superior Court, 190 Cal.App.3d 1141, 1149, 235 Cal.Rptr. 837 (1987) ); Wardley Development Inc. v. Superior Court, 213 Cal.App.3d 391, 394, 262 Cal.Rptr. 87 (1989) (same). Consistent with this line of authority, the majority of California courts had concluded that constructive trust and equitable lien claims are not "real property claims" because the claims seek an interest in real property merely for the purpose of securing a money damage judgment. When the California Court of Appeal examined whether a fraudulent conveyance cause of action could be a "real property claim" in Lewis v. Superior Court, 30 Cal.App.4th 1850, 37 Cal.Rptr. 2d 63 (1994) (hereinafter " Lewis ") and Hunting World, Inc. v. Superior Court, 22 Cal.App.4th 67, 26 Cal.Rptr. 2d 923 (1994) (hereinafter " Hunting World" ), however, it narrowed the equitable remedy exclusion that had been adopted in Urez Corp. v. Superior Court, 190 Cal.App.3d at 1149, 235 Cal.Rptr. 837.
See, e.g. , Burger v. Superior Court, 151 Cal.App.3d 1013, 199 Cal.Rptr. 227 (1984) (constructive trust claim appended to breach of contract and fraud claims); Deane v. Superior Court, 164 Cal.App. 3d 292, 210 Cal.Rptr. 406 (1985) (constructive trust claim appended to breach of contract claim); Urez Corp. v. Superior Court, 190 Cal.App.3d 1141, 235 Cal.Rptr. 837 (1987) (constructive trust claim appended to fraud and deceit claims); Wardley Development Inc. v. Superior Court, 213 Cal.App.3d 391, 262 Cal.Rptr. 87 (1989) (equitable lien claim appended to default money judgment); La Paglia v. Superior Court, 215 Cal.App.3d 1322, 264 Cal.Rptr. 63 (1989) (constructive trust claim appended to waste, trespass, conversion, and accounting claims); BGJ Associates, LLC v. Superior Court, 75 Cal.App.4th 952, 89 Cal. Rptr.2d 693 (1999) (constructive trust claim appended to fraud and tort claims seeking compensatory and punitive damages); Campbell v. Superior Court, 132 Cal.App.4th 904, 34 Cal.Rptr.3d 68 (2005) (constructive trust and equitable lien claims appended to conversion and money had and received claims). But see Coppinger v. Superior Court, 134 Cal.App.3d 883, 185 Cal.Rptr. 24 (1982) ; Okuda v. Superior Court, 144 Cal.App.3d 135, 192 Cal.Rptr. 388 (1983).
In Lewis , the California Court of Appeal determined that the plaintiff's lis pendens should be ordered expunged after looking to the purpose of the complaint as a whole and determining that plaintiff's fraudulent transfer claim was, in essence, a claim for constructive trust. Id. at 1865, 37 Cal.Rptr. 2d 63 ("while in the abstract ... a fraudulent conveyance claim can support a lis pendens, the application of this rule in a given case depends on the specific nature of the claim."). In Hunting World , however, the California Court of Appeal concluded that a fraudulent transfer claim was a "real property claim" where the plaintiff, after receiving a money damages judgment against the debtor in federal court, sought to avoid the debtor's transfer of real property to his wife. Id. at 73, 26 Cal.Rptr.2d 923 ("Extension of the Urez / Wardley line of decisions is not warranted because the clear wording of the ‘real property claim’ prong of lis pendens law covers a claim to set aside a conveyance of real property.").
In Kirkeby , the plaintiff alleged twenty-seven causes of action in her complaint, "including a cause of action for fraudulent conveyance, and sought declaratory and injunctive relief and damages in the aggregate amount of $4.9 million on behalf of herself" and the allegedly looted corporation that plaintiff owned with her brother and his wife. 33 Cal.4th at 646, 15 Cal.Rptr.3d 805, 93 P.3d 395. The plaintiff alleged that her brother had obtained a loan from their corporation but used the proceeds to purchase a residential income property that he immediately transferred to a family limited partnership. Id. The plaintiff also alleged that her brother transferred interests in his family residence to the same partnership, and that he executed both of the transfers in order to defraud creditors. Id. The plaintiff specifically requested that "the [loan and real property] transfers be voided to the extent necessary to satisfy the claims set forth in her complaint." Id. The California Supreme Court granted review after both lower courts found that the fraudulent conveyance claim was plaintiff's only claim relating to the real properties and was not a "real property claim" for the purposes of the lis pendens statutes. Id. at 646-647, 15 Cal.Rptr.3d 805, 93 P.3d 395.
The California Supreme Court in Kirkeby looked to the plain language of California Civil Code § 3439.07, which sets forth the remedies available to a creditor bringing a fraudulent transfer action, and concluded that a successful fraudulent transfer claim
California Civil Code § 3439.07(a)(1) provides that "[i]n an action for relief against a transfer or obligation under this chapter, a creditor, ... may obtain: [a]voidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim."
may result in the voiding of a transfer of title of specific real property. By definition, the voiding of a transfer of real property will affect title to or possession of real property. Therefore, a fraudulent conveyance action seeking avoidance of a transfer [to the extent necessary to satisfy the creditor's claim] clearly ‘affects title to, or the right to possession of’ real property and is therefore a real property claim for the purposes of the lis pendens statutes.
Id. at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395. Thus, the outcome of the case in Kirkeby was based on the plain meaning of the statutory language in California Civil Code § 3439.07 and California Code of Civil Procedure § 405.4. Kirkeby, 33 Cal.4th at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395 (citing Hunting World, 22 Cal.App.4th at 73, 26 Cal.Rptr.2d 923 ). The court therefore held the defendants’ argument that the court should look beyond the face of the noticing party's pleading and examine the purpose of the complaint to be unavailing. Id. at 649-650, 15 Cal.Rptr.3d 805, 93 P.3d 395 (declining to depart from application of the plain language of § 405.31 and its legislative history, which require courts "to consider only the specific claim as pled[.]").
Additionally, the California Supreme Court in Kirkeby held that Lewis was "inapposite and actually support[ed]" the court's conclusion, even though the California Court of Appeal determined that the fraudulent transfer claim in that case was not a "real property claim." Id. at 650, 15 Cal.Rptr.3d 805, 93 P.3d 395. In discussing Lewis, the California Supreme Court in Kirkeby noted that the Court of Appeal held in that case that the party in interest pleaded a constructive trust claim in substance, and only labelled the claim as a fraudulent transfer cause of action in form; the party in interest did not allege any conveyance of property. Id. (citing Lewis, 30 Cal.App.4th at 1865, 37 Cal.Rptr.2d 63 ). Thus, the Lewis court held that although a fraudulent conveyance claim may support a lis pendens, no such claim was alleged in that case. Id. The California Supreme Court distinguished the plaintiff's allegations in Kirkeby from the allegations pleaded in Lewis, noting that the plaintiff in Kirkeby adequately alleged that the defendant transferred title of the real property with the intent to defraud creditors. Id. Therefore, the California Supreme Court in Kirkeby held that the fraudulent transfer claim, if successful, would affect title to specific real property. Id.
Accordingly, Kirkeby directs courts applying the California expungement statutes to proceed with a demurrer-like analysis of the noticing party's pleading. That analysis must avoid looking beyond the pleading to the noticing party's purpose, and instead focus on the specific claim as pleaded. Further, the trial court's analysis of the cause of action underlying the asserted "real property claim" must begin with the plain language of that cause of action. Id. at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395 (discussing Cal. Civ. Code § 3439.07(a)(1) ).
Defendants argue that under Kirkeby, "the only analysis that matters is whether a plaintiff alleges a direct claim to title or possession." Defendants’ Reply in Support of Motion to Expunge, ECF 79 at 9 (citing Kirkeby, 33 Cal. 4th at 649-650, 15 Cal.Rptr.3d 805, 93 P.3d 395 ). The court disagrees with this argument because the California Supreme Court did not set forth a "direct claim" standard in Kirkeby, and the holding in that case undermines Defendants’ argument. Pursuant to California Civil Code § 3439.07(a)(1), the plaintiff in Kirkeby sought to void a transfer of real property to satisfy her claim for nearly $5 million in money damages, among other requested relief. Kirkeby, 33 Cal. 4th at 646, 15 Cal.Rptr.3d 805, 93 P.3d 395. The court determined that if plaintiff's fraudulent transfer claim was successful, "[b]y definition," the avoidance of the transfer would "affect ... title to, or the right to possession of, specific real property," California Code of Civil Procedure § 405.4. Id. at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395. Defendants are correct that the California Supreme Court in Kirkeby , in reaching its conclusion, relied upon a statute which allows a creditor to obtain "[a]voidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim[,]" and, here, no similar statute exists. Id. at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395. Nothing in Kirkeby indicates, however, that a "real property claim" determination is limited to statutory causes of action.
Id. at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395.
In the absence of statutory language beyond 11 U.S.C. § 105(a), the court, guided by Kirkeby , therefore evaluates the plain effect and nature of an order granting substantive consolidation. The court determines that an order consolidating Defendants’ assets and liabilities with the bankruptcy estate would "affect ... title to, or the right to possession of, specific real property," California Code of Civil Procedure § 405.4. Accordingly, Plaintiffs’ Substantive Consolidation Claim is a "real property claim" for the purposes of the California lis pendens statutes.
2. The Effect of Substantive Consolidation
"A bankruptcy court's power of substantive consolidation has been considered part of the bankruptcy court's general equitable powers since the passage of the Bankruptcy Act of 1898." Alexander v. Compton (In re Bonham), 229 F.3d 750, 763 (9th Cir. 2000) (citing Sampsell v. Imperial Paper & Color Corp. , 313 U.S. 215, 219, 61 S.Ct. 904, 85 L.Ed. 1293 (1941) (hereinafter "Sampsell" )). Although uncodified, the authority of a bankruptcy court to substantively consolidate the estate of a separate debtor or non-debtor derives from the court's "general equity powers as expressed in [ 11 U.S.C. § 105 ]." In re Bonham, 229 F.3d at 764 (citation omitted) (hereinafter " Bonham "); see also , In re Mihranian, 937 F.3d at 1216 (citing Bonham ). The official commentary for the Federal Rules of Bankruptcy Procedure also acknowledges the propriety of substantive consolidation. The Advisory Committee Note to Federal Rule of Bankruptcy Procedure 1015 provides that "[c]onsolidation, as distinguished from joint administration, is neither authorized nor prohibited by this rule since the propriety of consolidation depends on substantive considerations and affects the substantive rights of the creditors of the different estates." Id. (citing Sampsell , 313 U.S. 215, 61 S.Ct. 904, 85 L.Ed. 1293 (1941) ).
In Sampsell , the Supreme Court "tacitly approved" substantive consolidation of a non-debtor entity with a bankruptcy estate. 313 U.S. at 219-220, 61 S.Ct. 904 (reversing the judgment of the Circuit Court of Appeals and affirming the District Court's "order consolidating the estates"). Prepetition, the individual debtor in Sampsell had fraudulently transferred assets to a dummy corporation and in consideration received all of the corporation's stock. Id. at 216-217, 61 S.Ct. 904. After the bankruptcy referee ordered that the corporation's assets be turned over to the estate, a creditor of the non-debtor corporation requested priority as to the distribution of the consolidated corporation's assets. Id. at 217, 61 S.Ct. 904. The bankruptcy referee determined that the creditor, "with knowledge of [debtor's] indebtedness, was instrumental in getting him to form the corporation and had full knowledge of its fraudulent character." Id. Thus, the bankruptcy referee disallowed the creditor's request for priority but permitted the creditor's claim as a general unsecured claim. Id. Because the Supreme Court affirmed the bankruptcy referee's determination that the creditor was "entitled only to pari passu participation" with debtor's other unsecured creditors, the court, "perhaps inadvertently," approved consolidation as a remedy to at once: (i) avoid a fraudulent transfer, (ii) subordinate an inequitable claim, and (iii) disregard legal forms to "absorb [nondebtor] assets into the bankruptcy estate" to satisfy the claims of a consolidated body of creditors. Id. at 219, 61 S.Ct. 904 ("The power of the bankruptcy court to subordinate claims or to adjudicate equities arising out of the relationship between the several creditors is complete.") (citation omitted).
Bonham, 229 F.3d at 764.
In re Owens Corning, 419 F.3d 195, 206 (3d Cir. 2005).
Accordingly, substantive consolidation is "an uncodified, equitable doctrine[,]" as observed by the Bankruptcy Appellate Panel of the Ninth Circuit, that allows bankruptcy courts to "combine the assets and liabilities of separate and distinct—but related—legal entities into a single pool and treat them as though they belong to a single entity[,]" in the words of the Ninth Circuit in Bonham, 229 F.3d at 764. In Bonham , the Ninth Circuit set forth the legal standard for establishing a substantive consolidation claim and its effect on non-debtor assets and liabilities if the claim is granted. Id. at 766-771. Defendants’ challenge to Plaintiffs’ lis pendens is on grounds that the Amended Complaint does not include a "real property claim" under California Code of Civil Procedure § 405.31, which looks to the effect of a purported "real property claim" if meritorious. Thus, the court's analysis is limited to Bonham 's discussion of the effect of a substantive consolidation order on the Properties.
Luxury Jewels, LLC v. Akers (In re Aronsakool), BAP No. SC-13-1206-JuKuPa, 2014 Bankr. LEXIS 1234, 2014 WL 1273696, at *8 (9th Cir. BAP Mar. 28, 2014).
Defendants’ challenge to Plaintiffs’ lis pendens is not under California Code of Civil Procedure § 405.32 requiring expungement of a lis pendens " if the court finds that the claimant has not established by a preponderance of the evidence the probable validity of the real property claim." Defendants did not move to expunge the lis pendens in this case by challenging the "probable validity" of the Plaintiffs' "real property claim" because the argument is that there is no such real property claim. Under the "probable validity" test of California Code of Civil Procedure § 405.32, the court would determine the probable validity of a substantive consolidation claim, and the parties would be entitled to take discovery and submit evidence, but the court does not decide the merits of any such potential claim here.
In Bonham, the chapter 7 trustee initially brought fraudulent transfer claims against numerous investors that had received assets from two non-debtor companies that the individual debtor had used to engage in a Ponzi scheme. 229 F.3d at 759-760. After the investor-defendants moved to dismiss the trustee's fraudulent transfer claims for lack of standing, the trustee filed a motion to substantively consolidate the debtor's estate with the non-debtor companies nunc pro tunc to the petition date. Id. at 760. Discussing the significant consequences of a substantive consolidation order, the Ninth Circuit noted "that substantive consolidation ‘is no mere instrument of procedural convenience ... but a measure vitally affecting substantive rights.’ " Id. at 762 (citation omitted). A substantive consolidation order allows a bankruptcy court to seriously affect the rights of non-debtor third parties "in order to reach assets for the satisfaction of debts of a related [entity]." Id. at 764 (citation and internal quotation omitted). Further, "[t]he consolidated assets create a single fund from which all claims against the consolidated debtors are satisfied; duplicate and intercompany claims are extinguished; and, the creditors of the consolidated entities are combined for purposes of voting on reorganization plans." Id. (emphasis added). See also In re Owens Corning, 419 F.3d 195, 206 (3d Cir. 2005) ("[Substantive consolidation] brings all the assets of a group of entities into a single survivor .") (emphasis added). Absent the authority to substantively consolidate, "debtors could insulate money through transfers among inter-company shell corporations with impunity." Bonham, 229 F.3d at 764.
Defendants contend that Bonham instructs courts to only "treat [consolidated assets] as though they belong to a single entity." Id. Defendants assert that such treatment falls short of affecting title to or possession of consolidated property. Defendants’ Reply in Support of Motion to Expunge, ECF 79 at 7-8. Defendants’ reliance on the phrase "as though," however, unduly minimizes the effect of substantive consolidation because substantive consolidation is a remedy "vitally affecting substantive rights." Bonham, 229 F.3d at 762 (citation and internal quotation omitted). The resulting "single fund" or "single survivor" is not a procedural construct that hardly affects ownership and control of consolidated assets. The single fund is the bankruptcy estate. The estate consists of all property that will be subject to the exclusive jurisdiction of the bankruptcy court, 28 U.S.C. § 1334(e)(1), and may be used to satisfy creditors’ claims. Elliott v. Weil (In re Elliott), 523 B.R. 188, 192 (9th Cir. BAP 2014) ("When a debtor files a bankruptcy petition, all of his assets become property of the estate and may be used to pay creditors ...." (citation omitted)); 11 U.S.C. § 541(a)(1) (estate property includes "all legal or equitable interests of the debtor in property as of the commencement of the case"), § 541(a)(7) (estate property includes "[a]ny interest in property that the estate acquires after the commencement of the case.").
Id. at 764.
In re Owens Corning, 419 F.3d at 206.
Bonham supports the proposition that upon issuance of a substantive consolidation order, the property of a consolidated non-debtor becomes property of the estate under 11 U.S.C. § 541. 229 F.3d at 766-767 (citing Kroh Bros. Development Co. v. Kroh Bros. Management Co. (In re Kroh Bros. Dev. Co.), 117 B.R. 499, 502 (W.D. Mo. 1989) (lien avoidance claims of non-debtor party that come into the bankruptcy estate are part of the estate nunc pro tunc)); see also, Kismet Acquisition, LLC v. Icenhower (In re Icenhower), 757 F.3d 1044, 1050 (9th Cir. 2014) (finding that non-debtor's real property became property of the bankruptcy estate as a result of substantive consolidation order). A substantive consolidation order imposes bankruptcy court jurisdiction on non-debtor assets and therefore affects title to and possession of those assets. See Schwab v. Reilly, 560 U.S. 770, 794 n. 21, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) (" Section 541 is clear that title to the [debtor's property] passed to [the bankruptcy] estate at the commencement of her case ...."); Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 764 F.3d 1168, 1178 (9th Cir. 2014) (debtors have "no right to possess or control estate property while it is property of the estate"); cf. Giovanazzi v. Schuette (In re Lebbos), BAP No. EC-11-1735-KiDJu, 2012 Bankr. LEXIS 5962, 2012 WL 6737841, at *8 (9th Cir. BAP Dec. 31, 2012) ("Because the bankruptcy court had jurisdiction over the [real property] by virtue of [ 11 U.S.C.] § 541(a) and 28 U.S.C. § 1334(e)(1), it had jurisdiction to enter [a judgment] vesting title to the [real property] in Trustee."); Federal Rule of Bankruptcy Procedure 7070 (allowing a bankruptcy court to "enter a judgment divesting the title of any party and vesting title in others whenever the real or personal property involved is within the jurisdiction of the court."). Like the fraudulent transfer avoidance action in Kirkeby, here, "[b]y definition," the combining of a consolidated entity's assets and liabilities with the bankruptcy estate will affect title to or right to possession of any consolidated real property asset.
Kirkeby, 33 Cal. 4th at 649, 15 Cal.Rptr.3d 805, 93 P.3d 395.
Substantive consolidation's relationship with fraudulent transfer law also demonstrates that a substantive consolidation claim is a "real property claim" that may support a lis pendens. This court's decision in In re Parkway Calabasas, 89 B.R. 832 (Bankr. C.D. Cal. 1988), aff'd, 949 F.2d 1058 (9th Cir. 1991), preceded Bonham and was discussed therein. See Bonham, 229 F.3d at 769. In Parkway Calabasas , the bankruptcy court held that a fraudulent transfer claim arising from one debtor's pre-petition payment of a debt that was owed by a separate debtor is rendered moot if the two estates are consolidated. 89 B.R. at 839 ("[s]ubstantive consolidation accomplishes the merger of the two estates ....").
The court's discussion of "the nature and consequences of substantive consolidation, and ... fraudulent conveyance[,]" in Parkway Calabasas is instructive. Id. at 836. "[S]ubstantive consolidation substitutes a single debtor, a single estate with a common fund of assets, and a single body of creditors. Assets and liabilities of each entity are pooled and inter-entity accounts and claims are eliminated." Id. at 837 (citations omitted). Where a putative consolidated non-debtor is an alleged transferee or indirect beneficiary of a fraudulent transfer—as is the case here—the impact of a substantive consolidation order is similar to the effect of a fraudulent transfer remedy. Much like the effect of avoidance of a fraudulent transfer and recovery of the transferred asset, substantive consolidation eliminates the harm to a transferor's creditors and the unjust enrichment of a transferee or indirect beneficiary. Id. at 839. A substantive consolidation order remedies these ills by enlarging the asset pool available to pay the transferor's creditors and allowing those creditors to look to the assets of the transferee, or indirect beneficiary, for payment. Id. ("Substantive consolidation ... leav[es] no party unjustly enriched and no creditors looking to an impoverished asset pool for payment.").
Other courts’ analysis of the relationship between fraudulent transfer and substantive consolidation claims comport with the Ninth Circuit authorities discussed above. See, e.g. , Luxury Jewels, LLC v. Akers (In re Aroonsakool), BAP No. SC-13-1206-JuKuPa, 2014 Bankr. LEXIS 1234, 2014 WL 1273696, at *3 (9th Cir. BAP Mar. 28, 2014) (discussing the bankruptcy court's conclusion that a "request ... to obtain standing to assert fraudulent conveyance theories as to transfers of [a] non-debtor's assets, is tantamount to a request for substantive consolidation."); Schnelling v. Crawford (In re James River Coal Co.), 360 B.R. 139, 172 (Bankr. E.D. Va. 2007) ("Substantive consolidation is a form of relief related to fraudulent transfer law. It is not strictly limited to cases in which fraudulent transfers have been proven. In fact, it can be an alternative to fraudulent transfer litigation."). In In re Owens Corning , the Third Circuit described the "subtle differences" between "remedies for corporate disregard" such as veil piercing, fraudulent transfer, equitable subordination, and substantive consolidation. 419 F.3d at 205-206.
Turnover and fraudulent transfer bring back to the transferor debtor assets improperly transferred to another (often an affiliate). Substantive consolidation goes in a direction different (and in most cases further) than any of these remedies; it is not limited to shareholders, it affects distribution to innocent creditors, and it mandates more than the return of specific assets to the predecessor owner. It brings all the assets of a group of entities into a single survivor.
Id. at 206. In In re James River Coal Co., the bankruptcy court for the Eastern District of Virginia reached a similar conclusion regarding the interrelationship between veil piercing, fraudulent transfer, and substantive consolidation. 360 B.R. at 172.
Ultimately, substantive consolidation (like veil-piercing) boils down to the issue of when the court should disregard the [entities’ separateness] because the [entities] involved effectively disregarded it themselves. When entities are effectively alter-egos and the allocation of assets and liabilities between them is not based on economic reality, then the [structural separateness of the entities] should neither control creditor recoveries nor put creditors in the position of spending inordinate amounts of time and money to prove fraudulent transfers.
Id . As discussed above, the Supreme Court in Sampsell also addressed the interplay between remedies such as equitable subordination, avoidance of fraudulent transfers, and substantive consolidation, which all disregard corporate forms. 313 U.S. at 217-219, 61 S.Ct. 904 (recovering fraudulently transferred assets by consolidating non-debtor corporation with the bankruptcy estate). That substantive consolidation, like an avoidance action, disregards legal forms to satisfy creditors’ claims bolsters the conclusion that a substantive consolidation claim may be a "real property claim" supporting a lis pendens.
In Kirkeby, the alleged "real property claim" under California Civil Code § 3439.07(a)(1) expressly provided for avoidance of a fraudulent or voidable transfer "to the extent necessary to satisfy the creditor's claim." Here, similarly, substantive consolidation provides for recovering ostensibly non-debtor assets to satisfy claims against the estate. 2 Collier on Bankruptcy ¶105.09 [3], at 105-110-11 (16th ed. 2019) ("In general, substantive consolidation results in the combination of the assets of both [entities] into a single pool from which the claims of creditors of both [entities] are satisfied ratably."). Accordingly, substantive consolidation is a remedy similar to avoidance of a fraudulent transfer, and such a cause of action may be a "real property claim."
Further, the effect of substantive consolidation is not diminished when a case involves real property assets. In re Icenhower, 757 F.3d at 1049 ("The court ... substantively consolidated [the non-debtor entity] with the bankruptcy estate, such that the [real property] interest was part of the estate nunc pro tunc to the petition date."); Sharp v. Salyer (In re SK Foods, LP), 499 B.R. 809, 843-844 (Bankr. E.D. Cal. 2013) (ordering substantive consolidation where "the assets that will be consolidated into the Debtors’ estate consist of real property"); cf. Committee of Tort Litigants v. Catholic Diocese of Spokane (In re Catholic Bishop of Spokane), 329 B.R. 304, 312-313 (Bankr. E.D. Wash. 2005) ("Even though a non-debtor entity may have a legal existence separate from the debtor, that does not necessarily defeat substantive consolidation. Nor does the fact that title to real estate is held in the name of a non-debtor preclude a determination that the debtor has an interest in that real estate.") (citation omitted). The court has found no authority indicating that the effect of an order for substantive consolidation is limited, or altered, when the consolidated assets include real property. A substantive consolidation order transfers a consolidated entity's assets, including real property, to the bankruptcy estate. The consolidated assets are then available to satisfy the claims of the consolidated creditors. A substantive consolidation order involving real property therefore plainly affects title to and possession of real property pursuant to California law. California Code of Civil Procedure § 405.4. This result is consistent with Kirkeby and the plain language of California Code of Civil Procedure § 405.4.
3. Plaintiffs’ Allegations and Claims in the Amended Complaint
Undertaking the "demurrer-like analysis" required by Kirkeby, the court determines that the Amended Complaint states a "real property claim" under California Code of Civil Procedure section 405.4. Plaintiffs allege in the Amended Complaint that Debtor and Defendants executed numerous unlawful transfers of Debtor's assets to, or for the benefit of, Defendants, Amended Complaint, ECF 9 at 18-28 (¶¶ 77-150, Claims for Relief I – XIV) (fraudulent transfer claims), including transfers in connection with the acquisition of the Properties, id. at 11 (¶ 44). Plaintiffs also allege that Debtor and Defendants commingled their affairs and assets to such an extent that substantive consolidation is necessary to benefit the estate and creditors. Id. at 11 (¶¶ 44-46), 14-16 (¶¶ 56-67), 31 (¶¶ 179-183). Plaintiffs seek to avoid and recover the value of those allegedly fraudulent transfers but only request relief under fraudulent transfer theories as to the Bordbar Transfers, the Legal Fee Transfers, the Leya Transfers, the Plea and Settlement Transfers, and the BMW Transfer. Id. at 27-28 (¶¶ 143-150, Claims for Relief XIII and XIV).
As discussed above at note 3, undefined capitalized terms included herein have the meaning ascribed to them as set forth in the Amended Complaint, ECF 9.
As noted above, Plaintiffs, discussing the Bordbar Transfers, allege that the Bordbars "either transferred [cash] assets to the Bordbar Trust, or used these assets to purchase real estate or other assets, which they then transferred to the Bordbar Trust." Id. at 11 (¶ 44). Plaintiffs did not specifically allege, however, that the Bordbar Trust was an "immediate or mediate transferee" under California Civil Code § 3439.08(b)(1)(B) or 11 U.S.C. § 550. Nor did Plaintiffs name the Bordbar Trust in the eleventh or twelfth claim for relief in the Amended Complaint, which request avoidance of fraudulent transfers under California common law. The court therefore considers the alleged transfers related to the Properties, id. at 11 (¶ 44), with the Substantive Consolidation Claim in mind, because Plaintiffs do not allege fraudulent transfer claims against the non-debtor Defendants as transferors under federal or state law. Grimmett v. McCloskey (In re Wardle), BAP No. NV-05-1000-KMoB, 2006 Bankr. LEXIS 4817, 2006 WL 6811026, at *4-5 (9th Cir. BAP 2006) ("Unless and until [a non-debtor defendant] is a debtor, either by a filed bankruptcy petition or by substantive consolidation, there is no ... bankruptcy estate and, thus, the trustee cannot pursue § 547 and § 548 actions in its name. [...] [T]he only way the ... trustee could avoid the transfers of property that belonged to [the non-debtor defendant] would be for [the non-debtor defendant] to become a debtor and for the cases to substantively consolidate under [trustee's] control."); Krohn v. Stipp (In re Plise), No. 2:14-cv-00169-JAD-PAL, 2015 U.S. Dist. LEXIS 111143, 2015 WL 4997296, at *2 (D. Nev. 2015) (quoting the bankruptcy court's order dismissing, without prejudice, trustee's fraudulent transfer and alter ego claims against non-debtor transferors: "trustee must now decide what she wants to do with regard to her claims for fraudulent conveyance, in particular, and whether substantive consolidation will allow her [standing] to [avoid transfers by non-debtor defendants]."); see also Spradlin v. Beads & Steeds Inns, LLC (In re Howland), 674 Fed. Appx. 482, 488 (6th Cir. 2017) ("[S]everal courts have held that substantive consolidation allows a trustee to bring avoidance claims involving transfers by the consolidated non-debtor entity—exactly what the trustee seeks to do here.").
The court construes Plaintiffs’ common law avoidance claims pursuant to the supplementary provisions of California Civil Code § 3439.12. See generally Jhaveri v. Teitelbaum, 176 Cal.App.4th 740, 755, 98 Cal.Rptr.3d 268 (2009) (citation omitted).
See generally California Civil Code §§ 3439.04(a) ("A transfer made or obligation incurred by a debtor is voidable ...."), 3439.05(a) (same); 11 U.S.C. §§ 544(a) ("The trustee ... may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable ..."), 544(b)(1) ("the trustee may avoid any transfer or an interest of the debtor in property or any obligation incurred by the debtor that is voidable ..."), 548(a)(1) ("The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor ....").
Here, Plaintiffs have alleged that Debtor fraudulently transferred cash assets to the Bordbars, who then either: (i) fraudulently transferred those same assets to the Bordbar Trust, or (ii) used those assets to purchase the Properties, which the Bordbars then transferred to the Bordbar Trust. Amended Complaint, ECF 9 at 11 (¶ 44). As discussed above, an amended substantive consolidation claim brought against the Bordbars, the Bordbar Trust, and Leya Technologies, if meritorious, will affect title to or possession of the Properties. Here, an order granting substantive consolidation would bring the Properties into the bankruptcy estate for the benefit of creditors pursuant to 11 U.S.C. §§ 105 and 541(a). Under the plain language of California Code of Civil Procedure § 405.4, Plaintiffs’ Amended Complaint had included a substantive consolidation cause of action that, if meritorious, would affect "title to, or the right to possession of, specific real property," and while that claim has been dismissed, Plaintiffs have leave of court to file an amended substantive consolidation claim.
ii. IT WOULD BE PREMATURE TO EXPUNGE THE LIS PENDENS
Plaintiffs contend that it would be inappropriate to expunge the lis pendens at this juncture because the court dismissed the Substantive Consolidation Claim without prejudice and with leave to amend. Plaintiffs’ Opposition to Motion to Expunge Lis Pendens, ECF 77 at 6-9 (citing inter alia McGhee v. Deutsche Bank National Trust Co. , No. EDCV1300281VAPOPX, 2013 WL 12137104, at *8 (C.D. Cal. May 29, 2013) ; McGough v. Wells Fargo Bank, N.A. , No. C12-0050 TEH, 2012 U.S. Dist. LEXIS 84327, 2012 WL 2277931, at *9 (N.D. Cal. June 18, 2012) ; Gomez v. Plaza Home Mortg., Inc. , No. 09cv2855-L(RBB), 2011 U.S. Dist. LEXIS 27444, 2011 WL 940762, at *5 (S.D. Cal. Mar. 17, 2011) ). Although the authorities cited by Plaintiffs are generally unreported cases, the court agrees that expunging the lis pendens before reaching the merits of any amended substantive consolidation claim, which the court determines is a "real property claim," would be premature. The court, however, notes the possible prejudice to Defendants if Plaintiffs are permitted to indefinitely maintain the lis pendens while the Substantive Consolidation Claim hangs in abeyance.
During the April 30, 2020 hearing on the Motion, the court acknowledged that its December 2019 Order imposed a burden on Defendants by allowing amendment of the Substantive Consolidation Claim without specifying a deadline for amendment. April 30, 2020 Hearing on Defendants’ Motion to Expunge Lis Pendens at 12:01-12:03 p.m., Adv. No. 2:19-ap-01332-RK. Noting the potential unfairness in having an open-ended time to amend, the court indicated that it was inclined to grant in part and deny in part Defendants’ Motion. Id. at 12:10-12:14 p.m. The court determined that the Motion should be conditionally granted in part to expunge the lis pendens, assuming Plaintiffs fail to amend the Substantive Consolidation Claim within 90 days of the entry of this memorandum decision and concurrent order. Id. The court finds that 90 days is a reasonable time permitting Plaintiffs to undertake discovery and identify non-debtor Defendants’ creditors before filing an amended substantive consolidation claim. In other words, the lis pendens will be expunged if Plaintiffs fail to amend the Substantive Consolidation Claim within the reasonable time set by the court. Id.
The court, thus, conditionally grants the Motion in part and orders the lis pendens expunged if Plaintiffs do not file an amended substantive consolidation claim within 90 days of the entry of this decision and concurrent order.
iii. PLAINTIFFS ARE NOT PRECLUDED FROM BRINGING ANY AMENDED SUBSTANTIVE CONSOLIDATION CLAIM IN THIS ADVERSARY PROCEEDING
Defendants argue, in the alternative, that "even if the Court were to accept ... that substantive consolidation is a ‘real property claim’ ... there is no ‘real property claim’ in this case because the substantive consolidation claim must be refiled, if at all, in a separate proceeding." Defendants’ Reply in Support of Motion to Expunge, ECF 79 at 10-11 (citing California Code of Civil Procedure § 405.20 ). Defendants contend that any amended substantive consolidation claim cannot be refiled in this action based on the court's December 2019 Order. ECF 79 at 11 (citing Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss Plaintiff's First Amended Complaint , ECF 57 at 2). Defendants’ position, however, overstates the court's ruling. In the December 2019 Order, the court stated:
As suggested by the court, if Plaintiff intends to file an amended substantive consolidation claim or motion, he should file it as a separate proceeding so that the creditors of debtor and the nondebtor party defendants need not involve themselves in the other claims in this adversary proceeding.
ECF 57 at 2.
The court suggested that Plaintiffs file any amended substantive consolidation claim separately from this adversary proceeding. It does not follow that "the substantive consolidation claim cannot be refiled in this action[.]" ECF 79 at 11. The court's suggestion was pursuant to the court's case management authority under 11 U.S.C. § 105 and based on interests of efficiency and fairness to all parties in interest. April 30, 2020 Hearing on Defendants’ Motion to Expunge Lis Pendens at 12:10-12:12 p.m., Adv. No. 2:19-ap-01332-RK. The court's suggestion was permissive, not mandatory.
Moreover, Plaintiffs addressed the technical requirement in California Code of Civil Procedure § 405.20 during the April 30, 2020 hearing on the Motion. April 30, 2020 Hearing on Defendants’ Motion to Expunge Lis Pendens at 11:38-11:40 a.m., Adv. No. 2:19-ap-01332-RK (statements of Plaintiffs’ counsel) ("If necessary, we will amend [the substantive consolidation claim], amend this complaint, and bring [the substantive consolidation claim] in this complaint, if that is what is required to keep the lis pendens on. The fact that we have the opportunity to not bring this again, or to bring it in a separate proceeding, shouldn't change the conclusion that granting the Motion to Expunge would be premature."); id. at 12:25-12:28 p.m. (statements of Plaintiffs’ counsel suggesting Plaintiffs first bring any amended substantive consolidation claim in this adversary proceeding, then seek to sever the claim into a separate adversary proceeding).
The facts of this case are perhaps usual because no purported "real property claim" is currently before the court since the one claim was dismissed. However, that one claim, the Substantive Consolidation Claim, is derived from the Amended Complaint, and that claim has been dismissed without prejudice, but with leave to amend, so as discussed above, expungement while leave to amend is pending would be premature. The court finds that its suggestion in the December 2019 Order, ECF 57 at 2, does not preclude Plaintiffs from satisfying the technical requirements of California Code of Civil Procedure § 405.20 and bringing any amended substantive consolidation claim in this action.
iv. DEFENDANTS’ REQUEST FOR FEES AND COSTS IS DENIED
Defendants contend that Trustee recorded the lis pendens on the Properties without "substantial justification," such that the court should award Defendants their attorneys’ fees and costs as a prevailing party pursuant to California Code of Civil Procedure § 405.38. Motion to Expunge Lis Pendens, ECF 63 at 13-14. The court adopts its tentative ruling as set forth on the record during the April 30, 2020 hearing, denying the Motion as to the request for fees and costs. April 30, 2020 Hearing on Defendants’ Motion to Expunge Lis Pendens at 12:13–12:15 p.m., Adv. No. 2:19-ap-01332-RK. During the hearing, the court noted that neither party disputed that whether a substantive consolidation claim may be a "real property claim" under California law was an issue of first impression. Id. Even if the court would grant the Motion, the court determines that there is substantial justification for asserting that a substantive consolidation order would "affect ... title to, or the right to possession of, specific real property[.]" California Code of Civil Procedure § 405.4.
v. THE NUNC PRO TUNC QUESTION IS NOT RIPE FOR ADJUDICATION
In their Supplemental Brief, Defendants argue that the Supreme Court's decision in Acevedo "is inconsistent with granting substantive consolidation nunc pro tunc. " Defendants’ Supplemental Brief, ECF 86 at 3. Defendants contend that "since substantive consolidation can be granted, if at all, only prospectively, and not nunc pro tunc to the commencement of the ... bankruptcy case," the Properties cannot be property of the bankruptcy estate, and therefore, the Substantive Consolidation Claim cannot be a "real property claim" under the California expungement statutes. Id. at 4 (citing 11 U.S.C. § 541(a)(1) ).
Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ––– U.S. ––––, 140 S. Ct. 696, 206 L.Ed.2d 1 (2020).
In their Supplemental Brief, Plaintiffs assert that Defendants’ reliance on Acevedo is misplaced because nunc pro tunc substantive consolidation orders are permissible under Acevedo. Plaintiffs contend, in the alternative, that Acevedo is inapposite because the decision does not affect whether a substantive consolidation claim is a "real property claim" under California law. Plaintiffs’ Supplemental Brief, ECF 87 at 3-4. Plaintiffs also note that 11 U.S.C. § 541(a)(7) provides that the bankruptcy estate includes "[a]ny interest in property that the estate acquires after the commencement of the case[,]" and therefore any prospective substantive consolidation order does not alter the order's effect on title to or possession of real property. Id. at 4-5.
Plaintiffs seem to have the better argument. "Property of the estate includes ‘any interest in property that the estate acquires after the commencement of the case.’ " Carroll v. Tri-Growth Centre City Ltd. (In re Carroll), 903 F.2d 1266, 1270 (9th Cir. 1990) (citing 11 U.S.C. § 541(a)(7) ); see also MacKenzie v. Neidorf (In re Neidorf), 534 B.R. 369, 371 (9th Cir. BAP 2015) (" Section 541(a)(7) makes property of the estate any interest in property that the estate (not the debtor) acquires after the petition date."). Defendants ask the court to ignore entire subsections of 11 U.S.C. § 541(a) and find that all estate property acquired after the petition date—whether by turnover, substantive consolidation, or otherwise—must somehow be retroactively acquired as of the commencement of the bankruptcy case, while also not disturbing the Supreme Court's recent holding in Acevedo. A substantive consolidation order, whether prospective or nunc pro tunc to the petition date, makes the assets of a consolidated entity property of the estate. As discussed above, a substantive consolidation claim therefore affects title to or right to possession of a putative consolidated non-debtor's property.
See, e.g. , 11 U.S.C. § 541(a)(3) ("Any interest in property that the trustee recovers [after the commencement of the case] under section 329(b), 363(n), 543, 550, 553, or 723 of this title."), (a)(7) ("Any interest in property that the estate acquires after the commencement of the case.").
Further, the Motion before the court seeks expungement of two lis pendens under the "real property claim" prong of California's expungement statutes, California Code of Civil Procedure § 405.4. The court agrees with Plaintiffs that "whether substantive consolidation is ordered nunc pro tunc or merely prospectively ... [only] alters the date upon which the effect is deemed to have occurred." Plaintiffs’ Supplemental Brief, ECF 87 at 4. Before Acevedo, bankruptcy courts in the Ninth Circuit had been permitted to substantively consolidate non-debtor estates nunc pro tunc under certain circumstances. Bonham, 229 F.3d at 763 ("The bankruptcy court did not err in substantively consolidating the estates, nor in doing so nunc pro tunc. "). After Acevedo, that authority may be in doubt. In re Telles, No. 8-20-70325-reg, Ch. 13, 2020 Bankr. LEXIS 1167, 2020 WL 2121254, at *4 (Bankr. E.D.N.Y. Apr. 30, 2020) ("The landscape of the law is different post- Acevedo , and [the bankruptcy court] is bound to follow the precedent set by the Supreme Court."). Defendants may be correct that Acevedo precludes the court from using "a nunc pro tunc order to give effect to an order of substantive consolidation before such time that the court actually intended to enter an order of substantive consolidation." Defendants’ Supplemental Brief, ECF 86 at 5. Plaintiffs argue that nunc pro tunc substantive consolidation orders survive Acevedo because the orders " ‘reflect the reality’ of what has already occurred." Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ––– U.S. ––––, 140 S. Ct. 696, 700-701, 206 L.Ed.2d 1 (2020) (quoting Missouri v. Jenkins, 495 U.S. 33, 49, 110 S.Ct. 1651, 109 L.Ed.2d 31 (1990) ). Whether Bonham and Acevedo may co-exist regarding the issuance of substantive consolidation orders nunc pro tunc , however, is not ripe for adjudication here. It would be premature for the court to issue, in essence, an advisory opinion on the merits of any to-be-filed amended substantive consolidation claim and the relief requested therein.
Accordingly, the court determines that Acevedo does not affect whether a substantive consolidation claim may be a "real property claim" under California law. The court will address any request for relief when, or if, Plaintiffs file an amended substantive consolidation claim. The court declines to decide whether, after Acevedo , courts in the Ninth Circuit may issue an order for substantive consolidation nunc pro tunc to the petition date.
III. CONCLUSION
For the foregoing reasons, the Motion is granted in part and denied in part as the court determines the following:
1. The Motion is denied to the extent that Defendants seek expungement of the two lis pendens under California Code of Civil Procedure §§ 405.20, 405.30, 405.31, and 405.4 at this time.
2. The Motion is conditionally granted in part and the lis pendens ordered expunged only if Plaintiffs do not file an amended substantive consolidation claim within 90 days of the entry of this memorandum decision and order thereon.
3. The Motion is denied to the extent that Defendants seek an award of attorneys’ fees and costs pursuant to California Code of Civil Procedure § 405.38.
4. The Motion is denied to the extent that Defendants seek expungement of the lis pendens following the Supreme Court's decision in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ––– U.S. ––––, 140 S. Ct. 696, 206 L.Ed.2d 1 (2020), and such denial is without prejudice.
IT IS SO ORDERED.