Opinion
SACV 15-01515-VAP
03-31-2017
In re: Walldesign, Inc.
MEMORANDUM AND ORDER AFFIRMING IN PART AND REVERSING IN PART THE JUDGMENT OF THE BANKRUPTCY COURT AND REMANDING FOR FURTHER PROCEEDINGS
Michael Bello ("Bello") was the sole shareholder, sole director, and president of Walldesign, Inc. ("Walldesign"), a California corporation. (See Doc. No. 21 ("Responsive Br.") at 5.) Bello opened a bank account in Walldesign's name but kept it secret from others at Walldesign. (Id. at 5-6.) He covertly placed Walldesign funds into this account and spent them on his personal expenses. (Id. at 6-7.) Bello spent approximately $667,355.60 of the funds in this account on services provided by Appellant David Abreu Vineyard Management, Inc. in connection with Bello's vineyard, Bello Family Vineyard, LLC. (Id. at 7.)
Walldesign filed its Chapter 11 petition for relief on January 4, 2012. The Official Committee ("the Committee") of Unsecured Creditors of the Estate of Walldesign was appointed on January 26, 2012. The Committee brought a number of separate adversary proceedings to recover payments Bello made from the secret account, including the payments to Appellants David Abreu and David Abreu Vineyard Management, Inc. (collectively, "Appellants").
Brian Weiss is now the acting trustee of the Walldesign Liquidation Trust, which is the successor-in-interest to the rights of the Committee. (Opening Br. at 3.) The Court considers the Committee the Appellee for ease of reference.
Appellee filed a motion for summary judgment against Appellants on April 22, 2015. The bankruptcy court granted Appellee's motion for summary judgment and Appellants timely filed the instant appeal.
After consideration of the papers filed by the parties in this appeal, the Court AFFIRMS the bankruptcy court's decision in part and REVERSES the bankruptcy court's decision in part.
I. BACKGROUND
The Bankruptcy Court held that Appellants received actual and constructive fraudulent transfers from Walldesign and that both David Abreu and David Abreu Vineyard Management, Inc. ("Vineyard Management") were the initial transferees. (See E.R. at 72-75.)
Citations to Appellants' excerpts of record (see Doc. Nos. 17, 17-1 to 17-11) are as follows: "E.R. at [page number]."
In this appeal, Appellants filed their opening brief on January 15, 2016. (See Doc. No. 15 ("Opening Br.").) Appellee filed his responsive brief on February 26, 2016. (Responsive Br.) Appellants filed their reply brief on March 17, 2016. (See Doc. No. 23 ("Reply Br.").)
II. LEGAL STANDARD
A "district court functions as an appellate court in reviewing a bankruptcy decision and applies the same standards of review as a federal court of appeals." In re Crystal Props., Ltd., 268 F.3d 743, 755 (9th Cir. 2001) (quoting another source). Accordingly, "[a] district court reviews a bankruptcy court's conclusions of law and interpretation of the Bankruptcy Code de novo." In re Orange Cnty. Nursery, Inc., 439 B.R. 144, 148 (C.D. Cal. 2010). It reviews factual findings for clear error, and it "must accept the bankruptcy court's findings of fact unless, upon review, the court is left with the definite and firm conviction that a mistake has been committed by the bankruptcy judge." In re Greene, 583 F.3d 614, 618 (9th Cir. 2009) (citing Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004)).
The bankruptcy court's decision to grant summary judgment is reviewed de novo. In re Raintree Healthcare Corp., 431 F.3d 685, 687 (9th Cir. 2005). "Summary judgment is to be granted if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, show that there is no genuine issue as to a material fact and the moving party is entitled to judgment as a matter of law." Id.
III. FACTS
The following facts are not in dispute.
A. Walldesign
Walldesign is a California corporation that was established in 1983. (Responsive Br. at 5.) Until 2012, it installed drywall, insulation, acoustical material, and plaster, and provided construction-related services to single and multi-family housing projects in California, Nevada, and Arizona. (Id.) Bello was Walldesign's sole shareholder, sole director, and president. (See E.R. at 264.)
B. The Secret Account
On November 1, 2002, Bello opened a bank account in Walldesign's name at Preferred Bank in Irvine, California ("the Secret Account"). (Responsive Br. at 5.) He used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him authority as an agent of Walldesign to open the Secret Account. (See E.R. at 282-300.) He did not disclose the Account in Walldesign's general ledger or other books and records, and did not disclose the Secret Account to Walldesign's management or creditors. (Responsive Br. at 6.)
Walldesign purchased materials for its business in bulk, and its suppliers occasionally issued rebates or refunds for these purchases. (Id.) Rather than deduct the refund or rebate from the total invoice, the suppliers issued checks to Walldesign for the difference. (Id.) Bello deposited these checks into the Secret Account and actively concealed the deposits from Walldesign's management and employees, its creditors, and the Bankruptcy Court. (Id.)
After it filed a voluntary Chapter 11 petition, Walldesign filed its Schedules and Statements of Financial Affairs, executed by Bello under penalty of perjury, with the Bankruptcy Court. (Responsive Br. at 6.) Bello did not disclose the Secret Account on these Schedules. (Id.)
Bello used the money in the Secret Account to cover expenses unrelated to Walldesign, including operating costs for Bello Family Vineyard, a winery, and Michael Bello LLC, a horseracing stable, as well as other entities he controlled; his Las Vegas casino bills; his personal expenses charged on his American Express credit card; and his homeowners' association and country club fees for two private golf courses. (Id. at 6-7.) C. David Abreu and David Abreu Vineyard Management, Inc.
David Abreu, a rancher from St. Helena, California, founded David Abreu Vineyard Management, Inc. ("Vineyard Management") in 1980. (Opening Br. at 4.) In 2007, Bello hired Vineyard Management to develop and provide services for Bello's vineyard, Bello Family Vineyard. (Id.)
Vineyard Management sent monthly invoices to Bello on Vineyard Management letterhead that contained the Vineyard Management corporate address and contact information. (Id.) Bello made payments for services rendered by Vineyard Management, using checks drawn on the Secret Account. (Id.) These checks bore the name "WALLDESIGN INCORPORATED." (Responsive Br. at 7.)
Although the invoices were always sent on Vineyard Management letterhead, Bello varied the payee on the checks that he submitted as payment. (Opening Br. at 7.) These checks were made out to "David Abreu Vineyard," "David Abreu Vineyard Management," and sometimes just "David Abreu." (Id.) Whatever payee was listed on the checks, the checks were endorsed by Vineyard Management and deposited into the Vineyard Management corporate bank account. (Id. at 8.)
IV. DISCUSSION
A. Actual Fraudulent Transfers
Appellants assert that Appellee failed to provide any direct evidence, or sufficient circumstantial evidence, to establish that Bello's payments to Vineyard Management were made with the intent to hinder, delay, or defraud his creditors. (Opening Br. at 10.) Thus, Appellants contend that the bankruptcy court erred in finding that a number of Bello's payments to Vineyard Management were actual fraudulent transfers and granting summary judgment to Appellee. (Opening Br. at 10-16.)
California Civil Code section 3439.04 provides that:
[a] transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.Cal. Civ. Code § 3439.04(a)(1).
In cases of fraudulent transactions, where the real intent of the parties is solely within their own knowledge, "[d]irect proof of a transfer and of a fraudulent intent is often an impossibility. Hence proof indicative of a transfer and of fraud may come by inference from circumstances surrounding the transaction, the relationship and interest of the parties." Menick v. Goldy, 131 Cal. App. 2d 542, 548, (1955). California Civil Code section 3439.04 includes the following circumstantial factors for a court to consider in making a determination regarding the intent of the debtor:
(1) Whether the transfer or obligation was to an insider.Cal. Civ. Code §§ 3439.04(b)(1)-(11).
(2) Whether the debtor retained possession or control of the property transferred after the transfer.
(3) Whether the transfer or obligation was disclosed or concealed.
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(5) Whether the transfer was of substantially all the debtor's assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.
This list of relevant factors "provides neither a counting rule, nor a mathematical formula." In re Beverly, 374 B.R. 221, 236 (B.A.P. 9th Cir. 2007), aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008). "No minimum number of factors tips the scales toward actual intent." Id.
Here, three badges of fraud are particularly relevant: the transfers were concealed from Walldesign; Walldesign did not receive reasonably equivalent value in exchange for the transfers; and the transfers and Secret Account were concealed from Walldesign's creditors.
As explained below, the Secret Account was a Walldesign account. Further, Bello did not disclose the Account in Walldesign's general ledger or other books and records, and did not disclose the Secret Account to Walldesign's management or creditors. (Responsive Br. at 6.) Further, no evidence has been presented to suggest that the services provided by Appellants to Bello Family Vineyard provided any value to Walldesign.
There is no minimum number of factors required for a court to make a finding of fraudulent intent. In re Beverly, 374 B.R. at 236. This Court finds that because the subject transfers were concealed from Walldesign and its creditors, and no evidence has been presented that Walldesign received any value from Abreu's services, there is no genuine dispute as to whether or not the subject transfers were made with actual intent to hinder, delay, or defraud Walldesign's creditors. Accordingly, the bankruptcy court did not err in finding that the transfers were made with the requisite fraudulent intent to be classified as actual fraudulent transfers.
B. The Initial Transferee
Appellants assert that the bankruptcy court erred in finding that Appellants were the initial transferees as a matter of law. (Opening Br. at 2.)
1. Defining "Initial Transferee"
Under the Bankruptcy Code, a trustee of the debtor may recover a fraudulent transfer of estate property from either "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." See Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195, 1197 (9th Cir. 1997) (quoting 11 U.S.C. § 550(a)).
The distinction between an "initial transferee" and a subsequent transferee is critical. See id. "The trustee's right to recover from an initial transferee is absolute." Id. at 1197-98 (quoting Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 547 (9th Cir. 1991)). A subsequent transferee, on the other hand, has a defense. A trustee may not recover from a subsequent transferee if "the subsequent transferee accepted the transfer for value, in good faith, and without knowledge of the transfer's voidability." Id. at 1198; see also 11 U.S.C. § 550(b)(1). Therefore, if Appellants are initial transferees, the Committee has an absolute right to recover the transfers at issue.
"Section 550(a) does not define the phrase 'initial transferee.'" In re Incomnet, Inc., 463 F.3d 1064, 1069 (9th Cir. 2006). Over the years, judges have crafted two distinct tests to determine whether a party is an "initial transferee" under § 550(a)(1): the "dominion test" and the "control test." Id. The Ninth Circuit has explicitly adopted the dominion test; it has declined to adopt the control test. See id. at 1070.
The Bankruptcy Code defines "transfer" broadly to mean "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with: (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54). Courts generally do not, however, treat the terms "transfer" and "initial transferee" as coterminous. See, e.g. Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890, 894 (7th Cir. 1988) ("'Transferee' is not a self-defining term; it must mean something different from 'possessor' or 'holder' or 'agent'. To treat 'transferee' as 'anyone who touches the money' and then to escape the absurd results that follow is to introduce useless steps . . . .").
"Under the dominion test, a transferee is one who has dominion over the money or other asset, the right to put the money to one's own purposes." Id. (citation, quotation marks, and alterations omitted). The test focuses on whether someone "had legal authority over the money and the right to use the money however" desired - for example, to invest the money in "lottery tickets or uranium stocks." Id. at 1070, 1073. The control test, on the other hand, "takes a more gestalt view of the entire transaction to determine who, in reality, controlled the funds in question." Id. at 1071.
The leading case on the dominion test, Bonded Financial Services, focuses on policy considerations. See Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988). Initial transferees are "the best monitor[s]" of fraudulent conveyances, it stated. Id. at 892-93. This status renders them defenseless to a trustee's right to recover fraudulent conveyances. Id. "[S]ubsequent transferees," on the other hand, "usually do not know where the assets came from and would be ineffectual monitors if they did." Id. They, therefore, have a defense.
In its most recent statement on the issue, the Ninth Circuit Court of Appeals echoed these considerations. See Mano-Y&M, Ltd. v. Field (In re The Mortgage Store), 773 F.3d 990 (9th Cir. 2014). In In re The Mortgage Store, the Ninth Circuit noted that "[i]n virtually every case involving a bankrupt entity, a third party will be injured because the debtor's obligations to creditors, by definition, outstrip its assets." Id. at 997. The "injury must fall on either the transferee of the conveyance or the debtor's creditors." Id. A court's aim in these cases "must be to allocate risk such that the parties tending to have the lowest monitoring costs [] bear the costs of a debtor's failings." Id. (citing Bonded Fin. Servs., 838 F.2d at 892-93). Congress determined that initial transferees have the lowest monitoring costs, and it therefore placed the risk of fraudulent conveyances on them rather than creditors. Id.
The In re The Mortgage Store Court further noted that "it is unreasonable to assume" a long-time president of a corporation from where a transfer came "has the proper incentives to monitor [that corporation] for fraud. . . . Charging a party with monitoring for fraud the entity that pays its debts would undermine the very structure of § 550." Id. at 998 n.1.
This notion is not novel. The Ninth Circuit in In re Video Depot earlier adopted the view that "[t]he mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control." 127 F.3d at 1199 (citing Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel Properties Ltd. P'ship), 99 F.3d 151, 156 (4th Cir. 1996)). Many principals of corporations "exercise de facto control over the funds of the corporations they manage," it stated. Id. (quoting Bowers, 99 F.3d at 156). These principals "can choose to cause their corporations to use those funds appropriately or inappropriately. The distinction is only relevant to the question whether the principal's conduct amounted to a breach of duty to the corporation." Id. (quoting Bowers, 99 F.3d at 156). It is not relevant to whether the principal is an initial transferee. A rule making "every agent or principal of a corporation . . . the initial transferee when he or she effected a transfer of property in his or her representative capacity" would give "too much power to an unscrupulous insider to effect a fraudulent transfer." Id.
Although the In re Video Depot Court made this statement while summarizing other decisions, it sided with those holdings, and therefore adopted their reasoning. In re Video Depot, Ltd., 127 F.3d at 1199 (declining "to depart from the considered judgment of the[se] other circuits").
The In re Video Depot Court "conclude[d] that [a principal's] control over the business operations of [the corporation] does not, in itself, compel a finding that [the principal] had dominion and control over the funds transferred from the [the corporation] to [a third party]." Id. at 1199-1200.
As these cases demonstrate, a corporation's principal who effects a transfer from the corporation in his representative capacity does not have dominion over those funds in his personal capacity, and therefore does not constitute an initial transferee of those funds under the Bankruptcy Code.
2. Applying the Definition of "Initial Transferee"
Applying this definition of "initial transferee," the Court holds that Bello was not the initial transferee. Bello did not have dominion over the funds in the Secret Account except in his capacity as a Walldesign representative. Moreover, he was the sole shareholder and president of Walldesign, and he therefore did not have the proper incentives to monitor Walldesign for fraud. Considering him the initial transferee of a transfer from Walldesign would undermine the structure of § 550(a)(1).
Courts have suggested that a corporate principal's transfer of corporate funds into a personal bank account may afford the principal dominion over those funds. See In re Video Depot, 127 F.3d at 1199. The Secret Account was not, however, Bello's personal bank account. Bello opened it in Walldesign's name as a Walldesign representative, and he deposited Walldesign funds into the Account. The checks issued from the Secret Account bore the title, "WALLDESIGN INCORPORATED."
Appellants point to several facts to show that the Secret Account was Bello's personal account: Bello used his personal address to open the Secret Account; the account was never included on Walldesign's financial statements; and Bello's wife - who was not a Walldesign employee - was a signatory to the Account. (Opening Br. at 25).
On the other hand, Bello used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him signing authority as an agent of Walldesign to open the Secret Account. (See E.R. at 284-94.) Hence, the Secret Account was a Walldesign account.
Although the transfers Bello made from the Secret Account were improper and breached his duty to the corporation, he effected them in his capacity as a Walldesign representative. He did not, therefore, have dominion over the funds in the Secret Account in his personal capacity, i.e., he was not the initial transferee.
3. David Abreu's Personal Liability
As explained above, the payments from Walldesign for services rendered by Vineyard management were the initial fraudulent transfers. Appellants contend that, even if Vineyard Management was the initial transferee, the bankruptcy court erred by holding David Abreu personally liable for the checks payable to "David Abreu" because, by issuing those checks, Bello intended to pay Vineyard Management for services that it provided to Bello Family Vineyards. (Opening Br. at 16.)
Under section 3110(a) of the California Commercial Code:
The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person. If more than one person signs in the name or behalf of the issuer of an instrument and all the signers do not
intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.Cal. Com. Code § 3110.
Throughout the course of Bello and Vineyard Management's business relationship, Bello issued checks to Vineyard Management under a variety of different names, including "David Abreu Vineyard," "David Abreu Vineyrad Management, Inc.," and "David Abreu Vineyard Management." (See E.R. at 305, 515, 523). None of these payee variations employed the correct legal entity, David Abreu Vineyard Management, Inc. In order to attribute those payments to David Abreu Vineyard Management, Inc. correctly, the bankruptcy court implicitly applied section 3110 and considered Bello's intent in issuing the payment. Paramount in the determination of Bello's intent are the invoices that were issued by Vineyard Management. These invoices were issued for services rendered by Vineyard Management, and the payment amounts on the checks issued by Bello were identical to the amounts invoiced by Vineyard Management. (See e.g. E.R. at 514-15, 522-23). These facts demonstrate that Bello intended to pay Vineyard Management with these checks. Thus, the bankruptcy court correctly attributed these payments to David Abreu Vineyard Management, Inc.
The checks made payable to "David Abreu" were also made for identical amounts to what was invoiced by Vineyard Management. (See e.g. ER at 607-608.) As with the other payee variations, the checks issued to "David Abreu" were issued by Bello for services rendered by Vineyard Management. (Opening Br. at 19.) The only difference between these checks, and checks that the bankruptcy court determined were payments to Vineyard Management, is that the former were made payable to "David Abreu" instead of "David Abreu Vineyard," "David Abreu Vineyrad Management, Inc.," or "David Abreu Vineyard Management." The facts presented by Appellants demonstrate that Bello had a habit of deviating from the correct legal name, "David Abreu Vineyard Management, Inc." when paying for services rendered by Vineyard Management. This information evidences that there is a genuine dispute regarding whether Bello intended to pay David Abreu, the individual, or Vineyard Management, when Bello listed "David Abreu" as the payee on checks that were payment for services rendered by Vineyard Management.
Appellee asserts that Bello's intent is not material because the dominion test is concerned purely with David Abreu's legal rights. (Responsive Br. at 26.)
As explained by the Ninth Circuit in In re The Mortgage Store, "a transferee is one who . . . has dominion over the money or other asset, the right to put the money to one's own purposes." In re Mortg. Store, 773 F.3d at 995. David Abreu's name was written on a number of checks that were issued by Bello for services rendered by Vineyard Management. Abreu thus had the ability to use the money for his own purposes because he could have cashed the checks or deposited them into his personal bank account. Nevertheless, Bello may have intended to issue payment to Vineyard Management. Under California law, "[t]he person to whom an instrument is initially payable is determined by the intent of the . . . issuer of the instrument." Cal. Com. Code § 3110. Therefore, if the instrument was intended to be payable only to Vineyard Management, it was not payable to Abreu personally.
Hence, there is a genuine issue as to whether Bello intended to pay David Abreu or Vineyard Management when he issued checks to "David Abreu" for services rendered by Vineyard Management, and that this fact is material to whether or not Abreu took dominion over the funds in his personal capacity.
C. Affirmative Defenses
Appellants contend that the bankruptcy court erred in its application of available affirmative defenses under the California Uniform Fraudulent Transfers Act and the Bankruptcy Code.
As written at the time of the relevant transfers, the California Uniform Fraudulent Transfers Act stated that an actual fraudulent transfer is not voidable "against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee." Cal. Civ. Code § 3439.08(a) (2005)(effective July 7, 2005). Before the 2015 amendment, the Ninth Circuit stated that a court's analysis of the availability of affirmative defenses under section 3439.08 "require[s] the determination of whether 'reasonably equivalent value' was transferred from the transferee to the debtor." In re AFI Holding, Inc., 525 F.3d 700, 707 (9th Cir. 2008).
The California Uniform Fraudulent Transfers Act, now the California Uniform Voidable Transactions Act, was amended in 2015, and now states that an actual fraudulent transfer is not voidable "against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee." Cal. Civ. Code § 3439.08(a)(2015)(effective January 1, 2016)(emphasis added). However, the legislative history clarifies that the amendment "would limit the applicability of the modifications to the act proposed by [the] bill to a right of action that accrued, transfer made, or obligation incurred on or after the effective date of [the] bill." CORPORATIONS—PUBLIC UTILITIES—RULES AND REGULATIONS, 2015 Cal. Legis. Serv. Ch. 44 (S.B. 161) page no. 96. Thus, the Court uses the version of the California Uniform Fraudulent Transfers Act that was in effect at the time of the subject transfers. --------
Here, Appellants do not contend that Walldesign received any value from the work done by Vineyard Management on Bello Family Vineyards. Appellants merely assert that the statute, as previously written, did not expressly require that reasonably equivalent value be determined from the perspective of the debtor. (Opening Br. at 29.) Further, Appellants argue that the Ninth Circuit's statement in In re AFI Holding is merely dicta and not binding on this Court. (Reply Br. at 16). The Ninth Circuit's statement in In re AFI Holding that reasonably equivalent value should be determined from the perspective of the debtor is consistent with the policy considerations of the California Uniform Fraudulent Transfers Act, which are further evidenced by the 2015 amendments that clarify this point. Thus, this Court finds that the bankruptcy court did not err in its finding that Appellants did not provide reasonably equivalent value to Walldesign in exchange for the money paid for Appellants' services.
Section 3439.08 (a) requires that the transfer be taken in both good faith and for reasonably equivalent value. The bankruptcy court did not err in its finding that Appellants did not provide reasonably equivalent value to Walldesign, and thus did not err in finding that Appellants were not entitled to the affirmative defense set forth in section 3439.08 (a). This Court does not address the bankruptcy court's analysis of whether or not Appellants received the transfer in good faith.
In addition, as explained above, the bankruptcy court did not err in finding that Appellant David Abreu Vineyard Management, Inc. was the initial transferee. Thus, the bankruptcy court did not err in finding that Appellants were not entitled to affirmative defenses under California Civil Code section 3439.08(b) and Bankruptcy Code Section 550(b) because Appellants were not subsequent transferees.
D. Evidentiary Objections
Appellants assert that the bankruptcy court erred in admitting the declarations of Jack Reitman and Brian Weiss. (Opening Br. at 34-35.) Further, Appellants contend that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without citing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (Id. at 36-37.) Finally, Appellants argue that the bankruptcy court erred in finding that there was no genuine issue of material fact concerning the date of Walldesign's insolvency. (Id. at 37.)
A district court reviews a "bankruptcy court's evidentiary rulings for an abuse of discretion." In re Slatkin, 525 F.3d 805, 811 (9th Cir. 2008)(citations omitted). "To reverse on the basis of an erroneous evidentiary ruling, [the reviewing court] must conclude not only that the bankruptcy court abused its discretion, but also that the error was prejudicial." Id.
1. The Reitman and Weiss Declarations
Appellants contend that the bankruptcy court abused its discretion in admitting the declarations of Jack Reitman and Brian Weiss because they contain material that is based upon information and belief as well as impermissible hearsay. (Opening Br. at 34-35.) Appellee asserts that the declarations were admissible as summaries of voluminous documents under Federal Rule of Evidence 1006.
Federal Rule of Evidence 1006 provides that:
The proponent may use a summary, chart, or calculation to prove the content of voluminous writings, recordings, or photographs that cannot be conveniently examined in court. The proponent must make the originals or duplicates available for examination or copying, or both, by other parties at a reasonable time and place. And the court may order the proponent to produce them in court.Fed. R. Evid. 1006.
This court has reviewed Appellants' evidentiary objections and agrees with the bankruptcy court that the Reitman and Weiss declarations were properly admissible under Rule 1006. It appears that these declarations were summaries of the case background and shortened the record by over 2,000 pages. (Responsive Br. at 40.) Although Appellants allege that Appellee failed to provide Appellants with sufficient time to review the summarized documents, Appellants have not explained how this failure, if it occurred, was prejudicial. This court finds that the bankruptcy court did not abuse its discretion in admitting the Reitman and Weiss Declarations, and even if it did, any potential abuse of discretion was not prejudicial.
2. The Existence of an Actual Creditor at the Time of the Transfers
Appellants contend that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without providing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (Opening Br. at 36-37.)
Under California law, an action to void an actual fraudulent transfer requires the existence of a creditor whose claim "arose before or after the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.04. An action to void a constructive fraudulent transfer requires the existence of "a creditor whose claim arose before the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.05.
Here, Appellants contend that Appellee failed to include any admissible evidence indicating the existence of these claims in the materials submitted in support of his motion for summary judgment. (Opening Br. at 36.) Appellee argues that he did prove the existence of these claims with the proof of claims filed on the main bankruptcy docket. (Responsive Br. at 42.)
Federal Rule of Evidence 201 provides that a court may take judicial notice on its own of an adjudicative fact that "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. Thus, the bankruptcy court could have taken judicial notice of the existence of proofs of claim filed by Walldesign creditors on the main bankruptcy docket.
Further, even if the bankruptcy court did abuse its discretion in taking judicial notice of the existence of claims, Appellants have not asserted that these claims did not in fact exist. Thus, Appellants have failed to show that they were prejudiced in any way. Therefore, the bankruptcy court did not err by taking judicial notice of the existence of claims against Walldesign by creditors prior to October 31, 2008.
3. The Debtor's Solvency Date
Appellants contend that the bankruptcy court erred in its determination that Walldesign was insolvent as of October 31, 2008 despite Appellants' contention that there was a genuine issue of material fact concerning the date of Walldesign's insolvency. (Opening Br. at 37.)
The bankruptcy found that Walldesign was insolvent by no later than October 31, 2008, which was the opinion of Appellee's expert. (See E.R. at 69, 663-725.) Appellants point to Walldesign's balance sheets, which show that the company was solvent through 2010, and argue that these balance sheets demonstrate that there is a genuine issue of material fact regarding the date of Walldesign's insolvency.
Under California law, the solvency of a debtor can be determined by the application of one of three tests. "A debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets." Cal. Civ. Code § 3439.02(a). Additionally, "[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent. Cal. Civ. Code § 3439.02(c). The third test for insolvency requires a determination of whether the debtor "was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction." Cal. Civ. Code § 3439.04(a)(2)(A).
Here, Appellee's expert's methodology addressed the "Balance Sheet Test" under California Civil Code §3439.02(a), and determined that the sum of Walldesign's debts was greater than all of its assets by no later than October 31, 2008. (See E.R. at 677.) In determining the date of Walldesign's insolvency, Appellee's expert used the "fair value" method as required by California Civil Code 3439.02(a), using the balance sheet reports on which Appellants rely. (Id. at 677-78).
Appellants rely solely on Walldesign's balance sheets, which were created using generally accepted accounting principles ("GAAP") in order to demonstrate that Walldesign was solvent through 2010. (Opening Br. at 43.) California Civil Code section 3439.02(a) is clear that "fair valuation" rather than GAAP is the appropriate methodology to employ in a determination of insolvency. Cal. Civ. Code § 3439.02(a); See also In re Richmond Produce Co., Inc., 151 B.R. 1012, 1019 (Bankr. N.D. Cal. 1993), aff'd, 195 B.R. 455 (N.D. Cal. 1996)(explaining that generally accepted accounting principles do not control the determination of solvency because certain assets that are recognized under GAAP cannot be sold to satisfy a creditor's claim, and thus are not a component of fair value). Appellants have not challenged the methodology of Appellee's expert nor have they provided an analysis of Walldesign's insolvency that comports with the requirements of California Civil Code § 3439.02(a). Thus, Appellants have failed to demonstrate that there is a genuine issue of material fact concerning Walldesign's date of insolvency. Accordingly, the bankruptcy court did not err in holding the same.
E. Prejudgment Interest
The bankruptcy court has discretion to award prejudgment interest on avoided fraudulent transfers. In re Fink, 217 B.R. 614, 623 (Bankr. C.D. Cal. 1997). State law regarding prejudgment interest controls in cases where state law causes of action are asserted in bankruptcy by virtue of 11 U.S.C. §544(b). In re Acequia, Inc., 34 F.3d 800, 818 (9th Cir. 1994).
California Civil Code section 3287 governs the award of prejudgment interest in this action. Subsection (a) of that statute provides that "[a] person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that day . . . ." Cal. Civ. Code § 3287. "The rate of seven percent per annum is appropriate on the claims under state law, asserted by virtue of 11 U.S.C. § 544(b)." In re Richmond Produce Co., 151 B.R. at 1022. Prejudgment interest is calculated from the time that damages "vest" or become certain and "not the time liability to pay those amounts is determined." Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915, 921 (9th Cir. 2009).
Here, there is no dispute about the amount of damages because the subject transfers are definite in nature. Thus, the damages vested at the time that the transfers were made, and prejudgment interest should be calculated from the date of transfer. Accordingly, the bankruptcy court did not abuse its discretion by awarding prejudgment interest from the date of transfer, and did not err in finding that seven percent per annum is the appropriate interest rate.
V. CONCLUSION
The Court holds that the bankruptcy court did not err in finding that the transfers to Vineyard Management prior to October 31, 2008 were actual fraudulent transfers. The Court also holds that the bankruptcy court did not err in finding that Vineyard Management was the initial transferee, but that there is still a genuine issue of material fact as to whether David Abreu was also an initial transferee. Further, the Court holds that the bankruptcy court did not err in its analysis of the available affirmative defenses, did not err in its evidentiary holdings, and did not err in awarding prejudgment interest. The Court REMANDS the case to the bankruptcy court for further proceedings regarding the issue of David Abreu's personal liability.
IT IS SO ORDERED.
Dated: 3/31/17
/s/_________
Virginia A. Phillips
Chief United States District Judge