Brookview Apartments, L.L.C. v. Bronson Family Trust (In re Know Weigh, L.L.C.)

• Decision Date: 31 August 2017
• Docket Number: Adv. Proc. No.: 1:15–ap–01009–MB,Case No.: 1:13–bk–12439–MB
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: IN RE: KNOW WEIGH, L.L.C., Former Debtor. Brookview Apartments, L.L.C., Mike Hoer, & Laurie Hoer Plaintiffs, v. Bronson Family Trust, et. al. Defendants.

576 B.R. 189

IN RE: KNOW WEIGH, L.L.C., Former Debtor.

Brookview Apartments, L.L.C., Mike Hoer, & Laurie Hoer Plaintiffs,

v.Bronson Family Trust, et. al. Defendants.

Case No.: 1:13–bk–12439–MB

Adv. Proc. No.: 1:15–ap–01009–MB

United States Bankruptcy Court, C.D. California, SAN FERNANDO VALLEY DIVISION.

Signed August 31, 2017

Brian M. Rothschild, Parsons Behle & Latimer, Salt Lake City, UT, for Plaintiffs.

Lloyd K. Chapman, Law Office of Lloyd K. Chapman, Jeff Katofsky, Sherman Oaks, CA, Illyssa I. Fogel, Los Angeles, CA, Gary Salomons, Encino, CA, for Defendants.

Martin R. Barash, United States Bankruptcy Judge

I. INTRODUCTION

Two related motions are pending before the Court in this adversary proceeding. The first is Defendants' Motion to Dismiss Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(1), (5) and (6) and 11 U.S.C. §§ 544, 548(the "Motion To Dismiss"), filed by the Bronson Family Trust, David Bronson, Nancy Bronson, and Joslyn Bronson (collectively, the "Defendants"). Adv. Dkt. 175. The other is the Plaintiffs' Motion For Authorization Nunc Pro Tunc To Pursue Estate Claims To The Extent Further Authorization Is Required(the "Authorization Motion") filed by Brookview Apartments, L.L.C., Mike Hoer, and Laurie Hoer (collectively, the "Plaintiffs"). Adv. Dkt. 192.

Defendants argue that the complaint in this adversary proceeding (the "Complaint") should be dismissed because: (i) the Court does not have jurisdiction over the avoidance claims asserted pursuant to the Bankruptcy Code following dismissal of the underlying chapter 11 bankruptcy case, (ii) the Court should not exercise its discretion to retain jurisdiction over the complaint following dismissal of the underlying bankruptcy case, (iii) Plaintiffs do not have standing to pursue the avoidance claims asserted in the Complaint under the Bankruptcy Code because none of the Plaintiffs is a trustee or debtor in possession, (iv) Plaintiffs do not have standing to pursue bankruptcy avoidance claims because Plaintiffs did not previously seek or obtain the authority of the Court to pursue those claims, (v) Plaintiffs do not have standing to pursue bankruptcy avoidance claims because the bankruptcy estate no longer exists and cannot benefit from any recovery, (vi) Plaintiffs' allegations fail to state a claim upon which relief can be granted, (vii) the Court cannot or should not exercise supplemental jurisdiction over Plaintiffs' state law fraudulent transfer claims, and (viii) Plaintiffs' avoidance claims asserted under Utah's version of the Uniform Fraudulent Transfer Act do not state claims upon which relief can be granted because Utah law does not apply. Defendants also suggest in the title of their Motion to Dismiss that they seek dismissal based on defective service.

The Plaintiffs oppose the Motion to Dismiss and disagree with all of the Defendants' myriad arguments—including Defendants' argument that Plaintiffs failed to seek or obtain an order of the Court authorizing them to assert avoidance claims pursuant to the Bankruptcy Code. Nevertheless, Plaintiffs have filed the Authorization Motion seeking an order of the Court, nunc pro tunc to the time the complaint was filed, expressly granting Plaintiffs standing to pursue those claims. Defendants oppose this request, arguing that the request comes too late, that the Court does not have jurisdiction over it, and that granting such relief would unduly prejudice their rights.

After multiple rounds of briefing and oral argument, the Motion to Dismiss and Authorization Motion are ripe for decision. For the reasons set forth in this Memorandum of Decision, the Court DENIES the Motion to Dismiss and GRANTS, the Authorization Motion. This Memorandum of Decision constitutes the Court's findings and conclusions for purposes of Federal Rule of Bankruptcy Procedure 7052.

II. FACTUAL AND PROCEDURAL BACKGROUND

Know Weigh, L.L.C. (the "Debtor") is a California limited liability company formed in 2007. One of its members is defendant Bronson Family Trust, which holds a 35.75 percent ownership interest. Complaint at ¶¶ 8, 14. Shortly after formation, in June 2007, the Debtor purchased Plaintiffs' ownership interest in a multi-unit residential property located in Provo, Utah (the "Property"). At the time of sale, the Property was encumbered by a mortgage in favor of Wells Fargo Bank. Id. at ¶ 18.

The transaction was seller financed; Plaintiffs took an interest-bearing promissory note in their favor, dated June 28, 2007, in the amount of $1 million (the "Note," collectively with the other security documents, the "Security Documents"). Id. at ¶ 17. The Security Documents provided that the Note would mature with a balloon payment on April 1, 2013, and was to be secured by the Property, second only to Wells Fargo Bank. Id. at ¶ 18. Plaintiffs allege, however, that the Debtor insisted that the deed of trust not be recorded unless and until an event of a default occurred. Id.

The Plaintiffs allege that the Security Documents allowed the Debtor to perpetrate a scheme by deferring payments for years, while further encumbering the Property with mortgages to insiders, thereafter selling the Property, dissipating the proceeds to those same insiders, but all the while maintaining the impression that Plaintiffs had "secured status" as a second position lender. Id. at ¶ 18.

The Debtor deferred interest payments to Plaintiffs under the Note for two years after the sale. Id. at ¶ 19. Following the two-year deferral period, the Debtor made three late payments to Plaintiffs and then stopped making payments, allegedly relying on a condition in the Security Documents, allowing for certain payments be "avoided" if the Debtor maintained a "debt coverage ratio" of less than 1.20. Id.

Meanwhile, the Debtor allegedly encumbered the Property in favor of two affiliates owned in whole or in part, and controlled by, the managing member of the Debtor, Jeff Katofsky (respectively, the "Affiliates" and "Katofsky"). Id. at ¶ 20. Regarding these additional encumbrances, the Plaintiffs allege that: (i) no value was given to the Debtor; (ii) any claimed security interest in the Property never attached; (iii) and any claimed security interest in the Property was not validly perfected. Id. at ¶ 21.

On or about March 30, 2012, the Debtor sold the Property to a third party for approximately $1,865,000, and used $665,000 of the sale proceeds to pay off the first mortgage to Wells Fargo. Id. at ¶ 22. The Debtor allegedly disbursed an aggregate of $557,500 to the Affiliates in order to satisfy their encumbrances. Id. at ¶ 23. Plaintiffs allege the Debtor never informed them about the sale, the existence of additional encumbrances against the Property, or the distribution of the sale proceeds. Id. at ¶¶ 23, 32.

After satisfying sale expenses and making the foregoing distributions, the Debtor allegedly was left with approximately $411,230 in cash from the sale of the Property and no other assets. Id. at ¶ 24. The Debtor allegedly distributed $224,800 of those funds to the Bronson Family Trust by way of a check dated April 1, 2012, drawn on the Debtor's bank account. (the "Transfer"). Id. at ¶¶ 25, 26, Exh. A. The check allegedly was endorsed by and deposited into the personal account of defendants David and Nancy Bronson. Id. at 25, Ex. A.

Plaintiffs allege that the Debtor was insolvent immediately prior to the Transfer because it had less than $500,000 in cash, no business operations or income, and a debt to Plaintiffs in excess of $1,000,000. Id. at ¶¶ 24, 25, 26 & 28. Plaintiffs further allege that the Debtor was insolvent following the sale of the Property because it could not satisfy its debts as they came due, i.e., the Note. Id. at ¶ 29.

Just over a year later, on April 8, 2013 (the "Petition Date"), the Debtor filed its voluntary chapter 11 petition in this Court. Case Dkt. 1 (the "Petition"). According to Katofsky, the filing was precipitated by the default under the Note and the collection demands of Plaintiffs. Case Dkt. 110 at 9 (Decl. of Katofsky in support of Debtor's Motion for Voluntary Dismissal of the Bankruptcy Case). Prior to the Petition Date, the Debtor had used the net proceeds of the sale of the Property to purchase six residential properties in St. Louis, Missouri (the "St. Louis Properties"). Complaint at ¶ 32. As of the Petition Date, these properties constituted the Debtor's sole significant asset. Id.

Plaintiffs filed a proof of claim in the Debtor's chapter 11 case for $1,165,355, which constituted more than 94 percent of the total amount of all claims filed in the case (i.e., $1,235,980). See Creditor Register; see also Adv. Dkt. 192 at 3 (uncontroverted summary of claims filed and disposition thereof). After one of the claims was settled for a reduced amount and another withdrawn, the Plaintiffs' claim constituted 99.48% of all claims outstanding in the case. Dkt. 192 at 3. As of the ultimate dismissal of the case (discussed below), the Plaintiffs' proof of claim was the only outstanding claim in the case, constituting 100% of the claims against the Debtor and its estate. See Case Dkt. 110 at 4 (Debtor's Motion to Dismiss Chapter 11 Case), and at 9 (Decl. of Katofsky in support thereof).

On or about May 7, 2014, the Debtor entered into a settlement agreement with Plaintiffs and thereafter filed a motion requesting approval of the settlement pursuant to Federal Rule of Bankruptcy Procedure 9019. Case Dkt. 62 (the "Compromise Motion"). The settlement agreement provided in principal part: (i) the Debtor would assign all avoidance actions to Plaintiffs, (ii) the Debtor would market the St. Louis Properties for sale and deliver $400,000 to the Plaintiffs (up to $40,000 of which would come from the Affiliates if need be) no later than January 31, 2015, (iii) the parties would exchange mutual releases, and (iv) the Debtor would use its "best efforts" to obtain entry of an order dismissing the bankruptcy case upon the consummation of its...