Brugnara Props. VI v. Internal Revenue Serv. (In re Props.)
| Decision Date | 20 July 2019 |
| Docket Number | Case No. 17-30501,A.P. No. 17-3071 |
| Citation | 606 B.R. 371 |
| Parties | IN RE: BRUGNARA PROPERTIES VI, Debtor. Brugnara Properties VI, Plaintiff, v. Internal Revenue Service, et al, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of California |
Ruth Elin Auerbach, Law Offices of Ruth Elin Auerbach, San Francisco, CA, for Plaintiff.
W. Carl Hankla, Mahana K. Weidler, U.S. Dept. of Justice, Tax Division, Washington, DC, Cara M. Porter, Lucy F. Wang, Office of the Attorney General, San Francisco, CA, for Defendants.
Michael A. Isaacs, Dentons US LLP, San Francisco, CA, for Trustee.
Plaintiff and Debtor Brugnara Properties VI ("Debtor") filed a motion for summary judgment in the above-captioned adversary proceeding. The Internal Revenue Service ("IRS") and the California Franchise Tax Board ("FTB," and together, the "Taxing Authorities") filed competing motions for summary judgment. The matters came on for argument on April 25, 2019, and thereafter were submitted. As explained below, Debtor's motion for summary judgment is DENIED, and the Taxing Authorities' motions for summary judgment are GRANTED on two alternate theories: alter ego and nominee.
This bankruptcy case originated as a chapter 11 and was converted to chapter 7 on April 3, 2018. While in chapter 11, Debtor acted as debtor in possession until Janina M. Hoskins was appointed chapter 11 trustee. Following conversion, Ms. Hoskins was again appointed trustee. Debtor filed this adversary proceeding on October 23, 2017, seeking a determination that the Taxing Authorities do not have valid nominee liens on Debtor's property located on Sea Cliff Avenue in San Francisco, California ("Sea Cliff").
The court relies principally on evidence jointly submitted by the Taxing Authorities. The facts below are not materially disputed and are corroborated by supporting documentation. Debtor has proffered little to no admissible evidence to rebut them or raise any material disputes as to their veracity. Consequently, the Joint Statement of Facts (dkt. 68) is incorporated into this decision and attached as Exhibit A.1
In summary, Debtor was created in April 2000, with Luke2 Brugnara ("Luke") as its sole officer, director, and shareholder. In July 2002, one of his entities, Brugnara Properties V, purchased Sea Cliff from a third party. In October 2002, Brugnara Properties V transferred Sea Cliff to Debtor, which holds title to this date. Luke and his family moved in to Sea Cliff shortly after it was acquired and continue to live there. In January 2010, Debtor elected Luke's wife, Katherine ("Kay" together with Luke, the "Brugnaras") as President. For the past two decades, Luke and Kay have incurred significant tax debts: together, they owe over $6.4 million to the FTB and over $1.8 million to the IRS (Joint Statement of Facts, ¶ ¶ 3-17).
The Taxing Authorities asserted nominee liens for these debts against Sea Cliff, so Luke and Kay, through Debtor, commenced this adversary proceeding to seek a determination that these liens are not valid. The Taxing Authorities now seek summary judgment, claiming that the both alter ego and nominee theories apply in their favor.
Federal Rule of Civil Procedure 56, made applicable through Federal Rule of Bankruptcy Procedure 7056, states that summary judgment shall be granted if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. A fact is material if it might affect the outcome of a proceeding under the governing substantive law. In a motion for summary judgment, the moving party bears the initial burden of persuasion in demonstrating that no issues of material fact exist. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 254, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact exists when the trier of fact could reasonably find for the non-moving party. Id. at 248, 106 S.Ct. 2505. The court may consider pleadings, depositions, answers to interrogatories and any affidavits. Celotex Corp. v. Catrett , 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In determining whether the movant has met its burden, the court should consider all reasonable inferences in a light most favorable to the non-movant. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
The Taxing Authorities jointly requested the court take judicial notice of certain items (dkt. 69-2). The items consist of documents recorded with the San Francisco Office of the Assessor-Recorder and are publicly available. The court grants this request pursuant to Federal Rule of Evidence 201.
Debtor also submitted a request for judicial notice (dkt. 26) requesting judicial notice of two items. The items can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned. The court grants this request pursuant to Federal Rule of Evidence 201.
Debtor's motion for summary judgment seeks to establish that nominee and alter ego theories are not available to the Taxing Authorities. Any arguments regarding the applicability of either theory are dealt with below. There is little evidence to support the motion. The only evidence submitted by Debtor are two declarations in opposition to the Taxing Authorities' motions. The declaration submitted on Luke's behalf is inadmissible as he did not sign it. See 28 U.S.C. § 1746. Kay's declaration (dkt. 81) is dealt with in the analysis below. As Debtor has not met its burden, the motion is denied.
The Taxing Authorities assert that they should be allowed to enforce their liens against Sea Cliff using an alter ego theory. The FTB seeks to satisfy its claim of $6.4 million against Luke and Kay, and the IRS seeks to satisfy its claim of $1.8 million.
An alter ego is an entity lacking economic substance, essentially acting as the other self of an individual or entity. United States v. Scherping , 187 F.3d 796, 803, 804 (8th Cir. 1999). In California, the conclusion that one is the alter ego of another may permit a remedy known as piercing the corporate veil, by which an individual is held liable for the acts of a corporation and requires (1) such unity of interest and ownership that the separate personalities of the corporation and individual do not exist and (2) an inequitable result will follow if the acts are treated as those of the corporation alone. RRX Indus., Inc. v. Lab-Con, Inc. , 772 F.2d 543, 545 (9th Cir. 1985) (citing Automotriz Del Golfo De California S.A. De C.V. v. Resnick , 47 Cal.2d 792, 796, 306 P.2d 1, 3 (1957) ). Reverse veil piercing, where a corporation may be held liable for the acts of an insider individual, is applicable in California under certain circumstances. See Taylor v. Newton , 117 Cal.App.2d 752, 758–60, 257 P.2d 68 (1953). A variant of this, known as "outside" reverse veil piercing, occurs when a third party (an ‘outsider’) attempts to reach corporate assets to satisfy claims against an individual shareholder. See Postal Instant Press, Inc. v. Kaswa Corp. , 162 Cal. App. 4th 1510, 1518, 77 Cal.Rptr.3d 96 (2008) (hereafter " Postal ").
The Taxing Authorities and Debtor agree that Postal is determinative of whether a finding of alter ego could be available here. In Postal , the California Court of Appeal determined that this theory was not available to a third-party creditor attempting to reach corporate assets in order to satisfy its debt against an individual shareholder. Postal , 162 Cal. App. 4th at 1523-24, 77 Cal.Rptr.3d 96. The court excepted federal tax cases from its decision, stating in a footnote that that advances the policies of "avoiding fraud and collecting delinquent federal taxes.’ " Id. at 1521 n. 3, 77 Cal.Rptr.3d 96 (citing Scherping , 187 F.3d at 803, 804 ). Among the cases cited in the footnote is Brownfield Inv. Corp., N.V. v. U.S. , 28 F.3d 105 (9th Cir. 1994). There, the court permitted reverse veil piercing to impose tax liabilities (citing Towe Antique Ford Foundation v. IRS , 999 F.2d 1387, 1390 (1993) ). Brownfield Inv. Corp. , 28 F.3d at 105. Other federal courts in California have held that reverse veil piercing is permitted for federal taxing authorities. See Prompt Staffing, Inc. v. United States. , 321 F.Supp.3d 1157, 1178 (C.D. Cal. 2018) (); see also United States v. Boyce , 148 F.Supp.2d 1069, 1094 (S.D. Cal. 2001), amended (Apr. 27, 2001), aff'd , 36 F.App'x 612 (9th Cir. 2002). As such, it appears settled that the IRS is permitted to employ alter ego theory and consequently, the California alter ego analysis is appropriate here.
Postal and its progeny are less clear about the result for the FTB. Postal referred specifically to the federal taxing authorities. It did not indicate state taxing authorities are extended the same benefit. Absent California Supreme Court precedent on the issue, the court must predict how the California Supreme Court would rule. See Fourth Inv. LP v. U.S. , 720 F.3d 1058, 1068-69 (9th Cir. 2013) (...
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