Corey, In re
| Decision Date | 27 December 1989 |
| Docket Number | 88-15595 and 88-15778,88-15351,Nos. 88-15350,s. 88-15350 |
| Citation | 892 F.2d 829 |
| Parties | , Bankr. L. Rep. P 73,219 In re Lillian Hagopian COREY, Debtor. Helen B. RYAN, Trustee; Kulalani, Ltd.; Florence A. Ellis; Auna Foundation; William S. Ellis, Jr., Appellants, v. Herbert H.K. LOUI; Alberta K.A. Loui; Lillian Hagopian Corey, Appellees. (Two Cases) William S. ELLIS, Jr., Appellant, v. Lillian Hagopian COREY, Appellee. Helen B. RYAN, Trustee; Florence A. Ellis; Auna Foundation; William S. Ellis, Jr., Appellants, v. Lillian Hagopian COREY, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
William S. Ellis, Jr., Honolulu, Hawaii, in pro per.
Helen B. Ryan, Honolulu, Hawaii, in pro per.
Walter R. Schoettle, Honolulu, Hawaii, for creditor-appellants.
James N. Duca, Kessner, Duca & Maki, Honolulu, Hawaii, for debtor-appellee.
Ivan M. Lui-Kwan, Presley W. Pang, Honolulu, Hawaii, for appellees Herbert H.K. Loui and Alberta K.A. Loui.
Appeal from the United States District Court for the District of Hawaii.
Before SNEED, KOZINSKI and THOMPSON, Circuit Judges.
Who owns the Silversword Inn? This seemingly innocuous question has been litigated vigorously for nearly two decades in various bankruptcy proceedings and in the state courts of Hawaii. We resolve this and many other questions today and, in so doing, put an end to a dispute that has consumed a disproportionate share of our legal system's energy and resources.
The facts of this case, many of which are set forth in greater detail in our earlier opinion, Ellis v. Corey (In re Ellis), 674 F.2d 1238 (9th Cir.1982), are largely not in dispute. In March 1971, William Ellis, then a Chapter XII debtor under the Bankruptcy Act of 1898, conveyed two adjoining parcels on the island of Maui to Bessie Hagopian. Located on one parcel was the Silversword Inn.
Under the terms of the Ellis-Hagopian conveyance, Lillian Corey, Hagopian's sister, was to pay Ellis $85,500. In return, Ellis was to transfer to Hagopian title to the parcels "free and clear of all encumbrances," but subject to two important exceptions. First, Hagopian agreed to be bound by existing lease agreements that permitted the Silversword Corporation, an entity controlled by Ellis, to occupy and operate the Inn. Second, Hagopian's title was subject to an exclusive option held by Ellis to repurchase the Inn. The option provided:
Now, therefore, the Purchaser, in consideration of the premises and of the foregoing conveyance to her, does hereby give to the Sellers an exclusive option for a period of two (2) years from the date hereof, to purchase from the Purchaser all of the interest of the Purchaser in said Lot 2 described in said Deed for the sum of EIGHTY-FIVE THOUSAND & No/100 DOLLARS ($85,000.00) plus five percent (5%) thereof per annum from the date hereof, and all of the interest of the Purchaser in said Lot 4 for the sum of ONE THOUSAND & No/100 DOLLARS ($1,000.00) plus five percent (5%) thereof per annum from the date hereof; PROVIDED, HOWEVER, that the foregoing option may not be exercised sooner than September 1, 1971;
Option, and Consent to Pledge and Assignment Thereof (Mar. 4, 1971) at 2.
In July 1973, Hagopian transferred her interest in the Silversword Inn to Lillian Corey. Ellis had previously assigned his option to purchase the Inn to Upland Investments, another entity he controls. With Corey's consent, Upland renewed the option twice, in 1973 and 1975 respectively, but never exercised it. The option expired by its own terms on December 31, 1976.
Believing that she owned the Silversword Inn outright upon the expiration of Upland's option, Corey signed a standard form Deposit Receipt, Offer and Acceptance (DROA) in January 1977, agreeing to convey the Inn to Herbert and Alberta Loui (the Louis) for $575,000. When Ellis received notice of the impending sale, he expressed, for the first time, doubt as to the validity of the 1971 conveyance to Hagopian. On February 26, 1977, he wrote Corey the following letter:
This will let you know in writing that I do not concur with your signing [the DROA]. Nor do I concur with the use of [the chosen escrow company]. Whether or not I concur in other terms would depend at least somewhat on how much of the net proceeds would come to Upland and on what schedule.... I also suggest that Upland be included as a Seller in any DROA. Otherwise, under the law of Hawaii, you might not be able to deliver clear title.
See Bankr. Nos. 84-0371, 72-391 and 70-249, Decision and Order (Aug. 12, 1988) at 36.
During the months that followed, Ellis tried to convince Corey that she did not in fact own the Silversword Inn. The court found that he used his friendship with Corey to gain her confidence in an attempt to confuse and deceive her as to the nature of the March 1971 transaction between Ellis and Hagopian. He told Corey that, under Hawaii law, many transactions that facially appear to be conveyances in fee simple are in fact mortgages. In particular, he cited Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221 (1966), which held that a lender may never use an automatic defeasance provision in a mortgage agreement to defeat the mortgagor's right of redemption. According to Kawauchi, "[s]ince the right of redemption may not be waived, the form of the instruments cannot control the case if in reality the transaction was a mortgage." 413 P.2d at 227.
Ellis's plan was clear; he wanted to persuade Corey that the conveyance between himself and Hagopian was not a transfer in fee simple subject to an option, but only a mortgage, with equitable title to the Inn remaining in Ellis. This, he hoped, would convince Corey not to go forward with the sale to the Louis, and would eventually enable him to claim the Inn on behalf of Upland. Ellis apparently was successful in blocking the sale, for on August 1, 1977, the scheduled closing date under the DROA, Corey refused to convey title to the Inn.
Twelve days later, the Louis filed a complaint against Corey in Hawaii state court seeking specific performance and damages for breach of contract. Haw. Civil No. 52308. During the course of this action, Corey defended on the theory espoused by Ellis; that is, she claimed that the 1971 transaction between Ellis and Hagopian was in fact a mortgage, not a sale. As a result, Corey claimed she was unable to transfer title to the Inn because she was not its owner. The state court rejected Corey's defense and ordered her to proceed with the sale. This portion of the trial court's ruling was affirmed by Hawaii's Intermediate Court of Appeals. See Loui v. Corey, 2 Haw.App. 556, 634 P.2d 1055 (1981). The Hawaii courts, however, never resolved the mortgage issue and declined to determine the true nature of the 1971 transaction. See In re Ellis, 674 F.2d at 1249-50.
Concurrent with the state court proceedings, Ellis filed in his bankruptcy proceeding a "Complaint to Determine Lien" against Corey. Adv. Pro. No. 72-391(3). The complaint sought relief on the mortgage theory raised by Corey in defense of the Louis's state court action. Ellis, Corey and certain entities controlled by Ellis brought a similar action against the Louis. Adv. Pro. No. 72-391(4). Following the Louis's successful intervention in No. 72-391(3), the court consolidated Nos. 72-391(3) and 72-391(4).
On September 12, 1980, the bankruptcy court issued a ruling that, as a matter of law, the March 1971 transaction between Ellis and Hagopian was a transfer in fee simple and not a mortgage. Ellis and his entities appealed this judgment, and we reversed. We held that the bankruptcy court improperly relied on the face of the documents in the 1971 transaction without, as required by Hawaii law, examining the intent of the parties. See In re Ellis, 674 F.2d at 1247. We remanded for the bankruptcy court to make a "fresh determination of the mortgage question." Id. at 1250. Before the bankruptcy court could resolve the mortgage question, however, appellants moved to dismiss the adversary proceeding.
Meanwhile, the Louis returned to state court and, on April 24, 1984, obtained a judgment for $757,000 in the form of "delay damages" for the rental value of the property from August 1, 1977, to April 30, 1983, attorney's fees and emotional distress. In response to this substantial judgment against her, Corey filed for protection under Chapter 11 of the 1978 Bankruptcy Code.
After unsuccessfully appealing the state court judgment to the Hawaii Supreme Court, Corey commenced an adversary proceeding, No. 85-0185, seeking to challenge the Louis's state court judgment and to establish her own rights to the Silversword Inn. On September 15, 1986, the district court, sitting in bankruptcy, 1 granted summary judgment in favor of the Louis as to their state court judgment, but permitted Corey to go forward with her claim of ownership to the Inn. However, because the district court apparently believed that the dismissal of Adv. Pro. Nos. 72-391(3) and 72-391(4) barred Corey from making a claim for title of the Inn in her own bankruptcy proceeding, the court sua sponte vacated the dismissal of those actions on April 7, 1988.
On February 29, 1988, the Louis filed a proposed Chapter 11 plan of reorganization of Corey's estate. Under the plan, Corey's creditors would be paid in full through a staged sale of her assets. Although the plan relied principally on the Silversword Inn's sale for the required funds, the court found that Corey had enough assets, even aside from the Inn, to pay her creditors' claims in full. The plan was approved on the basis of the Louis's votes in favor of confirmation. See Order Confirming Plan Proposed by Loui Creditors (June 24, 1988). Although Ellis, his controlled entities and Helen Ryan, Ellis's trustee in bankruptcy, opposed the plan, the court did not count their votes because it had previously estimated their claims against the...
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