Estate of Daily v. Title Guar. Escrow Service, Inc.
| Decision Date | 21 February 1995 |
| Docket Number | Civ. No. 92-0404 DAE. |
| Citation | 178 BR 837 |
| Parties | The ESTATE OF Sammy G. DAILY, Plaintiff, v. TITLE GUARANTY ESCROW SERVICE, INC., a Hawaii corporation; Lilipuna Associates, a Hawaii limited partnership; Lilipuna Development Corporation, a Hawaii corporation; Lilipuna Venture, Inc., a Hawaii corporation; Michael C. Daily; Terri Daily Wilcox, fna Terri Lynn Daily; Kevin Thomas Shannon; Frank Blazek; Harvey Hee; Rania Michiyo Hee; Doe Corporations 1-50 and Doe Governmental Entities 1-50, Defendants. |
| Court | U.S. District Court — District of Hawaii |
COPYRIGHT MATERIAL OMITTED
Enver W. Painter, Jr., Painter & Luria, Honolulu, HI, for plaintiff.
Roy L. Anderson, Honolulu, HI, for defendants.
W. Thomas Fagan, Stuart T. Feeley, Jerold K. Guben, Reinwald O'Connor Marrack Hoskins & Playdon, Honolulu, HI, Curtis B. Ching, Office of the U.S. Trustee, Honolulu, HI, for Richard M. Kennedy, trustee.
ORDER ADOPTING BANKRUPTCY JUDGE'S REPORT AND RECOMMENDATION; DISMISSING FIRST AMENDED COMPLAINT AS TO DEFENDANTS MICHAEL C. DAILY, TERRI DAILY WILCOX, AND LILIPUNA DEVELOPMENT CORPORATION; AND DISSOLVING PRELIMINARY INJUNCTION THIRTY DAYS AFTER ENTRY OF ORDER
After reviewing Plaintiff's objections and Defendants' response to those objections, the court ADOPTS the Bankruptcy Judge's Report & Recommendation, and GRANTS the motions to dismiss Plaintiff's First Amended Complaint, with prejudice, as to moving Defendants Michael C. Daily, Terri Daily Wilcox, and Lilipuna Development Corporation. The court further orders that the preliminary injunction enjoining distribution of escrow monies belonging to Lilipuna Development Corporation and Lilipuna Venture, Inc., shall be dissolved 30 days after entry of this order if Plaintiff does not obtain an emergency order from the Ninth Circuit continuing the injunction.
On December 13, 1994, United States Bankruptcy Judge Lloyd King entered his Report and Recommendation on two motions by Defendants. Defendant Lilipuna Development Corp. (LDC) moved to dismiss Plaintiff's First Amended Complaint or, alternatively, for summary judgment.1 Defendants Michael C. Daily and Terri Daily Wilcox also moved for dismissal or for partial summary judgment. Judge King recommended that Plaintiff's amended complaint be dismissed, with prejudice, as to the moving defendants, and also recommended dissolving an injunction enjoining the distribution of sales proceeds now held in an escrow account. On January 13, 1995, Plaintiff filed its objections to Judge King's Report and Recommendation. LDC filed a response to Plaintiff's objections on February 6, 1995.
This lawsuit centers on a dispute over entitlement to proceeds of the sale of real property formerly owned by Defendant Lilipuna Associates ("Lilipuna"), a Hawaii limited partnership.2 Defendant Lilipuna Venture, Inc., (LVI) is the general partner. Defendant LDC is a limited partner. Lilipuna deposited into an escrow account the share of the sales proceeds allocated to LVI, as general partner, and LDC, as a limited partner. The sales proceeds are currently held by the escrow agent, Defendant Title Guaranty Escrow Services, Inc., ("Title Guaranty"), which has been sued only as a stakeholder. As of April 21, 1994, the escrow account held $334,505, with interest accruing.
While the named plaintiff is The Estate of Sammy G. Daily, the real plaintiff in this case, pursuant to 11 U.S.C. § 704(1), is Daily's bankruptcy trustee, Richard Kennedy. Daily, a well-known Hawaii real estate broker and developer, filed a voluntary petition for Chapter 11 reorganization on January 31, 1985. The case was converted to a Chapter 7 liquidating bankruptcy on November 22, 1988, and Kennedy was appointed Chapter 7 trustee on January 6, 1989. The original complaint was filed on January 9, 1989. The amended complaint, which is the subject of these motions, was filed on February 2, 1994.
The original complaint alleged that LVI and LDC were mere "alter egos" of Sammy G. Daily ("Daily"), that the purported stock ownership of LVI and LDC by Daily's children was a legal fiction, and that as a result any distribution of sales proceeds by Lilipuna to LVI and LDC belonged to trustee Kennedy, as representative of Daily's bankruptcy estate. After five years of motions and appeals,3 this court dismissed the original complaint with leave to amend. Dismissal was ordered, in accord with Bankruptcy Judge King's recommendations, because Hawaii state courts have not and are not expected to recognize "reverse alter ego" claims for relief.4 See Proposed Report & Recommendation to the U.S. District Court, ("Report I") November 12, 1993, at 10-11. The complaint was also dismissed because it failed to name the shareholders of LDC and LVI as defendants, and as a result those shareholders had no opportunity to protect their shareholdings.
Most, if not all, of the shares of LDC and LVI are now owned by Daily's children, Michael C. Daily ("Michael") and Terri Daily Wilcox ("Terri"). Plaintiff's amended complaint alleges that Sammy Daily and his wife Margaret transferred "all or substantially all" of the stock of LDC and LVI to Michael and Terri in February 1983. The transfer of the LDC stock is a matter of serious disagreement. Michael and Terri contend that Daily and his wife never owned the LDC stock, and that the shares were transferred to them by a separate company, Sam Daily Realty, Inc.5 For purposes of this motion to dismiss, the court assumes the truth of the amended complaint's conclusory allegations.
Plaintiff's amended complaint also alleges that Daily and his wife transferred the stock of LDC and LVI to Michael and Terri for "no consideration or less than reasonably equivalent value and with the effect of hindering, delaying and defrauding Sammy G. Daily's creditors." The complaint does not seek to avoid those transfers. Instead, it seeks a declaration that LDC and LVI are alter egos of Daily and that any money from the sale of the Lilipuna property be held in "constructive trust" for the creditors of Daily's bankruptcy estate. It also seeks an order requiring Title Guaranty to "turnover" to Daily's bankruptcy trustee any money attributable to the sale of the Lilipuna property now being held in an escrow account.
The amended complaint added the shareholders of LDC and LVI as defendants. In addition to Michael and Terri, those defendants include Kevin Thomas Shannon, Frank Blazek, Harvey Hee, and Rania Michiyo Hee. From the amended complaint, it appears that Michael and Terri are the sole shareholders in LDC and the principal shareholders in LVI. The remaining defendants apparently retain few, if any, shares in LVI. Daily himself owned no shares in either corporation at the time he filed his bankruptcy petition.
On April 4, 1994, Michael and Terri moved to dismiss or for partial summary judgment as to the claims against them in the amended complaint. The same day, LDC moved to dismiss or for summary judgment as to the claims against it, and additionally moved to remove the "preliminary injunction" freezing the funds in the Title Guaranty escrow account. The court referred the motions to Bankruptcy Judge King, under 28 U.S.C. 157(c)(1).
Judge King's second Report and Recommendation ("Report II") recommended this court grant the motions to dismiss. In brief, Report II concludes:
(1) State statutes of limitations barred Plaintiff from adding Michael and Terri as defendants to the amended complaint. By January 30, 1989, at the latest, Plaintiff knew or should have known about the alleged fraudulent stock transfers, and thus the applicable statute of limitations expired in early 1991—more than three years before the amended complaint was filed. The amended complaint did not "relate back" to the date of the original complaint, because there was no mistake as to the identity of the parties, and the doctrines of "equitable tolling" and "virtual representation" could not save Plaintiff;
(2) Plaintiff's attempt to state a claim based on reverse alter ego must fail, because no such claim has been or is expected to be recognized in Hawaii state courts. Moreover, even if such a claim might be recognized in general terms, it could not be made in this case because: a) Daily, the individual debtor whose debts would be paid from corporate assets, owns no shares of either LVI or LDC; and b) Michael and Terri, who effectively own all the shares of LVI and LDC, cannot be named parties to the amended complaint because of the statute of limitations; and
(3) The amended complaint fails to state a claim for imposing a constructive trust under Hawaii law.
In addition to recommending that the amended complaint be dismissed, with prejudice, as to Michael, Terri, and LDC, Report II also recommends dissolving the injunction enjoining distribution of monies in the escrow account and dismissing Title Guaranty as a defendant. Finally, Report II notes that its reasoning with regard to Michael and Terri applies equally to the other newly-named, individual defendants (Shannon, Blazek, and the Hees), and suggests this court order Plaintiff to proceed or dismiss as to those remaining defendants within a fixed period of time.
Plaintiff makes three general objections to Report II. In summary, Plaintiff argues:
(1) That applicable federal and state law allow a bankruptcy trustee for an individual debtor to institute reverse alter ego claims on behalf of the debtor's estate for the benefit of its creditors. Specifically, Plaintiff contends that a bankruptcy trustee has standing to assert such a claim, despite seemingly contrary Ninth Circuit precedent, and that Hawaii state courts would "follow the prevailing trend in the law" and recognize the doctrine of reverse piercing a corporate veil;
(2) that a corporation's individual shareholders need not be named as parties in an action to reach the corporation's assets through reverse alter ego; and
(3) that the ...
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