Gottlieb v. Fulcrum 5 Inc. (In re KSL Media Inc.)

• Decision Date: 21 June 2016
• Docket Number: Case No.: 1:13-bk-15929-MB,Adv No: 1:15-ap-01212-GM
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re: KSL MEDIA INC Debtor. David K Gottlieb Plaintiff, v. Fulcrum 5 Inc, Fulcrum 5 Inc, Rodger M Landau, Landau Gottfriend & Berger LLP, TV 10's LLC, TV 10's LLC Defendants.

In re: KSL MEDIA INC Debtor.David K Gottlieb Plaintiff, v. Fulcrum 5 Inc, Fulcrum 5 Inc, Rodger M Landau,Landau Gottfriend & Berger LLP, TV 10's LLC, TV 10's LLC Defendants.

Case No.: 1:13-bk-15929-MB

Adv No: 1:15-ap-01212-GM

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA SAN FERNANDO VALLEY DIVISION

June 21, 2016

CHAPTER 7

MEMORANDUM DENYING PLAINTIFF'S MOTION FOR RECONSIDERATION PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 59(e)

Date: June 7, 2016

Time: 10:00 a.m.

Courtroom: 303

21041 Burbank Blvd.

Woodland Hills, CA By way of this Motion and pursuant to Fed. Rule Civ. Proc. 59(e), Plaintiff David K. Gottlieb ("Plaintiff" or "Trustee") asks the Court to reconsider its Order Granting in Part and Denying in Part Defendants' Motion to Strike entered on April 21, 2016 ("Order"). Trustee requests the Court amend that portion of the Order which strikes from the Complaint the allegations relating to the $2 million preferential payment to Cumberland Packing Corporation. Trustee asserts that the Court erroneously concluded that these allegations are subject to the in pari delicto and unclean hands defenses. Specifically, Trustee asserts the Court erred by (1) adjudicating the affirmative defenses on a pre-discovery motion; (2) resolving on a motion to strike issues of material fact inherent in both affirmative defenses; (3) resolving on a motion to strike the unsettled legal question of whether the in pari delicto defense is applicable to a bankruptcy trustee; and (4) striking the allegations absent any demonstration of prejudice to the Defendants, Roger Landau and Landau Gottfried & Berger, LLP ("LGB" or collectively "Defendants").

Trustee relies on Rule 59(e) as authority for the Court to amend its April 21, 2016 Order. Under Rule 59(e), Trustee contends relief is warranted where "the court committed a clear error or the initial decision was manifestly unjust." Zimmerman v. City of Oakland, 255 F.3d 734, 740 (9^th Cir. 2001); Motion, p. 9. Trustee argues that the Court committed clear error since by sustaining the in pari delicto and unclean hands defenses, it improperly resolved disputed factual issues and an unsettled legal question in a pre-discovery motion to strike. Trustee contends this ruling was premature and will unduly prejudice the Trustee and the estate's creditors.

1. Striking the Cumberland Payment allegations was Clear Error by the Court

Trustee contends that this Court erred in striking the allegations regarding the Cumberland payments. Trustee reminds this Court that motions to strike are clearly disfavored by the 9^th Circuit and beyond. Moreover, the 9^th Circuit has recognized that disputed factual issues and unsettled legal questions may not be resolved on a motion to strike. See, Motion, p. 10, citing Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 974 (9^th Cir. 2010).

A. The Court Erred in Adjudicating the Affirmative Defenses by way of a Pre-Discovery Motion, such as the Motion to Strike

Trustee argues there is much legal authority to support his assertion that a motion to strike is not the proper platform from which to adjudicate the in pari delicto and unclean hands defenses. Trustee cites to numerous cases where these affirmative defenses were adjudicated by way of a motion to dismiss or motion for summary judgment. Moreover, Trustee contends that the Court's reliance on Uecker v. Zentil, 244 Cal. App. 4^th 789 (Cal. Ct. App. 2016)¹ and Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, 133 Cal. App. 4^th 658 (Cal. Ct. App. 2005) is misplaced. Trustee argues that these cases fail to support the Court's adjudication of these affirmative defenses by way of a motion to strike.

B. The Court Erred in Resolving Material Factual Issues Prematurely

Trustee argues that there are fact issues that go to the heart of both defenses. For instance, with in pari delicto, it is crucial to analyze which party is more morally blameworthy, the plaintiff or the defendant. As such, the doctrine of in pari delicto involves a fact-intensive assessment of balancing the parties' culpability.

Trustee argues that to sustain the defense of in pari delicto the Court must have determined that the Debtors were at least as culpable as Defendants, their counsel who advised of the Cumberland payment. This type of a factual determination, prior to the taking of discovery, is not a proper one especially on a motion to strike. Trustee further asserts that the critical question is whether the Debtors' representatives, Liebowitz and Cohen, should have known that the Cumberland payment would become avoidable as a matter of law. A motion to strike cannot properly resolve this issue.

Just as the in pari delicto doctrine is fact-sensitive, so too is the unclean hands doctrine. As such, adjudicating this affirmative defense by way of a motion to strike is improper. Trustee urges the Court recognize that the application of this defense remains primarily a question of fact. Trustee should have had the opportunity to perform discovery prior to the Court making its ultimate decision concerning the affirmative defense. Trustee argues that "by sustaining the unclean hands defense, the Court necessarily determined that Defendants somehow were seriously injured by the Debtors' conduct with respect to the Cumberland Payment. Similarly, the Court necessarily determined that the Defendants did not profit from their role in the Cumberland Payment." Motion, p. 21. Thus, given the factual nature of this defense, the Court should have declined to apply the defense at this stage in the litigation.Citing, POM Wonderful, LLC vs. Tropicana Prods., 2010 U.S. Dist. LEXIS 99280, at *1-2 (C.D. Cal. Sep. 7, 2010).

C. The Court Erred in Resolving the Unsettled Legal Question of Whether the In Pari Delicto Affirmative Defense Applies to Bankruptcy Trustees

Trustee reminds the Court that the Ninth Circuit has not resolved the question of whether the in pari delicto defense is applicable to bankruptcy trustees. Moreover, Trustee asserts there are strong policy reasons for excluding bankruptcy trustees from the application of this doctrine. Trustee also points out that LGB, in an appellate brief in the case of In re Estate Fin. Mortgage Fund, LLC, argued that public policy favors liberating bankruptcy trustees from the defense of in pari delicto. In re Estate Fin. Mortgage Fund, LLC, 2013 WL 950466, at *24 (9^th Cir. Nov. 27, 2013). For instance, Trustee asserts that Congress specifically contemplated that a defense against a debtor may be ineffective against a trustee, notwithstanding Section 541(a)(1). Trustee cites to 124 Cong. Rec. 32,399 (1978): "As section 541(a)(1) clearly states, the estate is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case. To the extent such an interest is limited in the hands of the debtor, it is equally limited in the hands of the estate except to the extent that defenses which are personal against the debtor are not effective against the estate."

Also, Trustee cites to F.D.I.C. v. O'Melveny & Meyers (O'Melveny I), 969 F.2d 744 (9^th Cir. 1992), rev'd, 512 U.S. 79 (1994), and F.D.I.C. v. O'Melveny & Meyers (O'Melveny II), 61 F.3d 17 (9^th Cir. 1995) to further highlight policy reasons weighing against the application of the in pari delicto defense to bankruptcy trustees. The 9^th Circuit found that the in pari delicto defense did not operate to impute a bank'sinequitable conduct to its receiver. Trustee notes that however the Ninth Circuit ultimately resolves the in pari delicto question, the point is that the motion to strike was not the proper way for the Court to resolve this unsettled legal question.

D. The Court Erred in that Defendants Failed to Show Prejudice

Finally, Trustee asserts that under Rule 12(f), a party seeking relief must demonstrate prejudice if the relief is not granted. Trustee, again, cites to numerous cases in support of this proposition concerning the existence of prejudice.

In its Order, the Court failed to find that the Cumberland payment allegations were prejudicial to the Defendants. If the allegations were not stricken with respect to the state law claims, the Defendants would face no greater discovery burden that they already are dealing with in connection with the pending bankruptcy claims. Moreover, Defendants failed to present any evidence demonstrating the requisite prejudice. Thus, the claims should not have been stricken.

Opposition:

Defendants oppose Trustee's Motion for Reconsideration. In summary, Defendants assert the following: (1) Trustee is not entitled to reconsideration by this Court as the Trustee has failed to demonstrate the Court's ruling was in clear error; (2) a Motion to Strike is the proper vehicle to dispose of the allegations at issue; and (3) Trustee should not be allowed to now submit new arguments in his Motion for Reconsideration, including that the in pari delicto and unclean hands defenses do not apply to bankruptcy trustees and the defenses are inherently fact sensitive and not to be adjudicated during the pleading stage.

1. Trustee has not Demonstrated that the Court Committed Clear Error

First, Trustee attempts to raise arguments in his Motion for Reconsideration that he did not set forth in his Opposition to the Motion to Strike. Defendants assert that the 9^th Circuit has established that a Motion for Reconsideration may not be used to raise arguments for the first time when they should have been raised earlier. Citing, Carroll v. Nakatani, 342 F.3d 934, 945 (9^th Cir. 2003).

Second, Defendants argue Trustee has not demonstrated that the Court committed clear error in her ruling. Contrary to the Trustee's claims, Defendants argue Trustee has not cited binding case law that the Court failed to apply, nor has Trustee set forth any reason why the Court should consider his new arguments concerning the equitable defenses of in pari delicto and unclean hands. Thus, the Trustee's arguments...