In re Advent Management Corp.

• Decision Date: 16 February 1995
• Docket Number: BAP No. CC-94-1413-HMeV. Bankruptcy No. LA-89-03782-JD/KM. Adv. No. LA-91-61036-KM.
• Citation: 178 BR 480
• Parties: In re ADVENT MANAGEMENT CORPORATION, a California corporation, Debtor. TAYLOR ASSOCIATES, Appellant, v. Lawrence A. DIAMANT, Chapter 7 Trustee, and United States Trustee, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

178 B.R. 480 (1995)

In re ADVENT MANAGEMENT CORPORATION, a California corporation, DebtorTAYLOR ASSOCIATES, Appellant, v.Lawrence A. DIAMANT, Chapter 7 Trustee, and United States Trustee, Appellees.

BAP No. CC-94-1413-HMeV. Bankruptcy No. LA-89-03782-JD/KM. Adv. No. LA-91-61036-KM.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted November 17, 1994.

Decided February 16, 1995.

COPYRIGHT MATERIAL OMITTED

Neil J. Rubenstein, San Francisco, CA, for appellant.

Gregg D. Lundberg, Irving M. Gross, Los Angeles, CA, for appellees.

Before HAGAN, MEYERS and VOLINN, Bankruptcy Judges.

OPINION

HAGAN, Bankruptcy Judge:

Lawrence Diamant("trustee") is the Chapter 7trustee for the debtor, Advent Management Corporation("Advent").The trustee commenced an action against Taylor Associates ("Taylor") to recover sums alleged to be either avoidable preferences under section 547,¹ or fraudulent transfers under section 548.The bankruptcy court granted partial summary judgment to the trustee, holding, inter alia, that the transfers to Taylor were transfers of an interest of the debtor in property.Taylor filed two motions for reconsideration.Both motions were denied.Taylor appeals the denial of the second motion.We AFFIRM.

FACTS

1.Facts Underlying the Disputed Transfers.

This action involves a three-sided transfer.Prior to bankruptcy, Taylor provided temporary services to Coastal Insurance Company("Coastal").Taylor received payment for these services from Advent, the sole owner of Coastal.It is these payments that are the subject of this adversary proceeding.

Coastal underwrote insurance policies, including auto insurance policies for high-risk drivers.However, Coastal had no employees and few of the physical assets necessary to conduct the business.Advent possessed "virtually all" of the employees and most of the furniture, fixtures, and equipment needed for operations.Advent handled all of Coastal's day-to-day administrative operations.

Advent had an unwritten agreement with Coastal regarding compensation for its services as Coastal's managing agent.Advent received 25% of premiums earned and approximately 100% of the policy fees earned, in addition to unallocated loss adjustment expenses representing 6% of the premiums written.

However, in addition to these funds, Coastal diverted over $48 million in assets to Advent.These transfers were recorded in Coastal's books as "advances."There was no written agreement or memorialization of the transfers, they were not collateralized, and there was no interest charged.A report of the California Auditor General concluded the advances were "payments on expenses its affiliates had not fully incurred yet and might never incur if the policies they were writing were not renewed each month."Auditor General's Report, Taylor's Excerpts of Record (hereinafter "Taylor's ER")at 462.The "Task Force Report on Coastal Insurance Company," prepared by the California Department of Insurance, indicated some of the "advances" to Advent went into personal loans to officers and directors, and personal and other expenses associated with Advent's operations.Task Force Report, Taylor's ERat 620-626.

On February 2, 1989, Coastal was taken over by the California Department of Insurance.The Insurance Commissioner for the State of California("Commissioner") was appointed as conservator for Coastal, and later as Coastal's liquidator.Advent filed its chapter 7 petition on February 23, 1989.

2.Procedural Posture.

On March 14, 1991, the trustee commenced the underlying adversary proceeding against Taylor for the recovery of a number of these payments.This initial complaint sought the return of a number of allegedly preferential transfers under section 547.After conducting discovery, the trustee concluded Taylor had never been a creditor of the debtor, and filed his first amended complaint pleading an additional cause of action to recover fraudulent transfers under section 548.The first amended complaint requested return of 36 payments made in the one year prior to Advent's bankruptcy.In his motion for summary judgment, the trustee requested the return of two additional payments.The total amount transferred in all 38 payments was $193,112.09.Taylor's answer to the first amended complaint admitted that 14 of the transfers to Taylor were transfers of Advent's property.The trustee filed a motion for summary judgment on October 7, 1992.Taylor opposed the motion.Taylor contended, among other things, that there was a genuine issue of material fact as to whether the transfers were transfers of property of Advent.The bankruptcy court asked Taylor's counsel if Taylor wished a continuance to conduct further discovery on this issue, and counsel declined.

The court granted partial summary judgment in favor of the trustee.The court's findings, entered on March 8, 1993, found that the 38 transfers were transfers of property of Advent.The court concluded the trustee's evidence of a transfer from Advent's general account constituted a prima facie showing the money was Advent's property, and Taylor failed to come forward with evidence sufficient to create a genuine issue of material fact.

Taylor obtained new counsel, who on March 18, 1993, filed a motion seeking: (1) leave to amend its answer to the first amended complaint; (2) an order altering or amending the prior order, reconsidering the prior order, or alternatively granting relief from the order for excusable neglect; and (3) an order reopening discovery (hereinafter, "first motion to reconsider").The basis for the motion was that newly-discovered evidence (three reports by public entities, including the two cited above) raised a genuine issue of material fact as to whether the transfers were of property of Advent.The motion was also based on the argument that Taylor's previous counsel erred, first in admitting that 14 transfers were transfers of property of the debtor, and second in declining additional discovery.Taylor contended the transfers were transfers of money misappropriated from Coastal by Advent, and consequently Advent held those monies in constructive trust for Coastal.

A hearing on the first motion to reconsider was held on May 5, 1993.The court denied all aspects of the motion.The court found that the previous counsel had not admitted the 14 transfers or declined additional discovery by mistake, but as a strategic decision regarding the conduct of the case.The court also concluded Taylor would be unable to trace the funds sufficiently to establish the existence of a constructive trust.

With specific regard to the motion to reconsider the prior summary judgment ruling, the court noted it could be analyzed under either Rule 59(e)² or Rule 60(b).The court held the three reports could have been discovered through due diligence at the time of the summary judgment hearing, and concluded relief under Rule 59(e) was therefore not appropriate.The court also rejected the conclusion it should reconsider under Rule 60(b), because there was no excusable neglect; the previous counsel had made a strategic decision not to contest the issue.The order denying the first motion to reconsider was entered on July 8, 1993.

Taylor filed its "Notice of Motion and Motion for Reconsideration of Order Re: `Property of the Debtor'" on January 28, 1994(hereinafter, "second motion to reconsider").This motion was based on the Ninth Circuit Court of Appeals decision in Mitsui Manuf. Bank v. Unicom Computer Corp.(In re Unicom Computer Corp.),13 F.3d 321(9th Cir.1994).In Unicom,the Court of Appeals dealt with an action to recover an avoidable preference under section 547.The debtor had wrongfully obtained a check that should have been paid to a creditor.Subsequently, the debtor paid the creditor the amount the debtor had wrongfully received, and then filed its petition in bankruptcy.The Court of Appeals held that the trustee for the debtor could not recover the transfer as a preference, because the funds were held subject to a constructive trust on the creditor's behalf and thus were not property of the debtor as is required by section 547(b).The court's reasoning was as follows: (1)"property of the debtor" means property that would have been property of the estate under section 541 but for the transfer, 13 F.3d at 324; and (2) property held in constructive trust is not property of the estate, and therefore is not property of the debtor, 13 F.3d at 324-25.

The trustee objected, presenting a number of arguments in response to Taylor's motion.The trustee contended Taylor could not trace the funds allegedly held by Advent in constructive trust, and therefore that Taylor was not entitled to argue that a constructive trust exists.The trustee also argued that the evidence showed that Advent was rightfully entitled to some of the monies received from Coastal, and therefore Taylor could not avoid the tracing requirement.

The bankruptcy court denied Taylor's second motion to reconsider.At oral argument, the court held that Unicom's holding was limited to the circumstance where the recipient of the transfer was also the beneficiary of the constructive trust.Because Taylor was not the beneficiary of the constructive trust, the court concluded Taylor could not interpose Coastal's alleged constructive trust as a defense.The court noted that there was no evidence Coastal ever tried to establish a constructive trust against the funds.Additionally, the court held Taylor failed to trace the funds Taylor received to funds Advent held in constructive trust for Coastal.

Taylor and the trustee stipulated to an interlocutory appeal.The bankruptcy court entered an order staying the proceeding until either the application for an interlocutory appeal was denied, or the appellate court issued a final order.The Panel granted leave to appeal.

3.Evidence Regarding the Constructive Trust.

After...