In re Blanchard, Case No. 8:14–bk–14105–SC

• Decision Date: 01 March 2016
• Docket Number: Case No. 8:14–bk–14105–SC
• Citation: 547 B.R. 347
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re Randall William Blanchard, Debtor.

547 B.R. 347

In re Randall William Blanchard, Debtor.

Case No. 8:14–bk–14105–SC

United States Bankruptcy Court, C.D. California, Santa Ana Division .

Signed March 1, 2016

Date: February 4, 2016

Jacob C. Gonzales, Weintraub Tobin, Garrick A. Hollander, Jeannie Kim, Winthrop Couchot PC, Marc J. Winthrop, Newport Beach, CA, for Debtor.

ORDER AND MEMORANDUM DECISION DENYING APPLICATION FOR ADMINISTRATIVE CLAIM

Scott C. Clarkson

, United States Bankruptcy Judge

Before the Court is the "Application for Payment of Postpetition/Administrative Claim" ("Application") [Dk. 649]¹ filed by Integrated Financial Associates, Inc. ("IFA"), which came on for hearing on February 4, 2016. Jeremy Richards, Esq. of Pachulski, Stang, Ziehl & Jones LLP appeared on behalf of the Chapter 11 Trustee/Plan Administrator Richard M. Pachulski ("Trustee"). Candace Carlyon, Esq. of Morris Polich & Purdy, LLP appeared on behalf of IFA. Other appearances, if any, were as noted on the record.

Based upon the Application, the declarations of Candace Carlyon, Esq. ("Carlyon Declaration") [Dk. 651] and William Dyer ("Dyer Declaration") [Dk. 650]; IFA's appendix of exhibits ("Appendix") [Dk. 652]; the Trustee's opposition ("Opposition") [Dk. 662]; the Trustee's evidentiary objections ("Evidentiary Objections") [Dk. 661]; IFA's reply ("Reply") [Dk. 692]; and IFA's response ("Response") [Dk. 691] to the Evidentiary Objections, and for the reasons set forth on the record and as set forth in detail below, the Application is DENIED. The Evidentiary Objections are SUSTAINED.

I. Introduction

This is not a typical administrative claim. Usually, an administrative claim involves vendors or creditors adding post-petition value to the reorganization efforts of a debtor's business. In those cases, the issues generally relate to the type of value afforded, the benefits derived from such contribution of value, the motives of the provider, and the like. In this case, however, we encounter an administrative claim arising from an alleged fraudulent transfer to the debtor. More particularly, the claimant asserts that the debtor received a fraudulent transfer from a non-debtor entity while the claimant was a creditor of that non-debtor entity.

II. Background²

The basis for IFA's Application stems from an agreement ("Victorville Agreement") [Appendix 1] entered into on or about November 28, 2008, between and among Sandcastle Nuevo, LLC ("SCN"), SCV, and IFA. The Victorville Agreement provides, in pertinent part, that SCV deliver to Kent G. Snyder, Esq. ("Snyder") an unrecorded deed of trust ("SCV Deed of Trust") related to the real property located at 14374 Borego Road, Victorville, CA 92392 ("Victorville Property"). The SCV Deed of Trust was to be recorded only upon the occurrence of certain conditions precedent. The debtor, Randall William Blanchard ("Blanchard"), was not a party to the Victorville Agreement; however, the recitals reflect that the SCV Deed of Trust was intended to provide additional security for a $1.7 million note ("SCN Note") made by SCN in favor of IFA and to "forestall IFA's potential suit" on Blanchard's guaranty of the SCN Note. [Appendix 1, page 1].

Blanchard filed an individual chapter 11 bankruptcy on July 1, 2014 ("Petition Date"). On July 25, 2014, shortly after the Petition Date, IFA alleges that Blanchard caused³ SCV to transfer $555,123.53 to his debtor-in-possession account and $393,796.47 to California Republic Bank ("CRB") in payment of a debt Blanchard owed to CRB (together "Transfers").

Richard M. Pachulski was appointed as chapter 11 trustee on January 12, 2015. Order [Dk. 262]. The Trustee's Fifth Amended Plan of Reorganization ("Plan") [Dk. 598] was confirmed, as amended, on December 9, 2015, with the Trustee acting as the plan administrator. Confirmation Order [Dk. 637].

IFA filed its Application on January 4, 2016. The Application asserts that the Transfers were fraudulent under the California Uniform Fraudulent Transfer Act ("CUFTA"),⁴ that IFA was a creditor of SCV at the time of the Transfers and that Blanchard was the initial transferee of the Transfers. The Trustee opposes the Application, asserting, among other things, that IFA lacks standing under CUFTA because IFA was not a creditor of SCV at the time of the Transfers.

III. Discussion

For the reasons set forth below, the Court finds that IFA has failed to meet its burden to establish a prima facie administrative claim against the estate. The Court also finds that even if IFA had established a prima facie administrative claim, it has failed to meet its burden to prove that it was a creditor of SCV at the time of the Transfers. Because IFA was not a creditor at the time of the Transfers, IFA has not proven that it was injured by the Transfers. Therefore, IFA lacks standing to assert a fraudulent transfer cause of action against Blanchard under CUFTA. Finally, assuming arguendo that IFA had standing under CUFTA, it has failed to prove other requisite elements of its claim under CUFTA.

A. Administrative Claims

Section 503(b)(1)(A) provides for administrative expenses, "including the actual, necessary costs and expenses of preserving the estate...." 11 U.S.C. § 503(b)(1)(A)

. The terms "actual" and "necessary" as used in § 503(b)(1)(A) are construed narrowly. Burlington N.R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 706 (9th Cir.1988) (citations omitted). This narrow construction implements a presumption that a bankruptcy estate has limited resources which should be equally distributed among creditors. Boeing N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir.2005). Bankruptcy courts have broad discretion in deciding whether to allow an administrative expense. Microsoft Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091, 1094 (9th Cir.1995) ; In re Dant & Russell, Inc., 853 F.2d at 706. The purpose of administrative priority status is to encourage third parties to do business with the bankruptcy estate for the benefit of the estate as a whole. Boeing N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir.2005) (citations omitted).

The claimant has the burden of proving by a preponderance of evidence that it has an administrative expense claim. See In re CWS Enterprises, Inc. , No. BAP EC–141195, 2015 WL 3651541, at *4 (9th Cir. BAP June 12, 2015)

(unpublished). Unlike general unsecured proofs of claims, administrative claims lack presumptive validity. In re Saxton, Inc. , No. BAP NV–06–1354–ESD, 2007 WL 7540972, at *7 n. 12 (9th Cir. BAP July 30, 2007) (unpublished). An administrative claimant bears the initial burden of establishing that its claim "(1) arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate." In re DAK Indus., Inc. , 66 F.3d 1091, 1094 (9th Cir.1995).

Analysis

IFA has not met its burden to establish a prima facie administrative claim. IFA has not cited any authority in support of its contention that where an individual chapter 11 debtor is the initial transferee of an allegedly fraudulent post-petition transfer, the transfer constitutes an actual and necessary cost of preserving the estate under § 503(b)(1)(A)

. The Court's own research indicates that there is a "venerable but limited exception" to the post-petition transaction-for-the-benefit-of-the-estate requirement under § 503(b)(1)(A)

. See In re Abercrombie, 139 F.3d 755, 758 (9th Cir.1998) (citing Reading v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) ). The so-called Reading exception provides that a post-petition tort committed by the debtor-in-possession within the course and scope of its continued operation of the estate's business may, itself, be considered a cost of doing business and is, therefore, entitled to administrative expense priority under § 503(b)(1)(A).⁵

IFA has failed to show that the Transfers are an "actual, necessary cost and expense of preserving the estate." IFA has failed to even analyze whether the Transfers come within the Reading

exception for post-petition torts incident to the debtor-in-possession's business operations.

A fraudulent transfer cause of action does not "sound in tort"; it is quasi-contractual in nature. See, e.g., United States v. Neidorf, 522 F.2d 916, 918–20 (9th Cir.1975)

(finding that claim for recovery of fraudulent transfer was quasi-contractual and not a tort for purposes of determining the applicable statute of limitations under 28 U.S.C. § 2415 ); In re Century City Doctors Hosp., LLC, 466 B.R. 1, 9 (Bankr.C.D.Cal.2012) (noting that fraudulent transfer actions are not founded upon tort for contractual choice of law provision purposes) (citing cases in other contexts). IFA has not provided (and the Court is unaware of) any authority which expands the Reading exception to encompass fraudulent transfers or other quasi-contractual remedies. Also, IFA has failed to establish that Blanchard (an individual chapter 11 debtor) was acting within the course and scope of his fiduciary capacity to the estate as a debtor-in-possession.

IFA has not established a prima facie administrative claim, but even if it had, the Application must be denied as a matter of law for the reasons set forth below.

B. Standing

A plaintiff must make an affirmative showing that it was injured by a transfer in order to have statutory standing to pursue a fraudulent transfer claim under CUFTA. See, e.g., Isaka Investments, Ltd. v. Reserva, LLC, No. B245650, 2014 WL 255701, at *13 (Cal.Ct.App. Jan. 23, 2014)

, reh'g denied (Feb. 24, 2014), review denied (Apr. 9, 2014) (unpublished) ("Without a ‘right to payment’ against the transferor, Plaintiffs have no standing to pursue a fraudulent transfer claim."); see also In re Paradigm Int'l, Inc. , No. 13–56517, ––– Fed.Appx. ––––, ––––, 2015 WL 8949762, at *1 (9th Cir. Dec. 16, 2015) (holding that the burden of...