In re Castle Trading, Inc., 053117 FED9, BAP CC-16-1322-FTaKu

Docket Nº:BAP CC-16-1322-FTaKu, CC-16-1323-FTaKu, CC-16-1324-FTaKu, CC-16-1352-FTaKu, CC-16-1353-FTaKu, CC-16-1354-FTaKu
Party Name:In re: CASTLE TRADING, INC., Debtor. v. MESISCA RILEY & KREITENBERG LLP, Appellee/Cross-Appellant. RICHARD K. DIAMOND, Chapter 7 Trustee, Appellant/Cross-Appellee, Bk. No. 2:13-bk-15021-BB Adv. Nos. 2:14-ap-01022-BB, 2:14-ap-01122-BB, 2:14-ap-01312-BB
Attorney:George E. Schulman of Danning, Gill, Diamond & Kollitz, LLP argued on behalf of Appellant/Cross-Appellee Richard K. Diamond, Chapter 7 Trustee Dennis P. Riley of Mesisca Riley & Kreitenberg, LLP argued on behalf of Appellee/Cross-Appellant Mesisca Riley & Kreitenberg LLP.
Judge Panel:Before: FARIS, TAYLOR, and KURTZ, Bankruptcy Judges.
Case Date:May 31, 2017
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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In re: CASTLE TRADING, INC., Debtor.

RICHARD K. DIAMOND, Chapter 7 Trustee, Appellant/Cross-Appellee,

v.

MESISCA RILEY & KREITENBERG LLP, Appellee/Cross-Appellant.

BAP Nos. CC-16-1322-FTaKu, CC-16-1323-FTaKu, CC-16-1324-FTaKu, CC-16-1352-FTaKu, CC-16-1353-FTaKu, CC-16-1354-FTaKu

Bk. No. 2:13-bk-15021-BB

Adv. Nos. 2:14-ap-01022-BB, 2:14-ap-01122-BB, 2:14-ap-01312-BB

United States Bankruptcy Appellate Panel of the Ninth Circuit

May 31, 2017

         NOT FOR PUBLICATION

          Argued and Submitted on May 18, 2017 at Pasadena, California

         Appeals from the United States Bankruptcy Court for the Central District of California Honorable Sheri Bluebond, Chief Bankruptcy Judge, Presiding

          George E. Schulman of Danning, Gill, Diamond & Kollitz, LLP argued on behalf of Appellant/Cross-Appellee Richard K. Diamond, Chapter 7 Trustee

          Dennis P. Riley of Mesisca Riley & Kreitenberg, LLP argued on behalf of Appellee/Cross-Appellant Mesisca Riley & Kreitenberg LLP.

          Before: FARIS, TAYLOR, and KURTZ, Bankruptcy Judges.

          MEMORANDUM [*]

         INTRODUCTION

         Debtor Castle Trading, Inc. retained Appellee/Cross-Appellant Mesisca Riley & Kreitenberg LLP ("MRK") to provide specified legal services. To pay for these future services, Castle Trading signed a promissory note in favor of MRK and deeds of trust encumbering certain properties. After Castle Trading filed for bankruptcy protection, Appellant/Cross-Appellee Richard K. Diamond, Chapter 71 Trustee ("Trustee"), sought to avoid the promissory note and deeds of trust as fraudulent transfers, arguing that the prepetition executory contract for MRK's future legal services did not provide "reasonably equivalent value" in exchange for the promissory note and deeds of trust. The bankruptcy court disagreed, holding that the promise of future services was reasonably equivalent value.

         On appeal, the Trustee argues that the bankruptcy court erred because the value of the executory contract was uncertain or limited and did not provide reasonably equivalent value. MRK cross-appeals, arguing that the agreement could not have been a fraudulent transfer because Castle Trading was not insolvent inasmuch as a $3.8 million "shareholder loan" was actually a capital contribution, as opposed to a liability.

         We AFFIRM the bankruptcy court's holding that the agreement provided reasonably equivalent value. We need not reach the points of error raised in MRK's cross-appeals.

         FACTUAL BACKGROUND

         A. The 2008 Action and 2011 Action

         Yuri and Natalia Plyam are the sole owners, directors, and officers of Castle Trading. It began as a commodities brokerage but later transitioned to real estate development and investment.

         In January 2008, Precision Development, LLC ("Precision"), a company previously owned by Mr. Plyam, filed a complaint against the Plyams in the state superior court (the "2008 Action"). Essentially, Precision alleged that the Plyams diverted substantial funds that Precision's investors had wired to them for a real estate development project and instead used the money for personal gain. In July 2010, MRK substituted in as counsel for the Plyams.

         Following a jury trial, the superior court entered judgment against the Plyams in the amount of $10.3 million. The Plyams unsuccessfully appealed the judgment.

         In July 2011, Precision filed a lawsuit against Castle Trading, the Plyams, and Ms. Plyam's mother, Anna Logvin, in state court (the "2011 Action"), alleging that the Plyams fraudulently transferred assets to Castle Trading. Precision recorded a lis pendens against each of Castle Trading's real property assets.

         B. The Fee Agreement between Castle Trading and MRK

         Because of MRK's familiarity with the Plyams and Castle Trading, the defendants sought MRK's representation in the 2011 Action.

         On September 7, 2011, Castle Trading entered into a fee agreement with MRK (the "Fee Agreement"). MRK agreed to represent Castle Trading in three state court proceedings: (1) the 2011 Action; (2) Castle Trading, Inc. v. Aframian, a breach of contract action (the "Aframian Action"); and (3) Castle Trading, Inc. v. Greer, an unlawful detainer action (the "Greer Action"). The Fee Agreement recited that, because of the substantial judgment against the Plyams in the 2008 Action, Castle Trading did not have the financial ability to pay MRK. Therefore, the parties agreed that: (1) MRK would represent Castle Trading in the Aframian Action for an earned fee of $202, 500, based on an estimate of 270 hours at $750 per hour; (2) MRK would represent Castle Trading in the 2011 Action for an earned fee of $412, 500, based on an estimate of 550 hours, and $750 per hour for time spent in excess of 550 hours; and (3) MRK would represent Castle Trading in the Greer Action for an earned fee of $20, 000, based on an estimate of 40 hours at $500 per hour. Castle Trading acknowledged that it would be indebted to MRK for the total amount of $635, 000 (plus any amount billed over the estimated 550 hours in the 2011 Action). Accordingly, Castle Trading executed a promissory note in favor of MRK in the amount of $635, 000.

         MRK agreed to delay collection of the $635, 000 and instead take as security deeds of trust encumbering certain real property owned by Castle Trading. The deeds of trust were recorded against five of Castle Trading's properties in California, which were known as: (1) the "Hayvenhurst Property, " (2) the "Alta Mesa Property, " (3) the "Meadow Bay Property, " (4) the "Bay View Property, " and (5) the "Angelo Property."

         MRK advised Castle Trading to consult independent counsel prior to entering into the Fee Agreement. Ms. Plyam testified that three other attorneys told her that the Fee Agreement was a "great deal, " especially because no other attorney would likely agree to represent Castle Trading.

         MRK represented Castle Trading in each of the three lawsuits. It obtained a judgment in favor of Castle Trading in the Aframian Action, successfully ejected the tenants in the Greer Action, and represented Castle Trading in the 2011 Action until Castle Trading filed for bankruptcy.2 According to its billing records, if MRK were billing Castle Trading on an hourly basis, its fee (based on the recorded time) would have been $217, 819.3

         C. Castle Trading's bankruptcy filing and the Trustee's adversary proceedings

         On February 23, 2013, Castle Trading filed a chapter 7 petition in the United States Bankruptcy Court for the Central District of California. On the same day, the Plyams filed a joint chapter 7 petition. The bankruptcy court initially appointed Alberta P. Stahl as chapter 7 trustee in both cases; Ms. Stahl later resigned from the Castle Trading case to avoid a conflict with her role as trustee in the Plyams' personal bankruptcy case. The bankruptcy court thereafter appointed Mr. Diamond as successor chapter 7 trustee.

         In its schedules, Castle Trading estimated that it held assets totaling $3, 262, 242. It listed liabilities of $16, 070, 990, including $1, 932, 533 in secured debts and a $3, 814, 457 "loan from shareholder" as an unsecured, nonpriority debt. The schedules identified Mr. Plyam as the creditor on the shareholder loan.

         Proofs of claims were filed by a number of creditors. Of relevance to this proceeding, Ms. Stahl, the Plyams' chapter...

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