In re Cyrus II Partnership

• Decision Date: 24 November 2008
• Docket Number: Bankruptcy No. 05-39857.,Adversary No. 07-03301.
• Citation: 413 B.R. 609
• Parties: In re CYRUS II PARTNERSHIP, et al., Debtor(s). Rodney D. Tow, et al., Plaintiff(s) v. Schumann Rafizadeh, et al., Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

Page 609

413 B.R. 609

In re CYRUS II PARTNERSHIP, et al., Debtor(s) Rodney D. Tow, et al., Plaintiff(s) v. Schumann Rafizadeh, et al., Defendant(s).

Bankruptcy No. 05-39857.

Adversary No. 07-03301.

United States Bankruptcy Court, S.D. Texas, Houston Division.

November 24, 2008.

MEMORANDUM OPINION ON MOTION FOR PARTIAL SUMMARY JUDGMENT ON COUNT 2-FRAUDULENT TRANSFER

MARVIN ISGUR, Bankruptcy Judge.

On July 1, 2008, the Court held a hearing on COOB, LP's ("COOB") Motion for Partial Summary Judgment on Count 2 — Fraudulent Transfer (docket no. 643). For the reasons set forth below, the Court denies the motion.

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157. Venue is proper in this District pursuant to 28 U.S.C. § 1409.

I. Background

Mondona Rafizadeh ("Mondona"), Cyrus II Partnership ("Cyrus"), and Bahar Development, Inc. ("Bahar") filed voluntary chapter 7 petitions on June 27, 2005 (collectively as "Debtors"). They filed bankruptcy after the 24th Judicial District Court for the Parish of Jefferson, Louisiana, issued a $10,893,350.96 judgment on December 23, 2004 against them and in favor of ORIX Capital Markets, L.L.C. ("ORIX").

The judgment was based on a $6,400,000 promissory note entered into on or about July 6, 1999, by Cyrus and secured by a lien interest in the Arlington Apartments in Harvey, Louisiana ("Arlington Note"). Cyrus's general partner was Bahar.

The Arlington Note was non-recourse, except in limited instances that triggered Mondona's liability. The 24th Judicial District Court found that personal liability arose under the Arlington Note and Mondona's guaranty because of, inter alia, commission of fraud, gross negligence waste, conversion, failure to provide financial information, failure to make payment on the note, and the transfer of the apartments without required consent.

The Louisiana judgment held Debtors personally liable for the remaining principal amount of $6,282,671.16, accrued non-default interest of $1,274,226.10, default interest of $1,611,673.70, a prepayment premium of $1,268,413.60, and other miscellaneous amounts totaling $456,366.40. The total judgment was for $10,893,360.96 plus attorneys' fees. The Louisiana Court later awarded attorneys' fees and expenses totaling $2,130,649.00. With post-judgment interest, the total amount awarded to ORIX as of the petition date was $14,160,348.75 plus post-judgment attorneys' fees and costs.

Pre-petition, ORIX, seeking to collect the judgment, sued Debtors and allegedly related entities in Louisiana, asserting that entities controlled by Mondona's husband, Schumann Rafizadeh ("Schumann"), received tens of millions of dollars of fraudulent transfers and that those entities are alter egos of Debtors ("SBE Litigation").

The bankruptcy filings stayed the SBE Litigation in Louisiana. The Trustee engaged in mediation in an attempt to settle the claims between the Debtors and ORIX. After the mediation failed, ORIX and the Trustee had several disputes. ORIX is by far the largest creditor of the estate. The Trustee and ORIX eventually settled their disputes, determining that the SBE claims were property of the estate, and that ORIX could act as a co-Plaintiff with the Trustee.

On June 21, 2007, the Trustee and ORIX ("Plaintiffs") filed this adversary proceeding against Mondona, Schumann, and a myriad of allegedly related entities. The complaint includes claims for avoidance of fraudulent transfers, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, and civil conspiracy. It also seeks a finding of single business enterprise and alter ego, and requests substantive consolidation, a constructive trust, and an accounting.

COOB is one of the defendants in this proceeding. Plaintiffs allege COOB was formed in February 2001 as an Ohio limited partnership with a principal place of business in Houston, Texas. Plaintiffs argue that on March 14, 2004, Debtor Bahar deeded an Ohio property, referred to as Imperial Towers, to COOB. Plaintiffs assert, however, that the transaction was backdated to be effective January 1, 2000. Through this transaction, Plaintiffs claim Mondona transferred a $4 million asset for virtually no consideration.

Plaintiffs seek to avoid this transfer pursuant to 11 U.S.C. § 544(b), § 1336.04(A)(1) of the Ohio Uniform Fraudulent Transfers Act ("OUFTA"), and § 24.005(a)(1) of the Texas Uniform Fraudulent Transfers Act ("TUFTA"). Although a significant amount of time has passed since the transfer, Plaintiffs argue that this complaint is timely because defendants concealed the fraudulent nature of the transfer. As such, they assert the relevant statute of limitations runs from the time the transfer could reasonably have been discovered rather than from the time the transfer actually occurred.

II. COOB's Motion for Partial Summary Judgment

COOB argues that under federal or Texas choice of law rules, Ohio substantive law applies to this transaction. Under Ohio substantive law, COOB asserts this claim is barred by the applicable statute of limitations. Section 1336.09 of OUFTA states:

A claim for relief with respect to a transfer or an obligation that is fraudulent under section 1336.04 or 1336.05 of the Revised Code is extinguished unless an action is brought in accordance with one of the following:

(A) If the transfer or obligation is fraudulent under division (A)(1) of section 1336.04 of the Revised Code, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or reasonably could have been discovered by the claimant....

R.C. § 1336.09 (Vernon's 2008). COOB argues that in Ohio, the recordation of a deed puts the world on notice of the transfer. The deed was recorded on March 27, 2001. Therefore, COOB argues that pursuant to § 1336.09, any possible cause of action for a fraudulent transfer under OUFTA § 1336.04(A)(1) is extinguished. Thus, if Ohio substantive law applies, COOB's Motion for Partial Summary Judgment should be granted.

Plaintiffs argue that COOB is ignoring the factually intense application of choice of law rules. As such, Plaintiffs assert that summary judgment cannot be granted because: (1) there are fact questions as to whether Texas or Ohio substantive law should apply; and (2) even if those questions can be answered at this stage, federal and Texas choice of law rules demand that Texas substantive law should apply. Plaintiffs, however, concede that if Ohio substantive law applies, their claim is barred.

III. Summary Judgment Standard

Which state's substantive law governs an issue is a question of law for the court to decide. Aqua-Marine Constructors, Inc. v. Banks, 110 F.3d 663, 667 (9th Cir.1997). However, determining which state contacts or interests control involves a factual inquiry. Hughes Wood Prods., Inc. v. Wagner, 18 S.W.3d 202, 204 (Tex. 2000) (citing Parra v. Larchmont Farms, Inc., 932 S.W.2d 68, 74 (Tex.App.1995), rev'd on other grounds, 941 S.W.2d 93 (1997) (per curiam)).

A party seeking summary judgment must show that there is no genuine issue of material fact as to fact questions necessary to determining a choice of law issue. Id. (citing Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548 (Tex.1985)). Material facts are those that could affect the outcome of the action or could allow a reasonable fact finder to find in favor of the non-moving party. DIRECTV, Inc. v. Budden, 420 F.3d 521, 529 (5th Cir.2005).

The evidentiary support needed to meet the initial summary judgment burden depends on whether the movant bears the ultimate burden of proof at trial. At all times, a court views the facts in the light most favorable to the non-moving party. Rodriguez v. ConAgra Grocery Products, Co., 436 F.3d 468, 473 (5th Cir.2006). However, to weigh evidence would result in a credibility determination that is not part of the summary judgment analysis. Hunt v. Rapides Healthcare Sys., LLC, 277 F.3d 757, 762 (5th Cir.2001); see MAN Roland, Inc. v. Kreitz Motor Express, Inc., 438 F.3d 476, 478 (5th Cir.2006). A court is not obligated to search the record for the non-moving party's evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir.2003).

If the movant does not bear the burden of proof, the movant must show the absence of sufficient evidence to support an essential element of the opposing party's claim. Id.; see also Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 197 (5th Cir. 2005); Ballard v. Burton, 444 F.3d 391, 396 (5th Cir.2006). The movant may seek summary judgment if insufficient evidence has emerged from discovery to support the non-moving party's claims. 10A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE & PROCEDURE § 2727 (3d ed.1998). At this time the non-moving party must respond with sufficient evidence to support the challenged element of its case or present evidence to raise a material issue of fact. Id.; Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Wheeler v. BL Dev. Corp., 415 F.3d 399, 402 (5th Cir.2005). Ultimately, the motion should be granted if the non-moving party cannot produce evidence to support an essential element of its claim. See Condrey, 431 F.3d at 197.

IV. Which Law Applies?

A. Federal or State Choice of Law Rules

A choice of law inquiry traditionally occurs as a two step process. First, the Court must determine whether federal or state choice of law rules govern. Second, once the Court has determined which choice of law rules apply, it must apply these rules to the facts of the case to determine the appropriate substantive laws.

In Klaxon, the Supreme Court of the United States held that a federal court sitting in diversity jurisdiction must apply choice of law rules of the forum state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (...