Kurtin v. Ehrenberg (In re Elieff)

• Decision Date: 21 March 2022
• Docket Number: BAP No. CC-21-1081-SFL,Bk. No. 8:19-bk-13858-ES,Adv. No. 8:19-ap-01205-ES
• Parties: IN RE: Bruce ELIEFF, Debtor. Todd Kurtin, Appellant, v. Howard M. Ehrenberg, Chapter 7 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

637 B.R. 612

IN RE: Bruce ELIEFF, Debtor.

Todd Kurtin, Appellant,

v.Howard M. Ehrenberg, Chapter 7 Trustee, Appellee.

BAP No. CC-21-1081-SFL

Bk. No. 8:19-bk-13858-ES

Adv. No. 8:19-ap-01205-ES

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Filed MARCH 21, 2022

Daniel Luke Geyser of Haynes and Boone, LLP, Los Angeles, argued for appellant;

Sean A. O'Keefe of O'Keefe & Assoc. Law Corp., P.C., Costa Mesa, argued for appellee.

Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.

SPRAKER, Bankruptcy Judge:

INTRODUCTION

Creditor Todd Kurtin appeals from the entry of summary judgment in favor of chapter 7¹ trustee Howard M. Ehrenberg subordinating Kurtin's claim under § 510(b). After its initial ruling, the bankruptcy court entered an order clarifying that its ruling subordinated not only his claim but also his lien rights arising from the prepetition judgment liens he obtained against Elieff.

We agree with the bankruptcy court that Kurtin's claim for damages arises from the purchase or sale of a security, and § 510(b) required subordination of his claim and the associated lien rights. Accordingly, we AFFIRM.

FACTS²

A. Kurtin's and Elieff's joint ventures.

Beginning in the early 1990s, Kurtin and Elieff, as equal partners, engaged in a series of real estate investment and development projects. Each project was owned and run through a separate business entity or collection of entities. Typically, Elieff and Kurtin used corporations or limited liability companies, but they also utilized limited partnerships (collectively, the "Joint Entities").

It is not clear whether their business relationship was a single partnership that engaged in multiple projects or a set of separate ventures. In his declaration opposing the Trustee's summary judgment motion, Kurtin referred to it as "an equal general partnership, based on an oral agreement." Elsewhere, however, Kurtin admitted that he and Elieff conducted their real estate investment and development business through the Joint Entities and that each of them as individuals formed and jointly owned the Joint Entities, rather than the partnership.

B. Kurtin's and Elieff's first round of state court litigation and the resulting Settlement Agreement.

The relationship between Kurtin and Elieff began to deteriorate in the late 1990s. In 2003, Kurtin sued Elieff and his separately owned development entities. Kurtin asserted claims for breach of contract, breach of fiduciary duty, conversion, embezzlement, and constructive fraud, among others. In turn, Elieff counter-sued Kurtin and his separately owned development entities, stating causes of action similar to those Kurtin had asserted.

During this litigation (the "First Lawsuit"), the parties engaged in mediation and entered into a Settlement Agreement in 2005. The Settlement Agreement not only resolved the parties’ existing disputes but also ended their business relationship. More specifically, the Settlement Agreement required Kurtin to transfer his interests in the Joint Entities to Elieff. In turn, Elieff agreed to indemnify Kurtin for any liabilities arising from the Joint Entities. In exchange for both the dismissal of his causes of action and the "sale" of his interest in the Joint Entities, Kurtin was to receive from Elieff or the Joint Entities an aggregate of $48.8 million in "Settlement Payments." The Settlement Agreement broke the Settlement Payments into four installments: (1) $21 million by no later than August 19, 2005; (2) $1.8 million on January 2, 2006; (3) $13.1 million on or before June 30, 2006; and (4) $12.9 million on or before December 31, 2006. Elieff and the Joint Entities were jointly and severally liable for the first Settlement Payment. Only the Joint Entities were liable for the remainder of the Settlement Payments.

The Settlement Agreement did not allocate any specific portion of the Settlement Payments to either the release of Kurtin's claims or the sale of his interest in the Joint Entities. Rather, the Settlement Agreement, as well as Kurtin's subsequent litigation statements, all indicated that the resolution of disputes and the "buyout" of Kurtin's interests were indivisible.

Paragraph 14 of the Settlement Agreement contained two distinct provisions significant to the issues before us. The first granted Kurtin a security interest "in the projects owned by the Joint Entities" to secure their obligation to make the Settlement Payments.³ The second and more important of the two provisions contemplated a safeguard for the source of funds from which Kurtin presumed the Settlement Payments would be made—the funds of the Joint Entities. This provision prohibited Elieff from taking any distribution from any of the Joint Entities to the extent that such distributions would prevent satisfaction of the obligation to make Settlement Payments.

C. The default on the Settlement Agreement and the second round of state court litigation.

When the Joint Entities failed to pay the full amount of the third Settlement Payment and any of the fourth Settlement Payment, Kurtin was entitled to judgment in the First Lawsuit for the amount of the shortfall under the terms of the Settlement Agreement. Kurtin sought entry of judgment against the Joint Entities for roughly $22.5 million. But the trial court denied this relief because the Joint Entities were not parties to the First Lawsuit at the time the Settlement Agreement was entered into.

Kurtin sought and obtained arbitration under paragraph 15 of the Settlement Agreement. This paragraph permitted the arbitrator to supply essential terms to the Settlement Agreement to the extent either party subsequently asserted that the Settlement Agreement was missing material terms. The arbitrator ultimately determined that the Settlement Agreement should be deemed amended to include a term that, if the default in Settlement Payments was not cured by June 30, 2007, "Kurtin shall have the right to require Bruce Elieff to transfer to Kurtin or his designee by July 10, 2007, any and all of Elieff's right, title and interest—held directly or indirectly—in and to any or all of the Joint Entities ...." But Kurtin never sought to enforce this new term of the Settlement Agreement. According to Kurtin, he suspected that by the time of the arbitrator's ruling the unencumbered assets and funds of the Joint Entities were grossly insufficient to satisfy the shortfall in Settlement Payments.

Instead, in December 2007, Kurtin sued Elieff and the Joint Entities, stating numerous causes of action ("Second Lawsuit"). Only the seventh cause of action for breach of contract is relevant to this appeal.

In relevant part, Kurtin alleged that Elieff breached paragraph 14 of the Settlement Agreement by taking distributions from the Joint Entities, "which distributions prevented the payment of the settlement payments as required under the Settlement Agreement."

In May 2010, following a bifurcated trial, the jury returned a verdict in favor of Kurtin and against Elieff for breach of paragraph 14 of the Settlement Agreement in the amount of $24,411,433.86, and judgment was entered for that amount. A series of appeals and a new trial on the amount of Kurtin's damages ensued. Ultimately, in February 2020,⁴ the state court entered its fifth amended judgment against Elieff for $33,892,117.62 based solely on his breach of the distribution restriction in the Settlement Agreement. Prior to Elieff's bankruptcy filing, Kurtin recorded abstracts of judgment against Elieff and two of his separate entities that the state court included as additional judgment debtors based on its finding that those two entities were Elieff's alter egos—Morse Properties, LLC ("Morse") and 4627 Camden, LLC ("Camden").

D. The bankruptcy filings and the subordination litigation.

In October 2019, Elieff, Morse, and Camden each filed chapter 11 petitions. In February 2020, three additional Elieff-related entities filed chapter 11 petitions. In June 2020, the bankruptcy court substantively consolidated the cases and ordered the appointment of a chapter 11 trustee. In September 2020, the consolidated case was converted to chapter 7, and Howard Ehrenberg was appointed to serve as chapter 7 trustee.

In his schedules, as amended, Elieff listed roughly $13 million in real property and $260,000 in personal property. He disclosed numerous affiliated entities but listed their values as zero or unknown. As for liabilities, he listed $97 million in secured debt, including $35 million owed to Kurtin on his judgment liens, and roughly $300,000 in unsecured debt.

Within weeks of his bankruptcy filing, Elieff commenced an adversary proceeding against Kurtin. In December 2019, Elieff filed his second amended complaint ("SAC"), which stated subordination claims under § 510(b), claims for transfer of Kurtin's judgment liens to the estate under § 510(c)(2), and various avoidance claims. In January 2020, Kurtin moved to dismiss the SAC. Elieff countered in February 2020 with a summary judgment motion filed jointly with intervenor the Official Committee of Unsecured Creditors of Bruce Elieff.

The bankruptcy court heard and determined the motion to dismiss and held its initial hearing on the summary judgment motion. The court dismissed some of the avoidance claims with leave to amend. It also dismissed without leave to amend the § 510(c)(2) claims seeking to transfer the judgment liens to the estate. The court held that § 510(c)(2) did not apply to claims subordinated under § 510(b) and only applied to claims subordinated under § 510(c)(1). The court denied the remainder of the motion to dismiss. As for the summary judgment motion, the court granted Kurtin's Civil Rule 56(d) (applicable via Rule 7056) request for time to conduct discovery and continued the summary judgment hearing.

By the time the court held its continued hearing on the summary judgment motion, the case had been converted, and Howard Ehrenberg, the chapter 7 trustee, had become the plaintiff. At the...