Rund v. Kirkland (In re EPD Inv. Co.)

• Decision Date: 29 October 2020
• Docket Number: Adv. No.: 2:12-ap-02424-ER,Case No.: 2:10-bk-62208-ER
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re: EPD Investment Co., LLC, and Jerrold S. Pressman, Consolidated Debtors. Jason M. Rund, solely in his capacity as Chapter 7 Trustee, Plaintiff, v. John C. Kirkland and Poshow Ann Kirkland, solely in her capacity as Trustee of the Bright Conscience Trust Dated September 9, 2009, Defendants.

In re: EPD Investment Co., LLC, and Jerrold S. Pressman, Consolidated Debtors.

Jason M. Rund, solely in his capacity as Chapter 7 Trustee, Plaintiff, v. John C. Kirkland and Poshow Ann Kirkland, solely in her capacity

as Trustee of the Bright Conscience Trust Dated September 9, 2009, Defendants.

Case No.: 2:10-bk-62208-ER

Adv. No.: 2:12-ap-02424-ER

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION

October 29, 2020

MEMORANDUM OF DECISION GRANTING IN PART AND DENYING IN PART CROSS-MOTIONS FOR SUMMARY JUDGMENT FILED BY THE CHAPTER 7 TRUSTEE AND THE BC TRUST

Date: October 28, 2020

Time: 10:00 a.m.

Location: Ctrm. 1568

Roybal Federal Building

255 East Temple Street

Los Angeles, CA 90012

At the above-captioned date and time, the Court conducted a hearing on cross-motions for summary judgment (the "MSJs") filed by the Chapter 7 Trustee (the "Trustee") and the Bright Conscience Trust Dated September 9, 2009 (the "BC Trust").¹ For the reasons set forth below,the MSJs are GRANTED IN PART and DENIED IN PART. The Court finds that the facts established by the jury trial, and/or the facts as to which there is no genuine dispute, support entry of the following findings:

1) The BC Trust holds an allowed secured claim in the amount of $1,950,613.41. This finding is without prejudice to the ability of the Trustee and the BC Trust to assert that the claim is subject to the following adjustments:

a) The BC Trust may assert that the claim should be increased by approximately $75,000, based on the fact that the estate has received approximately $75,000 in proceeds from a Court-approved settlement with Union Bank, and the estate is entitled to only a single satisfaction of avoided transfers under § 550(d).

b) The Trustee may assert that the claim is subject to being surcharged in the amount of $309,166.70 under § 506(c), based on the fact that the Trustee was required to pay this amount to facilitate a settlement with Robert Geringer.²

2) The BC Trust is not entitled to any interest on its claim because the Trustee is entitled to avoid the claim as an actually fraudulent transfer pursuant to § 548(a)(1)(A). Notwithstanding such avoidance, the BC Trust is entitled to a claim of $1,950,613.41 because it has established that it acquired the claim in good faith and for value pursuant to § 548(c).

3) The BC Trust's claim does not attach to (a) $3,886,650.83 in proceeds from the Trustee's settlement of avoidance actions or (b) $1,250,000.00 in proceeds from the Trustee's settlements with Luce Forward and Greenberg Traurig. The BC Trust's claim does attach to (a) $3,615,817.85 in proceeds from a settlement with Robert Geringer³ and (b) $104,588.83 in proceeds from the sale of stock in Ice Skating Enterprises and Sidecreek Development.

4) The BC Trust is entitled to summary adjudication in its favor on the Trustee's constructively fraudulent transfer claims.

5) Neither party is entitled to summary adjudication with respect to the Trustee's equitable subordination claim.

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I. Procedural Background

On December 7, 2010, creditors filed an involuntary petition against EPD Investment Co., LLC ("EPD"). Bankr. Doc. No. 1.⁴ The Court entered an Order for Relief on February 9, 2011. Bankr. Doc. No. 29. On February 1, 2012, Jerrold S. Pressman ("Pressman") filed a voluntary Chapter 7 petition. On June 4, 2012, the bankruptcy cases of EPD and Pressman (collectively, the "Debtors") were substantively consolidated. Bankr. Doc. No. 227.

On October 31, 2012, the Trustee filed the complaint commencing this adversary proceeding. Adv. Doc. No. 1. The Trustee filed the operative Fourth Amended Complaint [Adv. Doc. No. 234] (the "Complaint") on October 14, 2016.⁵ The Complaint seeks to (1) disallow and/or equitably subordinate proofs of claim filed by the Bright Conscience Trust Dated September 9, 2009 (the "BC Trust") and (2) avoid allegedly fraudulent transfers from the Debtors to John Kirkland ("Kirkland") and the BC Trust.

On December 17, 2018, the District Court withdrew the reference of this adversary proceeding from the Bankruptcy Court. Rund v. Kirkland (In re EPD Investment Co., LLC), 594 B.R. 423 (C.D. Cal. 2018). Withdrawal of the reference was based on Kirkland's right to a jury trial conducted by the District Court. Id. at 426. Observing the "common issues of fact and the overlapping nature of the claims against the BC Trust and John Kirkland," the District Court found that "judicial economy and the uniformity of bankruptcy administration ... would be best served by withdrawing the entire action." Id.

On June 4, 2019, the District Court granted the Trustee's motion to bifurcate the trial of the (1) disallowance, equitable subordination, and fraudulent transfer claims against the BC Trust and (2) the fraudulent transfer claims against Kirkland. District Court Doc. No. 117. A six-day jury trial of the Trustee's claims against Kirkland was conducted between June 25, 2019 and July 3, 2019. District Court Doc. Nos. 180-86. Specifically, the Trustee sought to avoid, as actually and constructively fraudulent, $104,852.82 in payments made by the Debtors towards the mortgage on Kirkland's home (the "Mortgage Transfers").

The jury returned a verdict in favor of Kirkland. In reaching its verdict, the jury found that EPD was a Ponzi scheme, see Verdict Form re Ponzi Scheme [District Court Doc. No. 174]; that Kirkland was not an insider of EPD and/or Pressman, see Verdict Form re Insider [District Court Doc. No. 174]; that EPD and/or Pressman transferred property to Kirkland to hinder, delay, and defraud one or more of their creditors, see Verdict Form No. 1 (Actual Fraud—California Law) at Question 3 and Verdict Form No. 2 (Actual Fraud—Bankruptcy Code) at Question 3 [District Court Doc. No. 174]; and that Kirkland received the Mortgage Transfers in good faith and for reasonably equivalent value, see Verdict Form No. 1 (Actual Fraud—California Law) at Questions 4-5; Verdict Form No. 2 (Actual Fraud—Bankruptcy Code) at Questions 4-5; VerdictForm No. 3 (Constructive Fraud—California Law) at Question 3; and Verdict Form No. 5 (Constructive Fraud—Bankruptcy Code) at Question 3 [District Court Doc. No. 174].

On October 3, 2019, the District Court remanded the Trustee's claims against the BC Trust to the Bankruptcy Court, and dismissed Count 1 of the Complaint (for disallowance and/or equitable subordination of the BC Trust's proofs of claim) as to Kirkland. District Court Doc. No. 189 (the "Remand Order"). The District Court stated that it saw no reason why the Bankruptcy Court could not rely upon the testimony provided during the jury trial in adjudicating the claims against the BC Trust. Id. The District Court has not yet entered judgment in connection with the jury's verdict in favor of Kirkland.

On July 22, 2020, the Court ordered the Trustee and the BC Trust to file cross-motions for summary judgment (the "MSJ's"). Adv. Doc. No. 409. The Court set a Pretrial Conference for December 15, 2020 at 11:00 a.m. in the event the MSJ's do not dispose of the action. Id.

At the time it ordered the parties to file the MSJ's, the Court noted that the Trustee and the BC Trust had submitted briefing to the Court and to the District Court regarding the extent to which the jury's findings as to Kirkland remain binding with respect to the Trustee's claims against the BC Trust. The Court ruled that the following legal framework would apply to the determination of which jury findings remained binding:

The Court finds that all explicit and implicit findings made by the jury remain binding with respect to the Trustee's claims against the BC Trust. The Seventh Amendment provides that "no fact tried by a jury, shall be otherwise re-examined in any Court of the United States." The Ninth Circuit has held:

The Supreme Court has explained how to comport with the Seventh Amendment when trying legal and equitable claims in the same action. In Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962), the Court held that in cases in which legal and equitable claims turn on common issues of fact, "any legal issues for which a trial by jury is timely and properly demanded [must] be submitted to a jury," id. at 473, 82 S.Ct. 894 (citing Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 510-11, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959)), and the jury's determination of the legal claims must occur "prior to any final court determination of [the] equitable claims," id. at 479, 82 S.Ct. 894. Because the Seventh Amendment's second clause "prohibit[s] ... the courts of the United States to re-examine any facts tried by a jury" except as permitted under the narrow "modes known to the common law," Parsons, 28 U.S. at 447-48, the court then must abide by the jury's findings of fact in making any subsequent rulings. See Floyd v. Laws, 929 F.2d 1390, 1397 (9th Cir. 1991) (holding that "it would be a violation of the seventh amendment right to jury trial for the court to disregard a jury's finding of fact").

It follows that "in a case where legal claims are tried by a jury and equitable claims are tried by a judge, and [those] claims are 'based on the same facts,'" the trial judge must "follow the jury's implicit or explicit factual determinations" "in deciding the equitable claims." L.A. Police Protective League v. Gates, 995 F.2d 1469, 1473 (9th Cir. 1993) (quoting Miller v. Fairchild Indus., 885 F.2d 498, 507 (9th Cir. 1989)). The trial court must do so in determining both liability and relief on the equitable claims.... These constraints are "consistent with ... the respectthat properly is accorded to a jury verdict in our system of jurisprudence." Miller, 885 F.2d at 507.

Teutscher v. Woodson, 835 F.3d 936, 944 (9th Cir. 2016).

Rather than being limited to the face of the verdict, the jury's findings include "any factual findings that the [v]erdict's contents necessarily imply." United States v. J-M Mfg. Co., Inc., No. EDCV 06-55-GW(PJWX), 2018 WL 705532, at *5 (

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