Sharp v. Tsai Luan Ho (In re Liberty Asset Mgmt. Corp.)

• Decision Date: 14 November 2022
• Docket Number: 2:16-bk-13575-ER,Adv. 2:16-ap-01374-ER
• Parties: In re: Liberty Asset Management Corporation, Debtor. v. Tsai Luan Ho, Defendant. Bradley D. Sharp, Plan Administrator for Liberty Asset Management Corporation, Plaintiff,
• Court: U.S. Bankruptcy Court — Central District of California

In re: Liberty Asset Management Corporation, Debtor.

Bradley D. Sharp, Plan Administrator for Liberty Asset Management Corporation, Plaintiff,
v.
Tsai Luan Ho, Defendant.

No. 2:16-bk-13575-ER

Adv. No. 2:16-ap-01374-ER

United States Bankruptcy Court, C.D. California, Los Angeles Division

November 14, 2022

MEMORANDUM OF DECISION: (1) DENYING DEFENDANT'S MOTION FOR ATTORNEYS' FEES AND (2) DISMISSING ACTION WITHOUT PREJUDICE PURSUANT TO CIVIL RULE 41(A)(2) [NO HEARING REQUIRED PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 78(B) AND LOCAL BANKRUPTCY RULE 9013-1(J)(3)]

Ernest M. Robles, United States Bankruptcy Judge

Before the Court is the motion of Tsai Luan Ho ("Ho") for an award of $50,000 in attorneys' fees (the "Fee Motion").^[1] For the reasons set forth below, the Fee Motion is DENIED. The Court

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will enter an order dismissing this action without prejudice pursuant to Civil Rule 41(a)(2),^[2] with each party bearing its own attorneys' fees and costs.

I. Background

On March 21, 2016, Liberty Asset Management Corporation (the "Debtor") filed a voluntary Chapter 11 petition. On August 16, 2016, the Official Committee of Unsecured Creditors (the "Committee") for the Debtor's estate commenced the above-captioned action against Ho and Benjamin Kirk ("Kirk"). On April 17, 2018, the Court approved a stipulation dismissing the claims against Kirk with prejudice.^[3]

On June 18, 2018, the Court confirmed the First Amended Chapter 11 Plan of Liquidation Dated January 31, 2018 Proposed by the Official Unsecured Creditors' Committee for Liberty Asset Management Corporation [Bankr. Doc. No. 609, Ex. A] (the "Plan"). See Bankr. Doc. No. 665 (the "Confirmation Order") and Bankr. Doc. No. 650 (ruling confirming Plan). The Plan appointed Bradley D. Sharp of Development Specialists, Inc. as the Plan Administrator responsible for liquidating the Debtor's assets for the benefit of creditors, see Plan at § VII.D.1, and vested in the Plan Administrator the right to prosecute the instant action on behalf of creditors, see Plan at § VII.D.2. The Plan created an Oversight Committee responsible for consulting with the Plan Administrator on the settlement of causes of action. Plan at § X.C.

In this action, the Plan Administrator seeks to avoid, as actually and constructively fraudulent, transfers made from the Debtor to Ho. The Plan Administrator seeks damages against Ho in excess of $11 million.

The trial of the claims against Ho was initially scheduled to commence on May 29, 2018, but did not go forward because Ho filed a voluntary Chapter 7 petition (the "Ho Bankruptcy Case")^[4]in the United States Bankruptcy Court for the Northern District of California (the "Northern District Bankruptcy Court") on May 28, 2018.

The Plan Administrator filed a Proof of Claim in the Ho Bankruptcy Case, in an amount in excess of $11 million, based upon the allegations asserted in this action. The Chapter 7 Trustee (the "Trustee") in the Ho Bankruptcy Case liquidated assets with a value of $357,557.51, and the Plan Administrator received a distribution of $17,756.70 in connection with its Proof of Claim.^[5]The Northern District Bankruptcy Court found that pursuant to § 727(a)(3), Ho was not entitled to a discharge, because she "has, for years, been involved in large and sophisticated transactions" involving real estate, but failed to maintain adequate financial records of those transactions.^[6] The District Court affirmed the Bankruptcy Court's determination that Ho was not entitled to a discharge.

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On May 25, 2022, the Court issued an Order Requiring Plan Administrator and Oversight Committee to Show Cause Why this Adversary Proceeding Should Not be Dismissed [Adv. Doc. No. 179] (the "OSC"). The OSC did not discuss the merits of the Plan Administrator's claims against Ho. Instead, the OSC expressed the concern that the costs of continued litigation would outweigh any potential recovery:

[T]he Court questions whether the Plan Administrator's desire to continue to pursue this action takes sufficient account of the high cost of trial, particularly when considering the possibility that any judgment entered in the Plan Administrator's favor could prove uncollectible. Ho has represented to the Court that she owns no real property does not own a car, has not been gainfully employed since 2016, works primarily as a babysitter for her grandchildren and lives on her social security payments. The real property assets which Ho did own through the corporate entities Big Max, LLC and Great Vista Real Estate Investment Corporation have already been sold and all proceeds of the sales have been distributed to creditors.

In support of the continued prosecution of this action, the Plan Administrator points to the Northern District Bankruptcy Court's judgment denying Ho's discharge based upon her failure to keep adequate business records, and argues that this judgment establishes that Ho's financial condition is unknown. Pursuant to his statutory obligation, the Trustee in the Ho Bankruptcy Case has already liquidated Ho's non-exempt assets. The Plan Administrator's argument presupposes that the Plan Administrator will be able to uncover additional assets that the Trustee could not locate. While the Court cannot rule out the possibility that the Plan Administrator would be more successful than the Trustee in uncovering hidden assets, there is nothing in the record suggesting that this is likely. The Trustee had both a statutory obligation and a financial incentive to locate Ho's hidden assets, and there is no indication that the Trustee was anything other than diligent in fulfilling his statutory obligations.

Were Ho to acquire significant assets in the future, entry of a judgment against her and in the Plan Administrator's favor could inure to the benefit of general unsecured creditors. But again, while this possibility cannot be ruled out, it seems unlikely. Prior to the commencement of this action, Ho received substantial income and assets through a Profit Sharing Agreement with the Debtor. In connection with that Profit Sharing Agreement, Ho used her contacts to bring potential real estate investors to the Debtor. Many investors in the Debtor lost a substantial portion of their investment; as noted above, investors receiving a distribution through the Plan have to date recovered only 18.98% of their claims. In view of her involvement with the Debtor's failed venture, Ho's ability to continue to earn substantial income in the real estate industry is questionable.

OSC at 5-6 (internal footnotes omitted).

In response to the OSC, the Plan Administrator stated that he did "not have information at this time to support that the potential for collection of assets from Ho outweighs the costs of trial."^[7] The Plan Administrator, with the approval of the Oversight Committee, requested that the Court dismiss this action without prejudice, with each party bearing their own fees and costs.

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The Plan Administrator sent Ho a proposed stipulation providing for dismissal of the adversary proceeding with prejudice. Ho refused to execute the stipulation, asserting that the estate should pay Ho's attorney's fees. The Court ordered Ho to file a motion explaining why should would be entitled to attorney's fees in the event the action was dismissed, and provided the Plan Administrator the opportunity to respond thereto.

Ho asserts that she is entitled to attorneys' fees, as the prevailing party in this action, based upon a fee clause in two deeds of trust referenced in the Plan Administrator's Complaint. Ho claims that she is entitled to fees pursuant to both Cal. Civ. Code §1717(a) and Cal. Civ. Proc. Code § 1021. The Plan Administrator contends that Ho is not entitled to attorneys' fees because this action was not an action "on a contract," and therefore the fee clause in the deeds of trust was not triggered.

II. Findings of Fact and Conclusions of Law

A. Ho is Not Entitled to Attorneys' Fees Under Cal. Civ. Code § 1717(a)

"No general right to attorney fees exists under the Bankruptcy Code. However, a prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law if state law governs the substantive issues raised in the proceedings." Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). The applicable provisions of California law governing the award of attorneys' fees are Cal. Civ. Code § 1717(a) and Cal. Code Civ. Proc. § 1021.

Cal. Civ. Code § 1717(a) provides in relevant part:

In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.

To obtain fees pursuant to Cal. Civ. Code § 1717(a), three conditions must be met:

First, the action in which the fees are incurred must be an action "on a contract," a phrase that is liberally construed. Second, the contract must contain a provision stating that attorney's fees incurred to enforce the contract shall be awarded either to one of the parties or to the prevailing party. And third, the party seeking fees must be the party who "prevail[ed] on the contract," meaning (with exceptions not relevant here) "the party who recovered a greater relief in the action on the contract."

Penrod v. AmeriCredit Fin. Svcs., Inc. (In re Penrod), 802 F.3d 1084, 1087-88 (9th Cir. 2015) (internal citations omitted).

Under California law, "an action is 'on a contract' when a party seeks to enforce, or avoid enforcement of, the provisions of the...