True Traditions, LC v. Wu

• Decision Date: 08 September 2015
• Docket Number: Case No. 14–cv–03605–BLF,A.P. No. 13–5062 SLJ
• Citation: 552 B.R. 826
• Parties: True Traditions, LC, Appellant, v. Carol Wu, et al., Appellees.
• Court: U.S. District Court — Northern District of California

552 B.R. 826

True Traditions, LC, Appellant

v.Carol Wu, et al., Appellees.

Case No. 14–cv–03605–BLF

A.P. No. 13–5062 SLJ

United States District Court, N.D. California, San Jose Division .

Signed September 08, 2015

John Arthur Shepardson, Attorney at Law, Los Gatos, CA, for Appellant.

Jean Barnier, John Harrington MacConaghy, Esq., MacConaghy & Barnier, PLC, Sonoma, CA, for Appellee.

ORDER AFFIRMING JUDGMENT OF BANKRUPTCY COURT

BETH LABSON FREEMAN

, District Judge

Appellant True Traditions, LC (“Appellant” or “TT”) appeals the judgment of the bankruptcy court avoiding a fraudulent conveyance of real property located at 415–417 Tehama Street, San Francisco, California (“Tehama Property”). For the reasons stated herein, the judgment of the bankruptcy court is AFFIRMED.

I. BACKGROUND

A. Factual and Procedural Overview of this Case

This adversary proceeding stems from two bankruptcy cases involving a debtor, Richard (“Rick”) Louie, Jr.,¹ who has gone to extraordinary lengths to conceal his assets.

On May 3, 2013, Appellee Carol Wu, the chapter 7 trustee for the individual bankruptcy estates of Rick and his wife, Stephanie Chan, filed the originating complaint in the underlying adversary proceeding in bankruptcy court seeking declaratory relief and to avoid fraudulent transfer. Appellees' App. (hereinafter “ER”), ECF 24, Exh. 1. The complaint asserted that Rick and Stephanie had failed to disclose as their personal assets a brokerage account at Merrill Lynch; that funds from the Merrill Lynch account had been used to purchase the Tehama Property in the name of Rick's mother, Mary Louie; that Mary then executed a grant deed transferring her fee title interest in the Tehama Property to Appellant True Traditions, LC, a purported New Mexico limited liability company, for no consideration; and that Rick, Stephanie, Mary, or TT might claim ownership over the Tehama Property. Id. ¶¶ 8–13. Appellee Wu accordingly sought a declaration that the Tehama Property belonged to the bankruptcy estate and to, among other things, avoid any transfer of interests in the Merrill Lynch account and Tehama Property made within two years of the filing of the complaint.

On June 28, 2013, Appellee Linda Green, the chapter 11 trustee for the bankruptcy estate of Homer Ventures LLC, a limited liability company formed and controlled by Rick, filed a motion to intervene in the Tehama Property action. ER Exh. 2. That motion was granted, and the two trustees filed their combined complaint-in-intervention on August 1, 2013 naming Rick, Stephanie, Mary, and TT as defendants. ER Exh. 3. The trustees eventually entered into a settlement whereby trustee Green would prosecute this lawsuit and agree to split any recovery with trustee Wu. See ER Exh. 16 (Bankruptcy Court's Order Following Trial (hereinafter “Trial Order”)) at 2. On January 15, 2014, the bankruptcy court also approved a joint stipulation of partial dismissal, through which the trustees agreed to dismiss Rick, Stephanie, and Mary without prejudice and pursue their declaratory relief and fraudulent transfer claims solely against Appellant TT. ER Exh. 6.

Appellant and Mary—represented by the same counsel—filed several motions thereafter. Appellant moved to dismiss the action for “lack of jurisdiction/authority” on January 27, 2014. ER Exh. 7.

Mary filed a motion to intervene in the adversary proceeding as a plaintiff on February 19, 2014 on the assertion that she owned the Tehama Property and could prove that ownership through a tracing of funds. ER Exh. 8. The bankruptcy court heard oral argument on both motions on March 31, 2014. With respect to the motion to dismiss, the bankruptcy court observed:

The Court would like to point out that Defendants' argument here that the Court has no jurisdiction conflicts with the answer filed in this case, in which it admitted the Court had jurisdiction. Somewhat confusingly, the answer to the complaint in intervention, Defendant denied the Court had jurisdiction, even though both complaints consist of the same allegations and the same causes of action. Regardless, as explained earlier, the issue is not whether the Court has jurisdiction, but rather, whether the Court can enter a final judgment.

3/31/14 Hr'g Tr. 6:9–18. On that basis, the bankruptcy court denied Appellant's motion to dismiss. ER Exh. 9. As to Mary's motion to intervene, the bankruptcy court considered Mary's arguments for intervention as of right and permissive intervention and rejected them both. In so doing, the court found that Mary's application was untimely, 3/31/14 Hr'g Tr. 11:6–10, and that intervention would complicate the proceedings—which were close to trial—and prejudice the plaintiff-trustees, id. 11:11–12. Furthermore, the court found that Mary had no “protectable interest” in the Tehama Property:

[T]he Defendants, including Mary Louie, admitted in their original answer to the complaint in January 2013 that Mary Louie executed a grant deed transferring title to Tehama to True Traditions. Under both California and New Mexico law, Mary no longer owns the Tehama property even if she is a hundred percent owner of True Traditions. True Traditions owns the property. Therefore Mary has no legal – no protectable legal interest in that property, if it's based only on the claim that she owns True Traditions.

Id. 13:10–19. The court also rejected Mary's alternative argument that she has an equitable interest in the Tehama Property arising out of a constructive trust, explaining:

Movant insists that Mary can assert a constructive trust. Under California law, a constructive trust may be imposed on property as a remedy for things wrongfully detained.... Movant appears to argue that Mary satisfies the requirement for a constructive trust because she can prove the funds used to purchase Tehama can be traced to her. The Ninth Circuit decided a similar tracing theory in In re Advent Management

... [and] found that the mere tracing of funds to a new entity was not sufficient to impose a constructive trust. The Circuit concluded that only money that was wrongfully acquired or detained by a person by a wrongful act would result in the imposition of a constructive trust. Mary Louie does not allege any wrongful act. The fact that Mary's monies may have been used to purchase the property in and of itself does not give rise to the imposition of a constructive trust.

Id. 13:21–14:15. In sum, the court found that any interest Mary personally had in the Tehama Property was, “[a]t best, ... an interest in True Traditions as the member of that company.” Id. 14:22–24. On the basis of that reasoning, the bankruptcy court concluded that any interest Mary had in the property could be adequately represented by TT and its counsel. Id. 15:13–24, 16:117:2. The motion to intervene was accordingly denied. ER Exh. 10.

The parties then filed cross-motions for summary judgment, with Appellant affirmatively seeking judgment as a matter of law that “at least 89.3% of the Tehama property is equitably owned by True Traditionis, L.C. [sic] and/or Mary Louie” and that “as of October 1, 2009, 89.3% of the monies in the Merrill Lynch Account was not an ‘interest in the debtor [Rick Louie] in property.” ER Exh. 12 at 2. The bankruptcy court granted summary adjudication for Appellees on certain facts not in material dispute. ER Exh. 13 (Order on Cross Mots. for Summary J. (hereinafter, “MSJ Order”)) at 9–10. The court denied Appellant's cross-motion, finding that there were disputed “material issues of fact” on Appellant's tracing evidence that may require the testimony of expert witnesses. Id. at 9.

The case then proceeded to two-day bench trial on June 9 and 10, 2014. On July 14, 2014, the bankruptcy court entered its post-trial order finding for Appellees and ordering that title to the Tehama Property be reformed and placed in the name of the chapter 7 estate of Rick and Stephanie for administration by the trustee-Appellees. ER Exh. 16 (Order Following Trial (hereinafter, “Trial Order”)). On July 28, 2014, the bankruptcy court entered its Judgment Avoiding Fraudulent Transfer. ER Exh. 17. This appeal followed.

B. Transactional History of the Tehama Property

A little background on the origins of the Tehama Property is necessary to understand the convoluted arguments in this case. The essential facts are set forth in the bankruptcy court's Trial Order, are largely undisputed, and are well-founded in the record.

i. The Sav–Mor Grocery store and the Buffalo Properties

In May 2003, Mary Louie and Richard Louie, Sr. sold a grocery store they owned and operated in Williams, California (“Sav–Mor Grocery”) for $280,000. Out of the proceeds of that sale, Mary and Richard Sr. purchased two investment properties at 965 Amherst Street and 241 West Utica Street, Buffalo, New York (collectively, “The Buffalo Properties”). The properties were purchased for $695,000 through a 1031 tax free exchange. This meant the sale deferred Richard Sr.'s and Mary's gains on the sale of the grocery store until the Buffalo Properties were sold. Title to both of the Buffalo Properties was taken in the names of four individuals: Richard Sr., Mary, Rick (Richard Sr.'s and Mary's only child), and Stephanie.

Even before the sale of the Sav–Mor Grocery, on February 27, 2003, Richard Sr., Mary, Rick, and Stephanie entered into a Partnership Agreement, supposedly in connection with the purchase of the Buffalo Properties. Pl. Trial Exh. 9.² This one-page agreement stated that Richard Sr. and Mary would be repaid their investment in the Buffalo Properties and that the four owners would divide amongst themselves funds generated by the properties, but only after paying Rick a 6% management fee. Id . The bankruptcy court observed that “the document is very brief, and does not contain many of the usual terms one would associate with such an agreement.” Trial Order at 4. Furthermore, Appellees presented unrebutted testimony at trial from its expert, Ms. M. Patricia Fisher, that Mary's...