Casey v. Rotenberg (In re Kenny G. Enterprises, LLC)

512 B.R. 628
CourtDistrict Court, C.D. California
DecidedJune 24, 2014
DocketNo. 8:14-cv-00246-ODW; Bankruptcy No. 8:11-bk-24750-TA; Adversary No. 8:13-ap-01271-TA
StatusPublished

This text of 512 B.R. 628 (Casey v. Rotenberg (In re Kenny G. Enterprises, LLC)) is published on Counsel Stack Legal Research, covering District Court, C.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Casey v. Rotenberg (In re Kenny G. Enterprises, LLC), 512 B.R. 628 (C.D. Cal. 2014).

Opinion

AMENDED ORDER REVERSING AND REMANDING BANKRUPTCY COURT’S DECISION

OTIS D. WRIGHT, II, District Judge.

I. INTRODUCTION

The Bankruptcy Code, found in Title XI of the United States Code, provides a bankruptcy trustee with a panoply of powers to discharge her statutory duties to administer the estate. These powers include the ability to challenge certain alleged fraudulent transfers so that the trustee can bring the property back into the estate for the benefit of outstanding creditors. But these powers have their limits.

Congress codified one such avoidance provision at 11 U.S.C. § 544(b). The section provides that “the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim.... ” § 544(b)(1). Generally, this section means that a trustee may assert standing on behalf of an existing unsecured creditor to invoke state law to set aside a fraudulent transfer. But whether Congress intended § 544(b) to apply to transfers occurring after the filing of a bankruptcy petition is a divisive, very unsettled issue nationwide given Congress’s apparent silence on the section’s temporal limits.

The bankruptcy court in this case found that the Trustee, Appellee Thomas H. Casey, could employ the section to avoid a postpetition transfer. But after interpreting the statute consistent with relevant legislative history, existing case law, and general bankruptcy principles, the Court finds that § 544(b) only applies to prepetition transfers. The Court consequently REVERSES the bankruptcy court’s decision and REMANDS for further proceedings consistent with this decision.

II. FACTUAL BACKGROUND

In this highly unique situation, the Trustee seeks to set aside an alleged fraudulent transfer — the sale of a residential property formerly part of the bankruptcy estate— that occurred both postpetition and post-conversion.

1. Kenny G. Enterprises files a voluntary Chapter 11 petition

On October 24, 2011, Kenny G. Enterprises, LLC — a Nevada limited-liability company (“Debtor”) — filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Central District of California. In re Kenny G. Enters., No. 8:11-bk-24750-TA (Bankr.C.D.Cal. pet. filed Oct. 24, 2011); (Excerpt of Record (“ER”) 0475-481). The Debtor disclosed its property located at 10 Horseshoe Court in Hillsborough, California (“Hillsborough Property”) as one of its assets valued at $1.2 million. (ER 0507.)

The Debtor subsequently filed a Plan of Reorganization. (ER 0520-33.) The Plan provided that the Debtor would continue to use the Hillsborough Property as residential rental property to provide income for the Chapter 11 estate. (ER 0529.) Further, confirmation of the Plan would vest all property of the estate in the Debt- or. (ER 0530.) On January 9, 2013, the bankruptcy court confirmed the Plan of Reorganization. (ER 0534-39.)

[631]*631 2. Debtor sells Hillsborough Property to Appellants

On or around March 26, 2013, Appellants Douglas Rotenberg and Toung-Vy Ton (“Rotenbergs” or “Appellants”) purchased the Hillsborough Property for $3,156,000.00 — a price that admittedly “far exceeded] the value of the property based on the documents filed in the Debtor’s bankruptcy proceeding.” (ER 0047.) A grant deed was recorded in the San Mateo County Recorder’s Office, which transferred the Hillsborough Property from the Debtor to the Rotenbergs. (ER 0034, at ¶ 30.)

The title company handling the transfer then deposited $1,897,126.22 of the sale proceeds into Debtor’s bank account on the day the transaction closed. (Id. ¶ 47.) That same day, the Debtor wired $1,714,900 to Freedom Investment, Corp., which the Trustee alleges is just a shell company formed 21 days earlier by the Debtor’s managing member, Kenneth Gha-brib. (Id. at ¶¶ 49-50, 52-55.) The Property was the only income-generating asset in the Chapter 11 estate. (Id. at ¶ 27.)

S. Bankruptcy court converts the case to Chapter 7

On August 14, 2013, the bankruptcy court converted the case from Chapter 11 bankruptcy to Chapter 7. (ER 0540-42.) The court also issued a temporary restraining order preventing the Debtor or those people acting in concert with it from distributing any property to anyone other than the Trustee. (ER 0541.) The bankruptcy court further ordered that the Debtor immediately transfer any funds from the Hillsborough Property sale to the Trustee. (Id.)

A Trustee files suit against Appellants seeking to set aside transfer

On August 21, 2013, the Trustee filed an adversary proceeding in the bankruptcy court seeking to set aside the Hillsborough Property sale as a fraudulent transfer.1 (ER 0019-30.) On October 4, 2013, the Trustee amended his Complaint, endeavoring to avoid the transfer under California Civil Code section 3439.04 and asserting standing to pursue the claim on behalf of an existing, unsecured creditor under 11 U.S.C. § 544(b).

On November 6, 2013, the Rotenbergs moved to dismiss the Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy 7012(b). (ER 0041-257.) They argued, among other things, that the Trustee could not void the Hillsborough Property sale, because 11 U.S.C. § 544(b) does not apply to postpetition transfers.

On February 10, 2014, the bankruptcy court denied the motion with prejudice. (ER 0347-58.) In its tentative ruling, the court recognized that the “majority rule appears to be that section 544(a) and (b) powers are limited and may not be used by a trustee to avoid a post-petition transfer.” (ER 0354.) But the court also noted authority on the other side of the split in which courts have held that a trustee could avoid a postpetition transfer under § 544. (ER 0354-55.)

The court ultimately interpreted § 544(b) as applying to both pre-and post-petition transfers for three main reasons:

[632]*632(1) § 549 — the section specifically dealing with postpetition transfers — is confined to “property of the estate,” so a trustee cannot use that section for property that has revested in the debtor postconfirmation;
(2) a narrow reading of § 544(b) would render a trustee “largely powerless to deal with post-confirmation misbehavior”; and
(3) even measured by § 544’s narrow statute of limitations, the Trustee timely brought the adversary proceeding. (ER 0356.) The court further observed that since a single trustee could sue to avoid the transfer under state law, “it is hard to make sense of a rule that would hold that the trustee, who is the representative of all creditors, should be powerless to likewise sue.” (Id.) The court concluded that it preferred to believe that “for every wrong there is a remedy.” (Id.)
5.

Free access — add to your briefcase to read the full text and ask questions with AI

Related

Moore v. Bay
284 U.S. 4 (Supreme Court, 1931)
Buffum v. Peter Barceloux Co.
289 U.S. 227 (Supreme Court, 1933)
Lamie v. United States Trustee
540 U.S. 526 (Supreme Court, 2004)
Decker v. Tramiel (In Re JTS Corp.)
617 F.3d 1102 (Ninth Circuit, 2010)
In Re Weisman
5 F.3d 417 (Ninth Circuit, 1993)
In Re Rufener Construction, Inc.
53 F.3d 1064 (Ninth Circuit, 1995)
In Re Schneiderman
251 B.R. 757 (District of Columbia, 2000)
Murray v. Guillot (In Re Guillot)
250 B.R. 570 (M.D. Louisiana, 2000)
Flint v. State of Cal.
594 F. Supp. 443 (E.D. California, 1984)
Farmers v. Autorics, Inc. (In Re Branam)
247 B.R. 440 (E.D. Tennessee, 2000)
Gold v. Marquette University (In Re Leonard)
454 B.R. 444 (E.D. Michigan, 2011)
Smith v. Arthur Andersen LLP
421 F.3d 989 (Ninth Circuit, 2005)

Cite This Page — Counsel Stack

Bluebook (online)
512 B.R. 628, Counsel Stack Legal Research, https://law.counselstack.com/opinion/casey-v-rotenberg-in-re-kenny-g-enterprises-llc-cacd-2014.