In re: Chonghee Jane Kim

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: May 2, 2016
• Docket: CC-15-1273-TaKuF
• Status: Unpublished

Opinion

FILED MAY 02 2016 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-15-1273-TaKuF ) 6 CHONGHEE JANE KIM, ) Bk. No. 2:13-bk-25661-BB ) 7 Debtor. ) Adv. No. 2:14-ap-01456-BB ______________________________) 8 ) BENJAMIN HOOSHIM; ALEXANDRE ) 9 OH, ) ) 10 Appellants, ) ) 11 v. ) MEMORANDUM* ) 12 EDWARD M. WOLKOWITZ, CHAPTER ) 7 TRUSTEE, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on February 19, 2016 at Pasadena, California 16 Filed – May 2, 2016 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Sheri Bluebond, Bankruptcy Judge, Presiding 20 Appearances: Andrew Edward Smyth argued for appellants; 21 Matthew Abbasi argued for appellee. 22 Before: TAYLOR, KURTZ, and FARIS, Bankruptcy Judges. 23 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1(c)(2). 1 INTRODUCTION 2 Benjamin Hooshim and Alexandre Oh appeal from the 3 bankruptcy court’s entry of a default judgment against them and 4 in favor of the chapter 71 trustee. The default judgment 5 avoided their liens against real property pursuant to 6 § 544(b)(1) and California Civil Code § 3439.04 and provided for 7 the Trustee’s recovery of the liens and the related notes under 8 §§ 550 and 551. The default judgment, however, also denied the 9 Trustee’s request for a recovery of title to and possession of 10 the real property itself given that the Trustee previously sold 11 it subject to the liens. The Trustee did not cross-appeal from 12 this determination. 13 Once the bankruptcy court determined that the Trustee was 14 not entitled to recover the real property, the only other relief 15 the Trustee sought in his complaint – set aside of the liens - 16 could not benefit the estate. We, thus, hold that the Trustee 17 lacked standing to seek such relief. As a result, we VACATE the 18 default judgment and DISMISS this appeal. 19 FACTS 20 Pre-petition Transfers and Litigation 21 Chapter 7 debtor Chonghee Jane Kim owned real property 22 located in or around Los Angeles, California, including 23 investment property in Sylmar (the “Property”). 24 In 2010, Finnegan & Diba, a law corporation, sued Kim in 25 state court and obtained a judgment against her in the principal 26 27 1 Unless otherwise indicated, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 1 amount of $109,843.89. Unbeknownst to the law firm, during the 2 course of this litigation, Kim transferred all of her real 3 property to two wholly-owned limited liability companies for no 4 consideration. As relevant to this appeal, Kim transferred the 5 Property to E & E Global, LLC (the “LLC”). 6 Kim later caused the LLC to encumber the Property with two 7 deeds of trust, each securing a promissory note payable to one 8 of the Appellants.2 Appellants had previously loaned money to 9 Kim – not to the LLC - in the amounts set forth in the notes. 10 The LLC executed its notes and recorded the trust deeds several 11 months later, and the timing of execution and recordation was 12 far from random; they were executed and recorded just one week 13 before entry of the judgment against Kim in the state court 14 action. Appellants, however, did not participate in the LLC 15 transactions,3 and they learned about the notes and trust deeds 16 at a later, unknown point in time. 17 After its discovery of these transfers, Finnegan & Diba 18 commenced a second state court action against Kim. Among other 19 things, the complaint sought to set aside the transfers as 20 fraudulent. Within days, Kim caused the LLC to transfer the 21 Property back to her via quitclaim deed. She then filed a 22 chapter 7 petition; that case was dismissed almost a year later, 23 24 2 One note referenced a $50,000 debt owed to Hooshim; the 25 other note referenced a $100,000 debt owed to Oh. 26 3 While Appellants may not have initially known about the 27 LLC’s notes and trust deeds, they were close associates of Kim. Hooshim was married to Kim’s sister. Oh was a longtime friend 28 and client of Kim’s bookkeeping and accounting services.

3 1 based on Kim’s failure to attend a continued § 341(a) meeting of 2 creditors. 3 Following dismissal of the first bankruptcy case, Finnegan 4 & Diba obtained a default judgment against Kim in the second 5 state court action; the judgment avoided Appellants’ trust 6 deeds. Just days before entry of this judgment, however, Kim 7 filed a second chapter 7 petition. The immediate result was 8 that the state court default judgment was void. 9 Trustee’s Sale of the Property 10 Expeditious in his liquidation efforts, the Trustee shopped 11 the Property and received a third party purchase offer. The 12 Trustee moved for authority to sell the Property under § 363(b), 13 subject to overbid. Of particular importance, the sale of the 14 Property was subject to any existing liens. 15 At the sale hearing, Kim emerged as the successful bidder.4 16 Following the bankruptcy court’s entry of an order confirming 17 the sale and receipt of payment, the Trustee quitclaimed the 18 Property to Kim. 19 No one appealed from the sale order, and it is now final. 20 Trustee’s Avoidance Proceeding 21 Seven months after the sale order became final, the Trustee 22 commenced an adversary proceeding against Appellants; he did not 23 name Kim as a party. As relevant to this appeal,5 the adversary 24 25 4 Kim paid $35,000 and acquired the Property and two other real properties. 26 5 27 The adversary complaint also asserted fraudulent transfer claims pursuant to § 548(a)(1)(A) and (a)(1)(B). The 28 (continued...)

4 1 complaint asserted the following claims and sought the following 2 relief: 3 ! First Claim for Relief (§ 544 / Cal. Civ. Code (“CC”) 4 § 3439). Avoidance of title transfer and lien transfers and 5 recovery of the Property. 6 ! Fourth Claim for Relief (Quiet Title). 100% title to 7 and possession of the Property free and clear of the liens. 8 ! Prayer: 9 ! Avoidance of transfer of title and liens under 10 §§ 544 and CC § 3439. 11 ! A declaration that the Property was property of 12 the estate free and clear of liens. 13 ! Vesting of legal title to the Property in the 14 estate. 15 ! Recovery of the Property under § 550. 16 ! The usual “other relief” catch all and costs. 17 Appellants did not initially defend the avoidance 18 proceeding, and, when they did enter the fray, they did not 19 timely comply with the bankruptcy court’s directive to 20 participate in a mediation. As a result, the bankruptcy court 21 struck Appellants’ answer to the complaint and entered defaults 22 against them. 23 In moving for default judgment, the Trustee argued that 24 judgment was warranted by the evidence that Kim transferred and 25 encumbered the Property with actual intent to hinder, delay, or 26 5 27 (...continued) bankruptcy court ultimately determined that these claims were 28 time-barred. No cross-appeal was taken from this determination.

5 1 defraud. Appellants opposed and focused on the effect of the 2 sale of the Property to Kim. They asserted that the Trustee 3 quitclaimed to Kim any and all interest the estate had in the 4 Property and, thus, that he lacked standing to pursue the 5 avoidance and recovery claims. 6 Following a hearing, the bankruptcy court entered an order 7 granting in part and denying in part the Trustee’s motion for 8 default judgment. It determined that the Trustee had standing 9 to avoid Kim’s fraudulent transfers of her interests in the 10 Property. And it concluded that the notes and trust deeds “were 11 created solely for the purpose of intentionally hindering, 12 defrauding and delaying Creditor, Finnegan & Diba . . . and for 13 no other purpose.” Emphasis in original. The bankruptcy court, 14 thus, avoided the trust deeds as fraudulent transfers under 15 § 544 and CC § 3439.04 and provided that all rights, title, and 16 interests in the trust deeds were transferred to the Trustee and 17 preserved for the benefit of the estate pursuant to §§ 550 and 18 551. The bankruptcy court also ruled that as the “holder in due 19 course” of the notes and trust deeds, the Trustee was “entitled 20 to fully and completely enforce the terms of the assumed 21 encumbrances.” 22 The bankruptcy court, however, denied the Trustee’s 23 requests for recovery, title, and possession in relation to the 24 Property given the Trustee’s prior sale of the Property. 25 Appellants timely appealed. 26 While this appeal was pending - at oral argument, in fact - 27 the Trustee informed the Panel that he had exercised the power 28 of sale under the trust deeds and foreclosed on the Property.

6 1 This information prompted the Panel to re-visit and grant 2 Appellants’ motion for a temporary stay, which prevents the 3 Trustee’s disbursement of any proceeds from the sale pending 4 final disposition of this appeal. 5 ISSUE 6 Whether the Trustee had standing to assert the avoidance 7 and recovery claims against Appellants. 8 DISCUSSION6 9 On appeal, Appellants continue to challenge the Trustee’s 10 standing to assert the avoidance and recovery claims.7 They 11 also maintain that the claims either were sold to Kim by the 12 Trustee or extinguished by the quitclaim deed. We agree with 13 the bankruptcy court that the Trustee did not sell avoidance 14 claims to Kim and that the quitclaim deed did not extinguish the 15 claims; in the absence of a sale expressly so providing, only 16 the Trustee could assert the estate’s fraudulent transfer 17 claims. But the sale did affect the estate’s remedies on 18 account of such claims. 19 In short, after the sale of the Property subject to the 20 21 6 Appellants request that the Panel take judicial notice 22 of an adversary complaint filed by Kim against the Trustee while this appeal was pending; the complaint asserts claims for quiet 23 title and declaratory relief. We grant the request, solely for 24 the fact that it was filed and not for the truth of the matters asserted in the complaint. 25 7 Although Appellants do not frame their arguments as a 26 constitutional standing issue, we have an independent duty to 27 examine issues of jurisdiction and justiciability, even sua sponte. See Am. Civ. Liberties Union of Nev. v. Lomax, 471 F.3d 28 1010, 1015 (9th Cir. 2006).

7 1 liens, the estate’s injury was no longer redressable through a 2 lien avoidance action. If this was unclear when the Trustee 3 filed the adversary complaint which requested recovery of the 4 Property, it became clear when the bankruptcy court denied 5 recovery of title by the estate. 6 Standing exists only when an injury can be redressed 7 through favorable judicial decision. The judicial power of the 8 federal courts, including the bankruptcy courts, is both 9 supplied and limited by the Constitution of the United States. 10 One limitation is standing, which involves the question of 11 “whether the litigant is entitled to have the court decide the 12 merits of the dispute or of particular issues.” Warth v. 13 Seldin, 422 U.S. 490, 498 (1975). Thus, “standing imports 14 justiciability: whether the plaintiff has made out a ‘case or 15 controversy’ between himself and the defendant within the 16 meaning of Art. III. This is the threshold question in every 17 federal case, determining the power of the court to entertain 18 the suit.” Id. (citation omitted). 19 To establish standing, “[t]he plaintiff must have suffered 20 or be imminently threatened with a concrete and particularized 21 ‘injury in fact’ that is fairly traceable to the challenged 22 action of the defendant and likely to be redressed by a 23 favorable judicial decision.” Lexmark Int’l, Inc. v. Static 24 Control Components, Inc., 134 S. Ct. 1377, 1386 (2014) (citation 25 omitted). “[R]edressability analyzes the connection between the 26 alleged injury and requested judicial relief. [It] does not 27 require certainty, but only a substantial likelihood that the 28 injury will be redressed by a favorable judicial decision.”

8 1 Nw. Requirements Utilities v. FERC, 798 F.3d 796, 806 (9th Cir. 2 2015) (internal quotation marks and citation omitted). 3 Here, there is no dispute that Kim transferred the Property 4 to the LLC. The resulting injury was remedied in part when, 5 pre-petition, Kim caused the LLC to reconvey the Property. But 6 while the Property was in the hands of the LLC, Kim caused the 7 LLC to grant liens on the Property in favor of Appellants. We 8 see no error in the bankruptcy court’s determination that Kim 9 caused the LLC to encumber the Property with the actual intent 10 to hinder, delay, or defraud Finnegan & Diba.8 The reconveyance 11 of the Property did not extinguish the liens. Consequently, the 12 Trustee’s sale of the Property did not entirely redress the 13 injury to the estate caused by Kim’s pre-petition fraudulent 14 transfers. No doubt, the existence of Appellants’ liens reduced 15 the sale price received for the Property. We, thus, agree that 16 the trust deed transfers were actually fraudulent and that there 17 was injury to the estate. 18 The Trustee had options for addressing this injury. He 19 could have moved to avoid the trust deeds prior to sale of the 20 Property. Or, he could have sold the Property, free and clear 21 8 22 We acknowledge that CC § 3439.05(a) applies only when there is a transfer “by the debtor” and recognize that, here, 23 the LLC transferred the trust deeds. At oral argument before 24 the Panel, the Trustee responded to this concern by asserting that there was substantial evidence in the record supporting 25 that the LLC was the alter ego of Kim; we cannot find any direct discussion of this topic – nor is there an express finding by 26 the bankruptcy court in this regard. But the bankruptcy court’s 27 implicit conclusion that the LLC’s transfer of the trust deeds was the equivalent of a transfer by Kim is not disputed by 28 Appellants and can be inferred on the record we do have.

9 1 of the trust deed liens. In such a case, he could then move to 2 avoid the liens on the sale proceeds. In both cases, he could 3 have achieved full value through sale. The Trustee, however, 4 chose neither of these options. Prior to the time he filed the 5 adversary complaint, he sold the Property subject to Appellants’ 6 liens. 7 Once the Trustee sold the Property subject to Appellants’ 8 liens, any injury to the estate was no longer redressable by 9 avoiding the trust deeds. Set aside of the trust deeds after 10 the sale benefitted only Kim. Despite this fact, the only 11 relief both requested by the Trustee in the adversary complaint 12 and before the Panel on appeal was lien set aside. Again, had 13 the Trustee possessed a meritorious claim to reacquire title to 14 the Property after the sale, then his request for lien set aside 15 was a remedy that addressed the continuing injury. 16 Unfortunately, he did not possess such a right to reacquire 17 title, and - even if he did - he did not preserve this claim on 18 appeal. 19 The Trustee neither requested nor preserved a claim for a 20 money judgment under § 550. We acknowledge that in a case 21 involving fraudulent conveyance of a trust deed, § 550 allows a 22 trustee to file a complaint seeking either set aside of the 23 liens or recovery of their value. The Trustee, however, never 24 sought recovery of the value of the liens through a money 25 judgment. At this post-judgment point in time, the historical 26 possibility of a claim for a money judgment (equal to the value 27 of the lien rights in the Property transferred) against 28 Appellants pursuant to § 550(a) does not cure the standing

10 1 problem. Again, the Trustee did not seek this relief, and the 2 time for doing so has passed. See 11 U.S.C. § 546(a).9 3 Rights to enforce the notes do not follow from recovery of 4 the trust deeds or otherwise. We also acknowledge the relief 5 accorded in connection with the notes but conclude that the 6 standing problem remains. The adversary complaint did not 7 assert that the LLC’s execution of the notes was fraudulent.10 8 9 9 We assume that the Trustee recognized the significant hurdles to such a recovery. The Ninth Circuit has made 10 clear that in the context of a § 550 lien recovery award, a money judgment is available only where the lien can be 11 appropriately valued. See USAA Fed. Sav. Bank v. Thacker 12 (In re Taylor), 599 F.3d 880, 892 (9th Cir. 2010). Nothing in this record suggests an attempt by the Trustee to value 13 Appellants’ liens. This makes sense, as the record is unclear as to if and when the notes were ever delivered to Appellants 14 and there is no evidence that Appellants provided consideration 15 to the LLC. Valuation of a trust deed where there are serious barriers to foreclosure could be difficult. 16 10 We recognize that California law permits the avoidance, 17 not only of transfers made by a debtor, but also of “obligations 18 incurred by a debtor” if actual or constructive fraud exists. Cal. Civ. Code §§ 3439.04(a), 3439.05(a). For example, if a 19 debtor executes a promissory note in favor of a friend evidencing a fictitious debt, for the purpose of diverting some 20 of the debtor’s assets to the friend rather than to legitimate 21 creditors, the obligation is avoidable. This provision does not help the Trustee, however, for several reasons. 22 First, the record indicates that Kim owed legitimate debts to Appellants. Therefore, signing the notes did not create a 23 fraudulent obligation that could be avoided. 24 Second, even if the notes were avoidable, the statute would not authorize the Trustee to recover the notes and become the 25 holder of them. If a transfer is avoided, the statute permits the trustee to recover either the property or its value. Id. 26 § 3439.08(b)(1). By its terms, however, the statute does not 27 permit “recovery” of an avoidable obligation. There is a good reason for this difference. Avoidance of a fraudulent 28 (continued...)

11 1 The bankruptcy court made no such finding. Indeed, the 2 bankruptcy court’s determination that Appellants loaned money to 3 Kim in the amounts included in the LLC notes is inconsistent 4 with such a conclusion; the notes, even in an alter ego 5 situation, merely evidence a legitimate debt. On this record, 6 the relief as to the notes follows, if at all, only from the 7 recovery of the trust deeds. Thus, our conclusion that the 8 Trustee lacks standing to recover the trust deeds makes recovery 9 of the notes and the exercise of rights thereunder impossible. 10 Our conclusion in this regard is supported by other 11 considerations. First, to the extent the bankruptcy court 12 granted recovery as to the notes other than as following from 13 recovery of the trust deeds, it erred. The adversary complaint 14 did not seek this relief. Given that the Trustee recovered 15 judgment through a default prove-up, the bankruptcy court could 16 not grant relief beyond that pled in the complaint. See Fed. R. 17 Civ. P. 54(c) (“A default judgment must not differ in kind from, 18 or exceed in amount, what is demanded in the pleadings.”), 19 incorporated into adversary proceedings by Fed. R. Bankr. 20 P. 7054; see also McDonald v. Checks-N-Advance, Inc. 21 (In re Ferrell), 539 F.3d 1186, 1192-93 (9th Cir. 2008); Sec. & 22 Exch. Comm’n v. Wencke, 577 F.2d 619, 623 (9th Cir. 1978). 23 Second, even if the trust deeds were recoverable, the 24 record does not support the bankruptcy court’s determination 25 10 (...continued) 26 obligation – i.e., eliminating that obligation – restores the 27 creditors to the status quo that existed before the fraudulent obligation was incurred. No further remedy is needed to provide 28 complete relief to the affected parties.

12 1 that the Trustee was the holder in due course of the notes and, 2 therefore, was entitled to exercise the power of sale under the 3 trust deeds. 4 In California, it is well-established that a deed of trust 5 follows the debt, whether evidenced by a promissory note or 6 otherwise; the converse is not true. See Willis v. Farley, 7 24 Cal. 490, 497-98 (1864) (“The doctrine that a mortgage is a 8 mere incident of the debt which it is executed to secure, and 9 follows the same in whosoever hands it may come by transfer or 10 assignment . . . may be regarded as the settled law of this 11 State.”); see also W. Loan & Bldg. Co. v. Scheib, 218 Cal. 386, 12 393 (1933) (“A mortgage is merely security for a debt, and if 13 there is no debt there is no mortgage.”). Only a party with 14 rights to enforce the note can properly authorize a foreclosure. 15 See Yvanova v. New Century Mortg. Corp., 62 Cal. 4th 919, 927 16 (2016). 17 No provision of the Bankruptcy Code converts a note payable 18 by third parties to a non-debtor (or to a debtor, for that 19 matter) into an obligation that can be enforced by a trustee 20 pursuant to a fraudulent conveyance action that attacks the 21 security for the note. Even where a trustee successfully avoids 22 a trust deed, there is no resultant right to collect debt owed 23 to the trust deed transferee by a third party or a debtor. 24 Further, the record does not establish that the Trustee was 25 the holder in due course of the notes. A holder can enforce a 26 27 28

13 1 note.11 Cal. Com. Code § 3301. One, however, must have more 2 than possession to be a holder; one also must be named as the 3 payee in the note or the note must be bearer paper. Cal. Com. 4 Code § 1201(a)(21)(A). Here, the record establishes that the 5 notes named Appellants as payees and there is no evidence that 6 the notes were endorsed in blank or to the Trustee. 7 Given our determination, the Trustee’s foreclosure may be 8 problematic. As stated, the Panel ordered a stay pending final 9 disposition of this appeal. Once the mandate issues, the 10 bankruptcy court will need to address the repercussions of the 11 foreclosure sale. 12 CONCLUSION 13 Based on the foregoing, we VACATE the judgment and DISMISS 14 the appeal. 15 16 17 18 19 20 21 22 23 24 25 11 There are two other mechanisms by which a non-holder may 26 enforce a note. See Cal. Com. Code § 3301. Here, the 27 bankruptcy court solely determined holder in due course status; it did not discuss the other mechanisms nor does the record 28 suggest their applicability under these facts.