In re: Edward J. Stout

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: May 1, 2014
• Docket: CC-13-1045-DKiTa CC-13-1257-DKiTa (related appeals)
• Status: Unpublished

Opinion

FILED MAY 01 2014 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY.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 Nos. CC-13-1045-DKiTa ) CC-13-1257-DKiTa 6 EDWARD J. STOUT, ) (related appeals) ) 7 Debtor. ) Bk. No. 09-17134-ES ______________________________) 8 ) Adv. Nos. 11-01026-ES DOLORES STOUT; KAUFMANN ) 09-01669-ES 9 GROUP, INC. ) ) 10 Appellants, ) ) 11 v. ) M E M O R A N D U M1 ) 12 RICHARD A. MARSHACK, Chapter 7) Trustee; STEVEN ROOT; JAMES ) 13 KERCHNER; QUALTECH BACKPLANES,) INC.; ELECTRONIC CONNECTOR ) 14 SERVICE; DYNAMIC STAMPING, ) ) 15 Appellees. ) ______________________________) 16 ) STEVEN ROOT; JAMES KERCHNER, ) 17 ) Appellants, ) 18 ) v. ) 19 ) EDWARD J. STOUT, ) 20 ) Appellee. ) 21 ______________________________) 22 Argued and Submitted on March 20, 2014 at Pasadena, California 23 Filed - May 1, 2014 24 25 26 1 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 8013-1. 1 Appeals from the United States Bankruptcy Court for the Central District of California 2 Honorable Erithe A. Smith, Bankruptcy Judge, Presiding 3 4 Appearances: Richard Edwin Masson, Esq. of Masson & Fatin, LLP argued for Dolores Stout and Kaufman Group, Inc., 5 appellants in 13-1045; John Robert Armstrong, II, Esq. of Horwitz Cron & Armstrong LLP argued for 6 Richard A. Marshack, Chapter 7 Trustee, appellee in 13-1045 and for James Kerchner and Steven Root, 7 appellees in 13-1045 and appellants in 13-1257; Michael S. Winsten, Esq. of Winsten Law Group 8 argued for Edward J. Stout, appellee in 13-1257. 9 10 Before: DUNN, KIRSCHER and TAYLOR, Bankruptcy Judges. 11 12 We consider two related appeals arising out of the same set 13 of facts involving the debtor, Edward Stout, his mother, Dolores 14 Stout (“Dolores”), and her company, Kaufman Group, Inc. (“Kaufman 15 Group”), and three of the debtor’s creditors, Jim Kerchner 16 (“Kerchner”), Steve Root (“Root”) and Qualtech Backplanes, Inc. 17 (“Qualtech”)(collectively, “Creditors”). 18 The two appeals concern transfers of assets by the debtor to 19 Dolores. One of the appeals (BAP No. CC-13-1045) involves an 20 adversary proceeding (AP No. 11-1026) initiated by the chapter 72 21 trustee (“Trustee”) and Creditors (who joined as co-plaintiffs) 22 against Dolores and Kaufman Group (together, “Dolores”) under 23 §§ 547(b), 548(a) and 550 (“Preference Adversary”). Trustee and 24 25 2 Unless otherwise indicated, all chapter and section 26 references are to the federal Bankruptcy Code, 11 U.S.C. 27 §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of 28 Civil Procedure are referred to as “Civil Rules.”

2 1 Creditors later moved for partial summary judgment on their 2 §§ 547(b) and 548(a)(1) claims against Dolores and Kaufman Group. 3 The bankruptcy court granted partial summary judgment in favor of 4 Trustee and Creditors on their § 547(b) claim (“§ 547(b) partial 5 summary judgment order”). Dolores appeals the bankruptcy court’s 6 grant of partial summary judgment. 7 The second appeal (BAP No. CC-13-1257) involves an adversary 8 proceeding (AP No. 09-1669) initiated by Creditors against the 9 debtor seeking to except their debt from discharge under 10 § 523(a)(6) and to deny the debtor’s discharge under 11 § 727(a)(2)(A)(“Discharge Adversary”). There, the bankruptcy 12 court ultimately ruled in the debtor’s favor on both claims. 13 Creditors subsequently moved to set aside the findings or for a 14 new trial (“motion for new trial”) under Civil Rules 52(a) and 15 59(a)3 and Rules 9013-4(a)(2), (7) and (8) of the Local 16 Bankruptcy Rules for the Central District of California.4 The 17 bankruptcy court denied the motion for new trial (“new trial 18 order”); the Creditors now appeal. Creditors moreover appeal the 19 bankruptcy court’s judgment in the debtor’s favor on their 20 § 727(a)(2)(A) claim (“§ 727(a)(2)(A) judgment”). 21 For the reasons set forth below, we AFFIRM the § 547(b) 22 partial summary judgment order, the new trial order to the extent 23 24 3 Civil Rule 52 is made applicable through Rule 7052. Civil 25 Rule 59 is made applicable through Rule 9023. 26 4 Creditors did not specify in their motion for new trial 27 the subsections of Civil Rules 52(a) and 59(a) that apply. Based on our review of the record and briefs before us, we assume that 28 Creditors intended Civil Rules 52(a)(6) and 59(a)(1)(B) to apply.

3 1 it dealt with Creditors’ § 523(a)(6) claim, and the 2 § 727(a)(2)(A) judgment. 3 4 FACTS 5 A. Events prior to the debtor’s chapter 7 bankruptcy 6 Prepetition, the debtor wholly owned and operated Dynamic 7 Stamping, Inc. (“Dynamic”), Electronic Connector Service, Inc. 8 (“Electronic”), and Qualtech Applied Engineering Corp. 9 (“Applied”)(collectively, “businesses”).5 Dynamic, Electronic 10 and Applied designed, made and/or assembled specialized 11 electronic components. 12 Kerchner and Root owned and operated Qualtech, a company 13 that made and sold various electronic connectors. It leased from 14 Lapco Industrial Parks (“landlord”) its manufacturing and office 15 facilities (“facility”) located in Santa Ana, California. 16 On September 18, 2006, the debtor and Creditors entered into 17 an asset purchase agreement (“Asset Purchase Agreement”) whereby 18 Creditors sold Qualtech’s business to the debtor (“Qualtech 19 sale”). Specifically, under the Asset Purchase Agreement, the 20 debtor purchased substantially all of Qualtech’s assets 21 (“Qualtech Assets”)6 for $250,000 cash. 22 23 5 Applied formerly was known as Zip-Tron Corp. (“ZTC”). ZTC 24 was incorporated in Nevada on May 1, 2000. It qualified to do business in California on April 16, 2001. ZTC changed its name 25 to “Qualtech Applied Engineering Corp.” on October 10, 2006. 26 6 We use the term “Qualtech Assets” in the very limited and 27 specific sense of the Qualtech assets sold in the Qualtech sale. Assets of the debtor, Dynamic, Electronic and Applied, as 28 continue...

4 1 However, the debtor did not intend to own the Qualtech 2 Assets. He expressed his intent in the Asset Purchase Agreement 3 to assign his rights and obligations under the Asset Purchase 4 Agreement to Applied. 5 Specifically, Article 2, Section 2.01 of the Asset Purchase 6 Agreement provided: 7 [The debtor] plans to assign his rights, and delegate his obligations, under this [Asset Purchase Agreement], 8 to a legal entity to be formed. Such legal entity may be a corporation or a limited liability company so long 9 as it is wholly owned and controlled by [the debtor]. In connection with such assignment and delegation, [the 10 debtor] and such legal entity shall execute and deliver an Assignment and Assumption Agreement [(“Assignment”)] 11 . . . . 12 The Assignment named Applied as the assignee. Article 1, 13 Section 1.01 of the Assignment provided: 14 [The debtor] hereby assigns to [Applied] all of his rights, and hereby delegates to [Applied] all of his 15 duties, under the Asset Purchase Agreement. [Applied] hereby accepts such assignment and delegation. 16 17 The Assignment further provided that Applied “will own and 18 operate [Qualtech’s] Business after the [sale] Closing (as 19 defined in the Asset Purchase Agreement).” Qualtech consented to 20 the assignment.7 21 22 6 ...continue 23 relevant to this disposition, are referred to collectively as the 24 “Business Assets.” 7 25 We have taken some of the facts from a joint pretrial order filed and entered on December 29, 2011, in the docket of 26 AP No. 09-1669. We exercise our discretion to take judicial 27 notice of documents electronically filed in the adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. 28 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

5 1 Although the debtor assigned to Applied all of his rights 2 and obligations under the Asset Purchase Agreement, “[s]uch 3 assignment and delegation shall not act as a release of [the 4 debtor] and [he] shall remain legally responsible for the 5 performance of all of the obligations of Buyer (as defined in the 6 Asset Purchase Agreement) under the Asset Purchase Agreement.” 7 The debtor also entered into a sublease with Qualtech to 8 lease its facility (“sublease”), agreeing to pay all of the rent 9 for the facility. He agreed to hold Qualtech harmless from any 10 liability arising from any failure to perform under the sublease. 11 The landlord consented to the sublease. 12 The debtor further entered into separate consulting 13 agreements with Root and Kerchner whereby they each agreed to 14 provide consulting services relating to Applied’s business in 15 exchange for consulting fees totaling $375,000 each. The debtor 16 was to pay the consulting fees in equal monthly installments over 17 five years. 18 Qualtech expressed its intent in the Asset Purchase 19 Agreement to cease all business activities following the sale. 20 However, Qualtech would continue to remain obligated as the 21 master tenant for the facility. Qualtech became inactive on 22 April 1, 2008. However, Qualtech later obtained a certificate of 23 revivor effective August 23, 2010. 24 For several years, the debtor operated the businesses out of 25 the facility. The debtor’s mother, Dolores, took care of various 26 administrative matters for the businesses. She also was an 27 officer and director of the businesses. 28 Dolores helped the debtor and the businesses in other ways

6 1 as well. Under two separate loan agreements, both dated June 20, 2 2005,8 Dolores loaned the debtor and the businesses a total of 3 $250,000. According to the debtor, he needed the funds “to close 4 out the deal with [Root] and [Kerchner].” As noted above, the 5 purchase price for the Qualtech Assets under the Asset Purchase 6 Agreement was $250,000. 7 On November 1, 2006, Applied, Electronic and the debtor 8 obtained a $1 million loan from Vineyard Bank. Vineyard Bank 9 filed UCC-1 financing statements perfecting its security 10 interests in the assets of Applied and Electronic in November 11 2006. 12 Pursuant to the loan agreements, Dolores sent the debtor a 13 written notice of demand, dated January 8, 2008 (“demand 14 letter”), requiring the debtor to make full payment by March 15, 15 16 8 The debtor and Dolores entered into a loan agreement, 17 dated June 20, 2005, wherein Dolores loaned the debtor $250,000, payable within 60 days of Dolores providing a written notice of 18 demand. The debtor personally guaranteed the loan, granting 19 Dolores a security interest in “his assets and properties until this Loan is paid in full.” 20 The businesses (i.e., Dynamic, Electronic and Applied) and Dolores entered into their own loan agreement, also dated 21 June 20, 2005, wherein Dolores loaned the businesses $250,000, 22 payable within 60 days of Dolores providing a written notice of demand. The loan to the businesses was “secured by the following 23 equipment (the Security): All current and future assets of the [businesses].” The businesses granted Dolores a security 24 interest in “the Security until this Loan is paid in full.” As 25 president and CEO of the businesses, the debtor signed the loan agreement on their behalf. 26 Notably, the two loan agreements contained nearly identical 27 provisions. The record reflects that the two loan agreements encompassed a single $250,000 loan. Dolores did not file a UCC-1 28 financing statement to perfect her security interest at the time.

7 1 2008.9 When the debtor failed to comply with the demand letter, 2 she sent another letter, dated March 26, 2008, advising him that 3 she was exercising her right under the loan agreements to 4 repossess the Business Assets.10 5 The debtor and Dolores thereafter entered into a loan 6 resolution agreement, dated March 31, 2008. Under the loan 7 resolution agreement, Dolores was to take immediate possession of 8 her collateral.11 No mention was made in the loan resolution 9 agreement of Dolores foreclosing her security interest in the 10 Business Assets. The loan resolution agreement further does not 11 provide for any transfer of title or ownership of the Business 12 Assets, and the Business Assets apparently remained in place. 13 Dolores agreed to lease the equipment to the debtor on certain 14 conditions, including: 1) Dolores making payments on the 15 9 16 In the demand letter, Dolores stated that she had made a $250,000 loan to Dynamic. She listed both the debtor and Dynamic 17 as addressees. However, she addressed the debtor directly and sought repayment from him. 18 10 19 In the March 26, 2008 letter, Dolores advised the debtor that she was going to “exercise her rights under section 6 of the 20 agreement and take possession of the security items defined in our agreement.” Dolores also stated that she was “disappointed 21 that [the debtor] did not comply with her request of January 8, 22 2008 for repayment of the $250,000 [she] loaned [the debtor] on June 20, 2005.” 23 In the March 26, 2008 letter, Dolores addressed the debtor 24 directly (i.e., as the recipient). As in the demand letter, she also listed both the debtor and Dynamic as the addressees. 25 11 The loan resolution agreement stated that it was between 26 the debtor and Dolores. It also stated that “[i]n exchange for 27 the option to use this equipment, [Dolores would] lease use of it to [the debtor] . . . .” The debtor did not list any equipment 28 among his personal property assets on Schedule B.

8 1 debtor’s line of credit; and 2) the debtor paying Dolores $6,000 2 per month, starting in April 2009. 3 In a letter dated June 19, 2008, Dolores informed the debtor 4 that she was “unhappy” with the “direction and results of the 5 company.” She advised him that she was “exercising her right to 6 demand payment in full of $165,000.” However, to make repayment 7 easier for him, Dolores declined to collect interest on the loan. 8 She purportedly obtained a lien securing future repayment of the 9 loan, recognizing that “the current economic conditions of the 10 company” made immediate repayment difficult. There is no 11 evidence in the record that Dolores took any action to have the 12 “lien” attach or to perfect it; she only referenced the lien in 13 her letter. 14 Thereafter, on January 1, 2009, Applied defaulted under the 15 lease by failing to pay the rent for the facility. After 16 notifying Applied and the debtor of the default, the landlord 17 initiated an unlawful detainer action against Creditors, Applied 18 and the debtor. On March 23, 2009, the landlord obtained a 19 $205,470.84 judgment against Creditors for past due rent and 20 rental value damages and attorney’s fees and costs (“landlord 21 judgment”). 22 Contributing to the flurry of collection activity against 23 the debtor and the businesses, Dolores sent the debtor a letter, 24 dated April 30, 2009 (“breach of contract letter”). In the 25 breach of contract letter, Dolores notified the debtor that she 26 would take immediate possession of all of Dynamic’s equipment, 27 tools, etc., as the debtor had failed to make the monthly loan 28 payments in breach of the loan agreement. Again, apparently all

9 1 of the Business Assets remained in place. 2 Due to the landlord judgment against them, on May 8, 2009, 3 Creditors initiated a state court action against the debtor and 4 Applied for breach of the sublease, declaratory relief as to the 5 right of indemnity from Applied and the debtor on the landlord 6 judgment and breach of guaranty against the debtor (“state court 7 action”). 8 On June 8, 2009, the debtor and Dolores entered into a 9 “voluntary foreclosure and repossession agreement” (“turnover 10 agreement”). Under the turnover agreement, Dolores took all of 11 the debtor’s right, title and interest in and possession of the 12 Business Assets, which included Dynamic’s and Electronic’s 13 machines, tools and equipment. Specifically, the turnover 14 agreement provided: 15 [The debtor] hereby continuously and irrevocably tenders to [Dolores] without need of judicial 16 proceedings, all right, title and interest, and full possession of, in and to all of its Asset Collateral, 17 which [the debtor] now owns or will own as a result of the daily operation of its business. All such Asset 18 Collateral not now in [Dolores’] possession shall be deemed received and held by [the debtor] in trust for 19 and subject to the sole discretion of [Dolores] until [her] acceptance of such tender of possession. 20 21 Notably, the turnover agreement included a list of various 22 machines and a list of equipment. Applied was not a party to the 23 turnover agreement. 24 At the time she entered into the turnover agreement, Dolores 25 was doing business as Kaufman Group. She soon transferred the 26 Business Assets acquired under the turnover agreement to Kaufman 27 Group. Using the Business Assets, Dolores began operating out of 28 the facility, making and selling the same products previously

10 1 made and sold by the businesses. 2 Dynamic filed a certificate of dissolution with the 3 California Secretary of State on June 22, 2009. Electronic and 4 Applied filed certificates of dissolution with the California 5 Secretary of State on July 10, 2009. 6 B. The debtor’s chapter 7 bankruptcy and adversary proceedings 7 On July 15, 2009, the debtor filed his chapter 7 bankruptcy 8 petition. He listed his interests in Applied, Electronic and 9 Dynamic on Schedule B, but noted that they were no longer in 10 business. He did not list any of the Business Assets as his own. 11 The debtor named Applied, Electronic and Dynamic as co-debtors on 12 his Schedule H. He listed Dolores on Schedule F with a $250,000 13 general unsecured claim based on business debt. 14 The debtor also scheduled Kerchner and Root with general 15 unsecured claims each in the amount of $605,000, both based on 16 business debts. He also listed Vineyard Bank with a $1,165,000 17 general unsecured claim based on trade debt. Two months after 18 the initial § 341(a) meeting, Trustee filed a no asset report on 19 October 7, 2009.12 20 1. Preference Adversary 21 On January 1, 2011, Trustee and Creditors filed a complaint 22 against Dolores (AP No. 11-1026) under §§ 547, 548, 550 and 551 23 to commence the Preference Adversary. 24 In their complaint, Trustee and Creditors highlighted the 25 lack of documentation for the following in their allegations: 26 1) attachment and perfection of Dolores’ security interests and 27 12 28 The debtor received his discharge on March 25, 2013.

11 1 liens in the Business Assets; 2) the provision of the loan funds 2 to the debtor and the businesses; 3) the transfer of the Qualtech 3 Assets to Applied; and 4) the repossession of the Business Assets 4 by Dolores. They also pointed out that the debtor, the 5 businesses and/or Dolores did not provide any third party notice 6 of the transfer of the Business Assets to Dolores. 7 Trustee and Creditors further alleged that there was such a 8 unity of interest between the debtor and Dolores and the 9 businesses, the businesses were their alter egos. They cited 10 numerous examples in support, including allegations that: 11 1) funds were moved between the businesses without regard to the 12 source or obligations; 2) the businesses had the same officers 13 and directors (i.e., the debtor and Dolores); 3) Kaufman Group 14 continued to use the trade names of Applied and Electronic and to 15 service the same customers; and 4) the debtor received 16 compensation (in the form of payment for his rent and the use of 17 a Mercedes Benz for his wife) for providing consultation services 18 to Kaufman Group. 19 They also pointed out that the debtor scheduled Dolores as a 20 general unsecured creditor, even though she took possession of 21 the Business Assets prepetition and supposedly had a valid 22 security interest in them. Moreover, even though the debtor 23 transferred the Business Assets to Dolores as a form of payment 24 on the $250,000 loan, he did not characterize the transfer in his 25 bankruptcy schedules as a credit against the debt owed to 26 Dolores. 27 Given these facts, Trustee and Creditors argued that the 28 debtor and Dolores fraudulently transferred the Business Assets

12 1 to Dolores through their alter egos in order to thwart Creditors’ 2 attempts to obtain judgment against the debtor, and to continue 3 the operations of the businesses. 4 Seven months after Dolores filed her answer, Trustee and 5 Creditors moved for partial summary judgment against them on the 6 §§ 547(b) and 548(a)(1) claims (“partial summary judgment 7 motion”). 8 With respect to their § 547(b) claim, Trustee and Creditors 9 averred that they met all of the elements for establishing an 10 avoidable preferential transfer. They focused on one element in 11 particular: the Business Assets as property of the debtor and/or 12 the bankruptcy estate. 13 Trustee and Creditors contended that because the debtor 14 wholly owned the businesses, they became assets of the bankruptcy 15 estate when he filed for bankruptcy. Under Cal. Corp. Code 16 § 2004, corporate assets are distributed to shareholders upon 17 dissolution of the corporation. Here, had the debtor not 18 transferred the Business Assets to Dolores, they would have been 19 distributed to him as the sole shareholder. The Business Assets 20 then would have become part of the bankruptcy estate when he 21 filed for bankruptcy. 22 Alternatively, Trustee and Creditors claimed that the debtor 23 owned the Qualtech Assets, not Applied. He never produced 24 documents showing that he transferred the Qualtech Assets to 25 Applied pursuant to the Asset Purchase Agreement and Assignment. 26 Moreover, he treated the Business Assets as his personal assets 27 when he pledged them as security on the personal loan. 28 Trustee and Creditors further argued that the debtor

13 1 actually owned the Business Assets because the businesses were 2 his alter egos. Under California law, although a corporation 3 typically is an entity separate and distinct from its 4 stockholders, it is considered an individual’s alter ego when 5 there is such a unity of interest between the individual and the 6 corporation as to negate the corporation’s separateness. In 7 other words, the corporation is considered the individual’s alter 8 ego when he uses it for convenience to transact his business in 9 such a way that amounts to fraud or injustice against third 10 parties. 11 Here, the debtor admitted at the § 341(a) meeting that he 12 moved funds between the businesses without regard to the source 13 or obligations, even though he maintained separate bank accounts. 14 Also, the debtor was the sole shareholder of the businesses. He 15 and Dolores were the only officers and directors of the 16 businesses. 17 As for the § 548(a)(1) claim, Trustee and Creditors 18 contended that the debtor received less than reasonably 19 equivalent value in exchange for the transfer of the Business 20 Assets to Dolores. Specifically, although he owed Dolores only 21 $250,000, he transferred all of the Business Assets, which were 22 worth more than $560,000. 23 They also argued that, based on circumstances surrounding 24 the transfers, the debtor had actual intent to hinder, delay or 25 defraud creditors when he transferred the Business Assets to 26 Dolores. Several badges of fraud existed, demonstrating the 27 debtor’s fraudulent intent, including: 1) as an officer and 28 director of the businesses, Dolores was an insider; 2) the debtor

14 1 concealed the transfer by failing to provide public notice to 2 creditors and by failing to comply with California bulk sales 3 law; 3) the debtor transferred the Business Assets to Dolores 4 less than a month after being served with Creditors’ state court 5 complaint; and 4) the debtor became insolvent after he 6 transferred the Business Assets to Dolores. 7 Dolores opposed the partial summary judgment motion 8 asserting that Trustee and Creditors failed to show that no 9 material factual issues existed as to their §§ 547(b) and 548(a) 10 claims. 11 With respect to the § 547(b) claim, Dolores contended that 12 Trustee and Creditors could not show that no material factual 13 issue existed as to whether the transfer involved property of the 14 debtor. She claimed that evidence showed that the debtor never 15 personally owned the Business Assets. Under the Asset Purchase 16 Agreement, Applied was the intended purchaser of the Qualtech 17 Assets. The debtor simply was the placeholder, holding the 18 Qualtech Assets until Applied could be established. The 19 Assignment further supports this intent. 20 Also, the Business Assets did not belong to the debtor 21 because Dolores took possession of the Business Assets on 22 March 31, 2008, then leased them back to the debtor and the 23 businesses. Neither the debtor nor the businesses owned the 24 Business Assets after March 31, 2008; they simply were leasing 25 them. In other words, they held a leasehold interest in the 26 Business Assets only, similar to holding the Business Assets in 27 trust for Dolores. 28 Moreover, the transfer of the Business Assets to Dolores

15 1 occurred outside of the statutory preference period under 2 § 547(b). Section 547(b)(4)(B) requires that the transfer take 3 place up to one year prepetition. Here, Dolores took possession 4 of the Business Assets on March 31, 2008. 5 She also disputed Trustee and Creditors’ allegation that the 6 businesses were her and the debtor’s alter egos. Each of the 7 businesses filed its own tax returns, conducted separate 8 operations and maintained separate books and records. Funds were 9 transferred between the businesses because goods and services 10 were exchanged between them. Further, Dolores made loans to each 11 of the businesses and the debtor separately. The debtor did not 12 use all of the loans for his personal benefit. Additionally, 13 Dolores was not paying the debtor a consulting fee; she simply 14 was helping his family with its expenses. 15 Dolores further argued that Trustee and Creditors failed to 16 show that no material factual issue existed as to whether Dolores 17 received more than she would have under a chapter 7 liquidation. 18 She was a secured creditor who was entitled to repayment of the 19 entire loan. Payment to a fully secured creditor is not 20 preferential because it does not deplete the bankruptcy estate as 21 such payment reduces the secured creditor’s lien in an equal 22 amount. 23 Dolores also raised the new value defense under § 547(c)(1), 24 claiming that she and the debtor intended that the transfer of 25 the Business Assets be a contemporaneous exchange for new value 26 given to him. 27 The bankruptcy court held a hearing on the partial summary 28 judgment motion on September 18, 2012. It concluded that the

16 1 debtor’s ownership interests in the businesses constituted 2 property of the estate within the meaning of § 541. The 3 bankruptcy court referenced the loan agreements, the loan 4 resolution agreement and the turnover agreement. It pointed out 5 that all of these agreements had been between the debtor and 6 Dolores. The bankruptcy court acknowledged that 7 [S]ome other entities that [the debtor] controlled also had an interest in all those assets. But it [was] 8 pretty clear that – you look at the agreements between Dolores Stout and Edward Stout, and the reference to 9 the assets is the reference to him. It’s only to him individually, in the body of the actual document. 10 11 Tr. of Sept. 18, 2012 hr’g, 6:7-12. 12 The bankruptcy court also determined that the perfection of 13 Dolores’s security interests, through the filing of a UCC-1 14 financing statement on May 27, 2009, was within the preference 15 period. At the summary judgment hearing, the bankruptcy court 16 wondered, “[i]f [Dolores] was the owner of the property, why on 17 earth would she file a UCC-1 in 2009, on her own property?” 18 Tr. of Sept. 18, 2012 h’rg, 2:22-25. It also noted that Dolores 19 took further steps to perfect her security interest by executing 20 the turnover agreement, which allowed her to take possession of 21 the Business Assets immediately. 22 The bankruptcy court also concluded that Dolores was an 23 insider within the meaning of § 101(31) as she was the debtor’s 24 mother. Consequently, the one-year reach back period of 25 § 547(b)(4)(B) applied. It thus granted summary judgment on the 26 § 547(b) claim, concluding that no genuine triable factual issues 27 existed as to that claim. 28 The bankruptcy court denied summary judgment on the

17 1 § 548(a)(1) claim. It found that triable issues of material fact 2 existed as to the § 548(a)(1) claim.13 3 On January 23, 2013, the bankruptcy court entered the 4 § 547(b) partial summary judgment order in favor of Creditors. 5 Dolores timely appealed the § 547(b) partial summary judgment 6 order. The bankruptcy court entered a Rule 54(b) certification 7 thereafter. 8 2. Discharge Adversary 9 On October 20, 2009, before the Preference Adversary was 10 filed, Creditors filed a complaint (“Discharge Complaint”) 11 against the debtor, initially asserting a claim under 12 § 727(a)(2)(A) only. Under a stipulation entered February 9, 13 2010, the debtor agreed to allow Creditors to amend their 14 complaint to include a claim under § 523(a)(6). AP No. 09-1669 15 Docket Nos. 9 and 10. Creditors filed their amended complaint on 16 March 16, 2010, including a claim under § 523(a)(6). 17 With respect to their § 523(a)(6) claim, Creditors asserted 18 that the businesses were the debtor’s alter egos. They then 19 alleged that the debtor “conspired” with Dolores “to thwart” the 20 pending state court action and to hinder, delay and defraud them 21 by fraudulently transferring the Business Assets to Dolores 22 and/or Kaufman Group. Finally, they alleged that such acts 23 willfully and maliciously injured Creditors. 24 Alternatively, they argued that the debtor’s discharge 25 should be denied under § 727(a)(2)(A) because, within one year 26 13 27 Since disposition of the § 548(a)(1) claim has no relevance to the disposition in this appeal, we will not refer to 28 it further herein.

18 1 prior to filing for bankruptcy, he transferred the Business 2 Assets to Dolores and/or Kaufman Group with the intent to prevent 3 Creditors from obtaining and collecting a judgment against him in 4 the state court action. 5 Several months after he filed his answer to the Discharge 6 Complaint, the debtor moved for summary judgment (“debtor summary 7 judgment motion”), asserting that Creditors failed to establish 8 the elements of their § 727(a)(2)(A) and § 523(a)(6) claims. 9 With respect to the § 727(a)(2)(A) claim, the debtor argued 10 that he never owned the Qualtech Assets at any time. At the time 11 of the Qualtech sale, the debtor merely held the Qualtech Assets 12 for Applied.14 The Asset Purchase Agreement specifically 13 contemplated that a business entity would be the “true” purchaser 14 of the Qualtech Assets; the debtor simply was a placeholder. 15 Moreover, Applied owned the Qualtech Assets until March 2008, 16 when Dolores allegedly foreclosed on the Business Assets. 17 Because the debtor never truly owned the Qualtech Assets, there 18 could not have been a transfer within the meaning of 19 § 727(a)(2)(A). 20 He also maintained that the businesses never were his alter 21 egos. The businesses filed their own tax returns and maintained 22 separate books and records. They also maintained separate bank 23 accounts; they did not commingle any funds with the debtor. 24 The debtor further contended that the transfer of the 25 Business Assets to Dolores occurred outside the one-year period 26 14 27 The debtor advanced a number of arguments in his summary judgment motion, but we focus only on those relevant to the 28 appeal.

19 1 under § 727(a)(2)(A). Although Dolores did not file her UCC-1 2 financing statement until May 27, 2009, the debtor alleged that 3 she had a perfected security interest. The transfers of the 4 Business Assets to Dolores through the attachment of her security 5 interest became effective on June 20, 2005 when she signed the 6 loan agreements. 7 He also contended that Creditors failed to show that he had 8 actual intent to hinder, delay or defraud them at the time he 9 transferred the Business Assets to Dolores. She had a valid 10 security interest in the Business Assets pursuant to the loan 11 agreements. Dolores acquired the Business Assets because the 12 debtor failed to repay his debt to her, not because the debtor 13 intended to prevent Creditors from obtaining a state court 14 judgment against him. 15 As to the § 523(a)(6) claim,15 the debtor argued that 16 Creditors failed to show that he had a subjective intent to 17 injure them when he transferred the Business Assets to Dolores. 18 She had a valid security interest in the Business Assets; Dolores 19 20 15 The debtor also argued that Creditors could not assert 21 their § 523(a)(6) claim because it was time-barred under 22 Rule 4007(c). Rule 4007(c) provides that the deadline to file a complaint 23 to except a debt from discharge, including under § 523(a)(6), is 60 days after the first date set for the § 341(a) meeting of 24 creditors. The initial § 341(a) meeting of creditors in the 25 debtor’s bankruptcy case was scheduled for August 21, 2009. According to Form B9A, the “Notice of Commencement of Case under 26 the Bankruptcy Code, Meeting of Creditors and Deadlines,” that 27 was filed and entered on July 20, 2009 in the debtor’s bankruptcy case (main case docket no. 3), the deadline to file 28 dischargeability complaints was October 20, 2009.

20 1 simply exercised her right to repossess them pursuant to the loan 2 agreements. 3 He also argued that the debt owed to Creditors arose out of 4 a breach of contract, which is not recognized as a debt excepted 5 from discharge under any of the provisions of § 523(a). 6 The debtor further sought to dismiss Qualtech as a 7 plaintiff. When Creditors filed the Discharge Complaint, 8 Qualtech was suspended for failing to pay taxes. Qualtech 9 therefore lacked the capacity to commence and prosecute the 10 Discharge Adversary against him. 11 Creditors filed an opposition to the debtor’s summary 12 judgment motion. They opposed it on procedural grounds only, 13 contending that the debtor filed his summary judgment motion 14 untimely. They also argued that notice of the hearing on the 15 summary judgment motion was defective as the notice was served 16 untimely. 17 Before the December 16, 2010 hearing on the summary judgment 18 motion,16 the bankruptcy court issued a tentative ruling. In its 19 tentative ruling, the bankruptcy court indicated an intent to 20 grant the debtor’s summary judgment motion as to the § 523(a)(6) 21 claim, but to deny the summary judgment motion as to the 22 § 727(a)(2)(A) claim. At the summary judgment hearing, the 23 bankruptcy court adopted its tentative ruling. 24 25 16 Within the Central District of California, a hearing 26 automatically is scheduled on a motion for summary judgment, 27 whether or not an opposition is filed. See Rule 7056-1(a) and Rule 9013-1(a)(5) of the Local Bankruptcy Rules for the 28 Bankruptcy Court of the Central District of California.

21 1 On March 21, 2011, the bankruptcy court entered the 2 § 523(a)(6) partial summary judgment order. It granted summary 3 judgment in the debtor’s favor as to the § 523(a)(6) claim on two 4 grounds: first, concluding that the § 523(a)(6) claim was not 5 timely filed and, further, determining that Creditors did not 6 raise any material factual issue concerning the debtor’s intent 7 to cause injury within the meaning of § 523(a)(6). 8 The bankruptcy court denied summary judgment on the 9 § 727(a)(2)(A) claim, determining that genuine material factual 10 issues existed as to the following: 1) the significance and 11 legal effect of the transfer of the Qualtech Assets to Applied; 12 2) the existence of alter ego; 3) the circumstances concerning 13 Dolores’ taking possession of the Business Assets; and 4) the 14 debtor’s intent to hinder, delay or defraud Creditors. 15 The bankruptcy court further determined that there was 16 insufficient admissible evidence as to Qualtech’s legal status as 17 of the filing of the Discharge Complaint. It also determined 18 that the debtor failed to address the issue involving Qualtech’s 19 certificate of revivor. 20 The remaining claim in the Discharge Complaint proceeded to 21 trial. In preparation for the trial, the debtor and Creditors 22 submitted a joint pretrial order. 23 In the joint pretrial order, they agreed and admitted to 24 several facts, including that: 1) the debtor wholly owned and 25 controlled the businesses by June 20, 2005; 2) Dolores was an 26 officer and director of the businesses by June 20, 2005; 3) the 27 debtor and the businesses entered into the loan agreements with 28 Dolores; 4) the debtor or his allowed assignee was the purchaser

22 1 under the Asset Purchase Agreement; 5) the debtor personally 2 guaranteed performance under the Asset Purchase Agreement, the 3 sublease and the consulting agreements; 6) Dolores took 4 possession of the Business Assets two months before the debtor 5 filed his chapter 7 petition; and 7) Qualtech was under 6 suspension from April 1, 2008 until August 23, 2010, when it 7 filed its certificate of revivor. 8 The debtor and Creditors also listed several factual issues 9 remaining to be litigated, including: 1) whether the debtor was 10 the alter ego of the businesses; 2) whether the debtor acted to 11 transfer, conceal, destroy or remove the Business Assets; and 12 3) whether the debtor had actual intent to defraud, delay or 13 hinder Creditors through his actions within one year prepetition. 14 Before the trial, the bankruptcy court addressed several 15 pretrial motions filed by the debtor. In one pretrial motion, 16 the debtor again sought to dismiss Qualtech as a plaintiff for 17 lack of standing to prosecute the Discharge Complaint (“pretrial 18 motion”). AP No. 09-1669 Docket No. 82. Following a hearing, 19 the bankruptcy court granted the pretrial motion, entering the 20 order on May 15, 2012. AP No. 09-1669 Docket No. 138. It 21 concluded that Qualtech lacked capacity to prosecute the 22 Discharge Adversary because at the time it was filed on 23 October 20, 2009, Qualtech was under suspension. 24 The bankruptcy court held a four-day trial. It issued its 25 ruling orally on March 1, 2013 (“Trial Findings Hearing”). 26 At the outset of the Trial Findings Hearing, the bankruptcy 27 court stressed that it reviewed all admissible evidence 28 independent from any other pending adversary proceeding, i.e.,

23 1 the Preference Adversary. It then went on to state that 2 Creditors had established all but one of the elements of 3 § 727(a)(2)(A). 4 It found that the debtor transferred all of the Business 5 Assets to Dolores within one year of his bankruptcy filing with 6 the actual intent to hinder, delay and defraud Creditors. The 7 bankruptcy court noted that the evidence showed that the transfer 8 of the Business Assets to Dolores “was designed to ensure 9 protection of [her] interest as a creditor to the detriment of 10 [Creditors].” Tr. of March 1, 2013 hr’g, 6:7-8. 11 It inferred that the debtor had fraudulent intent in 12 transferring the Business Assets to Dolores based on the 13 circumstances surrounding the transfer. The bankruptcy court 14 pointed out that Dolores had a close relationship with the debtor 15 because she was his mother. It also noted that the debtor made 16 the transfer very shortly after Creditors initiated the state 17 court action. The bankruptcy court further pointed out that the 18 debtor transferred substantially all of the Business Assets to 19 Dolores which left “other creditors with little from which to 20 recover on their claims.” Tr. of March 1, 2013 hr’g, 6:23-24. 21 However, it found that Creditors failed to show that the 22 Business Assets were the property of the debtor. The bankruptcy 23 court noted that Creditors seemed to rely on its earlier 24 determination in the Preference Adversary. There, in its partial 25 summary judgment order entered January 23, 2013, the bankruptcy 26 court had found that the debtor’s transfer of the Business Assets 27 to Dolores under the turnover agreement constituted a 28 preferential transfer under § 547(b). It explained to Creditors

24 1 that its holding in the Preference Adversary had “no bearing on 2 [its] ruling in this matter” because: 1) the debtor was not a 3 party to the Preference Adversary so he could not raise a defense 4 or submit evidence and legal argument regarding the property 5 transfer’s characterization; 2) the evidence and legal arguments 6 presented in the Preference Adversary “were far more extensive 7 and compelling” than the Creditors’ presentation in the Discharge 8 Adversary; 3) Creditors provided no evidence showing that the 9 debtor was the alter ego of the businesses, even though a joint 10 pretrial order had listed this as an issue to be determined at 11 trial. Tr. of March 1, 2013 hr’g, 7:10-25, 8:1-18. See 12 Discussion infra. The bankruptcy court concluded that, “absent a 13 finding of alter ego, property belonging to a debtor’s wholly- 14 owned corporation is property of that entity and not property of 15 the debtor within the meaning of 727(a)(2).” Tr. of March 1, 16 2013 hr’g, 10:8-11. 17 On March 25, 2013, the bankruptcy court entered judgment in 18 favor of the debtor on the § 727(a)(2)(A) claim (“§ 727(a)(2) 19 judgment”). Two weeks later, Creditors filed the motion for new 20 trial. 21 They contended that they established all of the elements of 22 § 727(a)(2)(A). In particular, Creditors averred that the 23 Business Assets were property of the estate within the meaning of 24 § 727(a)(2)(A). Under California law, when a corporation is 25 dissolved, all of its assets automatically are transferred to its 26 shareholders. When an individual files for bankruptcy, the 27 chapter 7 trustee acquires all of his rights and interests in 28 property. Any property belonging to the debtor thus becomes part

25 1 of the bankruptcy estate. 2 Here, the debtor owned all of the stock in the businesses. 3 When the debtor dissolved the businesses shortly before he filed 4 his bankruptcy petition, all of their assets went to the 5 businesses’ shareholder – i.e., the debtor. When he filed for 6 bankruptcy, Trustee succeeded to the debtor’s rights and 7 interests, including his ownership interest in the Business 8 Assets. The Business Assets thus became part of the bankruptcy 9 estate. 10 Creditors further argued that, under § 727(a)(7), a debtor’s 11 discharge shall be denied if he is an insider of a corporation 12 and had fraudulently transferred the corporation’s assets within 13 the meaning of § 727(a)(2). Here, the debtor was an officer and 14 director and sole shareholder of the businesses, which qualified 15 him as an insider. Because he fraudulently transferred the 16 Business Assets to Dolores when he was an insider of the 17 businesses, his discharge must be denied. 18 Creditors also maintained that the businesses were the 19 debtor’s alter egos under California law. In California, a 20 person is the alter ego of his corporation if: 1) he owns all of 21 the corporation’s stock; 2) there is such a unity of interest and 22 ownership that the separateness of the person and the corporation 23 has ceased; and 3) an adherence to the fiction of the separate 24 existence of the corporation would sanction a fraud or promote 25 injustice. Here, Creditors averred, all three elements of alter 26 ego were met: 1) the debtor wholly owned and controlled the 27 businesses; 2) the debtor admitted at the § 341(a) meeting that 28 he co-owned with the businesses the Business Assets and

26 1 commingled his personal assets in the Business Assets in such a 2 way that he could not separate them; and 3) adhering to the 3 fiction of the separate existence of the businesses would condone 4 fraud and promote injustice. 5 Creditors further asked the bankruptcy court to reconsider 6 its grant of partial summary judgment on the § 523(a)(6) claim. 7 Creditors contended that the facts proven at trial showed that 8 the debtor intended “to strip the value” from his corporate stock 9 by transferring the sale assets to Dolores, an insider. In doing 10 so, the debtor caused Creditors willful and malicious injury 11 within the meaning of § 523(a)(6). 12 Following a hearing on May 7, 2013 (“new trial hearing”), 13 the bankruptcy court denied the motion for new trial. It noted 14 that Creditors did not provide any substantive analysis as to how 15 Civil Rules 52 and 59 and Local Rule 9013-4(a) applied. 16 The bankruptcy court determined that Creditors misapplied 17 § 727(a)(7). It explained that § 727(a)(7) ties together related 18 cases so that misconduct in one case by an individual may be 19 chargeable against him in other related cases. Here, the 20 businesses never filed for bankruptcy; they were nonbankruptcy 21 insiders. 22 Moreover, the bankruptcy court reasoned, even if § 727(a)(7) 23 applied to nonbankruptcy insiders such as the businesses, 24 Creditors never included their § 727(a)(7) claim in the joint 25 pretrial order as a claim to be litigated. 26 As for their arguments regarding alter ego, the bankruptcy 27 court found that Creditors failed to address the lack of evidence 28 of alter ego at trial. They also failed to proffer appropriate

27 1 analysis of alter ego under Civil Rules 59 and 52. 2 The bankruptcy court further found unpersuasive Creditors’ 3 argument that the debtor’s dissolution of the businesses shortly 4 before his bankruptcy filing required the denial of his 5 discharge. It pointed out that Creditors failed to provide any 6 analysis as to how the assets of the debtor’s dissolved 7 businesses (if any at the times that the businesses were 8 dissolved) legally reverted to the debtor, as shareholder, 9 prepetition. 10 The bankruptcy court denied Creditors’ request to reconsider 11 its grant of partial summary judgment on their § 523(a)(6) claim 12 because they failed to present any grounds for reconsideration. 13 It moreover mentioned that Creditors were seeking reconsideration 14 of an order that it issued more than two years before. 15 On May 15, 2013, the bankruptcy court entered the new trial 16 order. Creditors timely appealed the new trial order. 17 18 JURISDICTION 19 The bankruptcy court had jurisdiction under 28 U.S.C. 20 §§ 1334 and 157(b)(2)(F) and (J). We have jurisdiction under 21 28 U.S.C. § 158. 22 23 ISSUES 24 1) Did the bankruptcy court err in granting partial summary 25 judgment on the § 547(b) claim by determining that the debtor’s 26 transfer of the Business Assets to Dolores constituted a 27 preferential transfer? 28 2) Did the bankruptcy court err in granting judgment in the

28 1 debtor’s favor on Creditor’s § 523(a)(6) claim? 2 3) Did the bankruptcy court err in granting judgment in the 3 debtor’s favor on Creditors’ § 727(a)(2)(A) claim? 4 5 STANDARDS OF REVIEW 6 We review the bankruptcy court’s legal conclusions de novo. 7 Goodrich v. Briones (In re Schwarzkof), 526 F.3d 1032, 1034 (9th 8 Cir. 2010). We also review de novo the bankruptcy court’s grant 9 of partial summary judgment. White v. City of Sparks, 500 F.3d 10 953, 955 (9th Cir. 2007). “Summary judgment is appropriate only 11 if, taking the evidence and all reasonable inferences drawn 12 therefrom in the light most favorable to the non-moving party, 13 there are no genuine issues of material fact and the moving party 14 is entitled to judgment as a matter of law.” Smith v. Clark 15 Cnty. Sch. Distr., 727 F.3d 950, 955 (9th Cir. 2013)(quoting 16 Furnace v. Sullivan, 705 F.3d 1021, 1026 (9th Cir. 2013)). The 17 moving party has the initial burden of demonstrating that no 18 material fact issues exist. Soremekun v. Thrifty Payless, Inc., 19 509 F.3d 978, 984 (9th Cir. 2007). 20 Generally, a court cannot grant summary judgment based on 21 its assessment of the credibility of the evidence presented. 22 Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th 23 Cir. 2008)(quoting Agosto v. INS, 436 U.S. 748, 756 (1978)). At 24 the summary judgment stage, the bankruptcy court’s function is 25 not to weigh the evidence and determine the truth of the matter. 26 Barboza, 545 F.3d at 707 (quoting Anderson v. Liberty Lobby, 27 Inc., 477 U.S. 242, 249 (1986)). Rather, it simply must 28 determine whether there is a genuine issue for trial. Barboza,

29 1 545 F.3d at 707 (quoting Anderson, 477 U.S. at 249). 2 We review the bankruptcy court’s factual findings under the 3 clearly erroneous standard. United States v. Hinkson, 585 F.3d 4 1247, 1252 & n.20 (9th Cir. 2009)(en banc). Determinations of 5 alter ego typically are factual findings, which we review for 6 clear error. Schwarzkof, 526 F.3d at 1034 (citing Towe Antique 7 Ford Found. v. IRS, 999 F.2d 1891, 1897 (9th Cir. 1993)). We 8 must affirm the bankruptcy court’s factual findings unless we 9 conclude that they are “(1) ‘illogical,’ (2) ‘implausible,’ or 10 (3) without ‘support in inferences that may be drawn from the 11 facts in the record.’” Hinkson, 585 F.3d at 1252. Clear error 12 exists when, on the entire evidence, the reviewing court is left 13 with the definite and firm conviction that a mistake was made. 14 Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th Cir. 15 2009); Hoopai v. Countrywide Home Loans, Inc. (In re Hoopai), 16 369 B.R. 506, 509 (9th Cir. BAP 2007). 17 We may affirm on any ground supported by the record. White, 18 500 F.3d at 955. 19 20 DISCUSSION 21 A. Preference Adversary 22 1. Motion to Supplement Record 23 Before we begin our analysis, we must address a procedural 24 matter: Dolores’ motion to supplement the record on appeal 25 (“supplement record motion”). All of the supplemental documents 26 submitted for our review concern Trustee’s application to employ 27 Creditors’ adversary counsel as his special counsel in the 28

30 1 underlying bankruptcy case.17 2 Having reviewed the supplemental documents, we conclude that 3 the supplemental documents would not be helpful in our 4 determination of Dolores’ appeal. We thus deny the supplement 5 record motion.18 6 2. Appeal of the § 547(b) partial summary judgment order 7 Under § 547(b), the transfer of a debtor’s interest in 8 property made to an insider within one year prior to the debtor’s 9 bankruptcy filing may be avoided as a preference if six elements 10 are met. Sigma Micro Corp. v. Healthcentral.com 11 (In re Healthcentral.com), 504 F.3d 775, 788 (9th Cir. 2007). A 12 preferential transfer consists of the following six elements: 13 1) a transfer of the debtor’s interest in property; 2) that was 14 to or for a creditor’s benefit; 3) that was for or on account of 15 an antecedent debt; 4) that was made while the debtor was 16 insolvent; 5) that was made up to one year prepetition, if such 17 creditor was an insider; and 6) that was a transfer that enables 18 the creditor to receive more than such creditor would receive in 19 a chapter 7 liquidation of the bankruptcy estate. Hansen v. 20 MacDonald Meat Co. (In re Kemp Pac. Fisheries, Inc.), 16 F.3d 21 17 22 This same counsel also represented Creditors in the state court action. 23 18 Shortly before oral argument, the debtor, Creditors and 24 Dolores each submitted additional authorities in support of their 25 briefs. The debtor and Dolores objected to Creditors’ submissions and moved to strike them. We deny the debtor’s and 26 Dolores’ motions to strike. After considering all of these 27 submissions, however, we conclude that the supplemental authorities cited by the debtor, Creditors and Dolores do not 28 assist us materially in our dispositions of these appeals.

31 1 313, 315 n.1 (9th Cir. 1994). All six of these elements must be 2 met, Wind Power Sys., Inc. v. Cannon Fin. Group, Inc. (In re Wind 3 Power Sys., Inc.), 841 F.2d 288, 290 (9th Cir. 1988)(en banc) 4 (citation omitted), and each must be proven by a preponderance of 5 the evidence. Arrow Elecs., Inc. v. Justus (In re Kaypro), 6 218 F.3d 1070, 1073 (9th Cir. 2000). 7 Dolores claims that she provided sufficient evidence to 8 raise genuine material factual issues as to three of these 9 elements: 1) whether the transfer involved the debtor’s 10 property; 2) whether the transfer was made within the preference 11 period; and 3) whether Dolores, as a secured creditor, received 12 more than she would have received in a chapter 7 liquidation. 13 a. Property of the debtor 14 Dolores first argues that she submitted evidence raising 15 questions as to whether the Business Assets ever constituted the 16 debtor’s property. Dolores asserts that the debtor never 17 intended to own the Business Assets. She references the Asset 18 Purchase Agreement and the Assignment, both of which provided 19 that Applied would own the Qualtech Assets when the debtor 20 assigned his rights under the Asset Purchase Agreement and made 21 the Assignment to Applied. 22 Dolores contends that she presented further evidence raising 23 material factual issues as to whether the debtor owned the 24 Business Assets under the alter ego theory. She provided 25 evidence that the businesses each kept separate books and 26 records, even though they operated out of the same facility. 27 Dolores also submitted evidence showing that the businesses did 28 not transfer funds between themselves without regard to source or

32 1 obligation, as Creditors alleged. The businesses exchanged funds 2 for various goods and services they provided to one another. 3 However, Dolores seeks to manufacture a genuine issue of 4 fact out of her subjective intent, which is belied by the reality 5 of her documented transactions with respect to the Business 6 Assets. As the bankruptcy court pointed out, Dolores relies on 7 documents that indicated that the debtor owned the Business 8 Assets. The loan resolution agreement was between Dolores and 9 the debtor only. None of the businesses was a party to the loan 10 resolution agreement. The loan resolution agreement further 11 allowed Dolores to take immediate possession of collateral under 12 her loan agreement with the debtor, but the loan resolution 13 agreement did not provide for any transfer of title or ownership. 14 In fact, the loan resolution agreement left the Business Assets 15 in place with the debtor. 16 Dynamic and Electronic along with the debtor, Dolores and 17 Kaufman Group were parties to the turnover agreement, but Applied 18 was not. Two lists of transferred assets were attached to the 19 turnover agreement, without any indication or division of 20 respective ownership interests among the debtor, Dynamic and 21 Electronic. If the subject lists included any of the Qualtech 22 Assets, to the extent Applied owned them, it was not a party, and 23 the subject assets were not transferred, unless the debtor had a 24 continuing ownership interest in them.19 25 At the summary judgment hearing, the bankruptcy court 26 19 27 Nothing in the record indicates that any interest in the Qualtech Assets ever was assigned or transferred from Applied to 28 either Dynamic or Electronic.

33 1 highlighted certain language in the turnover agreement indicating 2 that the Business Assets belonged to the debtor. The relevant 3 provision of the turnover agreement stated that the debtor 4 “continuously and irrevocably tender[ed] . . . all right, title 5 and interest and full possession of, in and to all its asset 6 collateral not [now] in [Dolores’] possession . . . .” Such 7 language, the bankruptcy court reasoned, indicated that the 8 debtor owned the Business Assets collateral, lists of which were 9 attached to the turnover agreement. Further, the bankruptcy 10 court concluded that the turnover agreement was more “explicit, 11 in terms of what it says,” than the loan resolution agreement. 12 Tr. of Sept. 18, 2012 hr’g, 11:6-7. 13 Dolores maintains that the actual transfer of the Business 14 Assets occurred on March 31, 2008, more than a year before the 15 debtor filed for bankruptcy protection. Following the transfer 16 on March 31, 2008, she asserts that she owned the Business 17 Assets, which she then leased back to the debtor. The debtor 18 thus did not own the Business Assets during the preference 19 period. 20 As the bankruptcy court noted, if Dolores actually owned the 21 Business Assets outside of the preference period, then it made no 22 sense (or, as the bankruptcy court put it, was “illogical”) for 23 Dolores to file the UCC-1 financing statement on May 27, 2009. 24 Like the bankruptcy court, we too wonder if she truly owned the 25 Business Assets during the preference period, “why on earth would 26 [Dolores] file a UCC-1 in 2009, on her own property?” 27 On the record before us and then before the bankruptcy 28 court, there is no genuine issue that the debtor owned at least

34 1 some interest in the Business Assets during the insider 2 preference period. However, even if the businesses owned some of 3 the Business Assets to an unspecified extent, as conceded by 4 Dolores’ counsel at oral argument, the debtor’s transfer of all 5 the Business Assets to Dolores drained the stock that he wholly 6 owned in the businesses of all value, thus constituting a 7 preferential transfer. 8 We ultimately conclude, as did the bankruptcy court, that 9 Dolores did not raise a genuine issue of material fact as to 10 whether the debtor had a property interest of some type either in 11 or with respect to the transferred Business Assets for purposes 12 of a determination of preferential transfer under § 547(b). 13 b. Preference period 14 Dolores next argues that she provided evidence raising 15 material factual issues as to whether the debtor transferred the 16 Business Assets to her within one year prepetition. She points 17 to the loan resolution agreement, dated March 31, 2008, under 18 which she allegedly took possession of the Business Assets. 19 According to Dolores, the loan resolution agreement proves that 20 the transfer occurred more than one year before the debtor filed 21 for bankruptcy protection on July 15, 2009. 22 We give no credence to this argument. As noted above, and 23 as the bankruptcy court reasoned at the partial summary judgment 24 hearing, if Dolores truly owned the Business Assets before the 25 preference period began, why would she file the UCC-1 financing 26 statement on her property on May 27, 2009, and enter into the 27 subsequent turnover agreement that transferred title and 28 ownership of the Business Assets? Such actions indicate that the

35 1 debtor had not yet transferred the Business Assets to Dolores 2 before the preference period began. Also, the loan resolution 3 agreement does not mention foreclosure by Dolores on the Business 4 Assets, and no notice of the purported transfer was provided at 5 that time to any third parties. 6 We thus conclude that Dolores did not raise a genuine issue 7 of material fact as to whether the transfer occurred outside of 8 the preference period. 9 c. Secured creditor status 10 Dolores finally contends that she raised a genuine issue of 11 material fact as to whether, as a secured creditor, she received 12 more than she would have in a chapter 7 liquidation. She points 13 out that payments to a fully secured creditor are not 14 preferential because such payments do not deplete the bankruptcy 15 estate. They do not diminish the value of the bankruptcy estate 16 because, while funds are removed from the bankruptcy estate, the 17 secured creditor’s lien is reduced in equal amount. 18 Dolores claims that she submitted evidence showing that she 19 was a fully secured creditor. However, the uncontradicted 20 evidence before the bankruptcy court established that her claimed 21 security interests were unperfected until she filed the UCC-1 22 financing statement on May 27, 2009 – well within the preference 23 period. Sheehan v. Valley Nat’l Bank (In re Shreves), 272 B.R. 24 614, 622 (Bankr. N.D.W. Va. 2001)(“The trustee is granted the 25 right under the Code to avoid transfers within the preference 26 period, and the perfection of a lien within the preference period 27 is a transfer avoidable by the trustee.”); Rouse v. Chase 28 Manhattan Bank (In re Brown), 226 B.R. 39, 45 (W.D. Mo.

36 1 1998)(“The perfection of a lien within the preference period is 2 considered a transfer, which is avoidable by the trustee.”). 3 Dolores also presented evidence to raise questions as to 4 whether the Business Assets had a value that exceeded her secured 5 claim. However, because her security interests were not 6 perfected until late in the preference period, such evidence was 7 ineffectual to raise a genuine issue of material fact. 8 Based on the foregoing, we determine that Dolores did not 9 present sufficient evidence to raise genuine factual issues as to 10 the three contested elements for a preferential transfer under 11 § 547(b). We thus conclude that the bankruptcy court did not err 12 in granting summary judgment on the § 547(b) claim. 13 B. Discharge Adversary 14 According to their notice of appeal, Creditors appeal the 15 new trial order. But, in their appellate briefs, Creditors 16 appear to be appealing both the § 523(a)(6) partial summary 17 judgment order and the § 727(a)(2)(A) judgment. 18 1. Section 523(a)(6) claim 19 Creditors contend that the bankruptcy court erred in 20 refusing to except their debt from discharge under § 523(a)(6). 21 They argue that they successfully established that the debtor 22 intentionally and fraudulently transferred to Dolores the 23 Business Assets because the bankruptcy court expressly found that 24 he transferred the Business Assets to diminish his bankruptcy 25 estate thereby defrauding his creditors. Creditors maintain that 26 the debtor’s intentional and fraudulent transfer constituted a 27 “willful and malicious injury” within the meaning of § 523(a)(6). 28 As noted above, the bankruptcy court granted summary

37 1 judgment in the debtor’s favor on Creditors’ § 523(a)(6) claim 2 for two reasons: First, the § 523(a)(6) claim was not timely 3 filed. Although the parties had stipulated to allow Creditors to 4 amend the Discharge Adversary complaint, there was no agreement 5 that the debtor could not assert an untimeliness defense to any 6 new claims that Creditors might assert in an amended complaint. 7 The deadline to file exception to discharge claims was 8 October 20, 2009. The amended complaint asserting a § 523(a)(6) 9 claim for the first time was not filed until March 16, 2010. The 10 Creditors missed the deadline to assert their § 523(a)(6) claim. 11 Rule 4007(c) provides that, “On motion of any party in interest 12 after hearing on notice the court may for cause extend the time 13 fixed under this subdivision. The motion shall be filed before 14 the time has expired.” No such motion was filed by the Creditors 15 to extend the deadline to file their § 523(a)(6) claim. On this 16 record, we perceive no error in the bankruptcy court dismissing 17 the Creditors’ § 523(a)(6) claim as not timely filed. 18 In addition, Creditors misapprehend § 523(a)(6). 19 Section 523(a)(6) essentially encompasses intentional torts. 20 Creditors’ claims arise out of breach of contract. Under 21 controlling Ninth Circuit case law, “‘a simple breach of contract 22 is not the type of injury addressed by § 523(a)(6).’” Petralia 23 v. Jercich (In re Jercich), 238 F.3d 1202, 1205 (9th Cir. 24 2001)(quoting Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154 25 (9th Cir. 1992)). The Ninth Circuit has held that “‘an 26 intentional breach of contract is excepted from discharge under 27 § 523(a)(6) only when it is accompanied by malicious and willful 28 tortious conduct.’” Jercich, 238 F.3d at 1205 (quoting Riso,

38 1 978 F.2d at 1154 (emphasis in original)). Creditors only have 2 breach of contract claims with an after-the-fact argument that 3 the debtor’s alleged fraudulent transfer of the Business Assets 4 to Dolores constitutes a willful and malicious injury. Their 5 embellished breach of contract claim does not support a willful 6 and malicious injury claim within the meaning of § 523(a)(6). 7 See Jercich, 238 F.3d at 1206. We thus conclude that the 8 bankruptcy court did not err in determining, on an alternative 9 basis, that Creditors’ debt was not excepted from discharge under 10 § 523(a)(6) due to a lack of evidence of the required subjective 11 tortious intent. 12 2. Section 727(a)(2)(A) claim 13 We now turn to Creditors’ appeal of the bankruptcy court’s 14 determination on their § 727(a)(2)(A) claim. Section 15 727(a)(2)(A) provides that the bankruptcy court must deny the 16 debtor’s discharge if the debtor, with intent to hinder, delay or 17 defraud a creditor, transferred property of the debtor within one 18 year prepetition. Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 19 273 (9th Cir. BAP 1990). The creditor must demonstrate by a 20 preponderance of evidence that: 1) the debtor transferred or 21 concealed property; 2) the property belonged to the debtor; 22 3) the transfer occurred within one year of his bankruptcy 23 filing; and 4) the debtor made the transfer with the intent to 24 hinder, delay or defraud a creditor. Id. (citations omitted). 25 The only element at issue on appeal is whether the Business 26 Assets were property of the debtor. 27 The bankruptcy court found in the Discharge Adversary that 28 Creditors did not meet their burden of proof to establish that

39 1 the debtor owned the Business Assets for § 727(a)(2)(A) purposes. 2 The fact that the bankruptcy court concluded upon the more 3 extensive evidentiary record and legal arguments presented in the 4 Preference Adversary that a property interest of the debtor had 5 been transferred for preference purposes is not dispositive here. 6 Creditors argue that they established that the Business 7 Assets belonged to the debtor. Creditors contend that the 8 businesses were the alter egos of the debtor. Specifically, they 9 argue that: 1) the debtor jointly owned the Business Assets with 10 the businesses; and 2) under California law, the shareholders of 11 a dissolved corporation hold legal and equitable title to the 12 dissolved corporation’s property, subject to the superior claims 13 of its creditors. 14 In determining whether alter ego liability applies, we must 15 look to the law of the forum state. Schwarzkopf, 626 F.3d at 16 1037. Here, California law applies. 17 California recognizes alter ego liability: 1) “where ‘there 18 is such a unity of interest and ownership that the individuality, 19 or separateness, of the said person and corporation has ceased’” 20 and 2) “where ‘adherence to the fiction of the separate existence 21 of the corporation would . . . sanction a fraud or promote 22 injustice.’” Id. at 1038 (quoting Wood v. Elling Corp., 572 P.2d 23 755, 761 n.9 (1977)). This is a highly fact-intensive 24 determination. Factors suggesting an alter ego relationship 25 include “‘[c]ommingling of funds and other assets [and] failure 26 to segregate funds of the separate entities . . .; the treatment 27 by an individual of the assets of the corporation as his own 28 . . .; the disregard of legal formalities and the failure to

40 1 maintain arm’s length relationships among related entities . . .’ 2 [and] the diversion [of assets from a corporation by or to a] 3 stockholder or other person or entity, to the detriment of 4 creditors, or the manipulation of assets . . . between entities 5 so as to concentrate the assets in one and the liabilities in 6 another.’” Schwarzkopf, 626 F.3d at 1038 (quoting Associated 7 Vendors, Inc. v. Oakland Meat Co., Inc., 26 Cal. Rptr. 806, 8 813-15 (1962)). 9 The bankruptcy court found that Creditors presented no 10 evidence establishing that the businesses were the debtor’s alter 11 egos, even though the joint pretrial order expressly listed this 12 as an issue to be determined at trial. We agree. 13 Creditors also contend that upon dissolution of a 14 corporation, its shareholders retain and own its assets. But 15 here, the dissolution of the businesses occurred after the 16 Business Assets already had been transferred to Dolores. By the 17 time the businesses dissolved, they had no assets to distribute 18 to the debtor. 19 Based on our review of the record, we do not have a firm and 20 definite conviction that the bankruptcy court clearly erred in 21 finding that the Creditors had not met their burden of proof to 22 establish that the Business Assets were the debtor’s property in 23 the Discharge Adversary for purposes of their § 727(a)(2)(A) 24 claim. 25 26 CONCLUSION 27 Both Dolores and Creditors contend on appeal that the 28 bankruptcy court erred in its determinations in the adversary

41 1 proceedings. Based on our review of the record, we conclude that 2 the bankruptcy court did not err. Accordingly, we AFFIRM the 3 bankruptcy court’s rulings on appeal. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28