FILED MAR 30 2016
1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
2 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. ID-15-1010-JuKiF )
6 JAY P. CLARK, ) Bk. No. 12-00649-TLM )
7 Debtor. ) Adv. No. 13-06016-TLM ______________________________)
8 )
CLARK’S CRYSTAL SPRINGS RANCH,)
9 LLC; CLARK FARMS FAMILY TRUST,)
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M* )
12 JEREMY J. GUGINO, Chapter 7 )
Trustee, )
13 )
Appellee. )
14 ______________________________) 15 Argued and Submitted on March 17, 2016 at Pasadena, California
16 Filed - March 30, 2016
17 Appeal from the United States Bankruptcy Court 18 for the District of Idaho 19 Honorable Terry L. Myers, Chief Bankruptcy Judge, Presiding
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20 Appearances: Nolan Sorensen of S&P Legal LLC argued for 21 appellants Clark’s Crystal Springs Ranch, LLC and Clark Farms Family Trust; Matthew Todd 22 Christensen of Angstman, Johnson & Associates, PLLC argued for appellee Jeremy J. Gugino, 23 chapter 7 trustee.
_________________________
24 Before: JURY, KIRSCHER, and FARIS, Bankruptcy Judges.
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.
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1 Chapter 71 trustee, Jeremy J. Gugino (Trustee), filed an 2 adversary complaint against Clark’s Crystal Springs Ranch, LLC 3 (LLC) and Clark Farms Family Trust (Trust) (collectively, 4 Defendants) seeking, among other things, a judgment 5 substantively consolidating the bankruptcy estate of Jay P. 6 Clark (Debtor) with the LLC and its sole member, the Trust. 7 After a trial, the bankruptcy court issued a decision finding 8 that the requirements for substantive consolidation articulated 9 in Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir. 10 2000), were met and entered judgment substantively consolidating 11 Debtor’s estate with the LLC and the Trust nunc pro tunc. This 12 appeal followed. We AFFIRM. 13 I. FACTS 14 A. The Trust 15 Debtor, at one time a lawyer, formed the Trust in 2008 and 16 was the grantor and sole trustee. At that time, the trust 17 property was described as $1.00 transferred by the grantor. The 18 agreement gave the grantor discretion to name the Trust as a 19 beneficiary of life insurance policies, deposit property with 20 the Trust or devise property to the Trust. In addition, the 21 trust agreement gave Debtor, as grantor, immediate benefits 22 while living: “the Trustee shall distribute to or for the 23 benefit of the Grantor such sums from income and principal as 24 the Grantor may at any time request.” The Trust did not provide 25 26 1 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure.
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1 for Debtor’s children during his lifetime nor did it 2 specifically identify them as beneficiaries. However, upon his 3 death, the trust agreement provided that the Trust’s property 4 should be administered and distributed to his “issue” according 5 to the Trust’s provisions. 6 Debtor was the initial trustee of the Trust. Under § 4.04 7 of the trust agreement, the trustee could resign on 30 days’ 8 notice. That section further provided: 9 Upon the death, resignation, or disability of Jay P.
Clark, then Judith Constance (Clark) Appleby shall 10 serve as Trustee of this Clark Farms Family Trust.
Upon the resignation of any Trustee, if no successor 11 Trustee is designated, as permitted by this Clark Farms Family Trust, a successor shall be appointed by 12 a court having jurisdiction over the trust with respect to which such Trustee has resigned.
13 14 As described below, when Debtor resigned as trustee, this 15 provision was ignored. The trust agreement also contained a 16 spendthrift clause. 17 Finally, while one provision of the Trust stated that it 18 was irrevocable and not subject to amendment, another provision 19 authorized the Debtor, as grantor, to amend the Trust at any 20 time. Debtor exercised the authority to amend in May 2010. 21 This amendment changed several provisions. First, the trust 22 property was described as all the assets of the LLC which were 23 primarily farm machinery and vehicles owned by the LLC. The 24 value of the assets was asserted to be at least $100,000, and 25 Debtor, as trustee, was required to maintain this “minimum 26 value.” Second, it stated that so long as the Trust earned 27 income through the operation of the LLC, the Trust would pay for 28 certain expenses such as a cell phone, housing, and a vehicle,
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1 on behalf of Debtor’s children. Finally, the amendment made the 2 Trust irrevocable, but its language purporting to do so was 3 ambiguous at best. 4 B. The LLC 5 Two weeks after the Trust was created, articles of 6 organization of the LLC were filed with the Idaho Secretary of 7 State. Debtor signed the documents, which disclosed him as the 8 initial registered agent. The form indicates that the LLC is 9 “member-managed.” The LLC’s operating agreement stated that the 10 Trust was the sole member and manager of the LLC. Thus, Debtor 11 individually was neither a member nor manager of the LLC. 12 The record shows that Debtor exercised total and sole 13 control over the LLC’s operations. Moreover, despite the fact 14 that he was neither a member nor manager, Debtor often 15 identified himself as one or the other. Further, although he 16 was not a member, Debtor’s sole compensation for operating the 17 farm came through “draws” from the LLC. These “draws” were paid 18 directly from the LLC to third parties for Debtor’s personal 19 expenses or those of his children. 20 In addition, one of the assets of the LLC was farm 21 equipment which was “leased” from Debtor’s parents. The 22 January 14, 2008 lease was executed on the eve of Debtor’s 23 chapter 12 filing in 2012. However, in response to discovery, 24 Defendants stated the LLC “owns” farm machinery and itemized 25 equipment with an auction value of $364,600. The LLC’s 26 Quickbooks report summarized “purchased” farming equipment from 27 John Clark valued at $203,192.92 and “other” used equipment 28 valued at $560,928.72. The record also shows that the LLC
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1 asserted ownership rights in $354,000 of crop insurance proceeds 2 and, due to Trustee’s intervention, that check was currently 3 being held by the insurance company.2 The LLC had liabilities 4 of $676,796.98 and Debtor was personally liable for most of 5 those debts as shown by the proofs of claim filed by creditors 6 in Debtor’s bankruptcy case. 7 Finally, the record shows that no tax returns were prepared 8 for the LLC. Rather, the income, profit and losses, 9 depreciation of assets, and other relevant information were on 10 Debtor’s personal tax returns. 11 C. Bankruptcy Events 12 On March 27, 2012, Debtor filed a voluntary chapter 12 13 petition in his own name dba Crystal Springs Ranch. At this 14 time, Debtor was the trustee of the Trust and thus manager of 15 the LLC. 16 On May 31, 2013, the bankruptcy court granted a creditor’s 17 motion to convert the case to chapter 7 under § 1208(d) which 18 allows for conversion “upon a showing that the debtor has 19 committed fraud in connection with the case.” On the same date, 20 Trustee was appointed and Debtor resigned as trustee of the 21 Trust and manager of the LLC. As described below, Debtor then 22 found a successor trustee and manager for the LLC. 23 On June 7, 2013, Trustee filed an adversary complaint 24 against the LLC and the Trust alleging various claims in an 25
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26 On June 10, 2013, the court issued an injunction freezing the Trust’s and LLC’s assets. Accordingly, there were 27 essentially no farming “operations” thereafter, even though Debtor attempted to procure the crop insurance proceeds for the 28 LLC.
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1 effort to recover and bring into the estate the assets of the 2 LLC consisting of $20,000 in a checking account, a crop 3 insurance check of $354,000, and farming equipment with an 4 unknown value. In the complaint, Trustee sought (1) a 5 declaration that the LLC and the Trust are invalid entities 6 created as part of a scheme to hinder, defraud, or delay 7 Debtor’s creditors (Sham Entities Claim); (2) a finding that the 8 LLC and the Trust are alter egos of Debtor and a determination 9 allowing Trustee to disregard the separate corporate existence 10 of those entities and treat the assets of the LLC and the Trust 11 as assets of the bankruptcy estate (Alter Ego Claim); (3) a 12 declaration that the Trust is a revocable trust with Debtor 13 retaining the right to revoke the Trust at any time (Revocable 14 Trust Claim); and (4) a judgment for the substantive 15 consolidation of the assets and liabilities of Debtor, the LLC, 16 and the Trust (Substantive Consolidation Claim). 17 After a two-day trial, the bankruptcy court took the matter 18 under submission. On December 30, 2014, the bankruptcy court 19 issued its memorandum decision. The court dismissed Trustee’s 20 Sham Entities Claim after concluding that Trustee failed to 21 present sufficient evidence of Debtor’s financial circumstances, 22 conduct, or creditor activity in 2008 that would shed light on 23 his motives when forming the Trust and the LLC. With respect to 24 the Alter Ego Claim, the court observed that “veil-piercing, or 25 reverse veil-piercing” is not an independent cause of action, 26 but a remedy and tantamount to a request for substantive 27 consolidation. Therefore, the bankruptcy court analyzed 28 Trustee’s arguments and facts related to the Alter Ego Claim in
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1 the context of the Substantive Consolidation Claim. The court 2 dismissed the Revocable Trust Claim as moot due to its finding 3 that substantive consolidation was appropriate. 4 The bankruptcy court applied the two-part disjunctive test 5 for substantive consolidation set forth in Bonham: whether 6 creditors dealt with the entities as a single economic unit and 7 did not rely on their separate identity in extending credit or 8 whether the affairs of the debtor are so entangled that 9 consolidation will benefit all creditors. In re Bonham, 10 229 F.3d at 766. As to the first factor, after noting Debtor’s 11 financial and operational commingling of his personal affairs 12 with the Trust and the LLC, the court found the evidence 13 established that creditors generally dealt with Debtor and the 14 LLC as a single economic unit. 15 The bankruptcy court found the evidence showed there was a 16 unity of interest between Debtor and the LLC and its member 17 Trust and that there was no clear demarcation between Debtor’s 18 affairs and those of the LLC and its member Trust. Debtor “drew 19 at his unfettered pleasure from the LLC,” and all such 20 distributions were characterized as “Jay’s Income (owner 21 draws).” However, there was no record keeping or accounting of 22 distributions by Debtor either as trustee of the Trust to 23 himself as grantor/beneficiary or to his children as 24 beneficiaries outside of the LLC’s “owner draws” entries. As a 25 result, the court found “there was an exploitation of, and a 26 disregard for the economic and legal separateness of, the LLC 27 and the Trust.” The bankruptcy court did not find Debtor’s 28 testimony regarding the separateness of the LLC and the Trust
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1 from his own personal affairs credible or trustworthy. 2 In considering the second factor under Bonham, the court 3 concluded that the evidence showed the financial affairs of 4 Debtor, the LLC, and the Trust were so entangled that unraveling 5 them would require significant time, effort, and expense, and 6 there was no realistic assurance that the result would be 7 accurate or without potential injury. Therefore, the bankruptcy 8 court concluded that substantive consolidation would benefit 9 creditors and far outweigh any potential harm. 10 On January 5, 2015, the bankruptcy court entered the 11 judgment substantively consolidating Debtor’s estate with the 12 Trust and the LLC effective nunc pro tunc as of the March 27, 13 2012 filing date. Under the judgment, Trustee retained all 14 avoidance powers for property that was transferred by the LLC or 15 the Trust after the date of the filing. 16 Defendants filed a timely notice of appeal from the 17 judgment. They then filed a motion for a stay pending appeal, 18 which the bankruptcy court denied on January 30, 2015. 19 Trustee filed a motion to sell the assets which were 20 divested from Defendants through the substantive consolidation. 21 The bankruptcy court granted this motion on February 5, 2015. 22 Defendants then sought a stay pending appeal from the Panel. On 23 February 10, 2015, a two-judge Panel denied the motion. Since 24 then, Trustee sold various farm machinery, equipment, motor 25 vehicles, tools and other personal property and has proceeded to 26 recover various machinery or monies through his avoidance 27 powers.
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1 II. JURISDICTION 2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. 4 § 158. 5 III. ISSUE 6 Did the bankruptcy court err by entering a judgment to 7 substantively consolidate the estate of Debtor with the LLC and 8 its member Trust? 9 IV. STANDARDS OF REVIEW 10 In this case, the “rule of law” is articulated by the Ninth 11 Circuit’s decision in In re Bonham, 229 F.3d 750. We therefore 12 must determine whether the facts support substantive 13 consolidation as ordered by the bankruptcy court. Factual 14 findings are reviewed under the clearly erroneous standard. A 15 factual finding is clearly erroneous if it is “(1) illogical; 16 (2) implausible; or (3) without support in inferences that may 17 be drawn from the facts in the record.” United States v. 18 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 19 We may affirm the bankruptcy court on any ground supported 20 by the record. Olsen v. Idaho State Bd. of Med., 363 F.3d 916, 21 922 (9th Cir. 2004). 22 V. DISCUSSION 23 A. The bankruptcy court has the authority to order substantive consolidation of a nondebtor entity with a debtor under 24 In re Bonham. 25 As a threshold issue and raised for the first time on 26 appeal, Defendants contend that the bankruptcy court lacks 27 equitable power to substantively consolidate nondebtor estates 28 with a debtor’s estate under Law v. Siegel, 134 S. Ct. 1188
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1 (2014). In general, we do not consider an issue raised for the 2 first time on appeal, although we have discretion to hear 3 previously unconsidered claims when the issue presented is 4 purely one of law and does not depend on the factual record 5 developed in the bankruptcy court. Cold Mountain v. Garber, 6 375 F.3d 884, 891 (9th Cir. 2004). Because the issue Defendants 7 raise meets this criteria, we exercise our discretion and 8 consider it. 9 We are not persuaded by Defendants’ arguments. The Supreme 10 Court’s ruling in Siegel is not applicable under these 11 circumstances — the facts are distinguishable,3 and the rule of 12 law that “whatever equitable powers remain in the bankruptcy 13 courts must and can only be exercised within the confines of the 14 Bankruptcy Code” was previously set forth in Norwest Bank 15 Worthington v. Ahlers, 485 U.S. 197, 206 (1988). The Ninth 16 Circuit’s decision in In re Bonham was rendered after Norwest, 17 3 In Siegel, the debtor fabricated a lien against his home 18 in an attempt to keep equity in the home from his creditors and 19 also claimed a $75,000 homestead exemption under California Civil Procedure Code section 704.730(a)(1). The chapter 7 trustee 20 successfully challenged the lien and obtained a determination from the bankruptcy court that the debtor had perpetrated a 21 fraud. The court ruled that the trustee could surcharge the debtor’s homestead exemption to pay the trustee’s attorneys’ 22 fees. The debtor appealed, and this Panel and the Ninth Circuit 23 both affirmed. The Supreme Court reversed, holding that the general equitable powers of § 105(a) did not provide authority 24 for judge-made exceptions to explicit mandates of the Bankruptcy Code. Because § 522(k) explicitly prohibits the use of exempt 25 property to satisfy administrative expenses such as attorney 26 fees, the bankruptcy court was not authorized to invoke a judge-made equitable exception to order otherwise. 134 S. Ct. at 27 1194 (“We have long held that ‘whatever equitable powers remain in the bankruptcy courts must and can only be exercised within 28 the confines of’ the Bankruptcy Code.”).
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1 and there is no Ninth Circuit case suggesting that bankruptcy 2 courts no longer have the authority to order substantive 3 consolidation. See Bank of Am., N.A. v. CD-04, Inc. 4 (In re Owner Mgmt. Serv., LLC Tr. Corps.), 530 B.R. 711 (Bankr. 5 C.D. Cal. 2015). There is thus no basis to “read broad new 6 rules into Supreme Court rulings in order to specifically ignore 7 Ninth Circuit precedent.” Id. at 723; see also In re Bonham, 8 229 F.3d at 763 (noting that the bankruptcy court’s power of 9 substantive consolidation has been considered part of the 10 bankruptcy court’s general equitable powers since the passage of 11 the Bankruptcy Act of 1898 and that “this equitable power 12 undoubtedly survived enactment of the Bankruptcy Code”). 13 B. Substantive consolidation is federal bankruptcy law. 14 Next, Defendants argue that the bankruptcy court erred by 15 not considering property rights under Idaho law as directed by 16 Butner v. United States, 440 U.S. 48, 54-56 (1979). Defendants 17 contend that it is impossible to collapse an Idaho limited 18 liability company into its members because there is no unity of 19 interest. They further maintain that the Trust was valid under 20 Idaho law and contained a spendthrift provision which prohibits 21 distributions from the Trust to creditors.4 22 Defendants are mistaken about the role of state law in the 23 substantive consolidation analysis. Substantive consolidation 24 does not exist outside the context of a bankruptcy proceeding. 25 It is available in bankruptcy courts as an alternative to remedy 26
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27 The bankruptcy court did not decide that the spendthrift clause was valid or invalid. We do not consider this issue for 28 the first time on appeal. Cold Mountain, 375 F.3d at 891.
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1 the harms caused by debtors and entities they control who 2 disregard separateness. In short, the law of substantive 3 consolidation is federal bankruptcy law and is not dependent 4 upon state law concepts. In re Bonham, 226 B.R. 56, 77 (Bankr. 5 D. Alaska 1998). 6 To more thoroughly explain this concept, the Bonham 7 bankruptcy court observed: 8 The factors evaluated on a motion for substantive consolidation appear similar to an analysis of 9 piercing the corporate veil. Like piercing the corporate veil, substantive consolidation ignores 10 artificial structures legally defining the consolidated entities. Ultimately, however, such an 11 analogy is misplaced because the corporate law doctrine of limited liability is not involved.
12 Rather, substantive consolidation is more like the corporate law notion of enterprise liability because 13 substantive consolidation does not seek to hold shareholders liable for the acts of their incorporated 14 entity. Substantive consolidation more closely resembles the bankruptcy rule of subordination because 15 competition for the consolidated assets is between creditors alone. Thus, substantive consolidation 16 ignores artificial legal structures but looks only to the combined assets of the consolidated entities for 17 satisfaction of all claims against the collective group.
18 . . . .
19 Piercing the corporate veil . . . is not a requisite 20 to the utilization of the bankruptcy law remedy of substantive consolidation. The bankruptcy remedy of 21 substantive consolidation ensures the equitable distribution of property to all creditors, while on 22 the other hand, piercing the corporate veil is a limited merger for the benefit of a particular 23 creditor. 24 Id. at 77, 89. In sum, the bankruptcy court did not err by 25 failing to consider Idaho property rights in its substantive 26 consolidation analysis.
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1 C. The bankruptcy court did not err when it granted the substantive consolidation motion nunc pro tunc.
2 3 Substantive consolidation is an uncodified, equitable 4 doctrine allowing the bankruptcy court, for purposes of the 5 bankruptcy, to “combine the assets and liabilities of separate 6 and distinct—but related—legal entities into a single pool and 7 treat them as though they belong to a single entity.” 8 In re Bonham, 229 F.3d at 764. The doctrine “enables a 9 bankruptcy court to disregard separate corporate entities, to 10 pierce their corporate veils in the usual metaphor, in order to 11 reach assets for the satisfaction of debts of a related 12 corporation.” Id. The essential purpose behind the doctrine is 13 one of fairness to all creditors, but it is a doctrine to be 14 used sparingly. Id. at 764, 768. 15 In Bonham, the Ninth Circuit adopted the analysis and 16 standards for substantive consolidation articulated by the 17 Second Circuit in Union Savings Bank v. Augie/Restivo Baking 18 Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860 F.2d 515 19 (2d Cir. 1988). In re Bonham, 229 F.3d at 766. The Bonham 20 court summarized those standards in a two-part disjunctive test 21 which requires bankruptcy courts to consider whether creditors 22 dealt with the entities as a single economic unit and did not 23 rely on their separate identity in extending credit or whether 24 the affairs of the debtor are so entangled that consolidation 25 will benefit all creditors. Id. at 766. “The presence of 26 either factor is a sufficient basis to order substantive 27 consolidation.” Id. “In either case, the bankruptcy court must 28 in essence determine that the assets of all of the consolidated
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1 parties are substantially the same.” Id. at 771. Ultimately, 2 the decision to apply the substantive consolidation doctrine 3 stems from a weighing of the equities and must be tailored to 4 meet the needs of each particular case. Id. at 771. 5 Trustee, as the moving party, has the initial burden of 6 showing either one of the Bonham factors are met. Luxury 7 Jewels, LLC v. Akers (In re Aroonsakool), 2014 WL 1273696, at *8 8 (9th Cir. BAP Mar. 28, 2014) (citing Reider v. Fed. Deposit Ins. 9 Corp. (In re Reider ), 31 F.3d 1102, 1107 (11th Cir. 1994)). 10 Once the trustee establishes a close interrelationship between 11 the debtor and the non-debtor entities, there is a presumption 12 that creditors did not rely on their separate credit. The 13 burden of proof then shifts to the parties opposing substantive 14 consolidation to show otherwise. In re Bonham, 229 F.3d at 767. 15 In applying Augie/Restivo’s approach, the Bonham court 16 concluded that substantive consolidation was appropriate where: 17 (1) the target entities were “but instrumentalities of the 18 bankrupt with no separate existence of their own;” (2) there 19 “existed a unity of interest and ownership common to all 20 corporations” such that there was commingling of assets; 21 (3) there was “no clear demarcation” between the affairs of the 22 debtor and the target entities; and (4) adhering to the separate 23 corporate entities theory would result in an injustice to the 24 bankrupt’s creditors. In re Bonham, 229 F.3d at 767. Here, 25 these factors are demonstrated in the record by Debtor’s 26 financial and operational commingling of his personal affairs 27 with the Trust and the LLC. 28 As to the Trust, except for the written trust agreement and
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1 amendment,5 there is nothing in the record which shows a 2 distinction between the Trust and Debtor’s personal affairs. At 3 all times, until May 31, 2013, the record shows that Debtor had 4 the exclusive and complete dominion and control over all aspects 5 of the Trust. Under the trust agreement, Debtor had unfettered 6 authority as trustee to make distributions to himself. Acting 7 pursuant to this authority, he made distributions to himself for 8 his personal benefit and made lesser distributions to his 9 children. The record shows that all distributions came directly 10 from the LLC’s funds. 11 As noted by the bankruptcy court, there was no record 12 keeping or accounting to establish any distributions to the 13 “member” of the LLC, i.e., the Trust - nor was there any 14 accounting of distributions by Debtor (as trustee of that Trust) 15 to himself (as grantor/beneficiary) or to his children as 16 beneficiaries outside of the LLC’s Quickbook “owner draws” 17 entries. In short, no monies from the LLC were ever deposited 18 into a Trust bank account - there wasn’t one - and there were no 19 records of activities concerning the Trust from 2008 to 2012. 20 Debtor’s disregard of Trust provisions is also demonstrated 21 by his selection of a successor trustee after he resigned as 22 trustee. As noted above, § 4.04 of the trust agreement provided 23 that Judith Appleby (Debtor’s sister) would be the successor 24 5 As pointed out by the bankruptcy court, the trust 25 agreement was ambiguous and inconsistent. One provision stated 26 that it was irrevocable and not subject to amendment, while another provision gave Debtor as grantor the authority to amend 27 any of the provisions in the Trust. Furthermore, when Debtor attempted to amend the trust agreement to make it irrevocable the 28 relevant provisions were once again inconsistent.
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1 trustee once Debtor resigned. If she did not serve, the trust 2 agreement provided that the court would appoint a trustee. 3 Notwithstanding these provisions, once Debtor resigned as 4 trustee he contacted Robert Jones6 who agreed to be the 5 successor trustee. After Trustee and other creditors pointed 6 out to the LLC and the Trust that Mr. Jones was not a proper 7 trustee pursuant to § 4.04 of the trust agreement, Ms. Appleby 8 was named as trustee. There is no resignation letter from 9 Mr. Jones in the record. He testified that at some point he was 10 removed as trustee but he could not recall when that was. He 11 also testified that even after he was appointed, it was his 12 impression that Debtor was the trustee of the Trust and manager 13 of the LLC stating: “I had no functionality.” 14 Ms. Appleby testified that, when Debtor realized the trust 15 agreement specifically identified her as the successor trustee 16 if Debtor were to resign, it made sense for her to serve rather 17 than Mr. Jones, who lived outside the region. She did not sign 18 any documents to effect this change, but testified that she 19 became the trustee of the Trust and the “manager” of the LLC by 20 September 2013. The bankruptcy court observed that because 21 Ms. Appleby assumed her duties in the fall of 2013, she provided 22 little testimony as to financial transactions of the LLC or 23 Trust, all of which preceded her involvement as trustee. 24 The record also shows that from the LLC’s inception in 25 February 2008 through May 31, 2013, Debtor exercised total and 26 6 27 Robert Jones was involved in a relationship with Debtor’s ex-wife Stacy Thomas and was like a “step father” to Debtor’s 28 children.
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1 sole control over the LLC’s operations. Again, the lack of 2 separateness between the LLC and Debtor’s personal affairs is 3 demonstrated in the record. Payments reflected as “Jay’s Income 4 owner draws” were used to pay for Debtor’s personal expenses. 5 For example, the LLC paid Debtor’s student loan payments, credit 6 card bills, child support payments, house payments for his 7 children, mortgage payments for rental property owned by Debtor, 8 and personal expenses for Debtor’s then-girlfriend. From 2008 9 to May 2013, the LLC paid approximately $6,500 on a monthly 10 basis for Debtor’s personal expenses, and the vast majority of 11 these payments were made directly to other parties on his behalf 12 - not to Debtor himself. 13 With few exceptions, Debtor was also personally liable for 14 the LLC’s liabilities. Therefore, many of the LLC’s creditors 15 were also creditors in Debtor’s bankruptcy case. One of the 16 creditors testified that he had no good understanding of the 17 difference between the LLC and Debtor. Other creditors did not 18 draw distinctions, as shown by various checks made out to 19 “Crystal Springs Ranch,” “Jay Clark,” “Clark’s Crystal Springs,” 20 and “Clark’s Crystal Springs Ranch.” 21 Debtor also did not separate himself from the LLC. 22 According to the record, during the 2012 farm season, Debtor, 23 not the LLC, contracted with DeVries Family Farm and Van Boven 24 Calf Ranch to sell them hay. Further, no tax returns were filed 25 for the LLC, but instead the operations of the LLC merely passed 26 through to Debtor and were reported on his personal tax returns. 27 Debtor failed to draw distinctions between himself and the 28 LLC even in his bankruptcy filing. He filed his chapter 12
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1 petition as “Jay P. Clark, DBA Crystal Springs Ranch.” He 2 conflated the LLC’s assets and his own in his bankruptcy 3 schedules. For example, he listed as “personal property of the 4 debtor” several LLC checking accounts. He also listed crops 5 consisting of 1,124 acres of wheat (worth $451,848) and 1,150 6 acres of hay ($832,140). He did not, however, indicate any 7 ownership of real property on which such crops could be grown. 8 His disclosure of leased ground was unclear as to which was the 9 LLC’s and which was his. His statement of financial affairs 10 indicated Debtor had gross income from the operation of “his” 11 business of $2.4 million in 2011 and almost $1.3 million in 12 2010. These figures were not shown to be distributions from the 13 LLC, distributions from the Trust, or income from the crops he 14 allegedly personally grew, as distinguished from the gross 15 income of the LLC. 16 Besides the confusion caused by Debtor’s schedules, the 17 record shows that the LLC’s assets consisted mainly of farm 18 equipment which was leased from Debtor’s parents. But the 19 “leased” equipment was depreciated on Debtor’s tax returns and 20 not shown as an expense. In responding to discovery, Debtor 21 provided a list of farm machinery “owned” by the LLC. That list 22 shows an auction value of $364,600. Ms. Appleby testified that 23 the LLC’s assets consisted of farm equipment that she had not 24 inventoried. In the end, it was unclear what assets were the 25 LLC’s as opposed to Debtor’s. 26 In sum, the commingling of assets and the operation of the 27 Trust and the LLC without any formality demonstrates a close 28 interrelationship between Debtor and the Trust and the LLC.
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1 Once Trustee established a close interrelationship between 2 Debtor and the LLC and its member Trust, there is a presumption 3 that creditors did not rely on their separate credit. The 4 burden of proof then shifts to the parties opposing substantive 5 consolidation to show otherwise. In re Bonham, 229 F.3d at 767. 6 Here, rather than pointing to any evidence in the record to 7 rebut this presumption, Defendants complain that Trustee’s 8 evidence does not show that the creditors dealt with Debtor and 9 Defendants as a single economic unit and, therefore, he did not 10 meet his burden of proof. Defendants suggest, without citation 11 to any authority, that the Bonham test for substantive 12 consolidation requires Trustee to prove what the creditors 13 thought and actually did. Defendants are mistaken. 14 Defendants, as the parties opposing substantive 15 consolidation, had the burden to overcome the presumption that 16 creditors did not rely on the separate credit of the LLC. While 17 Defendants attempted to show the separateness of the LLC and its 18 member Trust, the bankruptcy court found Defendants’ evidence 19 “conflicting and inconclusive” and Debtor’s testimony not 20 credible or trustworthy. In essence, the bankruptcy court 21 concluded that Defendants did not meet their burden to overcome 22 the presumption once the burden shifted. Therefore, it 23 concluded that the first prong for substantive consolidation was 24 met. 25 Upon careful review of the record, we are satisfied that 26 the bankruptcy court considered all opposing evidence before 27 rejecting one view in favor of the other. The bankruptcy 28 court’s account of the evidence is plausible in light of the
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1 record cited above and when viewed in its entirety. We may not 2 reverse merely because we may have decided the issue 3 differently. Anderson v. City of Bessemer City, N.C., 470 U.S. 4 564, 573–74 (1985) (“Where there are two permissible views of 5 the evidence, the factfinder’s choice between them cannot be 6 clearly erroneous.”). Further, as the trier of fact, the 7 bankruptcy court is entitled to evaluate a witness’s credibility 8 and to determine whether to believe the testimony or not. 9 Beauchamp v. Hoose (In re Beauchamp), 236 B.R. 727, 731 (9th 10 Cir. BAP 1999), aff’d mem. 5 F. App’x 743 (9th Cir. 2001). 11 “When the testimony of a witness is not believed, the trier of 12 fact may simply disregard it.” Bose Corp. v. Consumers Union of 13 U.S., Inc., 466 U.S. 485, 512 (1984). The bankruptcy court’s 14 determinations regarding credibility are given due regard on 15 appeal. Anderson, 470 U.S. at 573–74. 16 In the end, we conclude that the record supports the 17 bankruptcy court’s conclusion that the first test in Bonham was 18 met and, therefore, consolidation was appropriate. Because we 19 affirm on this basis, it is unnecessary for us to consider 20 whether consolidation was appropriate under the second factor. 21 VI. CONCLUSION 22 For the reasons stated, we AFFIRM. 23 24 25 26