ROBBIN L. ITKIN (SBN 117105) 1 DLA PIPER LLP (US) · The earmarking doctrine does not apply. ........

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UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION

In re:

ZETTA JET USA, INC., a California corporation,

Debtor.

Lead Case No.: 2:17-bk-21386-SK

Chapter 7

Jointly Administered With: Case No.: 2:17-bk-21387-SK

Adv. Proc. No. 2:19-ap-01147-SK

TRUSTEE’S OPPOSITION TO CAVIC AVIATION LEASING (IRELAND) 22 CO. DESIGNATED ACTIVITY COMPANY’S NOTICE OF MOTION AND MOTION TO DISMISS COUNTS I, III, IV, V, VI, AND VII OF THE TRUSTEE’S ADVERSARY COMPLAINT1

[Relates to Adv. Docket Nos. 1 & 59]

[Hearing date has not been set]

In re:

ZETTA JET PTE, LTD., a Singaporean corporation,

Debtor.

JONATHAN D. KING, solely in his capacity as Chapter 7 Trustee of Zetta Jet USA, Inc. and Zetta Jet PTE, Ltd.

Plaintiff,

v.

CAVIC AVIATION LEASING (IRELAND) 22 CO. DESIGNATED ACTIVITY COMPANY; and BOMBARDIER AEROSPACE CORPORATION,

Defendants.

1 The Trustee has redacted certain portions of the Response that relate to allegations redacted in the Complaint and exhibits filed under seal. Unredacted versions of the Response will be provided to the Court and served on the U.S. Trustee. As discussed with the Court at a hearing on June 12, 2019, the parties previously agreed to treat the redacted allegations and exhibits as confidential pursuant to a stipulated protective order. The Trustee intends to work with CAVIC and Bombardier to submit a proposed agreed protective order for the Court’s consideration.

ROBBIN L. ITKIN (SBN 117105) [email protected] DLA PIPER LLP (US) 2000 Avenue of the Stars Suite 400 North Tower Los Angeles, California 90067-4704 Tel: (310) 595-3000 Fax: (310) 595-3300

JOHN K. LYONS (Pro Hac Vice) [email protected] JEFFREY S. TOROSIAN (Pro Hac Vice) [email protected] JOSEPH A. ROSELIUS (Pro Hac Vice) [email protected] DLA PIPER LLP (US) 444 West Lake Street, Suite 900 Chicago, Illinois 60606-0089 Tel: (312) 368-4000 Fax: (312) 236-7516

Attorneys for Jonathan D. King as Chapter 7 Trustee

Case 2:19-ap-01147-SK Doc 75 Filed 02/14/20 Entered 02/14/20 17:17:26 DescMain Document of 38

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TABLE OF CONTENTS

INTRODUCTION ....................................................................................................................... 1

BACKGROUND ......................................................................................................................... 5

A. The Financed Lease Transactions ......................................................................... 5

B. The Undelivered Aircraft Finance Lease Transaction ............................................ 5

C. The Preference Payments ...................................................................................... 7

D. The Complaint ...................................................................................................... 8

PLEADING STANDARD ........................................................................................................... 8

ARGUMENT .............................................................................................................................. 9

I. Count I states a claim for recharacterization................................................................ 9

A. The Complaint identifies the Financed Lease transactions it intends to recharacterize. ............................................................................................. 12

B. CAVIC ignores entire portions of the Complaint and erroneously states that the Complaint only offers an unsigned Term Sheet in support of recharacterization. ....................................................................................... 13

C. English Law does not apply. ............................................................................... 14

i. English Law has no reasonable relationship to the parties or the transaction. ............................................................................ 15

ii. The California Commercial Code does not recognize a contractual choice-of-law clause for Article 9 issues, including recharacterization of a lease. ........................................ 15

iii. The Financed Leases are considered “contracts of conditional sales,” not true leases, under the Federal Aviation Regulations prescribed by the Federal Aviation Administration. ............................................................................ 18

II. The Complaint states a claim that the Refund is property of the estate. ..................... 18

A. The Complaint plausibly pleads that Zetta PTE, as the Buyer under the APA, is entitled to the Refund. .................................................................................. 19

B. The Complaint plausibly alleges that the March 31 Assignment was for security and not an absolute assignment. ................................................................... 20

C. The Complaint adequately pleads that the Trustee is entitled to avoid CAVIC’s security interest in the Refund. ..................................................................... 23

III. Count VII states a preference claim. ......................................................................... 25

A. The Complaint sufficiently pleads the nature and amount of each antecedent debt. ............................................................................................................ 25

B. The “ordinary course of business,” “new value,” and “subsequent new value defenses” are affirmative defenses that cannot succeed on a motion to dismiss......................................................................................................... 26

C. The earmarking doctrine does not apply. ............................................................. 28


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IV. In the event of dismissal, the Court should grant leave to re-plead. ........................... 29

CONCLUSION ......................................................................................................................... 30


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TABLE OF AUTHORITIES2

Page(s)

Cases

Addison v. Burnett, 41 Cal. App. 4th 1288 (1996) ............................................................................................... 11

Adelphia Commc’ns Corp. v. Bank of Am., N.A., 365 B.R. 24 (Bankr. S.D.N.Y. 2007) .................................................................................... 26

In re Allegheny Label, Inc., 128 B.R. 947 (Bankr. W.D. Pa. 1991) .............................................................................19, 29

In re Autobacs Strauss, Inc., 473 B.R. 525 (Bankr. D. Del. 2012) ..................................................................................... 26

In re Automated Bookbinding Services, Inc., 336 F. Supp. 1128 (D. Md. 1972), rev’d on other grounds, 471 F.2d 546 ............................. 17

In re Bender Shipbuilding & Repair Co., 479 B.R. 899 (Bankr. S.D. Ala. 2012) .................................................................................. 28

Blackstone Equip. Fin., L.P. v. Bernhard, 2011 WL 13227750 (C.D. Cal. May 5, 2011) ....................................................................... 10

Bly–Magee v. California, 236 F.3d 1014 (9th Cir. 2001) .............................................................................................. 29

In re Bonner, 2014 WL 890477 (B.A.P. 9th Cir. Mar. 6, 2014) .................................................................. 19

In re BR Festivals, LLC, 2015 WL 1216836 (Bankr. N.D. Cal. Mar. 11, 2015) ........................................................... 28

In re Bullion Reserve of N. Am., 836 F.2d 1214 (9th Cir. 1988) .............................................................................................. 29

In re Caremerica, Inc., 409 B.R. 759 (Bankr. E.D.N.C. 2009) .................................................................................. 25

Carlson v. Tandy Computer Leasing, 803 F.2d 391 (8th Cir. 1986) ...........................................................................................16, 17

U.S. ex rel. Chabot v. MLU Servs., Inc., 544 F. Supp. 2d 1326 (M.D. Fla. 2008) ................................................................................ 13

In re Continental Airlines, Inc., 932 F.2d 282 (3d Cir. 1991) ................................................................................................. 10

2 All unpublished opinions are attached hereto as Composite Exhibit A.


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In re CRC Parent Corp., 2013 WL 781603 (Bankr. D. Del. Mar. 1, 2013) .................................................................. 25

Cutler v. Rancher Energy Corp., 2014 WL 12599602 (C.D. Cal. June 2, 2014) ................................................................... 9, 25

In re Eagle Enterprises, Inc., 223 B.R. 290 (Bankr. E.D. Pa. 1998) ..............................................................................16, 17

In re Evergreen Valley Resort, Inc., 23 B.R. 659 (Bankr. D. Me. 1982) ............................................................................ 20, 21, 22

In re Gluth Bros. Const., Inc., 424 B.R. 379 (Bankr. N.D. Ill. 2009) ................................................................................... 26

In re Grubbs Const. Co., 319 B.R. 698 (Bankr. M.D. Fla. 2005) ................................................................................. 11

In re High–Line Aviation, Inc., 149 B.R. 730 (Bankr. N.D. Ga. 1992) .................................................................................. 17

Hong Kong and Shanghai Banking Corp. v. HFH USA Corp., 805 F.Supp. 133 (W.D.N.Y.1992) ........................................................................................ 17

Industrial Packaging Products Co. v. Fort Pitt Packaging International, Inc., 399 Pa. 643 (1960) ............................................................................................................... 17

In re Interior Wood Prods. Co., 986 F.2d 228 (8th Cir. 1993) ................................................................................................ 29

In re Joseph Kanner Hat Co., Inc., 482 F.2d 937 (2d Cir. 1973) ................................................................................................. 21

Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 979 (9th Cir. 2000) ................................................................................................ 29

In re Know Weigh, 576 B.R. 189 (Bankr. C.D. Cal. 2017) .............................................................................23, 24

In re Kokomo Times Publishing and Printing Corp., 301 F. Supp. 529 (S.D. Ind. 1968) ........................................................................................ 17

Kreipke v. Wayne State University, 807 F.3d 768 (6th Cir. 2015) ................................................................................................ 13

In re Libby Int’l, Inc., 247 B.R. 463 (B.A.P. 8th Cir. 2000)..................................................................................... 29

Lopez v. Smith, 203 F.3d 1122 (9th Cir. 2000) .............................................................................................. 29

Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir. 1991) ................................................................................................ 28


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M.M. v. Cnty. of San Mateo, 2019 WL 414962 (N.D. Cal. Feb. 1, 2019) ............................................................................. 9

In re Matter of Candy Lane Corp., 38 B.R. 571 (Bankr. S.D.N.Y. 1984) ...............................................................................20, 21

Milbeck v. TrueCar, Inc., 2019 WL 476004 (C.D. Cal. Feb. 5, 2019) ......................................................................... 8, 9

In re Modtech Holdings, Inc., 503 B.R. 737 (Bankr. C.D. Cal. 2013) .................................................................................. 27

In re Moreggia & Sons, Inc., 852 F.2d 1179 (9th Cir. 1988) ..................................................................................... 9, 10, 17

In re Morse Tool, Inc., 108 B.R. 384 (Bankr. D. Mass. 1989)................................................................................... 16

In re Nat’l Envtl. Waste Corp., 191 B.R. 832 (Bankr. C.D. Cal. 1996), subsequently aff’d, 129 F.3d 1052 (9th Cir. 1997) .............................................................................................. 19

In re Nucorp Energy, 116 B.R. 872 (B.A.P. 9th Cir. 1989)..................................................................................... 27

Odom v. Microsoft Corp., 486 F.3d 541 (9th Cir. 2007) .................................................................................................. 9

In re Pac. Exp., Inc., 780 F.2d 1482 (9th Cir. 1986) ................................................................................... 11, 17, 19

In re Pac. Sunwest Printing, 6 B.R. 408 (Bankr. S.D. Cal. 1980) ...................................................................................... 11

In re PCH Assocs., 804 F.2d 193 (2d Cir. 1983) ................................................................................................. 10

In re Peregrine Entm’t, Ltd., 116 B.R. 194 (C.D. Cal. 1990) ............................................................................................. 19

In re Phoenix Equip. Co., Inc., 2009 WL 3188684 (Bankr. D. Ari. Sept. 30, 2009) .............................................................. 11

In re Pillowtex, Inc., 349 F.3d 711 (3d Cir. 2003) ................................................................................................. 10

In re Straightline Invs., 525 F.3d 870 (9th Cir. 2002) ................................................................................................ 28

In re Superior Stamp & Coin Co., Inc., 223 F.3d 1004 (9th Cir. 2000) .............................................................................................. 29

Tamayo v. Blagojevich, 526 F.3d 1074 (7th Cir. 2008) .............................................................................................. 26


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In re The Russ Cos., Inc., 2013 WL 4028098 (Bankr. D.N.J. Aug. 6, 2013) ................................................................. 26

United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F. 3d 609 (7th Cir. 2005), cert. denied 126 S. Ct. 1465 (Mar. 6, 2006).......... 10, 16, 17, 27

United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) ............................................................................................................. 19

In re Valley Media, Inc., 288 B.R. 189 (Bankr. D. Del. 2003) ..................................................................................... 25

In re Vintero Corp., 31 UCC Rep. Serv. (CBC) 1145 (Bankr. S.D.N.Y. 1980) ..................................................... 17

In re Voboril, 568 B.R. 797 (Bankr. E.D. Wis. 2017) ............................................................................21, 22

In re Wathen’s Elevators, Inc., 32 B.R. 912 (Bankr. W.D. Ky.1983) .................................................................................... 17

In re WorldCom, Inc., 339 B.R. 56 (Bankr. S.D.N.Y. 2006) ...............................................................................10, 11

Zochlinski v. Regents of the Univ. of Cal., 578 F. App’x 636 (9th Cir. 2014) ......................................................................................... 23

Statutes

11 U.S.C. § 365 ................................................................................................................ 9, 17, 27

11 U.S.C. § 544 .................................................................................................................. passim

11 U.S.C. § 547 ....................................................................................................................25, 26

49 U.S.C. § 40102 ..................................................................................................................... 18

CCC § 1201 ............................................................................................................................... 16

CCC § 1203 .................................................................................................................... 10, 15, 16

CCC § 1301 ..........................................................................................................................15, 16

CCC § 9301. .........................................................................................................................15, 16

UCC § 1-201 ............................................................................................................................. 16

UCC § 1-203 ............................................................................................................ 10, 11, 12, 13

UCC § 1-301 ............................................................................................................................. 16

UCC § 9-103 ............................................................................................................................. 16


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Other Authorities

5 Collier on Bankruptcy ¶ 547.03

14 C.F.R. § 47.5....................................................................................................................15, 18

Fed. R. Bankr. 7008 ................................................................................................................... 13

Fed. R. Civ. P. 12(b)(6).........................................................................................................23, 26

Fed. R. Civ. P. 9(b) .................................................................................................................... 29

J.C. Rozendaal, Note, Choice of Law in Distinguishing Leases from Security Interests Under the Uniform Commercial Code, 75 Tex. L. Rev. 375 (1996)........................ 17


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INTRODUCTION

In Count I of the Complaint,2 the Trustee seeks to recharacterize specified leases (the

“Financed Leases”) for the 9716 Aircraft, 9740 Aircraft, 9764 Aircraft, and Undelivered Aircraft3

as disguised financings. (¶¶ 2, 9, 11, 90, 123-33 and Compl. Ex. I.) The Complaint plausibly alleges

that the leases are disguised financings because, among other, things: (1) payments under the

Financed Leases were designed to provide CAVIC a set return on its loans, (2) was calculated

on the amount CAVIC borrowed from its leveraged financier, EDC, (3) the “leases” could not be

terminated, (4) the aircraft was purchased for Zetta USA to operate (and not CAVIC), (5) the

Debtors assumed almost all of the obligations associated with ownership and (6) the Debtors,

through the U.S. corporate trust TVPX, had the ability to purchase the aircraft

. (¶ 130.)

Because controlling Ninth Circuit precedent requires the court to look at the economic

substance of the leases, and not mere form or titles, in determining whether the leases constitute

true leases or disguised financings under the Bankruptcy Code, the facts alleged above dictate that

the leases be recharacterized as disguised financings. The same is true if the Court looks to the

California Commercial Code (the “CCC”) – which CAVIC concedes applies – for guidance. Under

the “bright line” and “economic realities” tests mandated by CCC, the leases constitute disguised

financings under the facts alleged in the Complaint.

CAVIC tries to avoid this result by arguing that the English choice-of-law provisions in the

Financed Leases prohibit recharacterization. CAVIC’s reliance on English law is

misplaced. Federal bankruptcy law, the CCC and applicable caselaw are crystal clear that

contractual choice-of-law provisions are simply not enforceable in the context of recharacterization

of leases under federal bankruptcy law and the CCC, especially if the chosen law does not look at

the economic substance of the transaction.

CAVIC also challenges recharacterization of the “invalid” lease for the Undelivered

Aircraft. The Trustee agrees that the Financed Lease for the Undelivered Aircraft was never

2 All paragraphs and exhibits referenced are to the operative Complaint, unless otherwise noted. All defined terms have the same meanings as in the Complaint. 3 In the Motion, CAVIC refers to the Undelivered Aircraft as “Aircraft 9788.”


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effective because the aircraft was never delivered. However, CAVIC misses the point. The Trustee

seeks a factual determination from the Court that the entirety of the intended disguised financing

structure with respect to the Undelivered Aircraft negates CAVIC’s contention that it was to be the

actual owner of the Aircraft, and not just a financier for the Debtors, and therefore the March 31

Assignment constituted an absolute assignment. (¶¶ 9, 130.) Because the parties never intended

CAVIC to be the owner, much less the operator, of the Undelivered Aircraft, and for other reasons

discussed below, the Court should determine that the March 31 Assignment was a security

assignment, and not an absolute assignment.

In Counts III through VI of the Complaint, the Trustee seeks to avoid CAVIC’s unperfected

March 31 Assignment – a security assignment – that was made by Zetta PTE to CAVIC to secure

repayment of Zetta PTE’s obligations to CAVIC under the PDP financing. The assigned rights

included the

. (¶ 51 and Compl. Ex. R at 1.)

The Complaint further alleges, and the attached transaction documents indicate,

. (¶¶ 6, 73(g), 92-110, 142.) Because CAVIC never perfected this security assignment, the

assignment is subject to avoidance under Section 544 of the Bankruptcy Code, the refund of

advance payments should be turned over to the Trustee, and any claims CAVIC may have under

the Assignment are relegated to unsecured, nonpriority treatment. (¶¶ 147-50.)

CAVIC does not challenge, nor could it on a motion to dismiss, the uncontroverted factual

allegations in the Complaint underpinning the Trustee’s contention that the March 31 Assignment

constituted a “security assignment” and not an absolute assignment under applicable law: (1) the

March 31 Assignment itself

(¶¶ 94, 110 (emphasis added)), (2) Zetta remained fully liable for all

obligations under the APA (¶¶ 98-99), (3) the Term Sheet negotiated between the parties

(¶¶ 73(g), 107),


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(4) Bombardier treated Zetta PTE as the counterparty to the APA throughout the chapter 11 (¶¶ 55-

62), (5) CAVIC itself filed proofs of claim with respect to the Undelivered Aircraft noting that it is

a “secured” creditor (¶ 96), (6) Zetta PTE’s debt under the APA was not reduced or eliminated by

reason of the March 31 Assignment (¶¶ 98-99), (7) the PDP Loan was made within one day of

execution of the March 31 Assignment (¶ 100), (8)

(¶¶ 101-04), (9) any excess insurance or casualty proceeds in excess of the loan balance

under the disguised financing were to be returned to Zetta PTE (¶¶ 105-06), (10) the Debtors

guaranteed repayment of the PDP Loan obligations through the Head Lease Guarantee and the FPA

Guarantee (¶ 108), and (11) CAVIC could be forced to transfer formal title to the Undelivered

Aircraft to the Debtors if the loan was paid in full (¶¶ 109-10).

Against this overwhelming factual predicate, CAVIC ducks and weaves by relying on a

consent provided by Bombardier, and to which debtor Zetta PTE was not even a party, to somehow

amend the APA and March 31 Assignment and block the ability of the Debtors to avoid the

unperfected security assignment. (Mot. at 26-27.) First, the consent has no bearing on whether the

underlying March 31 Assignment was a security assignment subject to avoidance. Nor can it by

any stretch be deemed to modify or amend the fully integrated APA. The APA

. Simply put, the Bombardier consent does not alter the

Trustee’s right to avoid the March 31 Assignment and collect the refund from Bombardier under

the Bankruptcy Code, applicable state law, and .

CAVIC next falls back on an argument that the Refund is not property of the Debtors’

estates because the Debtors never paid PDPs, CAVIC did. (Mot. at 25-26.) This argument is fatally

flawed in that it rests on CAVIC’s misguided assumption that the March 31 Assignment was an

“absolute assignment,” meaning that CAVIC paid the advance to Bombardier because it intended

to buy the Undelivered Aircraft for its own account and own and operate the aircraft outright. For

the reasons set forth above, the factual allegations in the Complaint are contrary to CAVIC’s theory

and, instead, indicate that CAVIC intended to act as a lender to the Debtors to finance the


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acquisition of the Undelivered Aircraft with formal legal title to be transferred to the Debtors after

repayment of the PDP Loan proceeds through the payment of under the disguised

financing. (¶¶ 87-90.) In short, when CAVIC paid the advance, it do so as a lender on behalf of the

Debtors.

Finally, CAVIC asserts that because it executed other documents with as “Buyer”

pursuant to its own leveraged financing structure (i.e., its separate funding agreement with to

which the Debtors were not parties) the Debtors have no right to the refund. (Mot. at 24.) First,

CAVIC never signed any documents as “Buyer” and, even if it did, it does not alter the fully

integrated APA, the March 31 Assignment, or the Trustee’s ability to avoid the unperfected March

31 Assignment and recover the Refund. Put otherwise, once the March 31 Assignment is avoided

as constituting an unperfected security assignment, CAVIC’s house of cards comes crashing down

and any later attempted hypothecation of the avoided security assignment in its leveraged financing

documents with – no matter what these documents say – has no effect on the Trustee’s right

to recover the refund under the APA under the Trustee’s strong-arm powers pursuant to Section

544 of the Bankruptcy Code.

With respect to Count VII of the Complaint regarding the avoidance and recovery of

preference payments, CAVIC asserts that the Complaint should be dismissed on the basis of various

affirmative defenses. (Mot. at 28-35.) This is entirely inappropriate on a motion to dismiss. Indeed,

all of CAVIC’s defenses turn on factual determinations that must be construed in the Trustee’s

favor: whether CAVIC received preference payments as an undersecured lender, and not a lessor,

and is thus not entitled to assert a new value defense and whether the payments were made in the

ordinary course of business, which the allegations of the Complaint negate. (¶¶ 111-22.) Finally,

CAVIC’s earmarking defense fails because that defense requires a new lender to replace an old

lender. Here, the “loan” was provided by an existing shareholder who was also a creditor to stave

off immediate liquidation. (¶ 116.) Nor do the allegations referenced by CAVIC indicate any

earmarking: an allegation that the Debtors paid a number of favored creditors the day after funds

were received hardly meets the stringent requirements of an earmarking defense.

For these reasons and as set forth below, CAVIC’s motion to dismiss should be denied.


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BACKGROUND

A. The Financed Lease Transactions

The Debtors and the Defendants are parties to a series of complex leveraged lease financing

transactions involving three Bombardier Global 6000 Aircraft that were delivered (9764 Aircraft,

9716 Aircraft, and 9740 Aircraft) and the Undelivered Aircraft. (¶ 2.) Bombardier manufactured

the Global 6000 Aircraft, while CAVIC provided the financing to the Debtors with the

understanding that the Debtors were to pay off the financed amount plus interest through disguised

lease payments. (¶ 3.) Each of the transactions were nearly identical in nature. (¶ 90.) The Debtors

. (¶¶ 87, 90.) The Debtors had no economic ability to terminate

the Financed Leases prior to the end of the term: if the Debtors terminated the Financed Leases,

they were required to pay the full amount of the principal plus interest. (Compl. Ex. I at 52-53, §

24.1.) The lease payments made under the head leases and sub-leases mirrored the payment terms

governing the repayment of the leveraged loans from to CAVIC. (¶ 86.) The economic reality

of the transactions was for the Debtors to own and operate the Bombardier Global 6000 Aircraft

while paying “lease payments” to repay funds loaned to the Debtors by CAVIC to purchase the

Aircraft. (¶ 9.) Ultimately, when the lease payments were completed, CAVIC would be left with

no residual interest in the Bombardier Global 6000 Aircraft .

(Id.)

B. The Undelivered Aircraft Finance Lease Transaction

On December 10, 2015, Bombardier as the “Seller” and Zetta PTE as the “Buyer” entered

into the APA,

. (¶¶ 4,

41.)

(¶¶ 4, 66.)


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(¶¶ 69, 94, 110.)

. (See

Compl. Ex. A at 6, § 10.4).

To finance the PDPs, the Debtors began negotiations with AVIC (¶ 45), which was

CAVIC’s parent corporation acting on behalf of CAVIC (¶ 26). The parties memorialized the terms

of the financing arrangement in the Term Sheet (¶ 46), which provided, among other things,

(¶ 73(g)). Therefore,

. (¶

110.)

Accordingly, CAVIC and Zetta PTE entered into the March 31 Assignment,

(¶ 94. (emphasis added))

Pursuant to the March 31 Assignment, Zetta PTE remained jointly and severally liable with CAVIC

for the performance of all obligations under the APA. (¶ 99.) The March 31 Assignment is fully

integrated. (See Compl. Ex. R at 3, § 10.) Both the

. (Compl. Ex. A at 1,

Ex. R at 3.)

The parties intended for the March 31 Assignment to create a security interest in Zetta

PTE’s rights under the APA. (¶¶ 92-110.)

(see Ex. R at 1). Accordingly, Zetta PTE always remained as “Buyer”

under the APA,

. (see Ex. T) (


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). The Complaint alleges that: (1)

(¶¶ 94, 110 (emphasis added)), (2) Zetta remained fully liable for all

obligations under the APA (¶¶ 98-99), (3)

(¶¶ 73(g), 107),

(4) Bombardier treated Zetta PTE as the counterparty to the APA throughout the chapter 11 (¶¶ 55-

62), (5) CAVIC itself filed proofs of claim with respect to the Undelivered Aircraft noting that it is

a “secured” creditor (¶ 96), (6) Zetta PTE’s debt under the APA was not reduced or eliminated by

reason of the March 31 Assignment (¶¶ 98-99), (7) the PDP Loan was made within one day of

execution of the March 31 Assignment (¶ 100), (8)

(¶¶ 101-04), (9) any excess insurance or casualty proceeds in excess

of the loan balance under the disguised financing were to be returned to Zetta PTE (¶¶ 105-06),

(10) the Debtors guaranteed repayment of the PDP Loan obligations through the Head Lease

Guarantee and the FPA Guarantee (¶ 108), and (11) CAVIC could be forced to transfer formal title

to the Undelivered Aircraft to the Debtors if the loan was paid in full (¶¶ 109-10).

CAVIC did not perfect its security interest in the assignment of rights under the APA. (¶¶

7, 143-44.) The APA was terminated on November 30, 20174 and Bombardier thus became

obligated to remit the Refund to the “Buyer” under the APA, Zetta PTE. (¶ 5.)

C. The Preference Payments

On June 14, 2017 and June 23, 2017, CAVIC, aware of the Debtors’ financial difficulties

since at least May 2017, contacted the Debtors and threatened default notices as a result of non-

payments on the Global 6000 Aircraft. (¶¶ 112, 115(a)-(b).) The Debtors previously paid four

invoices that were late on May 11, 2017. (¶ 113.) By June, the Debtors were essentially out of

4 CAVIC does not challenge the Complaint’s allegations that the APA was terminated. Nor does Bombardier. See Mot. at 17, n. 8 (CAVIC adopts Bombardier’s Motion to Dismiss as to Count II; however, Bombardier does not challenge Count II. See Dkt. No. 70.)


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money and facing over $19 million in overdue accounts payable and several millions of dollars of

unpaid bills to aircraft financiers. (¶ 114). The Debtors, desperate for money, contacted one of their

shareholders seeking a $15 million loan, which was transferred to the Debtors on June 26, 2017. (¶

116.) The following day, the Debtors disbursed roughly $14.5 million of the $15 million to certain

favored creditors, including $4,768,654.10 (the “Preference Payments”). (¶¶ 117-18.) The

Preference Payments were almost $2.4 million more than the Debtors had ever made to CAVIC in

a single day for the Global 6000 Aircraft. (¶¶ 118-22.) And those payments were made during the

ninety (90) day period prior to the Petition Date when the Debtors were insolvent, in respect of the

Global 6000 Aircraft. (Id.) At the time of the Preference Payments, CAVIC was vastly

undersecured, making the undersecured portion a general unsecured deficiency claim. In addition,

the Complaint alleges it is highly unlikely that general unsecured claims will be paid in full and,

accordingly, the Preference Payments enabled CAVIC to receive more than it would have received

in the chapter 7 cases had the payments not been made. (¶ 122.)

D. The Complaint

On May 21, 2019, the Trustee filed the instant Complaint against CAVIC and Bombardier.

The first three counts seek declaratory judgments: Count I (declaratory judgment that the Financed

Leases are financings and not true leases), Count II (declaratory judgment that the APA is

terminated),5 and Count III (declaratory judgment that CAVIC’s security interest in the Refund is

not perfected). The remaining counts allege bankruptcy claims against CAVIC and Bombardier:

Count IV (the avoidance of CAVIC’s unperfected security interest in the Refund and preservation

of the Refund for the benefit of the Debtors’ estates), Count V (the right to recover the Refund),

Count VI (turnover of the Refund to the Debtors’ estates, and Count VII (preference transfers to

CAVIC). CAVIC has moved to dismiss Counts I, III-V, and VII.

PLEADING STANDARD

“To survive a motion to dismiss, a complaint ‘must contain sufficient factual matter,

accepted as true, to state a claim to relief that is plausible on its face.’” Milbeck v. TrueCar, Inc.,

2019 WL 476004, at *1 (C.D. Cal. Feb. 5, 2019) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678

5 As stated above, neither CAVIC nor Bombardier challenges the termination of the APA in their motions to dismiss.


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(2009)). A “claim is plausible on its face when the plaintiff pleads factual content that allows the

court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

In making this determination, the court “accepts as true a plaintiff’s well-pled factual allegations

and construes all factual inferences in the light most favorable to the plaintiff.” Cutler v. Rancher

Energy Corp., 2014 WL 12599602, at *1 (C.D. Cal. June 2, 2014). “Allegations in the complaint,

together with reasonable inferences therefrom, are assumed to be true for purposes of the motion.”

Odom v. Microsoft Corp., 486 F.3d 541, 545 (9th Cir. 2007). A complaint must only “proffer

enough facts on its face to nudge the plaintiff’s ‘claims across the line from conceivable to

plausible’” to survive a motion to dismiss. M.M. v. Cnty. of San Mateo, 2019 WL 414962, at *2

(N.D. Cal. Feb. 1, 2019) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007)).

ARGUMENT

I. Count I states a claim for recharacterization.

Count I pleads that the Financed Leases are disguised financings that created security

interests, rather than true leases. The Bankruptcy Code does not define what constitutes a “lease”

for purposes of Section 365. However, the Ninth Circuit held in In re Moreggia & Sons, Inc., 852

F.2d 1179 (9th Cir. 1988) that even an agreement that otherwise qualified as a lease under

California law based upon “surface formalities” would nonetheless be subject to recharacterization

as a disguised financing if the economic realities so dictated. Id. at 1182-84. This view stems from

this passage in the legislative history of Section 365: “[t]he distinction between a true lease and a

financing transaction is based upon the economic substance of the transaction and not, for example,

upon the locus of title, the form of the transaction or the fact that the transaction is denominated as

a ‘lease.’” Id. at 1182 (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 64 (1978)).

In Moreggia, the lease called for fixed monthly payments over a 40 year period that would

cease once the underlying bond debt was repaid. Id. at 1184. Because the rent payments were

calculated based upon debt service, the payments did not relate to the value of the possessory right

and no true landlord/tenant relationship was ever created. Id.

The same is true here. The Complaint alleges the “lease payments” were calculated on

CAVIC’s debt service obligations to . Once all of the payments were made, and the debt


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extinguished, .

Moreover, even if the Court applies California law for guidance, CAVIC still loses.6 This

is because even where courts look to state law for guidance, state law must employ a substance-

based test. United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609, 615 (7th Cir. 2005). That

is to say, state law will be consulted to the extent that it too uses factors intended to glean the

economic substance of the transaction. If, however, the state law test is form-based, as opposed to

substance-based, then the state law must yield to the federal law. See id.

Applying state law, Section 1203 of the CCC sets forth a bright-line test.7 Under the bright-

line test, a transaction in the form of a lease per se creates a security interest if (a) “the consideration

that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation

for the term of the lease and is not subject to termination by the lessee,” and (b) one of these four

“residual value factors” is met:

(1) the original term of the lease is equal to or greater than the remaining economic life of the goods;

(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;

(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or

(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

See UCC § 1-203(b); see Blackstone Equip. Fin., L.P. v. Bernhard, 2011 WL 13227750, at *2 (C.D.

Cal. May 5, 2011); In re WorldCom, Inc., 339 B.R. 56, 65 (Bankr. S.D.N.Y. 2006).

Count I pleads facts showing that each element is met. First, the Complaint pleads that the

6 Though courts uniformly agree that the economic substance of a transaction prevails over its form, courts are divided on whether state law or federal law provides the test for determining whether a transaction is a “true lease” or “disguised” financing. Compare In re PCH Assocs., 804 F.2d 193, 198-200 (2d Cir. 1983), and Moreggia, 852 F.2d at 1182-84, with United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F. 3d 609, 615 (7th Cir. 2005), cert. denied 126 S. Ct. 1465 (Mar. 6, 2006) (citing In re PCH Associates, 804 F.2d 193, 198–200 (2d Cir. 1986); In re Pillowtex, Inc., 349 F.3d 711, 716 (3d Cir. 2003); see also, e.g., In re Continental Airlines, Inc., 932 F.2d 282 (3d Cir. 1991). 7 California has adopted the UCC. UCC § 1-203 can be found at CCC § 1203.


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obligation is for the term of the Financed Leases and are not subject to termination by the Debtors.

(¶¶ 74, 87, 90 (allegations relating to Undelivered Aircraft Finance Lease applies to all Delivered

Financed Leases) and Compl. Ex. I at p. 52-53, § 24.1.) Second, the complaint pleads that after all

payments are made under the lease, the Debtors have

(¶¶ 87, 90.) The arrangement involving the Undelivered Aircraft was

nearly identical to each of the Financed Leases for the Delivered Aircraft. (¶ 90.) The Trustee

specifically alleged that each of the Financed Leases

. (Id.) Therefore, the Complaint plausibly alleges that each of the Financed

Lease transactions are subject to recharacterization as security interests under UCC § 1-203(b)(4).

Even if the agreement is not a per se disguised financing, courts look to the “facts of each

case,” also known as the “economic realities test.” See UCC § 1-203(a) (“Whether a transaction in

the form of a lease creates a lease or security interest is determined by the facts of each case.”). In

In re Pac. Exp., Inc., 780 F.2d 1482 (9th Cir. 1986), the Ninth Circuit, applying the Texas UCC,

held that a lease that called for payments over a five year term that equaled the stipulated value plus

interest constituted a disguised financing that was subject to avoidance under Section 544 of the

Bankruptcy Code for lack of perfection.8 Id. at 1485-86; see also WorldCom, 339 B.R. at 66-72; In

re Pac. Sunwest Printing, 6 B.R. 408, 412 (Bankr. S.D. Cal. 1980); In re Grubbs Const. Co., 319

B.R. 698, 711 (Bankr. M.D. Fla. 2005). When analyzing the transaction on a case by case basis,

the majority of courts agree that a security interest is created when at the end of the lease term the

lessor retains no meaningful reversionary interest in the good. WorldCom, 339 B.R. at 70-72; In re

Phoenix Equip. Co., Inc., 2009 WL 3188684, at *10 (Bankr. D. Ari. Sept. 30, 2009). “Ordinarily,

this means two things: (1) at the outset of the lease the parties expect the goods to retain some

significant residual value at the end of the lease term; and (2) the lessor retains some entrepreneurial

stake (either the possibility of gain or the risk of loss) in the value of the goods at the end of the

lease term.” Grubbs Const., 319 B.R. at 711. California courts focus on two features of a lease

when evaluating if there is a meaningful reversionary interest: “(1) any option to purchase and (2)

any provision for the lessee’s acquisition of equity in the goods.” Addison v. Burnett, 41 Cal. App.

8 The Texas UCC substantially tracks the CCC on the bright-line test and the other factors outlined below.


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4th 1288, 1296 (1996).

Count I pleads facts showing that “the economic realities of the transactions indicate that

the arrangements between the parties were not true leases, but rather disguised financings.” (¶¶ 9,

88.) Specifically, CAVIC has no reversionary interest in the aircraft at the end of the lease term as

a result of the t. (¶¶ 87, 90.) In

fact, CAVIC never had an interest in owning the aircraft, but rather only in receiving the principal

and interest of its loans from the Debtors. (¶¶ 130-31.) CAVIC concedes that if the Trustee can

show the elements of the UCC bright-line test or “establish that the economic realities of the

transaction created a security agreement,” Count I states a claim. (Mot. at 17 (citations omitted).)

Count I does both.

CAVIC challenges the sufficiency of the allegations of the Complaint on three grounds: (1)

the Complaint does not identify which of the Financed Leases it is seeking to recharacterize, (2)

the recharacterization of the Undelivered Aircraft Lease is moot, and (3) applicable English law

does not permit recharacterization. CAVIC is wrong on each point. (Mot. at 18-22.)

. The Complaint identifies the Financed Lease transactions it intends to recharacterize.

CAVIC argues that the Trustee failed to identify which “Delivered Finance Lease” he is

seeking to recharacterize, which is grounds for dismissal. (Mot. at 18.)

The Complaint clearly identifies the Financed Leases that should be recharacterized: the

9764 Financed Lease, the 9716 Financed Lease, the 9740 Financed Lease, and the Undelivered

Aircraft Financed Lease. (¶ 2.)

CAVIC also contends that the Undelivered Aircraft Lease transaction cannot be

recharacterized because the aircraft manufacturing was not completed. But UCC § 1-203 governs

a “transaction in the form of a lease,” which is precisely what this was. CAVIC provides no support

for its argument that the Undelivered Aircraft Lease transaction cannot be recharacterized simply

because the aircraft was not delivered.

Moreover, CAVIC misapprehends the purpose for which recharacterization is sought with

respect to the Undelivered Aircraft Financed Lease. By seeking a recharacterization finding, the

A


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Trustee is seeking a factual finding from this Court to bolster the legal conclusion that the March

31 Assignment was a security assignment and not an absolute assignment. The parties never

intended CAVIC to “own” the Undelivered Aircraft. Rather, the parties always intended that the

Debtors would own the aircraft subject to CAVIC’s rights as a lender under a disguised financing

structure.

. CAVIC ignores entire portions of the Complaint and erroneously states that the Complaint only offers an unsigned Term Sheet in support of recharacterization.

CAVIC argues that the Complaint is deficient because it lacks factual allegations regarding

the Financed Leases and “offers only [the] unsigned Term Sheet . . . .” (Mot. at 19 (emphasis

added).) CAVIC simply ignores vast swathes of the Complaint that sufficiently allege key

provisions of Delivered Aircraft Financed Leases, including incorporating by reference the detailed

discussion of the Undelivered Aircraft Finance Lease that was attached to the Complaint. (See ¶¶

70-88, 90-91.) As outlined above, the Trustee has plausibly alleged that the Financed Leases are

subject to recharacterization under Section 1-203 of the CCC. The Trustee is not required to attach

all of the master leases and sub-leases for the Delivered Aircraft Financed Leases to the Complaint

to meet the pleading standard under Bankruptcy Rule 7008.9 U.S. ex rel. Chabot v. MLU Servs.,

Inc., 544 F. Supp. 2d 1326, 1329 (M.D. Fla. 2008) (quoting LeBlanc Nutritions, Inc. v. Advanced

Nutra LLC, 2005 WL 1398538, at *2 (E.D. Cal. June 14, 2005) (refusing to dismiss case because

the plaintiff did not attach an exhibit and stating that “‘[n]othing in the Federal Rules of Civil

Procedure requires Plaintiff to attach any document to the complaint.’ A plaintiff is only required

to state a ‘short and plain statement of the claim showing that the pleader is entitled to relief.’ Fed.

R. Civ. P. 8(a)(2). The fact that Federal Rule of Civil Procedure 10(c) allows exhibits to be filed

with the complaint does not create an affirmative duty to file such an exhibit.”)).

CAVIC focuses on the “unsigned Term Sheet” instead of addressing the factual allegations

in the Complaint, including (i) that the majority of the terms in the Term Sheet are identified in

each relevant lease document attached to the Term Sheet (¶¶ 71-73), and (ii) that after all lease

9 CAVIC was free to attach relevant portions of the Financed Leases if it believes the terms of such agreements contradicted the allegations of the Complaint. Kreipke v. Wayne State University, 807 F.3d 768, 774 (6th Cir. 2015) (the court may consider exhibits attached to a motion to dismiss if they are referred to in the complaint). It did not.

B


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payments are made each of the Financed Leases contains the same

(¶¶ 71-73, 87, 90). The Term Sheet, at a minimum, provides conclusive parol evidence that the

parties intended the aircraft transactions to be disguised financings. CAVIC attempts to discredit

the Term Sheet by focusing on the fact that the version attached to the Complaint is unsigned. (Mot.

at 19.) This is irrelevant for purposes of a motion to dismiss because all factual allegations –

including the provisions in the unsigned Term Sheet and that those terms are probative of the intent

of the parties to enter into disguised financing transactions – are assumed to be true.

CAVIC also argues that AVIC was a party to the Term Sheet and that there are no factual

allegations to show that the Term Sheet was negotiated for the benefit of CAVIC. (Id.) The Trustee

alleges in the Complaint that AVIC is the ultimate parent corporation of CAVIC and was

responsible for negotiating the terms of the Financed Leases on behalf of CAVIC. (¶¶ 26, 46.)

Additionally, AVIC is the notice party under the Head Lease and Sub-Lease. (Compl. Ex. at 35, §

30.1.4. and Ex. M at 62, § 27.1) CAVIC, again, ignores the extensive analysis that shows the terms

of the Term Sheet found their way into the transaction documents. (¶¶ 71-73.) To argue that such

specificity is just coincidence is meritless.

. English Law does not apply.

After conceding that the CCC governs the determination of whether the Financed Leases

constitute true leases or disguised financings, CAVIC then argues that English law should be

applied because the Financed Leases contain English choice-of-law provisions and that, under

English law, recharacterization is not permitted. (Mot. at 20-21.) CAVIC’s argument fails for five

reasons: (1) English law has no reasonable or substantial relationship to the transactions at issue

and so the choice-of-law provisions should be disregarded, (2) the CCC expressly disregards a

contractual choice of law in the context of recharacterization of a lease under Article 9 of the CCC,

(3) a contractual choice-of-law clause cannot bind third parties such as a bankruptcy trustee acting

on behalf of all creditors, and (4) even if California law required English law to apply, it should be

disregarded under federal bankruptcy law as violative of the Bankruptcy Code which requires the

economic substance of the transaction be determined for purposes of recharacterization.

C


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English Law has no reasonable relationship to the parties or the transaction.

Section 1301 of the CCC requires that a contractual choice of law of a jurisdiction outside

of California bear a “reasonable relation” to the transaction. See CCC §§ 1301 (a)-(b). In this case,

English law bears no relationship to the parties or the transaction: (i) Zetta PTE is a Singaporean

corporation (¶ 22); (ii) CAVIC is an Irish corporation (¶ 25); (iii) AVIC is a Chinese corporation

(¶ 26); (iv) the corporate trusts acting as lessors or lessees (ZJ6000-1 ST, ZJ6000-2 ST, ZJ6000-3

ST, ZJ6000-4 ST, Zetta MSN 9716 Trust, Zetta MSN 9740 Trust, Zetta MSN 9764 Trust, 186

Trust, TVPX) are U.S. based (¶¶ 28-30, 32-39); (v) (¶ 27); (vi) the

aircraft were ultimately to be operated by Zetta USA, a California corporation (¶ 48(h)); and (vii)

the aircraft were to be registered in the United States (Compl. Exs. I at 87 and M at 84). Therefore,

there is no basis to apply English law. Accordingly, the contractual choice of law should be

disregarded and this Court should apply the CCC to determine recharacterization.

The California Commercial Code does not recognize a contractual choice-of-law clause for Article 9 issues, including recharacterization of a lease.

Moreover, by making this argument, CAVIC completely ignores Section 1301 of the CCC,

that disregard contractual choice-of-law provisions when considering issues arising under Article

9 of the Uniform Commercial Code, including whether a lease constitutes a disguised financing

(i.e., a “security interest”) or a true lease. Section 1301 provides that “[i]f one of the following

provisions specifies the applicable law, that provision governs and a contrary agreement is effective

only to the extent permitted by the law so specified.” See CCC § 1301(c); 14 C.F.R. 47.5 (discussed

supra). Section 9301 of the CCC is one such provision. It governs the “perfection, the effect of

perfection or nonperfection, and the priority of a security interest in collateral,” and it adopts the

“modified situs test” that looks to the law of where the debtor is located. See CCC § 9301(1).

Section 1203 of the CCC, as noted by CAVIC, defines “security interest” for purposes of Article 9

and enumerates the “bright line” and “economic realities” tests discussed above. Read together,

Sections 1301, 9301, and 1203 of the CCC displace an extraterritorial contractual choice-of-law

clause with respect to recharacterization of a lease under Article 9 of the CCC.

i.

ii.


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In In re Eagle Enterprises, Inc., 223 B.R. 290, 293 (Bankr. E.D. Pa. 1998), the court

examined a similar issue to that raised here in the context of a German choice of law provision that,

if enforced, would have negated recharacterization. Applying the provisions under the

Pennsylvania Uniform Commercial Code that are identical to the CCC,10 the court determined that

the German choice of law should be disregarded and the lease recharacterized as a disguised

financing. In that case, the seller of three pieces of heavy equipment which it had sold to the debtors

argued that the agreements were true leases based on a German choice-of-law provision, while the

trustee argued that they were unperfected security interests under the UCC. Id. at 292. The court

explained that UCC § 1-301, which governs contractual choice-of-law clauses, “expressly makes

those choice of law decisions inapplicable to issues concerning the perfection of security interests”

under UCC § 9-103. Id. at 293. UCC § 9-103 “contains specific choice of law provisions to

determine the law applicable to the perfection of security interests in transactions with multi-state

contracts.” Id. UCC § 9-103 in turn “references and thereby incorporates the law applicable to the

classification of security agreements through its use of the term ‘security interest.’” Id. “Security

interest” is a term of art defined in UCC § 1-201, and the definition “itself contains all of the rules

applicable under the U.C.C. for determining whether an agreement is a ‘true lease’ or security

agreement.” Id. Under the Eagle Enterprises analysis, Sections 1301, 9301, 1201, and 1203 of the

CCC are appropriately read together to require application of California law to determine

recharacterization.11 See id. at 294.

Additionally, a choice-of-law provision in a contract cannot impact the rights of third parties

seeking recharacterization of a lease. Eagle Enterprises, 223 B.R. at 293; Carlson v. Tandy

Computer Leasing, 803 F.2d 391, 394 (8th Cir. 1986); In re Morse Tool, Inc., 108 B.R. 384, 386

(Bankr. D. Mass. 1989). “The cases addressing the issue are fairly uniform in holding that

contractual choice of law provisions are not binding on third parties or otherwise capable of

10 The applicable Sections of the Pennsylvania Commercial Code are 1105, 9103, and 1201, which are identical to Sections 1301, 9301, and 1201 of the CCC. 11 California law looks to the substance of a transaction rather than the form. United Airlines, 416 F.3d at 616 (citing Burr v. Capital Reserve Corp., 71 Cal. 2d 983, 989 (1969) (finding that the form of the transaction must be pierced to get at the substance)). In analyzing the substance of the transaction, California law applies the bright-line test under Section 1203 of the CCC. Id. at 617.


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effecting the reclassification of security agreements into leases.” Eagle Enterprises, 223 B.R. at

294 (collecting cases).12 The Trustee is a third party because, in a chapter 7 case, the Trustee stands

in the role of a third party representative of all creditors and is given the power of a judgment lien

creditor. Id. at 293. Therefore, the issue of recharacterization is governed by the CCC, not the

English choice-of-law provision.

Moreover, as noted above, the Ninth Circuit has held that the Bankruptcy Code and state

law dictate that a court look to the economic substance of a transaction in determining whether the

transaction constitutes a lease or a disguised financing. Moreggia, 852 F.2d at 1182-84 (Section

365); Pac. Exp., 780 F.2d at 1485-86 (avoidance of security interest under Section 544). However,

if state law does not review the economic substance of a transaction, a bankruptcy court must

disregard the applicable state law and apply federal common law to answer this question. See

United Airlines, 416 F.3d at 615.

Even assuming English law would otherwise supply the relevant law that the Court should

review in the first instance, the Court should disregard CAVIC’s caricature of a English law as

being contrary to the Bankruptcy Code. Under CAVIC’s view, English law prohibits

recharacterization in all instances and does not permit a court to review the economic substance of

the transaction.13 This result is simply not permitted under Section 365 of the Bankruptcy Code and

the Court should apply either California law or federal bankruptcy law, or both, to determine that

the Financed Leases are disguised financings and not true leases.

12 Tandy Computer Leasing, 803 F.2d at 393; Hong Kong and Shanghai Banking Corp. v. HFH USA Corp., 805 F.Supp. 133, 140 (W.D.N.Y.1992); In re Automated Bookbinding Services, Inc., 336 F. Supp. 1128, 1132 (D. Md. 1972), rev'd on other grounds, 471 F.2d 546; In re Kokomo Times Publishing and Printing Corp., 301 F. Supp. 529, 536 (S.D. Ind. 1968); In re High–Line Aviation, Inc., 149 B.R. 730, 735 (Bankr. N.D. Ga. 1992); In re Wathen's Elevators, Inc., 32 B.R. 912, 919 n. 16 (Bankr. W.D. Ky.1983); In re Vintero Corp., 31 UCC Rep. Serv. (CBC) 1145 (Bankr. S.D.N.Y. 1980); Industrial Packaging Products Co. v. Fort Pitt Packaging International, Inc., 399 Pa. 643, 647, 161 A.2d 19, 21 (1960). See generally J.C. Rozendaal, Note, Choice of Law in Distinguishing Leases from Security Interests Under the Uniform Commercial Code, 75 Tex. L. Rev. 375 (1996). 13 CAVIC fails to cite any English or American case law to support this assertion. Instead, it relies solely on a law firm publication that also fails to cite any English or American case law for this assertion. To the extent that the Court finds that English law would or should apply, further briefing by the parties supported by expert testimony should be provided to the Court.


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The Financed Leases are considered “contracts of conditional sales,” not true leases, under the Federal Aviation Regulations prescribed by the Federal Aviation Administration.

The Federal Aviation Regulations, which govern the operation and registration of aircraft

in the United States, treat the Debtors as the true owners of the aircraft and the Financed Leases as

“contracts of conditional sales.” See 14 C.F.R. §§ 47.5(b) and (d). 14 C.F.R. § 47.5(b) states that

“[a]n aircraft may be registered only by and in the legal name of its owner,” and § 47.5(d) states

“[i]n this part, ‘owner’ includes . . . a lessee of an aircraft under a contract of conditional sale.” The

definition of “contract of conditional sale” is provided by Title 49 of the United States Code: “a

contract to bail or lease an aircraft . . . under which the bailee or lessee (i) agrees to pay an amount

substantially equal to the value of the property; and (ii) is to become, or has the option of becoming,

the owner of the property on complying with the contract.” 49 U.S.C. § 40102(a)(18). Pursuant to

the Financed Leases, the Debtors would be paying in full the purchase price of the Bombardier

Global 6000 Aircraft plus interest over the life of the leases. (¶¶ 71, 74.) Additionally, as previously

discussed, the Debtors had the

. (¶¶ 87, 90.) Therefore, the Financed Leases are

conditional sales under the Federal Aviation Regulations.

II. The Complaint states a claim that the Refund is property of the estate.

The interrelated Counts III, IV, V, and VI are much more straightforward than CAVIC’s

disjointed briefing suggests. The March 31 Assignment was not an absolute assignment, but rather

a security assignment of Zetta PTE’s and

March 31 Assignment. CAVIC failed to perfect that security assignment. Count III seeks a

declaratory judgment that CAVIC failed to perfect its security interest, which CAVIC does not

dispute. Because CAVIC failed to perfect its security interest, Count IV seeks to avoid CAVIC’s

unperfected security interest in the Refund under § 544. Once CAVIC’s security interest is avoided,

so is everything that comes after, including perfected security interest in CAVIC’s avoided

rights under the March 31 Assignment. Because CAVIC’s unperfected security interest is avoided,

Count V seeks to recover the under § 550. Count VI seeks turnover of the

Refund from Bombardier under § 542.

iii.


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CAVIC does not directly challenge any of these Counts. Instead, its argument appears to

boil down to two points. First, the Debtors do not have an interest in the Refund under applicable

state law. (Mot. at 22-24.) Second, the Trustee cannot avoid the March 31 Assignment. (Id. at 25-

27.) Both arguments miss the mark.

A. The Complaint plausibly pleads that Zetta PTE, as the Buyer under the APA, is entitled to the Refund.

CAVIC first argues that the Complaint fails to plead that the Refund is property of the estate.

CAVIC is wrong.

The Trustee may avoid unperfected security interests in property of the estate under the

strong-arm powers provided by 11 U.S.C. § 544(a)(1). See Pac. Exp., 780 F.2d at 1485-86; In re

Bonner, 2014 WL 890477, at *4 (B.A.P. 9th Cir. Mar. 6, 2014); In re Peregrine Entm't, Ltd., 116

B.R. 194, 207 (C.D. Cal. 1990). Section 541(a) describes property of the estate as “all legal or

equitable interest of the debtor in property as of the commencement of the case” “wherever located

and by whomever held.” The scope of § 541(a) is broad and ubiquitous and includes all “[p]roceeds

. . . or profits of or from property of the estate.” United States v. Whiting Pools, Inc., 462 U.S. 198,

204 n.9 (1983); § 541(a)(6). Property of the estate includes “all kinds of proceeds derived from

property of the estate.” In re Allegheny Label, Inc., 128 B.R. 947, 952 (Bankr. W.D. Pa. 1991).

A contract right of a debtor is property of the estate. In re Nat'l Envtl. Waste Corp., 191

B.R. 832, 834 (Bankr. C.D. Cal. 1996) (“It is well established in the Ninth Circuit that the contract

rights of a debtor are property of the estate pursuant to Bankruptcy code Section 541.”),

subsequently aff'd, 129 F.3d 1052 (9th Cir. 1997). The Complaint alleges that pursuant to the APA,

Zetta PTE is the “Buyer” and Bombardier is the “Seller.” (¶¶ 4, 41.) Under


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(¶ 66 (quoting

APA § 9.2).)

Neither CAVIC nor Bombardier have challenged Count II in the Complaint that seeks a

declaration that the APA was terminated. They have also not contested that Bombardier received

the . Accordingly, under the clear and unambiguous

langue of

.

For the reasons detailed above and below, the March 31 Assignment—a security

assignment—does not alter this result because it is avoidable under Section 544 for lack of

perfection. Therefore,

.

B. The Complaint plausibly alleges that the March 31 Assignment was for security and not an absolute assignment.

To avoid the plain language of the APA and March 31 Assignment, CAVIC contends that

the March 31 Assignment was an absolute assignment, not just the assignment of a security interest.

(Mot. at 22-24.) In making its argument, CAVIC completely disregards the Complaint, which

plausibly alleges that the March 31 Assignment only resulted in CAVIC holding a security interest

in the Refund, which it failed to perfect. (¶¶ 92-110, 143-44.)

An assignment “may operate to transfer a security interest, rather than absolute ownership,

if it is intended to create a security interest.” In re Evergreen Valley Resort, Inc., 23 B.R. 659, 661

(Bankr. D. Me. 1982). Whether an assignment is absolute or a security transaction “is left to the

courts.” Id. “A document which is seemingly an absolute assignment on its face may nevertheless

be treated as a security agreement in certain instances.” In re Matter of Candy Lane Corp., 38 B.R.

571, 574-75 (Bankr. S.D.N.Y. 1984) (applying New York law).14 Rather than looking at the

language of the purported assignment, courts look to the nature of the transaction and analyze the

parties’ intent. Evergreen Valley Resort, 23 B.R. at 661; Candy Lane, 38 B.R. at 574-75.

Additionally, if the language is ambiguous courts have looked to parol evidence to further

14 The APA and March 31 Assignment are governed by New York law.


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determine the nature and intent of the transaction. Candy Lane, 38 B.R. at 576; Evergreen Valley

Resort, 23 B.R. at 661 (citing In re Joseph Kanner Hat Co., Inc., 482 F.2d 937, 940 (2d Cir. 1973)).

The Complaint plausibly pleads that the parties intended for the March 31 Assignment to

be a security interest rather than an absolute assignment.

. First, Zetta PTE

did not assign the APA itself, but only assigned certain of its rights and obligations under the APA

to CAVIC (¶ 51),

.

(¶ 94). Further, the Complaint alleges numerous additional facts to show that the parties’ intent was

for the March 31 Assignment to act as security for the repayment of the PDP Loan. (¶¶ 92-97.)

Specifically,

(¶ 95). Additionally, Bombardier and the Debtors treated the APA as an executory

contract in the Chapter 11 Cases (¶ 96), and CAVIC indicated in its filed proofs of claim that its

claim against the Debtors was secured (¶ 97).

If that were not enough, a number of other factors confirm the parties’ intent. In examining

the intent behind an assignment, courts also consider a list of several other non-exclusive factors,

including:

1. Whether the assignor’s debt is reduced on account of the assignment. Levin v. City Trust Co., 482 F. 2d 937, 938 (2d Cir. 1973); Evergreen Valley Resort, 23 B.R. at 662.

2. The timing of the assignment as it relates to the loan. Candy Lane, 38 B.R. at 576; Levin, 482 F.2d at 938.

3. Whether payments made under the assignment would be applied to reduce the amount of the loan. Levin, 482 F.2d at 938.

4. Whether any excess paid on the loan would be returned to the assignor. Candy Lane, 38 B.R. at 576; Evergreen Valley Resort, 23 B.R. at 661; In re Voboril, 568 B.R. 797, 799 (Bankr. E.D. Wis. 2017).

5. Whether the assignment was a source of payment of the loan. Levin, 482 F.2d at 938.

6. Whether the assignee retains a right to a deficiency on the debt if the assignment does not provide sufficient funds to satisfy the amount of debt. Evergreen Valley Resort, 23 B.R. at 661.


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7. Whether the assignee acknowledges that his right in the assigned property would be extinguished if the debt owed were to be paid through some other source. Id.; Voboril, 568 B.R. at 797.

The Complaint plausibly pleads support for each factor. First, the assignment did not reduce

Zetta PTE’s obligations and left Zetta PTE jointly and severally liable with CAVIC for the

performance of all obligations under the APA. (¶¶ 98-99.) Second, the timing of the March 31

Assignment, within one day of the PDP loan, suggests it was for security rather than an absolute

assignment. (¶ 100.) Third,

. (¶¶

101-04.) Fourth, , CAVIC was required to pay any amounts

recovered in excess of the remaining amount due under the lease to Zetta PTE. (¶¶ 105-06.) Fifth,

the parties intended that the March 31 Assignment would give CAVIC an extra source of payment

for the loan. (¶ 107.) Sixth, CAVIC retained a right of deficiency on the debt because Zetta PTE

remained jointly and severally liable. (¶ 108.) Seventh, TVPX at the direction of the Debtors, had

the right to pay off the debt in full, which would extinguish CAVIC’s rights to the assigned

property. (¶ 109.)

Rather than address any of these facts, CAVIC blithely states that “[t]he Trustee’s claim to

the PDP rests entirely on the theory that, upon termination of the December 10, 2015 APA, the

‘Buyer’ is entitled to a return of all ‘advanced payments’ received by Bombardier . . . .” (Mot. at

24.) The Trustee’s claim is not based on “theory,” but as demonstrated above, is based on specific

factual allegations and the plain reading of the APA and ancillary documents.

Despite the plain meaning of the relevant documents, CAVIC states that several of the other

transaction documents list CAVIC as the “Buyer.” (Mot. at 24.) That is incorrect. None of the

documents that CAVIC cites to call it the “Buyer.” (See Compl. Exs. F, H, I, K, N, T.)15 In

particular, (Compl. Ex. T at 1; see supra n.3.)

CAVIC does not get to assert alternative facts or draw alternative inferences.

15 See Compl. Ex. F at 1 (CAVIC is defined as "Borrower”); Compl. Ex. H at 1 (CAVIC is defined as “Trustor”);Compl. Ex. I at 110 (CAVIC is defined as “Beneficial Owner”); Compl. Ex. K at 1 (CAVIC is defined as “Seller”); Compl. Ex. N at 1 (CAVIC is defined as “Borrower”); Compl. Ex. T at 1 (CAVIC is defined as “Assignor”).


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(Compl. Ex. T at 4, § 14.) CAVIC does not get to assert

alternative facts or draw alternative inferences, especially when they are contradicted by movant’s

own documents. The “Defendants’ factual allegations . . . are irrelevant to the Motion to Dismiss.”

In re Know Weigh, 576 B.R. 189, 213 (Bankr. C.D. Cal. 2017). The Court may not simply

disbelieve the Trustee’s allegations in favor of the Defendants’ competing inferences: “Rule

12(b)(6) does not countenance dismissals based on a judge’s disbelief of a complaint’s factual

allegations.” Zochlinski v. Regents of the Univ. of Cal., 578 F. App’x 636, 638 (9th Cir. 2014)

(quoting Neitzke v. Williams, 490 U.S. 319, 327 (1989)).16

C. The Complaint adequately pleads that the Trustee is entitled to avoid CAVIC’s security interest in the Refund.

In summary fashion, CAVIC argues that the Trustee cannot avoid the March 31 Assignment

and recover the Refund for five reasons: (i) the March 31 Assignment is not a lease that can be

avoided as a disguised financing; (ii) the Debtors were not parties to certain of the operative

documents relating to the Undelivered Aircraft and therefore there is no basis to recharacterize

those transactions; (iii) the Undelivered Aircraft Financed Lease was a “busted deal” and no

precedent exists to recharacterize it; (iv) no plausible state law claim to the Refund exists in the

Complaint; and (v) the Consent provides that is entitled to the Refund. (Mot. at 25-26.) Each

argument fails.

CAVIC’s first, second, and third arguments miss the mark because CAVIC conflates the

recharacterization of the lease transaction with the finding that the March 31 Assignment was a

security assignment subject to avoidance, rather than an absolute assignment. The Trustee does not

assert that the March 31 Assignment is a lease. As noted above, the Court applies different factors

in determining whether the Undelivered Lease should be recharacterized. (See supra at I. and

16 CAVIC bizarrely states that Zetta PTE “acknowledges [the] APA Assignment was an absolute assignment.” (Mot. at 27.) The basis for this statement is entirely unclear because CAVIC did not provide a citation. If CAVIC is asserting that the Complaint acknowledged that the March 31 Assignment is absolute, it is wrong. The Complaint states repeatedly that the March 31 Assignment was not absolute. (¶¶ 7, 92, 110, 142.) If CAVIC is simply arguing that the March 31 Assignment contained language in paragraph 1 that it was “absolute”, the parties’ use of terminology is disregarded if a court determines that the substance of the transaction, after applying the factors discussed above, indicates an assignment for security.


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whether the March 31 Assignment should be determined to be a security assignment (see infra at

II.B.) The Court’s determination of whether the Undelivered Financed Lease constitutes, or could

have constituted, a disguised financing is relevant, although not dispositive, to the question of

whether the March 31 Assignment constitutes a security assignment by bolstering the conclusion

that CAVIC never intended to be the owner of the Undelivered Aircraft.

CAVIC’s fourth argument is simply a rehash of the arguments about whether the Refund is

Zetta PTE’s property, as discussed above. CAVIC argues that when Zetta PTE assigned the APA

to CAVIC, CAVIC “took on the obligation to pay [for the Undelivered Aircraft]. As a result,

[CAVIC], not the Debtors, was the party to borrow the money to fund the PDP.” This is simply

false. Zetta PTE remained

(Compl. Ex. R at 2) and was, of course, on the hook directly to CAVIC for all

of the funds advanced by CAVIC under the Head Lease Guarantee and FPA Guarantee. (See Compl

Exs. J, K.) As the Complaint alleges, this demonstrates the parties’ intent that the March 31

Assignment

(¶¶

92-93, 99, 108.)

CAVIC’s fifth argument, which bleeds into the next section of its brief, is that the plain

language of the Consent reflects Bombardier’s and intent that the March 31 Assignment

was an absolute assignment. Set aside for a moment that neither Bombardier nor were parties

to the March 31 Assignment, and thus their intent is irrelevant, if it can even be determined on a

motion to dismiss when the Complaint pleads otherwise. Know Weigh, 576 B.R. at 213 (the

“Defendants’ factual allegations . . . are irrelevant to the Motion to Dismiss”). CAVIC speculates

that the March 31 Assignment must have been absolute because otherwise Bombardier and

would have required Zetta PTE to be a party to the Bombardier Consent, and that making Zetta

PTE a party was unnecessary because the parties’ intent as reflected in the Bombardier Consent

was for to receive the refund. (Id.) Nothing in the Bombardier Consent, or whatever intent

implied in that Consent between the parties to that document, affects Zetta PTE and the fully


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integrated APA and March 31 Assignment. Indeed, it would be quite strange if the Court could

ignore all of the facts pleaded in the Complaint in favor of a document to which Zetta PTE was not

even a party to infer Zetta PTE’s intent. Cutler, 2014 WL 12599602, at *1.

Most importantly, the Trustee does not need to avoid the entire transaction or the

Bombardier Consent to recover. Rather, the Trustee has sufficiently pled that CAVIC has an

unperfected security interest in the Refund, which the Trustee can avoid using his strong-arm

powers under Section 544(a)(1). (¶¶ 7-8, 148-49.) Because CAVIC failed to perfect this security

interest prior to the Petition Date, the March 31 Assignment is subject to avoidance and the Refund

is recoverable for the benefit of the estates.

III. Count VII states a preference claim.

Count VII adequately states a preference claim. The elements of a preference claim are (i)

a transfer of an interest of the Debtor in property; (ii) to or for the benefit of a creditor; (iii) for or

on account of an antecedent debt; (iv) made while the debtor was insolvent; (v) during the 90 days

before the petition date; and (vi) that enabled the creditor to receive more than it would under

chapter 7. See 11 U.S.C. § 547(b); In re Caremerica, Inc., 409 B.R. 759, 763-66 (Bankr. E.D.N.C.

2009). “The purpose of the preference pleading requirements ‘is to ensure that the defendant

receives sufficient notice of what transfer is sought to be avoided.’” In re CRC Parent Corp., 2013

WL 781603, at *2 (Bankr. D. Del. March 1, 2013) (quoting In re Crucible Materials Corp., 2011

WL 2669113, at *3 (Bankr. D. Del. July 6, 2011)). The Complaint provides sufficient notice if it

includes: “(a) an identification of the nature and amount of each antecedent debt and (b) an

identification of each alleged preference transfer by (i) date [of the transfer], (ii) name of the debtor/

transferor, (iii) name of transferee, and (iv) the amount of the transfer.” Id. (citing In re Oakwood

Homes Corp., 340 B.R. 510, 522 (Bankr. D. Del. 2006)); see also In re Valley Media, Inc., 288

B.R. 189, 192 (Bankr. D. Del. 2003).

A. The Complaint sufficiently pleads the nature and amount of each antecedent debt.

CAVIC argues that Count VII should be dismissed because the Trustee failed to provide

information about the nature and amount of each antecedent debt owed to it. (Mot. at 28.) Yet the


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Complaint states that the preference payments were made on account of amounts owed on the

Delivered Financed Leases. (¶¶ 122, 167.) The Complaint even breaks out by aircraft the specific

payments made on account of each antecedent debt:

(¶¶ 119(a)-(d).) Therefore, the Complaint sufficiently provides the amount and nature of the

antecedent debt.

B. The “ordinary course of business,” “new value,” and “subsequent new value defenses” are affirmative defenses that cannot succeed on a motion to dismiss.

CAVIC argues that the Debtors’ preference claims should be dismissed based on the “new

value,” “subsequent new value,” and “ordinary course of business” exceptions, codified in § 547(c).

(Mot. at 28-34.) However, those exceptions are affirmative defenses, making such an argument

“irrelevant for purposes of a motion to dismiss.” In re Gluth Bros. Const., Inc., 424 B.R. 379, 398

(Bankr. N.D. Ill. 2009); see also Tamayo v. Blagojevich, 526 F.3d 1074, 1090 (7th Cir. 2008));

Adelphia Commc’ns Corp. v. Bank of Am., N.A., 365 B.R. 24, 79 (Bankr. S.D.N.Y. 2007).

“Affirmative defenses . . . notwithstanding their likelihood of success, cannot be used to dismiss a

plaintiff’s complaint under Rule 12(b)(6).” In re The Russ Cos., Inc., 2013 WL 4028098, at *5

(Bankr. D.N.J. Aug. 6, 2013) (citing In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 277 (3d Cir.

2004); In re Autobacs Strauss, Inc., 473 B.R. 525, 571 (Bankr. D. Del. 2012) (rejecting motion to

dismiss based on subsequent new value defense).

Indeed, the “new value,” “subsequent new value,” and “ordinary course of business”

defenses relied on by CAVIC raise numerous factual issues, making them inappropriate for decision

at this time. First, the “new value” and “subsequent new value” defenses are inapplicable because


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the Financed Leases were not true leases, but rather security agreements. To establish a new value

defense, a creditor must establish: (1) it advanced new value to the debtor after the preferential

transfer; (ii) the advance of new value was unsecured; and (iii) the advance of new value remains

unpaid or, if paid, the payment must also be avoidable. See In re Modtech Holdings, Inc., 503 B.R.

737, 745 (Bankr. C.D. Cal. 2013).

CAVIC will not be able to meet its burden because, among other reasons, missed “lease

payments” under a disguised financing arrangement to acquire a capital asset do not provide any

new value to a debtor or its estate. See generally United Airlines, 416 F.3d at 613; In re Nucorp

Energy, 116 B.R. 872, *3 (B.A.P. 9th Cir. 1989) (citing Drabkin v. A.I. Credit Corp., 800 F.2d

1153, 1159 (D.C. Cir. 1986)). The Seventh Circuit in United Airlines distinguished payments under

a true lease that reflect compensation for current use of an asset and payments under a disguised

financing to repay obligations incurred to acquire a capital asset. 416 F.3d at 617. The United

Airlines court held that a debtor was not required to assume a disguised financing lease under

Section 365 of the Bankruptcy Code and pay post-assumption “rent” for what were, in reality,

obligations incurred to acquire a capital asset. Id. Rather, the future obligation to pay “rent” under

a disguised financing was no different than a debtor’s obligation to pay prepetition principal and

interest under a prepetition asset acquisition loan which is dealt with, along with other prepetition

claims, under a plan of reorganization. Id.

The same rationale applies to negate the “new value” theory advanced by CAVIC here.

CAVIC provided value to the Debtors when it funded the loans under the disguised financings at

the inception of the Financed Leases, not when the Debtors missed debt service payments under

the disguised financings following the Preference Payments.

Under the same rationale, the Preference Payments did not constitute “a contemporaneous

exchange for new value” either since the value provided by CAVIC to the Debtors occurred at the

time of delivery of the aircraft and effective date of the leases. Moreover, the Complaint alleges

that the Preference Payments “were over $2.4 million more than the Debtors had ever paid to

CAVIC on a single day,” which negates any contemporaneous exchange and, at a minimum,

warrants discovery and a trial to determine if a contemporaneous exchange of new value occurred.


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(¶ 120.)

Third, the ordinary course of business defense requires a “peculiarly factual analysis,”

Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991), and “unusual collection

practices” such as threats are viewed as not in the ordinary course of business, In re Bender

Shipbuilding & Repair Co., 479 B.R. 899, 905 (Bankr. S.D. Ala. 2012) (finding threat to

discontinue services unless overdue invoices paid was an unusual collection practice). The

Complaint’s allegations of threats and other unusual practices require a factual analysis. (¶¶ 115(a)-

(b), 120.)

C. The earmarking doctrine does not apply.

“Under the ‘earmarking doctrine,’ funds provided to a debtor for the purpose of paying a

specific indebtedness may not be recoverable as a preference from the creditor to which they are

paid, because the property ‘transferred’ in such a situation was never property of the debtor and so

the transfer did not disadvantage other creditors.” 5 Collier on Bankruptcy ¶ 547.03[2][a]. The

earmarking doctrine applies where the only change is the identity of the creditor, while the nature

of the debt does not change: “If all that occurs in a ‘transfer’ is the substitution of one creditor for

another, no preference is created because the debtor has not transferred property of his estate; he

still owes the same sum to a creditor, only the identity of the creditor has changed.” Id. The

earmarking doctrine requires the defendant to establish each of three elements: “(1) the existence

of an agreement between the new lender and the debtor that the new funds will be used to pay a

specified antecedent debt; (2) performance of that agreement according to its terms; (3) the

transaction viewed as a whole . . . does not result in any diminution of the estate.” In re Straightline

Invs., 525 F.3d 870, 881-82 (9th Cir. 2002). As a judge-made exception, it is narrowly construed

against the defendant. In re BR Festivals, LLC, 2015 WL 1216836, at *2 (Bankr. N.D. Cal. Mar.

11, 2015) (citing 5 Collier on Bankruptcy ¶ 547.03[2][a]). If the defendant fails to establish all three

elements, the earmarking doctrine does not apply. None of the three elements are met.

The first element of the earmarking doctrine is not met because the “lender” was a

shareholder and pre-existing lender and was thus not a new creditor substituting for an old creditor.

The earmarking doctrine is “typically applicable when a third party makes a loan to a debtor


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specifically to enable the debtor to satisfy the debt of a designated creditor. In other words, a new

creditor is substituted for an old creditor.” In re Interior Wood Prods. Co., 986 F.2d 228, 231 (8th

Cir. 1993) (emphasis added).

Equally important, with respect to the second element the Complaint does not allege that

that the express terms of the loan agreement with the shareholder required that any specific debt be

repaid with the loan proceeds (as opposed to use of proceeds for general working capital needs).

That too is fatal to CAVIC’s claim. In re Superior Stamp & Coin Co., Inc., 223 F.3d 1004, 1010

(9th Cir. 2000).

The third element of the earmarking doctrine is not met because the preference transfers

diminished the debtor’s estate. “The fundamental inquiry in determining whether the doctrine

applies is whether the transfer at issue has diminished the debtor’s estate.” Allegheny Label, 128

B.R. at 952. Diminishing the estate results in assets not being available to other creditors that

otherwise would be. In re Bullion Reserve of N. Am., 836 F.2d 1214, 1217 (9th Cir. 1988). The

estate is not diminished if the result of the transaction merely substitutes a new creditor for an old

creditor. In re Libby Int'l, Inc., 247 B.R. 463, 467 (B.A.P. 8th Cir. 2000). Here, the third element is

not met because, without the transfers to CAVIC, that money could have been used to pay other

creditors.

IV. In the event of dismissal, the Court should grant leave to re-plead.

The Complaint states each claim alleged, but even if it did not, the proper remedy here

would be a dismissal without prejudice and with leave to replead. Leave to amend should be granted

unless the court “determines that the pleading could not possibly be cured by the allegation of other

facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc); Bly–Magee v. California,

236 F.3d 1014, 1019 (9th Cir. 2001) (holding that when dismissing for failure to comply with Rule

9(b) “leave to amend should be granted unless the district court determines that the pleading could

not possibly be cured by the allegation of other facts”); see also Knevelbaard Dairies v. Kraft

Foods, Inc., 232 F.3d 979, 983 (9th Cir. 2000) (“An order granting [a motion to dismiss] must be


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accompanied by leave to amend unless amendment would be futile”).

CONCLUSION

The Trustee thus respectfully requests that the Court deny the Motion in its entirety.

DATED: February 14, 2020 DLA PIPER LLP (US)

By: /s/ John K. LyonsROBBIN L. ITKIN JOHN K. LYONS (Pro Hac Vice) JEFFREY S. TOROSIAN (Pro Hac Vice) JOSEPH A. ROSELIUS (Pro Hac Vice)

Attorneys for the Chapter 7 Trustee


Composite Exhibit A

(Unpublished Opinions)

Case 2:19-ap-01147-SK Doc 75-1 Filed 02/14/20 Entered 02/14/20 17:17:26 DescExhibit A Page 1 of 55

Milbeck v. TrueCar, Inc., Slip Copy (2019)2019 WL 476004

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 476004Only the Westlaw citation is currently available.

United States District Court, C.D. California.

Leon D. MILBECKv.

TRUECAR, INC. et al.

Case No. 2:18-cv-02612-SVW-AGR|

Filed 02/05/2019

Attorneys and Law Firms

Justin B. Farar, Mario Man-Lung Choi, Laurence D King,Kaplan Fox and Kilsheimer LLP, San Francisco, CA, FredericS. Fox, Pro Hac Vice, Jason A. Uris, Pro Hac Vice, JeffreyP. Campisi, Pro Hac Vice, Robert N. Kaplan, Pro Hac Vice,Kaplan Fox and Kilsheimer LLP, New York, NY, for Leon D.Milbeck.

Boris Feldman, Catherine E Moreno, Jerome F. Birn, Jr.,Wilson Sonsini Goodrich and Rosati PC, Palo Alto, CA,Nicholas R. Miller, Wilson Sonsini Goodrich and Rosati PC,Washington, DC, for TrueCar, Inc. et al.

Proceedings: IN CHAMBERS ORDER DENYINGDEFENDANTS' MOTION TO DISMISS [88]

STEPHEN V. WILSON, U.S. DISTRICT JUDGE

*1 A motion to dismiss under Rule 12(b)(6) challenges thelegal sufficiency of the claims stated in the complaint. Fed. R.Civ. P. 12(b)(6). To survive a motion to dismiss, a complaint“must contain sufficient factual matter, accepted as true, to

‘state a claim to relief that is plausible on its face.’ ” Ashcroft v.Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp.v. Twombly, 550 U.S. 544, 570 (2007) ). claim is plausibleon its face “when the plaintiff pleads factual content thatallows the court to draw the reasonable inference that thedefendant is liable for the misconduct alleged.” Id. Rule 9(b)“requires particularity when pleading ‘fraud or mistake.’ ”Iqbal, 566 U.S. at 686. “Allegations in the complaint, togetherwith reasonable inferences therefrom, are assumed to be truefor purposes of the motion.” Odom v. Microsoft Corp., 486F.3d 541, 545 (9th Cir. 2007).

The Court has reviewed Plaintiff's Amended Class ActionComplaint, Dkt. 47, and Defendants' motion to dismiss,Dkt. 88. For purposes of the motion-to-dismiss stage,Plaintiff has adequately alleged—under both the plausibilityand heightened pleading standards—that Defendants madematerially false and misleading statements by making riskstatements regarding TrueCar's reliance on USAA's websitewithout alerting the public that the risk had already come tofruition and by falsely representing that USAA would be akey driver of unit and revenue growth in 2017. Furthermore,Plaintiff has adequately alleged a strong inference of scienterby alleging that Defendants knew about USAA's websiteredesign and its impact as of January 2017 and thatGuthrie and Pierantoni sold TrueCar stock in sales that weresuspicious in their timing, size, and amount, especially in lightof Guthrie's and Pierantoni's prior sales. Assuming, as it must,the allegations to be true, the Court DENIES Defendants'motion to dismiss.

IT IS SO ORDERED.

All Citations

Slip Copy, 2019 WL 476004

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.


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Cutler v. Rancher Energy Corp., Not Reported in Fed. Supp. (2014)2014 WL 12599602




Frank W. CUTLER, et al.v.

RANCHER ENERGY CORP., et al.

SACV 13-0906-DOC (JPRx)|

Filed 06/02/2014


Inna S. Demin, Todd B. Becker, Law Offices of Todd B.Becker, Long Beach, CA, for Frank W. Cutler, et al.

Danielle Serbin, Gareth Thomas Evans, Gibson Dunn andCrutcher LLP, Irvine, CA, Gareth Thomas Evans, GibsonDunn & Crutcher, Los Angeles, CA, for Rancher EnergyCorp., et al.

PROCEEDINGS (IN CHAMBERS): ORDERDENYING MOTION TO DISMISS [51] [52]

THE HONORABLE DAVID O. CARTER, JUDGE

*1 Before the Court is Defendant's renewed Motionto Dismiss (Dkts. 51, 52). The Court finds this matterappropriate for resolution without oral argument. See Fed.R. Civ. P. 78; L.R. 7-15. Having considered the moving andopposing papers and the entirety of the record, the CourtDENIES the motion.

I. BACKGROUNDThe Court described fully the facts of the case in itsprior order. Plaintiffs Frank W. Cutler et al. (“Plaintiffs”)brought this lawsuit against Defendants Rancher EnergyCorp. (“Rancher”) and John Works (CEO of Rancher) basedon representations made to Plaintiffs regarding investments.

After an initial Motion to Dismiss by Defendant Works,the Court dismissed without prejudice Plaintiffs' negligentmisrepresentation claim. See Order, March 11, 2014 (Dkt.44). The Court found that Plaintiffs had failed to sufficientlyallege the lack of reasonable grounds for belief in the allegedmisrepresentations' truth. Id. at 11.

Plaintiffs filed a Third Amended Complaint (“TAC”) onMarch 25, 2014 (Dkt. 47). Defendants filed the instant motionon April 15, 2014, alleging that Plaintiffs did not cure thedeficiency in their Second Amended Complaint.

II. LEGAL STANDARDUnder Federal Rule of Civil Procedure 12(b)(6), a complaintmust be dismissed when a plaintiff's allegations fail toset forth a set of facts which, if true, would entitle thecomplainant to relief. Bell Atl. Corp. v. Twombly, 550 U.S.544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)(holding that a claim must be facially plausible in order tosurvive a motion to dismiss). The pleadings must raise theright to relief beyond the speculative level; a plaintiff mustprovide “more than labels and conclusions, and a formulaicrecitation of the elements of a cause of action will not do.”Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S.265, 286 (1986)). On a motion to dismiss, this court accepts astrue a plaintiff's well-pled factual allegations and construes allfactual inferences in the light most favorable to the plaintiff.Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025,1031 (9th Cir. 2008). The court is not required to accept astrue legal conclusions couched as factual allegations. Iqbal,556 U.S. at 678.

Dismissal without leave to amend is appropriate only whenthe court is satisfied that the deficiencies in the complaintcould not possibly be cured by amendment. Jackson v. Carey,353 F.3d 750, 758 (9th Cir. 2003); Lopez v. Smith, 203 F.3d1122, 1127 (9th Cir. 2000) (holding that dismissal with leaveto amend should be granted even if no request to amend wasmade). Rule 15(a)(2) of the Federal Rules of Civil Procedurestates that leave to amend should be freely given “when justiceso requires.” This policy is applied with “extreme liberality.”Morongo Band of Mission Indians v. Rose, 893 F.2d 1074,1079 (9th Cir. 1990).

III. ANALYSISPlaintiffs added allegations in the TAC that are very similarto the text of a California Court of Appeal case cited in theCourt's prior order. The additional allegations are, essentially,as follows

*2 38. Plaintiffs are informed andbelieve and based thereon allegethat the representations, promises,assurances and expressions of opinion


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Cutler v. Rancher Energy Corp., Not Reported in Fed. Supp. (2014)2014 WL 12599602


by defendant Works were false atthe time they were made, andthat he made them negligently,carelessly and recklessly with noreasonable grounds for believing theywere true. Defendant Works, as acorporate officer and director, lackedreasonable grounds for believing thatthe substance of his statements,representations, promises, assurancesand expressions of opinion weretrue because he failed to utilize thedegree of skill, prudence and diligencecommonly possessed by corporateofficers and corporate directors, andif he had utilized such skill, prudenceand diligence, he would not havemade such statements, representations,promises, assurances and expressionsof opinion.

TAC ¶ 38. Plaintiffs pull the bulk of this language fromB.L.M. v. Sabo & Deitsch, 55 Cal. App. 4th 823, 835 (1997).

Defendants argue that this addition does not actually articulatenew facts. Further, Defendants point out that the Sabo &Deitsch case is irrelevant to the present motion because thecase is a California case decided before Iqbal and Twombly.The Court agrees that the case is not directly on pointnor is it binding authority. However, the Court finds theminimal additions sufficient to bring Plaintiffs' allegationsover the Iqbal burden. The Second Amended Complaintalready described in detail the allegedly false facts and theirallegedly truthful counterparts. Plaintiffs' additions providesome explanation of why Defendant Works' belief in theserepresentations' truthfulness was unreasonable. The Courttherefore DENIES the motion to dismiss.

IV. DISPOSITIONAccordingly, the Court DENIES Defendant's Motion toDismiss.

The Clerk shall serve this minute order on the parties.

All Citations

Not Reported in Fed. Supp., 2014 WL 12599602




M. M. v. County of San Mateo, Slip Copy (2019)2019 WL 414962



United States District Court, N.D. California.

M. M., Plaintiff,v.

COUNTY OF SAN MATEO, et al., Defendants.

CASE NO. 18-cv-05396-YGR|

Signed 02/01/2019


Hasmukhjit Singh Jawandha, Law Office of Joseph S. May,Castro Valley, CA, Joseph S. May, Law Office of Joseph S.May, San Francisco, CA, for Plaintiff.

Tara Emily Heumann, Jan Ellen Ellard, San Mateo CountyCounsel, Redwood City, CA, for Defendants.

ORDER DENYING MOTION TO DISMISS

Re: Dkt. No. 19

Yvonne Gonzalez Rogers, United States District Court Judge

*1 Plaintiff M.M., a minor, by and through her Guardianad litem, brings this action against defendants County ofSan Mateo (the “County”), deputies Robert Willett, DevinCrocker, James Brown, and Does 1 to 50, inclusive. (Dkt.No. 9 (“FAC”).) Plaintiff alleges four causes of action:(1) deprivation of constitutional rights in violation of 42U.S.C. Section 1983, including unreasonable search andseizure, arrest without probable cause, and excessive andunreasonable force and restraint in the course of an arrestagainst deputies Willet, Crocker, and Brown, as well as Does1-25; (2) deprivation of those same constitutional rights inviolation of Section 1983, pursuant to Monell, against theCounty and Does 26-50; (3) violation of California CivilCode § 52.1 against all defendants; and (4) battery against alldefendants. (Id. ¶¶ 16-38.) The County now moves to dismissplaintiff’s second cause of action pursuant to Rule 12(b)(6)on the grounds that plaintiff failed to allege sufficient factsunder Section 1983 to support a Monell claim for municipalliability against the County. (Dkt. No. 19 (“Motion”).)

Having carefully considered the papers submitted, and for thereasons set forth more fully below, the Court DENIES theCounty’s motion to dismiss.

I. BACKGROUNDPlaintiff alleges as follows:

On August 14, 2017, plaintiff M.M. was a minor residing atYour House South, a group home in Redwood City. (FAC ¶¶1, 8.) Following a report that M.M. went missing, a dispatchersent defendant deputies Willet, Crocker, and Brown to addressthe situation. (Id. ¶ 8.) Employees of Your House South hadpreviously observed Willet act unprofessionally and “exhibita hostile attitude toward the residents.” (Id. ¶ 9.) Afterlearning that Willet had been dispatched to the scene, a YourHouse South employee called the dispatcher to request adifferent deputy. (Id.) The dispatcher denied the employee’srequest. (Id.)

When Willet arrived at Your House South, he appearedannoyed. (Id. ¶ 10.) He was advised that M.M. previouslysuffered from depression or other mental illness and/oremotional disturbance. (Id.) M.M. was in her room whenWillet entered and began reading portions of M.M.’s privatejournal aloud. (Id.) The deputy defendants then demandedthat M.M. undress, so they could observe her body. (Id.) M.M.responded that she felt uncomfortable removing her clothes infront of male sheriff deputies and requested a female deputyinstead. (Id.) Defendants continued to demand that M.M.undress. (Id.) When she refused, Willett threw her to theground, grabbed her neck/throat, pulled her arms behind herback, and placed his knee on her back. (Id.) Neither Crockernor Brown intervened in order to prevent Willet from usingexcessive force against M.M. (Id. ¶ 13.)

The defendants then handcuffed M.M. and strapped her downto a gurney before taking her by ambulance to a hospital for a72-hour mental health detention, pursuant to section 5150 ofthe California Welfare and Institutions Code. (Id. ¶ 11.) Thehospital staff released M.M. the following day and told herthat she should not have been brought there at all. (Id.)

*2 M.M. never touched, threatened, or harmed any of thedefendant deputies. (Id. ¶ 12.) She did nothing that wouldplace the deputies justifiably in fear of harm. (Id.) They alsolacked probable cause to believe that she had committed acrime. (Id.)


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On January 23, 2018, M.M. presented a claim to the Countypursuant to Government Code section 910 et seq. (Id. ¶ 14.)The County notified M.M. on March 1, 2018, that it rejectedher claim in its entirety. (Id. ¶ 15.)

M.M. filed the initial complaint in this action on August31, 2018. (Dkt. No. 1.) She filed an amended complaint onOctober 25, 2018. (FAC.) On December 19, 2018, the Countyfiled the instant motion to dismiss plaintiff’s Monell claim

against the County. (Motion at 2.) 1

1 The Court notes that the County did not file a replyin support of its motion.

II. LEGAL STANDARDA motion to dismiss under Rule 12(b)(6) tests the legalsufficiency of the claims alleged in the complaint. Ileto v.Glock. Inc., 349 F.3d 1191, 1199–1200 (9th Cir. 2003). Allallegations of material fact are taken as true and construedin the light most favorable to the nonmoving party. Johnsonv. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011).However, legally conclusory statements, not supported byactual factual allegations, need not be accepted. See Ashcroftv. Iqbal, 556 U.S. 662, 679 (2009). Nevertheless, “when theallegations in a complaint, however true, could not raise aclaim of entitlement to relief,” dismissal is appropriate. BellAtl. Corp. v. Twombly, 550 U.S. 544, 558 (2007). Thus, amotion to dismiss will be granted if the complaint does notproffer enough facts on its face to nudge the plaintiff’s “claimsacross the line from conceivable to plausible[.]” See id. at 570.

III. ANALYSISThe County moves to dismiss plaintiff’s second claimfor relief under Section 1983 for municipal Monellliability, arguing that plaintiff’s “conclusory allegations areinsufficient to state a cause of action.” (Motion at 4.) Amunicipality may be liable under Section 1983 when theenforcement of a municipal policy or custom was the movingforce behind the violation of a constitutionally protected right.Monell v. Dep't of Soc. Servs. of the City of New York, 436U.S. 658, 690 (1978). However, a public entity “cannot beheld liable solely because it employs a tortfeasor.” Id. at 691.In order to establish liability for governmental entities underMonell, a plaintiff must prove: “(1) that [s]he possessed aconstitutional right of which [s]he was deprived; (2) that themunicipality had a policy; (3) that this policy amounts todeliberate indifference to the plaintiff's constitutional rights;and (4) that the policy is the moving force behind the

constitutional violation.” See Oviatt By and Through Waughv. Pearce, 954 F.2d 1470, 1474 (9th Cir. 1992) (quotingCity of Canton v. Harris, 489 U.S. 378, 389 (1989) (internalquotation marks omitted) ).

A plaintiff may state a claim for Section 1983 liability againsta municipality under Monell in any of three circumstances:(1) when official policies or established customs inflicta constitutional injury; (2) when omissions or failures toact amount to a local government policy of “deliberateindifference” to constitutional rights; or (3) when a localgovernment official with final policy-making authorityratifies a subordinate' unconstitutional conduct. Clouthier v.Cty. of Contra Costa, 591 F.3d 1232, 1249-50 (9th Cir. 2010)(synthesizing authorities).

*3 In order to state a Section 1983 claim against amunicipality, a complaint “must contain sufficient allegationsof underlying facts to give fair notice and to enable theopposing party to defend itself effectively,” and those factsmust “plausibly suggest an entitlement to relief.” AE ex rel.Hernandez v. Cty. of Tulare, 666 F.3d 631, 636-37 (9th Cir.2012) (quoting Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.2011) cert. denied, 566 U.S. 982 (2012) ). With respect to theterm “plausibility,” the court explained in Starr:

If there are two alternativeexplanations, one advanced bydefendant and the other advanced byplaintiff, both of which are plausible,plaintiff’s complaint survives amotion to dismiss under Rule 12(b)(6). Plaintiff’s complaint may bedismissed only when defendant’splausible alternative explanation is soconvincing that plaintiff’s explanationis implausible. The standard at thisstage of the litigation is not thatplaintiff’s explanation must be true oreven probable.

Starr, 652 F.3d at 1216-17.

In AE ex rel. Hernandez, the Ninth Circuit affirmeddismissal of a Monell claim brought by a nine-year-oldboy alleging that defendants followed county “ordinances,regulations, customs, and practices” when they failed to


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prevent plaintiff’s foster brother from sexually assaultinghim. Id. at 636-67. Specifically, the plaintiff alleged thatthe municipality “maintained or permitted an official policy,custom, or practice of knowingly permitting the occurrenceof the type of wrongs” stated elsewhere in the amendedcomplaint. Id. However, the plaintiff failed to provide anyfacts regarding the specific “policy, custom, or practice.”Id. Therefore, applying Starr, the court concluded that thecomplaint failed to state a sufficient claim for Monell liabilityand dismissed plaintiff’s claim with leave to amend. Id.

Similarly, in Dougherty v. City of Covina, the Ninth Circuitheld that the district court rightly dismissed a Monell claimbecause the claim lacked factual allegations that wouldseparate it from the “formulaic recitation of a cause ofaction’s elements.” 654 F.3d 892, 900 (9th Cir. 2011) (citingTwombly, 550 U.S. at 555). The plaintiff alleged that thecity’s “policies and/or customs caused the specific violationsof Plaintiff’s constitutional rights at issue in this case,” andthose policies “were the moving force and/or affirmativelink” behind the alleged injury. The court found that thecomplaint “lacked any facts demonstrating that [plaintiff’s]constitutional deprivation was the result of a custom orpractice” of the city. Id. at 900-901; see also Brown v. ContraCosta Cty., No. C 12-1923 PJH, 2012 WL 4804862, at *12(N.D. Cal. Oct. 9, 2012) (dismissing a Monell claim becausethe plaintiff asserted “legal conclusions only” and failed toallege facts to support any of the three theories of Monellliability).

Here, plaintiff alleges that (1) she was deprived of herconstitutional rights under the Fourth and Fourteenthamendments, as well as her right tot be free from arrestwithout probable cause; (2) the County had in place “customs,policies, practices, and/or procedures”; (3) those customs,policies, practices, and/or procedures constituted deliberateindifference to plaintiff’s constitutional rights; and (4)those customs, policies, practices, and/or procedures werea moving force and/or proximate cause of the deprivationof plaintiff’s constitutional rights. (FAC ¶¶ 16, 22-26.)Unlike the “formulaic recitation of a cause of action’selements” in Dougherty, plaintiff enumerates six customs,policies, practices, and/or procedures, including failure “toinstitute, require, and enforce proper and adequate training,supervision, policies, and procedures concerning interactionwith individuals who have, or are suspected of having, mentalillness,” as well as “concerning interaction with minors.”Compare FAC ¶ 22 with Dougherty, 654 F.3d at 900.

*4 Plaintiff also provides factual support for theseallegations. C.f. AE ex rel. Hernandez, 666 F.3d at 640(holding that “plausible facts supporting a policy or custom ...could cure[ ] the deficiency in [a] Monell claim”). Plaintiffasserts that she was a minor at the time of the alleged incident,and that Willet was advised that she suffered “from depressionor other mental illness and/or emotional disturbance[.]” (FAC¶¶ 1, 10.) Plaintiff avers that in spite of this information,Willet demanded that she undress in the presence of threemale deputies, and, when plaintiff requested the presence of afemale deputy and refused to disrobe, Willet threw her to theground, grabbed her by her throat/neck area, pulled her armsbehind her back, and placed his knee on plaintiff’s back. (Id.¶ 10.) Plaintiff further alleges that neither Crocker nor Brownintervened to prevent or otherwise impede Willet’s actions.(Id. ¶ 13.)

Moreover, plaintiff alleges that on a prior occasion, Willethad acted unprofessionally and exhibited a “hostile attitudetoward the residents” of Your House South. (Id. ¶ 9.) Plaintiffavers that as a result of this interaction, on the date of theincident in question, a Your House South employee called thepolice dispatcher to request that they send a different deputy.(Id.) Accordingly, plaintiff’s complaint contains facts that

“plausibly 2 suggest an entitlement to relief” and “give fairnotice and ... enable the [County] to defend itself effectively.”

AE ex rel. Hernandez, 666 F.3d at 636-37. 3

2 The Court notes that the County did not provide anyalternative explanation regarding the defendants'alleged unconstitutional conduct. Instead, theCounty submitted a conclusory argument that theplaintiff failed to articulate any facts to support herMonell claim. (Motion at 4.)

3 See also Mateos-Sandoval v. County of Sonoma,942 F.Supp.2d 890, 899 (N.D. Cal. 2013) (denyingmotion to dismiss Monell claims where plaintiffs'allegations “specify the content of the policies,customs, or practices the execution of which gaverise to” their constitutional injuries); Galindo v.City of San Mateo, No. 16-cv-03651-EMC, 2016WL 7116927, at *6 (N.D. Cal. Dec. 7, 2016)(denying motion to dismiss Monell claim whereplaintiff alleges that defendant city failed “tomaintain or effectively administer an appropriatetraining regimen or required protocol on citizensearches by officers of the opposite sex”); Lav. San Mateo County Transit District, No. 14-




















cv-01768-WHO, 2014 WL 4632224, at *8 (N.D.Cal. Sept. 16, 2014) (denying motion to dismissMonell claim where plaintiff alleges that defendant“has a policy or custom of performing a specificadverse employment action (termination) against aparticular subset of employees (those who reportinternal misconduct”).

IV. CONCLUSION

For the reasons stated above, the Court DENIES the County’smotion to dismiss plaintiff’s second cause of action.

This Order terminates Docket Number 19.

IT IS SO ORDERED.

All Citations

Slip Copy, 2019 WL 414962





Blackstone Equipment Financing, L.P. v. Bernhard, Not Reported in Fed. Supp. (2011)2011 WL 13227750




BLACKSTONE EQUIPMENT FINANCING, L.P.v.

Gary BERNHARD, et al.

Case No. SACV 10–1733–JST (MLGx)|

Filed 05/05/2011


Thomas E. McCurnin, Barton Klugman and Oetting LLP, LosAngeles, CA, for Blackstone Equipment Financing, L.P.

Gary Bernhard, Royersford, PA, pro se.

Susan Bernhard, Royersford, PA, pro se.

PROCEEDINGS: (IN CHAMBERS) ORDERGRANTING IN PART AND DENYING IN PART

PLAINTIFF’S MOTION TO DISMISS DEFENDANTS’FIRST AMENDED COUNTERCLAIM (Doc. 43)

JOSEPHINE STATON TUCKER, UNITED STATESDISTRICT JUDGE

*1 Before the Court is the following motion: Plaintiff’sMotion to Dismiss Defendants’ First Amended Counterclaim(Doc. 43). The Court finds this matter appropriate for decisionwithout oral argument. Fed. R. Civ. P. 78; C.D. Cal. R. 7–15.Accordingly, the hearing set for May 9, 2011, at 10:00 a.m. isremoved from the calendar.

I. BACKGROUNDPlaintiff Blackstone Equipment Financing, L.P.(“Blackstone”) filed this action against Defendants Garyand Susan Bernhard on November 10, 2010. (Doc. 1.)On March 29, 2011, Gary and Susan Bernhard, as wellas GB Excavating Inc. (“the Bernhards”), filed their FirstAmended Counterclaim (“FACC”) against Blackstone, aswell as Counter–Defendants Richard W. London and Metrix

Financial Group. 1 (Doc. 38.)

1 Neither Richard W. London nor Metrix FinancialGroup Inc. made an appearance in this case.

Both parties agree that in May 2006, the Bernhards enteredinto an agreement (“the Agreement”) with Blackstone. (SeeFACC ¶ 10.) The Agreement sets forth a schedule underwhich the Bernhards were to make sixty (60) payments of$5,797.23, in exchange for the use of certain constructionequipment (“the Equipment”), specifically two backhoes, twotrack loaders, three trachoes, two bulldozers, and three rollers.(FACC, Exh. 1.) Both Blackstone and the Bernhards attacheda copy of the Agreement to their operative complaints. TheBernhards allege that the Agreement was a loan, and theFACC’s eight claims rely on the Agreement being a loan.Blackstone filed this Motion to Dismiss the FACC on April8, 2011; Blackstone, among other things, argues that theAgreement is a “true lease,” which precludes all of theBernhard’s counterclaims. (Doc. 43.) Having read the papers,the Court GRANTS IN PART AND DENIES IN PARTBlackstone’s Motion.

II. LEGAL STANDARDWhen evaluating a Rule 12(b)(6) motion, the Court mustaccept as true all allegations of material facts that are inthe complaint and must construe all inferences in the lightmost favorable to the non-moving party. Moyo v. Gomez,32 F.3d 1382, 1384 (9th Cir. 1994). Rule 12(b)(6) is readin conjunction with Rule 8(a), which requires only a shortand plain statement of the claim showing that the pleaderis entitled to relief. Fed. R. Civ. P. 8(a)(2). “Specific legaltheories need not be pleaded so long as sufficient factualaverments show that the claimant may be entitled to somerelief.” Fontana v. Haskin, 262 F.3d 871, 877 (9th Cir. 2001).Dismissal of a complaint for failure to state a claim is notproper where a plaintiff has alleged “enough facts to state aclaim to relief that is plausible on its face.” Bell Atl. Corp.v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facialplausibility when the plaintiff pleads factual content thatallows the court to draw the reasonable inference that thedefendant is liable for the misconduct alleged.” Ashcroft v.Iqbal, 129 S. Ct. 1937, 1949 (2009). “And, of course, a well-pleaded complaint may proceed even if it strikes a savvyjudge that actual proof of those facts is improbable, and thata recovery is very remote and unlikely.” Twombly, 550 U.S.at 556 (internal quotation marks and citation omitted).

*2 When the legal sufficiency of a complaint’s allegationsare tested by a motion under Rule 12(b)(6), review is typicallylimited to the complaint, however, “a court may consider


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material which is properly submitted as part of the complainton a motion to dismiss without converting the motion todismiss into a motion for summary judgment.” Lee v. Cityof Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (internalquotation marks and citation omitted). In addition, under Rule10(c), “[a] copy of a written instrument that is an exhibit to apleading is a part of the pleading for all purposes.” Fed. R. Civ.P. 10(c). When such a document is offered, “the district courtmay treat such a document as part of the complaint, and thusmay assume that its contents are true for purposes of a motionto dismiss under Rule 12(b)(6).” United States v. Ritchie, 342F.3d 903, 908 (9th Cir. 2003).

III. DISCUSSIONFirst, the Court holds that the Agreement is not ambiguousregarding what would happen to the Equipment after allsixty payments were made. “Whether a contract is or isnot ambiguous is a question of law for the court.” U.S. forUse of White Masonry, Inc. v. F.D. Rich Co., 432 F.2d 855,856 (9th Cir. 1970) (citing cases). Paragraph seven of theAgreement states: “After all lease payments have been madeLessee will, at its expense, immediately insure and ship theEquipment and operating manuals to a destination designatedby Lessor ....” (FACC, Exh. 1.) The Bernhards argue, withoutcitation to any legal authority, that this paragraph “only stateswhat is to happen upon ‘termination’ of the agreement duringthe executor period, which has a completely different legalmeaning than expiration on its own terms.” (Opp., Doc. 49, at3.) The Court, finding no support for this argument, concludesthat the Agreement is not ambiguous in setting forth that theEquipment is to be shipped to a destination designated byBlackstone when the Agreement expires.

Second, the Court concludes that the Agreement could bea loan, because the Bernhards have alleged facts, which ifproven, establish that the Agreement meets the criteria forcreating a security interest under California Commercial Codesection 1203. Section 1203 sets forth a bright-line two-parttest for determining if a transaction creates a security interest:(A) the consideration the lessee must pay the lessor for theright to possession and use of the goods at issue must be“an obligation for the term of the lease and ... not subject totermination by the lessee,” and (B) one of the following fourrequirements must be met: (i) “the original term of the leaseis equal to or greater than the remaining economic life of thegoods;” (ii) the lessee must “renew the lease for the remainingeconomic life of the goods” or “become the owner of thegoods;” (iii) the lessee has an option to renew the lease forthe remaining economic life of the goods for either nominal

consideration or no additional consideration; or (iv) the lesseehas an option to become the owner of the goods for eithernominal or no additional consideration. Cal. Com. Code §1203(b).

Here, the Agreement did not permit the Bernhards toterminate the transaction, thus meeting the first part of thebright-line test. Blackstone argues the Agreement meets noneof the four requirements set forth in the second part of thebright-line test, because there was no signed purchase optionunder which the Bernhards could become the owners of theEquipment for either nominal or no additional consideration.The Bernhards also allege, however, that “the original termof the finance agreement was equal [to] or greater than theeconomic life of the goods; i.e. the [Bernhards] have paid formore than the entire value of the equipment set at the inceptionof [the Agreement] and [Blackstone] ha[s] no meaningfulresidual interest in said equipment.” (FACC ¶ 13.) The Courtholds that this is a factual allegation that, if proven, wouldestablish under the bright-line test that the Agreement createda security interest and not a true lease.

*3 Third, the Court concludes that the Bernhards’ sixthclaim for relief for breach of the covenant of good faith andfair dealing is based solely on the Bernhards’ allegation thatBlackstone “fail[ed] to honor the $1.00 purchase option in theagreement.” FACC ¶ 60.) As the Court has already held, theAgreement is unambiguous and does not contain a purchaseoption. Therefore, the Court dismisses the sixth claim of theFACC without prejudice.

Fourth, the Court concludes that Bernhards’ third througheighth claims do not fail as a matter of law, becausethe Bernhards’ allege that “misrepresentations were madeby Counter–Defendant Blackstone directly and through itsagents ....” (See, e.g., FACC ¶¶ 37, 45.) Under Rule 12(b)(6), the Court accepts these allegations as true. Therefore,the claims survive, regardless of whether Counter–DefendantRichard London was or was not an agent of Blackstone.

Finally, the Court notes that, although Blackstone states onpage four of its Motion that the Bernhards’ failure to submit asummons to Counter–Defendant Richard London is “a basisfor the Motion to Dismiss,” Blackstone makes no furtherarguments as to why this is so, nor does it present any legalauthority supporting this argument.

IV. CONCLUSION








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For the foregoing reasons, the Court GRANTS IN PARTAND DENIES IN PART Plaintiff’s Motion to Dismiss theFirst Amended Counterclaim. Any amended Counterclaimmust be filed within 45 days.

All Citations

Not Reported in Fed. Supp., 2011 WL 13227750



In re Phoenix Equipment Co., Inc., Not Reported in B.R. (2009)2009 WL 3188684, 52 Bankr.Ct.Dec. 65


2009 WL 3188684(Not for Publication–Electronic Docketing ONLY)

United States Bankruptcy Court,D. Arizona.

In re PHOENIX EQUIPMENTCOMPANY, INC., Debtor.

Park Western Financial Corporation, an Arizonacorporation dba Park Western Leasing, Movant,

v.Phoenix Equipment Company, Inc., Respondent.

No. 2:08–bk–13108–SSC.|

Sept. 30, 2009.

West KeySummary

1 BankruptcyContracts Assumable; Assignability

Secured TransactionsOther transactions distinguished

A creditor was not entitled to compel aChapter 11 debtor to assume or reject equipmentleases. The creditor entered into a sale-leasebackagreement with the debtor for certain equipmentin order to provide the debtor with additionalworking capital, but the leases were actuallydisguised security agreements. The creditorestablished an arbitrary amount for the debtorto exercise a ten percent purchase option onthe items of equipment at the expiration ofthe agreements, which was set low enough toguarantee that the Debtor would have no choicebut to purchase the equipment at the expirationof the agreements to remain in business. A.R.S.§ 47–1203.

8 Cases that cite this headnote


Thomas G. Luikens, Ayers & Brown, P.C., Phoenix, AZ, forDebtor.

MEMORANDUM DECISION CONCERNINGWHETHER AN AGREEMENT IS A TRUE LEASE

SARAH SHARER CURLEY, United States BankruptcyJudge.

I. INTRODUCTION

*1 On December 12, 2008, Park Western Financial Corp.dba Park Western Leasing (“Park Western”) filed a “Motionto Compel Debtor to Assume or Reject Equipment Leases;[or] in the Alternative, Motion for Relief from AutomaticStay to Permit Possession and Disposal of Certain LeaseEquipment” (“Motion to Compel”). On January 5, 2009, theDebtor, Phoenix Equipment Company, Inc., (“Debtor”) filedits Response to Park Western's Motion to Compel. Aftera series of pre-trial matters, scheduling conferences, andevidentiary hearings were held, the parties filed post-trialmemoranda of law. Thereafter the Court took the matter underadvisement.

Taking into account the evidence presented at trial, thearguments of the parties, the documents filed, and the entirerecord before the Court, the Court has set forth in thisdecision its findings of fact and conclusions of law pursuantto Fed.R.Civ.P. 52, Bankruptcy Rule 7052. The Court hasjurisdiction over this matter, and this is a core proceeding. 28U.S.C. §§ 1334 and 157 (West 2009).

II. FACTUAL HISTORY

The Debtor and Park Western have entered into a number oftransactions over the years. As of the summer of 2001, bothparties described their business relationship as successful.The Debtor needed equipment for its excavating operations,and Park Western provided the financing or the equipmentto the Debtor. During the course of their relationship, theDebtor and Park Western entered into no fewer than tentransactions concerning the financing or lease of equipment.However, the Debtor experienced financial problems, and onSeptember 26, 2008, the Debtor filed its voluntary Chapter 11bankruptcy petition. Now the Debtor seeks a determinationfrom this Court as to the nature of its transactions withPark Western. The agreements currently at issue have beenlabeled “leases” by Park Western and have been consecutively





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numbered, beginning with number 262401 and ending in

number 262410. 1

The first agreement, No. 401, was purportedly a sixty-month

lease for a 2002 Trail King Trailer. 2 The Debtor selected theequipment, and Park Western purchased the equipment andleased it back to the Debtor. Although not provided for withinthe four corners of the contract, the parties verbally agreed

to a 10 percent purchase option at the end of the lease. 3 Atthe end of the lease term, the Debtor exercised the purchaseoption.

Park Western entered into a number of agreements withcustomers such as the Debtor. The terms and conditions ofthe other the agreements had conditions which were similarto secured transactions. For instance, whenever a customerentered into more than one alleged lease agreement with ParkWestern, it was required to use the equipment that was thesubject of earlier leases as “collateral” for the alleged newlease. Park Western described this document that provided“collateral” to it as a Continuing Cross–CollateralizationAgreement. Any item of equipment that had previously beenleased to a customer became security under the Cross–Collateral Agreement to ensure repayment of any otherobligations that were due and owing by the customer toPark Western. Furthermore, the Cross–Collateral Agreementprovided that if a customer exercised its purchase option atthe end of an agreement, concerning a particular item ofequipment, Park Western had the option to retain the title tothe equipment as “additional security” for any outstandingobligations between the parties. According to Park Western,when a customer completed the term of the lease andexercised its purchase option, Park Western's decision torelease its “security interest” in the equipment, and returnthe document of title to the customer, or retain the item ofequipment as ongoing collateral for future transactions wasbased upon an analysis of the customer's payment history andwhat other items of equipment remained as security for anyobligations still due and owing to Park Western. The better the“payment history” and “collateral position,” the more likelyit was that Park Western would release its security interest inthe equipment.

*2 Since the Debtor entered into multiple leases withPark Western, it was required to execute Continuing Cross–Collateralization Agreements. Since the Debtor entered into

ten alleged lease agreements, Nos. 401 through 410, 4 it was

required to enter into nine separate Cross–Collateralization

Agreements. 5

Prior to the start of 2008, the Debtor was current on allof its obligations with Park Western, and the relationshipbetween the parties was positive. The Debtor had paid,in full, Agreement Nos. 401 through 403, and the Debtorhad exercised its purchase option on these three “leases.”Upon exercising its purchase option under No. 401, theDebtor retained possession of the equipment. However, ParkWestern determined that the item of equipment that was thesubject of the No. 401 “lease” would become security for therepayment of the Debtor's other obligations to Park Westernunder the Continuing Cross–Collateralization Agreements.As to agreements Nos. 402 and 403, Park Western releasedany interest that it had in the equipment by returning theequipment titles to the Debtor.

On or about June 1, 2007, the Debtor and Park Westernentered into Agreement No. 407 for a 2006 CPS End Dump.Approximately one year later, Scott Stern (“Mr.Stern”),the principal of the Debtor, discussed with John Lieber(“Mr.Lieber”), a business development manager for ParkWestern, the Debtor's need for up to $500,000 in additionalworking capital. As a result of these discussions, Mr. Lieberspoke with James Mangieri (“Mr.Mangiri”), the senior vicepresident of Park Western, about the possibility of providingthe Debtor with the necessary financing. In order to facilitatethe transaction, Messrs. Mangieri and Lieber decided to enterinto an agreement whereby Park Western would purchasecertain used equipment from the Debtor, and would thenlease this same equipment back to the Debtor. Park Westerndescribed the transaction as a sale-leaseback arrangement.

Because the Debtor needed the working capital, Mr. Stern,on behalf of the Debtor, provided Park Western with a list ofall of the Debtor's equipment which it owned free and clearof any security interest. Park Western then selected a totalof eighteen pieces of equipment which it agreed to purchase

from the Debtor for approximately $514,000. 6 Although Mr.Stern requested one agreement, Park Western separated theequipment into two separate agreements, Nos. 409 and 410.Each agreement, however, only described seven pieces ofequipment. Mr. Lieber, of Park Western, explained that onlyfourteen items of equipment were listed, because they wereutilized on the road and, hence, had separate certificates oftitle issued with respect to them. The remaining four items,however, did not have certificates of title, so Park Westerncreated two separate Additional Collateral Agreements, and




listed two untitled pieces of equipment in each of theAdditional Collateral Agreements. Park Western then filedthese Additional Collateral Agreements, along with separateUCC Financing Statements, with the Arizona Secretary ofState.

*3 Beginning in February or March of 2008, Mr. Sterntestified that the Debtor experienced a business slowdown,and as a result, the Debtor began to fall behind in its paymentsto Park Western. By this time, the Debtor still had at least sixoutstanding agreements with Park Western, Nos. 405 through

410. 7 Since the Debtor was not using all of its equipment,it approached Park Western about the possibility of sellingcertain pieces of equipment subject to Nos. 409 and 410.Park Western agreed to the sale of four pieces of equipmentselected by the Debtor, and the Debtor proceeded with thesales of the equipment. Three separate sales took place over

a short period of time. 8

The Debtor sold the first piece of equipment forapproximately $85,565. Park Western utilized the saleproceeds to make the remaining monthly payments dueunder Agreement Nos. 405 and 408, to allow the Debtorto exercise the 10 percent purchase option on AgreementNos. 405, 406, and 408, and to allow the Debtor to makethe July 2008 payments on Agreement Nos. 407, 409, and

410. 9 However, even though the sale proceeds allowed theDebtor to pay all obligations arising under three of theagreements, Park Western did not release its security interestin the equipment. Instead the items of equipment remainedas collateral for any other obligations that the Debtorowed to Park Western pursuant to the Continuing Cross–Collateralization Agreements. After all of the payments weremade, as outlined above, Park Western utilized the remainingbalance of $23,882.99 from the sale of the item of equipmentas a new type of security deposit under No. 407.

Park Western attempted to justify its allocation of the saleproceeds. It set forth its standard policy of applying thesale proceeds to the final payments due and owing underan agreement, not for the payment of any future obligationsdue and owing under any other agreement. Thus, the Debtorwas required to continue making its monthly payments underNo. 407 until the agreement had a remaining balance of$23,882.99. Then, and only then, could the Debtor apply thenew security deposit in the amount of $23,882.99 in reductionof the final payments under the agreement, with the Debtorbeing offered the opportunity to purchase the equipment forthe 10 percent purchase option.

The Debtor disagreed with this application of the saleproceeds. The Debtor first argued that instead of making theJuly payments under Agreement Nos. 407, 409, and 410, allof the sale proceeds should have been applied to pay off oneor more of the agreements. According to the Debtor, if theproceeds had been applied in this manner, there would havebeen sufficient net proceeds to pay all of the obligations dueand owing under Agreement No. 407. Moreover, the Debtorargued that even if the proceeds were not used in such amanner, the sum of $23,882.99 should have been appliedto future payments under the agreements, rather than as asecurity deposit. Finally, the Debtor argued that just as in thecase of Nos. 402 and 403, Park Western should have releasedits security interest in the equipment instead of requiring thatthe item of equipment remain as collateral for any obligationsstill due and owing to Park Western. If Park Western hadreleased its interest in the equipment, the Debtor could havesold the equipment in order to raise additional capital.

*4 After the first sale, the Debtor sold the remaining threepieces of equipment. These sales provided Park Western withnet proceeds in the amount of $77,168.99. Although the netproceeds from these three sales provided Park Western withsufficient funds to pay off the remaining obligations underAgreement No. 407, including the 10 percent purchase optionpayment, Park Western did not so apply the proceeds. Instead,it chose to hold the net proceeds as an additional securitydeposit. According to Park Western, it would have paid offAgreement No. 407, but it did not want to do so without

approval of this Court. 10 Park Western still retains thesecurity deposit in the amount of $23,882.99 as to AgreementNo. 407, and the net sale proceeds of $77,168.99.

III. LEGAL ANALYSIS

The Debtor argues that although Park Western filed a Motionto Compel, these “leases” are actually disguised securityagreements, and the Debtor will appropriately treat ParkWestern as a secured creditor in its plan of reorganization.Park Western takes the opposite position, arguing that theseare leases which the Debtor should be compelled to assumeor reject pursuant to 11 U.S.C. § 365.

Determining whether an agreement is a true lease or adisguised security agreement is governed by state law. Butnerv. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d

136 (1979). 11 A.R.S. § 47–1203 provides as follows:



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A. Whether a transaction in the form of a lease creates alease or security interest is determined by the facts of eachcase.

B. A transaction in the form of a lease creates a securityinterest if the consideration that the lessee is to pay thelessor for the right to possession and use of the goods isan obligation for the term of the lease and is not subject totermination by the lessee, and:

1. The original term of the lease is equal to or greater thanthe remaining economic life of the goods;

2. The lessee is bound to renew the lease for the remainingeconomic life of the goods or is bound to become the ownerof the goods;

3. The lessee has an option to renew the lease for theremaining economic life of the goods for no additionalconsideration or for nominal additional consideration oncompliance with the lease agreement; or

4. The lessee has an option to become the owner ofthe goods for no additional consideration or for nominaladditional consideration on compliance with the leaseagreement.

C. A transaction in the form of a lease does not create asecurity interest merely because:

1. The present value of the consideration the lessee isobligated to pay the lessor for the right to possession anduse of the goods is substantially equal to or is greater thanthe fair market value of the goods at the time the lease isentered into;

2. The lessee assumes risk of loss of the goods;

3. The lessee agrees to pay, with respect to the goods, taxes,insurance, filing, recording or registration fees or serviceor maintenance costs;

*5 4. The lessee has an option to renew the lease or tobecome the owner of the goods;

5. The lessee has an option to renew the lease for afixed rent that is equal to or greater than the reasonablypredictable fair market rent for the use of the goods forthe term of the renewal at the time the option is to beperformed; or

6. The lessee has an option to become the owner of thegoods for a fixed price that is equal to or greater than thereasonably predictable fair market value of the goods at thetime the option is to be performed.

D. Additional consideration is nominal if it is less thanthe lessee's reasonably predictable cost of performingunder the lease agreement if the option is not exercised.Additional consideration is not nominal if:

1. When the option to renew the lease is granted to thelessee, the rent is stated to be the fair market rent for theuse of the goods for the term of the renewal determined atthe time the option is to be performed; or

2. When the option to become the owner of the goods isgranted to the lessee, the price is stated to be the fair marketvalue of the goods determined at the time the option is tobe performed.

E. The “remaining economic life of the goods” and“reasonably predictable” fair market rent, fair market valueor cost of performing under the lease agreement must bedetermined with reference to the facts and circumstances atthe time the transaction is entered into.

The Arizona statute, however, is modeled after UCC § 1–

203. 12 Therefore, a brief history of UCC § 1–203 is pertinentto analyzing whether an agreement is a true lease or adisguised security agreement. Prior to 1987, UCC § 1–203(West 1986) stated as follows:

Whether a lease is intended assecurity is to be determined by thefacts of each case; however, (a) theinclusion of an option to purchasedoes not of itself make the leaseone intended for security, and (b)an agreement that upon compliancewith the terms of the lease the lesseeshall become or has the option tobecome the owner of the property forno additional consideration or for anominal consideration does make thelease one intended for security.


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Based upon this language, the courts fashioned a multi-factor approach in determining whether an agreement was atrue lease. However, the critical factor in the approach wasascertaining whether the parties intended a lease or a securityagreement at the inception of the contract.

Over the years, the drafters of the Uniform Commercial Codehad received a number of requests to revise Section 1–203.In 1987, the drafters concluded that Section 1–203 should beamended and provided the proposed language. In Commentsto the revised Section, they stated:

[r]eference to the intent of the partiesto create a security interest has ledto unfortunate results. In discoveringintent, courts have relied upon factorsthat were thought to be more consistentwith sales or loans than leases.Most of these criteria however, areas applicable to true leases asto security interests.... Accordingly,amended Section 1–201(37) deletes allreferences to the parties' intent.

*6 In creating the revised UCC § 1–201(37), the drafterssought to refocus the attention of the courts and the parties to asmall set of objective factors commonly associated with a truelease versus a security agreement. Accordingly, the drafterseliminated all references to the parties' intent. The revisedversion, UCC § 1–203, now provides:

(a) Whether a transaction creates a lease or security interestis determined by the facts of each case.

(b) A transaction in the form of a lease creates a securityinterest if the consideration the lessee is to pay the lessorfor the right to possession and use of the goods is anobligation for the term of the lease and is not subject totermination by the lessee, and:

(1) the original term of the lease is equal to or greater thanthe remaining economic life of the goods;

(2) the lessee is bound to renew the lease for the remainingeconomic life of the goods or is bound to become theowner of the goods;

(3) the lessee has an option to renew the lease for theremaining economic life of the goods for no additionalconsideration or nominal additional consideration uponcompliance with the lease agreement; or

(4) the lessee has an option to become the owner ofthe goods for no additional consideration or nominaladditional consideration upon compliance with the leaseagreement.

(c) A transaction in the form of a lease does not create asecurity interest merely because:

(1) the present value of the consideration the lessee isobligated to pay the lessor for the right to possession anduse of the goods is substantially equal to or is greaterthan the fair market value of the goods at the time thelease is entered into;

(2) the lessee assumes risk of loss of the goods,

(3) the lessee agrees to pay, with respect to the goods,taxes, insurance, filing, recording, or registration fees, orservice or maintenance costs;

(4) the lessee has an option to renew the lease or to becomethe owner of the goods,

(5) the lessee has an option to renew the lease for afixed rent that is equal to or greater than the reasonablypredictable fair market rent for the use of the goods forthe term of the renewal at the time the option is to beperformed; or

(6) the lessee has an option to become the owner of thegoods for a fixed price that is equal to or greater than thereasonably predictable fair market value of the goods atthe time the option is to be performed.

(d) Additional consideration is nominal if it is less thanthe lessee's reasonably predictable costs of performingunder the lease agreement if the option is not exercised.Additional consideration is not nominal if:

(1) when the option to renew the lease is granted to thelessee, the rent is stated to be the fair market rent for theuse of the goods for the term of the renewal determinedat the time the option is to be performed; or

(2) when the option to become the owner of the goods isgranted to the lessee, the price is stated to be the fair




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market value of the goods determined at the time theoption is to be performed.

*7 (e) The “remaining economic life of the goods” and“reasonably predictable” fair market rent, fair marketvalue, or cost of performing under the lease agreementmust be determined with reference to the facts andcircumstances at the time the transaction was enteredinto.

UCC § 1–203 establishes a two-step test for determiningwhether an agreement constitutes a true lease or a disguisedsecurity agreement. Under the first step of the test, the courtsare to apply what has been described as the “Bright–LineTest.” The Bright–Line Test is derived from Section 1–203(b)which sets forth the objective criteria to determine whetherthe parties have entered into a security agreement. In the two-part test, the courts must ascertain (i) whether the lease isterminable by the lessee, and (ii) whether at least one in aseries of four enumerated conditions is met. If the lease is notterminable by the lessee and one or more of the enumeratedconditions is present, then the contract is a per se securityagreement, and the court's analysis may conclude.

However, if the lease is terminable by the lessee, or ifthe lease is not terminable by the lessee but none of theenumerated conditions is present, then a security interestwill not be conclusively found to exist, and the court willneed to consider other factors. Most courts which have beenrequired to complete a further factual analysis have focusedtheir attention on whether the facts reflect that the lessorhas retained a “meaningful residual interest” in the goods.Addison v. Burnett, 41 Cal.App.4th 1288, 49 Cal.Rptr.2d132 (1996). In determining whether the lessor has retainedan economically meaningful residual interest in the goods,courts must look to the economic effect of the purported leaseagreement, rather than the intent of the parties. In re QDSComponents, Inc., 292 B.R. 313, (Bankr.S.D.Ohio 2002).

Under both the Bright–Line Test and the subsequent factualanalysis, if necessary, most courts have focused their attentiononly on those facts which existed at the time the partiesentered into the agreement. “When the parties sign thecontract and become bound, they have either made a leaseor a security agreement. That agreement is based upon theirpresent judgments about values, useful life, inflation, risk ofnon-payment, and other matters.... Foresight not hindsightcontrols.” James J. White & Robert S. Summers, UniformCommercial Code vol.4 § 30–3, 9 (5th ed. West 2002).This analysis “focuses on all the facts and circumstances

surrounding the transaction as anticipated by the partiesat the contract inception....” In re Grubbs, 319 B.R. 698,717 (Bankr.M.D.Fla.2005). This Court will now apply theobjective factors outlined above to the facts of this case.In determining the various objective factors which arenow required under Section 1–203(b), the party seeking tochallenge the nature of the agreement carries the burdenof proof by a preponderance of the evidence. In this case,Park Western has requested that the Debtor assume or rejectthe agreements. The Debtor questions the nature of theseagreements, seeking to recast them as security agreements.Under these facts, the Debtor carries the burden of proof. Inre WorldCom, Inc., 339 B.R. 56 (Bankr.S.D.N.Y.2006).

A. Bright–Line Test*8 The first prong of the Bright–Line Test requires the

Court to determine whether the contract is terminable bythe lessee. In this case, the explicit terms of the underlying

agreements, 13 as well as the testimony of the Debtor'sprincipal and the representatives of Park Western are clear thatthe agreements were not terminable by the Debtor, as lessee.Accordingly, the first prong of the Bright–Line Test is met.

The Court must now determine whether one of the factorsset forth under Subsections (1) through (4) of the securityinterest test has been met. As a preliminary matter, since theagreements do not provide for mandatory or optional renewal,it is unnecessary for the Court to consider Subsections (2) and(3) of the Bright–Line Test, as both of these sections focuson a lessee's duty or option to renew the lease. Furthermore,the parties agree that at the inception of the agreements,they anticipated that the equipment subject to the agreementswould have economic life at the end. Therefore, Subsection(1) is not applicable to these agreements. Thus, the Court mustonly determine whether the agreements contained a purchaseoption. If the Court so finds, then the remaining issue iswhether the purchase option in one or more of the agreementswas nominal.

The agreements at issue in this case are Nos. 407, 409,and 410. Agreement No. 407 consists of the lease, as wellas a Continuing Cross–Collateralization Agreement, whileAgreement Nos. 409 and 410 consist of the leases, the Cross–Collateralization Agreements, and an Additional Collateral

Agreement. 14 Pursuant to the Additional CollateralAgreement, the Debtor pledged numerous items of equipmentas additional collateral to secure the Debtor's performance

under the lease agreements. 15 The Additional Collateral



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Agreements contain language that specifically prohibited thesale of the collateral, and the use of such proceeds to beapplied to any lease payment or obligation pursuant to the

underlying lease agreement. 16 Even though the agreementprohibited the use of proceeds, the course of dealing betweenthe parties was to allow it. Moreover, none of the leasescontain any language which allows the Debtor the optionto purchase an item of equipment at the expiration of theagreement. Nevertheless, the evidence presented by both theDebtor's principal and the representatives of Park Westernreflects that the Debtor had an unwritten or verbal option topurchase the equipment at the expiration of any lease for 10percent of the original cost of the equipment.

Is such an oral agreement enforceable? When interpretinga contract, the courts may consider the parties' course ofdealing. A course of dealing is defined as “a sequence ofconduct concerning previous transactions between the partiesto a particular transaction that is fairly to be regarded asestablishing a common basis of understanding for interpretingtheir expressions and other conduct.” A.R.S. § 47–1303(B).The existence of a course of dealing between two partiesis a question of fact. Mobile Discount Corp. v. LuBean,134 Ariz. 350, 353, 6565 P.2d 639, 642 (Ariz.App.1982). Acourse of dealing may be used to ascertain the meaning ofthe parties' agreement, to give particular meaning to specificterms of the agreement, and to supplement or qualify theterms of an agreement. A.R.S. § 47–1303(D). The expressterms and course of dealing must be construed as consistentwith one another whenever such a reading of the contractterms is reasonable. A.R.S. § 47–1303(E). However, if sucha consistent reading is not possible, then the express termsof the contract will prevail over the parties' prior course ofdealing. Id.

*9 At issue is the treatment of the equipment when the lease

term expires. Paragraph 13 of the leases, 17 which deals withthis issue, states:

SURRENDER. By this Lease, Lessee acquires noownership rights in the Equipment. Upon the expiration, orearlier termination or cancellation of this Lease, or in theevent of a default ... Lessee, at its expense, shall return theEquipment ... by delivering it ... to such place as Lessormay specify.

The parties agree that in the course of their relationship,this language has always been contained in their agreements.However, the parties state that despite this language, the

Debtor has always had the option, at the expiration ofany lease, to purchase the equipment for 10 percent of theoriginal cost of the equipment. Park Western concedes thatfor purposes of Agreement Nos. 407, 409, and 410, theparties again verbally agreed that the Debtor had a 10 percentpurchase option upon the expiration of the agreements.Furthermore, when the Debtor fell behind in its paymentsunder the agreements, Park Western allowed the Debtor toselect and sell certain pieces of equipment subject to theagreements, and Park Western allocated a portion of the netproceeds to the payment of the 10 percent purchase option tocertain items of equipment.

The Court finds that the parties course of dealing providedthe Debtor with the option to purchase the subject itemsof equipment for 10 percent of the original cost of theequipment. The Court also finds that this purchase optiondoes not contradict Paragraph 13 of the lease. Park Westernnever implemented this provision of the agreement. Ratherthan requiring a surrender of the equipment, Park Westernnever specified a place for the Debtor to return the itemof equipment. Park Western supplemented Paragraph 13 ofthe lease by allowing the Debtor to pursue an option topurchase one or more items of equipment at a fixed price of10 percent of the original cost of the equipment. Accordingly,the parties' course of dealing establishes that Agreement Nos.407, 409, and 410 included a 10 percent purchase option uponcompletion of the contract.

Having determined that a purchase option exists, the Courtmust next consider whether such a purchase option is“nominal.” UCC § 1–203(d)(2) provides that the option topurchase is not nominal if the purchase price represents thefair market value of the goods as of the date in which thelease has been entered into between the parties. UCC § 1–203(d) also provides that additional consideration is nominal,if “it is less than the lessee's reasonably predictable costof performing under the lease agreement if the [purchase]option is not exercised.” Based upon this record, the Court isunable to determine whether the purchase option is nominal.“The date of the transaction, rather than a future date, isthe more appropriate point to determine the adequacy of theoption price.” In re Zaleha, 159 B.R. 581, 586 (Bankr.D.Idaho1993); See also, In re Marhoefer Packing Company, Inc., 674F.2d 1139 (7th Cir.1982); In re WorldCom, Inc., 339 B.R.56 (Bankr.S.D.N.Y.2006). The Bright–Line Test focuses onspecific valuations placed on the goods at the time that theparties entered into the contract. However, under the Bright–Line Test, the Debtor has failed to present any valuation







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evidence to establish, at the inception of the agreementsbetween the parties, its estimates regarding the fair marketvalue of the equipment when the leases would expire, orthe costs of not exercising the purchase options at theexpiration of the leases. Therefore, the Court is unable todetermine, under the Bright–Line Test, that the purchaseoption is nominal. Since the Court is unable to find oneof the enumerated factors under the security agreementpart of Section 1–203(b), the Court must consider whetheradditional facts associated with the transaction evidence thatthe agreements between the parties were in the nature ofdisguised secured transactions.

B. Facts of the Case:*10 Since the Debtor has been unable to meet the objective

factors set forth in the Bright–Line Test, the Court mustnext determine whether, based upon the facts of the case,the contract is a disguised security agreement. See UCC§ 1–203(a). “[T]he determination of whether an agreementcreates a true lease ... or a security interest ... is dependenton the economics of the transaction.” PSINet, Inc. v. CiscoSystems Captial Corp., 271 B.R. 1, (Bankr.S.D.N.Y.2001); Inre WorldCom, Inc., 339 B.R. 56, 69 (Bankr.S.D.N.Y.2006).In the absence of statutory guidance, a majority of courtshave determined that such an inquiry is based upon “whetherthe lessor has retained a meaningful reversionary interest inthe goods.” Addison v. Burnett, 41 Cal.App.4th 1288, 49Cal.Rptr.2d 132 (1996).

Two factors are considered as having great significance indetermining whether the lessor has retained a meaningfulreversionary interest in the goods. These two factors are: (i)whether the lease contains an option to purchase which isnominal and (ii) whether the lessee develops equity in theproperty, such that the only economically reasonable optionfor the lessee is to purchase the goods. Addison v. Burnett,41 Cal.App.4th at 1296, 49 Cal.Rptr.2d 132; In re Zaleha,159 B.R. 581, 585 (Bankr.D.Idaho 1993). However, althoughthese factors are most commonly used in determining whetherthe Debtor retained a meaningful reversionary interest, theCourt is not limited to these two factors alone. In reWorldCom, Inc., 339 B.R. 56, 72 (Bankr.S.D.N.Y.2006). Infact, as other courts have observed, these two factors seemto provide a redundant examination of those items alreadyconsidered in the Bright–Line Test. Id. at 73; In re QDSComponents, Inc., 292 B.R. at 343 n. 20. Accordingly, theCourt finds that it is not limited to simply determiningwhether the economic realities of the transaction establishthat Park Western obtained a meaningful residual interest, but

that it may also consider any number of other facts for thepurposes of determining whether the parties entered into atrue lease or a disguised security agreement.

Having previously determined that the Debtor did not provideadequate valuation evidence to establish that the purchaseprice is nominal, the Court need not repeat its Bright–LineTest valuation analysis. Instead, the Court will focus on otherrelevant facts which existed at the time the parties entered intothe agreements, such as those events which occurred beforeand at the time the parties entered into Agreement Nos. 409

and 410. 18

Prior to entering into Agreement Nos. 409 and 410, theDebtor approached Park Western, to obtain operating capitalfor the Debtor's operations. The Debtor estimated that itneeded between $350,000–$500,000 in financing. In orderto determine whether it could provide such financing, ParkWestern requested a list of all of the Debtor's unencumberedassets. From this list, Park Western determined that the Debtorhad sufficient value in its assets to facilitate the transaction.Accordingly, Park Western selected eighteen items of theDebtor's equipment, a majority of which ranged in agefrom eight to twelve years, which it “purchased” from theDebtor. Fourteen of the eighteen items had certificates oftitle, issued by the Arizona Motor Vehicle Division, so ParkWestern obtained possession of the titles. Seven items of titledequipment were listed in Agreement No. 409, the balance ofthe items of titled equipment were listed in Agreement No.410. The remaining four, untitled items of equipment werelisted in two separate Additional Collateral Agreements. Inorder to secure its interest in the non-titled equipment, ParkWestern properly filed the Additional Collateral Agreementsand UCC Financing Statements with the Arizona Secretary ofState. According to Mr. Stern, the Debtor's principal, the itemsit sold to Park Western constituted a majority of the Debtor'sequipment, without which the Debtor could not survive as agoing concern.

*11 Agreement Nos. 409 and 410 both had a durationof forty-eight months, and while the agreements did notprovide for an option to purchase the equipment, as previouslydiscussed, the parties' course of dealing established that theDebtor had a right to purchase the equipment for 10 percentof the original cost of the equipment. As with the priorcontracts, the Debtor also entered into Continuing Cross–Collateralization Agreements, which allowed Park Western,at its discretion, to retain its security interest in the equipmentif the Debtor exercised its purchase option.



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Considering these agreements within the greater context ofthe parties' relationship establishes that Agreement Nos. 409and 410 were, in fact, sophisticated financing agreements.Although there are a variety of facts which are useful incoming to this conclusion, the most critical facts are thoseassociated with the Debtor's ability to exercise a purchaseoption on any of the items of equipment. The Court observesthat irrespective of the original terms of the agreements, or thevalue or use of the equipment, the Debtor retained the rightto purchase the equipment for a constant option price of 10percent of the original cost of the equipment. For example,while Agreement No. 407 had a duration of sixty months,and Agreement Nos. 409 and 410 had a duration of forty-eight months, the purchase option for the equipment remainedthe same. Furthermore, while earlier agreements involved thepurchase of brand new equipment to be utilized by the Debtorin its operations, Agreement Nos. 409 and 410 consistedof equipment which, on average, ranged in age from 8–12years. How is it that brand new equipment depreciates atexactly the same rate as used equipment, and why has thepurchase option been set at the same percentage no matterthe age of the equipment or how the equipment is used in theDebtor's operations? It also makes no sense that the Debtor,who desired to remain an ongoing concern, would provideall of its equipment used in its operations and which in manycases was unencumbered to Park Western, relinquishing allindicia of ownership to the equipment. Accordingly, the onlyreasonable conclusion is that the 10 percent purchase optionwas not, in fact, Park Western's attempt at the inception of theagreements to place a fair market value on the equipment atthe end of the lease term. Instead, the Court finds that ParkWestern included a purchase option price that bore no relationto the anticipated fair market value of the equipment at theexpiration of the agreements.

To understand the purpose of the 10 percent purchase option,the Court focuses on two specific facts. First, throughoutthe seven-year relationship of the parties, the Debtor alwaysexercised the purchase option, never returning any equipmentto Park Western. Second, to enter into Agreement Nos. 409and 410, the Debtor needed to sell Park Western most of itsequipment, without which the Debtor would have been unableto operate. Mr. Stern, the Debtor's principal, also testified thathad the Debtor not been able to repurchase the equipment at aprice less than what it thought the equipment at the expirationof the agreements was worth, it would not have entered intothe agreements. In essence, the Debtor needed financing, nota lease arrangement.

*12 Based upon these facts, the Court finds that the 10percent purchase option was not an estimate of the anticipatedfair market value of the property at the expiration of theagreement. In fact, the application of the 10 percent purchaseoption to all of the items of equipment, given the myriaddifferences between the items of equipment, leads the Courtto conclude that the 10 percent purchase option was chosenby Park Western for one of two reasons. Either Park Westernincluded the purchase option to disguise the fact that it wasentering into a secured transaction, or given the fact thatthe Debtor desperately needed financing to continue with itsoperations, Park Western set the purchase option at a nominalamount in order to guarantee that the Debtor's only reasonableeconomic choice to remain in business was to exercisethe purchase option. It does not matter which alternativemotivated Park Western to act, the Court finds that eitheralternative evidences the creation of a disguised securityagreement, rather than a lease. Accordingly, the Court findsthat Agreement Nos. 407, 409, and 410 are disguised securityagreements.

IV. CONCLUSION

The Court has analyzed the parties' agreements, pursuantto A.R.S. § 47–1203, to determine whether the parties'agreement constitutes a true lease or a disguised securityagreement. The Court concludes that under the Bright–LineTest, the Debtor has shown that it did not have the ability toterminate any of the agreements with Park Western. However,the Debtor failed to provide sufficient evidence to reflectone of the four objective factors necessary under the Test.However, under the second, less rigid test which considersadditional facts, the Court finds that at the time the partiesentered into Agreement Nos. 407, 409, and 410, the Debtorrequired financing to continue with its operations. At thattime, Park Western established an arbitrary amount for theDebtor to exercise the purchase option on the items ofequipment at the expiration of the agreements, which amountwas set low enough to guarantee that the Debtor would haveno choice but to purchase the equipment at the expirationof the agreements to remain in business. Accordingly, theCourt concludes that Agreement Nos. 407, 409, and 410 aredisguised security agreements.

1 Throughout the Decision, references to the leasesshall be based upon the last three numbers of the





lease. For example, lease number 262401 shall bereferred to as 401.

2 See Debtor Exhibit A.

3 The 10% figure was based upon the originalpurchase price of the equipment provided to theDebtor. For example, if the purchase price of theequipment was $200,000, then the purchase optionwould be $20,000. It was not related to the fairmarket value of the equipment.

4 See Docket No. 45; Exhibit A.

5 The Debtor was not required to enter intoa Continuing Cross–Collateralization Agreementuntil it entered into its second “lease.” Thus, theContinuing Cross–Collateralization Agreementswere only required for Agreements Nos. 402through 410. Although only one exhibit ofthe Continuing Cross–Collateralization Agreementwas submitted into evidence, Mr. John Lieber, ofPark Western, testified that the Debtor entered intonine separate Continuing Cross–CollateralizationAgreements.

6 Park Western testified that it selected nineteenpieces of equipment. However, in reviewing theleases, it appears that there were only eighteenpieces of equipment included in the “leases”and associated Continuing Cross–CollateralizationAgreements.

7 The parties did not present evidence regarding No.404. Accordingly, it is unclear whether the Debtorwas still making payments on this agreement at thepoint when it began to fall behind in its payments.

8 There were two sales of one piece of equipment,and one sale of two pieces of equipment.

9 See Debtor Exhibit G. 6

10 The parties agree that the final sales took place priorto the Debtor filing its bankruptcy petition, so it isunclear why the proceeds were not used to pay offAgreement No. 407.

11 The parties do not disagree that the law of Arizonaapplies to their dispute.

12 “UCC” refers to the Uniform Commercial Code,which is prepared and reviewed by a distinguishedgroup of practitioners and academics, appointedby each state, the District of Columbia, theCommonwealth of Puerto Rico and the UnitedStates Virgin Islands. Each State and territorythen reviews the proposed provisions and decideswhether to adopt the Code as written, or to modifyit to be consistent with applicable State law. In thiscase A.R.S. § 47–1203 is virtually identical to UCC§ 1–203. The definition of “present value” formerlyembedded in Section 1–201(37) has been placed inSection 1–201(28), and is also found at A.R.S. §47–1201(28). It's important to note that UCC § 1–203 was formerly labeled UCC § 1–201(37).

13 See Docket No. 45; Exhibit A. On page 1 ofthe leases, between Paragraphs 3 and 4, thelanguage explicitly provides “THIS LEASE ISNOT CANCELABLE OR TERMINABLE BYLESSEE.”

14 See Park Western Exhibits 5 and 6.

15 [Missing Text].

16 See Park Western Exhibits 5 and 6, Line 4 on thefirst page of each exhibit.

17 See Park Western Exhibits 1, 2, and 3.

18 While the Court must still consider whetherAgreement No. 407 was a disguised securityagreement, the parties focused on the events whichoccurred prior to or at the time they entered intoAgreement Nos. 409 and 410. Accordingly, theCourt will focus its analysis on those Agreements.

All Citations

Not Reported in B.R., 2009 WL 3188684, 52 Bankr.Ct.Dec.65







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LeBlanc Nutritions, Inc. v. Advanced Nutra LLC, Not Reported in F.Supp.2d (2005)2005 WL 1398538


KeyCite Yellow Flag - Negative Treatment Distinguished by Hurst v. Buczek Enterprises, LLC, N.D.Cal., May 2, 2012


United States District Court,E.D. California.

LEBLANC NUTRITIONS, INC., Plaintiff,v.

ADVANCED NUTRA LLC, Defendant.

No. Civ. S-05-0581FCDJFM.|

June 14, 2005.


Louise Burda Gilbert, Weintraub Genshlea Chediak SproulLaw Corporation, Sacramento, CA, for Plaintiff.

Roger V. Jaffe, Law Office of Roger V. Jaffe, Sacramento,CA, for Defendant.

MEMORANDUM AND ORDER

DAMRELL, J.

*1 Plaintiff, LeBlanc Nutritions (“plaintiff”), filed acomplaint alleging intentional misrepresentation, negligentmisrepresentation, negligence, breach of contract, breach ofimplied warranties, and violation of the Federal Food, Drug,and Cosmetic Act (“FDCA”), 21 U.S.C. § 301, et seq. Thismatter is before the court on motion by defendant, AdvancedNutra LLC (“defendant”), to dismiss the complaint, or, in thealternative, to dismiss Claims One, Two, Three, Five and Six.For the reasons set forth below, the court grants defendant'smotion to dismiss Claim Six based on the FDCA, and denies

the motion in all other respects. 1

1 Because oral argument will not be of materialassistance, the court orders this matter submitted onthe briefs. E.D. Cal. Local Rule 78-230(h).

FACTUAL BACKGROUND

Plaintiff, a Japanese corporation, is an importer, exporter,and purchaser of certain manufactured food additives and

cosmetic products. (Pl.'s Compl. ¶ 7.) In late 2004, plaintiffpurchased 300 kilograms of a product represented to beUbidecarenone, an active enzyme, from defendant. (Pl.'sCompl. ¶ 11.) Global Distribution Inc. (“Global”) servedas plaintiff's broker, facilitating plaintiff's purchase of the

product. 2 (Pl.'s Compl. ¶¶ 8, 12.) Defendant requiredpayment of the more than $500,000.00 purchase price priorto delivery. (Pl.'s Compl. ¶¶ 7, 14.)

2 Pursuant to Fed.R.Civ.P. 12(b)(6), all factualallegations from the complaint are taken as true.

After receiving full payment, defendant shipped the productfrom California to plaintiff in Japan. (Pl.'s Compl. ¶¶ 16,17.) Documentation shipped with the product indicatedthat the product delivered was ninety-nine percent pureUbidecarenone. (Pl.'s Compl. ¶¶ 19-21.) Based on thisdocumentation and defendant's representations, plaintiffresold the product as Ubidecarenone to its customers in Japan.(Pl.'s Compl. ¶ 18.) However, according to the complaint,the product defendant delivered to plaintiff was not, in fact,Ubidecarenone. (Pl.'s Compl. ¶ 24.)

Plaintiff's customers notified plaintiff that the product wasnot Ubidecarenone. (Id.) They continue to return the productto plaintiff and request information about the identity of theproduct they purchased and used. (Pl.'s Compl. ¶ 25.) Plaintiffhas in turn requested the information from defendant, who hasrefused to provide it. (Pl.'s Compl. ¶ 25.)

Plaintiff filed a complaint on March 24, 2005 which allegesclaims for: 1) intentional misrepresentation of the product asUbidecarenone; 2) negligent misrepresentation; 3) negligencein representing, identifying, testing, packaging and handlingof the product defendant sold as Ubidecarenone; 4) breachof contract based on defendant providing a product notcontracted for in lieu of Ubidecarenone; 5) breach of impliedwarranties by defendant in providing a product inferior toUbidecarenone; and 6) violation of the FDCA, based on themisbranding of the product as Ubidecarenone.

On April 18, 2005, defendant filed the instant motion todismiss the complaint in its entirety based on plaintiff's failureto attach specified documents to the complaint and plaintiff'slack of legal standing in California to bring an action. Inthe alternative, defendant seeks dismissal of: 1) Claims One,Two, and Three because plaintiff cannot recover in tort forpurely economic losses; 2) Claim Five based on the lack ofprivity to support breach of implied warranty claims; and 3)


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Claim Six because the FDCA does not create a private rightof action.

STANDARD

*2 A complaint may be dismissed under Fed.R.Civ.P.

12(b)(6) 3 for: (1) lack of a cognizable legal theory or(2) insufficient facts to support a cognizable legal claim.Smilecare Dental Group v. Delta Dental Plan of Cal., Inc.,88 F.3d 780, 783 (9th Cir.1996). A complaint will not bedismissed under Rule 12(b)(6) “unless it appears beyonddoubt that plaintiff can prove no set of facts in support ofhis [or her] claim that would entitle him [or her] to relief.”Yamaguchi v. Dept. of the Air Force, 109 F.3d 1475, 1480 (9thCir.1997)(quoting Lewis v. Tel. Employees Credit Union, 87F.3d 1537, 1545 (9th Cir.1996)). “All allegations of materialfact are taken as true and construed in the light most favorableto the nonmoving party.” Cahill v. Liberty Mut. Ins. Co. ., 80F.3d 336, 337-38 (9th Cir.1996). Thus, the plaintiff need notnecessarily plead a particular fact if that fact is a reasonableinference from facts properly alleged. Retail Clerks Int'l Ass'nv. Schermerhorn, 373 U.S. 746, 753 n. 6, 83 S.Ct. 1461, 10L.Ed.2d 678 (1963).

3 Unless otherwise stated, further references to a“Rule” are to the Federal Rules of Civil Procedure.

Nevertheless, it is inappropriate to assume that the plaintiff“can prove facts which it has not alleged or that the defendantshave violated the ... laws in ways that have not been alleged.”Associated Gen. Contractors of Calif., Inc. v. Calif. StateCouncil of Carpenters, 459 U.S. 519, 526, 103 S.Ct. 897, 74L.Ed.2d 723 (1983). Moreover, the court “need not assumethe truth of legal conclusions cast in the form of factualallegations.” United States ex rel. Chunie v. Ringrose, 788F.2d 638, 643 n. 2 (9th Cir.1986).

In ruling on a motion to dismiss, the court may consider onlythe complaint, any exhibits thereto, and matters which maybe judicially noticed pursuant to Fed.R.Evid. 201. See Mir v.Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir.1988);Isuzu Motors Ltd. v. Consumers Union of United States, Inc.,12 F.Supp.2d 1035, 1042 (C.D.Cal.1998).

ANALYSIS

1. Failure to Attach Documents to the Complaint

Defendant argues that plaintiff's complaint providesinsufficient facts to state a cognizable legal claim because itfailed to attach to the complaint copies of, inter alia, the salesdocumentation, brokerage agreement, and proof of payment.

However, nothing in the Federal Rules of Civil Procedurerequires plaintiff to attach any document to the complaint.To satisfy federal notice pleading, plaintiff need only providea “short and plain statement of the claim showing that thepleader is entitled to relief.” Rule 12(b)(6); see Leathermanv. Tarrant County Intelligence & Coordination Unit, 507U.S. 163, 168, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993)(noting that the “liberal system of ‘notice pleading’ does notrequire detailed factual pleadings.”). A plaintiff in federalcourt is not expected to “plead his evidence or specificfactual details.” Gibson v. United States, 781 F.2d 1334, 1340(9th Cir.1986) (internal quotations omitted). Accordingly,defendant's motion to dismiss for failure to attach documentsto the complaint is DENIED.

2. Lack of Standing Based on Cal. Corp.Code §§ 2105,2203*3 Defendant next contends that plaintiff, as a foreign

corporation, does not have standing to maintain this actionbecause it did not obtain a certificate of qualification asrequired by Cal. Corp.Code §§ 2105 and 2203.

The California Corporations Code restricts foreigncorporations from transacting intrastate business withouthaving first obtained a certificate of qualification from theCalifornia Secretary of State. Cal. Corp.Code § 2105. Toobtain the certificate of qualification, a corporation mustidentify its state of incorporation, place of business, andprincipal office within California; designate an agent forservice of process; and consent to such service of process.Id. A foreign corporation conducting intrastate business thatdoes not register can be restricted from maintaining any actionor proceeding based upon that business. Cal. Corp.Code §

2203(c). 4

4 Cal. Corp.Code § 2203(c) provides:

“A foreign corporation ...which transacts intrastatebusiness without complyingwith Section 2105 shallnot maintain any action or




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proceeding upon any intrastatebusiness so transacted in anycourt of this state, commencedprior to compliance withSection 2105, until it hascomplied with the provisionsthereof and has paid to theSecretary of State a penaltyof two hundred fifty dollars($250) in addition to the feesdue for filing the statementand designation required bySection 2105 and has filedwith the clerk of the court inwhich the action is pendingreceipts showing the paymentof the fees and penalty and allfranchise taxes and any othertaxes on business or propertyin this state that should havebeen paid for the period duringwhich it transacted intrastatebusiness.

A defendant who seeks to challenge a plaintiff's standingunder Cal. Corp.Code §§ 2105 and 2203 may do so bymotion to dismiss for lack of standing. The defendant, asmoving party, bears the burden to prove that: 1) the actionarose out of plaintiff's transaction of intrastate business; and2) the action was commenced prior to plaintiff qualifyingto transact intrastate business. United Sys. of Ark., Inc. v.Stamison, 63 Cal.App.4th 1001, 1007, 74 Cal.Rptr.2d 407 (3dDist.1998), (following United Med. Mgmt. Ltd. v. Gatto, 49Cal.App.4th 1732, 1740, 57 Cal.Rptr.2d 600 (2d Dist.1996));McMillan Process Co. v. Brown, 33 Cal.App.2d 279, 284,91 P.2d 613 (3d Dist.1996). If the defendant prevails inchallenging standing, plaintiff's action may be dismissed orstayed pending compliance with Cal. Corp.Code § 2203.United Med., 49 Cal.App.4th at 1740, 57 Cal.Rptr.2d 600.

Defendant has failed to demonstrate that plaintiff wasrequired to comply with Cal. Corp.Code §§ 2105 and 2203prior to filing its complaint. Specifically, defendant failed tooffer any evidence that plaintiff engaged in intrastate businesstriggering the obligation to obtain a certificate of qualificationin accordance with Cal. Corp.Code § 2105. For purposesof qualification under that section “ ‘transact[ing] intrastatebusiness' means entering into repeated and successive

transactions of its business in this state, other than interstateor foreign commerce.” Cal. Corp.Code § 191(a). Plaintiff'scomplaint alleges that plaintiff entered into two transactions,between California and Japan. (Pl.'s Compl. ¶¶ 11, 22.)Courts have found similar transactions were not intrastatefor the purposes of Cal. Corp.Code §§ 2105 and 2203. SeeCal. Corp-Code § 191(c)(6) (“Soliciting or procuring orderswhere such orders require acceptance without the state tobecome contracts does not constitute transacting intrastatebusiness.”); Thorner v. Selective Cam Transmission Co., 180Cal.App.2d 89, 4 Cal.Rptr. 409 (1st Dist.1960) (finding nointrastate business even when negotiations are carried outwithin the state by an agent of a foreign corporation, ifthe final acceptance of the offer is made outside the state).Accordingly, the court DENIES defendant's motion to dismissbased on plaintiff's lack of standing.

3. Restriction on Tort Claims in the Commercial Code*4 Plaintiff alleges tort claims for intentional

misrepresentation, negligent misrepresentation, andnegligence against defendant due to its allegedly falserepresentations that the product supplied was Ubidecarenone.Defendant contends that plaintiff's tort claims must bedismissed because plaintiff prays for solely economic relief.

As a general rule, solely economic losses are not recoverablein tort. S.M. Wilson & Co. v. Smith Intl., Inc., 587 F.2d1363, 1376 (9th Cir.1978); Seely v. White Motor Co., 63Cal.2d 9, 18, 45 Cal.Rptr. 17, 403 P.2d 145 (1965). However,California courts recognize numerous to this general rule.Aas v. Superior Court, 24 Cal.4th 627, 643, 101 Cal.Rptr.2d718, 12 P.3d 1125 (2000) (allowing recovery in tort for acontract breach where an independent duty was violated);J'Aire Corp. v. Gregory, 24 Cal.3d 799, 157 Cal.Rptr. 407, 598P.2d 60 (1979) (allowing recovery for solely economic losswhere the risk of harm was foreseeable and where privity waslacking with defendant); Walker v. Signal Co., 84 Cal.App.3d982, 994-997, 149 Cal.Rptr. 119 (4th Dist.1978) (allowingthe possibility of recovery in contract cases if defendantfraudulently induced plaintiff to enter into contract).

However, the court does not need to delve into the intricaciesand exceptions to tort recovery for pure economic loss,since plaintiff's complaint can be construed to allege morethan solely economic damages. The complaint alleges that“[i]n addition, LeBlanc has suffered other damages not yetascertained.” (Pl.'s Compl. §§ 45, 59, 78.) The court canreasonably infer from these averments that plaintiff seeksmore than solely economic damages, including possible




































injury to property, employees, or customers caused by theunidentified product. See Yamaguchi, 109 F.3d at 1480; RetailClerks, 373 U.S. at 753 (finding reasonable inferences mustbe given to allegations in complaint).

Additionally, under Rule 8(e)(2), plaintiff is entitled toset forth multiple claims upon which “alternatively orhypothetically” relief could be based. Claims can be pled inthe alternative “regardless of the consistency and whetherbased on legal, equitable or maritime ground.” Rule 8(e)(2).“When two or more statements are made in the alternative andone of them if made independently would be sufficient, thepleading is not made insufficient by the insufficiency of oneor more of the alternative statements.” Id.

Here, plaintiff is entitled to plead in the alternative,particularly given defendant's contentions that privity islacking between plaintiff and defendant. (Mot. to Dismiss7:3-7). California courts permit negligence claims based onsolely economic loss between commercial litigants not inprivity when the harm to the plaintiff is foreseeable. FrankM. Booth, Inc. v. Reynolds Metals Co., 754 F.Supp. 1441(E.D.Cal.1991); See J'Aire Corp., 24 Cal.3d at 799, 157Cal.Rptr. 407, 598 P.2d 60. Thus, if it were determined, asdefendant alleges, that there is no basis for contractual relief,plaintiff clearly would be entitled to seek relief in tort.

*5 Accordingly, the court DENIES defendant's motion todismiss Claims One, Two, and Three.

4. Lack of PrivityPlaintiff alleges that defendant breached implied warrantiesof merchantability and fitness by providing a product inferiorto Ubidecarenone. Defendant contends that this claim mustbe dismissed because there is no privity between plaintiff anddefendant.

California has adopted the Uniform Commercial Code'simplied warranty provisions. Cal. Com.Code § 2315. Underthese provisions, “[v]ertical privity is a prerequisite inCalifornia for recovery on the theory of breach of impliedwarranties of fitness and merchantability.” U.S. Roofing,Inc. v. Credit Alliance Corp., 228 Cal.App.3d 1431, 1441,279 Cal.Rptr. 533 (3d Dist.1991). Vertical privity generallyrequires a direct contractual nexus between plaintiff anddefendant for a claim of breach of implied warrantyto succeed. Osbourne v. Subaru of America, Inc., 198Cal.App.3d 646, 656, 243 Cal.Rptr. 815 n.6 (3d Dist.1988).

Here, the complaint sets forth facts sufficient to allege privity.Specifically, the complaint alleges that “LeBlanc agreed inlate 2004 to purchase from Advanced Nutra 300 kilogramsof Ubidecarenone, an active enzyme, for resale to LeBlanc'scustomers in Japan.” (Pl.'s Compl. ¶ 11 (emphasis added)).In deciding a motion to dismiss, “[a]ll allegations of materialfact are taken as true and construed in the light most favorableto the nonmoving party.” Cahill v. Liberty Mut. Ins. Co., 80F.3d 336, 337-38 (9th Cir.1996). Thus plaintiff's allegationsare sufficient to survive a motion to dismiss. Accordingly, thecourt DENIES defendant's motion to dismiss Claim Five.

5. No Private Action under the FDCAIn Claim Six, plaintiff alleges that defendant violatedthe FDCA by misbranding the product it represented asUbidecarenone. Defendant moves to dismiss this claim on thegrounds that Congress did not create a private right of actionin the FDCA.

The FDCA provides that “all such proceedings for theenforcement, or to restrain violations, of this chapter shallbe by and in the name of the United States [or by a state incertain circumstances]” 21 U.S.C. §§ 332(a), 337. “Courtshave generally interpreted this provision to mean that noprivate right of action exists to redress alleged violations tothe FDCA.” Summit Tech., Inc. v. High-line Med. InstrumentsCo., 922 F.Supp. 299, 304 (S.D.Cal.1996); See also In re:Orthopedic Bones Screw Prods. Liab. Litig., 159 F.3d 817,824 (3d Cir.1998) (“It is ... well established that Congresshas not created an express or implied private cause of actionfor violation of the FDCA.”); PDK Labs., Inc. v. Friedlander,103 F.3d 1105, 1113 (2d Cir.1997), (holding plaintiff's suit“represents an impermissible attempt to enforce the FDCAthrough a private right of action”); Gile v. Optical RadiationCorp., 22 F.3d 540, 544 (3d Cir.1994), cert. denied, 513 U.S.965, 115 S.Ct. 429, 130 L.Ed.2d 342 (1994) (citing Pac.Trading Co. v. Wilson & Co., 547 F.2d 367, 370 (7th Cir.1976)(“violations of the FDCA do not create private rights ofaction”)); Mylan Lab., Inc. v. Matkari, 7 F.3d 1130, 1139 (4thCir.1993), cert. denied, 510 U.S. 1197, 114 S.Ct. 1307, 127L.Ed.2d 658 (1994) (same); Ginochio v. Surikos, Inc. 864F.Supp. 948, 956 (N.D.Cal.1994) (citing various courts thathave held “there is no private cause of action for violationof the [FDCA]”); see also Fielder v. Clark, 714 F.2d 77, 79(9th Cir.1983) (holding that the court lacked subject matterjurisdiction based on 21 U.S.C. § 337 because a “private partysuing in his own name [has] no jurisdiction under the Act”).










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*6 As a private party, plaintiff cannot maintain anaction under the FDCA. Accordingly, the court GRANTSdefendant's motion to dismiss Claim Six for violation of theFDCA.

CONCLUSION

For the foregoing reasons:1. Defendant's motion to dismiss Claim Six under FederalFood, Drug and Cosmetic Act is GRANTED.

2. In all other respects defendant's motion to dismiss isDENIED.

3. The parties shall file a joint status conference statement onor before August 1, 2005.

IT IS SO ORDERED

All Citations

Not Reported in F.Supp.2d, 2005 WL 1398538



In re Bonner, Not Reported in B.R. (2014)2014 WL 890477



United States Bankruptcy Appellate Panelof the Ninth Circuit.

In re Ernest Lincoln BONNER, Jr., Debtor.Elaine W. Wallace, Appellant,

v.Ernest Lincoln Bonner, Jr., Appellee.

BAP No. NC–13–1365–KiDJu.|

Bankruptcy No. 11–72110–WJL.|

Adversary No. 12–4177.|

Argued and Submitted on Feb. 20, 2014.|

Filed March 6, 2014.

Appeal from the United States Bankruptcy Court forthe Northern District of California, Honorable William J.Lafferty, III, Bankruptcy Judge, Presiding.


Elaine W. Wallace, Esq., argued pro se.

Craig K. Welch, Esq. of the Law Office of Craig K. Welchargued for appellee, Ernest Lincoln Bonner, Jr.

Before KIRSCHER, DUNN and JURY, Bankruptcy Judges.

MEMORANDUM 1

1 This disposition is not appropriate for publication.Although it may be cited for whatever persuasivevalue it may have (see Fed. R.App. P. 32.1), it hasno precedential value. See 9th Cir. BAP Rule 8013–1.

*1 Appellant Elaine W. Wallace (“Wallace”) appeals asummary judgment order avoiding her unperfected security

interest under 11 U .S.C. § 544(a)(1) 2 and preserving it forthe benefit of the estate. Because Wallace did not raise agenuine issue of material fact in opposition to the debtor'smotion for summary judgment, we AFFIRM.

2 Unless specified otherwise, all chapter, code andrule references are to the Bankruptcy Code, 11U.S.C. §§ 101–1532, and the Federal Rules ofBankruptcy Procedure, Rules 1001–9037. TheFederal Rules of Civil Procedure are referred to as“Civil Rules.”

I. FACTUAL BACKGROUNDAND PROCEDURAL HISTORY

A. Wallace's loans to debtorWallace, an attorney, met debtor Ernest Lincoln Bonner,Jr. (“Bonner”) in approximately 1993 through her law firmemployee. Bonner is a physician and also attended law school.Wallace's employee was Bonner's law school classmate.During their friendship, Bonner provided medical services toWallace and her family, and he would occasionally stop byWallace's law office and come to her home for dinner.

In October 1997, Bonner approached Wallace for a loan.According to Wallace, Bonner informed her that for the pastfew months he had been attempting to collect on previouslyuncollectible medical liens worth “hundreds of thousands ofdollars.” Bonner was confident he could collect on thesedebts, but told Wallace that he needed some money to tidehim over during the process. Wallace, who represents federalemployees in administrative proceedings, was reluctant atfirst, but after Bonner's repeated assurances that she wouldbe protected from any loss, even if Bonner filed bankruptcy,Wallace agreed to make the loan.

In exchange for the funds, on October 27, 1997, Bonnerexecuted a promissory note payable to Wallace for $45,350.00with 10% simple interest. The due date for the note wasJuly 27, 1999. The note also purported to give Wallace asecurity interest in various medical and office equipmentbelonging to Bonner Medical Corporation—a one-time entityof Bonner's. Bonner allegedly told Wallace that she did notneed to do anything further to protect herself; the note createdan enforceable security interest, and all she had to do was putit away for safekeeping. Wallace claimed that she relied onBonner's statements.

In January 1998, Bonner approached Wallace for a secondloan. Bonner allegedly told Wallace that he was unable tocollect on the medical liens, but that he was soon expectingmoney for services he had provided to Medi–Cal/Medicarepatients, which was more than enough to pay back everything


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he owed her. After Bonner provided Wallace with the sameassurances that she would be protected, Wallace agreed tomake the second loan. In exchange for the second loan, onJanuary 2, 1998, Bonner executed a similar promissory notepayable to Wallace for $16,000.00 with 10% simple interest.The note purported to give Wallace a security interest inthe same medical and office equipment, as well as Bonner'saccounts receivable. As with the first note, Bonner allegedlytold Wallace that she did not need to do anything further toprotect herself from any loss.

Wallace never filed a UCC–1 Financing Statement (“UCC–1”) with the California Secretary of State to perfect hersecurity interest in the named collateral. According toWallace's records, over the course of thirteen years (1997–2010) Bonner paid Wallace a total of $53,400.00.

B. Bonner's instant bankruptcy case and adversaryproceeding against Wallace*2 Bonner filed an individual chapter 11 bankruptcy case

on November 16, 2011. No trustee has been appointed, andBonner remains the debtor in possession.

Wallace filed an amended proof of claim asserting a securedclaim for $127,094.94 and an unsecured claim for $70,183.74.Bonner did not object. After Bonner filed the instantbankruptcy case, Wallace discovered through PACER that hehad filed four previous chapter 13 cases, two in 1998 and twoin 2008. Wallace never received notice of any of Bonner'sprior bankruptcies, either formally or otherwise, even thoughshe was a creditor during these time periods.

1. Bonner's adversary complaintBonner filed an adversary complaint against Wallace seekingto avoid her unperfected security interest in the accountsreceivable and equipment under § 544(a)(1) and to preservethe avoided interest for the benefit of the bankruptcyestate under § 551. In her answer, Wallace asserted severalaffirmative defenses, including that the debt was exceptedfrom discharge under § 523(a)(2) based on Bonner's fraud.

In an attempt to settle the matter, on November 19, 2012,Wallace and Bonner filed a stipulation allowing Wallace asecured claim for $45,000.00 and allowing the remainderof her claim as an unsecured claim for $152,378.68. Noorder was ever entered. The bankruptcy court later statedat the hearing on Bonner's motion for summary judgmentthat it denied the stipulation because Wallace had not

provided anything to support an enforceable security interest

in property of Bonner's estate. 3

3 See Hr'g Tr. (June 19, 2013) 3:24–4:4.

2. Bonner's motion for summary judgmentBonner moved for summary judgment on his complaint(“MSJ”), arguing that no material facts were in dispute.Because Wallace had failed to perfect her security interest inthe accounts receivable and equipment by filing a UCC–1,Bonner argued that he could assert his right as a hypotheticaljudicial lien creditor and avoid Wallace's unperfected securityinterest using the strong-arm provision of § 544(a)(1) andpreserve that interest for the estate under § 551. A hearing wasset for June 19, 2013.

In her amended opposition to the MSJ, Wallace contendedthat her affirmative defense no. 4—that the loan debt wasexcepted from discharge under § 523(a)(2)(A) and (B) basedon Bonner's fraud—precluded summary judgment. In herattached declaration, Wallace set forth facts to support anondischargeability claim under § 523(a)(2)(A) and (B).Wallace asserted that she did not file a UCC–1 because ofBonner's assurances that she was protected from any loss,even if he filed bankruptcy, and that she did not need to doanything further to protect herself other than put the notes in asafe place. Wallace also argued that distributions in Bonner'sbankruptcy case should follow California law. Specifically,because California law gives creditors with an unperfectedsecurity interest priority over an unsecured creditor's claim,Wallace argued that her claim should be given priority overother general unsecured claims. Finally, Wallace contendedthat an equitable lien should be imposed because she hadrelied on Bonner's false representations that perfection wasnot required to protect her security interest, citing Funk v.G.W. Custom Homes, LLC (In re Funk), 2011 WL 3300350(9th Cir. BAP May 11, 2011)(unpublished).

*3 In his reply, Bonner argued that even if Wallace's debtwas excepted from discharge, the lien securing her claimwould still be avoidable under § 544(a). Nonetheless, arguedBonner, the debt was dischargeable because the time to filea nondischargeability action had expired. In sum, Bonnerargued that his conduct and liability were not at issue here.This was not an objection to Wallace's claim; this was anaction to avoid her lien.

3. The bankruptcy court's ruling on the MSJ




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The hearing on the MSJ lasted approximately four minutes,with neither party offering oral argument. The bankruptcycourt announced its ruling in favor of Bonner, finding thatWallace had not taken the proper steps to perfect her securityinterest, and the fact that Bonner “may or may not have madesome statements that may or may not have been correct,that may or may not have supported a § 523(a)(2) complaint[was] neither here nor there.” Hr'g Tr. (June 19, 2013) 4:7–12. Bonner's misstatements, which might have supported a§ 523(a)(2) claim, did not create an affirmative defense toan avoidance action under § 544(a)(1), even though it mighthave supported a lawsuit against him, which Wallace neverbrought.

In the MSJ order entered on July 24, 2013, the bankruptcycourt determined that a claim under § 523(a)(2)(A) was nota cognizable affirmative defense to an avoidance action; thepurpose of that statute had no relationship to the avoidance ofan unperfected security interest. Therefore, because Wallacehad not filed a UCC–1 with the California Secretary of Stateto perfect her security interest as against the rights of thirdparties, her interest was unsecured.

Alternatively, the bankruptcy court determined that even ifa claim under § 523(a)(2)(A) were cognizable under thecircumstances, Wallace's reliance was not justifiable. Bonnernever represented that he would file the UCC–1 to perfecther security interest, and Wallace was a sophisticated partywho had previous experience with bankruptcy cases and,prior to finalizing their agreement, vocalized her wish thatBonner protect her interests. As such, Wallace's professionaland practical knowledge belied any reliance on Bonner to takethe simple step of filing the UCC–1.

The bankruptcy court also determined that no grounds existedto impose an equitable lien on the estate's assets becauseWallace had made no attempt to perfect her own interests.The court found Wallace's reading of In re Funk as “overlynarrow” and that she had misstated the case's actual holding.In the court's opinion, In re Funk held that an equitable lienmay not be imposed when the lienholder possessed otherremedies at law to protect its interests.

The bankruptcy court entered a separate judgment on July 29,2013, avoiding Wallace's security interest under § 544 andordering that it be preserved for the benefit of the bankruptcyestate under § 551. Wallace's timely appeal followed.

II. JURISDICTION

*4 The bankruptcy court had jurisdiction under 28 U.S.C. §§1334 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C.§ 158.

III. ISSUE

Did the bankruptcy court err in granting summary judgmentavoiding Wallace's unperfected security interest under §544(a)(1)?

IV. STANDARDS OF REVIEW

We review de novo the bankruptcy court's ruling on a motionfor summary judgment, its interpretation of the Code, and itsinterpretation of state law. Trunk v. City of San Diego, 629F.3d 1099, 1105 (9th Cir.2011)(summary judgment); Hopkinsv. Cerchione (In re Cerchione), 414 B.R. 540, 545 (9th Cir.BAP2009) (interpretation of the Code and state law). We mayaffirm a grant of summary judgment on any ground supportedby the record. Balint v. Carson City, 180 F.3d 1047, 1054 (9thCir.1999).

V. DISCUSSION

A. The bankruptcy court did not err when it grantedsummary judgment avoiding Wallace's unperfectedsecurity interest, thereby rendering her claim anunsecured nonpriority claim.Summary judgment is proper when the pleadings, discoveryand affidavits show that there is “no genuine dispute as to anymaterial fact and that the movant is entitled to judgment as amatter of law.” Civil Rule 56(a), incorporated by Rule 7056.The party moving for summary judgment bears the burdenof identifying those portions of the pleadings, discovery andaffidavits that demonstrate the absence of a genuine issue ofa material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323(1986). Material facts are such facts as may affect the outcomeof the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,248 (1986).

Wallace raises several arguments for why Bonner was notentitled to summary judgment. We address each argument inturn.











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1. Section 544(a) and the California Commercial CodeSection 544(a), the “strong-arm clause,” gives a bankruptcytrustee special powers to set aside transfers or liens againstproperty of the bankruptcy estate. Specifically, § 544(a)(1)“grants a trustee in bankruptcy ‘the rights and powers of ahypothetical creditor who obtained a judicial lien on all of theproperty in the estate at the date the petition in bankruptcywas filed.’ “ Neilson v. Chang (In re First T.D. & Inv., Inc.),253 F.3d 520, 526 (9th Cir.2001)(quoting Brady v. Andrew(In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1331

n. 2 (9th Cir.1985) (citing § 544(a)(1)). 4 “ ‘One of thesepowers is the ability to take priority over or “avoid” securityinterests that are unperfected under applicable state law....’ “Id. (quoting In re Commercial W. Fin. Corp., 761 F.2d at 1331n. 2). “Avoiding such interests relegates them to the status

of a general unsecured claim.” 5 Id. (citing 5 COLLIER ONBANKRUPTCY ¶¶ 544.02, 544.05 (Lawrence P. King ed.,15th ed. rev.2000)).

4 Although § 544 specifically gives avoidancepowers only to a “trustee,” § 1107(a) gives achapter 11 debtor in possession all of the rights,powers and duties of a trustee, with certainexceptions not relevant to this case.

5 A general unsecured claim is the same as anunsecured nonpriority claim.

The applicable state law in this case, the California

Commercial Code 6 (“CAL.COM.CODE”), provides that anunperfected security interest is subordinate to the rightsof a “lien creditor.” CAL. COM.CODE § 9317, subd. (a)

(2). 7 A security interest in accounts receivable and businessequipment—i.e ., personal property—is perfected by filinga UCC–1 with the California Secretary of State. CAL.

COM.CODE § 9310, subd. (a) . 8

6 Unless otherwise noted, all references to Division9 of the California Commercial Code are to suchDivision as it was revised and effective on Jan. 1,2007.

7 CAL. COM.CODE § 9317, subd. (a)(2) provides,in relevant part: “A security interest ... issubordinate to the rights of ... a person that becomesa lien creditor before the earlier of the time thesecurity interest ... is perfected, or one of the

conditions specified in paragraph (3) of subdivision(b) of Section 9203 is met and a financing statementcovering the collateral is filed.”

8 CAL. COM.CODE § 9310, subd. (a) provides:“Except as otherwise provided in subdivision (b)and in subdivision (b) of Section 9312, a financingstatement must be filed to perfect all securityinterests and agricultural liens.” Wallace has notcontended or shown that any exceptions notedabove apply in this case.

*5 Wallace concedes that she did not perfect her securityinterest in accordance with California law by filing a UCC–1. As a result, Bonner, as a hypothetical lien creditor, couldavoid Wallace's unperfected security interest pursuant to §544(a)(1).

2. The bankruptcy court did not err in determiningthat a claim under § 523(a)(2) could not be anaffirmative defense to an avoidance action under §544(a).

Wallace contends that summary judgment was improperbecause she raised the affirmative defense of fraud under§ 523(a)(2)(A) and (B), and the bankruptcy court erred inholding that such claims were not a cognizable defense to anavoidance action under § 544(a).

Wallace has not cited, and we could not locate, any authorityto support her contention that a nondischargeability claimunder § 523(a)(2) can be raised as an affirmative defenseto a trustee's avoidance action under § 544(a). The twostatutes have no relationship with one another and serveentirely different purposes: nondischargeability of a debtversus avoiding a creditor's unperfected lien. Further, even ifthe debt to Wallace were deemed nondischargeable, Bonneras trustee could still have avoided her unperfected securityinterest. While an unfortunate situation, we are unable toapply § 523(a)(2) as an affirmative defense to the trustee'sstrong-arm powers under § 544(a). In the context of lienavoidance, either Wallace perfected her lien or she did not.Accordingly, we discern no error by the bankruptcy court.

Wallace takes issue with the bankruptcy court's silenceas to her argument under § 523(a)(2)(B). Because anondischargeability claim under any paragraph of § 523(a)could not support a defense to an action under § 544(a), thebankruptcy court did not need to address Wallace's argumentand therefore did not err by not addressing it.














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3. Once her unperfected security interest was avoided,Wallace's claim became an unsecured nonpriorityclaim by operation of bankruptcy law and is notentitled to priority.

Wallace contends that the bankruptcy court erroneously“converted” her claim into an unsecured nonpriority claim,even though California law gives priority to creditors holdingunperfected security interests over creditors with unsecuredclaims. In other words, Wallace contends she has priorityover all other unsecured nonpriority creditors in Bonner'sbankruptcy case.

We agree with Wallace that under California law, a creditorwith an attached but unperfected security interest has priorityover an unsecured creditor's claim. People v. Green, 125Cal.App.4th 360, 377 (2004)(citing CAL. COM.CODE §9201, subd. (a) and Bank of Stockton v. Diamond WalnutGrowers, Inc., 199 Cal.App.3d 144, 155 (1988)). However,California priority law does not apply when it comes todistributions in bankruptcy.

Priority of distribution in bankruptcy is a question of federal,not state law. See Am. Sur. Co. of N.Y. v. Sampsell, 327U.S. 269, 272 (1946)( “[F]ederal bankruptcy law, not statelaw, governs the distribution of a bankrupt's assets to hiscreditors.”); Matter of Quanta Res. Corp., 739 F.2d 912,920 (3d Cir.1984)(state law regulating distribution of assetsamong creditors must give way to the “all-encompassingfederal law of creditors' rights”); Sticka v. Applebaum (In reApplebaum), 422 B.R. 684, 694 (9th Cir. BAP2009)(Markell,J., dissenting) (“[I]t is well-settled that federal law hasprimacy over contrary state law, especially in the area ofbankruptcy distribution.”) (citing Sampsell and Elliott v.Bumb, 356 F.2d 749, 755 (9th Cir.1966)(“state creation ofpriorities in various classes of creditors ... would tend tothwart or obstruct the scheme of federal bankruptcy”)); In reMacomb Occupational Health Care, LLC, 300 B.R. 270, 292(Bankr.E.D.Mich.2003).

*6 Under federal bankruptcy law, Wallace has not shownthat she is entitled to priority over other unsecured nonprioritycreditors. She has made no argument that her claim fits underany paragraph of § 507(a), and we see none under which itcould apply. Accordingly, the bankruptcy court did not err indetermining that Wallace's claim is an unsecured nonpriorityclaim.

4. The bankruptcy court did not err in determiningthat Wallace had not shown any grounds to impose anequitable lien on the estate's assets.

Lastly, Wallace argues that a material issue of disputed factexisted as to whether she set forth any grounds to support anequitable lien on the estate's assets. Namely, Wallace contendsthat she justifiably relied on Bonner's misrepresentations,which is why she did not perfect her security interest. Inaddition, she argues that the bankruptcy court erroneouslyinterpreted In re Funk as holding that an equitable lien maynot be imposed when the lienholder possessed other remediesat law to protect its interest, and, based on that erroneousinterpretation, erred in concluding she was not entitled to anequitable lien because she could have filed a UCC–1, butfailed to file one.

We do not disagree with the bankruptcy court's interpretationof In re Funk. Presumably, the only reason the court evendiscussed the case, which is unpublished and not even bindingon this Panel, is because it was the only authority Wallaceraised in her five-sentence argument as to why an equitablelien should be imposed. However, the bankruptcy court'sinterpretation of In re Funk is of no moment, since we are ableto affirm its ruling on other grounds supported by the record.Balint, 180 F.3d at 1054.

Even if Wallace was entitled to an equitable lien and wasgranted one by the bankruptcy court, it would still besubordinate to Bonner's interest as a hypothetical judgmentlien creditor and avoidable. Palmer v. Wash. Mut. Bank (Inre Ritchie), 416 B.R. 638, 646 (6th Cir. BAP2009); In reHendleman, 91 B.R. 475, 476 (Bankr.N.D.Ill.1988)(equitablelien in debtor's property is by definition unperfected andcan never survive attack by trustee); Hunter v. OhioCitizens Bank (In re Henzler Mfg. Corp.), 36 B.R. 303,306 (Bankr.N.D.Ohio 1984)(“[E]ven if MFG could claiman equitable lien it would nevertheless be subordinate,under the relevant provisions of UCC, to a subsequentlegal lien of a judgment creditor and is invalid againstthe Trustee in this case who has asserted his hypotheticallien creditor status under § 544(a)(1).”); Hassett v. Revlon,Inc. (In re O.P.M. Leasing Servs ., Inc.), 23 B.R. 104,120 (Bankr.S.D.N.Y.1982)(“The legislative history of theBankruptcy Code makes clear that Article 9 of the U.C .C.treats equitable liens as ‘unperfected security interests whichthe trustee can in any case set aside.’ ”). Therefore, a trial onthis issue would serve no purpose.

































VI. CONCLUSION

Because the bankruptcy court did not err when it determinedthat no genuine issue of material fact existed, and that Bonner

was entitled to summary judgment as a matter of law, weAFFIRM.

All Citations

Not Reported in B.R., 2014 WL 890477



In re CRC Parent Corp., Not Reported in B.R. (2013)2013 WL 781603


2013 WL 781603Only the Westlaw citation is currently available.United States Bankruptcy Court, D. Delaware.

In re CRC PARENT CORPORATION, et al.f/k/a Chem RX Corporation, et al. Debtors.

AP Services, LLC, as Trustee ofthe CRC Litigation Trust, Plaintiff,

v.Bellco Drug Corp., Defendant.

Bankruptcy No. 10–11567 (MFW).|

Adversary No. 12–50702 (MFW).|

March 1, 2013.


Jeffrey M. Schlerf, Carl D. Neff, L. John N. Bird, FoxRothschild LLP, Wilmington, DE, for Plaintiff.

Carol Ann Slocum, Klehr, Harrison, Harvey, Branzburg,LLP, Cherry Hill, NJ, Margaret M. Manning, Klehr HarrisonHarvey Branzburg LLP, Wilmington, DE, for Defendant.

MEMORANDUM OPINION 1

1 The Court is not required to state findings of factor conclusions of law pursuant to Rule 7052(a)(3) of the Federal Rules of Bankruptcy Procedure.Accordingly, the Court makes no findings of fact orconclusions of law. Instead, the facts recited are asaverred in the Complaint, which must be presumedtrue for the purposes of this Motion to Dismiss. SeeAshcroft v. Iqbal, 556 U.S. 662, 678 (2009).

MARY F. WALRATH, United States Bankruptcy Judge.

*1 Before the Court is the Motion of Bellco Drug Corp.(“Bellco”) to Dismiss the Complaint filed by AP Services,LLC, as Trustee of the CRC Litigation Trust (the “Trustee”),for failure to state a claim for relief. For the reasons set forthbelow, the Court will grant, in part, and deny, in part, theMotion to Dismiss.

I. BACKGROUND

CRC Parent Corporation and its affiliates (the “Debtors”)were long-term care pharmacies serving multiple correctionalinstitutions and long-term care facilities, including skillednursing homes and group homes. The Debtors providedprescription and non-prescription drugs, intravenousmedications, durable medical equipment, and surgicalsupplies for residents of institutions in New York, New Jersey,Pennsylvania, and Florida.

The Debtors filed voluntary petitions for relief under chapter11 of the Bankruptcy Code on May 11, 2010 (the “PetitionDate”). On April 11, 2011, the Court entered an Orderconfirming the Debtors' Second Amended Joint Plan of

Liquidation (the “Plan”). (D.I.900.) 2 Under the Plan, theTrustee is responsible for prosecuting causes of action for thebenefit of creditors. (D.I.873.)

2 Citations to pleadings in the bankruptcy caseare “D.I. # ” and to pleadings in the adversaryproceeding are “Adv. D.I. # .”

On May 8, 2012, the Trustee commenced the instantadversary proceeding by filing a Complaint against Bellcoin which it alleges, inter alia, that Bellco received sixty-fourpreferential transfers in the aggregate amount of $9,807,000(the “Transfers”) (“Count I”). The Trustee alternativelyalleges the Transfers were fraudulent conveyances undersection 548 (“Count II”) or unauthorized post-petitiontransfers under section 549 (“Count III”). Additionally, theTrustee seeks to recover the Transfers under section 550(a)( “Count IV”) and to disallow Bellco's claims under section502(d) ( “Count V”).

On September 18, 2012, Bellco filed its Motion to Dismissall counts for failure to state a claim under Rule 12(b)(6)of the Federal Rules of Civil Procedure. Briefing has beencompleted, and the matter is ripe for decision.

II. JURISDICTIONThe Court has core jurisdiction over this adversaryproceeding. 28 U.S.C. §§ 1334 & 157(b)(2)(B). The Courthas the power to enter an order on a motion to dismisseven if the matter is non-core or the Court lacks authority toenter a final order. See, e.g., Boyd v. Kind Par, LLC, CaseNo. 11–CV–1106, 2011 WL 5509873, at *2 (W.D .Mich.Nov. 10, 2011) (“[U]ncertainty regarding the bankruptcycourt's ability to enter a final judgment ... does not deprivethe bankruptcy court of the power to entertain all pretrialproceedings, including summary judgment motions.”); In re


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Trinsum Grp., Inc., 467 B.R. 734, 739 (Bankr.S.D.N.Y.2012)(“After Stern v. Marshall, the ability of bankruptcy judgesto enter interlocutory orders in ... proceedings has beenreaffirmed....”).

III. DISCUSSION

A. Standard of ReviewTo survive a Rule 12(b)(6) motion, the claims alleged in thecomplaint must meet the standards of pleading. The SupremeCourt's decisions in Bell Atl. Corp. v. Twombly, 550 U.S.544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) haveshifted federal pleading standards from notice pleading to aheightened standard of pleading. Fowler v. UPMC Shadyside,578 F.3d 203, 210 (3d Cir.2009). This heightened pleadingrequirement applies to all civil suits in federal courts. Id.

*2 To survive a motion to dismiss, a complaint mustcontain “sufficient factual matter ... to state a claim torelief that is plausible on its face.” Twombly, 550 U.S. at570. A claim is facially plausible “when the plaintiff pleadsfactual content that allows the court to draw the reasonableinference that the defendant is liable for the misconductalleged.” Id. Conversely, “[a] pleading offering only labelsand conclusions or a formulaic recitation of the elementsof a cause of action will not do.” Twombly, 550 U.S. at555. “Courts have an obligation in matters before them toview the complaint as a whole and to base rulings not uponthe presence of mere words but, rather, upon the presenceof a factual situation which is or is not justiciable.” DougGrant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 184(3d Cir.2000). A court must “draw on the allegations of thecomplaint, but in a realistic, rather than a slavish, manner.” Id.

Determining whether a complaint is “facially plausible” is“a context-specific task that requires the reviewing court todraw on its judicial experience and common sense.” Iqbal,556 U.S. at 679. However, “where the well-pleaded facts donot permit the court to infer more than the mere possibility ofmisconduct, the complaint has alleged—but it has not shown—that the pleader is entitled to relief.” Id.

The Third Circuit has instructed courts to conduct a twopartanalysis. Fowler, 578 F.3d at 210. “First, the factual and legalelements of a claim should be separated,” with the reviewingcourt accepting “all of the complaint's well-pleaded facts astrue, but ... disregard[ing] any legal conclusions.” Id. at 210–11. Next, the reviewing court must “determine whether the

facts alleged in the complaint are sufficient to show that theplaintiff has a plausible claim for relief.” Id.

B. Failure to State a ClaimIn the Complaint, the Trustee asserts that it is entitled toavoid and recover from Bellco the transfers listed on Exhibit1 as preferences under section 547, fraudulent transfers undersection 548, or unauthorized post-petition transfers undersection 549.

1. Preferential TransferBellco contends that the Trustee fails to state facts sufficientto plead the elements of a preferential transfer under section547. The purpose of the preference pleading requirements is“to ensure that the defendant receives sufficient notice of whattransfer is sought to be avoided.” Gellert v. The Lenick Co. (Inre Crucible Materials, Corp.), Adv. No. 10–55178, 2011 WL2669113, at *3 (Bankr.D.Del. July 6, 2011).

To provide sufficient notice to the defendant, courts havedetermined that a preference complaint must include: “(a) anidentification of the nature and amount of each antecedentdebt and (b) an identification of each alleged preferencetransfer by (i) date [of the transfer], (ii) name of the debtor/transferor, (iii) name of transferee, and (iv) the amountof the transfer.” OHC Liquidation Trust v. Credit SuisseFirst Boston (In re Oakwood Homes Corp.), 340 B.R.510, 522 (Bankr.D.Del.2006). See also Valley Media Inc. v.Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189, 192(Bankr.D.Del.2003).

*3 When there are multiple debtors in a case, the Complaintmust state which debtor owed the antecedent debt and thatthe same debtor made the preferential transfer. See, e.g.,Michalski v. State Bank and Trust (In re Taco Ed's, Inc.), 63B.R. 913, 925 (Bankr.N.D.Ohio 1986) (“Where an obligationof the debtor is satisfied with property of a third party, orwhere the obligation which is satisfied is not owed by thedebtor, there is no transfer which is subject to recovery under[section] 547(b).”).

In this case, Bellco argues that the Complaint is deficientin two areas. First, Bellco argues that the Complaint fails toidentify the specific debtor that owed an antecedent debt tothe transferee because there are multiple Debtors and none arespecifically named in the Complaint. Second, Bellco assertsthat the Complaint does not identify which debtor made thetransfer.



















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For purposes of section 547, an antecedent debt is a debtor'sprepetition obligation owed to the creditor prior to the allegedpreferential transfer. Charys Liquidating Trust v. HadesAdvisors, LLC (In re Charys Holding Co., Inc.), Adv. No.10–50211, 2010 WL 2788152, at *5 (Bankr.D.Del. July 14,2010) (“In the context of a preferential transfer under theBankruptcy Code, the transfer must have been on accountof a debt owed to the debtor prior to the transfer.”). Tosurvive a 12(b)(6) motion, the plaintiff must adequately pleadboth the nature and amount of the antecedent debt. Id.; seealso Crucible Materials, 2011 WL 2669113, at *2; OakwoodHomes, 340 B.R. at 522; Valley Media, 288 B.R. at 192.

The Complaint must plead at least some facts that makeit plausible that a debtor/creditor relationship existed fromwhich an antecedent debt arose, such as “any contractsbetween the parties or any description of goods or servicesexchanged.” See, e.g., Miller v. Mitsubishi Digital Elecs. Am.Inc. (In re Tweeter Opco), 452 B.R. 150, 155 (holding thatthe complaint failed to sufficiently plead an antecedent debtwhen it did not identify any contract between the parties ora description of goods or services exchanged). Additionally,the Complaint must allege that there was a prepetition transferof goods or services to the debtor. See, e.g ., Charys Holding,2010 WL 2788152, at *5 (holding that the complaint failedto allege a transfer for or on account of an antecedent debtbetween the plaintiff and defendant when it merely allegedthat the debtor “retained” the creditor but failed to identifyany services rendered).

Bellco asserts that the Complaint is silent as to thedetails of the debtor/creditor relationship including whichpharmaceuticals were supplied and how the alleged transfersrelate to those pharmaceuticals. Bellco argues that theComplaint merely pleads that during some unspecified timeprior to the Petition Date, Bellco provided pharmaceuticalsupplies to one of the Debtors and that one of the Debtorstransferred property to Bellco. Thus, Bellco argues that theComplaint does not properly relate the Transfers to thesupplier relationship.

*4 The Trustee responds that it has sufficiently met thepleading requirements to survive a Motion to Dismiss. TheTrustee asserts that the Complaint and Exhibit 1, when readtogether, sufficiently detail the nature of the antecedent debtand its payment. Specifically, in the Complaint the Trusteealleges that “[p]rior to the Petition Date, Defendant providedPharmaceutical Supplies to the Debtor or Debtors listed in

the attached Exhibit 1.” (Adv. D.I. 1 at ¶ 11.) The onlyDebtor listed on Exhibit 1 is “B.J.K., Inc.” (Adv. D.I. 1 at Ex.1.) Additionally, the Complaint alleges that “[t]he Transferswere made on account of antecedent debts owed by theDebtors.” (Adv. D.I. 1 at ¶ 15.) Exhibit 1 identifies onlyTransfers from B.J.K., Inc. as preferences.

The Court concludes that no more detail is needed.The Complaint sufficiently alleges that a debtor/creditorrelationship existed between Bellco and B.J.K., Inc. byreference to Exhibit 1. Further, Exhibit 1 identifies thatthe transfers sought to be avoided were from B.J.K., Inc.Thus, it is plausible that the alleged Transfers made duringthe preference period satisfied debt that arose from thepre-petition debtor/creditor relationship between Bellco andB.J.K., Inc. The Court will, therefore, deny the Motion toDismiss Count I of the Complaint.

2. Fraudulent TransfersThe Trustee asserts that the Transfers made to Bellco beforebankruptcy were constructively fraudulent pursuant to section548(a)(1)(B). Bellco asserts that the Trustee has failed to meetthe heightened pleading standard required by Rule 9(b). SeeFed.R.Civ.P. 9(b); Fed. R. Bankr.P. 7009.

Where a party asserts a claim for fraud, the complaint mustset forth facts with sufficient particularity to apprise thedefendant of the charges against him so that he may preparean adequate answer. Global Link Liquidating Trust v. Avantel,S.A. (In re Global Link Telecom Corp.), 327 B.R. 711, 718(Bankr.D.Del.2005). To provide fair notice, the complainantmust go beyond merely parroting statutory language. Id. Seealso Burtch v. Dent (In re Circle Y of Yoakum, Texas), 354B.R. 349, 356 (Bankr.D.Del.2006).

A claim of constructive fraud, however, “need not allegethe common variety of deceit, misrepresentation, or fraud inthe inducement ... because the transaction is presumptivelyfraudulent and all that need be alleged is that the conveyancewas made without fair consideration while the debtor wasfunctionally insolvent.” Id. at 718. See also, AstropowerLiquidating Trust v. Xantrex Tech., Inc. (In re Astropower),335 B.R. 309, 333 (Bankr.D.Del.2005). Nonetheless, theTrustee must do more than simply allege the statutoryelements of a constructive fraud action. Global Link, 327 B.R.at 718.

Bellco argues that Count II is not sufficiently pled becausethe Trustee merely parrots the language of section 548(a)(1).














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Specifically, Bellco asserts that the Trustee failed to plead thatthe Debtors were insolvent or that the Debtors received noreasonably equivalent value in exchange for the transfers. See11 U.S.C. § 548(a)(1)(B)(I)-(ii).

a. Reasonably Equivalent Value*5 The Third Circuit has held that “a party receives

reasonably equivalent value for what it gives up if it getsroughly the value it gave.” Walker v. Sonafi Pasteur (In reAphton Corp.), 423 B .R. 76, 89 (Bankr.D.Del.2010) (internalcitations omitted). To sufficiently plead lack of reasonablyequivalent value exchanged, the Trustee must present someinformation of the value of what the debtor received inexchange for the transfer.

In the Complaint, the Trustee alleges that the Transfers werein payment of an antecedent debt and, therefore, avoidable aspreferences. Alternatively, the Trustee asserts that if they werenot in payment of the antecedent debt, then no considerationwas given for them and they are avoidable as fraudulenttransfers. The Court concludes that this is sufficient to pleadlack of reasonably equivalent value.

b. InsolvencyTo adequately plead insolvency, the Trustee must presentsome information of the Debtors' financial status at the time ofthe transfer. See, e.g., Global Link, 327 B.R. at 717 (holdingthat a claim under section 548 is insufficient when it “simplyalleges the statutory elements of a constructive fraud actionunder section 548(a)(1)(B)”). But see Zazzali v. Mott (Inre DBSI, Inc.), 447 B.R. 243, 247–48 (Bankr.D.Del.2011)(holding that insolvency was sufficiently pled when plaintiffalleged debtors never realized a profit, its liabilities exceededits assets, the debtors relied solely on investment money,and the debtors failed to properly account for assets andliabilities); Charys Liquidating Trust v. McMahan Sec. Co.(In re Charys Holding Co., Inc.), 443 B.R. 628, 636(Bankr.D.Del.2010) (holding that insolvency was sufficientlypled when complaint detailed working capital deficit, balancesheet numbers, and overvalued assets).

Here, the Complaint merely provides a near-verbatimrecitation of the statutory elements of section 548 withoutproviding any facts to support the Trustee's assertion that theDebtors were insolvent or became insolvent as a result ofthe transfers. Therefore, the Court concludes that the Trusteehas failed to plead with particularity that the Debtors wereinsolvent during the transfer period as required by Rules

8(a) and 9(b). Thus, the Court will grant Bellco's Motion toDismiss Count II of the Complaint.

3. Unauthorized Post–Petition TransferBellco also asserts that the Trustee failed to plead that anyof the Transfers occurred post-petition as required by section549(a). Bellco argues that Exhibit 1 is conclusive evidencethat the sixty-four wire transfers occurred prior to the PetitionDate because the last “clear date” was May 10, 2010, the daybefore the Petition Date.

The Trustee responds that with regard to Count III, since “theTrustee has pled such causes of action in the alternative, [t]heTrustee should be afforded leeway in asserting the instantavoidance action.” (Adv.D.I.1.) To support this contention,the Trustee argues that “[c]ourts are generally liberal withpleading requirements when a third party trustee is the onebringing the complaint.” Miller v. McCown de Leeuw &Co., Inc. (In re The Brown Schools), 368 B.R. 394, 399(Bankr.D.Del.2007). See, e.g., In re Am. Business Fin. Svcs.,Inc., 361 B.R. 747, 753 (Bankr.D.Del.2007) (“A bankruptcytrustee, as a third party outsider to the debtor's transactions, isgenerally afforded greater liberality in pleading fraud.”).

*6 Courts have only allowed a liberal pleading requirementfor a third-party trustee, however, when pleading fraud underRule 9(b). See, e.g., Global Link, 327 B.R. at 717 (holdingthat in the bankruptcy context, “greater liberality shouldbe afforded in the pleading of fraud” when the Trustee isasserting the claim). Because section 549 does not invokethe pleading requirements of Rule 9(b), but instead relies onthe traditional pleading requirements of 8(a) and 12(b)(6) setforth in Iqbal and Twombly, the Trustee is not entitled to anyleeway. See e.g., Iqbal, 556 U.S. at 678 (quoting Twombly,550 U.S. at 570) (holding that the test is whether there is“sufficient factual matter ... to state a claim to relief that isplausible on its face”).

a. Timing of the TransferTo satisfy the elements of section 549(a), the Trustee mustplead that “1) after commencement of the bankruptcy casein question, 2) property of the estate 3) was transferred,and 4) the transfer was not authorized by the BankruptcyCourt or by a provision of the Bankruptcy Code.” ETSPayphones, Inc. v. AT & T (In re PSA, Inc.), 335 B.R. 580,585 (Bankr.D.Del.2005). As a matter of law, there can beno unauthorized post-petition transfer when payment occurs


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prior to the petition date. Pardo v. Nylcare Health Plans, Inc.(In re APF Co.), 274 B.R. 408, 418 (Bankr.D.Del.2001).

When the transfer is made by check or wire transfer, thetransfer date for section 549 purposes is the date that thebank honors the check or transfer instructions. See, e.g.,Smith v. Hall (In re Ottoman's, Inc.), Nos. 99–13648–MWV,01–1210–MWV, 2002 WL 1011326, at *2 (Bankr.D.N.H.Mar. 26, 2002) (adopting honor date test for purposes ofsection 549). The “clear date” for a transfer is the date thatthe bank honored the check. See e.g., Guinn v. OakwoodProps., Inc. (In re Oakwood Markets, Inc.), 203 F.3d 406,409 (6th Cir.2000) (equating “clear date” with date check washonored); Springel v. Hotel Plaze Athenee (In re InnovativeCommc'n Corp.), Adv. No. 09–3001, 2010 WL 3069489, at*3, n. 6 (Bankr.D. V.I. June 18, 2010) (same); Official Comm.of Unsecured Creditors of Contempri Homes Inc. v. Seven DWholesale (In re Contempri Homes, Inc.), 269 B.R. 124, 131(Bankr.M.D.Pa.2001) (same).

In this case, the Trustee specifically identifies the “clear date”on Exhibit 1 as occurring before the Petition Date. Therefore,the Trustee has failed to allege any facts to make it plausiblethat any of the Transfers cleared post-petition. As a result, theCourt will grant Bellco's Motion to Dismiss Count III.

C. Leave to AmendNormally, when granting a motion to dismiss, leave to amendthe complaint under Fed.R.Civ.P. 15(a) will be freely granted.See, e.g., Shane v. Fauver, 213 F.3d 113, 115–16 (3d Cir.2000)(holding that the court should generally grant leave to amenda complaint dismissed for failure to state a claim). Accordingto the Third Circuit, a presumption exists in favor of grantingthe moving party leave to amend. Boileau v. BethlehemSteel Corp., 730 F.2d 929, 938 (3d Cir.1984). Evidence ofundue delay, bad faith, undue prejudice, or futility may rebutthat presumption. Burtch v. Henry Prod., Inc. (In re AELiquidation, Inc.), Adv. No. 10–55478, 2012 WL 32589, at*2 (Bankr.D.Del. Jan. 6, 2012).

*7 In this case, Bellco has alleged no undue delay, badfaith, undue prejudice, or futility. The Court will, therefore,grant the Trustee 30 days to amend Counts II and III of theComplaint.

IV. CONCLUSIONFor the foregoing reasons, the Court will grant, in part, anddeny, in part, Bellco's Motion to Dismiss the Complaint andwill grant the Trustee leave to amend the Complaint.

An appropriate Order is attached.

ORDER

AND NOW, this 1st day of MARCH, 2013, uponconsideration of the Motion to Dismiss filed by Bellco andfor the reasons set forth in the accompanying MemorandumOpinion, it is hereby

ORDERED that the Motion to Dismiss is DENIED withrespect to Count I; and it is further

ORDERED that the Motion to Dismiss is GRANTED withrespect to Counts II and III; and it is further

ORDERED that the Trustee is GRANTED leave to amendthe Complaint within 30 days.

cc: Margaret M. Manning, Esquire 1

1 Counsel is to serve a copy of this Order andthe accompanying Memorandum Opinion on allinterested parties and file a Certificate of Servicewith the Court.

All Citations


























In re Crucible Materials Corp., Not Reported in B.R. (2011)2011 WL 2669113


2011 WL 2669113Only the Westlaw citation is currently available.United States Bankruptcy Court, D. Delaware.

In re CRUCIBLE MATERIALSCORPORATION, et al., Debtors.

Ronald S. Gellert, as Successor LitigationTrustee of the Crucible Materials Corporation

Creditors' Litigation Trust, Plaintiff,v.

The Lenick Company, Defendant.

Bankruptcy No. 09–11582.|

Adversary No. 10–55178.|

July 6, 2011.


Mark Minuti, Saul Ewing LLP, Wilmington, DE, for Debtor.

Brya M. Keilson, Ronald S. Gellert, Eckert Seamans Cherin& Mellot, LLC, Wilmington, DE, Joseph L. Steinfeld, Jr.,A.S.K. Financial LLP, Eagan, MN, USA, for Plaintiff.

J. Lawson Johnston, Pion Johnston Nerone girman Clements& S, Pittsburgh, PA, John R. Weaver, Jr., Wilmington, DE,for Defendant.

MEMORANDUM OPINION 1

1 The Court is not required to state findings of factor conclusions of law, pursuant to Rule 7052(a)(3)of the Federal Rules of Bankruptcy Procedure, ona motion to dismiss.

MARY F. WALRATH, Bankruptcy Judge.

*1 In its Motion to Dismiss, the Defendant contends thatthe Trustee's Complaint for recovery of a preference fails tostate a claim upon which relief can be granted, because itsets forth only conclusory allegations parroting the statutorylanguage of section 547 of the Bankruptcy Code. The Courtagrees and accordingly will grant the Defendant's Motion toDismiss. The Court will, however, allow the Trustee leave toamend the Complaint for the reasons set forth below.

I. BACKGROUNDCrucible Materials Corporation (“Crucible”) produced a widearray of steel products for manufacturers, principally in theautomotive industry. After experiencing a significant drop indemand, sparked in part by the disruption in the automotiveindustry, Crucible and its affiliates (the “Debtors”) filed forchapter 11 reorganization on May 6, 2009 (the “PetitionDate”).

Under the Debtors' plan of reorganization, which wasconfirmed on August 26, 2010, Richard D. Caruso wasappointed Litigation Trustee (the “Trustee”). On November8, 2010, the Trustee filed an adversary proceeding(the “Complaint”) against The Lenick Company (the“Defendant”) to avoid transfers pursuant to section 547(“Count 1”), to avoid fraudulent conveyances pursuant tosection 548 (“Count 2”), to recover post-petition transferspursuant to section 549 (“Count 3”), to recover propertytransferred pursuant to section 550 (“Count 4”), and todisallow any claims the Defendant may have pursuant tosection 502 (“Count 5”).

On January 12, 2011, the Defendant moved to dismiss theComplaint pursuant to Rule 12(b)(6) for failure to state aclaim. The Trustee has agreed to withdraw Counts 2 and3 of the Complaint without prejudice in exchange for theDefendant's agreement to withdraw its Motion to Dismissthose Counts. (Pl.'s Resp. 2). The Motion has been fullybriefed as to the remaining counts and is ripe for decision.

II. JURISDICTIONThis Court has core jurisdiction over this adversaryproceeding. 28 U.S.C. §§ 1334 & 157(b)(2)(F).

III. DISCUSSIONThe Defendant moves for dismissal of the preference countunder Rules 8(a) and 12(b)(6) of the Federal Rules of CivilProcedure, made applicable to adversary proceedings byRules 7008 and 7012(b) of the Federal Rules of BankruptcyProcedure. The Defendant argues that the Complaint fails toestablish a plausible claim for the avoidance of preferentialtransfers.

A. Standard of Review

1. Rule 8(a)(2)


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Rule 8(a) of the Federal Rules of Civil Procedure requiresonly that a complaint contain “a short and plain statementof the claim showing that the pleader is entitled to relief.”Fed.R.Civ.P. 8(a). The statement must provide “the defendantfair notice of what the plaintiff's claim is and the groundsupon which it rests.” Conley v. Gibson, 355 U.S. 41, 47(1957). While a complaint “does not need detailed factualallegations, a plaintiff's obligation to provide the ‘grounds'of his ‘entitle[ment] to relief’ requires more than labels andconclusions, and a formulaic recitation of the elements of acause of action will not do....” Bell Atl. v. Twombly, 550 U.S.544, 555 (2007) (citation omitted). In other words, “Rule 8(a)(2) requires a ‘showing’ rather than a blanket assertion of anentitlement to relief.... [W]ithout some factual allegation inthe complaint, a claimant cannot satisfy the requirement thathe or she provide not only ‘fair notice,’ but also the ‘grounds'on which the claim rests.” Phillips v. Cnty. of Allegheny, 515F.3d 224, 232 (3d Cir.2008) (citing Twombly, 550 U.S. at 556).

2. Rule 12(b)(6)*2 A Rule 12(b)(6) motion serves to test the sufficiency

of the factual allegations in the plaintiff's complaint. Kost v.Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993) (“The pleaderis required to set forth sufficient information to outline theelements of his claim or to permit inferences to be drawnthat these elements exist.”). With the Supreme Court's recent

decisions in Twombly 2 and Ashcroft v. Iqbal, 3 “pleadingstandards have seemingly shifted from simple notice pleadingto a more heightened form of pleading, requiring a plaintiff toplead more than the possibility of relief to survive a motionto dismiss.” Fowler v. UPMC Shadyside, 578 F.3d 203, 210(3d Cir.2009).

2 550 U.S. 544 (2007).

3 129 S.Ct. 1937 (2009).

A claim is sufficient if it is facially plausible, that is “when theplaintiff pleads factual content that allows the court to drawthe reasonable inference that the defendant is liable for themisconduct alleged.” Iqbal, 129 S.Ct. at 1949. Determiningwhether a complaint is “facially plausible” is “a context-specific task that requires the reviewing court to draw on itsjudicial experience and common sense.” Id. at 1950. “[W]herethe well-pleaded facts do not permit the court to infer morethan the mere possibility of misconduct, the complaint hasalleged—but not shown—that the pleader is entitled to relief.”Id.

After Iqbal, the Third Circuit has instructed the courts to“conduct a two part analysis. First the factual and legalelements of a claim should be separated. The [court] mustaccept all of the complaint's well-pleaded facts as true, butmay disregard any legal conclusions.” Fowler, 578 F.3d at210–11. See also Iqbal, 129 S.Ct. at 1949–50 (“Threadbarerecitals of the elements of a cause of action, supported bymere conclusory statements, do not suffice.... When there arewell-pleaded factual allegations, a court should assume theirveracity and then determine whether they plausibly give riseto an entitlement to relief.”). “The plaintiff must put some‘meat on the bones' by presenting sufficient factual allegationsto explain the basis for its claim.” Buckley v. Merrill Lynch& Co., Inc. (In re DVI, Inc.), Adv. No. 08–50248, 2008 WL4239120, at *4 (Bankr.D.Del. Sept. 16, 2008).

B. Count 1—Failure to State a ClaimThe Defendant argues that the Complaint must be dismissedbecause it fails to establish a plausible claim for a preference.Even before the Iqbal and Twombly decisions, courtsrequired that to survive a motion to dismiss, a preferencecomplaint must allege more than just the statutory elementsof a preference and must include: “(a) an identificationof the nature and amount of each antecedent debt and(b) an identification of each alleged preference transfer by(i) date [of the transfer], (ii) name of debtor/transferor,(iii) name of transferee and (iv) the amount of thetransfer.” OHC Liquidation Trust v. Credit Suisse FirstBoston (In re Oakwood Homes Corp.), 340 B.R. 510, 522(Bankr.D.Del.2006); Valley Media Inc. v. Borders, Inc. (In reValley Media, Inc.), 288 B.R. 189, 192 (Bankr.D.Del.2003).

*3 Courts have held that alleged preferential transfers mustbe identified with particularity to ensure that the defendantreceives sufficient notice of what transfer is sought to beavoided. See, e.g., DVI, Inc., 2008 WL 4239120, at *5;Pardo v. Gonzava (In re APF Co.), 308 B.R. 183, 188–89(Bankr.D.Del.2004) (concluding that preference complaintmust identify each transfer by date, amount, name oftransferor, and name of transferee). Simply quoting thestatutory language is insufficient to withstand a motion todismiss. Iqbal, 129 S.Ct. at 1949–50.

The Defendant contends that the Trustee simply asserts theelements of section 547(b) and relies on legal conclusionsrather than factual assertions. Specifically, the Defendantasserts that Exhibit A to the Complaint does not contain anyproof of transfers such as invoices, bills, canceled checks orother evidence to substantiate the Trustee's claims. Further,




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the Defendant argues that any factual allegations in theComplaint regarding the alleged transfers are insufficient towithstand a motion to dismiss.

The Trustee responds that the Complaint contains enoughfactual details to describe adequately the alleged transfers.The Trustee contends that Exhibit A provides the name ofthe transferee (The Lenick Company), check numbers, checkamounts, invoice dates, invoice numbers, and the clear datesof the transfers sought to be avoided. (Compl. at Ex. A.)This, the Trustee contends makes Count 1 plausible on itsface. In addition, the Trustee contends that Exhibit A showsthat the transfers took place within the 90–day preferenceperiod. Id. Further, the Trustee asserts that section 547'spresumption of insolvency and the Complaint's allegationthat the Defendant received more than it would have undera chapter 7 bankruptcy are sufficient to make the claimplausible.

As an initial matter, the Court concludes that the Trustee isnot required, as the Defendant contends, to provide actualcopies of the invoices, bills, canceled checks or other tangibleevidence to substantiate his claims at the motion to dismissstage. Branson v.. Exide Electronics Corp., 645 A.2d 568(Del.1994) (stating that a plaintiff is only required to “statea claim, not to plead the evidence upon which the claimis based.”) (citing TSC Indus., Inc,. V. Northway, Inc., 426U.S. 438, 450 (1976)); Fowler v. UPMC Shadyside, 578 F.3d203, 213 (3d Cir.2009) (stating that “[i]t is axiomatic thatthe standards for dismissing claims under Fed.R.Civ.P. 12(b)(6) and granting judgment under either Fed.R.Civ.P. 50 orFed.R.Civ.P. 56 are vastly different.”).

The Court finds that the Complaint adequately alleges factsidentifying the date of transfer, name of transferee, andtransfer amount. (Compl. at ¶¶ 8, 10 (stating that between“February 5, 2009 and May 6, 2009 (the “PreferencePeriod”) ... one or more of the Debtors made transfersto Defendant ... in an amount not less than $122,070.69(the “Transfers”).”) In addition, the Complaint identifies thecheck numbers, check amounts, clear dates, invoice numbers,invoice dates and invoice amounts. (D.I. # 1 at Ex. A.)

*4 The Court finds, however, that the Complaint is deficientin two areas. First, the Trustee has not sufficiently identifiedthe transferor of the alleged preferential payments. Becausethere is more than one debtor in this proceeding, the Courtconcludes that the Trustee must identify the transferor by

name. The Trustee's allegation that “one or more of theDebtors made transfers” is not sufficient. (Compl. at ¶ 10.)

Second, the Complaint fails to provide sufficient factsdetailing the nature of the alleged antecedent debt. ValleyMedia, 288 B.R. at 193. Although the Complaint doesprovide the check numbers, dates and amounts, no otherinformation is provided to explain the nature of the antecedentdebt. See In re Insilco Techs., Inc., 330 B.R. 512, 520(Bankr.D.Del.2005) (concluding that the complaint failed toidentify the antecedent debt); TWA, Inc. Post ConfirmationEstate v. Marsh USA Inc. (In re TWA, Inc. Post ConfirmationEstate), 305 B.R. 228, 232 (Bankr.D.Del.2004) (finding thecomplaint deficient, inter alia, for failing to provide the natureand amount of the antecedent debt).

The Complaint fails to provide any details to show that therewas in fact an antecedent debt. (Compl. at ¶ 14 (stating onlythat “[t]he Transfers were for, or on account of, antecedentdebts owed by one or more of the Debtors before the Transferswere made”).) The recitation of the elements of section 547in place of any factual allegations is insufficient to withstanda motion to dismiss. Iqbal, 129 S.Ct. at 1949–50.

The Complaint even fails to provide the Court with evidenceof a pre-existing debtor/creditor relationship from which anantecedent debt could have arisen. (Compl. at ¶ 12.) TheComplaint provides no detail of any contracts between theparties or any description of the goods or services exchanged.Beyond stating that the “Defendant was a creditor of oneor more of the Debtors at the time of the Transfers,” theTrustee completely fails to describe any type of relationshipbetween the Defendant and any of the Debtors. Without suchinformation, the Court determines that the Trustee has failedto describe sufficiently the nature of the antecedent debt.

C. Count 4—Recovery of Avoided TransfersCount 4 of the Complaint seeks to recover avoided transfers

pursuant to section 550(a). 4 The Defendant contends thatCount 4 is derivative of Count 1 and should be dismissedbecause the Trustee did not state a valid claim for Count 1.The Trustee contends that Count 1 has been sufficiently plead;therefore, Count 4 is properly before the Court. Because theCourt is granting the Motion to Dismiss Count 1, the Countunder section 550(a) must also be dismissed. See In re CharysHolding Co., 2010 WL 2774852, at *8 (July 14, 2010); In reUSDigital, Inc., 443 B.R. 22, 40 (Bankr.D.Del.2011).











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4 Section 550(a) states:Except as otherwise provided in this section,to the extent that a transfer is avoided undersection ... 547 ... of this title, the trusteemay recover, for the benefit of the estate, theproperty transferred ... from(1) the initial transferee of such transfer orthe entity for whose benefit such transfer wasmade; or(2) any immediate or mediate transferee ofsuch initial transferee.

11 U.S.C. § 550(a).

D. Count 5—Disallowance of All ClaimsCount 5 of the Complaint seeks to disallow any and all claimsthe Defendant or its affiliates may have against the Debtors

until the avoided transfers are recouped. 11 U.S.C. § 502(d). 5

The Defendant contends that Count 5 is derivative of Count1 and should be dismissed because the Trustee did not statea valid claim for Count 1. The Trustee contends that Count1 has been sufficiently plead; therefore, Count 5 is properlybefore the Court. Because the Court is granting the Motion toDismiss Count 1, Count 5 must also be dismissed.

5 Section 502(d) states:Notwithstanding subsections (a) and (b) ofthis section, the court shall disallow any claimof any entity ... that is a transferee of a transferavoidable under section ... 547 ... unless suchentity or transferee has paid the amount ... forwhich such entity or transferee is liable undersection ... 550....

11 U.S.C. § 502(d).

D. Amendment of Complaint

*5 If the Complaint is found to be insufficient in detail, theTrustee has asked the Court for leave to amend the Complaint.The Defendant argues that the Complaint should be dismissedwith prejudice but fails to articulate any argument whybeyond the fact that the Complaint was insufficiently plead.

Rule 15(a) states that “leave to amend shall be freely givenwhen justice so requires.” Fed.R.Civ.P. 15(a). Because theDefendant presents no reason why leave to amend should notbe granted, the Court will allow the Trustee to amend theComplaint.

IV. CONCLUSIONFor the reasons set forth above, the Court will grant theMotion to Dismiss the Complaint in the instant adversaryproceeding but will allow the Trustee to amend the Complaint.

An appropriate order is attached.

ORDER

AND NOW, this 6th day of JULY, 2011, upon considerationof the Motion to Dismiss filed by the Defendant and for thereasons set forth in the accompanying Memorandum Opinion,it is hereby

ORDERED that the Motion to Dismiss is GRANTED; andit is further

ORDERED that the Trustee may file an AmemdedComplaint within 30 days of this Order.

All Citations





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In re The Russ Companies, Inc., Not Reported in B.R. Rptr. (2013)2013 WL 4028098



NOT FOR PUBLICATIONUnited States Bankruptcy Court, D. New Jersey.

IN RE: THE RUSS COMPANIES,INC., et al., Debtors.

Charles M. Forman, in his capacityas Chapter 7 Trustee, Plaintiffs,

v.Deutsch Atkins, P.C., Defendant.

Case No.: 11–22471 (DHS)|

Adv. No.: 13–01432 (DHS)|

Filed August 5, 2013|

Entered August 6, 2013


Forman Holt Eliades & Youngman LLC, Kim R. Lynch, Esq.,Matteo Percontino, Esq., 80 Route 4 East, Suite 290, Paramus,New Jersey 07652, Counsel for Charles M. Forman, Chapter7 Trustee for the Debtors.

Norgaard O'Boyle , John O'Boyle, Esq., 184 Grand Avenue,Englewood, New Jersey 07631, Counsel for Defendant,Deutsch Atkins, P.C.

OPINION

THE HONORABLE DONALD H. STECKROTH,BANKRUPTCY JUDGE

*1 Before the Court is the motion filed by the defendantlaw firm, Deutsch Atkins, P.C. (“Deutsch Atkins” or“Defendant”), to dismiss the adversary complaint (“Motion”)filed by Charles Forman, the chapter 7 trustee (“Trustee”) for

The Russ Companies, Inc., et al. (“Debtors”), 1 pursuant toFederal Rule of Civil Procedure 12(b)(6). The Trustee fileda two-count complaint against Deutsch Atkins seeking: (i)avoidance of preferential transfers paid to Deutsch Atkins forthe benefit of David Moll, a creditor of the Debtors, pursuantto section 547(b) of the Bankruptcy Code and (ii) recovery ofthe voidable transfers pursuant to section 550(a) of the Code.

1 The Debtors are The Russ Companies, Inc., RussBerrie Company Investments, Inc., Russ BerrieU.S. Gift Inc., The Encore Group, Inc., Russ Berrieand Company Properties, Inc., andRussplus, Inc.

The Defendant submits the following arguments in supportof its motion to dismiss: (i) the transfer was of propertybelonging to a third party, not the Debtors; (ii) the transferswere not made on account of an antecedent debt because:(a) the debt was not the Debtors', but rather a third party's,or alternatively (b) if the debt is one of the Debtors',the transfers were made contemporaneously with incurringthe debt; (iii) the Trustee is not permitted to pursue twoadversary proceedings to recover the transferred funds fromtwo different parties; and, lastly, (iv) the Debtors received newvalue for the transfers.

The Court has jurisdiction over this motion pursuant to28 U.S.C. §§ 1334(b), 157(a), and the Standing Order ofReference from the United States District Court for theDistrict of New Jersey dated July 23, 1984 as amendedSeptember 18, 2012. This matter is a core proceedingpursuant to 28 U.S.C. § 157(b)(2)(E), (F), and (H). Venue isproper under 28 U.S.C. §§ 1408 and 1409(a). The followingshall constitute the Court's findings of fact and conclusionsof law as required by Federal Rule of Bankruptcy Procedure7052.

BACKGROUND AND RELEVANT FACTS

Considering the nature of the Defendant's motion, one seekingdismissal of the complaint pursuant to Rule 12(b)(6), forpurposes of this hearing, the factual record comprises the factsas presented in the Trustee ‘s Complaint.

The Debtors were in the business of designing and marketinggifts, collectibles, and home decor. Between October, 2006and July, 2009, David Moll served as Vice President for theDebtors. Mr. Moll was subsequently terminated and prior tothe petition date filed an arbitration demand (“ArbitrationAction”) against the Debtors seeking unpaid severancepayments that had accrued. Deutsch Atkins represented Mr.Moll in that arbitration.

On March 8, 2011, the Debtors and Mr. Moll resolved theArbitration Action by entering into a settlement agreement(“Settlement Agreement”), whereby the following paymentswere to be made by the Debtors:



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●$66,666.67 on March 10, 2011 to Mr. Moll;

●$33,333.33 on March 10, 2011 to Deutsch Atkins;

●$36,666.66 on April 10, 2011 to Mr. Moll;

*2 ●$18,333.34 on April 10, 2011 to Deutsch Atkins;

●$36,666.66 on May 10, 2011 to Mr. Moll; and

●$18,333.34 on May 10, 2011 to Deutsch Atkins;

The actual payments made to the Defendant included:

●$33,333.33 on March 8, 2011;

●$5,987.50 on March 17, 2011; and

●$18,333.34 on April 11, 2011.

The Debtors filed independent voluntary petitions for reliefunder chapter 7 on April 21, 2011. On the same day, theTrustee was appointed by the Court to act as chapter 7 trusteefor each of the Debtors' estates. The matters were procedurallyconsolidated. Thereafter, the Trustee initiated this adversaryproceeding seeking to avoid the payments made to DeutschAtkins.

DISCUSSION

I. Standard of ReviewFederal Rule of Civil Procedure 12(b)(6) permits a party toseek dismissal of a complaint for failure to state a claim uponwhich relief may be granted. Bankruptcy Rule 7012 providesthat Rule 12(b)(6) applies in adversary proceedings. FederalRule of Civil Procedure 8 provides that pleadings mustcontain “a short and plain statement of the claim showing thatthe pleader is entitled to relief, in order to give fair notice ofwhat the ... claim is and the grounds upon which it rests.”Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct.1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355U.S. 41, 47 (1957)). Upon considering a 12(b)(6) motion todismiss, courts “accept all factual allegations as true, construethe complaint in the light most favorable to the plaintiff,and determine whether, under any reasonable reading of thecomplaint, the plaintiff may be entitled to relief.” Phillips v.County of Allegheny, 515 F.3d 224, 233 (3d Cir.2008) (citationand quotations omitted). The factual allegations contained inthe complaint “must be enough to raise the right to reliefabove the speculative level.” Twombly, 550 U.S. at 555.

Furthermore, “[t]he allegations of the complaint should‘plausibly suggest’ the pleader is entitled to relief.” Wilkersonv. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3dCir.2008) (citing Twombly, 127 S.Ct. at 1966). The SupremeCourt clarified the “plausibility” standard in Ashcroft v. Iqbalby holding that in order “[t]o survive a motion to dismiss,a complaint must contain sufficient factual matter, acceptedas true, to ‘state a claim to relief that is plausible on itsface.’ ” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L.Ed.2d868 (2009) (citation omitted). “The plausibility standard isnot akin to a ‘probability requirement,’ but it asks for morethan a sheer possibility that a defendant acted unlawfully.”Id. Indeed, mere “labels and conclusions, and a formulaicrecitation of the elements of a cause of action will not do. “Twombly, 550 U.S. at 555. Thus, Rule 8 “requires a ‘showing,’rather than a blanket assertion, of entitlement to relief.”Twombly, 550 U.S. at 555 n.3.

II. Factual Record Before the CourtAs a threshold matter, the Trustee contends that many of theDefendant's arguments rely on facts introduced by counsel'scertification in opposition and are outside the four cornersof the Complaint. These facts include that Mr. Moll workedas Vice President for Russ Berrie & Company, Inc. untilDecember 2008 when he was transferred to Russ Berrie U.S.Gift, Inc., and was terminated from Russ Berrie U.S. Gift, Inc.in or about July, 2009.

*3 The Court cannot consider the extraneous factsintroduced by the Defendant unless those facts can be found indocuments relied on by the Trustee is forming the allegationscontained in the Complaint. See In re Burlington Coat FactorySec. Litig., 114 F.3d 1410, 1424–25 (3d Cir.1997) (whenruling on a motion to dismiss, the Court is not permittedto go beyond the facts alleged in the Complaint and thedocuments on which the claims made therein were based).For this reason, the Court will look no further than the fourcorners of the Complaint, the Debtors' disbursement receipts,and the Settlement Agreement entered into by Mr. Moll andthe Debtors resolving the Arbitration Action.

III. Count I—Preferential TransfersTo succeed, the Trustee must adequately plead that theDebtors' interest in property was transferred and that thesubject transfers: (1) were to or for the benefit of a creditor;(2) were for or on account of antecedent debt owed by thedebtor before such transfer was made; (3) were made while






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the debtor was insolvent; (4) were made on or within 90 daysbefore the date of the filing of the petition; and (5) enabledthe creditor to receive more than such creditor would receiveunder a chapter 7 distribution if the transfers had not beenmade. 11 U.S.C. § 547(b).

The Defendant challenges, first, that the funds transferreddo not constitute an interest of the Debtors in property,and, second, that the transfers were not on account of anantecedent debt. Finally the Defendant seeks dismissal basedon a procedural argument and an affirmative defense. Each isdiscussed in turn.

A. Interest of the Debtors in PropertyThe Defendant argues the funds transferred by the Debtorswere not property of the Debtors, but rather Mr. Moll becauseMr. Moll was required to declare the funds transferred to theDefendant as his own income. (See Settlement Agreement)The Trustee counters that this is the kind of extraneous factTHAT cannot be considered by the Court in determininga motion to dismiss. This is incorrect, however, since theSettlement Agreement, relied upon by the Trustee, doesrequire such an acknowledgment. However, the Court stillmust determine whether the Trustee has sufficiently allegedthat the property transferred was an interest of the Debtors' inproperty.

The Bankruptcy Code does not define the phrase: “an interestof the debtor in property.” Jacobs v. Matrix Capital Bank (Inre AppOnline.com, Inc.), 315 B.R. 259, 272 Bankr. E.D.N.Y.(2004). Courts have concluded, however, that the term isequivalent to the term: “property of the estate,” pursuant to 11U.S.C. § 541. See Begier v. Internal Revenue Serv., 496 U.S.53, 59–60 (1990); AppOnline.com, 315 B.R. at 272. Courtsturn then to § 541 in order to determine the scope of propertyinterests that are recoverable under §§ 544, 547, and 548. SeeBegier, 496 U.S. at 59–60, 110.

Because the purpose of the avoidanceprovision is to preserve the propertyincludable within the bankruptcyestate—the property available fordistribution to creditors—“property ofthe debtor” subject to the preferentialtransfer provision is best understoodas that property that would have beenpart of the estate had it not been

transferred before the commencementof bankruptcy proceedings.

Begier, 496 U.S. at 59. Section 541(a)(1) provides thatproperty of the estate includes “all legal or equitable interestsof the debtor in property as of the commencement of the case.”11 U.S.C. § 541(a)(1). As such, the Complaint needs onlya short and plain statement that plausibly suggests that theDebtors held an interest in the funds in their DisbursementAccount that were subsequently transferred to the Defendantsuch that if they had not been transferred they would haveconstituted property of the estate upon commencement of thebankruptcy case.

*4 Reviewing the Complaint makes clear that the Trusteeclearly alleges a transfer of the Debtors' interest inproperty. The Complaint alleges that “the Debtors madethe following payments (the “Transfers”) by checks toDefendant's attorneys that were drawn from the Debtors'Disbursement Account based upon the Agreement reached inthe Arbitration Action ...” and that the Disbursement Accountwas one maintained by Russ Berrie U.S. Gift, Inc. at WellsFargo bank, N.A. for purposes of the Debtors' receipt anddisbursement of funds, thus, supporting the requirement thatthe funds transferred were property of the Debtors. (Compl.,¶¶ 11,17).

The Trustee further argues that because the funds weretransferred from the Debtors' account, there is a presumptionthat they constitute an interest of the Debtors' inproperty. In re Spinnaker Industries, Inc., 328 B.R. 755(Bankr.S.D.Oh.2005) (stating that “The check evidencing theTransfer was drawn on a Spinnaker Coating account withKey Bank of Maine in the amount $100,000 and, thus, wasunquestionably property of the Debtor's estate” because itconstituted a legal or equitable interest); In re Tax Grp., LLC,439 B.R. 47 (Bankr.S.D.N.Y.2010) (holding that funds in thedebtor's bank account were presumed to be property of theestate upon commencement of the case); But see also In reFin. Res. Mortgage Inc., 468 B.R. 487 (Bankr.D.N.H.2012)(found that funds held in the debtor's account were presumedto be property of the estate based on New Hampshire statelaw).

Notwithstanding the Trustee's attempt to establish thepresumption that the Debtors held an interest in the fundstransferred, such a presumption is not required under thepleading standard of Rule 8. It is sufficient that the Trustee


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clearly and plainly alleges facts that would plausibly suggestthat the Debtors held an interest in the funds transferredto the Defendant from the Debtors' Disbursement Account.Therefore, the Court finds that the Trustee has adequatelypleaded that the transfers were of property in which theDebtors held an interest.

B. On Account of an Antecedent DebtThe Defendant argues that the Complaint must be dismissedbecause the transfers from the Disbursement Account werenot on account of an antecedent debt. Its argument relieson, first, a finding by the Court that the debt owed tothe Defendant was not that of the transferring Debtor,but of a third party, or, alternatively, that the debt wascontemporaneous with the transfer, not antecedent.

i. Debt of the Debtor or of a Third Party

The Defendant argues that the payments to Deutsch Atkinswere made on behalf of Kid Brands, Inc., the new namefor Russ Berrie & Company, neither of which is a debtor inthis case. Further, the Defendant contends that Russ BerrieU.S. Gift, Inc., a Debtor herein, made payment to DeutschAtkins for Kid Brands, Inc. in connection with the SettlementAgreement for various forms of consideration and a releaseof Russ Berrie U.S. Gift, Inc. and its affiliates.

Defendant's statements are not contained within theComplaint and should not be considered by the Court.Moreover, the Complaint sets out a clear statement plausiblysuggesting that the Trustee is entitled to relief. Paragraph12 states that Mr. Moll served as vice president for theDebtors until July, 2009. Paragraph 13 states that on March8, 2011, Mr. Moll and the Debtors reached a settlement to theArbitration Action. Paragraph 17 clearly states that betweenMarch 10, 2011, and April 11, 2011, payments were madeto the Defendant, and paragraph 22 states that “[e]ach ofthe Transfers was made for or on account of an antecedentdebt owed by the Debtors to David Moll before each of theTransfers was made.”

*5 The Complaint clearly states that the payments weremade to the Defendant on account of a debt owed by theDebtors. Furthermore, the extraneous facts introduced bythe Defendants should not be considered by the Court inconsidering a motion to dismiss pursuant to Rule 12(b)(6).See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410,

1424–25 (3d Cir.1997). For these reasons, the Court findsthat the Trustee has adequately plead that the payments weremade on account of an antecedent debt and denies the motioninsofar as it seeks to dismiss for that reason.

ii. Antecedent or Contemporaneous Debt

Alternatively, the Defendant argues that, if the debtis determined to be that of the Debtors, then thepayment of March 8, 2011, made the same day as theSettlement Agreement resolving the Arbitration Action, wascontemporaneous with the debt being incurred and, therefore,not antecedent. See In re U.S. Digital, Inc., 443 B.R. 22,37 (Bankr.D.Del.2011). The Trustee counters that the debtdid not arise with the Settlement Agreement, but rather themoment when Mr. Moll was entitled to his pension benefits– upon his termination, which is alleged to have occurredprior to the Arbitration Action, which commenced in January,2010.

Again, considering the Complaint on its face, the Trusteehas sufficiently alleged that the Debt was antecedent. Muchof the factual evidence on which the Defendant relies isdrawn from a 2008 Severance Policy that was created inanticipation of an acquisition of Russ Berrie & Company,Inc. (or Kids Brand, Inc.) by The Encore Group, Inc., notproperly in evidence and not to be considered in defenseof this Motion. Notwithstanding the improper submission offacts by the Defendant, the debt, whether arising at the pointof Mr. Moll's termination, pursuant to the 2008 SeverancePolicy, upon the commencement of the Arbitration Action, orpursuant to the Settlement Agreement, it is clear that: (1) theComplaint clearly sets forth that the debt owed to Mr. Mollarose prior to the date of the payments to the Defendant, and(2) to make a final determination on the Trustee's preferenceaction, the Court needs a more developed factual record todetermine the nature of the debt and when it arose. Becausethere remain substantial questions of fact, the Court will allowthe parties to pursue discovery and present a fully developedfactual record for the Court to consider.

C. Other ArgumentsThe Defendant contends that the Trustee's Complaint must bedismissed because he has initiated a similar action seekingavoidance of the transfer from Mr. Moll. While Section550(d) provides that “[t]he trustee is entitled to only asingle satisfaction under subsection (a),” it recognizes the









possibility that more than one party may be liable and,thus, the trustee's remedy is limited not by parties, but byamount. In other words, the limiting nature of section 550(d)ensures only that the trustee's recovery does not exceed theproperty value or the property transferred. See 5 COLLIERON BANKRUPTCY ¶ 550.05 (Alan N. Resnick & Henry J.Sommer eds., 16th eds.) (citing Freeland v. Enodis Corp., 540F.3d 721 (7th Cir.2008)). The Trustee is not precluded frompursuing separate actions against multiple parties for receiptof the same property. The limitation is on the recovery.

Lastly, the Defendant seeks dismissal of the Complaint basedupon its claimed affirmative defense of contemporaneousexchange for new value. The preference exception, codifiedby 11 U.S.C. § 547(c)(1), serves as a defense to anavoidance action based on a preferential transfer whenthe transfer was “substantially contemporaneous” and wasintended to be for new value by both the creditor andthe debtor. In re Hechinger Inv. Co. of Delaware, Inc.,489 F.3d 568, 572 (3d Cir.2007) (citing 11 U.S.C. §547(c)(1)). Affirmative defenses, however, notwithstandingtheir likelihood of success, cannot be used to dismiss aplaintiff's complaint under Rule 12(b)(6). In re AdamsGolf, Inc. Securities Litigation, 381 F.3d 267, 277 (3dCir.2004) (citing Doe v. GTE Corp., 347 F.3d 655, 657(7th Cir.2003)) (defendant's affirmative defense to plaintiff'sloss causation pleading could not be used to dismiss thecomplaint). Furthermore, courts have specifically determinedthat preference exceptions listed under 11 U.S.C. § 547(c)cannot be used to dismiss a plaintiff's complaint under Rule

12(b)(6). See e.g. Gluth Bros. Const., Inc., 424 B.R. 379, 398(Bankr.N.D.Ill.2009) (defendant's argument that paymentsfell within the ordinary course of business exception wereirrelevant for the purposes of the motion to dismiss since thepreference exceptions in § 547(c) are affirmative defenses);Adelphia Communications Corp. v. Bank of America, N.A.(In re Adelphia Communications Corp.), 365 B.R. 24,79 (Bankr.S.D.N.Y.2007) (the ordinary course of businessaffirmative defense under 11 U.S.C. § 547(c)(2) raised factualissues inappropriate for a determination on a motion todismiss under Rule 12(b)(6)); In re DVI, Inc., 2008 WL4239120, at *3 (Bankr.D.Del.2008) (conduit defense is anaffirmative defense and cannot form the basis of a motion todismiss). Therefore, the Defendant's affirmative defense ofcontemporaneous exchange for new value is irrelevant to theinstant Rule 12(b)(6) action.

CONCLUSION

*6 For the foregoing reasons, the Defendant's motion todismiss the adversary complaint pursuant to Federal Ruleof Bankruptcy Procedure 7012 is denied. An Order inconformance with this Opinion has been entered by the Courtand a copy attached hereto.

All Citations

Not Reported in B.R. Rptr., 2013 WL 4028098





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In re BR Festivals, LLC, Not Reported in B.R. Rptr. (2015)2015 WL 1216836



United States Bankruptcy Court, N.D. California.

IN RE BR FESTIVALS, LLC, Debtor(s).BR Festivals, LLC, Plaintiff(s),

v.Jason W. Johnson, et al., Defendant(s).

No. 14–10175|

A.P. No. 14–1024|

Signed March 11, 2015


John H. MacConaghy, MacConaghy and Barnier, Sonoma,CA, for Debtor(s).

Memorandum After Trial

Alan Jaroslovs, U.S. Bankruptcy Judge

I. Background*1 Chapter 11 debtor in possession and plaintiff BR

Festivals, LLC, was formed in December, 2012, to stagean outdoor music festival in Napa, California, known as“Bottlerock,” from May 9—13, 2013. Defendant Jason W.Johnson was an original manager and 35% owner, havingcontributed $1 million in cash. The other two managers wereRobert Vogt, who resigned in 2013, and Gabriel Meyers.

The operating agreement provided that if BR Festivals neededcash Johnson had the first right to loan it funds, on anunsecured basis, with interest at 10%. On January 22, 2013,Johnson exercised this right by loaning BR Festivals $1million.

The operating agreement gave BR Festivals the right to buyout Johnson for $2 million any time before April 30, 2013.If BR Festivals exercised this right, it was also obligated torepay any loans it owed to Johnson, with accrued interest.

Bottlerock was doomed to be a financial failure from thevery start, due to the lack of experience of the managersand undercapitalization. Vogt, who was making most of thedecisions, seriously underestimated the expenses of staging

such a large event and over-estimated the expected revenues.However, the ultimate failure of the concert was maskedfor a considerable time by advance ticket sales, optimisticprojections and wishful thinking.

Believing that Bottlerock would be a financial success, Vogtand Meyers decided to exercise the option to buy out Johnson,even though it would cost BR Festivals $1 million more thanJohnson had contributed. They found two new investors, whoagreed to invest a total of $3 million in the form of a notefor $3 million secured by all assets of BR Festivals. In returnfor the loan, the new investors were given an immediate10% membership interest in BR Festivals and the right toconvert the note into additional membership interest if itwas not paid in full by May 31, 2013. The note providedthat “The Company shall use the proceeds of the Note topay off the consideration due to Jason Johnson and returnhis Membership Interest to the Company within one day offunding.”

On April 29, 2013, the new investors wired a total of$3 million to BR Festivals. Later that day, BR Festivalswired $3,025,849.32 to Johnson's wholly-owned corporation,defendant DeVille Enterprises, Inc. This sum representedJohnson's original $1 million investment, the $1 millionadditional buyout price, the $1 million loan, and $25,849.32in accrued interest. Immediately after the transfer, BRFestivals had $662,681.00 in cash in its account at ChaseBank, $50,000.00 in receivables and $5,038,526.50 in prepaidperformers' fees, all of which became collateral of the newinvestors.

When all the dust settled after Bottlerock was over, it becameclear that BR Festivals had lost at least $6 million and wasinsolvent. It filed its Chapter 11 petition on February 5, 2014and has been a debtor in possession since that date.

By this adversary proceeding BR Festivals, as a Chapter 11debtor in possession entitled to exercise the rights of trusteeby virtue of § 1107(a) of the Bankruptcy Code, seeks torecover the $3,025,849.32 from Johnson. It alleges that thetransfer was avoidable as either a preference or a fraudulenttransfer and is recoverable under California law forbiddingcertain payments to insiders by an insolvent entity. The courtwill address these claims separately.

II. Preference*2 A simple reading of § 547(b) of the Bankruptcy Code

makes the $1 million loan repayment to Johnson avoidable.


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BR Festivals paid Johnson, an insider, $1,025,849.32 onaccount of a pre-existing debt at a time when it was insolventand within one year of bankruptcy. The payment allowedJohnson to be paid in full while ordinary creditors standto recover very little. It is hard to imagine a more classicpreference. However, the court must consider the EarmarkingDoctrine in determining if the transfer is avoidable.

The Earmarking Doctrine dictates that a preference is notavoidable where a new lender has loaned money to thedebtor for the purpose of paying off the recipient of thepreferential payment. It is generally considered a court-madeequitable exception to the provisions of § 547 (In re KempPacific Fisheries, Inc., 16 F.3d 313, 316n2 (9th Cir.1994)),although justified as consistent with the statute on the theorythat the debtor had no property interest in the newly-lentfunds (as required by § 547(b))(In re Adbox, Inc., 488 F.3d836, 841–42 (9th Cir.2007)) or that the contemporaneousexchange for new value defense of § 547(c)(1) applies(“The Earmarking Defense to Voidable Preference Liability;A Reconceptualization,” 73 Am.Bankr.L.J. 591 (1999)).However it is characterized, the Earmarking Doctrine is tobe narrowly construed. 5 Collier on Bankruptcy 16th Ed., ¶547.03[2][a], p. 547–21.

Regardless of whether the Earmarking Doctrine is considereda purely equitable doctrine, a test of whether the debtor hadan interest in the funds or an affirmative defense, virtually allauthorities agree that if collateral is given to the new lenderwho provides funds to pay off an old unsecured creditor thenthe old creditor receives an avoidable transfer to the extentof the value of the collateral. In re Superior Stamp & CoinCo., Inc., 223 F.3d 1004, 1008n3 (9th Cir.2000); Collier onBankruptcy, Id. at p. 547–25 [“A payment by the debtor withfunds earmarked for a specified unsecured creditor will beavoidable as a preference to the creditor if the debtor had togrant a security interest to the new lender.”]; In re Moses,256 B.R. 641, 651 (10th Cir. BAP 2000)[The EarmarkingDoctrine “never applies in situations where an unsecureddebt ... is replaced by a secured debt....”; 73 Am.Bankr.LJ at602—03. Johnson blithely dismisses this point by asserting,without foundation, that its collateral had little or no value.The evidence established quite the opposite.

Johnson argues that the date for valuing the collateral givento the new investors was May 16, 2013, when they filedtheir UCC–1. However, that merely perfected the securityinterest as to third parties; as between the new investors andBR Festivals, the security interest was effective as of its

granting on April 28, 2013, so that is the date of the transferfor preference determination. See In re Royal Golf ProductsCorp., 908 F.2d 91, 93–95 (6th Cir.1990). At that time, inaddition to over $600,000 cash in the bank, BR Festivals hadprepaid entertainers over five million dollars. The fact thatthese prepayments later became ticket sales does not mean

they had no value. 1 No evidence was presented that anyof the performers failed to honor their commitments. It isconceivable that a prepayment to a band might have a valuefar in excess of the amount prepaid where, for example, anold band member suddenly decided to rejoin the band for theprepaid performance, but there was no evidence of that either.The court accordingly adopts the book value of $5,038,526.50as the value of the prepaid entertainment.

1 Nor does it matter that the new investors, forwhatever business or strategic reason, decided wellafter the fact to waive their security interest. At thetime of their loan, their collateral had substantialvalue.

*3 The court finds that BR Festivals has proved all of theelements of a preference as to the repayment of Johnson's$1 million loan and that the Earmarking Doctrine doesnot insulate the preference from avoidance because thenew lender took collateral having a value in excess of therepayment. The court further finds that Johnson has not met

his burden as to any affirmative defense. 2 Accordingly, theloan repayment to Johnson of $1,025,849.32 will be avoidedand recovered by BR Festivals.

2 Specifically, there was nothing in the least“ordinary” about this transaction. Extending theordinary course of business defense of § 547(c)(2)to these facts, as Johnson urges, would effectivelyerase preference recovery and make those draftersof the Bankruptcy Code who are no longer with usturn over in their graves.

II. Fraudulent TransferSection 548(a)(1)(B) of the Bankruptcy Code allowsavoidance of an interest of the debtor in property madewithin two years before bankruptcy, if the debtor received lessthan reasonably equivalent value in exchange and the debtorwas at the time insolvent, or was engaged in a business forwhich property remaining was an unreasonably small capital,or the debtor intended to incur debts beyond the debtor'sability to pay as they matured. As noted above, BR Festivalswas insolvent almost from the beginning and was certainly



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insolvent on April 28, 2013. On that date, it had unreasonablysmall capital for its business and intended to incur debtsbeyond its ability to pay. These facts were masked by theinexperience of BR Festival's managers and the positive cashflow created by advance ticket sales, but knowledge is notan element of a constructive fraudulent transfer pursuant to §548(a)(1)(B).

BR Festivals got nothing for the $2 million it paid to Johnsonfor ownership interest. Johnson again invokes the EarmarkingDoctrine, but that doctrine is a less availing argument againsta fraudulent transfer claim than the court found it in thepreference context.

Johnson argues that in substance the new investors werejust buying out his ownership interest, so that the estatewas not diminished. However, this is clearly not the case.The new investors could not have accomplished their goalsmerely by paying Johnson directly, because they also wanteda security interest in BR Festival's assets. By going throughBR Festivals, $1 million in ownership equity was transmutedinto $2 million in secured debt. This diminished the BRFestival estate by $2 million, for which the estate got nothing.

While the Earmarking Doctrine is usually applied topreference claims, it may be invoked, in a proper case, tofraudulent transfer claims. In re Chase & Sandborn Corp.,813 F.2d 1177, 1182 (11th Cir.1987). However, this is nota proper case. As Johnson himself noted in his trial brief,“Fraudulent transfer law in the bankruptcy context focuseson the preservation of the assets of the estate, specificallyto benefit unsecured creditors.” By the transaction, generalunsecured creditors were instantly deprived of a pro ratainterest in BR Festivals estate so that Johnson could be repaidin full and bought out with a profit. The estate was diminishedby more than the amount of the total payments to Johnson,so avoidance creates fairness, not a windfall. As noted above,the Earmarking Doctrine must be applied narrowly. It cannotbe stretched to cover the facts of this case.

III. Illegal DividendAs an alternative theory, BR Festivals argues that the $2million buyout of Johnson violated part of California's

Beverly–Killea Limited Liability Company Act. 3 It is clearthat California Corporations Code Section 17254(a) wasviolated by the buyout. That section provides, in pertinentpart:

*4 (a) No distribution shall be made if, after giving effectto the distribution, either of the following occurs:

(1) The limited liability company would not be able to payits debts as they become due in the usual course of business.

(2) The limited liability company's total assets would beless than the sum of its total liabilities ...”

The problem with BR Festivals' argument is that the remedyfor violation of the section is contained in § 17254(e),which provides that “A member ... is obligated to return adistribution from a limited liability company to the extentthat ... the member ... had actual knowledge of facts indicatingthe impropriety of the distribution....”

3 The California statutes relied upon by BR Festivalswere replaced with other statutes in 2014. The courtdiscusses the statutes as they existed during 2013.

Factually, the matter is not as clear as Johnson argues. Thereare some facts from which the court could infer that Johnsonhad actual knowledge of BR Festivals' financial problems.Most notably, while he readily exercised his right to loan BRFestivals the initial $1 million, he later declined a requestfrom Vogt to make an additional loan. However, this aspect ofthe case was not vigorously pursued by BR Festivals. In theend, the court cannot say that it proved, by a preponderanceof the evidence, that Johnson had the requisite knowledge.Accordingly, the court finds no liability under § 17254.

Section 17255(a) makes a member or manager of an LLCpersonally liable for distributions made in violation of §17254, but only if the member or manager voted for thedistribution. Since Johnson did not vote for the distribution,

it appears that he has no liability under § 17255(a) either. 4

4 The right of the other owners to buy out Johnsonwas contained in the operating agreement, so thatJohnson had no say (and hence no vote) in whetherhe was bought out. Johnson did agree to the termsof the operating agreement; there is an issue asto whether this could constitute a “vote” withinthe meaning of § 17255(a). In the absence of anyauthority or compelling argument by BR Festivals,the court declines to so find.

IV. Conclusion






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The payment to Johnson was not, as he styles, in substancejust a buyout of his ownership by new investors. The assets ofBR Festivals were leveraged in order to finance the buyout;so the funds of the new investors needed to come throughBR Festivals rather than be paid directly to Johnson. Becausethe assets of BR Festivals were encumbered to finance thepayment, the Earmarking Doctrine does not afford Johnson anescape from avoidance. He received a preferential paymentof $1,025,849.32, and the other $2 million he received wasconstructively fraudulent as to BR Festivals. Accordingly,BR Festivals shall have judgment against Johnson as prayed,

including interest from and after April 29, 2013, as prayed. 5

5 BR Festivals does not seek prejudgment interestas to the preference. The court agrees with BRFestivals that since an existing creditor would havea right to prejudgment interest on the fraudulenttransfer claim then BR Festivals has that right alsopursuant to § 544(b)(1) of the Bankruptcy Code.

*5 This memorandum constitutes the court's findings andconclusions pursuant to FRCP 52(a) and FRBP 7052. Counselfor BR Festivals shall submit an appropriate form of judgmentforthwith.

All Citations

Not Reported in B.R. Rptr., 2015 WL 1216836




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In re Nucorp Energy, Inc., 116 B.R. 872 (1989)Bankr. L. Rep. P 73,136


116 B.R. 872Unpublished Disposition

NOTICE: THIS IS AN UNPUBLISHED OPINION.(The Court's decision is referenced in the Bankruptcy

Reporter in a table captioned “United StatesBankruptcy Appellate Panel for the Ninth

Circuit Decisions Without Published Opinions.”See FI CTA9 BAP Rule 11 rules regarding the

publication and citation of unpublished opinions.)United States Bankruptcy Appellate

Panel of the Ninth Circuit.

In re NUCORP ENERGY, INC., an Ohiocorporation, and its affiliates, Debtor(s).

ADDISON & LEYEN, INC., Appellant,v.

NUCORP LIQUIDATING TRUST, MiltonFredman, Co–Trustee of the Trust, Appellees.

BAP No. SC 88–1352–ASRP.|

Bankruptcy No. 82–01306.|

Adv. No. C85–0377–P11.|

Argued and Submitted Feb. 15, 1989.|

Decided Dec. 21, 1989.


Patrick J. Malloy, III, Tulsa, Okl., for appellant.

Ali M. M. Mojdehi, Baker & McKenzie, San Diego, Cal., forappellees.

SynopsisBkrtcy.S.D.Cal.

AFFIRMED.

Procedural Posture(s): On Appeal.

Before CALVIN K. ASHLAND, BARRY RUSSELL andELIZABETH L. PERRIS, Bankruptcy Judges.

OPINION

CALVIN K. ASHLAND, Bankruptcy Judge:

*1 Addison & Leyen, Inc. appeal the bankruptcy court'sorder holding that its forbearance from asserting its statutorylien rights against property of Nucorp Energy, Inc. did notconstitute “new value” under § 547(a)(2) & (c)(1). We affirm.

FACTS

Nucorp Energy, Inc. (Nucorp) and its affiliated subsidiariesfiled Chapter 11 petitions on July 27, 1982. Prior to the filingof the bankruptcy petitions, Nucorp employed Addison &Leyen, Inc. (Addison) to provide materials and services inconnection with two oil wells (the Storseth and Federal # 31–1 Wells) in North Dakota. The present controversy centersaround work performed on the Storseth Well.

Addison provided materials and services as agreed and issuedtwo invoices dated February 15, 1982 and February 19, 1982to Nucorp. Addison received two payments from Nucorp.Nucorp mailed a check for the first invoice in the amountof $36,637.20 to Addison on April 27, 1982. The check wasreceived by Addison on May 3, 1982. Nucorp mailed a secondcheck covering the later invoice in the amount of $26,601.40on June 28, 1982. This check was received by Addison onJuly 6, 1982.

Prior to accepting the two checks Addison took no action toperfect any lien rights on the oil wells. In addition, after thechecks were received, Addison did not actually release a filingof a notice of lien.

The Storseth Well was drilled pursuant to an agreementwhereby Nucorp would earn a leasehold interest onlyif the well was capable of producing oil and gas incommercial quantities. On December 19, 1982 the StorsethWell was plugged and abandoned because it did not producecommercial quantities of oil and gas. The bankruptcy courtfound the salvage value of the equipment at the well site tobe $22,426.41 and also found that the cost associated withsalvaging the equipment was $29,893.00. As a result, therewas a net negative salvage value of $7,466.59.

Addison argues that it waived its lien rights when it acceptedpayment of the two invoices and that this waiver wasconsideration for the payments by Nucorp. As a result,Addison contends that the payments constituted new value




under § 547(c)(1) and were, therefore, excepted from thetrustee's power to avoid preferential transfers.

ISSUES

1. Did the bankruptcy court err in finding that the StorsethWell, underlying lease, and equipment did not have value onthe date of transfer?

2. Did Addison's forbearance from asserting its inchoatestatutory lien against Nucorp's property constitute new valueunder § 547(c)(1)?

STANDARD OF REVIEW

The bankruptcy court's valuation of Nucorp's oil well, lease,and equipment is a finding of fact reviewed under the clearlyerroneous standard. Matter of Lackow Bros., Inc., 752 F.2d1529, 1533 (11th Cir.1985). Whether forbearance of aninchoate statutory lien may constitute new value is a questionof law reviewed independently. In re Jet Florida System, Inc.,841 F.2d 1082, 1083 (11th Cir.1988).

DISCUSSION

*2 At the outset, we note that the first payment madeby Nucorp was issued 92 days before the petition dateand received by Addison 85 days prior to the filing ofNucorp's petition. Section 547(b) allows the trustee to avoidpreferential transfers made within 90 days before the date thebankruptcy petition is filed. 11 U.S.C. § 547(b)(4)(A). Forpurposes of § 547(b) a transfer made by check occurs noearlier than when the check is received by the creditor. In reGold Coast Seed Co., 30 B.R. 551, 552 (9th Cir.BAP 1983);See Newton Exploration Co., Inc. v. Fredman, (In re NucorpEnergy, Inc.), 92 B.R. 416, 417 (9th Cir.BAP 1988). Becausethe first check was received by Addison 85 days prior toNucorp's petition in bankruptcy the payment falls within thepreference period. The two payments made by Nucorp satisfythe remaining four statutory requirements for an avoidabletransfer contained in § 547(b).

Addison asserts that the bankruptcy court erred in finding thatat the time of the transfers the Storseth Well, underlying lease,and equipment had no economic value. Addison offered thetestimony of its president Wilfred Roach, that the equipment

could have been salvaged and that the Storseth Well hadeconomic value. Nucorp presented testimony from TimothyWiener, an expert witness, who testified that the cost ofrecovering the equipment was greater than the salvage valueof the equipment, and that the well would not producecommercial quantities of oil and gas. It is within the exclusiveprovince of the trier of fact to resolve such conflicts oftestimony. Jet Florida, 841 F.2d at 1082. Since the valuedetermination was not clearly erroneous the bankruptcycourt's finding will not be overturned.

The gravamen of Addison's contention lies in the assertionthat the forbearance from asserting its inchoate statutory lienon the Storseth Well constituted new value, and therefore,falls within the contemporaneous exchange for new valueexception to avoidable preferences under § 547(c)(1). In

pertinent part, § 547(c) provides 1 :

(c) The trustee may not avoid under this section a transfer—

(1) to the extent such transfer was—

(A) intended by the debtor and the creditor to or for whosebenefit such transfer was made to be a contemporaneousexchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

11 U.S.C. § 547(c)(1)(A) & (B) (1982).To come within the § 547(c)(1) exception there are threeelements that must be satisfied: (1) the creditor must extendnew value to the debtor; (2) both the creditor and thedebtor must intend the new value and reciprocal transferto be contemporaneous; and (3) the exchange must in factbe contemporaneous. Cimmaron Oil Co., Inc. v. CameronConsultants, Inc., 71 B.R. 1005 (N.D.Tex.1987). In this casethe second and third elements have been satisfied. Addisonlost its right to assert a statutory lien when it received paymentby Nucorp. It can fairly be said that the parties intendedthe forbearance of the right as a contemporaneous incidentto the payment by Nucorp. The remaining issue is whetherAddison's forbearance in asserting its inchoate statutory liencould constitute “new value” as a matter of law and if so,whether such forbearance constitutes “new value” under thefacts of this case.

*3 “New value” for purposes of § 547 is defined as:


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(a) In this section—

(2) “new value” means money or money's worth in goods,services, or new credit, or release by a transferee of propertypreviously transferred to such transferee in a transaction thatis neither void nor voidable by the debtor or the trusteeunder any applicable law, but does not include an obligationsubstituted for an existing obligation;

11 U.S.C. § 547(a)(2) (1982).Courts have generally applied two levels of analysis indetermining whether the forbearance of inchoate lien rightsmay constitute new value. Several courts have concluded thatforbearance of the right to perfect a lien is not the exchangeof “new value” under section 547(a)(2) as a matter of law.Cimmaron Oil, 71 B.R. at 1009; In re Hatfield Electric,Co., 91 B.R. 782, 785-786 (Bankr.N.D.Ohio 1988); see alsoFredman v. Milchem, Inc. (In re Nucorp Energy, Inc.), 80 B.R.517, 519 (Bankr.S.D.Cal.1987); cf In re Energy Co-op, Inc.,832 F.2d 997, 1002-3 (7th Cir.1987); Drabkin v. A.I. CreditCorp., 800 F.2d 1153, 1159 (D.C.Cir.1986) (forbearance withregard to collateral that could be repossessed is not “newvalue”); In re Duffy, 3 B.R. 263, 266 (Bankr.S.D.N.Y.1980)(creditor's forbearance did not constitute new value); butsee In re Wilco Forest Machinery, Inc., 491 F.2d 1041,1046-47 (5th Cir.1974) (release of a security interest is“new value”); In re Quality Plastics, Inc., 41 B.R. 241,243 (Bankr.W.D.Mich.1984) (officer-creditor's forbearanceconstituted new value).

In Cimmaron the court reasoned:

... This court concludes that forgoing, by operation of law, theright to perfect a lien is not the exchanging of “new value”with the debtor because it is not money or money's worth ingoods, services, or new credit, nor is it a release of propertyby the lienor that has previously been transferred to the lienor.Congress carefully defined new value in § 547(a)(2). The termincludes goods, or the value of them, or the release of propertypreviously transferred. The waiver of an inchoate lien rightdoes not fit within the definition of “new value” as set forthby Congress.

... Congress apparently meant a precise definition whenit listed what constitutes new value. Congress could haveallowed courts to expand upon the doctrine of new valueby legislating that new value includes certain transactions.Instead, Congress stated what new value means, which shouldretard case law expansion.

Cimmaron, 71 B.R. at 1009 (citations omitted).Other courts have taken a more factual approach todetermining whether forbearance of an inchoate statutorylien is “new value” by focusing on the actual value ofthe lien that was released. In Fredman, the court held thatirrespective of whether forbearance of an inchoate lien fallswithin the definition of new value contained in § 547(a)(2),at a minimum there must be actual or equivalent value in theright exchanged. Fredman, 80 B.R. at 519. The court stated:

*4 The language of this section clearly indicates that“new value” may be money or money's worth in goods, ormoney's worth in services, or money's worth in the releaseof an unavoidable transfer. The concept of worth is oneof valuation. Black's Law Dictionary defines worth as “thequality of a thing which gives it value; ... value.” At 17.82.Worth is defined as “monetary value” in Webster's NewCollegiate Dictionary.

Id. at 520.Such courts look to the basic policy considerationsunderlying the preference provisions of the BankruptcyCode, specifically § 547(a)(2), to determine if forbearancefrom asserting an inchoate lien is sufficient to constitutenew value. See In re Johnson, 25 B.R. 889, 893–94(Bankr.E.D.Tenn.1982). Johnson holds that forbearance fromasserting an inchoate lien may constitute new value becausethe failure to make payment would simply increase the valueof the creditor's lien, and the creditor would obtain the valueof those payments upon liquidation. A different result wouldoccur where the secured creditor is undersecured because anundersecured creditor would be obtaining more than he wouldreceive in Chapter 7 to the extent that payments reduced theunsecured deficiency. Id. (citing 9A Am.Jur.2d., Bankruptcy§ 551 at 153–54 (1980)).

The Court of Appeals of the District of Columbia discussedthe policy considerations in determining whether forbearanceis sufficient to constitute new value in Drabkin v. A.I. CreditCorp., 800 F.2d 1153 (D.C.Cir.1986). The court in Drabkinstated:

We think it plain that a payment to an unsecured creditor inreturn for that creditor's agreement not to force the debtorinto bankruptcy can never be treated as new value. Otherwisethe preference provisions of the bankruptcy code would benullified, because all creditors could extract payments within
























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the preference period under that exception. Similarly, anagreement by an undersecured creditor to forgo his right toforeclose on collateral could not be treated as new valuewithout unfairly prejudicing general creditors. It is a basicaxiom of the bankruptcy law that a secured creditor isprotected only to the extent of his security interest. If anagreement not to foreclose—to forbear—were treated as newvalue, however, then a debtor's payment of the entire debt(both secured and unsecured portions) in return for thatagreement could be sheltered from the Code's preferenceprovisions. The undersecured creditor, in other words, couldleverage his security to cover the unsecured portion of thedebt....

Id. at 1159 (footnotes and citations omitted).The Tenth Circuit in In re George Rodman, Inc., 792 F.2d 125(10th Cir.1986) disagreed with the analysis applied by courtsconsidering the actual value of the inchoate lien that has beenreleased. The court in Rodman read two independent clausesinto § 547(a)(2). Thus, equivalent value is required if goods,services, or new credit is transferred to the debtor. But a“release by the transferee of previously transferred property”is independent of the equivalent value requirement containedin the first clause of the requirement. Id. at 128. The courtreasoned that a computation of the value of the exchangeis an improper undertaking in the context of a § 547(a)(2)property transfer. Id. It is important to note that the Rodmancourt did not rule on whether an inchoate lien falls within thedefinition of § 547(a)(2) since the lien that was waived wasperfected and had already attached to the debtor's property.Rodman merely stands for the proposition that undertakingan equivalency of value analysis is not appropriate when the“new value” given is the release of previously transferredproperty.

*5 Finally, the Ninth Circuit in In re Fegert, 887 F.2d955 (9th Cir.1989), aff'g, 88 B.R. 258 (9th Cir. BAP 1988),recently held that the release of an equitable lien by a MillerAct surety constitutes “new value.” In Fegert, the debtor, acontractor on a government project, paid two subcontractorsin full within the preference period. If the debtor had not paidthe subcontractors in full, the debtor's surety would have beenrequired to pay them pursuant to the Miller Act, 40 U.S.C. §§270a–270d. If a surety pays a subcontractor pursuant to theMiller Act the surety has a subrogated right to the equitablelien that an unpaid subcontractor would hold in the contractbalance or retainage. Fegert, at 958; see Pearlman v. Reliance,Co., 371 U.S. 132, 141, 83 S.Ct. 232, 237, 9 L.Ed.2d 190(1962). The Court of Appeals held that the release of the

surety's interest fell within the § 547(c)(1) exception. Fegert,at 959.

Fegert is both factually and legally distinguishable fromthis case. In Fegert, the equitable liens in favor of thesubcontractors had economic value because the contractretainage held adequate funds for payment of claims againstthe debtor. More importantly, subcontractors working ongovernment projects do not have enforceable rights againstthe United States for their compensation, and cannot acquirea lien on public buildings. U.S. v. Munsey Trust Co. ofWashington, D.C., 332 U.S. 234, 241, 67 S.Ct. 1599, 1602,91 L.Ed. 2022 (1947). The Miller Act preempts remediesunder state laws or lien statutes with respect to governmentcontracts. Continental Cas. Co. v. U.S. for use and benefitof Robertson Lumber Co., 305 F.2d 794, 797 (8th Cir.), cert.denied, 371 U.S. 922, 83 S.Ct. 290, 9 L.Ed.2d 231 (1962).In lieu of state remedies; the subcontractor has an equitablelien on the contract balances or retainage until such time asthe retainage fund is paid over to the contractor. PhiladelphiaNat'l Bank v. McKinlay, 72 F.2d 89, 90-91, (D.C.Cir.), cert.denied, 293 U.S. 583, 55 S.Ct. 96, 79 L.Ed. 679 (1934); seePearlman v. Reliance Ins. Co., 371 U.S. 132, 136–37, 141–42, 83 S.Ct. 232, 234–35, 237–38, 9 L.Ed.2d 190 (1962).

Thus, the subcontractor's equitable lien arises upon thefurnishing of his workmanship or materials and nothing moreneed be done to perfect the subcontractor's “security” interest.In fact, there is nothing more that a subcontractor workingon a government contract could do to perfect its interest. InFegert, the interest of the subcontractor was perfected underthe applicable statutes and case law, and the Court of Appealsheld that when such an interest is released by virtue of thedebtor's payment of the subcontractor in full, that “new value”has been contemporaneously exchanged and the paymentsfall within the preference exception contained in § 547(c)(1).

*6 In this case, Addison is seeking to apply the sameexception to a statutory lien that was never perfected. Thelanguage of § 547(a)(2) and the basic policy considerationsunderlying the preference provisions lead to the conclusionthat forbearance from asserting an inchoate statutory liencannot constitute “new value.” However, even if this courtwere to engage in an equivalency of value analysis, Addison'sforbearance would still be insufficient to constitute “newvalue” as a matter of law because the bankruptcy courtcorrectly decided that the liens had no economic value on thedate payment was received.


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Addison cites Greenblatt v. Utley, 240 F.2d 243 (9thCir.1956), for the proposition that a transfer made in dischargeof an inchoate mechanic's lien may not be avoided by thetrustee as a preference. As explained in Fredman v. Milchem,Inc. (In re Nucorp Energy Inc.):

... Nothing in the Greenblatt case suggests that the lien uponwhich the payment was made would not have been paid infull if the estate were liquidated. However, having determinedthat the lien rights Milchem surrendered were valueless, adifferent result must obtain in this case.

80 B.R. at 520. So too here, a different result must obtain. Thetrial court determined that Addison's inchoate lien right wasvalueless.

CONCLUSION

The bankruptcy court's finding that the Storseth Well,underlying lease, and equipment did not have value onthe date of transfer was not clearly erroneous. Addison'sforbearance from asserting its inchoate statutory lien did notconstitute “new value” as that term is used in § 547(a)(2) &(c)(1). The judgment of the bankruptcy court is affirmed.

1 In 1984 Congress amended § 547(a)(2) & (c)(1).See Pub.L. No. 98–353, § 462(a)(1), 98 Stat. 377–78 (1984). The 1984 amendments apply only tobankruptcy cases filed 90 days after July 10, 1984.Pub.L. No. 98–353, § 553, 98 Stat. 392. Thiscase was filed in July 1982, therefore, the 1984amendments do not apply. Even if the amendmentsdid apply our analysis would not be changed.

All Citations

116 B.R. 872, 1989 WL 207914 (Table), Bankr. L. Rep. P73,136









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Counsel via Electronic Mail

Bombardier Aerospace Corporation and Bombardier, Inc.

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