Brekelmans v. Salas

1

NICOLAAS BREKELMANS AND GAIL GREGORY BREKELMANS, CO-PERSONAL REPRESENTATIVES OF THE ESTATE OF NINA BREKELMANS, and MICHAEL MCLOUGHLIN AND MARTHA JOHNSON, COPERSONAL REPRESENTATIVES OF THE ESTATE OF MICHAEL PATRICK MCLOUGHLIN, Plaintiffs/Appellants/Cross-Appellees, v. MAX SALAS, Defendant/Appellee/Cross-Appellant.

No. 3:23-cv-00987

United States District Court, M.D. Tennessee, Nashville Division

September 30, 2024

MEMORANDUM

ALETA A. TRAUGER UNITED STATES DISTRICT JUDGE

The matter now before the court is an appeal and a corresponding cross-appeal from a judgment in a bankruptcy adversary proceeding pursuant to 28 U.S.C. § 158(a)(3), the court having previously granted the parties' motions for leave to take an interlocutory appeal. Specifically, these cross-appeals are from the Bankruptcy Court's May 24 2023 Order denying the plaintiffs' Motion for Summary Judgment as to Counts I, II, and VI of the plaintiffs' Complaint and granting defendant Max Salas' Motion for Summary Judgment on Counts IV and V of the Complaint and from the Bankruptcy Court's August 16, 2023 Order Denying Plaintiffs' Motion to Alter or Amend Under Fed.R.Bankr.P. 9023. (AP Nos. 102, 109.)^[1] For the reasons set forth herein, the Bankruptcy Court's Orders will be affirmed.

I. LEGAL STANDARD

Rule 56 of the Federal Rules of Civil Procedure governs motions for summary judgment in adversary proceedings in bankruptcy court. Fed.R.Bankr.P. 7056. Under Rule 56, summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). On a motion for summary judgment, the court must view the evidence and any reasonable inferences drawn from the evidence in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Pittman v. Experian Info. Sols., Inc., 901 F.3d 619, 627-28 (6th Cir. 2018). The court must then determine whether the evidence presents a sufficient factual disagreement to require submission of the challenged claims to the trier of fact or whether the moving party must prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).

Because a grant of summary judgment presents a pure question of law, district courts review the bankruptcy court's grant of summary judgment de novo, using the same Rule 56 standard as the bankruptcy court. In re McDonald, 29 F.4th 817, 822 (6th Cir. 2022); In re Morris, 260 F.3d 654, 663 (6th Cir. 2001).

II. PROCEDURAL HISTORY

This case has a very convoluted, as well as heartbreaking, history. In 2015, a fire broke out at 1610 Riggs Place, NW, Washington, D.C. (“Property”).^[2] Two individuals renting rooms at the Property, Nina Brekelmans and Patrick McLoughlin, died in the fire, and Max Salas, who also lived at and managed the Property, was seriously injured. On October 20, 2015, the plaintiffs herein, as the parents of the decedents and personal representatives of their estates, filed two separate wrongful death actions against Max Salas, as the manager of the Property, and his son, Len Salas, as owner of the Property, in the Superior Court for the District of Columbia (“Superior Court”). The Superior Court trial was scheduled to begin on March 26, 2018.^[3]

Less than two weeks before trial, Len Salas filed an “emergency” motion for summary judgment, in support of which he produced, for the first time, a copy of a 2010 trust and quitclaim deed (“2010 Quitclaim Deed”). Len Salas sought judgment in his favor on the basis that Max Salas was the real owner of the Property. His motion was denied, and the Superior Court declined to consider Len Salas' new evidence at trial, based on the belated filing.

The two matters proceeded to a single, consolidated trial, and, on April 4, 2018, the McLoughlin plaintiffs and the Brekelmans plaintiffs obtained jury verdicts in the Superior Court in the amounts of $7.7 million and $7.5 million, respectively, against Max Salas (as manager of the Property) and Len Salas (as owner) jointly and severally. Shortly after entry of the judgment, Max Salas filed for bankruptcy protection in the D.C. Bankruptcy Court, and Len Salas filed his petition in this district on April 18, 2018. Len Salas' case was converted from Chapter 11 to Chapter 7 on December 26, 2018, and the Chapter 7 Trustee (“Trustee”) was appointed.

Despite the Superior Court's verdict and the fact that the 2010 Quitclaim Deed was never recorded as required by D.C. Code § 42-401, the D.C. Bankruptcy Court ruled on September 25, 2018, in the context of Max Salas' Bankruptcy Case, that the conveyance was valid, giving Max Salas both legal interest and beneficial interest in the Property. In re Salas, 2018 WL 4621930, at *20. Based on that conclusion, the court also held that Max Salas was entitled to claim the District of Columbia's unlimited homestead exemption in the Property. Id. The D.C. Bankruptcy Court declined to rule on whether the transfer could be avoided under 11 U.S.C. § 544(a)(3) in Len Salas' Bankruptcy Case, based on Max Salas' failure to record the 2010 Quitclaim Deed, finding that “whether a hypothetical purchaser of the Property would have inquiry notice of Max's ownership of the Property” was “an issue of fact that must be decided by the U.S. Bankruptcy Court for the Middle District of Tennessee.” Id. at *21. Likewise, it noted that “[h]ow a judgment regarding the right of Len's estate to recover the Property under § 544 would affect Max's homestead exemption in this case is an issue for another day.” Id.^[4] On April 10, 2019, the Trustee in debtor Len Salas's Bankruptcy Case filed a “Motion to Sell Property” belonging to Len Salas, specifically described as “[a]ny and all claims and interests of the bankruptcy estate or the Chapter 7 trustee to the certain real estate located at 1619 Riggs Place, NW, Washington, DC 20009,” i.e., the Property, “such legal and equitable interest in the real estate having been possessed by Max Salas” pursuant to the D.C. Bankruptcy Court's September 25, 2018 ruling on Max Salas' homestead exemption. (Bankr. No. 162, at 3.) The claims and interests the Trustee sought to sell specifically included the Trustee's “rights to pursue a cause of action against Max Salas under the trustee's avoidance powers.” (Id.) The motion proposed to sell the claims to Ron Salas, defendant Max Salas' other son, for $10,000. (Id.) Over the objections of the plaintiffs and the U.S. Trustee, the Bankruptcy Court granted the motion but required the Trustee to provide notice of the sale to all interested parties and potential buyers and, if alternative bids were received, to conduct an auction. Because there were alternative bids, the auction took place, and the plaintiffs ultimately purchased the estate's interest in “any potential avoidance actions against Max Salas and/or his bankruptcy estate under 11 U.S.C. §§ 544, 545, 547, 548, 549, and 553 as related to the . . . [P]roperty” for $156,000. (Bankr. No. 179, at 2; see also Bankr. No. 191 (Trustee's Report of Sale and Bill of Sale).)^[5]

Having purchased the Trustee's interest in “any potential avoidance actions against Max Salas and/or his bankruptcy estate,” the plaintiffs initiated the Adversary Proceeding against Max Salas by filing their Complaint to Avoid Transfers and Recover Property in the Tennessee Bankruptcy Court. (AP No. 1.) After finding that the plaintiffs lacked standing to pursue the Trustee's avoidance actions on their own behalf, the Bankruptcy Court permitted them to amend the Complaint to assert the same claims in a derivative capacity on behalf of the Len Salas bankruptcy estate, essentially stepping into the shoes of the Trustee. (See AP Nos. 29, 30, 31, 38, 39, 40.)

The Amended Complaint contains six counts-three seeking recovery under 11 U.S.C. § 544(a) (Counts I, II, and III), one under § 548 (Count IV), one under 11 U.S.C. § 544(b) and D.C. Code §§ 28-3104 and 28-3105 (Count V), and one under 11 U.S.C. § 550 (Count VI). (AP No. 40.) The plaintiffs filed their Motion for Summary Judgment in the Bankruptcy Court in July 2022, seeking judgment on all claims except Count III and the “actual fraud” portion of Counts IV and V. (AP Nos. 73, 74.) The Bankruptcy Court initially denied the motion after oral argument on November 8, 2022, finding that material factual disputes precluded summary judgment for either party, and set the matter for trial. (See AP No. 82.)

After further consideration, however, the Bankruptcy Court entered a subsequent Order directing additional briefing on two specific issues:

1. In relationship to the strong-arm avoidance claims under 11 U.S.C. § 544(a)(3) (a bona fide purchaser) and 11 U.S.C. § 544(a)(1) (a hypothetical judgment lienholder), whether it is appropriate to consider inquiry notice and if so, whether inquiry notice existed as a matter of law based on the undisputed facts.

2. In relationship to the fraudulent conveyance claims under 11 U.S.C. §§ 544(b)(1) and 548(a)(1)(B), whether the [D.C. Bankruptcy Court] already determined the issue of ownership and bare legal title in its homestead exemption opinion[, In re Salas, 2018 WL 4621930]. [And i]f so, is the D.C. Court's Homestead Opinion entitled to preclusive or collateral effect in this proceeding.

(Order, AP No. 83, as summarized in Mem. Op., AP No. 101.)

The defendant thereafter filed his own Motion for Summary Judgment and supporting Memorandum, seeking judgment in his favor on all counts in the Amended Complaint, and the plaintiffs filed a Supplemental Memorandum and a Second Supplemental Memorandum in support of their Motion for Summary Judgment. (AP Nos. 89, 91, 92, 100.) Following the hearing...