Ehrenberg v. Halajyan (In re Victory Entm't Inc.)

634 B.R. 90

IN RE: VICTORY ENTERTAINMENT INC., Debtor.

Howard M. Ehrenberg, Plaintiff,

v.Agassi Halajyan and Hala Enterprises, LLC, Defendants.

Case No.: 1:18-bk-11342-VK

Adv. No.: 1:20-ap-01056-VK

United States Bankruptcy Court, C.D. California, San Fernando Valley Division.

Signed September 29, 2021

Hearing: Date: April 7, 2021

Paul A. Beck, Law Offices of Paul A. Beck APC, Sherman Oaks, CA, for Plaintiff.

David L. Oberg, Madison B. Oberg, Oberg Law Group, APC, Calabasas, CA, for Defendants.

MEMORANDUM OF DECISION

Victoria S. Kaufman, United States Bankruptcy Judge

I. BACKGROUND

On May 25, 2018, Victory Entertainment, Inc. ("Debtor") filed a voluntary chapter 11 petition. On September 27, 2018, the Court entered an order converting Debtor's case to a chapter 7 case [Bankruptcy Docket, doc. 108]. Howard M. Ehrenberg was appointed the chapter 7 trustee (the "Trustee").

On May 24, 2020, the Trustee filed a complaint against Hala Enterprises, LLC ("Hala") and Agassi Halajyan (together, "Defendants"). On January 22, 2021, the Trustee filed a second amended complaint (the "SAC") [doc. 36]. On February 5, 2021, Defendants filed a motion to dismiss the SAC (the "Motion") [doc. 37]. Plaintiff opposed the Motion [doc. 44].

On April 7, 2021, the Court held a hearing on the Motion. At that time, the Court issued a ruling on the Motion [doc. 47]. However, the Court took under advisement the issue of whether Mr. Halajyan and Debtor's principal, who are alleged to be first cousins, qualify as "relatives" under 11 U.S.C. § 101(45). Through this decision, the Court holds that first cousins qualify as "relatives" that are related within the second degree of consanguinity under the common law.

II. ANALYSIS

A. The Relevant Statutes and Current Case Law

Pursuant to 11 U.S.C. § 547(b) —

[T]he trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property—

...

(4) made— (A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider ....

(Emphasis added). Under 11 U.S.C. § 101(31)(B)(vi), the term "insider" includes, if the debtor is a corporation, a "relative of a general partner, director, officer, or person in control of the debtor." Finally, pursuant to 11 U.S.C. § 101(45), "[t]he term ‘relative’ means individual related by affinity or consanguinity within the third degree as determined by the common law...."

Whether a first cousin qualifies as a relative "within the third degree as determined by the common law" appears to be a matter of first impression in the Ninth Circuit. The Bankruptcy Code does not clarify which common law applies to the determination. In fact, currently, only the Advisory Committee Notes to Federal Rule of Bankruptcy Procedure ("FRBP") 5002 provide any clarity to interpreting this statute. Those notes provide—

A relative is defined in § 101(34)¹ of the Code to be an "individual related by affinity or consanguinity within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree." Persons within the third degree under the common law system are as follows: first degree--parents, brothers and sisters, and children; second degree--grandparents, uncles and aunts, first cousins, nephews and nieces, and grandchildren; third degree--great grandparents, great uncles and aunts, first cousins once removed, second cousins, grand nephews and nieces, great grandchildren. Rule 9001 incorporates the definitions of § 101 of the Code.

FRBP 5002 Advisory Committee Notes; see also In re Christensen , 2014 WL 1873401, at *8 (Bankr. D. Utah May 8, 2014) ("[T]he advisory committee note lays out which persons are related by the first, second, and third degree under the common law system.").

Courts that have addressed this issue appear to agree that "common law," for purposes of 11 U.S.C. § 101(45), refers to state law instead of federal law. See In re Olympia Office LLC , 562 B.R. 8 (Bankr. E.D.N.Y. 2017) ; In re Harvey Goldman & Co. , 2011 WL 3734912 (Bankr. E.D. Mich. Aug. 24, 2011) ; In re Gray , 355 B.R. 777 (Bankr. W.D. Mo. 2006) ; In re Herbison , 1998 WL 35324197 (Bankr. W.D. Tenn. March 24, 1998) ; and In re Hydraulic Indus. Prods. Co. , 101 B.R. 107 (Bankr. E.D. Mo. 1989). However, the courts disagree regarding whether state civil law or state common law applies. Id . In Olympia Office , for instance, the court believed application of state civil law was appropriate, which provided that first cousins were related in the fourth degree of consanguinity; as a result, the cousins were not considered statutory insiders. Olympia Office , 562 B.R. at 14. On the other hand, in Gray , the court applied Missouri common law, pursuant to which law first cousins would be related in the second degree of consanguinity and deemed statutory insiders. Gray , 355 B.R. at 781. As highlighted by these cases, the differences in the common law of each state, as well as the conflicting common and civil law within each state, results in courts assigning varying degrees of kinship to the same relatives.

Despite this lack of uniformity, the courts which have considered this have rejected application of any other common law, such as federal common law or English common law.² However, a review of Congressional records, as well as case law published near the time of the original drafting of this language, reveals that, for purposes of the Bankruptcy Code, Congress intended English law on consanguinity to apply.

B. Legislative History

When a statute is ambiguous, as it is here, courts may look to legislative history. In re Del Biaggio , 834 F.3d 1003, 1010 (9th Cir. 2016). Prior to consulting the relevant Congressional records, the Court must determine the first instance Congress used the term "consanguinity within the third degree as determined by the common law."

The first three iterations of the Bankruptcy Code (the Bankruptcy Act of 1800, the Bankruptcy Act of 1841 and the Bankruptcy Act of 1867) did not use the phrase "consanguinity within the third degree as determined by the common law." Bankr. Act of 1800; Bankr. Act of 1841; Bankr. Act of 1867. In 1898, Congress repealed the Bankruptcy Act of 1867 and passed the Bankruptcy Act of 1898 (the "Act of 1898"). The phrase appears twice in the Act of 1898. Section 35(a), regarding qualifications of referees, provided—

Individuals shall not be eligible to appointment as referees unless they are respectively...

(3) not related by consanguinity or affinity, within the third degree as determined by the common law.

(Emphasis added). In addition, Section 59(e), regarding who may file and dismiss petitions, provided—

In computing the number of creditors of a bankrupt for the purpose of determining how many creditors must join in the petition, such creditors as were employed by him at the time of the filing of the petition or are related to him by consanguinity or affinity within the third degree, as determined by the common law , and have not joined in the petition, shall not be counted.

(Emphasis added). On June 22, 1938, Congress passed an amendment to the Act of 1898. The amendment added a formal definition for the term "relative."

(27) ‘Relatives’ shall mean persons related by affinity or consanguinity within the third degree as determined by the common law and shall include the spouse.

Bankruptcy Act of 1898, amendments., 52 Stat. 840 (June 22, 1938). This definition would be adopted in the next iteration of the bankruptcy code, the Bankruptcy Reform Act of 1978, with a minor adjustment that included individuals in a step or adoptive relationship. Bankr. Reform Act of 1978. The current Bankruptcy Code adopted that definition. 11 U.S.C. § 101(45).

As such, because the Act of 1898 included the first use of the phrase, the Court must consult the relevant Congressional records related to passage of that Act. From July 22, 1890 through July 28, 1898, Congress held hearings related to the Act of 1898.³ Although these records do not reflect a discussion of which "common law" was applicable to consanguinity, Congress did refer to "the common law" when discussing other parts of the Act of 1898. See, e.g. 30 Cong. Rec. (Apr. 20, 1897), p. 765 ("At common law – I speak now of the statute of Elizabeth as if it were part of the common law, because its ancient provisions were brought over here by our ancestors to the states that introduced the common law...."); and 25 Cong. Rec. (Oct. 24, 1893), p. 2803 ("I know that the Constitution says ‘proceedings under the common law.’ The bankruptcy proceeding is a common law proceeding. Bankruptcy was known to the common law. The first English bankruptcy act was in the reign of Henry VIII, and that, under our decisions, is made a part of the common law, and, indeed, British statutes become common law in our country evendown to the reign of Queen Elizabeth, subsequent to the reign of King Henry VIII.").

In one particularly illuminating discussion, while debating whether to pass uniform, federal bankruptcy laws, Congressman William A. Stone noted—

We borrow our common law from England, and underlying our codes of State law the principles of the common law as complied by Sir William Blackstone are found. Naturally we look to England as a guide in the matter of a bankrupt law, and while it is admitted that England has a bankrupt law, yet it is a fact that it has been found almost an impossibility in that country to obtain a law that was satisfactory to the people and that worked good results to debtors and creditors alike.

28 Cong. Rec. (Apr. 29, 1896), p. 4574. Congressman Stone then proceeded to argue that, unlike England, the United States should not adopt a uniform federal bankruptcy law, arguing...