Giantsea New Energy Tech. Co. v. Dobin (In re Xuehai Li)

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In re XUEHAI LI, Debtor,

GIANTSEA NEW ENERGY TECHNOLOGY CO., LTD., Appellant, v. ANDREA DOBIN, Trustee, Appellee.

Civil Action No. 22-07071 (GC)

United States District Court, D. New Jersey

October 31, 2023

NOT FOR PUBLICATION

On Appeal from Bankruptcy Case No. 20-14367 (CMG), Adversary Pro. No. 20-01639 (CMG)

OPINION

CASTNER, DISTRICT JUDGE

THIS MATTER comes before the Court upon an appeal by Giantsea New Energy Technology Co., Ltd., from the November 28, 2022 Order issued by the Bankruptcy Court in Adversary Proceeding Number 20-01639, which granted summary judgment to the Chapter 7 Trustee Andrea Dobin. (ECF No. 1.) The Court has carefully considered the parties' submissions, and for the reasons set forth below, AFFIRMS the Bankruptcy Court's Order.

I. BACKGROUND

A. Factual & Procedural Background

Debtor Xuehali Li and his then-wife, Yun Zhang, owned and lived at a property on Princeton-Kingston Road in Princeton, New Jersey. (ECF No. 5-1 at 107.^[1]) The property had been purchased by the couple in February 2014, and title to the property had been placed in both their names as tenants by the entirety.^[2] (Id. at 8 ¶¶ 11-12, 107-08 ¶¶ 1-2; ECF No. 1-2 at 4:12-14; ECF No. 5-2 at 7-8 ¶¶ 1-2.)

In March 2015, Zhang initiated divorce proceedings against the Debtor in the Chancery Division, Family Part, of the Superior Court of New Jersey, Mercer County. (ECF No. 5-1 at 108 ¶ 3; ECF No. 5-2 at 8 ¶ 3.) These proceedings did not culminate in a Final Judgment of Divorce until August 20, 2019.^[3] (Civ. No. 22-04321, ECF No. 10 at 2.)

In August 2015, Giantsea commenced an action against the Debtor in the Superior Court of New Jersey, Mercer County, Docket No. MER-L-1855-15, for alleged defaults by the Debtor under a loan agreement that gave the Debtor a total of $2,235,000.00, which the Debtor allegedly used to purchase the Princeton property.^[4] (ECF No. 5-1 at 96, 108 ¶ 4; ECF No. 5-2 at 8 ¶ 4.) Giantsea is a privately-owned company in the People's Republic of China whose majority shareholder is the Debtor's father with the Debtor owning the remaining interest.^[5] (ECF No. 5-1 at 7, 49, 96.) Giantsea did not name Zhang, the Debtor's then-wife, in the state-court complaint or seek relief against the Princeton property. (Id. at 108 ¶ 5; ECF No. 5-2 at 8 ¶ 5.) On March 15, 2016, default judgment was entered in favor of Giantsea against the Debtor in the amount of $2,268,065.76, plus interest and other charges. (ECF No. 5-1 at 41-42.)

More than two years after the default judgment, on May 29, 2018, the Debtor executed a mortgage, backdated to December 4, 2013, purporting to grant a lien on the Princeton property to Giantsea. (Id. at 86-93.) Zhang did not execute the mortgage, and her written consent to the mortgage was not obtained. (Id. at 86-93, 96.)

On March 13, 2020, the Debtor filed a voluntary petition for bankruptcy pursuant to Chapter 11 of the Bankruptcy Code, Bankruptcy Case No. 20-14367. (Id. at 95; ECF No. 5-4 at 1-7.) On May 20, 2020, Giantsea filed a proof of claim, alleging a secured interest in the Debtor's Princeton property in the amount of $2,268,065.76. (ECF No. 5-3 at 1-8.) Six days later, on May 26, Giantsea amended its proof of claim to an unsecured interest. (Id. at 30-36.)

On July 1, 2020, Giantsea filed an adversary complaint against the Debtor, Zhang, and others, Adversary Proc. No. 20-01389. (ECF No. 5-1 at 97.) On July 24, 2020, Giantsea amended its adversary complaint to include the Trustee as a defendant. (Id.; ECF No. 5-2 at 30.) Giantsea sought to determine its interest in the Princeton property “for purposes of classification and treatment for any proposed plan of reorganization.” (ECF No. 5-1 at 97.) It “assert[ed] that because the [p]roperty was purchased with [Giantsea's] funds [via the loan agreement], it is held in a constructive trust for [Giantsea's] benefit, notwithstanding the fact that title is in the names of Debtor and his” ex-wife. (Id.) Giantsea's adversary complaint was dismissed on October 2, 2020. (Id. at 106.)

The Bankruptcy Court ruled that, under the entire controversy doctrine, any claims against Zhang regarding the Princeton property were known in 2015 when Giantsea brought suit in state court against the Debtor, and “there [wa]s no justification for not bringing in the [e]x-spouse as a party when all claims under the Loan Agreement were to be litigated.” (Id. at 101.) The court wrote that Giantsea's attempt to secure “a declaration that the [property was held in constructive trust. . ., or in the alternative, that [Giantsea] is entitled to a first priority lien and security interest that is superior to all named defendants” was a “request[] for equitable relief as state law constructs that could have been brought in the” state court action and “because [Giantsea] failed to assert any rights to equitable remedies in the state court,” Giantsea was “barred . . . from further litigating the[] claims in th[e] bankruptcy.” (Id. at 102-03.)

On July 15, 2020, the Bankruptcy Court appointed Appellee Andrea Dobin (the “Trustee”) as the Chapter 11 Trustee for the Debtor's estate in the main bankruptcy case. (Id. at 95; ECF No. 5-4 at 70.) On October 22, 2020, the Bankruptcy Court converted the Chapter 11 bankruptcy case to one under Chapter 7 of the Bankruptcy Code. (ECF No. 5-4 at 71.) Dobin remained the Trustee of the Debtor's estate. (Id. at 74.)

On December 28, 2020, the Trustee initiated an adversary proceeding in the Debtor's bankruptcy case, Adversary Proc. No. 20-01639, to have Giantsea's claim on the Princeton property classified as unsecured and subordinated to the Trustee's interest. (ECF No. 5-1 at 1113.) This is the adversary proceeding from which the present appeal arises. While the proceeding was pending, the Bankruptcy Court authorized the Trustee on March 9, 2021, to sell the Princeton property, with the consent of Zhang, to a buyer in the amount of $1,840,000.00, which was the highest offer received. (ECF No. 5-4 at 75-78.) On October 11, 2022, the Trustee moved for summary judgment in its adversary proceeding, asking the Bankruptcy Court to “avoid[] [the] unperfected lien against property of the estate.” (ECF No. 5-1 at 19-20.) The motion was granted on November 28, 2022. (ECF No. 1 at 4.)

B. Bankruptcy Court's Ruling on Summary Judgment

The Bankruptcy Court concluded that the purported mortgage that the Debtor granted to Giantsea in 2018 “constitutes an unperfected lien against the [Princeton] [p]roperty and/or any of the proceeds from the sale thereof and is unenforceable against property of the [Debtor's] Estate.” (ECF No. 1-1 at 3.) Asa result, and pursuant to 11 U.S.C. § 544, the court declared that “the rights of Giantsea in the [p]roperty and the proceeds of sale ... are subordinated to the rights of the Trustee.” (Id.)

In reaching its conclusion, the Bankruptcy Court found that the Debtor had executed the mortgage “without the written consent of his [e]x-[w]ife to whom he was married at the time.” (Id. at 2.) Accordingly, the court found that the unilateral mortgage between Giantsea and the Debtor as to the Princeton property that was owned by the Debtor and Zhang as tenants by the entirety “violates the provisions of N.J. Stat. Ann. § 46:3-17.4,” which “require[es] that the [m]ortgage be executed by both spouses if and when title to property is held as tenants by the entirety.” (Id.) The Bankruptcy Court further found that the mortgage had been “backdated to a date that pre-dated the purchase of the [p]roperty . . . when the Debtor could not have granted Giantsea a valid mortgage,” and Giantsea filed its amended claim in the bankruptcy proceeding “as unsecured, serving as prima facie evidence that Giantsea's claim is not secured by the [p]roperty or the proceeds of sale of same.” (Id. at 3.)

Finally, the Bankruptcy Court found that its decision in the earlier adversary proceeding, Adversary Proc. No. 20-01389, that applied “the entire controversy doctrine [to] bar[] Giantsea from attempting to assert an interest in the [p]roperty or its proceeds by virtue of imposition of a constructive trust or equitable lien and/or any other interest other than that which was granted by the” New Jersey Superior Court's March 15, 2016 default judgment “is the law of the case” and had to be respected. (Id.)

II. LEGAL STANDARD

In cases originating in the Bankruptcy Court, district courts occupy the first level of appellate review. 28 U.S.C. § 158(a)(1) grants a district court jurisdiction “to hear appeals from final judgments, orders and decrees” of the bankruptcy court. A court considering such an appeal “review[s] the bankruptcy court's legal determinations de novo, its factual findings for clear error, and its discretionary decisions for abuse of discretion.” In re Imerys Talc Am., Inc., 38 F.4th 361, 370 (3d Cir. 2022) (quoting In re Somerset Reg'l Water Res., LLC, 949 F.3d 837, 844 (3d Cir. 2020)). And a court “must break down mixed questions of law and fact, applying the appropriate standard to each component.” Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992) (quoting In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989)). The district court “may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” In re Holmes, 603 B.R. 757, 770 (D.N.J. 2019) (citation omitted).

III. DISCUSSION

Under Federal Rule of Civil Procedure 56, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate where “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 summary judgment, courts “view[] the...