Kasolas v. Aurora Capital Advisors (In re Brower)

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In re: ROBERT S. BROWER, SR., Debtor.

MICHAEL G. KASOLAS, Liquidating Trustee for the Robert Brower, Sr. Liquidating Trust, Appellant, v. AURORA CAPITAL ADVISORS; RICHARD BABCOCK; JRG ATTORNEYS AT LAW; OLDFIELD CREELY, LLP; ANTHONY NOBLES, Appellees.

Adv. No. 5:21-ap-05029-MEH

BAP No. NC-22-1215-FBG

Bk. No. 5:15-bk-50801-MEH

United States Bankruptcy Appellate Panel of the Ninth Circuit

April 12, 2023

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Northern District of California M. Elaine Hammond, Bankruptcy Judge Presiding

Before: FARIS, BRAND, and GAN, Bankruptcy Judges.

MEMORANDUM ^[*]

INTRODUCTION

Section 549 of the Bankruptcy Code allows a trustee to avoid a transfer of property of the debtor's bankruptcy estate. Chapter 11^[1] debtor-in-possession Robert S. Brower, Sr. caused his wholly-owned corporation to transfer substantial corporate assets postpetition to various individuals and entities without court approval. The liquidation trustee sued to recover the transferred assets, characterizing those corporate assets as property of the shareholder's bankruptcy estate. We agree with the bankruptcy court's determination that, under California law, the corporation's assets were not estate property. We therefore AFFIRM the bankruptcy court's partial dismissal of the liquidation trustee's complaint.

FACTS

A. Prepetition events

Mr. Brower was director, president, and sole shareholder of Coastal Cypress Corporation ("Coastal"). Coastal's main asset was real property (the "Wine Estate") used by another of Mr. Brower's corporations, Chateau Julien, Inc.

Chateau Julien borrowed $4.85 million from MUFG Union Bank, N.A. ("Union Bank"). Mr. Brower personally guaranteed the loan. Chateau Julien defaulted on the loan, and Union Bank obtained a writ of attachment against Mr. Brower.

B. Mr. Brower's bankruptcy proceedings

Shortly thereafter, Mr. Brower filed a chapter 11 petition. He scheduled his shares in Coastal as personal property. (At the time, he claimed that he owned only 24 percent of Coastal's shares.)

Very soon after Mr. Brower filed his petition, Coastal sold the Wine Estate for over $12 million and received net proceeds exceeding $7 million ("Net Proceeds"). The sale apparently closed by April 2015, but Mr. Brower repeatedly reported to the bankruptcy court that the sale was not final.

Mr. Brower caused Coastal to transfer the Net Proceeds to various entities, allegedly to or for the benefit of Mr. Brower, his corporations, his family, his family's corporations, and other businesses. He allegedly transferred substantial sums to the appellees, including approximately: $1,120,000 to Med-Venture Investments (of which appellee Anthony Nobles was a member and to which appellee Richard Babcock provided legal services); $600,000 to Aurora Capital Advisors ("Aurora") (of which Mr. Nobles and Mr. Babcock are general partners); $200,000 to appellee Oldfield Creely, LLP ("Oldfield Creely"); and $280,000 to appellee JRG Attorneys at Law ("JRG").

Union Bank filed an adversary proceeding against Mr. Brower and others, seeking a determination that Mr. Brower had understated his interests in Coastal and another business.^[2] After a trial, the bankruptcy court held that Mr. Brower was the sole shareholder of Coastal and other corporate entities. The district court affirmed the bankruptcy court's ruling.

Meanwhile, the bankruptcy court confirmed a plan of reorganization proposed by Union Bank. The plan provided for appointment of a liquidating trustee ("Trustee"). The "Liquidating Trust Agreement" specified that the Trustee's duties and powers would accrue in two stages. First, beginning on the "Confirmation Date," the Trustee would market the assets of the estate. Second, on the "Effective Date," the legal claims of the estate would become the property of the liquidating trust and the Trustee would become empowered to pursue claims and close the sales of estate assets. Ultimately, nearly three years passed between the confirmation date (November 6, 2017) and the effective date (September 15, 2020).

Mr. Brower passed away in September 2020.

C. The Trustee's adversary complaint

The Trustee filed an adversary complaint against the appellees, Mr. Brower's estate, and others. He alleged that Mr. Brower had caused Coastal to transfer over $7 million of the Net Proceeds postpetition to other entities or to use the funds to enrich himself. He alleged ten claims for relief: (1) avoidance of postpetition transfers under § 549; (2) avoidance of actual fraudulent transfers under California law; (3) avoidance of constructive fraudulent transfers under California law; (4) recovery of transfers for the benefit of the estate under §§ 550 and 551; (5) turnover of estate property under § 542; (6) accounting of property of the estate under § 542; (7) breach of fiduciary duty against Mr. Brower's trust; (8) aiding and abetting breach of fiduciary duty against JRG; (9) disgorgement under § 330 against three law firms; and (10) conversion.

Some of the defendants filed motions to dismiss portions of the complaint under Civil Rule 12(b)(6) (made applicable in adversary proceedings by Rule 7012): one by Aurora, Mr. Babcock, Mr. Nobles, and Med-Venture Investments; another by Oldfield Creely; and a third by JRG. All three motions argued that the Net Proceeds were not property of Mr. Brower's estate, which was fatal to the avoidance and turnover claims.

After two hearings, the bankruptcy court granted the motions with leave to amend. The court held that the complaint did not sufficiently allege that the Net Proceeds were property of the bankruptcy estate. It stated that the "estate includes the debtor's ownership interest in Coastal, but the standard rule is that assets of a corporation owned by a debtor are not an asset of the debtor unless the corporate form is pierced or otherwise invaded. Here, the complaint does not allege alter ego or veil-piercing claims." It allowed the Trustee to amend the complaint to allege an alternate basis of relief.^[3]

D. The first amended complaint

The Trustee filed a first amended complaint ("FAC") that asserted the same ten causes of action. He asserted two theories for avoidance under § 549: that Mr. Brower had full control of Coastal and was entitled to the full Net Proceeds; and that Mr. Brower treated Coastal as his alter ego, so the court must disregard any distinction between the two.

Aurora, Mr. Babcock, Mr. Nobles, and Med-Venture filed a motion to dismiss the FAC. They argued that the Trustee's amendments failed to cure the defects that warranted dismissal of the original complaint.

Oldfield Creely filed a separate motion to dismiss. It argued that, under California law, alter ego concerns only liability and does not mean that an individual's assets are that of a corporation, or vice versa.

The Trustee opposed the two motions to dismiss. He argued that the primary asset of a closely held corporation owned and fully controlled by the debtor is property of the bankruptcy estate.

After a hearing, the bankruptcy court held that the Trustee had not adequately pled that the Net Proceeds were estate property and granted the motions to dismiss as to the first, fourth, fifth, sixth, ninth, and tenth causes of action; it granted leave to amend "solely on the issue of whether the Debtor exceeded shareholder authority." It dismissed the second and third causes of action without leave to amend.

As to whether the transfers involved estate property, the bankruptcy court rejected the Trustee's arguments. First, the court examined state law to determine whether the Net Proceeds ever became property of the bankruptcy estate under § 541. Under California law, a "shareholder simply has an expectancy in [corporate property and corporate earnings]" and "does not own the corporate property." Miller v. McColgan, 17 Cal. 2d 432, 436 (1941). It concluded that, because Coastal (and not Mr. Brower) owned the Wine Estate, the sale proceeds were not proceeds of Mr. Brower's shares and were thus not property of his bankruptcy estate.

Second, the bankruptcy court held that alter ego under California law - as opposed to federal authority cited by the Trustee - only establishes that one entity is liable for the debts of another and does not merge the assets of the two entities. Therefore, the alter ego theory could not establish that Mr. Brower owned Coastal's assets.

Third, the bankruptcy court rejected the Trustee's theory that Mr. Brower had full control over Coastal's assets and was entitled to distribution of the Net Proceeds. The court noted that the Net Proceeds had not been transferred to Mr. Brower and therefore had not become assets of his estate.

Fourth, the court allowed the Trustee to amend the FAC to assert his new position that Mr. Brower had exceeded his shareholder authority under California Corporations Code § 1001(a) when he transferred Coastal's assets without shareholder approval.

E. The second amended complaint

The Trustee filed a second amended complaint ("SAC") and reworked some of his claims: (1) avoidance of postpetition transfers under § 549; (2) rescission under California Corporations Code § 1001; (3) recovery of avoided transfers under §§ 550 and 551; (4) turnover of estate assets pursuant to § 542; (5) accounting; (6) breach of fiduciary duty against Mr. Brower's trust; (7) breach of fiduciary duty against JRG; (8) disgorgement; and (9) conversion.

For the first time, the Trustee asserted that the sale of the Wine Estate was a "Liquidation Event" pursuant to Coastal's Amended Articles of Incorporation ("Articles") because it was a sale of all or substantially all of Coastal's assets. Article III.B.2(c)(i) of the Articles defines a ...