Luxury Jewels, LLC v. Akers (In re Aroonsakool)

In re: LIPPUNG AROONSAKOOL and VARATHIP AROONSAKOOL, Debtors.LUXURY JEWELS, LLC, Appellant, v. GREGORY A. AKERS, Appellee.

BAP No. SC-13-1206-JuKuPa

Bk. No. 11-06927-LA7

Adv. No. 11-90299-LA

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Filed: March 28, 2014

NOT FOR PUBLICATION

MEMORANDUM^*

Argued and Submitted on March 20, 2014

at Pasadena, California

Appeal from the United States Bankruptcy Court

for the Southern District of California

Honorable Louise de Carl Adler, Bankruptcy Judge, Presiding

Appearances: Douglas Jaffe, Esq. argued for appellant Luxury Jewels, LLC; William P. Fennel, Esq. argued for appellee Gregory A. Akers, chapter 7 trustee.

Before: JURY, KURTZ, and PAPPAS, Bankruptcy Judges.

Chapter 7¹ trustee Gregory A. Akers filed a motion to substantively consolidate the estate of debtors, Lippung and Varathip Aroonsakool, with non-debtor entities Thai Export, LLC (TE) and Luxury Jewels, LLC (LJ). The bankruptcy court found that the requirements for substantive consolidation articulated in Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir. 2000) were met and ordered the substantive consolidation nunc pro tunc to debtors' petition date. LJ appeals from this order. Finding no error, we AFFIRM.

I. FACTS

A. Prepetition Facts

1. Debtors' Jewelry Business

For many years, debtors owned and operated a family jewelry business. Debtors' sons, Nimit and Nakon, and their daughter, Tarrah, worked at the business as did Loxunipan Pomsavanh (Lox) and her brother, Tanasin "Bo" Panusith (Bo), who were part of the Aroonsakool household.² In February 2007, debtors entered into a seven-year lease at the Grove Plaza Shopping Center (Grove Plaza) in National City, California, where they operated their jewelry business named TE.

In January 2010, Hieu, Inc. filed a complaint against TE alleging breach of contract for debtors' failure to returnjewelry items. In June 2010, Hieu obtained a judgment against TE and proceeded to collect its judgment by placing a keeper at the Grove Plaza store. In October 2010, Lox accepted service on behalf of TE for placement of a keeper. Donald Jaffee, counsel for LJ in this matter, filed a third party claim in the case on behalf of TE and submitted the declaration of Varathip in opposition to the keeper. The declaration, signed under penalty of perjury, stated that the market value of the property at the Grove Plaza store was $1 million and that TE had been denied access to its records. Ultimately, Jaffee represented TE in a settlement between Hieu and TE.

Tax Returns for the year 2010 show that TE had a beginning 2010 inventory value of $677,725 and end of year 2010 inventory value of $650,580. At some point in 2010, TE went out of business.

2. LJ Is Formed And Opened For Business

On January 4, 2011, LJ was formed. Lox is the sole owner and managing member of LJ.

Twenty days prior to debtors' bankruptcy filing, Lox was added as an additional tenant to the Grove Plaza lease based on representations from debtors that she was going to operate the store as her own business. At that time, Lox submitted an application to the landlord containing information about her financial condition. Lox stated that she was a current employee of TE, held the position of manager, and that her salary was $24,000 a year. Lox listed assets valued at $10,000, but at the same time stated that she would spend $250,000 to acquireinventory for her business.³ Later, in a deposition conducted in connection with the substantive consolidation motion at issue in this appeal, Lox explained away these facts by testifying that she made them up.

Lox then proceeded to open LJ for business. A few days before the landlord received notice of debtors' bankruptcy filing, the TE store sign was removed and a new sign installed changing the name of the business to LJ.⁴ During the pendency of the bankruptcy, the lease was amended to reflect Lox as the sole tenant and guarantor of the lease as of June 1, 2011. The record evidence shows LJ used the same computers, database, furniture, fixtures, and equipment that TE had used. LJ also used the same business forms and invoices that TE had used and, in many cases, the name of TE was crossed out on the form and the name of LJ substituted. As in the case of TE, workers at LJ included Lox, Nimit, and Nakon. Nakon and Nimit both testified that they "helped out" at LJ. Further, another employee who was a jeweler worked at TE and then worked at LJ.

Lox admitted that TE left some jewelry at the Grove Plaza store when it closed down, including brass, stainless steel and silver items. In deposition testimony, Lox claimed that theremaining jewelry located at the Grove Plaza store was hers and came from an entity called 99 Jewelry owned by her and her brother Bo which operated between 2001 and 2005. However, the record also indicates Varathip owned 50% of 99 Jewelry as represented in a credit application for Mercedes-Benz. Lox testified that when 99 Jewelry shut down in 2006, she stored the jewelry in a safe deposit box at Union Bank. The record reveals that Union Bank was unable to identify a safe deposit box in the name of LJ or Lox.⁵

Moreover, the record contains no evidence that LJ or Lox paid anything to debtors or TE for the business or the jewelry other than Lox's testimony that she paid TE for the computer, furniture, safe and fixtures which were at the Grove Plaza store. Although Lox testified that she never borrowed money from anyone for the purpose of opening or operating LJ, her own testimony shows that she did not have the financial wherewithal to purchase any of TE's assets. Contrary to the financial information that she gave Grove Plaza when she was added to the lease, she testified that prior to December 2010, she was not employed anywhere other than as a caretaker for her grandmother since 2000. Although she received $800-900 a month from the state or federal government to care for her grandmother, Lox testified that she received no other income.

B. Bankruptcy Events: Procedural History

On April 28, 2011, debtors filed a chapter 7 petition.Akers was appointed the trustee. At the time of their filing, debtors owed over $1.3 million in unsecured debt.

Debtors stated in their petition that they formerly did business as TE. Under personal property in Schedule B, they listed TE as 70% owned by them jointly and described:

Wife owns 50%, Husband owns 20%, three children each own 10%. Consignment based jewelry business. Imports and exports jewelry from Thailand to USA. Neither Debtors nor business have ownership interest in jewelry sold. Debtors ceased operatio[n] (sic).

Debtors assigned a value of 0.00 to TE. Debtors listed creditors who held judgments against TE alone or against both TE and debtors in Schedule F.⁶

Prior to the initial meeting of creditors, a listed creditor, Saif Siddiqui of Americans/Gold/Diamonds, contacted trustee advising him that debtors were continuing to operate the jewelry store through their children to "defraud creditors" and that the "new" company existed at the same location (Grove Plaza) with the same employees. Siddiqui also stated that he spoke to other vendors with smaller debts and that they were being paid with checks issued by LJ to pay debts owed by TE.

1. Trustee's Lockdown Of The Grove Plaza Store

At the § 341(a) meeting of creditors on May 26, 2011, debtors testified that all of the inventory of TE was consignment jewelry of undisclosed wholesale sellers or other jewelry proprietors and, prior to the bankruptcy filing, all jewelry inventory of TE had been returned to the consigningparties. There is no documentation in the record showing that all the jewelry located at the Grove Plaza store was consigned — although some of it was — nor is there any documentation showing that the jewelry was returned to the consigning parties.

On the same day, without the benefit of a court order, trustee locked down the Grove Plaza store to protect the assets for the benefit of creditors.

2. The Adversary Complaint

Less than a month later, on June 20, 2011, trustee filed an adversary complaint against LJ, Lox, and the Aroonsakool children (Nimit, Nakon and Tarrah) seeking declaratory and injunctive relief and alleging claims for turnover and to avoid and recover fraudulent transfers. Trustee sought a declaration that the jewelry at the Grove Plaza store was property of debtors' estate.⁷

LJ and Lox filed answers to the complaint and a counterclaim against trustee for damages arising from trustee's seizure of the business. In November 2011, LJ and Lox filed an amended counterclaim alleging claims against trustee for violation of duties, conversion, trespass and fraud, and seeking declaratory and injunctive relief. A year later, in November2012, trustee entered into an agreement with LJ, Lox, Bo and Grove Plaza, LP, which settled, among other things, the counterclaim. In exchange for Grove Plaza, LP withdrawing its bankruptcy claim, trustee's insurer paid Grove Plaza, LP $23,500 for unpaid rent and LJ $110, 000 in damages.⁸ In December 2012, the counterclaim was dismissed.

a. Motion For Summary Judgment

On December 4, 2011, trustee filed a MSJ seeking judgment on all claims alleged in the complaint as a matter of law. Trustee argued that debtors and TE were alter egos because debtors did not observe any corporate formalities as shown by the undisputed evidence. He further maintained that the transfers of TE's property to LJ were avoidable as fraudulent transfers as a matter of law.

In opposition to the MSJ, Nimit submitted a declaration stating that "[n]one of the assets of Thai Export were in any way transferred to Luxury . . . [Lox] was the owner of Luxury and I saw her purchasing inventory for Luxury and I assisted in purchasing inventory for Luxury, using Luxury funds." Debtors each submitted declarations stating that at the time of their bankruptcy filing, there was no property owned by them at theGrove Plaza store. They further declared that the only...