Montoya v. Goldstein (In re Chuza Oil Co.)

639 B.R. 586

IN RE CHUZA OIL COMPANY, Debtor.

Philip J. Montoya, Chapter 7 Trustee, Plaintiff - Appellant,

v.Paula Goldstein, Bobby Goldstein Productions, Inc., and Robert "Bobby" Goldstein, Defendants - Appellees.

BAP No. NM-21-029

Bankr. No. 18-11836

Adv. No. 20-01008

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Filed May 27, 2022

Daniel White of Askew & White, LLC, Albuquerque, New Mexico, for the Appellant.

Clifford C. Gramer Jr., Albuquerque, New Mexico, for the Appellees.

Before ROMERO, Chief Judge, HALL, and ROSANIA,¹ Bankruptcy Judges.

OPINION

ROSANIA, Bankruptcy Judge.

The Debtor was an unprofitable petroleum production company that twice landed in bankruptcy. The confirmed chapter 11 plan in its first case required the Debtor to pay all general unsecured creditors in full before paying an insider note obligation. The Defendants are the Debtor's insiders, one of whom holds the subordinated note and two of whom guaranteed the note. After plan confirmation, the Defendants lent hundreds of thousands of dollars to the Debtor so it could make its plan payments and survive as a going concern. From the borrowed funds, the Debtor paid roughly $47,000 on the subordinated note even though general unsecured creditors were not yet paid in full. The postconfirmation insider loans were not enough to keep the Debtor afloat, and the chapter 7 trustee in the Debtor's subsequent bankruptcy case sued the insiders to recover the subordinated-note payments as preferential transfers, actual fraudulent transfers, and constructive fraudulent transfers. The Bankruptcy Court held a bench trial on the merits.

Relying on the earmarking doctrine, the Bankruptcy Court ruled for the Defendants on all three counts because there was no transfer of an interest of the Debtor in property, a required element under Bankruptcy Code §§ 547(b) and 548(a). The Bankruptcy Court also held (alternatively) that the Defendants satisfied the contemporaneous-exchange-for-new-value defense to the preference, that the Debtor did not intend to hinder, delay, or defraud creditors, and that the Debtor received reasonably equivalent value in exchange for the transfers. The chapter 7 trustee appeals the Bankruptcy Court's rulings on the preferential-transfer and constructive-fraudulent-transfer counts.

We conclude that each subordinated-note payment was a transfer of an interest of the Debtor in property under both §§ 547(b) and 548(a). We also conclude that such note payments were not intended to be, and were not actually, a reasonably equivalent or roughly equivalent exchange for new or other value given to the Debtor. Therefore, we reverse.

I. BACKGROUND

A. Loan history

The Debtor was a petroleum production company in New Mexico. Defendant Bobby Goldstein ("Bobby") controlled the Debtor as a shareholder, chief executive officer, and director. In 2012, the Debtor borrowed $500,000 from Leon Goldstein, Bobby's father, evidenced by an Installment Loan Promissory Note (the "Note"). The Note is secured by certain accounts receivable of defendant Bobby Goldstein Productions, Inc. ("BGPI"), which is owned and controlled by Bobby. BGPI and Bobby guaranteed payment of the Note.

B. The Debtor's prior chapter 11 bankruptcy

The Debtor filed a chapter 11 case in 2014 in the United States Bankruptcy Court for the District of New Mexico. A plan was confirmed in March 2016. The plan classifies non-insider and insider unsecured creditors in classes six and seven, respectively. The Note obligation was a class seven claim. Under the plan, class six claimants were to be paid 100% of their claims in 48 monthly payments. Class seven claims were to be paid only after all class six claims had been paid in full. Leon died at some point between 2012 and plan confirmation. Leon's wife, defendant Paula Goldstein ("Paula"), held the Note on the confirmation date.

C. Postconfirmation insider loans to the Debtor and postconfirmation payments on the Note

The Debtor was not profitable after it confirmed its chapter 11 plan, so the Debtor had to rely on insider loans to continue operating. On March 27, 2017, Paula lent the Debtor $99,853.88. In addition, Bobby and BGPI lent money to the Debtor when it ran low on cash and needed funds to pay creditors under the confirmed plan.

Despite the distribution scheme under the confirmed plan, the Debtor made payments on the Note, from September 2016 through December 2017, totaling $46,885 (the "Transfers"), even though not all class 6 claimants had been paid. Of that total, the Debtor made five payments totaling $15,635 to Paula in the year before the involuntary filing (the "First-Year Transfers") and another $31,250 in payments the year before that.

The Bankruptcy Court's opinion includes a chart that summarizes the funds transferred to the Debtor from the Defendants and to the Defendants from the Debtor from September 2016 through December 2017.² All of the transfers were made into and out of the Debtor's bank account at Wells Fargo. According to the chart, the Defendants transferred a net of $395,663.09 more into the Debtor than the Debtor transferred out to the Defendants.³

D. Involuntary chapter 7 filing and the Trustee's subsequent avoidance litigation against the Defendants

On July 25, 2018, an involuntary chapter 7 petition was filed against the Debtor. The Bankruptcy Court entered an order for relief in August 2018. Plaintiff Philip Montoya was appointed the chapter 7 trustee (the "Trustee").

On February 5, 2020, the Trustee filed an adversary proceeding against Paula Goldstein, seeking to avoid the First-Year Transfers as insider preferential transfers under 11 U.S.C. § 547(b) and to recover and preserve them for the benefit of the estate under 11 U.S.C. §§ 550 and 551.

The Trustee later filed an amended complaint, adding Bobby and BGPI as defendants and asserting three counts against all Defendants to avoid (a) the First-Year Transfers as preferential transfers to insiders under 11 U.S.C. § 547(b) ; (b) all the Transfers as actual fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) ; and (c) all the Transfers as constructive fraudulent transfers under 11 U.S.C. § 548(a)(1)(B). The amended complaint also sought to recover and preserve all of the Transfers for the benefit of the estate under 11 U.S.C. §§ 550 and 551.

In the parties’ pretrial order, and at the trial, the parties stipulated to the following facts (among others):

• The Defendants were insiders of the Debtor at all relevant times.

• At the time of all Transfers, Paula was a creditor of the Debtor.

• All Transfers were made to Paula.

• All Transfers were made for the benefit of Bobby and BGPI.

• All Transfers were made while the Debtor was insolvent.

• The First-Year Transfers were made between ninety days and one year before the date of the filing of the bankruptcy petition.

• The First-Year Transfers enabled Paula to receive more than she would have received if (i) as a case under chapter 7 of the Bankruptcy Code (ii) the First-Year Transfers had not been made, and (iii) Paula received payment of such debt to the extent provided by the provisions of the Bankruptcy Code.

• Under the confirmed plan, Leon and any successor-in-interest, including Paula, was to receive payment from the Debtor on the class seven claim only if all class six claims were paid in full.

• At all relevant times, at least one class six claim under the plan remained due and owing.

• All Transfers were made on account of the Note.

• During the one-year insider preference period, each payment to Paula was made contemporaneously with one or more transfers of cash by Bobby or BGPI into the Debtor's Wells Fargo account that equaled or exceeded the amount of the contemporaneous payment to Paula.

E. Bankruptcy Court trial, opinion, and related appeal

The Bankruptcy Court conducted a trial on May 12, 2021, and on July 16, 2021, the court entered its Opinion and Final Judgment, denying any relief to the Trustee and awarding relief to the Defendants on all counts in the amended complaint. The Bankruptcy Court, relying on the earmarking doctrine, held that all three counts failed because there was no transfer of an interest of the Debtor in property, a required element under Bankruptcy Code §§ 547(b) and 548(a). In addition, the Bankruptcy Court held that (a) count 1 (preferential transfer) also failed because the Defendants (if necessary) established the contemporaneous-exchange-for-new-value defense under 11 U.S.C. § 547(c) ; (b) count 2 (actual fraudulent transfer) failed because the Debtor did not intend to hinder, delay, or defraud creditors; and (c) count 3 (constructive fraudulent transfer) failed because the Defendants provided reasonably equivalent value in exchange for the Transfers.

The Trustee timely appealed the Final Judgment, taking issue with all of the Bankruptcy Court's rulings. The Trustee later abandoned his appeal of the Bankruptcy Court's ruling on count 2 (actual fraudulent transfer).

II. JURISDICTION

The BAP has jurisdiction to hear timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.⁴ The Trustee filed his notice of appeal timely on July 19, 2021, within fourteen days of entry of the Final Judgment.⁵ Neither party elected to have the district court hear this appeal. The Opinion and Final Judgment finally resolved all claims in the litigation. Therefore, the BAP has valid appellate jurisdiction.⁶

III. STANDARDS OF REVIEW

Questions of law are reviewed de novo, questions of fact are reviewed for clear error, and matters of discretion are reviewed for abuse of discretion.⁷ The standard of review for a mixed question of law and fact depends on whether answering it entails primarily legal or factual work.⁸

Whether there was a transfer of an interest of the Debtor in property is a legal issue reviewed de novo.⁹ Equivalent value usually is a question of fact reviewed for clear...