Menu   4 ABR 309 

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA


In Re:)
)
KEMP and PAULUCCI SEAFOODS, INC.,)
)
Debtor.          )
__________________________________)
)
KENNETH W. BATTLEY, TRUSTEE,)
)
Plaintiff,          )
)
     vs.)
)No. A93-0157-CV (HRH)
LOUIS KEMP, et al.,)(consolidated)
)
Defendants.          )
__________________________________)

O R D E R
(Cross-Motions for Summary Judgment)

Defendant Monarch Life Insurance Company ("Monarch") has filed a motion for summary judgment.(1) This motion is opposed by plaintiff, Trustee Kenneth W. Battley ("the trustee"). (2) The trustee   TOP    4 ABR 310  has filed a cross-motion for summary judgment.(3) This motion is opposed. (4) Oral argument has been requested. (5) This court has requested and received supplemental briefing on the issue of the trustee's alleged independent standing. The request for oral argument is denied.

Defendant American Express has filed a motion for summary judgment.(6) This motion is opposed.(7)

Facts This action revolves around the involuntary Chapter 7 bankruptcy of Kemp & Paulucci Seafoods, Inc. ("Paulucci"). The following is the relevant chronology of events:

1. On May 7, 1991, an involuntary petition is filed against Paulucci in Bankruptcy Court.

2. On July 26, 1991, the trustee was appointed on an interim basis.

3. On October 3, 1991, the initial meeting of the creditors pursuant to 11 U.S.C.§ 341 occurred and was continued until November.

4. On November 1, 1991, the schedules and statement of affairs of the debtor were filed in bankruptcy court.

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5. The initial meeting of creditors was held in November of 1991. The trustee became permanent as of that date.

6. In May of 1992, trustee receives a copy of a complaint filed in another bankruptcy. This action is by Kemp Pacific Fisheries against Louis Kemp. Allegations of fraudulent transfers for Louis Kemp's benefit are contained within.

7. On December 8, 1992, the trustee filed an adversary complaint in bankruptcy court, Case No. A91-00419-002-HAR, against Louis Kemp, only, seeking to recover on a $3.7 million stockholder loan.

8. On April 8, 1993, bankruptcy case A9100419-002-HAR is withdrawn from bankruptcy court to this court.

9. On May 5, 1993, the trustee indicated he may add additional parties to this action. No explanation was given as to who would be added or why.

10. On June 4, 1993, the trustee again informed this court that additional parties would be added, again without explanation.

11. On November 16, 1993, the trustee lodged a proposed amended complaint in which 17 new defendants were named. Motion for Leave to File Amended Complaint, Clerk's Docket No. 23. This motion states that: "The amended complaint ... add[s] 18 new counts against Kemp's individual creditors who received payments from the debtor which were fraudulent as to the corporation." Id. at 1-2. This motion to amend plaintiff's complaint was not acted upon by this court because the parties stipulated to postpone the deadline for opposing the motion to amend until February 28, 1994.

12. On February 9, 1994, the trustee tendered a proposed second amended complaint.   TOP    4 ABR 312  Motion for Leave to File Second Amended Complaint, Clerk's Docket No. 26. This motion also explains that new defendants are added because of fraudulent payments out of the corporation. This proposed complaint was filed (not lodged) on the same day apparently inadvertently. Clerk's Docket No. 27. The Second Amended Complaint was then stricken by this court on April 5, 1994, both because of the inadvertent filing and because the trustee on March 31, 1994, filed yet another motion to amend. Order of April 4, 1994, Clerk's Docket No. 31.

13. Another adversary complaint was filed in the Bankruptcy Court on March 9, 1994. This complaint paralleled the trustee's proposed Second Amended Complaint except for the omission of Kemp and three payee defendants. That matter was withdrawn from bankruptcy court and assigned case number A94-0278 (JKS). A94-0278 was consolidated with the instant action. Order of July 12, 1994, Clerk's Docket No. 3, Case No. A94-0278.

14. On September 27, 1994, Kuskokwim Fisherman's Cooperative, Inc. ("Kuskokwim"), creditor of Paulucci, executes an assignment of any and all causes of action regarding fraudulent conveyances to the trustee.

15. On September 30, 1994, the trustee filed a second motion for leave to file a proposed Second Amended Complaint.

16. On October 26, 1994, the new Second Amended Complaint was filed. The Second Amended Complaint listed 17 defendants, 16 of .whom are alleged to have received payments in fraud of creditors.

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General Bankruptcy Law After an involuntary petition for bankruptcy is filed, a trustee is generally elected at the initial meeting of the creditors pursuant to 11 U.S.C. § 341.(8)

Fraudulent conveyances may be avoided by the trustee under 11 U.S.C. § 544(b), which reads as follows:

The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502 (e) of this title.

11 U.S.C. § 544(b). Collier states:

(1) Section 544(b) confers upon the trustee, with certain restrictions, the power to avoid any of the debtor's transfers or obligations that are voidable for fraud or any other reason under applicable state or federal law. Voidability, therefore, is not automatic but must be asserted, and is to be determined wholly by the applicable law, federal or state. (2) The trustee has no independent power of avoidance, but may act only upon the rights of at least one unsecured creditor holding an allowable claim, against whom the transfer or obligation   TOP    4 ABR 314  was invalid under such law. (3) The creditor, however, need not have reduced his claim to a lien or judgement. The transfer is voidable in its entirety to the extent necessary to benefit the estate and the recovery is for the benefit of all creditors holding unsecured claims. (4) The trustee cannot act upon the rights of holders of secured claims under this section.

Collier on Bankruptcy ¶ 544.03 at 544-20 (Lawrence P. King ed., 1995) (footnote omitted).

There are two issues in the instant motions: (1) whether the applicable statute (or statutes) of limitations has (or have) run thereby preventing the trustee from bringing this action against the moving defendants, and (2) if the trustee has standing to bring an independent fraudulent conveyance action against the moving defendants due to an assignment from a creditor. These issues will be addressed in turn.

Statute of Limitations

This court must determine what is the applicable statute of limitations for a section 544 (b) action. 11 U.S.C. § 546 (a) states:

(a) An action or proceeding under section 544, 545, 547, 548 or 553 of this title may not be commenced after the earlier of

    (1) two years after the appointment of a trustee . . . ; or

    (2) the time the case is closed or dismissed.

11 U.S.C. § 546(a). Section 544 (b) borrows state fraudulent conveyance law. The state fraudulent conveyance statute of   TOP    4 ABR 315  limitations is also used. In re Mankin, 823 F.2d

1296, 1299 n.2 (9th Cir. 1987); In re Lyons, 130 B.R. 272, 278 (Bankr. N.D. Ill. 1991); Battley v. Stanton, A91-0161 Civ., Order of March 12, 1992, at 8. The interaction between section 546 (a) and the state fraudulent conveyance statute has been described as follows:

[A] trustee seeking to enforce a state remedy under section 544 (b) is subject to a "dual" statute of limitations. If the applicable nonbankruptcy statute of limitations period has run at the time the bankruptcy petition is filed, the trustee is estopped from pursuing the action under that statute. . . . If the creditor into whose shoes the trustee seeks to step. . . , however, still had time to pursue the remedy at the time of the petition, the trustee must bring the action within the time fixed by section 546.

In re Lyons, 130 B.R. 272, 278 (Bankr. N.D. Ill. 1991).(9) This action was filed two years and four months after the trustee was appointed. The trustee's action would therefore appear to be time-barred. Both sides, however, admit the doctrine of equitable tolling applies to this action. The trustee seeks summary judgment that this action was timely filed, defendants seek summary judgment that this action was not timely filed.

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The Ninth Circuit recently discussed equitable tolling in In re United Ins. Management. Inc., 14 F.3d 1380 (9th Cir. 1994). The Circuit stated:

Section 546(a)(l) of the Bankruptcy Code provides that "[a]n action or proceeding under section 544, 545, 547, 548, or 553 of the title may not be commenced . . . two years after the appointment of a trustee." 11 U.S.C. § 546(a)(l). . . .

We hold that equitable tolling may, in proper cases, apply to § 546(a)(l). . . .

Under the equitable tolling doctrine, where a party "remains in ignorance of (a wrong] without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, __ U.S. __, 111 S. Ct. 2773, 115 L.Ed. 2d 321 (1991) (internal quotation omitted) . . . .
Id. at 1384. The court noted the doctrine of equitable tolling generally requires a fact determination. The court stated:
Nevertheless, when application of equitable tolling turns on the plaintiff's diligence in discovering a cause of action, courts may hold, as a matter of law, that the doctrine does not apply. "[T]he extent to which a plaintiff used reasonable diligence is tested by an objective standard. A district court may, therefore, grant a summary judgment motion if the uncontroverted evidence irrefutably demonstrates that a plaintiff discovered or should have discovered the fraud but failed to file a timely complaint." Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1417 (9th Cir. 1987).

Id. at 1385-86.

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The court infers from the foregoing recitation of facts that in this case the plaintiff trustee must have learned sometime in the two years following his permanent appointment that he had colorable claims against other parties for fraudulent transfers of the debtor's assets. It is not at all clear, however, on the present record when the trustee actually learned of these claims or, if pertinent, when he should in the exercise of due diligence have learned of them. Since it is agreed that equitable tolling applies in this case, it is the date when the trustee knew or should have discovered the claims in question which marks the beginning of the limitation period. Since the court cannot say that the evidence before it irrefutably demonstrates that the trustee discovered or should have discovered the claims in question and failed for two years thereafter to assert them, the court cannot grant summary judgment on this issue to either party. Absent some other agreement to the parties, an evidentiary hearing on this issue will be necessary. Counsel will please confer with one another and on or before September 29, 1995, report to the court as to whether they desire to have an evidentiary hearing scheduled (and if so suggested dates shall be provided) or whether they are desirous of suggesting some other procedure whereby this dispute as to the statute of limitations might be submitted to the court for a decision on the merits. In the latter regard, the parties might develop an agreed statement of facts, might agree to submit the matter on affidavits and/or depositions or a combination of the .foregoing.

  TOP    4 ABR 318 

Standing

The Ninth Circuit has stated "[i]n seeking recovery [of fraudulent transfers], the trustee stands in the overshoes of the debtor corporation's unsecured creditors. In re Agricultural Research and Technology Group, Inc., 916 F.2d 528, 534 (9th Cir. 1990).

The trustee is aware that he may no longer be able to bring this action due to the statute of limitations found in section 546 (a). In order to still have a cause of action, the trustee arranged to have assigned to himself the rights of Kuskokwim. The trustee claims the assignment is a separate basis on which the trustee may bring a section 544 (b) action. The trustee asserts the only statute of limitations on the Kuskokwim claim is the six year Alaska statute of limitations on fraudulent conveyances. The trustee seeks summary judgment that he has independent standing to bring the action as the assignee of the rights of Kuskokwim.

This court requested and reviewed supplemental briefing on the issue of the trustee's alleged independent ground for standing due to the assignment of the Kuskokwim.

The trustee claims the assignment from Kuskokwim gives him an independent right to bring this action. The sole case on which the trustee relies is In re Levine, 100 B.R. 537 (Bankr. D. Colo. 1989). In Levine a trustee sought to recover funds and other assets alleged to have been fraudulently concealed from the   TOP    4 ABR 319  individual bankruptcy estates and from the debtors' creditors. Id. at 538. The trustee also sought to recover funds and assets allegedly wrongfully taken from the Sofa Gallery, a corporation wholly owned by the debtors. Id. The debtors and Sofa Gallery were at one time represented by defendant Zimmerman & Schwartz (Z & S). Z & S were alleged to have helped fraudulently conceal funds and assets. Id. One of the claims the trustee made was a section 544 claim. Id. The trustee's ability to assert the claims of the Sofa Gallery was the subject of a motion to dismiss filed by Z & S. Id. at 539.

The bankruptcy court held the trustee could assert the claims of the Sofa Gallery. Id. The bankruptcy court noted:

Two principle reasons support this conclusion. First, the theory and pleading of business alter ego supports standing of the Trustee sufficient to withstand a Motion to Dismiss. Second, the complete and unqualified assignment of all right, title, claims and causes of action by the Levines and the Sofa Gallery to the Trustee supports standing.
Id. at 539. As to the alter-ego theory, the bankruptcy court noted:

Use of an alter-ego theory in "reverse" as Defendant calls it, is admittedly unconventional. Still the Debtor's Trustee owns all the Debtor's property, rights, claims and assets under 11 U.S.C. § 541 (a) and the property, rights and claims of a business alter-ego might well be deemed property of its principals, here, the Levines. Thus, Sofa Gallery's property, rights and claims might well be deemed those of the Levines and, as a consequence of the Chapter 7 cases, the property, rights and claims may now be deemed those of the Trustee's.   TOP    4 ABR 320  . . .

If the alter-ego theory prevails, Sofa Gallery's claims against Z & S for both prepetition and, significantly, post-petition conduct, are those of its principals, the Levines. The Trustee would accede to those claims of the Levines under Section 541 (a) (1)

Id. at 539-40.

The bankruptcy court then turned to the issue of the Levines' and Sofa Gallery's assignment to the trustee in a companion case. The bankruptcy court stated:

[T]he assignment of all of the Levines' and all of the Sofa Gallery's rights, titles, claims, and interests, and causes of action to the Trustee . . . in a companion proceeding . . . is a second, independent, but also reinforcing, basis on which to accord to the Trustee standing to bring claims of Sofa Gallery against Z & S.

Id. at 540. The bankruptcy court cited no law for this proposition.

This court holds that an assignment will not give the trustee an independent source of standing and thereby allow the trustee to bypass the two year statute of limitations. A ruling to the contrary would often eviscerate the two year statute of limitations found in section 546(a)(l). Any time a trustee failed to meet this deadline, the trustee would merely need to be assigned the rights of an unsecured creditor who allegedly would not be bound by the trustee's failure to act. Congress enacted section 546 (a) (1) to bring some semblance of finality to bankruptcy proceedings. The trustee's argument, if accepted, would stretch the limitation period to six years as long as one creditor is willing to assign its   TOP    4 ABR 321  rights. Such is contrary to the intent of Congress. The trustee does not have standing due to the assignment of rights from Kuskokwim.(10)



    DATED at Anchorage, Alaska, this 7th day of September, 1995.


                H. Russel Holland
                United States District Judge


1.   TOP    4 ABR 309  Clerk's Docket No. 88. This motion is joined by defendants City of Los Angles Water and Power, Norwest Card Services Inc., Ida Cook Hebrew School, Jewish Federation, Anne Lauren Arenson, Sharon Kemp, and defendant debtor Louis Kemp.

2.   TOP    4 ABR 309  Clerk's Docket No. 104.

3.   TOP    4 ABR 310  Id.

4.   TOP    4 ABR 310  Clerk's Docket Nos.115, 117.

5.   TOP    4 ABR 310  Clerk's Docket No. 118.

6.   TOP    4 ABR 310  Clerk's Docket No. 102.

7.   TOP    4 ABR 310  Clerk's Docket No. 104.

8.   TOP    4 ABR 313  11 U.S.C. § 341 states in pertinent part:

    (a) Within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of the creditors.
    (b) The United States trustee may convene a meeting of any equity security holders.
    (c) The court may not preside at, and may not attend, any meeting under this section including any final meeting of creditors.

9.   TOP    4 ABR 315  There are cases to the contrary. In In re Josefik, 72 B.R. 393 (Bankr. N.D. Ill. 1987), the bankruptcy court held a fraudulent transfer action may be brought any time within the state statute of limitations. Id. at 397 n.4. This appears to be the minority position. The trustee in the instant action states he merely notes this case, he does not rely on it. This court concludes that where the applicable state statute of limitations and 11 U.S.C. § 546 (a) conflict, the latter should control.

10.   TOP    4 ABR 321  This holding makes it unnecessary for this court to discuss the sovereign immunity claims of the City of Los Angeles Department of Water and Power. See, Clerk's Docket No. 135.