In Re: International Manufacturing Group, Inc.

Filing 26

MEMORANDUM and ORDER signed by Senior Judge William B. Shubb on 9/19/2017 AFFIRMING the US Bankruptcy Court's Ruling. CASE CLOSED. (Donati, J)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 JAMESTOWN S’KLALLAM TRIBE, 12 Appellant, 13 14 v. BANKR. ADV. NO. 16-02090 BANKR. NO. 14-25820-D11 BEVERLY McFARLAND, 15 CIV. NO. 2:17-00293-WBS Appellee. MEMORANDUM AND ORDER RE: BANKRUPTCY APPEAL 16 In connection with the Chapter 11 bankruptcy proceeding 17 18 of International Manufacturing Group, Inc. (“IMG”) (Bankr. No. 19 14-25820), appellee Beverly McFarland (“trustee”), as Chapter 11 20 Trustee for the estate of IMG, initiated an adversarial 21 proceeding against appellant Jamestown S’Klallam Tribe (“the 22 Tribe”) under 11 U.S.C. § 544(b), seeking to avoid and recover 23 the value of certain allegedly fraudulent transfers (Adv. No. 16- 24 02090.) 25 dismiss trustee’s First Amended Complaint. Presently before the 26 court is the Tribe’s appeal from the bankruptcy court’s order 27 denying that motion. 28 I. In the bankruptcy court, the Tribe filed a motion to Factual and Procedural History 1 1 On May 6, 2016, appellee brought its adversary 2 proceeding against the Tribe in bankruptcy court under Section 3 544(b) of the Bankruptcy Code (11 U.S.C. § 544(b)). 4 Records (“ER”) at 1, Original Compl. (Docket No. 12-2).) 5 Trustee attempted to serve the complaint on the Tribe’s counsel, 6 but there was a typographical error and the complaint was mailed 7 to “James B. Rediger” rather than “Shawn B. Rediger.” 8 Certification of Service.) 9 delivered to the correct attorney, and on June 27, 2016, the (Excerpts of (ER 109, The complaint was ultimately 10 trustee and Tribe stipulated that the Tribe had been served with 11 the original complaint on May 26, 2016. 12 1).) 13 stipulation on June 27, 2016. (ER 749 (Docket No. 17-2).) (ER 746 (Docket No. 17- The Bankruptcy Court entered an order approving this 14 On August 4, 2016, the Tribe filed a motion to dismiss 15 the trustee’s then original Complaint. (ER 111, Tribe’s Mot. to 16 Dismiss.) 17 Amended Complaint (First Am. Compl. (“FAC”) (Docket No. 12-3)) 18 and on September 9, 2016, served it on W. Ron Allen, the Tribe’s 19 Council Chairman and Chief Executive Officer, and Shawn B. 20 Rediger. (ER 327-31, Certificates of Service.) 21 2016, the bankruptcy court denied the Tribe’s motion to transfer 22 and motion to dismiss the original Complaint, finding that the 23 First Amended Complaint supersedes the original Complaint and the 24 latter was no longer existent. 25 Hrg. (Docket No. 12-6).) 26 On August 24, 2016, the trustee filed its First On September 21, (ER 373, Mins. of Sept. 21, 2016 The Tribe then filed another motion to transfer and a 27 motion to dismiss the First Amended Complaint, arguing the 28 original Complaint had not been properly served on the Tribe and 2 1 the First Amended Complaint was served after the designated 90- 2 day time period had elapsed. 3 Am. Compl.) 4 denied the Tribe’s request to transfer venue, denied the Tribe 5 sovereign immunity, and allowed the trustee to pursue a claim 6 under § 544(b). 7 No. 12-7).) 8 been sufficient, did not opine as to whether the trustee had 9 shown good cause for her failure to serve the Tribe within 90 (ER 376, Tribe’s Mot. to Dismiss On November 8, 2016, the bankruptcy court again (ER 671-84, Mins. of Nov. 8, 2016 Hrg. (Docket The court, though finding that prior service had 10 days from the commencement of the case. 11 of the motion was continued to January 23, 2017, to allow the 12 trustee an opportunity to brief the issue related to the timing 13 of service. Id. at 671. 14 Id. at 674. The hearing On January 26, 2017, the bankruptcy court reaffirmed 15 its denial of the motion to dismiss, finding that service had 16 been proper and that the trustee had shown good cause for her 17 failure to serve the Tribe within the 90-day period. 18 Mins. of Jan. 26, 2017 Hrg.) 19 (ER 691-92, Presently before the court is the Tribe’s appeal from 20 the bankruptcy court’s order, which argues: (1) the bankruptcy 21 court erred when it found the Trustee could assert a 11 U.S.C. § 22 544(b) claim against the Tribe; (2) the bankruptcy court erred 23 when it found that service had been proper; and (3) the 24 bankruptcy court erred when it extended the time for service. 25 II. 26 Legal Standard In reviewing the bankruptcy court’s decision, legal 27 conclusions are reviewed de novo while factual findings are 28 reviewed for clear error. In re Kennerly, 995 F. 2d 145, 146 3 1 (9th Cir. 1993). 2 III. Discussion 3 A. 11 U.S.C. § 544(b) Claim 4 The Tribe argues the bankruptcy court erred in allowing 5 the appellee to bring a claim to avoid and recover the value of 6 certain allegedly fraudulent transfers under 11 U.S.C. § 544(b) 7 for two reasons: (1) the Tribe is protected from this claim by 8 sovereign immunity and (2) even if sovereign immunity had been 9 abrogated or waived with respect to this claim, the appellee’s 10 claim fails because there is no actual unsecured creditor who 11 could avoid the transfers, as required by § 544(b). 12 1. Sovereign Immunity 13 1 11 U.S.C. § 106(a) states “notwithstanding an assertion 14 of sovereign immunity, sovereign immunity is abrogated as to a 15 government unit to the extent set forth in this section with 16 respect to the following: (1) Sections . . . 544. . . ”. Thus, 17 government entities may not assert sovereign immunity as a 18 defense to § 544 claims. The Ninth Circuit has held that § 106(a) 19 applies to Indian tribes, thereby abrogating tribal sovereign 20 immunity with respect to § 544. Krystal Energy Co. v. Navajo 21 Nation, 357 F. 3d 1055, 1059 (9th Cir. 2004) (“Because Indian 22 tribes are domestic governments, Congress has abrogated their 23 sovereign immunity in 11 U.S.C. § 106(a).”) 24 11 U.S.C. § 544(b) states that “except as provided in paragraph (2), 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. 4 1 25 26 27 28 1 The Tribe argues that Congress has not in fact 2 abrogated its sovereign immunity and contends that Krystal was 3 wrongly decided. The bankruptcy court rejected this argument and 4 followed the Ninth Circuit precedent set by Krystal. 5 concedes that while § 106(a) abrogates sovereign immunity with 6 respect to § 544, it applies only to § 544(a) and not to § 544 7 (b). (Tribe’s Br. at 18 (Docket No. 12).) 8 the Seventh Circuit’s holding in In re Equipment Acquisition 9 Resources, Inc., 742 F. 3d 743, 749 (7th Cir. 2014), which The Tribe The Tribe relies upon 10 limited §106(a) to §544(a). 11 courts, including the bankruptcy court, have not agreed with this 12 interpretation.2 13 However, the vast majority of There is also no textual basis to support the Tribe’s 14 position because the language of § 106(a) does not distinguish 15 between § 544(a) and § 544(b), as the bankruptcy court discussed 16 (see ER 679, Mins. of Nov. 8, 2016 Hrg.) 17 carve out any exceptions for particular subsections, indicating a 18 clear legislative intent to be as broad as possible in abrogating 19 sovereign immunity in the bankruptcy context. Section 106(a) does not 20 Accordingly, because the Tribe has failed to 21 demonstrate that § 106(a)’s reference to § 544 should be limited 22 to § 544(a), the court finds the bankruptcy court was correct in 23 concluding that the Tribe’s sovereign immunity has been 24 abrogated. 25 been abrogated, it need not address the additional question of 26 27 28 Because the court finds that sovereign immunity has The Seventh Circuit itself acknowledged “that by interpreting § 106(a)(1) and § 544(b) as we have, we diverge from all of the bankruptcy and district courts to consider the issue.” Equip. Acquisition, 742 F. 3d at 748. 5 2 1 whether the Tribe waived its sovereign immunity. 2 2. Actual Creditor 3 The tribe argues that even if its sovereign immunity 4 has been abrogated, the trustee’s § 544(b) claim fails because 5 there is no actual unsecured creditor who could avoid the 6 transfers. 7 assert a § 544(b) claim, there must be a creditor who could 8 actually avoid the transfer under applicable law outside of 9 bankruptcy. 10 The trustee concedes that in order for a trustee to (Appellee Br. at 14, (Docket No. 16).) The Tribe contends there is no such creditor here 11 because any claim brought by an actual unsecured creditor against 12 the Tribe would be barred by sovereign immunity. (Appellant Br. 13 at 6-7.) 14 3d at 744, the court held that “§ 106(a)(1) does not displace the 15 actual-creditor requirement in § 544(b)(1).” 16 to state that in §106(a), Congress “did not alter § 544(b)’s 17 substantive requirements merely by stating that the federal 18 government’s immunity was abrogated ‘with respect to’ this 19 provision.” 20 In In re Equipment Acquisition Resources, Inc., 742 F. The court went on Id. at 747. However, the great weight of authority is to the 21 contrary. The Ninth Circuit recently held that “the text of 22 Section 106(a)(1) is unambiguous and clearly abrogates sovereign 23 immunity as to Section 544(b)(1), including the underlying state 24 law cause of action.” 25 3760847, at *6 (9th Cir. Aug. 31, 2017). 26 abrogation of sovereign immunity means that in order to bring a 27 § 544(b) claim, the trustee need only identify an unsecured 28 creditor who, but for sovereign immunity, could have brought this In re DBSI, Inc., No. 16-35597, 2017 WL 6 This explicit 1 claim against the Tribe. Accordingly, the court finds the Tribe’s 2 argument regarding actual creditor to be meritless. 3 The Tribe also argues that allowing the trustee to 4 bring a § 544(b) claim against the Tribe created a new cause of 5 action in violation of 11 U.S.C. § 106(a)(5), which states that 6 “nothing in this section shall create any substantive claim for 7 relief or cause of action not otherwise existing under this 8 title, the Federal Rules of Bankruptcy Procedure, or 9 nonbankruptcy law.” 11 U.S.C. § 106(a)(5). The bankruptcy court 10 rejected this argument, holding that applying §106(a) to §544(b) 11 “does not create a substantive claim for relief that does not 12 otherwise exist; it simply recognizes that, with respect to 13 existing causes of action, sovereign immunity is abrogated.” 14 679, Mins. of Nov. 8, 2016 Hrg.) 15 the bankruptcy court’s determination, finds that reading 16 § 106(a)in such a way that it abrogates sovereign immunity with 17 respect to §544(b) in no way alters state law or creates a new 18 cause of action. 19 bankruptcy court’s conclusion that appellee may bring a § 544(b) 20 claim against the Tribe. 21 22 (ER This court, in agreeing with Accordingly, the court agrees with the B. Service 1. Proper Service 23 The Tribe argues the bankruptcy court erred in refusing 24 to dismiss the First Amended Complaint on the ground that neither 25 it nor the original Complaint was properly served on the Tribe. 26 The Tribe argues that it cannot properly be served by mail and 27 that even if service by mail were sufficient, it never authorized 28 Mr. Allen to accept service of process on its behalf. 7 1 Bankruptcy Rule 7004(b) allows for nationwide service 2 by mail to all types of persons, business entities, and 3 government entities. 4 the defendant, it is “sufficient if a copy of the summons and 5 complaint is mailed to an agent of such defendant authorized by 6 appointment or by law to receive service of process.” 7 Bankr. P. 7004(b)(8). 8 to accept service, service may be made on state and local 9 governmental entities through mailing “to the chief executive Fed. R. Bankr. P. 7004(b).3 When serving Fed. R. If no one has been specifically designated 10 thereof.” 11 held that service rules are to be “liberally construed to uphold 12 service so long as a party receives sufficient notice of the 13 complaint.” 14 (9th Cir. 1994). 15 Fed. R. Bankr. P. 7004(b)(6). The Ninth Circuit has Chan v. Soc’y Expeditions, Inc., 39 F. 3d 1398, 1404 Here, the trustee served her original summons and 16 Complaint on “James B. Rediger” at the law firm of Williams, 17 Kastner & Gibbs, LLC. 18 firm had previously represented the Tribe. 19 “James B. Rediger” at the firm, though there is a “Shawn B. 20 Rediger.” 21 routed to the appropriate attorney. 22 & A. at 10.) The trustee later filed the First Amended Complaint, 23 obtained an alias summons, and served both on W. Ron Allen, the 24 Tribe’s Council Chairman and Chief Executive Officer. (ER 109, Certification of Service.) The However, there is no Despite this typographical error, the summons was (ER 125, Tribe’s Mem. of P. (Tribe’s 25 26 27 28 The Ninth Circuit has held that Indian tribes are domestic governments, see, e.g., Krystal Energy Co., 357 F. 3d at 1059, and thus they are covered by this rule despite the fact that there is no explicit mention of Indian tribes in the rule itself. 8 3 1 Br. at 22.) 2 requirements of Rule 7004. 3 By doing so, the trustee clearly complied with the The court notes that the stipulation that the Tribe and 4 trustee entered into on June 27, 2016, did not mention any 5 deficiencies in service and expressly stated that “the Trustee 6 served the Complaint on May 26, 2016.” 7 1).) 8 documents required to be served be sent to its local counsel and 9 its attorneys at Williams Kastner & Gibbs. (ER 746 (Docket No. 17- On July 15, 2016, the Tribe filed a request that all (ER 751, Req. for 10 Special Notice (Docket No. 22).) 11 month, on August 4, 2016, that the Tribe finally raised the 12 service issues for the first time. 13 Dismiss.) 14 It was not until the following (ER 112, Tribe’s Mot. to Here, it is clear that the summons was served by mail 15 and received by both the Tribe’s Williams Kastner & Gibbs 16 attorneys and W. Ron Allen. 17 conduct, the fact that service by mail is the default mode of 18 service of process in bankruptcy matters, and that the Tribe 19 received actual notice, the court finds that service was 20 effective. 21 Accordingly, based on the Tribe’s 2. Timing of Service 22 Rule 4(m) of the Federal Rules of Civil Procedure 23 requires that a complaint be served within 90 days of filing. 24 Rule 4(m) also allows for the time for service to be extended 25 upon either a showing of good cause for the defective service or, 26 if there is no good cause, the court has discretion to dismiss 27 without prejudice or extend the time period. 28 4(m). 9 Fed. R. Civ. P. 1 The Tribe contends the bankruptcy court incorrectly 2 found good cause for the appellee’s failure to properly serve the 3 Tribe within the requisite 90-day period and thereby erred in 4 extending the time for service of summons. 5 position that there was no service, and thus there could be no 6 “good cause” for an extension of service. 7 above, service was proper. 8 9 The Tribe takes the However, as discussed Although the trustee attempted to serve her original complaint on the Tribe within the required 90-day period, thereby 10 complying with Rule 4(m), she did not serve the First Amended 11 Complaint on the Tribe until 126 days after the filing of the 12 original complaint. (ER 327-31, Certificates of Service.) 13 determine whether appellee has shown good cause for the delay, 14 the court must consider whether “(a) the party to be served. . . 15 received actual notice of the lawsuit; (b) the defendant would 16 suffer no prejudice; and (c) plaintiff would be severely 17 prejudiced if his complaint were dismissed.” 18 (In re Sheehan), 253 F. 3d 507, 512 (9th Cir. 2001) (citations 19 omitted). 20 To Oyama c. Sheehan Here, it is undisputed that the Tribe had actual notice 21 of the action within the 90-day period. During that time, the 22 Tribe’s attorney signed a stipulation in which she agreed to a 23 deadline for the Tribe to respond to the complaint, thus 24 indicating that the Tribe acknowledged it had been served. (ER 25 746.) 26 any argument indicating that it would suffer any prejudice if the 27 court were to extend the service deadline. 28 would likely suffer severe prejudice if the complaint were As for the second requirement, the Tribe does not present 10 Moreover, the trustee 1 dismissed given that she would be barred by the statute of 2 limitations from filing a new complaint against the Tribe. 3 Ninth Circuit has previously held that “relief under Rule 4(m) 4 may be justified, for example, if the applicable statute of 5 limitations would bar the re-filed action.” 6 States, 587 F. 3d 1188, 1195 (9th Cir. 2009) (citations omitted). 7 The trustee has therefore demonstrated that all three 8 requirements for a finding of good cause have been satisfied. 9 Accordingly, the court finds the bankruptcy court did not abuse 10 The Lemoge v. United its discretion in extending the time for service under Rule 4(m). 11 Had the trustee been unable to demonstrate good cause, 12 the court still would be entitled to “utilize its broad 13 discretion to extend the time for service.”4 14 the court has found good cause for the extension, the court will 15 not address whether the bankruptcy court could have extended the 16 time for service even absent a finding of good cause. 17 However, given that IT IS THEREFORE ORDERED that the bankruptcy court’s 18 ruling be, and the same hereby is, AFFIRMED. 19 Dated: September 19, 2017 20 21 22 23 24 25 26 27 28 United States v. 2,164 Watches, More or Less Bearing a Registered Trademark of Guess?, Inc., 366 F. 3d 767, 772 (9th Cir. 2004). 11 4

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