RNI-NV Limited Partnership v. Field

Filing 12

ORDER AFFIRMING BANKRUPTCY COURT ORDER re 1 - Signed by JUDGE DERRICK K. WATSON on 1/30/2018. "For the foregoing reasons,11 the bankruptcy court did not err when it sustained the Trustee's Objection and disallowed RNI' s Claim. Accordingly, the Court affirms the bankruptcy court's July 27, 2017 Order and Final Judgment entered on July 31, 2017. The Clerk of Court is directed to close the case." (emt, )CERTIFICATE OF SERVICE Participants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAI‘I
In the Matter of:

CV NO. 17-00394 DKW-KSC

MAUI INDUSTRIAL LOAN &
FINANCE CO.,

Bankr. Case No. 10-00235

Debtor,
______________________________

ORDER AFFIRMING
BANKRUPTCY COURT ORDER

RNI-NV LIMITED PARTNERSHIP,
Appellant,
v.
DANE S. FIELD, Chapter 7 Trustee,
Appellee.

INTRODUCTION
Appellant RNI-NV Limited Partnership (“RNI”) appeals the bankruptcy
court’s July 31, 2017 “Final Judgment as to Trustee’s Objection to RNI-NV Limited
Partnership’s Claim (POC#21).” RNI asks the Court to overturn the bankruptcy
court’s decision disallowing its claim against the estate of chapter 7 debtor Maui
Industrial Loan and Finance Company, Inc. (“MFC”). In the proceedings below,
the bankruptcy court sustained the Trustee’s Objection to RNI’s Claim, based in
part, on the bankruptcy court’s prior determination in a 2010 Adversary Proceeding
between these parties that RNI does not have a valid restitution claim.

RNI argues that the bankruptcy court erred both procedurally and on the
merits when it sustained the Trustee’s Objection and proceeded by contested matter.
Although the Court agrees that the bankruptcy court should have proceeded by
adversary proceeding, rather than by contested matter, given that the Trustee’s
Objection included a request for subordination, such error was harmless under the
particular circumstances presented because RNI suffered no prejudice. With
respect to the substance of the claim, the bankruptcy court did not err when it
precluded RNI from asserting a restitution claim, in view of its prior determination
of that same issue in a 2010 Adversary Proceeding. Nor did the bankruptcy court
err in disallowing RNI’s Claim pursuant to 11 U.S.C. § 502(b)(1), notwithstanding
RNI’s repayment of its liability to the estate under Section 502(d). AFFIRMED.
BACKGROUND
MFC was a nondepository financial services loan company that was
authorized to make loans, but not authorized to accept deposits from the public
under state law. Lloyd Kimura controlled MFC and caused it to “borrow” money
from investors in exchange for promised returns, and to repay the loans and make
the promised returns largely with funds borrowed from subsequent investors. In a
federal plea agreement, Mr. Kimura admitted that he operated MFC as a Ponzi
scheme for approximately twenty-three years. See United States v. Kimura, Case
No. 10-CR-00890 (D. Haw.), Dkt. No. 8 (1/5/11 Mem. of Plea Agreement). After a

2

state regulator ordered MFC to cease doing business, MFC and Kimura commenced
separate bankruptcy cases in 2010. See Mem. of Decision on Tr.’s Mot. for
Instructions, filed Sept. 7, 2017, attached as Ex. 3 to MFC Opening Br., Dkt. No. 6.1
I.

Bankruptcy Proceedings
In 1999, RNI paid $1,000,000 for forty percent of the stock in MFC, but did

not obtain approval from the State Division of Financial Institutions before
completing the stock purchase. In 2007, when RNI sought to withdraw its
investment in MFC, the parties entered into a stock repurchase agreement on
October 8, 2007, in which MFC promised to pay RNI a total of $2,500,000 in
installments. MFC paid $1,040,000 on the repurchase agreement before defaulting.
RNI then sued MFC in state court and judgment was entered in RNI’s favor on
November 4, 2009 (Civil No. 09-0037).
MFC filed for bankruptcy under Chapter 7 on January 28, 2010. Two
bankruptcy proceedings are relevant to this appeal. First, the Trustee successfully
brought an adversary proceeding against RNI seeking to recover the $1,040,000 that
MFC paid to it (Adv. Pro. No. 10-90069). Second, on April 1, 2010, in the Chapter
7 proceedings below (Bankr. No. 10-00235), RNI filed Proof of Claim No. 21 (from
Claims Registry) for $1,938,186.97, which the bankruptcy court disallowed upon

1

Unless otherwise indicated, all references to the record correspond to this Court’s docket number
entries for the instant appeal, Civil No. 17-00394.
3

the Trustee’s Objection and which is the subject of the present appeal. See Dkt. No.
7-2 (4/1/2010 POC No. 21).
A.

Adversary Proceeding (Adv. Pro. No. 10-90069)

The Adversary Proceeding was an avoidance action brought by the Trustee to
recover the amounts paid by MFC to RNI under the stock repurchase agreement.
The complaint in the Adversary Proceeding alleged four counts: (1) violation of the
Hawaii Business Corporations Act, HRS § 414-111(c) (Count I); (2) violation of the
Hawaii Uniform Fraudulent Transfer Act, HRS Chapter 651C (Count II); (3) 11
U.S.C. § 548 (Count III); and (4) transferee liability pursuant to 11 U.S.C. § 550
(Count IV). The bankruptcy judge granted the Trustee’s motion for summary
judgment on Counts I, II, and IV in a May 16, 2011 Memorandum of Decision, and
on June 1, 2011, the parties stipulated to dismiss Count III. On May 27, 2011, RNI
filed a Notice of Appeal of the May 16, 2011 Decision. The district court dismissed
the appeal for lack of jurisdiction, and the Ninth Circuit affirmed. See Field v.
RNI-NV (In re Maui Indus., Loan & Fin. Co., Inc.), 2011 WL 1870289 (Bankr. D.
Haw. 2011), appeal dismissed, 2011WL 6012039 (D. Haw.), recon. denied, 2012
WL 667759 (D. Haw.), aff’d, 583 Fed. Appx. 636 (9th Cir. July 14, 2014).
The bankruptcy court determined that the pre-petition transfers violated the
Hawaii Business Corporations Act, in part, because at a time when it was insolvent,
MFC made “distributions” to RNI, which under Hawaii law, are defined as “[a]

4

direct or indirect transfer of money or other property (except its own shares) or
incurrence of indebtedness by a corporation to or for the benefit of its shareholders
in respect of any of its shares.” Mem. of Decision at 6, filed May 16, 2011, Dkt.
No. 7-31 (quoting HRS § 414-3). The bankruptcy court explained that RNI’s
restitution claim was also not warranted because “granting RNI a restitution claim
would unjustly give RNI greater rights than it bargained for. RNI’s restitution
claim, if granted, would put RNI on a par with [MFC]’s unsecured creditors, even
though RNI agreed to buy stock, which is subordinate to creditor claims.” Id. at 7.
The bankruptcy court reasoned that “[a]llowing RNI to elevate its rights to equal
status with unsecured creditors would be unfair to [MFC]’s other creditors.” Id.
(citing Durette v. Aloha Plastic Recycling, Inc., 105 Hawai‘i 490, 503, 100 P.3d 60,
73 (2004) (recognizing that restitution is equitable in nature, guided by the goal of
preventing injustice)). The bankruptcy court further determined that “a party that
has engaged in wrongful conduct in connection with the transaction is not entitled to
restitution,” citing RNI’s failure “to obtain regulatory approval before acquiring
shares of [MFC].” Id. at 7. The bankruptcy court concluded that the Trustee was
entitled to avoid the stock repurchase agreement, the related promissory note, and
the payments from MFC to RNI under HRS § 414-111(c). Id. at 8.
Additionally, because there was no dispute that RNI did not give reasonably
equivalent value in exchange for the $1,040,000 in transfers received from MFC,

5

that the transfers occurred within a four-year reach-back period, or that RNI did not
prove that it took the transfers in good faith, the bankruptcy court found the transfers
were avoidable by the Trustee under the Hawaii Uniform Fraudulent Transfer Act,
HRS § 651-4C(a). Id. at 9–10. Finally, the bankruptcy court concluded that the
Trustee was entitled to recover from RNI the $1,040,000 in transfers under 11
U.S.C. § 550, and awarded the Trustee pre-judgment interest at ten percent per
annum from the date on which the transfers were made. Id. at 11.
Following RNI’s unsuccessful appeals to the district court and the Ninth
Circuit, the Trustee executed on RNI’s appeal bond and, on September 11, 2014,
filed a Satisfaction of Judgment for the $1,428,324.90 that RNI paid back to the
estate in the avoidance action. Dkt. No. 7-44 (9/11/2014 Satisfaction of Judgment
in Adv. Pro. No. 10-90069); Dkt. No. 7-6 (8/7/14 Notice of Receipt of Payment on
Judgment in Adv. Pro. No. 10-90069).
B.

RNI’s Claim And Trustee’s Objection (Bankr. No. 10-00235)

In the MFC Chapter 7 case, RNI filed its Proof of Claim No. 21 (“Claim”) in
the amount of $1,938,186.97 on April 1, 2010. Dkt. No. 7-2. On August 2, 2011,
while the contemporaneous Adversary Proceeding was pending, the Trustee

6

scheduled RNI’s Claim at $0. Dkt. No. 7-4 at 6 (8/2/11 Mot. to Approve Procedure
for Bifurcation of Unsecured Claims Filed by Ponzi Scheme Investors).2
On April 25, 2017, the Trustee filed a Motion for Instructions as to
Distribution Rights of Creditors Filing Claims (“Motion for Instructions”), seeking
clarification from the bankruptcy court on the procedure for disbursing
approximately $8,000,000 in estate funds to creditors, of which $6,000,000 was
designated for timely “Class A” restitution claims under 11 U.S.C. § 726(a)(2).
Dkt. No. 7-7. The Motion for Instructions sought guidance as to how the Trustee
was to distribute the balance of estate funds—whether to first pay untimely claims
(Section 726(a)(3)) or “Class B” claims (lost investment/lost profit). Id. at 2–3.
Exhibits A through C to the Trustee’s Motion for Instructions proposed
classification and distribution of the estate funds to three types of creditors based on
their classes of recovery: “Class A” (timely restitution claims); “Class B” (timely
lost profit claims); and untimely, as-yet unbifurcated claims. Because RNI’s Claim
for $1,938,186.97 was neither scheduled in Exhibits A though C nor addressed in the
Motion for Instructions, RNI filed an Objection to the Trustee’s Motion for
Instructions on May 19, 2017, demanding that its Claim be classified “in Exhibit A
[Class A claims], as a timely filed proof of claim,” either “for $1,938,186.97 or

2

As of August 2, 2011, RNI had not yet complied with the requirements of an “allowed claim”
under 11 U.S.C. § 502(d). RNI had posted a bond pending its appeal of the Adversary Proceeding
on June 17, 2011, but did not satisfy the judgment until September 11, 2014.
7

$1,728,831.00, the amount of the appeal bond paid over to the Trustee.” Dkt. No.
7-8 at 2, 5. RNI argued that “[u]nder § 502(d), after RNI had posted an appeal bond
. . . and the Trustee filed his Satisfaction of Judgment on September 14, 2014, RNI’s
proof of claim was reinstated and allowed to participate in the distribution of the
estate funds, unless the Trustee filed a formal objection.” Id. at 8.
On June 1, 2017, the Trustee did object, filing an Objection to RNI’s Claim on
the bankruptcy court’s local form (hib_3007-1), asserting that the Claim should be
disallowed in its entirety. Dkt. No. 7-11 (Objection to Claim). The Trustee’s
Objection argued that RNI’s Claim was unenforceable against the estate by
operation of collateral estoppel or issue preclusion, in light of the issues already
adjudicated by the courts in the Adversary Proceeding. In the alternative, the
Trustee asserted that any “allowed claim” that RNI may have must be subordinated
to the lowest priority under Section 510(b), or alternatively, equitably subordinated
under Section 510(c), or alternatively, subordinated to a “Class B” claim. Dkt. No.
7-11 at 15.
RNI opposed the Trustee’s Objection as both procedurally improper and
substantively without merit. RNI first asked the bankruptcy court to dismiss the
Trustee’s Objection on procedural grounds because the Trustee combined its
Objection to the Claim with another demand for relief—subordination—which is
not permitted under Federal Rule of Bankruptcy Procedure 3007(b) and Local

8

Bankruptcy Rule 3007-1(d). According to RNI, when an objection is accompanied
by a subordination request, such relief must be sought in a separate adversary
proceeding. Dkt. No. 7-12.3
In reply, the Trustee emphasized that he only sought subordination of the
Claim in the alternative and argued that RNI identified no prejudice that it would
suffer should the bankruptcy court proceed by way of contested matter. According
to the Trustee, there were no remaining issues of factual or legal dispute regarding
subordination, since all such issues had previously been determined in the
Adversary Proceeding. Dkt. No. 7-13 at 4–5. The Trustee also maintained that
RNI did not have a restitution claim because the bankruptcy court previously
determined in the Adversary Proceeding that RNI was a shareholder, not an MFC
investor, and that MFC made “distributions” to RNI. Moreover, the Trustee
asserted that RNI’s Claim was not “restored” pursuant to Section 502(d); rather, its

3

RNI declared in its opposition:
RNI hereby raises an objection to the Trustee pursuing its objection and
subordination of RNI’s claim by way of a Rule 3007(a) and/or Rule 9014
“contested matter,” when Rule 3007(b) and LBR 3007-1(d) clearly require that the
Trustee proceed by way of an adversary complaint for both the objection to RNI’s
claim and any subordination of that claim. In the Ninth Circuit, it is clear that a
request to subordinate a claim must proceed pursuant to a Rule 7001(8) adversary
complaint when the request is combined with an objection to a claim.

Dkt. No. 7-12 at 11.

9

Claim was merely “reinstated” when RNI paid the judgment against it and was then
an “allowed claim,” subject to the Trustee’s Objection. Id. at 7-8.
II.

Bankruptcy Court Order And Judgement
The matter was fully briefed, and the bankruptcy court held a hearing on the

Trustee’s Objection on July 10, 2017. Dkt. No. 7-21 (7/10/17 Hrg. Tr.). On July
27, 2017, the bankruptcy court entered its Order Sustaining Objection to Claim,
determining that RNI’s Claim should be disallowed. Dkt. No. 7-15 (7/27/17
Order). With respect to the procedural issue, the bankruptcy court rejected RNI’s
request to dismiss the Trustee’s Objection, and noted that:
RNI argues that the proper procedure to subordinate under
§ 510(b) is to initiate an adversary proceeding. However, the
judgment in the prior adversary proceeding determined all issues
that are necessary to determine § 510(b) subordination, so it
would be useless to initiate another proceeding because RNI
would lose. However, equitable subordination under § 510(c)
would bring in to play factors that were not involved in the prior
adversary proceeding.
7/27/17 Order at 4 n.7. With respect to the merits of the Trustee’s Objection, the
bankruptcy court recounted the prior determination in the Adversary Proceeding in
which the Trustee–
brought an avoidance action against RNI to recover the roughly
$1.4 million that the debtor paid to RNI pursuant to the judgment
in the state court breach of contract action for the remaining debt
owed under the stock repurchase agreement. I issued a
judgment avoiding the transfer and ordering RNI to return the
money to the bankruptcy estate. I found that the stock

10

repurchase agreement was illegal and that RNI had no restitution
claim against the debtor.
7/27/17 Order at 2 (footnotes omitted). The bankruptcy court then evaluated RNI’s
current Claim in light of the prior rulings in the Adversary Proceeding, and
concluded that the issues previously adjudicated precluded re-litigation of RNI’s
Claim for restitution:
The issue previously alleged in the avoidance litigation is
identical to the issue raised in this claim objection—whether
RNI has a restitution claim for its original $1,000,000.00
contribution to the debtor. The debtor and RNI already
presented arguments on this issue in the avoidance action and I
made a final ruling that RNI did not have a restitution claim.
RNI appealed to the U.S. District Court but the appeal was
dismissed for lack of jurisdiction (RNI failed to timely file a
notice of appeal) and the Ninth Circuit affirmed the dismissal.
Thus, the issue was actually litigated and adjudicated. Finally,
the determination that RNI’s purchase of the debtor’s stock was
illegal was critical to the avoidance action. RNI argued, as a
defense to the avoidance claim, that it had a restitution claim
against the debtor, and that the satisfaction of that claim was
value given in exchange for the payment. In order to evaluate
this defense, I had to decide whether RNI’s restitution claim was
valid. Because all of the elements are established, issue
preclusion applies and [Proof of Claim] 21 is disallowed.
7/27/17 Order at 2–3 (footnote omitted).
With respect to RNI’s assertion that its Claim was restored pursuant to
Section 502(d), the bankruptcy court explained, Section 502(d) “provides that, if a
creditor received an avoidable transfer, the creditor’s claim is disallowed unless the
creditor returns the transferred property. The implication of this section is that

11

returning the transferred property does not create a new claim; instead, it eliminates
one reason for disallowing the creditor’s original claim.” 7/27/17 Order at 3.
RNI’s repayment of the $1.4 million to the bankruptcy estate did not give “it a valid
claim under § 502(d). . . the fact remains that, as [the court] previously determined,
RNI’s claim is also invalid because the contract on which it was based was illegal.”
7/27/17 Order at 3–4.
Because the bankruptcy court disallowed RNI’s claim, it determined that the
Trustee’s alternative requests for subordination under Section 510(b) and for
equitable subordination under Section 510(c) were irrelevant, and did not address
them further. Final Judgment was entered Sustaining the Trustee’s Objection to
RNI’s Claim on July 31, 2017. Dkt. No. 7-16.
This appeal and United States District Court election ensued. Dkt. No. 1.
STANDARD OF REVIEW
This court reviews a bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. In re Kimura (United States v. Battley), 969 F.2d 806,
810 (9th Cir. 1992). The court “must accept the Bankruptcy Court’s findings of
fact, unless the court is left with the definite and firm conviction that a mistake has
been committed. Mixed questions of law and fact are reviewed de novo.” In re
JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010) (quotation marks and citations
omitted). The Court reviews “de novo a bankruptcy court’s determination that

12

issue preclusion is available, and for an abuse of discretion the decision to apply
issue preclusion.” In re Chunchai Yu, 694 F. App’x 542 (9th Cir. 2017) (citing
Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006)).
DISCUSSION
The Court resolves three issues necessary to the determination of this appeal,
and affirms the bankruptcy court as to each.4 First, although it was error to proceed
by contested matter instead of adversary proceeding on the Trustee’s Objection to
RNI’s Claim, such error was harmless where it did not affect the substantial rights of
the parties, is not inconsistent with substantial justice, and RNI suffered no
prejudice. Second, the bankruptcy court neither erred nor abused its discretion by

4

Although RNI lists thirteen issues in its Statement of Issues on Appeal, most of the issues it raises
are duplicative or irrelevant. In particular, several of the stated “issues on appeal” attack final
determinations made by the bankruptcy court in the 2010 Adversary Proceeding—and not during
the applicable Claims determination process—and which are not properly the subject of this
appeal. See Dkt. No. 4-2 (8/28/17 RNI Designation of Record on Appeal and Statement of Issues
on Appeal). One example, which does not touch on the bankruptcy court’s 7/27/17 Order at all,
but relates entirely to the bankruptcy court’s prior ruling on Count I of the Trustee’s Motion for
Summary Judgment in the Adversary Proceeding, states:
Whether the Bankruptcy Court erred in holding that Appellant-RNI violated
§ 412:9-500 and § 412:3-612, Haw. Rev. Stat., when Appellant-RNI could not, as a
matter of law, purchase an “equity interest” in Debtor nor could Appellant-RNI
receive an “unlawful” dividend nor a dividend of any type from the Debtor because
(i) the Debtor had operated as a Ponzi scheme since 1986, 13 years before
Appellant-RNI purportedly purchased an “equity interest” in the Debtor in 1999,
and (ii) thus Appellant-RNI could neither have “purchased” nor “redeemed” the
“equity interest” in the Debtor after 1986, when the Debtor began operating as a
Ponzi scheme.
Dkt. No. 4-2 at 10 ¶ 8. RNI previously had the opportunity to challenge the bankruptcy court’s
May 2011 rulings in the Adversary Proceeding. Seven years later, it may not seek to re-litigate
those matters now in this appeal.
13

precluding RNI from asserting its Claim as a valid restitution claim. Finally, the
bankruptcy court did not err in disallowing RNI’s Claim pursuant to Section
502(b)(1), notwithstanding RNI’s repayment of its liability under Section 502(d).
I.

The Bankruptcy Court’s Decision To Proceed By Contested Matter Was
Harmless Error, And RNI Suffered No Prejudice
The Court first addresses RNI’s assertion that the bankruptcy court was

required to dismiss the Trustee’s Objection to RNI’s Claim pursuant to Federal
Rules of Bankruptcy Procedure 3007(b) and 7001(8) and Local Bankruptcy Rule
3007-1(d). Although the Trustee’s Objection included alternative requests for
subordination, which ordinarily require the filing of an adversary complaint under
Bankruptcy Rule 7001(8), it was harmless error not to proceed in that manner under
the specific circumstances of this case. That is because the material facts were few
and undisputed, the critical issues were pure questions of law, and RNI identified no
prejudice it would suffer by forgoing the successive adversary proceeding it now
demands. Further explanation is set forth below.
A.

The Bankruptcy Court’s Decision To Proceed By Contested
Matter Is Subject To Harmless Error Analysis

It is undisputed that the Trustee filed an Objection to RNI’s Claim, and that
Federal Rule of Bankruptcy Procedure 3007 governs such objections. Nor is it
disputed that the Trustee’s objection also included an alternative subordination
request. In such circumstances, Bankruptcy Rule 3007(b) commands that the court

14

proceed by adversary proceeding. Fed. R. Bank. P. 3007(b) (“[a] party in interest
shall not include a demand for relief of a kind specified in Rule 7001[5] in an
objection to the allowance of a claim, but may include the objection in an adversary
proceeding.”); see also Local Bankr. R. 3007-1(d) (“An objection to claim that
includes a demand for relief of a kind specified in Bankruptcy Rule 7001 shall be
converted to an adversary proceeding.”).
The Bankruptcy Appellate Panel of the Ninth Circuit and other reviewing
courts have examined similar procedural challenges under the Bankruptcy Rules and
determined that the failure to require a separate adversary proceeding is subject to
harmless error analysis. See, e.g., Korneff v. Downey Reg’l Med. Ctr. Hosp., Inc.
(In re Downey Reg’l Med. Ctr. Hosp., Inc.), 441 B.R. 120, 127 (B.A.P. 9th Cir.
2010) (“The bankruptcy court’s decision not to require an adversary proceeding is
subject to a harmless error analysis.”); Ruvacalba v. Munoz (In re Munoz), 287 B.R.
546, 551 (B.A.P. 9th Cir. 2002) (“Such an error may nevertheless be harmless when
the record of the procedurally incorrect ‘contested matter’ is developed to a
sufficient degree that the record of an adversary proceeding likely would not have
been materially different. In such circumstances, the error does not affect the
substantial rights of the parties and is not inconsistent with substantial justice.”); In

5

The Trustee does not dispute that Bankruptcy Rule 7001, which provides a list of all items to be
brought as adversary proceedings, expressly includes “a proceeding to subordinate any allowed
claim or interest[.]” Fed. R. Bankr. P. 7001(8).
15

re Decker, 199 B.R. 684, 689 (B.A.P. 9th Cir. 1996) (“Ninth Circuit case law
indicates that failure to provide an adversary proceeding is subject to a harmless
error analysis.”); In re Gentile Family Indus., 2014 WL 4091001, at *6 (B.A.P. 9th
Cir. Aug. 19, 2014) (“Even if the bankruptcy court possibly erred in not requiring an
adversary proceeding to determine the Cooper Lease’s term, we conclude that such
error was harmless.”); In re Strata Title, L.L.C., 2014 WL 661174, at *8 (B.A.P. 9th
Cir. Feb. 21, 2014) (“In reviewing the bankruptcy court’s decision to allow the
contest between Debtor and Pure Country to be litigated in a contested matter rather
than in an adversary proceeding, we apply a harmless error analysis.”); see also In re
Cannonsburg Envtl. Assocs., Ltd., 72 F.3d 1260, 1264 (6th Cir. 1996) (“Although
we believe that an adversary proceeding should have been filed instead of a motion
in a contested matter, this error constitutes harmless error.”) (citing Fed. R. Bankr. P.
9005 (harmless error rule incorporating Fed. R. Civ. P. 61)).
The Court examines the following factors, among others, to determine
whether the failure to require the Trustee to file a separate adversary complaint
constitutes harmless error:
whether the “material facts are few and undisputed,” whether the
“critical questions are pure questions of law,” and whether the
“factual record [or] the quality of the presentation of the
arguments would have been materially different had there been
an adversary proceeding.”

16

In re Lakhany, 538 B.R. 555, 561–62 (B.A.P. 9th Cir. 2015) (quoting In re Munoz,
287 B.R. at 551).
Some courts have reframed these factors to evaluate whether the appellant
was prejudiced by the bankruptcy court’s procedural determinations:
The [Bankruptcy Appellate] Panel has developed a list of factors
that we consider in determining whether prejudice has resulted
from a bankruptcy court’s decision to proceed by contested
matter rather than adversary proceeding: (1) the material facts
were few and undisputed, (2) the dispositive issues were pure
questions of law, (3) neither party expressed any discontent with
the contested matter procedures the bankruptcy court utilized,
and (4) this Panel was “satisfied that neither the factual record
nor the quality of the presentation of the arguments would have
been materially different had there been an adversary
proceeding.” Ruvacalba v. Munoz (In re Munoz), 287 B .R.
546, 551 (9th Cir. BAP 2002).
In re Strata Title, L.L.C., 2014 WL 661174, at *9 (B.A.P. 9th Cir. Feb. 21, 2014).
As detailed below, under this rubric, RNI has not demonstrated that it was
prejudiced, and, to the extent the bankruptcy court erred in not requiring that the
Trustee seek alternative relief via an adversary proceeding, that error was harmless.6

6

Even in In re Copper King Inn, Inc., 918 F.2d 1404, 1406–07 (9th Cir. 1990), cited by RNI for the
proposition that a subordination defense must proceed via adversary proceeding, the Ninth Circuit
found that a trustee’s failure to file an adversarial proceeding was not fatal because “for all
practical purposes an adversarial proceeding was held in this case,” and because the claimant
“ha[d] not shown its position was materially prejudiced by the course of events.”
17

B.

RNI Suffered No Prejudice, And The Bankruptcy Court’s
Decision To Proceed Without A Separate Adversary Proceeding
Was Harmless Error

Under the harmless error standard, the Court concludes that the failure to
require the Trustee to commence a separate adversary proceeding did not
substantially affect the rights of the parties and is not inconsistent with substantial
justice. See In re Munoz, 287 B.R. at 551 (internal citations omitted); Fed. R.
Bankr. P. 9005. The procedural error is harmless in light of: the bankruptcy court
record, which was developed to a sufficient degree that the record of an adversary
proceeding likely would not have been materially different; the issues of law raised
by the Trustee’s Objection, rather than disputed issues of fact; the procedures
utilized, which were the practical equivalent of an adversary proceeding and
satisfied the basic tenets of due process; and the lack of prejudice to RNI.
First, the Court observes that the record before the bankruptcy court when it
determined the Trustee’s Objection was complete. The alternative requests for
subordination under Section 510(b) and equitable subordination under Section
510(c) were clearly presented to the bankruptcy court in the Trustee’s Objection, and
RNI does not offer any evidence or argument that the separate filing of an adversary
complaint would have resulted in a more fully developed record with respect to the
alternative requests for subordination. In any event, the arguments and evidence
that RNI presented to the bankruptcy court with respect to Sections 510(b) and

18

510(c), as it turned out, were irrelevant to the central issue of the Trustee’s Objection
to RNI’s claim. In short, the record in the bankruptcy court was developed to a
sufficient degree that “any arguably enhanced record generated in an adversary
proceeding likely would not have been material.” In re Strata Title, L.L.C., 2014
WL 661174, at *10.
Second, as RNI acknowledges, the bankruptcy court was asked to decide
questions of law, rather than resolve questions of disputed fact in the matters below.
See RNI Opening Br. at 6, Dkt. No. 6. The “harmless error standard is especially
apt where the bankruptcy motion in question was the procedural equivalent of a
motion for summary judgment, with the issues to be decided by the bankruptcy court
dealing with questions of law, not disputed fact.” In re Strata Title, L.L.C., 2014
WL 661174, at *8 (citing City Equities Anaheim, Ltd. v. Lincoln Plaza Dev. Co. (In
re City Equities Anaheim, Ltd.), 22 F.3d 954, 958–59 (9th Cir. 1994)). In the
briefing below, the Trustee urged the bankruptcy court (1) to disallow RNI’s claim
based upon prior Adversary Proceeding rulings and, alternatively, (2) to subordinate
RNI’s Claim under Section 510(b) because RNI was a shareholder of MFC, and
(3) to equitably subordinate RNI’s Claim under Section 510(c) because the court
previously determined that MFC’s distributions to RNI violated state law. See Dkt.
No. 7-11 (Tr.’s Obj.). These were issues of law that did not require consideration of
disputed facts, did not call for the court to weigh evidence, and did not require the

19

court to assess credibility. Moreover, no new evidence was raised at the July 10,
2017 hearing on the Trustee’s Objection. In other words, the material facts relied
upon by the bankruptcy court were undisputed at the time of the July 10, 2017
hearing—the parties contested only the law applicable to those undisputed facts and
the ultimate outcome.
Third, the contested matter conducted below was the functional equivalent of
an adversary proceeding, offering and providing all parties notice, briefing and an
opportunity to be heard. At the July 10, 2017 hearing on the Trustee’s Objection,
the bankruptcy court considered the parties’ arguments—including those raised by
RNI for the first time at the hearing—and even discussed the possible effect of the
Trustee dropping the alternative subordination request and proceeding only with the
Objection. Dkt. No. 7-21 at 8–13 (7/10/2017 Hrg. Tr.). The Court is satisfied that
“the quality of the presentation of the arguments would [not] have been materially
different had there been an adversary proceeding. Instead, it appears that [RNI] had
adequate notice of the issues raised in the [Trustee’s Objection], [a] hearing[] w[as]
conducted, . . . briefing was submitted, [and] the parties had ample time to air their
positions[.]” In re Strata Title, L.L.C., 2014 WL 661174, at *10; see also In re
Starky, 522 B.R. 220, 229 (B.A.P. 9th Cir. 2014) (proceeding by contested matter
was harmless error where “Debtors never argued to the bankruptcy court that they
were not properly served with the Trustee’s papers or did not receive notice of

20

scheduled proceedings”); In re Gentile Family Indus., 2014 WL 4091001, at *6
(“The hearing was held as scheduled; the parties had ample time to air their
positions. After considering the parties’ evidence and arguments, the bankruptcy
court determined, as a matter of law, that the Cooper Lease term had been extended
another five years. On this record, we have difficulty understanding how Diatom
was procedurally disadvantaged by the bankruptcy court’s approach.”). Here, as in
Strata Title, “for all practical purposes, an adversary proceeding was held,” and RNI
was not denied due process. In re Strata Title, L.L.C., 2014 WL 661174, at *10–11
(“The due process requirements Debtor invokes are satisfied in both adversary
proceedings under Rule 7001 and contested matters under Rule 9014.”).
Finally, both before the bankruptcy court and again in this appeal, RNI
identified no prejudice to itself caused by the bankruptcy court’s decision to proceed
by contested matter. See, e.g., RNI Mem. in Opp’n to Tr.’s Obj., filed 6/26/17, Dkt.
No. 7-12; see also In re Strata Title, L.L.C., 2014 WL 661174, at *8 (“Debtor has not
provided any specific examples of how the contested proceedings employed in this
case caused it any significant prejudice.”) (citing In re Downey Reg’l Med. Ctr.
Hosp., Inc., 441 B.R. at 128 (requiring the party claiming prejudice to identify
discoverable facts or witnesses that would “have changed the outcome of the
case.”)). Put another way, RNI failed to demonstrate how any “procedural
difference between contested matters and adversary proceedings prejudiced [it] in

21

any meaningful way.” In re Downey Reg’l Med. Ctr. Hosp., Inc., 441 B.R. at 127.
Based upon the factors discussed above, RNI not only did not suffer any evident
prejudice, but does not even offer any allegation to the contrary. “It is difficult to
understand how [RNI] was disadvantaged by the bankruptcy court’s approach,” In
re Strata Title, L.L.C., 2014 WL 661174, at *8, particularly where RNI itself does
not attempt to identify any such disadvantage. In short, “[a]bsent a credible
argument or specific examples from [RNI] showing it suffered some procedural
disadvantage as a result of the procedures used in the bankruptcy court, that the court
allowed the action to proceed as a contested motion rather than adversary
proceeding is not a sufficient reason to disturb the [bankruptcy court’s Order].” In
re Strata Title, L.L.C., 2014 WL 661174, at *10.
II.

The Bankruptcy Court Properly Sustained The Trustee’s Objection To
RNI’s Restitution Claim Based Upon Principles Of Issue Preclusion
RNI argues that the bankruptcy court wrongly disallowed its Claim under the

doctrine of collateral estoppel. The Court disagrees.
“Collateral estoppel, or issue preclusion, bars the relitigation of
issues actually adjudicated in previous litigation between the
same parties.” Clark v. Bear Stearns & Co., Inc., 966 F.2d
1318, 1320 (9th Cir. 1992). For the doctrine to apply: (1) the
issue must be identical to one alleged in prior litigation; (2) the
issue must have been “actually litigated” in the prior litigation;
and (3) the determination of the issue in the prior litigation must
have been “critical and necessary” to the judgment. Id.
Beauchamp v. Anaheim Union High Sch. Dist., 816 F.3d 1216, 1225 (9th Cir. 2016).

22

First, as accurately recounted by the bankruptcy court, the parties to this
action are identical to those in the 2010 Adversary Proceeding in which the Trustee
brought an avoidance action on behalf of the estate against RNI seeking to recover
the $1,040,000 that MFC paid to it. The issue is also identical—despite RNI’s
attempt to obfuscate.7 In giving the issue preclusive effect, the bankruptcy court
held that the facts and law that it relied upon in establishing that RNI did not have a
valid restitution claim for avoidance purposes also established that RNI did not have
a valid restitution claim for purposes of whether to disallow RNI’s claim under
Section 502(a)–(e). 7/27/17 Order at 2–3.
RNI’s arguments to the contrary are misplaced. For example, RNI notes that
the bankruptcy court “relied on its earlier decision in the fraudulent transfer
[Adversary Proceeding] under [HRS] § 651C-4, to conclude that under § 502(b)(1)
RNI could not have a restitution claim as per § 651C-8 [avoidance defense based
upon showing of both good faith and equivalent value].” RNI Reply at 6, Dkt. No.
10. RNI, however, maintains that it is not presently “attempting to argue that the
§ 651C-8 restitution defense affects Trustee’s avoidance recovery, but RNI contends
that [the] § 651C-8 restitution decision cannot be applied to disallow RNI’s timely
filed proof of claim under both § 502(b) and § 502(d) since the elements of both laws

7

RNI, for instance, argues that its own 2009 state court judgment against MFC should have
preclusive effect, rather that the bankruptcy court’s final decision in the Adversary Proceeding. It
is difficult to see how that could be so, given the Trustee’s absence from the state court proceeding.
23

are different, as are the underlying policies.” RNI Reply at 6, Dkt. No. 10
(emphasis added). RNI’s argument misses the mark. Whether the elements of a
fraudulent transfer claim or defense are identical to the elements applicable to
determining whether a claim is “allowed” or “disallowed” under the Bankruptcy
Code is not dispositive of whether issue preclusion applies.8 Throughout its
briefing, RNI insists that it is “simply trying to enforce its restitution claim that the
Bankruptcy Court wrongly denied.” RNI Opening Br. at 19, Dkt. No. 6; see also id.
at 22–24. For purposes of this appeal, whether RNI had a valid restitution claim
was an issue previously litigated and determined in the Adversary Proceeding. RNI

8

RNI appears to confuse the requirements of issue preclusion with those of “claim preclusion” or
res judicata. See, e.g., Whole Woman’s Health v. Hellerstedt, 136 S. Ct. 2292, 2331 (2016)
(Alito, J., dissenting) (“Litigation of a ‘cause of action’ or ‘claim’ is barred if (1) the same (or a
closely related) party (2) brought a prior suit asserting the same cause of action or claim, (3) the
prior case was adjudicated by a court of competent jurisdiction and (4) was decided on the merits,
(5) a final judgment was entered, and (6) there is no ground, such as fraud, to invalidate the prior
judgment.”). “[C]laim preclusion prevents a party from relitigating not only issues which were
actually litigated in a prior action, but also all grounds of claim and defense which might have been
properly litigated in the prior action.” Hanson v. Palehua Cmty. Ass’n, 2013 WL 1751504, at *7
(D. Haw. Apr. 23, 2013), aff’d, 599 F. App’x 299 (9th Cir. 2015) (citations omitted). “[I]ssue
preclusion similarly prevents a subsequent suit between the parties or their privies on a different
cause of action and prevents the parties or their privies from relitigating any issue that was actually
litigated and finally decided in the earlier action.” Id. (citation omitted); see also New Hampshire
v. Maine, 532 U.S. 742, 748–49 (2001) (“Claim preclusion generally refers to the effect of a prior
judgment in foreclosing successive litigation of the very same claim, whether or not relitigation of
the claim raises the same issues as the earlier suit. Issue preclusion generally refers to the effect
of a prior judgment in foreclosing successive litigation of an issue of fact or law actually litigated
and resolved in a valid court determination essential to the prior judgment, whether or not the issue
arises on the same or a different claim.”). The bankruptcy court did not rely upon claim
preclusion when considering the preclusive effect of the judgment in the Adversary Proceeding on
the issues raised by the Trustee’s Objection to RNI’s Claim.
24

may not relitigate that same “issue” by recasting it as a different “claim” or cause of
action.
Second, the parties during the Adversary Proceeding presented arguments on
the issue, and the bankruptcy court issued a final ruling which was appealed by RNI
and dismissed by the district court and the Ninth Circuit. See Field v. RNI-NV,
2011 WL 1870289 (Bankr. D. Haw. 2011), appeal dismissed, 2011WL 6012039 (D.
Haw.), recon. denied, 2012 WL 667759 (D. Haw.), aff’d, 583 Fed. Appx. 636 (9th
Cir. July 14, 2014). For a claim to be “actually litigated” means that there was “a
full and fair opportunity to litigate the merits of an issue.” Littlejohn v. United
States, 321 F.3d 915, 923 (9th Cir. 2003). RNI has had a full opportunity to litigate
the restitution issue in the Adversary Proceeding—including the chance to raise its
argument regarding the preclusive effect of the 2009 state court action between RNI
and MFC. Accordingly, the issue was actually litigated and adjudicated.
Finally, the question of whether RNI had a valid restitution claim was critical
and necessary to the judgment where the bankruptcy court avoided the transfers and
determined that because RNI did not have a restitution claim, the Trustee was
entitled to summary judgment.9 As to Count I for violation of the Hawaii Business

9

According to the bankruptcy judge,
the determination that RNI’s purchase of the debtor’s stock was illegal was critical
to the avoidance action. RNI argued, as a defense to the avoidance claim, that it
25

Corporations Act, HRS § 414-111(c), the bankruptcy court found that MFC’s
issuance of the promissory note to RNI and payments on the note were
“distributions” and that MFC was insolvent when the transfers were made. As a
result, the transfers were avoided, and RNI was not entitled to restitution for the
original $1,000,000 contribution to MFC. Mem. of Decision at 4–8, filed May 16,
2011, Dkt. No. 7-31. With respect to Count II, the bankruptcy court determined
that the Trustee could avoid the transfers to MFC under the Hawaii Uniform
Fraudulent Transfer Act, HRS § 651C-4(a), because RNI did not take the transfers in
good faith and for reasonably equivalent value. Although RNI argued that its
restitution claim arising out of the void stock repurchase agreement was equivalent
value for the purpose of its good faith defense, the bankruptcy court rejected this
assertion because “RNI does not have a valid restitution claim.” Mem. of Decision
at 6, filed May 16, 2011, Dkt. No. 7-31. That is, because the bankruptcy court
determined that RNI did not have a valid restitution claim, it granted summary
judgment to the Trustee on Counts I and II and avoided the $1,040,000 transfer from
MFC to RNI.

had a restitution claim against the debtor, and that the satisfaction of that claim was
value given in exchange for the payment. In order to evaluate this defense, I had to
decide whether RNI’s restitution claim was valid.
7/27/2017 Order at 3.
26

The bankruptcy court found in the 2010 Adversary Proceeding that RNI did
not have a restitution claim, and that determination was not disturbed on appeal.
RNI is collaterally estopped from re-litigating this issue, and the bankruptcy court
did not err in disallowing the claim.
III.

The Bankruptcy Court Properly Sustained The Trustee’s Objection To
RNI’s “Restoration” Claim Under Section 502(d)
RNI also argues that the bankruptcy court erred in denying its Claim in light

of the fact that it repaid the judgment against it in the Adversary Proceeding. The
Trustee does not dispute RNI’s argument that its Claim was “reinstated” by
repayment of the voided transfers. However, the Trustee disagrees that the Claim
was somehow “restored” pursuant to Section 502(d).
Under RNI’s reading of the relevant provisions, because its Claim is no longer
“disallowed” pursuant to 11 U.S.C. § 502(d), it is thereby entitled to a distribution
from the estate on its Claim. It is RNI’s theory that the “Trustee’s receipt for RNI’s
payment of the judgment, satisfied the requirements of § 502(d), enabling RNI to
participate in any distribution from the Estate.” RNI Opening Br. at 11 (citations
omitted), Dkt. No. 6. Indeed, RNI asserts that “[e]ven though the court avoided
MFC’s transfer to RNI, because RNI repaid the full amount of the avoided transfers
with pre- and postjudgment interest, now the Bankruptcy Court must allow RNI’s
Class A claim in the amount of $1,000,000.00, or $1,428,324.90, or in an amount to
be determined by the Court.” Id. (Emphasis added). RNI is incorrect.
27

Section 502(d) provides:
Notwithstanding subsections (a) and (b) of this section, the court
shall disallow any claim of any entity from which property is
recoverable under section 542, 543, 550, or 553 of this title or
that is a transferee of a transfer avoidable under section 522(f),
522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless
such entity or transferee has paid the amount, or turned over any
such property, for which such entity or transferee is liable under
section 522(i), 542, 543, 550, or 553 of this title.
Under this provision, until RNI “paid the amount” for which it was liable under
Section 550, its Claim was “disallowed.” Once RNI repaid the estate (upon
termination of its appeal of the Adversary Proceeding in 2014), its Claim was no
longer “disallowed” by operation of Section 502(d). Nothing in Section 502(d),
however, mandates that once an entity pays the “amount recoverable,” such entity is
thereby entitled to distributions from the estate. To be clear, under the plain
language of the statute, Section 502(d) simply provides that until a creditor pays
what it owes to an estate, any claim it may have is disallowed. That is all. No
portion of this provision, nor any other in the Bankruptcy Code, states that once an
entity pays what it owes the estate, such entity is unconditionally entitled to
participate in distributions from the estate.
To the contrary, RNI is not entitled to payment on its Claim based solely upon
operation of Section 502(d) because the bankruptcy court sustained the Trustee’s
Objection based, in part, upon the prior binding determination in the 2010 Adversary
Proceeding that RNI does not have a valid restitution claim. The Trustee does not
28

dispute that RNI accounted to the estate for its liability, and, therefore, RNI’s Claim
is no longer disallowed. Notwithstanding repayment of its liability pursuant to
Section 502(d), RNI’s Claim remains subject to the remaining provisions of Section
502. Section 502(h) provides that Sections 502(a) and (b) apply to RNI’s reinstated
claim.10 Under Section 502(a), “[a] claim or interest, proof of which is filed under
section 501 of this title, is deemed allowed, unless a party in interest, including a
creditor of a general partner in a partnership that is a debtor in a case under chapter 7
of this title, objects.” (Emphasis added). In this instance, the Trustee filed an
objection, which the bankruptcy court considered, and sustained pursuant to Section
502(b)(1), which provides:
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of
this section, if such objection to a claim is made, the court, after
notice and a hearing, shall determine the amount of such claim in
lawful currency of the United States as of the date of the filing of
the petition, and shall allow such claim in such amount, except to
the extent that—
(1) such claim is unenforceable against the debtor and
property of the debtor, under any agreement or applicable
law for a reason other than because such claim is
contingent or unmatured[.]

10

Section 502(h) states:
A claim arising from the recovery of property under section 522, 550, or 553 of this
title shall be determined, and shall be allowed under subsection (a), (b), or (c) of
this section, or disallowed under subsection (d) or (e) of this section, the same as if
such claim had arisen before the date of the filing of the petition.
29

Because the bankruptcy court determined that RNI’s Claim was unenforceable
under Section 502(b)(1), it disallowed the Claim. This was not error, despite the
fact that RNI had satisfied its liability under Section 502(d).
CONCLUSION
For the foregoing reasons,11 the bankruptcy court did not err when it sustained
the Trustee’s Objection and disallowed RNI’s Claim. Accordingly, the Court
affirms the bankruptcy court’s July 27, 2017 Order and Final Judgment entered on
July 31, 2017. The Clerk of Court is directed to close the case.
IT IS SO ORDERED.
DATED: January 30, 2018 at Honolulu, Hawai‘i.

In re Maui Indus. Loan & Fin. Co., CV 17-00394; ORDER AFFIRMING BANKRUPTCY
COURT ORDER

11

Because the Court affirms the bankruptcy court’s decision to sustain the Trustee’s Objection to
RNI’s Claim on these grounds, it does not reach the remaining issues raised in the parties’ briefing
relating to subordination or classification of the Claim.
30