Coulson v. Kane
Filing
11
ORDER Denying Appeal and Affirming The Bankruptcy Court's Order re: 1 "On the basis of the foregoing, Appellant Thomas W. Coulsons appeal, filed August 31, 2017, is HEREBY DENIED and the bankruptcy court's Order, filed Augu st 17, 2017 is HEREBY AFFIRMED.The Clerk's Office is DIRECTED to enter final judgment and to close this case on July 16, 2018, unless a motion for reconsideration of this Order is filed not more than fourteen days after this written order is filed. See LR60.1." Signed by JUDGE LESLIE E. KOBAYASHI on 6/29/2018. (cib, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
In re
)
)
RICHARD ALLEN PRICE, JR.,
)
)
Debtor.
)
_____________________________ )
)
THOMAS W. COULSON,
)
Appellant,
)
)
)
vs.
)
)
ELIZABETH A. KANE, Trustee,
)
)
Appellee.
_____________________________ )
CIVIL 17-00437 LEK-KSC
ORDER DENYING APPEAL AND AFFIRMING THE BANKRUPTCY COURT’S ORDER
On August 17, 2017, in In re Price, Bankruptcy Case
No. 16–00036, the bankruptcy court issued its Memorandum of
Decision on Motion for Partial Summary Judgment (“Bankruptcy
Court’s Order”).
575 B.R. 461 (Bankr. D. Hawai`i 2017).
Appellant Thomas W. Coulson (“Coulson” or “Appellant”) filed his
Notice of Appeal and Statement of Election (“Notice of Appeal”)
on August 31, 2017.
[Dkt. no. 1.]
Appellant filed his opening brief.
On October 31, 2017,
[Dkt. no. 3.]
Appellee
Elizabeth A. Kane, Trustee (“Appellee” or “Trustee”) filed her
answering brief on December 4, 2017, and Appellant filed his
reply brief on December 18, 2017.
[Dkt. nos. 7, 9.]
came on for hearing on March 12, 2018.
This matter
Appellant’s appeal is
denied, and the Bankruptcy Court’s Order is affirmed, for the
reasons set forth below.
BACKGROUND
In the instant appeal, Appellant challenges the
Trustee’s avoidance of a transfer of $123,716.23 to him, which
occurred less than ninety days before Debtor Richard Allen Price
(“Debtor”) filed his bankruptcy petition on January 15, 2016.
Price, 575 B.R. at 464.
Under 11 U.S.C. § 547(b), the bankruptcy
trustee is authorized to avoid certain preferential transfers to
creditors made within ninety days before a debtor files his
bankruptcy petition.1
undisputed.
The historical facts of this case are
Appellant argues reversal is warranted because the
relevant transfer occurred at an earlier stage of their dispute,
outside the ninety-day preference period.
In 2002, Appellant terminated his right to purchase
certain real property in Honolulu, Hawai`i (“Property”) in favor
of Debtor, in exchange for Debtor’s written promise that
Appellant would receive half of any net profit, if the Property
were resold under certain conditions (“Agreement”).
B.R. at 463.
Price, 575
The Agreement was not recorded at the time.
In
2010, Appellant recorded with the Bureau of Conveyances (“BOC”)
1
Debtor’s bankruptcy “case was converted [from chapter 13]
to chapter 7 on January 27, 2016.” Price, 575 B.R. at 464. The
parties do contend this date affects the § 547(b) preference
period.
2
an Affidavit of Adverse Claim (“Affidavit”) and attached the
Agreement as an exhibit.
Id.
Debtor could not sell the Property
because the Affidavit rendered his title unmarketable.2
466.
Id. at
In 2011, Debtor sued Appellant in the Circuit Court of the
First Circuit of the State of Hawai`i (“state court”) to
invalidate the Agreement and Affidavit.
Id. at 463.
Appellant
counterclaimed seeking specific performance and damages.
During
the pendency of the litigation, the parties agreed that:
1) Appellant would withdraw the Affidavit so that Debtor could
sell the Property; and 2) Debtor would deposit the net proceeds
into an escrow account.
Id.
Debtor sold the Property and deposited $122,635.22, the
entirety of the net proceeds, into an escrow account governed by
Joint Escrow Instructions (“Escrow Instructions”), which the
parties executed March 16, 2012.
[Opening Brief, Appellant’s
Appendix to Opening Brief (Excerpts of the Records) (“Record
2
The Affidavit functioned as a lis pendens, also called a
notice of pendency of action, the recordation of which is
authorized by Haw. Rev. Stat. § 634-51. The Hawai`i Supreme
Court has recognized that “the practical effect of a recorded lis
pendens is to render a . . . property unmarketable.”
S. Utsunomiya Enters., Inc. v. Moomuku Country Club, 75 Haw. 480,
502, 866 P.2d 951, 963 (1994) (citations and internal quotation
marks omitted).
3
Appendix”) at COULSON 105-06 (Escrow Instructions).3]
In
pertinent part, the Escrow Instructions provided that:
The escrow funds shall only be released upon any
one of the following occurrences: (1) receipt by
the Escrow Holder of a document signed by both
parties directing the Escrow Holder to release the
funds; or (2) the receipt by the Escrow Holder of
a court order directing the Escrow Holder to
release the funds; or (3) no mutual instructions
are received by the Escrow Holder by the close of
business day on December 3, 2012, after which time
the Escrow Holder will release the funds by way of
a check to be deposited into a court-supervised
account at The First Circuit Court, State of
Hawaii. The court-supervised account will be
established by appropriate motion or stipulation
of the parties no later than December 2, 2012,
with the account number provided to Escrow Holder by December 3,
2012.
[Id.]
Later, Debtor obtained a court order transferring the
funds to a court-supervised account, which was governed by the
same terms as in the Escrow Instructions.
Price, 575 B.R. at
463, 467 n.30.
On July 24, 2012, the state court granted summary
judgment in favor of Appellant on his counterclaim against
3
The Escrow Instructions were attached as Exhibit A to the
Declaration of Counsel, which was attached to Price’s Motion to
Deposit Funds in Court (“Deposit Motion”), filed May 3, 2012, in
state court. [Record Appendix at COULSON 99-110.] The Deposit
Motion was Exhibit 4 to the Declaration of Simon Klevansky,
attached to the Separate Concise Statement in Support of
Trustee’s Motion for Partial Summary Judgment on Count III of the
Complaint, filed on June 13, 2017 in the bankruptcy court
(“Klevansy Summary Judgment Declaration”). [Id. at COULSON 58-67
(concise statement), COULSON 200-03 (declaration).]
4
Debtor, and ruled Debtor was liable to Appellant for “damages ‘in
an amount to be proven.’”
Id. at 463 (footnote omitted).
Later,
the state court entered a minute order on
January 30, 2015, determining that [Appellant] was
entitled to recover $362,884.84.
On November 20, 2015, the state court entered
a Final Judgment in the amount of $423,601.17 and
directed the clerk of the state court to pay to
[Appellant] the funds deposited with the clerk in
partial satisfaction of the judgment. For reasons
that the record does not explain, the clerk did
not immediately comply with this directive. The
state court entered an amended final judgment on
January 4, 2016. On January 7, 2016, the clerk
disbursed $123,716.23 to [Appellant] in partial
repayment of the state court judgment.
Id. at 463–64 (footnotes omitted).
The bankruptcy court ruled the Trustee was entitled to
recover the $123,716.23 because the relevant transfer occurred
within the ninety-day preference period – either when the state
court entered its final judgment or when the clerk disbursed the
funds.
Price, 575 B.R. at 467.
In the instant appeal, Appellant
argues the bankruptcy court erred because the relevant transfer
occurred either:
1) when he filed his Affidavit with the BOC in
2010; 2) when the net proceeds were deposited in the escrow
account; 3) when the net proceeds were deposited in the courtsupervised account; or 4) when the state court issued its Minute
Order on January 15, 2015.
5
STANDARD
This Court has stated:
This court reviews a bankruptcy
court’s findings of fact for clear error
and its conclusions of law de novo. See
In re Kimura (United States v. Battley),
969 F.2d 806, 810 (9th Cir. 1992) (“The
Court reviews the bankruptcy court’s
findings of fact under the clearly
erroneous standard and its conclusions
of law de novo.”). 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).
In re Lee, CIVIL NO. 15-00278 SOM/RLP, 2015 WL
7274035, at *1 (D. Hawai`i Nov. 17, 2015). The
United States Supreme Court has stated:
[a] finding is ‘clearly erroneous’ when
although there is evidence to support
it, the reviewing court on the entire
evidence is left with the definite and
firm conviction that a mistake has been
committed. This standard plainly does
not entitle a reviewing court to reverse
the finding of the trier of fact simply
because it is convinced that it would
have decided the case differently. The
reviewing court oversteps the bounds of
its duty under Fed. R. Civ. P. 52(a) if
it undertakes to duplicate the role of
the lower court. In applying the
clearly erroneous standard . . . ,
[reviewing] courts must constantly have
in mind that their function is not to
decided factual issues de novo. If the
[lower] court’s account of the evidence
is plausible in light of the record
viewed in its entirety, the [reviewing
court] may not reverse it even though
6
convinced that had it been sitting as
the trier of fact, it would have weighed
the evidence differently. Where there
are two permissible views of the
evidence, the factfinder’s choice
between them cannot be clearly
erroneous.
Anderson v. City of Bessemer, 470 U.S. 564, 573-74
(1985) (some alterations in Anderson) (citations
and some internal quotation marks omitted). The
standards described in Anderson apply when a
district court reviews the factual findings of a
bankruptcy court. See, e.g., Ingram v. Burchard,
482 B.R. 313, 322 (N.D. Cal. 2012); In re Daewoo
Motor Am., Inc., 471 B.R. 721, 732 (C.D. Cal.
2012), aff’d, 554 Fed. Appx. 638 (9th Cir. 2014);
In re Folsom, Civil No. 10CV2440 L(NLS), 2011 WL
3489681, at *1 (S.D. Cal Aug. 8, 2011), aff’d sub
nom., Folsom v. Davis, 513 Fed. Appx. 651 (9th
Cir. 2013).
Sebetich v. Woods, CIVIL 15-00233 LEK-BMK, 2016 WL 8710426, at
*4-5 (D. Hawai`i Jan. 29, 2016) (alterations in Sebetich).
DISCUSSION
This appeal turns on whether the relevant transfer of
the Debtor’s property interest occurred within the ninety-day
preference period.4
For purposes of an avoidance action under
§ 547(b), “property of the debtor” does not include “‘[p]roperty
in which the debtor holds . . . only legal title and not an
equitable interest.’”
Begier v. Internal Revenue Serv., 496 U.S.
53, 59 (1990) (quoting 11 U.S.C. § 541(d)).
4
Appellant argues
The Trustee does not contend the one-year preference
period applicable to insiders applies. See § 547(b)(4)(B).
7
transactions and events outside the preference period left Debtor
with only bare legal title to the proceeds.
The Ninth Circuit has stated:
Pursuant to Section 547 the trustee in
bankruptcy may avoid transfers of property made by
the debtor when a transfer meets certain
requirements. “The purpose of this provision is
to discourage creditors ‘from racing to the
courthouse to dismember the debtor during his
slide into bankruptcy’ and to ‘facilitate the
prime bankruptcy policy of equality of
distribution among creditors of the debtor.’” In
re Vance, 721 F.2d 259 (9th Cir. 1983) (quoting
H.R. Rep. No. 95-595, 95th Cong., 1st Sess.,
reprinted in, 1978 U.S. Code Cong. & Ad. News
5787, 5963, 6138).
The eligible transfers are referred to as
“preferences” because they are deemed to be
transfers that favor one creditor to the detriment
of other creditors. Outside of the bankruptcy
context such transfers are unobjectionable: The
payments are properly earned and owed. But in
bankruptcy, the concern is that a debtor, aware of
imminent bankruptcy, will try to pay favored
creditors which it may want or need to deal with
in the future, at the expense of not paying other
creditors. See T. Jackson, The Logic and Limits
of Bankruptcy Law 123-25 (1986). When a transfer
is avoided the recipient of the transfer must
return the property or equivalent value to the
debtor estate.
In re Ehring, 900 F.2d 184, 186 (9th Cir. 1990).
In a preference
avoidance action, typically “the equities clearly favor” a
creditor over a defaulted debtor, but “the balance of the
equities between [one creditor and the debtor’s] other creditors
is far from clear.”
See In re Lewis W. Shurtleff, Inc., 778 F.2d
1416, 1419–20 (9th Cir. 1985).
Federal courts must “necessarily
8
act very cautiously in exercising . . . equitable power in favor
of one group of potential creditors at the expense of other
creditors, for ratable distribution among all creditors is one of
the strongest policies behind the bankruptcy laws.”
In re N. Am.
Coin & Currency, Ltd., 767 F.2d 1573, 1574 (9th Cir. 1985)
(declining to find a constructive trust had been imposed on
certain property).
“Whether a particular action constitutes a ‘transfer’
is a matter of federal law.”
(9th Cir. 2009).
In re Costas, 555 F.3d 790, 793
But “‘[i]n the absence of any controlling
federal law, “property” and “interests in property” are creatures
of state law.’”
Id. (alteration in Costas) (quoting Barnhill v.
Johnson, 503 U.S. 393, 398, 112 S. Ct. 1386 (1992)).
I.
The Filing of the Affidavit
Appellant argues the December 13, 2010 recordation with
the BOC of the Affidavit, i.e., the lis pendens, was the relevant
transfer.
Specifically, Appellant argues the Affidavit:
was
like a consensual lien because its recordation was authorized by
the 2002 Agreement; encumbered Debtor’s title, and prevented
Debtor from selling the Property; and sufficed to prevent a
subsequent judgment creditor from obtaining an interest in the
Property superior to Appellant’s.
Appellant argues the
bankruptcy court erred by ignoring the state court’s grant of
summary judgment in his favor, which is binding under the Rooker-
9
Feldman doctrine and principles of claim preclusion.5
This Court
disagrees.
This case does not implicate the Rooker-Feldman
doctrine because Plaintiff is not asking this Court to review and
reject the state court’s judgment.
See Tiburcio v. Reo Props.
Corp., Civil No. 15-00039 LEK-RLP, 2015 WL 3463507, at *2 (D.
Hawai`i May 29, 2015).
This Court has stated:
“The Rooker–Feldman doctrine provides that
federal district courts lack jurisdiction to
exercise appellate review over final state court
judgments.” Henrichs v. Valley View Dev., 474
F.3d 609, 613 (9th Cir 2007) (some citations
omitted) (citing Rooker v. Fidelity Trust Co., 263
U.S. 413, 415–16, 44 S. Ct. 149, 68 L. Ed. 362
(1923); District of Columbia Court of Appeals v.
Feldman, 460 U.S. 462, 482–86, 103 S. Ct. 1303, 75
L. [Ed. 2d 206 (1983)]. “Essentially, the
doctrine bars ‘state-court losers complaining of
injuries caused by state-court judgments rendered
before the district court proceedings commenced’
from asking district courts to review and reject
those judgments.” Id. (quoting Exxon Mobil Corp.
v. Saudi Basic Indus. Corp., 544 U.S. 280, 284,
125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005)).
Id.
Even if “the federal suit [is] claim-precluded under [28
U.S.C.] § 1738,” the “Rooker–Feldman [doctrine does not] bar
jurisdiction.”
Noel v. Hall, 341 F.3d 1148, 1164 (9th Cir.
2003).
Moreover, this case does not implicate claim
preclusion.
This district court has stated:
5
See Dist. of Columbia Court of Appeals v. Feldman, 460
U.S. 462 (1983); Rooker v. Fid. Tr. Co., 263 U.S. 413 (1925).
10
Under 28 U.S.C. § 1738, “a federal court ‘must
give to a state-court judgment the same preclusive
effect as would be given that judgment under the
law of the State in which the judgment was
entered.’” White v. City of Pasadena, 671 F.3d
918, 926 (9th Cir. 2012) (citing Migra v. Warren
City Sch. Dist. Bd. of Ed., 465 U.S. 75, 81
(1984)). . . . In Hawaii,
the test for collateral estoppel has four
elements: (1) the fact or issue in the
present action is identical to the one
decided in the prior adjudication; (2) there
was a final judgment on the merits in the
prior adjudication; (3) the parties present
in the action are the same or in privity with
the parties in the prior action; and (4) the
fact or issue decided in the prior action was
actually litigated, finally decided, and
essential to the earlier valid and final
judgment.
Dannenberg v. Hawaii, 139 Haw. 39, 60, 383 P.3d
1177, 1198 (2016).
Kuehu v. United Airlines, Inc., Civ. No. 16-00216 ACK-KJM, 2017
WL 2312475, at *4 (D. Hawai`i May 26, 2017) (some citations
omitted).
satisfied.
The first element of claim preclusion is not
The state court granted Appellant’s motion for
summary judgment, which sought, inter alia, a “declar[ation] that
the Agreement . . . is a valid and enforceable contract” and a
determination that Debtor was liable to Appellant for “breach of
contract damages, in an amount to be proven, resulting from
[Debtor’s] breach of the Agreement.”
[Record Appendix at
COULSON 123 (from Appellant’s state court motion for summary
11
judgment, filed 6/19/12).6]
The state court did not decide
whether Appellant had a security interest in the Property, and if
so, whether it was perfected.
Therefore, claim preclusion does
not prevent this Court from deciding that issue.
This Court now
considers whether the Agreement and Affidavit granted Appellant a
perfected security interest in the Property so as to warrant
reversing the bankruptcy court’s grant of summary judgment in
favor of the Trustee.7
The Ninth Circuit has stated:
“No magic words or precise form are necessary to
create or provide for a security interest so long
as the minimum formal requirements of the [Uniform
Commercial] Code are met.” In re Amex–Protein
Dev. Corp., 504 F.2d 1056, 1058–59 (9th Cir.
1974). “Although the U.C.C. does not specifically
state that intention to create a security
agreement is an element necessary to creating a
valid security agreement, it is clear that
intention to do so is required.” In re Airwest
Int`l, 70 B.R. 914, 919 (Bkrtcy. D. Hawai`i 1987).
Determining whether the parties intended to create
a security interest is a two-step process. The
court must find both language in a written
agreement that objectively indicates the parties’
intent to create a security interest and the
presence of a subjective intent by the parties to
create a security interest. See id. (citing White
& Summers, Handbook of the Law Under the Uniform
Commercial Code, § 23–3 (1980)). The intent to
6
The June 19, 2012 state court motion for summary judgment
was Exhibit 7 to the Kelvansky Summary Judgment Declaration.
[Record Appendix at COULSON 122-43.]
7
In light of these rulings, the Trustee’s argument that
Appellant waived arguments relying on the Rooker-Feldman doctrine
and claim preclusion by failing to argue them to the bankruptcy
court is not reached.
12
create a security interest must appear on the face
of a written document executed by the debtor. See
In re Ace Lumber Supply, Inc., 105 B.R. 964, 968
(Bankr. D. Mont. 1989).
In re CFLC, Inc., 166 F.3d 1012, 1016 (9th Cir. 1999).
“One of [the bankruptcy trustee’s] powers is the
ability to take priority over or ‘avoid’ security interests that
are unperfected under applicable state law.”
In re First T.D. &
Inv., Inc., 253 F.3d 520, 526 (9th Cir. 2001) (internal quotation
marks and citation omitted).
“‘Perfection’ and ‘priority’ . . .
are separable but intertwined concepts.
When a lender has
properly perfected a security interest in property . . . , lender
may obtain priority — the ability to assert that its interest
ranks before those of other parties with claims to that
property.”
In re Cybernetic Servs., Inc., 252 F.3d 1039, 1044
n.1 (9th Cir. 2001) (internal quotation marks and citation
omitted).
Under Hawai`i law, “[a]bsent a statutory or common law
exception, a secured creditor with a perfected security interest
in collateral is entitled to priority over a subsequent lien
creditor seeking to claim the same collateral.”
Bank of Hawaii
v. DeYoung, 92 Hawai`i 347, 353, 992 P.2d 42, 48 (2000) (some
citations omitted) (citing W.S. Badcock Corp. v. Myers, 696 So.
2d 776 (Fla. App. 1996) (“A perfected secured creditor has
priority over an unsecured creditor and over a subsequent lien
creditor, even the trustee in bankruptcy.”)).
13
Appellant fails to carry his burden on appeal to show
the Agreement and Affidavit functioned to grant him a security
interest in the Property or its proceeds.
Appellant’s “Opening
Brief was required to contain ‘the argument, which [means]
appellant’s contentions and the reasons for them, with citations
to the authorities and parts of the record on which the appellant
relies.’”
See Higashi v. Takazawa, CIVIL 16-00479 LEK-RLP, 2018
WL 692407, at *2 (D. Hawai`i Feb. 2, 2018) (alteration in
Higashi) (quoting Fed. R. Bankr. P. 8014(a)(8)).
Appellant
points to no “language in [the Agreement] that objectively
manifests the parties’ intent to create a security interest” in
the Property.
See CFLC, 166 F.3d at 1016.
This Court therefore
affirms the bankruptcy court’s conclusion that the 2002 Agreement
did not grant Appellant a security interest in the Property.
See
Price, 575 B.R. at 465 (“The agreement gave [Appellant] a
contingent and time-limited right to payment of an amount of
money measured in part by the resale price of the property.
agreement is unambiguous in this respect:
The
it did not grant
[Appellant] a lien on or other interest in the real property.”).
Because Appellant fails to show the Agreement and Affidavit
granted him a security interest in the Property, he necessarily
fails to show he had a perfected security interest.
Next, the Court considers whether the Affidavit created
a security interest by agreement.
14
Recordation of the Affidavit
was a unilateral act by Appellant.
The Affidavit does not show
the parties’ mutual intent to grant Appellant a security interest
in the Property.
See CFLC, 166 F.3d at 1016.
Thus, the
bankruptcy court correctly concluded the Affidavit “could not
function as a grant of an interest in the property.”
See Price,
575 B.R. at 466.
Next, Appellant argues his filing of the Affidavit is
the date of the relevant § 547 transfer because it prevented any
subsequent judgment creditor from obtaining an interest in the
Property superior to his.
The Ninth Circuit has stated that, in
a preference avoidance action, a court’s final judgment relates
back to the recordation of a lis pendens only if “following [the
creditor’s] filing of its lis pendens, a bona fide purchaser of
the [debtor’s] real property could acquire an interest superior
to [the creditor’s] interest in the property.
Determining what
is necessary to perfect a transfer of an interest in real
property depends entirely on state law.”
See In re Lane, 980
F.2d 601, 604 (9th Cir. 1992) (internal citation and quotation
marks omitted).
The Ninth Circuit then proceeded to analyze
whether, under applicable state law, the plaintiff’s recordation
of a lis pendens secured his claim against the property.
Id.
Under Hawai`i law, a lis pendens is only effective to give notice
of a claim to title or possession of real property.
Utsunomiya, 75 Haw. at 513, 866 P.2d at 967.
15
S.
Filing a lis
pendens is ineffective to secure a claim for money damages
against the owner of real property.
966–67.
Id. at 511–12, 866 P.2d at
Because the Affidavit merely gave notice of Appellant’s
claim for money damages against the owner of the Property, its
filing was insufficient to perfect any security interest by
Appellant in the Property.
Therefore, the state court’s final
judgment does not relate back to the filing of the Affidavit.
See Lane, 980 F.2d at 604.
The Agreement and the Affidavit neither:
1) granted
Appellant a security interest in the Property; nor 2) determined
the date of the relevant § 547 transfer.
II.
The Deposit in Escrow
Appellant relies on In re O.P.M. Leasing Services,
Inc., and argues the relevant transfer occurred when Debtor
deposited the net proceeds from the sale of the Property into
escrow because “‘[c]ourts of bankruptcy recognize that money held
in escrow is not property which vests in the trustee in
bankruptcy.’”
See 46 B.R. 661, 667–68 (Bankr. S.D.N.Y. 1985)
(quoting Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257, 261 (1st
Cir. 1963)).
Appellant argues bankruptcy courts hold the
relevant transfer “occurs at the time the debtor deposits the
funds into the escrow account[, and] the date the funds are
released to the grantee is . . . [ir]relevant under [] § 547(b).”
In re Anthony Sicari, Inc., 144 B.R. 656, 661 (Bankr. S.D.N.Y.
16
1992) (internal citations and quotation marks omitted), aff’d,
151 B.R. 60 (S.D.N.Y. 1993).
To prevail on his escrow theory, Appellant must show
the ultimate transfer of the funds to him, which occurred inside
the preference period, did not “deplete[] the assets of the
estate available for distribution to creditors.”
See In re
Tenderloin Health, 849 F.3d 1231, 1244 (9th Cir. 2017) (footnote
omitted) (citing Begier, 496 U.S. at 58, 110 S. Ct. 2258 (stating
the preference provision is designed to “preserve the property
includable within the bankruptcy estate”)).
In other words,
Appellant must show the Escrow Instructions diminished Debtor’s
interest in the escrowed funds sufficiently so that they were not
property of the bankruptcy estate.
See In re Pettit, 217 F.3d
1072, 1078 (9th Cir. 2000) (depositor’s “funds never became
‘property of the estate’” because they were held “as judgment
security in the event” of an adverse outcome at trial against the
depositor); see also Tenderloin Health, 849 F.3d at 1248 n.14
(“[T]he diminution of estate doctrine is used to determine
whether property that is transferred belongs to the debtor, not
whether a transaction constitutes a transfer.” (citation and
internal quotation marks omitted)).
In cases relied on by
Appellant, the creditors showed the escrowed funds were not
property of the bankruptcy estate where the escrow agreement
“‘left the debtor with only a contingent right to the escrowed
17
funds. . . .
[T]he transfer that occurred when the condition of
the escrow was met . . . [therefore] did not deprive the debtor’s
estate of anything of value.’”
See Sicari, 144 B.R. at 662 (some
citations omitted) (quoting Matter of Newcomb, 744 F.2d 621, 627
(8th Cir. 1984), cited with approval in Matter of O.P.M. Leasing
Servs., Inc., 46 B.R. at 667–68).
Appellant errs insofar as he assumes outcomes in other
cases involving escrows apply here.
“[M]erely labeling a
specific delivery of property as an escrow . . . does not give
such characteristic to the particular transaction.”
Co. v. Henderson, 120 F.2d 525, 530 (4th Cir. 1941).
Am. Serv.
Whether
property deposited into “an escrow constitutes property of a
debtor’s estate depends entirely on the nature and circumstances
of the escrow in question.”
In re Taylor, No. 94-01878, 1995 WL
577361, at *4 (Bankr. D. Idaho Oct. 3, 1995).
Appellant fails to show that, by subjecting the
escrowed funds to the Escrow Instructions, Debtor’s property
interest in the funds was diminished such that the subsequent
funds transfer to Appellant “did not deprive [D]ebtor’s estate of
anything of value.”
See Tenderloin Health, 849 F.3d at 1244
(citations and internal quotation marks omitted).
Appellant
cites no particular terms of the Escrow Instructions as
purportedly causing Debtor’s interest in the escrowed funds to be
without value to the bankruptcy estate.
18
Cf. O.P.M. Leasing, 46
B.R. at 664 (“Section 4 of the escrow agreement required the
Escrow Agent, upon written notice from [grantee that granting
condition was satisfied], to release to [grantee the required]
portion of the escrow deposit.”); id. at 667 (an effective
“escrow ‘creates in the grantee [] an equitable interest in the
property [because] upon full performance of the conditions
according to the escrow agreement, title will vest at once in
[the grantee]’” (quoting 28 Am. Jur. 2d Escrow § 10 (1964)).
The
only case-specific facts Appellant provides in support of his
escrow argument are his claims that, because the Affidavit
granted him a security interest in the Property, he also had a
security interest in the proceeds.
[Opening Brief at 12, 23.]
As Appellant’s claim that the Affidavit granted him a security
interest in the Property has been rejected, his claim to have a
security interest in the proceeds is likewise rejected.
Appellant also asserts that, under the Escrow Instructions,
Debtor “only had a contract right to a portion of the proceeds.”
[Id. at 20].
Appellant cites no particular provision of the
Escrow Instructions producing this result.
Mere assertion is
insufficient to warrant reversal of the bankruptcy court.
See
Greenwood v. F.A.A., 28 F.3d 971, 977 (9th Cir. 1994) (“We review
only issues which are argued specifically and distinctly in a
party’s opening brief.
We will not manufacture arguments for an
appellant, and a bare assertion does not preserve a claim.”
19
(internal citation omitted)).
Because Appellant has not met his
burden on the escrow argument, this Court may stop its analysis
here.
However, for completeness, it will also address the
Trustee’s argument that the instant Escrow Instructions are
distinguishable from the escrow agreements in cases relied on by
Appellant.
The Trustee argues the escrow deposit was not the
controlling transfer because it did not materially alter the
parties’ rights and merely extended the status quo.
agrees.
This Court
As the bankruptcy court explained,
At the outset, [Debtor] owned the property. [He]
could not sell it and use the proceeds as [he]
wished, however, because [Appellant’s] recorded
affidavit rendered [his] title unmarketable. [He]
could only get and use the proceeds if [Appellant]
agreed to remove his affidavit or a court
determined that [Appellant’s] claims were
invalid. . . . The escrow instructions provided
that the funds would be released only upon mutual
agreement of the [parties] or the entry of a court
order. In other words,[Debtor’s] interest in the
escrowed funds were subject to the same
restrictions as . . . before the sale. . . .
[T]he deposit of the funds in escrow did not
diminish [Debtor’s] rights in or enhance
[Appellant’s] claims to the funds[.]
Price, 575 B.R. at 466.
For Appellant to show that the escrow
deposit sufficiently changed Debtor’s interest in the funds so
that it was without value and did not become part of the
bankruptcy estate, it is at least necessary that the escrow
deposit altered the status quo.
Here the Escrow Instructions
20
preserved the status quo, and thus the escrow deposit does not
affect when the relevant § 547 transfer occurred.
Further, unlike escrow agreements sufficient for
purposes of § 547 to divest a debtor of his interest property,
the instant Escrow Instructions’ terms neither 1) specify a
definite granting condition; nor 2) provide that the grantor has
pledged its interest in the escrowed property.
Hawai`i law
determines “whether the . . . escrow funds were brought into the
bankruptcy estate.”
See In re Dreier LLP, 527 B.R. 126, 133
(S.D.N.Y. 2014) (quoting Butner v. United States, 440 U.S. 48,
55, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979)); see also Costas, 555
F.3d at 793 (“‘interests in property’ are creatures of state
law”).
Under Hawai`i law, an effective escrow agreement must
define the granting condition, which when satisfied, requires the
escrow holder to deliver the escrowed property to the grantee.
Whitlow v. Jennings, 40 Haw. 523, 530 (Hawai`i Terr. 1954).
The
Escrow Instructions do not define a granting condition, apart
from the general instruction to the escrow holder to release the
funds only upon receipt of instructions signed by both parties or
a court order.
Instructions).]
[Record Appendix at COULSON 105 (Escrow
The granting condition must be “much more
definite” to “to defeat the interest of the [] Trustee[].”
See
In re Friedman & Wexler, LLC, 494 B.R. 724, 736 (Bankr. N.D. Ill.
2013).
In Friedman & Wexler, the court considered a creditor’s
21
claim to funds the debtor deposited in escrow, during litigation,
subject to the condition “[n]o money shall be released from the
account without a court order.”
Id. at 735.
Because those
instructions lacked a definite granting condition, the bankruptcy
court concluded “the escrowed funds are estate funds, and [the
creditor’s] claim is, in this regard, an unsecured claim to be
treated on par with the other unsecured claims against the
bankruptcy estates.”
Id. at 737.
The same applies here.
In
addition, the Debtor never pledged his interest in the escrowed
funds.
Cf. Pettit, 217 F.3d at 1079-80 (both the parties and the
judge had “all referred to the [deposited] funds . . . as
‘security,’ and there is no doubt that this was what the funds
were to be used for’”).
Under these facts, even after the
execution of the Escrow Instructions, the Debtor retained an
interest in the escrowed funds, and the deposit into escrow did
not result in any § 547 transfer.
III. In Custodia Legis
Appellant cites In re Roman and argues that, once the
funds were moved from the escrow to an account supervised by the
state court, the funds were in custodia legis and could not be
reached by other creditors or the bankruptcy trustee.
See In Re
Roman, Case No. 6:13-bk-22482-MH, 2017 WL 1321758 (Bankr. C.D.
Cal. Apr. 7, 2017), aff’d in part, vacated in part, rev’d in
part, 2017 WL 5587610 (B.A.P. 9th Cir. Nov. 20, 2017).
22
In Roman, the Bankruptcy Appellate Panel concluded
funds deposited with the court were not held in custodia legis
because the court did not “retain[] exclusive jurisdiction over
the Funds,” given that “the parties [could] release the Funds by
written agreement.”
2017 WL 5587610, at *4.
circumstance is present in this case.
The same
Appellant does not dispute
that, as with funds in the custody of a private escrow holder,
the parties could withdraw the funds from the court-supervised
See Price, 575 B.R. at 467 n.30
account by mutual agreement.
(funds were deposited with the court on the same terms as with
the private escrow holder).
Therefore the funds were not held in
custodia legis.8
IV.
State Court Minute Order
Appellant argues the controlling transfer occurred at
least by January 30, 2015, when the state court issued its Minute
Order determining that Debtor owed Appellant more than the amount
of funds on deposit.
Appellant asserts the controlling transfer
at least occurred by this date because, afterwards, “no one other
than [Appellant] could have sought the release of the funds.”
[Opening Brief at 29.]
The bankruptcy court considered this
argument and rejected it because it was asserted without any
supporting authority and because “it is inconsistent with the
8
In light of this ruling, the Trustee’s argument that
Appellant waived the in custodia legis argument by failing to
argue it to the bankruptcy court is not reached.
23
plain terms of the escrow instructions.”
Price, 575 B.R. at 467.
Appellant offers no authority for this proposition on appeal, nor
does he explain why, if it were true, he did not obtain release
of the funds after issuance of the January 30, 2015 Minute Order.
Appellant further argues the state court’s entry of
“final judgment was simply a ministerial act based on the earlier
[minute] order.”
[Opening Brief at 29-30.]
However, Appellant
cites no authority for the proposition that issuance of a minute
order causes a judge’s subsequent entry of a final order to be
merely a ministerial act.
This proposition is doubtful because a
minute order is not equivalent to a final judgment.
See Wailehua
v. Mindoro, No. 24200, 2003 WL 393769, at *1 (Hawai`i Feb. 20,
2003) (concluding “the circuit court did not violate HRCP Rule
77(d) in failing to immediately enter and serve a notice of the
entry by mail of the minute order [entering a default judgment
against the appellant] because HRCP Rule 77(d) applies to only
final orders or judgments and is not applicable to minute
orders”); see also Pettit, 217 F.3d at 1080 (concluding the
debtors’ interest in deposited funds was “extinguished” when the
district judge entered final judgment and ordered funds released
to the prevailing party; and that the clerk of court’s issuance
of the check pursuant to the order was “purely ministerial”).
In any event, the Court need not dwell on the
comparative effects of minute orders and final judgments under
24
Hawai`i law.
Appellant cites no authority in support of his
assertions that:
1) the controlling transfer occurred at least
by the state court’s entry of the January 30, 2015 Minute Order;
and 2) the date when the state court entered its final judgment
may be disregarded as a ministerial acts.
are insufficient to warrant reversal.
These bare assertions
See Greenwood, 28 F.3d at
977.
CONCLUSION
On the basis of the foregoing, Appellant Thomas W.
Coulson’s appeal, filed August 31, 2017, is HEREBY DENIED and the
bankruptcy court’s Order, filed August 17, 2017 is HEREBY
AFFIRMED.
The Clerk’s Office is DIRECTED to enter final judgment
and to close this case on July 16, 2018, unless a motion for
reconsideration of this Order is filed not more than fourteen
days after this written order is filed.
IT IS SO ORDERED.
25
See LR60.1
DATED AT HONOLULU, HAWAII, June 29, 2018.
/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge
THOMAS W. COULSON VS. ELIZABETH KANE; CV 17-00437 LEK-KSC; ORDER
DENYING APPEAL AND AFFIRMING THE BANKRUPTCY COURT’S ORDER
26
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