Patriot Reading Associates, LLC v. Tadlock et al
Filing
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ORDER that the bankruptcy court's order be, and the same hereby is, AFFIRMED. The clerk is instructed to close the case accordingly. Signed by Judge James C. Mahan on 3/4/2019. (Copies have been distributed pursuant to the NEF: cc USBC Clerk - MMM)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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***
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In re:
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CHARLES H. TADLOCK and
MARY E. TADLOCK,
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BK-S-15-13135-ABL
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Debtors-in-Possession.
PATRIOT READING ASSOCIATES, LLC,
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Plaintiff(s),
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Case No. 2:17-CV-2096 JCM
ORDER
v.
CHARLES H. TADLOCK and
MARY E. TADLOCK,
Defendant(s).
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Presently before the court is an appeal of a bankruptcy court’s order. Appellant Patriot
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Reading Associates, LLC (“Patriot”) filed an opening brief. (ECF No. 11). Appellees Charles
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Tadlock and Mary Tadlock (the “Tadlocks”) filed an answering brief (ECF No. 25), to which
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Patriot replied (ECF No. 27).
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I.
Background
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This bankruptcy case involves two debtors, the Tadlocks. (ECF No. 11). Mr. Tadlock, a
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surgeon, and his wife own significant assets in California and Nevada. Id. These assets include
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two life estates in waterfront properties, a private airplane, Mr. Tadlock’s medical practice, trusts,
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and retirement and pension funds worth roughly $3.6 million. Id.
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Mr. Tadlock acquired a loan from Patriot in order to lease a premises for his medical
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practice. Id. After many years of the Tadlocks’ delinquency, Patriot initiated civil proceedings in
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U.S. District Judge
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Nevada state court against one of the Tadlocks’ business entities. Id. The state court eventually
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dismissed the case because the business entity became defunct. Id.
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After the Nevada state court dismissed Patriot’s state court case, the Tadlocks initiated the
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underlying bankruptcy case on May 29, 2015. Id. On July 14, 2017, the bankruptcy court held a
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core proceeding in which it (1) denied Patriot’s motion to dismiss, (2) approved the Tadlocks’
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fourth amended disclosure statement, and (3) approved the Tadlocks’ modified plan of
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reorganization. (ECF No. 12-1).
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On August 1, 2017, Patriot filed a notice of appeal. (ECF No. 1). In its opening brief,
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Patriot challenges the bankruptcy court’s holding in the July 14, 2017, proceeding. (ECF No. 11).
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II.
Discussion
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Patriot primarily argues that the bankruptcy court erroneously confirmed the modification
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plan of reorganization. Patriot’s briefs also include various ancillary objections to the bankruptcy
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court’s ruling. The court hereby proceeds to adjudicate these matters in turn.
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a. Modified plan of reorganization
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Patriot argues that the bankruptcy court improperly confirmed the modification plan on
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three grounds: (1) the debtors did not file adequate disclosures; (2) the modified plan did not reflect
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the debtor’s actual plans for disposition of assets; and (3) the plan was not fair or equitable.
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i. Standard of Review
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District courts review a bankruptcy court’s decision to confirm a reorganization plan for
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an abuse of discretion. In re Brotby, 303 B.R. 177, 184 (9th Cir. BAP 2003). “A bankruptcy court
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abuses its discretion if it applies the law incorrectly or if it rests its decision on a clearly erroneous
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finding of a material fact.” Id. The court may affirm the bankruptcy court’s decision “on any
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ground fairly supported by the record.” In re Warren, 568 F.3d 1113, 1116 (9th Cir. 2009).
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ii. Discussion
The court hereby addresses Patriot’s challenges to the bankruptcy court’s ruling in turn.
1. Adequate disclosure
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Patriot argues that the Tadlocks failed to file a complete and accurate schedule of assets
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and liabilities because the modified plan did not include the value of the Tadlocks’ life estates in
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U.S. District Judge
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the waterfront properties, one of the properties’ rent-free occupancy to the Tadlocks’ daughter, the
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Tadlocks pocketing proceed from the sale of a vehicle belonging to Charles H. Tadlock Limited
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(“CHT”), the rental value of their private airplane, the dissipation of CHT’s assets, and CHT’s
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claims against Bank of America. See (ECF No. 11). The court has reviewed the record and does
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not find that the bankruptcy court abused its discretion.
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A Chapter 7 bankruptcy estate is administered by a trustee, who is obligated to “collect and
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reduce to money the property of the estate for which such trustee serves, and close such estate as
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expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704.
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Subject to certain exemptions, a “trustee in bankruptcy succeeds to all causes of action held by a
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debtor at the time a bankruptcy petition is filed.” In re Degenaars, 261 B.R. 316, 319 (Bankr.
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M.D. Fla. 2001). In order to enable the trustee to identify the property of the estate under his
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control, Bankruptcy Code § 521(a)(1)(B)((i) requires the debtor to file schedules of the debtor’s
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assets and liabilities. “The debtor has a duty to prepare schedules carefully, completely, and
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accurately.” Cusano v. Klein, 264 F.3d 936, 946 (9th Cir. 2001); see also In re Coombs, 193 B.R.
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557 (Bankr. S.D. Cal. 1996).
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The bankruptcy court, prior to approving the modified plan, considered Patriot’s
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objections, which were practically identical to the challenges that Patriot now raises on appeal.
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(ECF No. 12-1). The bankruptcy court explained in a ninety-nine (99) page oral opinion that the
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Tadlocks properly excluded the assets in dispute because those assets were not part of the
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bankruptcy estate. Id.
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Specifically, the bankruptcy court held that the assets in dispute are not part of the estate
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because (1) the life estates in the waterfront properties were held in the Charles H. Tadlock and
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Mary E. Tadlock Qualified Personal Residential Trust, which is an irrevocable trust; (2) the
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airplane is owned by Icarus Air, LLC (“Icarus Air”), which is not a debtor entity; and (3) CHT is
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also a separate legal entity. Id.
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The parties have not brought forth evidence showing that the bankruptcy court’s factual
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findings were clearly erroneous. Moreover, “[a]ssets transferred to an irrevocable trust do not
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become part of a bankruptcy estate unless the transfer or the trust is invalid.” In re Cutter, 398
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B.R. 6 (9th Cir. BAP 2008). Thus, because the underlying record does not show that Tadlocks
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improperly transferred the waterfront properties into the trust or that the trust is invalid, the
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bankruptcy court properly allowed the Tadlocks to exclude the waterfront properties and assets
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related to those properties from their disclosure statement and modified plan.
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As for the exclusion of assets belonging to CHT and Icarus Air, the court does not find any
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reversible error. Corporations and limited liability companies are separate legal entities that are
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not part of the bankruptcy estate. In re Micr Toner International, LLC (NEVADA), No. 2:16-bk-
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24024, 2017 WL 766899 at *7 (C.D. Cal. Feb. 24, 2017) (citing In re O’Brien, No. 10-52610,
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2011 WL 6754095 at *2 (Bankr. D. Conn. 2011). This remains true even when the debtor wholly
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owns the business entities. Id. Thus, the bankruptcy court properly allowed the Tadlocks to
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exclude the assets belonging to CHT and Icarus Air from their disclosure statement and modified
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plan.
2. Actual plan for disposition of assets
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Patriot argues that the bankruptcy court improperly confirmed the modified plan because
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it did not disclose what the Tadlocks intended to do with various “revenue-generating assets.”
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(ECF No. 11). Patriot’s motion is unclear as to what those revenue-generating assets are. The
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court assumes that Patriot is referring to the life estates, airplane, and CHT’s assets. As the court
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explained in subsection (b)(ii)(1), the bankruptcy court properly held that these assets were not
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necessary in order to confirm the modified plan because these assets were not part of the
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bankruptcy estate. Therefore, the bankruptcy court acted well within its discretion when it
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confirmed the modified plan.
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Fairness and equity
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Patriot argues that the exclusion of the separate legal entities and the waterfront properties
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is unfair and inequitable because it prevents the creditors from being able to access those assets.
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(ECF No. 11). Patriot, however, fails to recognize that its argument does not provide adequate
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grounds to set aside a valid irrevocable trust or to pierce the corporate veil.
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...
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...
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U.S. District Judge
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b. Ancillary concerns
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Patriot’s brief also includes various comments questioning the Tadlock’s candor and
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management of assets. (ECF No. 11). The court is uncertain how these comments relate to
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Patriot’s appeal. Nevertheless, after reviewing the underlying record, the court finds that the
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bankruptcy court did not commit any reversible error when it held that the Tadlocks’ actions do
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not demonstrate a lack of candor, self-dealing, or gross mismanagement of estate assets.
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III.
Conclusion
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Accordingly,
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IT IS HEREBY ORDERED, ADUDGED, and DECREED that the bankruptcy court’s
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order be, and the same hereby is, AFFIRMED.
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The clerk is instructed to close the case accordingly.
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DATED March 4, 2019.
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__________________________________________
UNITED STATES DISTRICT JUDGE
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James C. Mahan
U.S. District Judge
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