Kriegman v. Mirrow

Filing 54

ORDER granting in part and denying in part 26 Motion for Summary Judgment Signed by Chief Judge Rosanna Malouf Peterson. (VR, Courtroom Deputy)

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

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In Re:
NO: 2:14-CV-268-RMP

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LLS AMERICA, LLC,
Bankr. Case No. 09-06194-FPC11
Debtor,

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BRUCE P. KRIEGMAN, solely in his
capacity as court-appointed Chapter 11
Trustee for LLS America, LLC,

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ORDER GRANTING IN PART AND
DENYING IN PART MOTION FOR
SUMMARY JUDGMENT

Plaintiff,

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v.

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ANGELA MIRROW, et al.,

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Defendants.

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Before the Court is Plaintiff’s Motion for Summary Judgment against

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Defendant Angela Mirrow. ECF No. 26. On December 18, 2014, the parties

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presented oral argument. Michael L. Loft appeared on behalf of Plaintiff.

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Defendant was represented by Gregg R. Smith. The Court has considered the

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parties’ arguments and all relevant filings. The Court is fully informed.

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BACKGROUND

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This matter is an adversary proceeding within the bankruptcy of the LLS

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Companies (“Debtor”), an extensive Ponzi scheme. Defendant’s husband, Alex

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Mirrow, arranged for the investment of large sums of money in Debtor, both

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through his companies and by recruiting new lenders. See 2:11-cv-00362-RMP,

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ECF No. 219 at 10-18.

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originally were to be tried together, the parties stipulated to holding a separate trial

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for Defendant in light of her right to a trial by jury. See 2:11-cv-00362-RMP, ECF

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No. 114.

Although the cases of Defendant and her husband

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On December 16, 2005, Alex Mirrow arranged for $200,000 to be loaned to

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Debtor from a line of credit that Weigh Station LLC held. See ECF No. 28-2 at 23.

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Defendant had no ownership interest in Weigh Station LLC, which was owned by

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her husband. ECF No. 28-2 at 23. However, at Alex Mirrow’s request, Debtor

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issued an unsigned promissory note for the $200,000 loan in Defendant’s name.

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See ECF Nos. 28-4 at 116; 34-1. Until this litigation began, Defendant was not

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aware that the December 2005 promissory note had been made in her name, nor

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did she know that on December 19, 2006, the note had been converted into a new

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note in the name of Save It, LLC. ECF Nos. 27 at 4; 33 at 3; see also ECF No. 28-

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7 at 143-44 (December 2006 promissory note).

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In relation to the promissory note, Debtor sent the Mirrows post-dated

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checks payable to “A. Mirrow.” ECF No. 27 at 4. At her husband’s request,

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Defendant signed at least eleven of the checks, each of which was in the amount of

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$7,167. ECF No. 33 at 2-3. Debtor issued additional checks in various amounts

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payable to “A. Mirrow,” some of which were signed by Alex Mirrow. See ECF

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Nos. 28-3; 33 at 3-4. Defendant asserts that the checks for amounts other than

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$7,167 were issued in consideration of other promissory notes or commissions

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owed to Alex Mirrow, not in relation to the 2005 promissory note. ECF No. 31 at

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7-8. It is undisputed that all of the “A. Mirrow” checks at issue in this matter,

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totaling $139,256.29 USD, were deposited into the Mirrows’ family bank

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accounts. See ECF Nos. 27 at 5; 28-6 at 10.

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Alex Mirrow filed a proof of claim in Debtor’s bankruptcy but did not assert

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a right to credit for the December 2005 loan. See ECF No. 28-8. Alex Mirrow

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included the December 2005 loan, however, in the proof of claim that he filed on

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behalf of Save It, LLC. See ECF No. 28-9 at 157. Defendant did not file a proof

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of claim in Debtor’s bankruptcy. ECF No. 28 at 3-4. In Alex Mirrow’s case, the

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Court included the $200,000 December 2005 deposit in its calculation of the total

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amount that Save It, LLC had invested in Debtor. See ECF No. 28-6 at 3 and 2:11-

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cv-00362-RMP, ECF No. 219 at 17.

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Plaintiff seeks judgment against Defendant for $139,256, which is the

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amount of payments and commissions that the Court found that Alex Mirrow

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personally had received from Debtor, 2:11-cv-00362-RMP, ECF No. 219 at 18.

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Defendant disputes this amount, claiming that the full amount that Plaintiff could

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claw back would be $78,837, the proceeds that she claims that Debtor transferred

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as payment for the December 2005 loan. See ECF No. 31 at 7-8, 13. Defendant

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further contends that this figure should be subtracted from the $200,000 investment

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made in December 2005, such that Defendant would be a net-negative investor.

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See ECF No. 28-11 at 198.

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ANALYSIS

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Plaintiff moves for summary judgment, asserting that the fact and amount of

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the deposits is not in dispute and that Defendant cannot succeed under the defense

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of good faith. Defendant argues that multiple issues must be resolved by a jury.

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Summary Judgment Standard

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Summary judgment is appropriate when there is no genuine dispute as to any

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material fact and the moving party is entitled to judgment as a matter of law. Fed.

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R. Civ. P. 56(a). The moving party bears the initial burden of demonstrating the

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absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S.

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317, 323 (1986). The party asserting the existence of an issue of material fact must

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show “‘sufficient evidence supporting the claimed factual dispute . . . to require a

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jury or judge to resolve the parties’ differing versions of the truth at trial.’” T.W.

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Elec. Serv. v. Pac. Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987)

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(quoting First Nat’l Bank v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968)). The

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nonmoving party “may not rely on denials in the pleadings, but must produce

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specific evidence, through affidavits or admissible discovery material, to show that

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the dispute exists.” Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir.

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1991).

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In deciding a motion for summary judgment, a court must construe the

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evidence and draw all reasonable inferences in the light most favorable to the

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nonmoving party. T.W. Elec. Serv., 809 F.2d at 630-31.

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Indirect Benefit Rule

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The Court has held that Debtor was a Ponzi scheme and that transfers made

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from Debtor in furtherance of that scheme constitute actual fraud. See 2:11-cv-

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00357-RMP, ECF No. 92. However, a transferee of a fraudulent transfer may keep

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funds that it took for reasonably equivalent value and in good faith. See 11 U.S.C.

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§ 548(c); RCW 19.40.081(a). As recipients of transfers that constitute actual

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fraud, the burden of proof in establishing the affirmative defense of good faith is

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on the transferees. In re Agric. Research and Tech. Grp., Inc., 916 F.2d 528, 535

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(9th Cir. 1990); 5 Collier on Bankruptcy ¶ 548.09[2][c] at 548-98.2 (16th ed.

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2011).

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The parties dispute whether Defendant may rely on the December 2005 loan

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to Debtor as reasonably equivalent value for any transfers received from Debtor.

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Defendant contends that the 2005 loan constitutes reasonably equivalent value

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because of the indirect benefit rule.

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The indirect benefit rule provides that “‘reasonably equivalent value can

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come from one other than the recipient of the payments . . . .’” In re N. Merch.,

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Inc., 371 F.3d 1056, 1058 (9th Cir. 2004) (quoting In re Jeffrey Bigelow Design

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Grp., Inc., 956 F.2d 479, 485 (4th Cir. 1992)); see also Kreidler v. Cascade Nat.

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Ins. Co., 179 Wn. App. 851, 862-63 (2014) (relying on the federal cases regarding

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the indirect benefit rule when interpreting “reasonably equivalent value” under

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state law). In Northern Merchandise, a debtor’s shareholders borrowed money

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from Frontier Bank after the bank had refused to loan the funds to the debtor. 371

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F.3d at 1057. The bank understood that the debtor would use the funds for its

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business operations and the bank even deposited the money directly into the

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debtor’s account. Id. On the same day that the shareholders entered into the loan,

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the debtor granted Frontier Bank a security interest in its inventory and other

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property. Id. at 1058.

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The debtor in Northern Merchandise later ended its business and sold its

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inventory. Id. at 1058. Frontier Bank was repaid for the loan from the proceeds

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from the sale of the debtor’s inventory. Id. A bankruptcy petition was filed, and

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the trustee contended that the money that the shareholders had borrowed

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technically was a capital contribution rather than a loan, such that the debtor was

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not obligated to grant Frontier Bank a security interest. Id. at 1059. The trustee

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argued that the debtor had not received reasonably equivalent value, supporting the

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trustee’s assertion that the grant of a security interest and transfers to Frontier Bank

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to satisfy the loan were fraudulent. See id. at 1058.

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The Ninth Circuit rejected the trustee’s view as too formalistic. “Although

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Debtor was not a party to the . . . loan, it clearly received a benefit from that loan.”

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Id. at 1059. The court explained that “the primary focus of Section 548 is on the

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net effect of the transaction on the debtor’s estate and the funds available to the

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unsecured creditors.” Id. Because the debtor received the same value from the

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loan as it transferred to Frontier Bank, its grant of a security interest “resulted in no

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net loss to Debtor’s estate nor the funds available to the unsecured creditors.” See

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id.

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Here, Plaintiff argues that the indirect benefit rule does not apply. Plaintiff

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explains that the deposit already was attributed to Save It, LLC in Alex Mirrow’s

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case; that the promissory note in Defendant’s name was re-issued in the name of

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Save It, LLC; and that the Court already has determined that Alex Mirrow and

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Save It, LLC did not meet the objective standard of good faith. ECF No. 26 at 7.

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Plaintiff also distinguishes Northern Merchandise because that case concerned a

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legitimate business debtor rather than a Ponzi scheme and because, unlike

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Defendant, Frontier Bank undisputedly had paid money that was received by the

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debtor.

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The root of the disagreement between the parties appears to be that the

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“indirect benefit” in Northern Merchandise was a benefit conferred on the debtor,

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while here Defendant argues that she should benefit indirectly from the funds that

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Save It, LLC paid, by being allowed to rely on those funds as value given in

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exchange for the transfers that she received. See ECF Nos. 26 at 9; 31 at 12.

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The Court finds that the proper inquiry is the net effect on Debtor’s estate.

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The parties do not dispute that $200,000 was loaned to Debtor in December 2005

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or that at least some of the transfers to Defendant were returns on that loan.

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Although Defendant did not personally fund the loan to Debtor, the effect on

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Debtor’s estate is the same as if she had supplied the money. Furthermore, even

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though the December 2005 promissory note already was attributed to Save It, LLC,

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the transfers that Plaintiff seeks to avoid as to Defendant also were awarded

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already to Plaintiff against Alex Mirrow and Save It, LLC. See 2:11-cv-00362-

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RMP, ECF No. 219 at 18. Debtor’s estate would receive a windfall if it benefitted

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from the December 2005 loan and also were entitled, regardless of Defendant’s

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objective good faith, to claw back the returns paid to Defendant on that loan.

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The Court concludes that Debtor received value in exchange for the transfers

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made to Defendant. See In re N. Merch., Inc., 371 F.3d at 1059 (“To hold

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otherwise would result in an unintended . . . windfall to Debtor’s estate.”).

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Collateral Estoppel

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Plaintiff also argues that Defendant is collaterally estopped from litigating

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the issue of good faith because of the findings of fact and conclusions of law

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entered in the case against her husband. ECF No. 26 at 10-14.

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“Where a federal court has decided the earlier case, federal law controls the

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collateral estoppel analysis.” McQuillion v. Schwarzenegger, 369 F.3d 1091, 1096

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(9th Cir. 2004). Collateral estoppel, also known as issue preclusion, is available

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when:

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(1) there was a full and fair opportunity to litigate the issue in the
previous action;
(2) the issue was actually litigated in that action;
(3) the issue was lost as a result of a final judgment in that action; and
(4) the person against whom collateral estoppel is asserted in the
present action was a party or in privity with a party in the previous
action.
In re Palmer, 207 F.3d 566, 568 (9th Cir. 2000).

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“‘Privity’—for the purposes of applying the doctrine of res judicata—is a

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legal conclusion ‘designating a person so identified in interest with a party to

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former litigation that he represents precisely the same right in respect to the subject

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matter involved.’” In re Schimmels, 127 F.3d 875, 881 (9th Cir. 1997) (quoting

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Southwest Airlines Co. v. Texas Int’l Airlines, Inc., 546 F.2d 84, 94 (5th Cir.

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1977)). See also United States v. Bhatia, 545 F.3d 757, 759 (9th Cir. 2008)

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(explaining that privity is an element of both res judicata and collateral estoppel).

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Familial relationship does not necessarily result in privity, although it is a factor in

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determining the preclusive effects of a prior judgment. Trevino v. Gates, 99 F.3d

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911, 924 (9th Cir. 1996).

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Plaintiff argues that Defendant is estopped from litigating the defense of

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good faith because she is in privity with Alex Mirrow, whom the Court previously

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determined had not established the defense.

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Defendant’s case will rely on her assertion that Alex Mirrow handled all

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interactions with Debtor. Accordingly, Plaintiff explains that the trial will turn on

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the testimony of Alex Mirrow, which the Court already has considered. See ECF

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No. 26 at 12.

Plaintiff also contends that

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The Court finds that it would be improper to apply the doctrine of collateral

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estoppel against Defendant. It would be unfair to allow Plaintiff to use offensive

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collateral estoppel here, after Plaintiff stipulated to resolving the case against

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Defendant in a separate jury trial. See Eureka Fed. Sav. & Loan Ass’n v. Am. Cas.

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Co. of Reading, Pa., 873 F.2d 229, 234 (9th Cir. 1989) (“[I]t is inappropriate to

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apply collateral estoppel when its effect would be unfair.”).

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Agency

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Plaintiff also alleges that there is no genuine issue for trial because

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Defendant’s husband acted as her agent, such that Alex Mirrow’s acts and

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knowledge are imputed to Defendant. ECF No. 26 at 14-18. Plaintiff relies on a

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case from Colorado, Defendant and Alex Mirrow’s former state of residence, ECF

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No. 27 at 1-2. Although Defendant does not expressly dispute Plaintiff’s reliance

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on Colorado law, Defendant’s briefing regarding this issue discusses case law from

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California and Washington. See ECF No. 31 at 10-11. Because there is no

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apparent justification for applying California’s law of agency, the Court turns to

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Colorado and Washington law. See 2:11-cv-00362-RMP, ECF No. 148 at 3-4

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(Court’s explanation that Debtor’s relevant conduct largely occurred in Spokane,

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Washington).

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There is little difference between the relevant laws of agency in Colorado

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and in Washington. Both states recognize that an agency relationship may arise

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implicitly through the conduct of two parties. Moses v. Diocese of Colo., 863 P.2d

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310, 324 (Colo. 1993); Hewson Const., Inc. v. Reintree Corp., 101 Wn.2d 819, 823

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(1984). For example, an agency relationship may exist “when one party acts at the

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instance of and, in some material degree, under the direction and control of

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another.” Hewson Const., 101 Wn.2d at 823; see also Moses, 863 P.2d at 324

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(“An ‘agent’ is generally one who acts for, or in place of, another, or is entrusted

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with the business of another.”). Both states also acknowledge that the existence of

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agency is a fact-specific determination. See Moses, 863 P.2d at 324 (“No one

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factor, including control, is determinative.”); Yong Tao v. Heng Bin Li, 140 Wn.

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App. 825, 831 (2007). Washington and Colorado courts also generally impute the

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knowledge of an agent to his or her principal. See Jehly v. Brown, 327 P.3d 351,

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354 (Colo. App. 2014); Denaxas v. Sandstone Court of Bellevue, L.L.C., 148

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Wn.2d 654, 665-66 (2003).

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Defendant contends that there is a genuine issue regarding whether Alex

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Mirrow acted with his wife’s “knowledge and acquiescence,” relying on a Ninth

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Circuit decision applying California and Washington law. ECF No. 31 at 10-11

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(discussing In re Nelson, 761 F.2d 1320, 1323 (9th Cir. 1985)). In Nelson, the

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Ninth Circuit explained that a spouse could act as the agent of another spouse and

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convey community real property. 761 F.2d at 1323. Referring to state case law,

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the court noted that a non-participating spouse’s “knowledge of and acquiescence

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to” a conveyance would bind her to it and that a marital community would be

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estopped from denying liability in situations “when one spouse permits the other to

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conduct the transaction, both have a general knowledge of the transaction, and both

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are ready to accept the benefits which may come from it.” Id. (citing Miller v.

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Johnston, 75 Cal. Rptr. 699, 707 n.6 (1969); Colorado Nat’l Bank of Denver v.

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Merlino, 35 Wn. App. 610, 616 (1983)) (internal quotation marks omitted).

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However, both of the state cases discussed in Nelson concern statutes that

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require both spouses to execute instruments that encumber community real

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property. See Miller, 270 Cal. Rptr. at 707 n.6; Merlino, 35 Wn. App. at 616. The

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cases do not stand for the broader proposition that one spouse may act as the agent

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for his or her spouse only if the principal spouse knows of and acquiesces to each

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transaction. See, e.g., Wallace v. Thomas, 193 Wash. 582, 593 (1938) (finding that

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wife who attended to all community business was actual agent of marital

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community).

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However, the Court nevertheless finds that a genuine dispute exists as to

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Alex Mirrow’s agency for Defendant. Defendant was aware that her husband

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invested in a number of ventures, but the evidence in the record is insufficient to

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establish whether and to what extent Alex Mirrow acted as her agent. Defendant

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explained in her discovery responses that “[t]he decision to invest with Little Loan

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Shoppe was left to [her] husband Alex Mirrow,” ECF No. 28-2 at 25, which tends

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to show that Defendant implicitly consented to allowing Alex Mirrow to act as her

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agent. However, in the same document Defendant responded that the $200,000

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investment “was actually purchased by Weigh Station, LLC a business owned by

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my husband, not me.” ECF No. 28-2 at 23. Thus, the extent of Alex Mirrow’s

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authority to act as Defendant’s agent while dealing with Debtor, if any such

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authority existed, is not certain from the record.

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Plaintiff relies on Colorado law for the rule that “[t]he agency of one spouse

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to act for the other may be established by the circumstances without proof of an

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express authorization, and may be proved by less convincing evidence than would

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be required to establish such agency between strangers.” Broomhall v. Edgemont

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Min. Co., 139 Colo. 496, 502 (1959). However, the decision that an agency

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existed in Broomhall was made after evidence was revealed at trial that allowed the

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court to conclude “that in all matters involved the acts of the husband were the acts

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of the wife.” Id. at 498, 502. As noted above, the current facts in the record do not

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permit the Court to determine whether Alex Mirrow acted as Defendant’s agent.

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Amount of Transfers that Defendant Received

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Defendant contends that a genuine dispute exists regarding the amount of

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transfers that she received from Debtor. Defendant concedes that she signed a

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series of the checks payable to “A. Mirrow” but implies that she should not be held

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liable for repayment of transfers received by checks that she did not sign and that

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relate to her husband’s other promissory notes and commission payments from

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Debtor. See ECF No. 31 at 7-8.

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However, the extent of Defendant’s involvement in procuring the money is

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irrelevant to the calculation of transfers that she received. It is undisputed that, in

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their family bank accounts, Defendant and Alex Mirrow received $139,256.29

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USD. See ECF No. 28-6 at 10.

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In sum, the Court finds that Debtor was given value in exchange for

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transfers that Defendant received and that Defendant is not collaterally estopped

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from disputing good faith. A genuine issue of material fact exists as to whether

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Alex Mirrow acted as Defendant’s agent while dealing with Debtor. However,

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Defendant failed to raise a genuine dispute of material fact regarding the amount of

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transfers that she received from Debtor, which the Court finds to be $139,256.29

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USD.

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Accordingly, IT IS HEREBY ORDERED that Plaintiff’s Motion for

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Summary Judgment, ECF No. 26, is GRANTED IN PART AND DENIED IN

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PART.

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The Clerk’s Office is directed to enter this Order and provide copies to
counsel and pro se defendants.
DATED this 10th day of February 2015.

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s/ Rosanna Malouf Peterson
ROSANNA MALOUF PETERSON
Chief United States District Court Judge

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