Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-5_14-ap-05105/USCOURTS-canb-5_14-ap-05105-0/pdf.json

Parties Involved:
Kyle Everett
Plaintiff
Darrow Family Partners
Defendant

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UNITED STATES BANKRUPTCY COURT

for the Northern District of California

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re

Pacific Thomas Corporation,

 

 Debtor.

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Case No. 14-54232 MEH 

Chapter 11

Kyle Everett,

 Plaintiff.

v.

Darrow Family Partners, 

 Defendant.

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Adv. No. 14-5105

Date: October 7, 2015

Time: 9:00 a.m.

Ctrm: 3020 (San Jose)

MEMORANDUM DECISION

Kyle Everett, Chapter 11 trustee (“Plaintiff”) of the bankruptcy estate of Darrow 

Family Partners (“PTC” or “Debtor”) brought this adversary proceeding to recover prepetition 

and postpetition transfers from Debtor’s estate, either directly or by Pacific Trading Ventures 

(“PTV”) to Darrow Family Partners (“Defendant”). 

The following constitutes

the order of the court. Signed December 8, 2015

_________________________________________________

M. Elaine Hammond

U.S. Bankruptcy Judge

Entered on Docket 

December 08, 2015

EDWARD J. EMMONS, CLERK 

U.S. BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES BANKRUPTCY COURT

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This court has jurisdiction pursuant to 28 U.S.C. § 1334. Avoidance is sought 

pursuant to Bankruptcy Code1 §§ 547(b), 549 and 548(a). These are core proceedings 

pursuant to 28 U.S.C. § 157(b)(2)(F) and (H). The Plaintiff and Defendant expressly 

consented to entry of a final order by this court in the complaint and answer, respectively.

During discovery, the Plaintiff served Defendant with interrogatories, requests for 

production of documents, and requests for admissions. Defendant acknowledged receipt of 

the discovery requests but failed to respond. Pursuant to FRCP 36(a)(3), made applicable by 

FRBP 7036, the requests for admission are admitted. A matter admitted under FRCP 36 is 

conclusively established unless the court permits the admission to be withdrawn. FRCP 

36(b). Defendant did not file a motion to withdraw its admissions. 

As a result, Defendant admits the facts supporting the Plaintiff’s claims, as provided in 

the following analysis. 

Avoidance of Transfers

1. Section 547(b):

A trustee may avoid any transfer of an interest of the debtor in property--

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer 

was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the 

petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if--

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the 

provisions of this title.

11 U.S.C. § 547(b).

Plaintiff has established all of these elements by way of Defendant’s admissions:

 

1 11 U.S.C. §§ 101, et seq. (the “Bankruptcy Code”)

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Debtor filed a chapter 11 petition on August 6, 2012. 

On or about January 9, 2003, Debtor and PTV entered into a written Management 

Agreement that was subsequently amended, through which PTV agreed to provide property 

management services to Debtor at Debtor's self-storage facilities located at 2619 East 12th 

Street in Oakland, California (the “Self-Storage Facility”), which are located on, and represent 

a portion of, the premises previously owned by Debtor, including agreeing to maintain, to 

operate, to manage, and to supervise the Self- Storage Facility.

Defendant received payments made by the Debtor, or PTV acting on the Debtor's 

behalf, including but not limited to the transfers set forth in Exhibit “1" to the Complaint 

between the dates of March 1, 2012 and September 26, 2013 (“Transfer” or “Transfers”). 

Each Transfer was made on the date indicated on Exhibit “1" to the Complaint. Each Transfer 

was a transfer of an interest of the Debtor in property. Defendant was the initial transferee or 

the entity for whose benefit the transfer was made pursuant to § 550(a)(l) of the Bankruptcy 

Code. 

Randall Whitney, president and shareholder of the Debtor, was a general partner of the 

Defendant at the time each Transfer was made. Defendant was in control of the Debtor at the 

time each Transfer was made, and is thus an insider of the Debtor under § 101(31)(B)(iii). 

Defendant was a creditor of the Debtor during the preference period between August 6, 2011

and August 6, 2012. Each Transfer was, at the time it was made, on account of an antecedent 

debt owed Defendant by the Debtor. Each Transfer was made for Defendant’s benefit.

Debtor was insolvent at the time of each Transfer.

Defendant has not paid or turned over each Transfer to Plaintiff.

With respect to each Transfer that occurred between August 6, 2011 and August 6, 

2012, Defendant received more than it would have received if: (1) the Debtor's estate was 

liquidated under chapter 7 of the Bankruptcy Code; (2) the Transfer had not been made; and 

(3) Defendant received payment of such debt to the extent provided by the Bankruptcy Code.

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For each Transfer, Defendant did not have a defense pursuant to § 547(b) of the 

Bankruptcy Code.

2. Section 549

Except as provided in subsection (b) or (c) of this section, the trustee may avoid a 

transfer of property of the estate--

(1) that occurs after the commencement of the case; and

(2) (A) that is authorized only under section 303(f) or 542(c) of this title; or

(B) that is not authorized under this title or by the court.

11 U.S.C. § 549.

Each element of an unauthorized post-petition transfer has been proven by 

Defendant’s admissions:

Debtor filed a chapter 11 petition on August 6, 2012. Defendant received payments 

made by the Debtor, or PTV acting on the Debtor's behalf, including but not limited to the 

Transfers set forth in Exhibit "1" to the Complaint between the dates of August 27, 2012 and 

September 26, 2013. Each Transfer was made on the date indicated on Exhibit “1" to the 

Complaint. Each Transfer was a transfer of an interest of the Debtor in property. 

Each Transfer set forth on Exhibit 1 to the Complaint that occurred after August 6, 

2012 (the “Post-Petition Period”) occurred after the commencement of Bankruptcy Case No. 

14-54232 MEH (formerly case no. 12-46534) filed in this court. Each Transfer set forth on 

Exhibit 1 to the Complaint that occurred during the Post-Petition Period was not authorized 

by the Bankruptcy Code. Defendant has not paid or turned over each Transfer.

3. Section 548(a)

Under § 548(a),

(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an 

insider under an employment contract) of an interest of the debtor in property, or any 

obligation (including any obligation to or for the benefit of an insider under an 

employment contract) incurred by the debtor, that was made or incurred on or within 2 

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years before the date of the filing of the petition, if the debtor voluntarily or 

involuntarily–

(A) made such transfer or incurred such obligation with actual intent to hinder, 

delay, or defraud any entity to which the debtor was or became, on or after the 

date that such transfer was made or such obligation was incurred, indebted; or

(B) (i) received less than a reasonably equivalent value in exchange for 

such transfer or obligation; and

(ii) (I) was insolvent on the date that such transfer was made or 

such obligation was incurred, or became insolvent as a result of 

such transfer or obligation;

(II) was engaged in business or a transaction, or was about to 

engage in business or a transaction, for which any property 

remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, 

debts that would be beyond the debtor's ability to pay as such 

debts matured; or

(IV) made such transfer to or for the benefit of an insider, or 

incurred such obligation to or for the benefit of an insider, under 

an employment contract and not in the ordinary course of 

business.

11 U.S.C. § 548(a).

Plaintiff has established the elements of a constructive fraudulent transfer under § 

548(a)(1)(B) by way of the following admissions:

Debtor filed a chapter 11 petition on August 6, 2012. 

Defendant received payments made by the Debtor, or PTV acting on the Debtor's 

behalf, including but not limited to the Transfers set forth in Exhibit “1" to the Complaint 

between the dates of August 6, 2010 and August 5, 2012. Each Transfer was made on the date 

indicated on Exhibit “1" to the Complaint. Each Transfer was a transfer of an interest of the 

Debtor in property. These transfers are duplicative of the transfers avoided pursuant to § 

547(b).

Randall Whitney, president and shareholder of the Debtor, was a general partner of the 

Defendant at the time each Transfer was made. Defendant was in control of the Debtor at the 

time each Transfer was made. Each Transfer was made for Defendant’s benefit.

Debtor received less than reasonably equivalent value in exchange for each Transfer, 

and was insolvent at the time of each Transfer.

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Defendant has not paid or turned over each Transfer to Plaintiff.

Recovery of Transfers

Plaintiff’s complaint does not specify that recovery of the avoided transfers is sought 

pursuant to § 550. However, it is clear from the pleadings and trial that the parties understood 

that the Plaintiff intended to seek recovery under § 550 and obtain a judgment against 

Defendant. 2 On this basis, the court finds that Defendant was on notice that the Plaintiff 

sought avoidance and recovery of the Transfers from Defendant. See FRBP 7015, applying 

FRCP 15(b)(2), which states: “When an issue not raised by the pleadings is tried by the 

parties’ express or implied consent, it must be treated in all respect as if raised in the 

pleadings. A party may move –at any time, even after judgment—to amend the pleadings to 

conform them to the evidence and to raise an unpleaded issue. But failure to amend does not 

affect the result of the trial of that issue.”

At trial, Plaintiff entered into evidence Exhibit “1” to the Complaint, a spreadsheet 

that identified Defendant as the initial transferee or entity for whose benefit the transfer was 

made. Defendant stipulated to the admissibility of this evidence. Further, its admissions 

conclusively establish that Defendant was the initial transferee or entity for whose benefit the 

transfer was made, pursuant to § 550(a)(1). 

Defenses Presented

Despite the admissions, Defendant was provided the opportunity to introduce evidence 

in support of its defenses. Defendant argued that res judicata or claim preclusion barred 

avoidance. Defendant further argued that the Debtor was not insolvent prior to the 90 day 

period that Debtor is presumptively insolvent under § 547(f) and that the Transfers were not 

 

2 The Complaint states that it is to “avoid and recover avoidable transfers” and includes in the prayer 

specific requests for recovery of each type of avoided transfer. The answer also states in the title that 

it is an answer to the complaint to “avoid and recovery avoidable transfers.” Further, the Plaintiff’s 

requests for admission specifically reference § 550(a)(1). 

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transfers of property of the estate. None of these defenses is supported by the evidence 

admitted at trial.

1. Claim Preclusion

Defendant asserts that relief should be denied on the basis of res judicata or claim 

preclusion. Claim preclusion serves two objectives: to limit “the number of times a defendant 

can be vexed by the same claim or issue” and to “promote efficiency in the judicial system by 

putting an end to litigation.” Gilbert v. Ben-Asher, 900 F.2d 1407, 1410 (9th Cir. 1990). A 

party asserting preclusion carries the burden of establishing all necessary elements. Taylor v. 

Sturgell, 553 U.S. 880, 907 (2008). Doubts are resolved against preclusion. In re Associated 

Vintage Grp., Inc., 283 B.R. 549, 562 (B.A.P. 9th Cir. 2002). Here, the burden lies with the 

Defendant.

Defendant asserts claim preclusion and, more specifically, claim splitting by the 

Plaintiff. The rule against claim splitting is rooted in the “court's broad discretion to control 

its own docket as well as the court's interests in judicial economy and efficiency.” Beckerley 

v. Alorica, Inc., 2014 WL 4670229, at *4 (C.D. Cal. Sept. 17, 2014). The idea is to prevent 

the same plaintiff from filing multiple suits alleging the same claims against the same 

defendant when one suit will do. Adams v. California Dep't of Health Servs., 487 F.3d 684, 

692–93 (9th Cir. 2007), overruled on other grounds by Taylor v. Sturgell, 553 U.S. 880, 904, 

128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). In the Ninth Circuit, “[a]fter weighing the equities 

of the case, the district court may exercise its discretion to dismiss a duplicative later-filed 

action, to stay that action pending resolution of the previously filed action, to enjoin the 

parties from proceeding with it, or to consolidate both actions.” Id. at 688.

“To determine whether a suit is duplicative, [the Ninth Circuit] borrow[s] from the test 

for claim preclusion.” Id. The rule against claim splitting applies when the causes of action 

are the same and the parties are the same or are in privity. Id. at 689.

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Under the doctrine of claim preclusion, a final judgment forecloses “successive 

litigation of the very same claim, whether or not relitigation of the claim raises the same 

issues as the earlier suit.” Taylor v. Sturgell, 553 U.S. at 892. Claim preclusion is applicable 

whenever there is (1) an identity of claims, (2) a final judgment on the merits, and (3) privity 

between parties. Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 322 F.3d 

1064, 1077 (9th Cir. 2003).

Identity of Claims

The identity of claims analysis takes the following factors into consideration: (1) 

whether the two suits arise out of the same transactional nucleus of facts; (2) whether rights or 

interests established in the prior judgment would be destroyed or impaired by prosecution of 

the second action; (3) whether the two suits involve infringement of the same right; and (4) 

whether substantially the same evidence is presented in the two actions. Turtle Island 

Restoration Network v. U.S. Dep’t of State, 673 F.3d 914, 917-18 (9th Cir. 2012). Of these, 

whether the two suits arise out of the same transactional nucleus of facts is the most 

important. Id. Whether the two suits arise out of the same transactional nucleus of facts turns 

on whether the suits are related to the same set of facts and whether they could conveniently 

be tried together. ProShipLine Inc. v. Aspen Intrastructures Ltd., 609 F. 3d 960, 968 (9th Cir. 

2010). 

The earlier adversary proceeding3 sought accounting and turnover related to 

interrelated corporate activity of the Debtor and PTV. In connection with this, recovery was 

initially sought against Whitney for transfers to him, but ultimately reduced to injunctive 

relief. Because the suit also sought recovery from Mr. Whitney of transfers to him or for his 

benefit, Defendant asserts they arise out of the same facts and could have been tried together. 

Applying Defendant’s theory, Plaintiff would be precluded from pursuing every entity that 

received transfers from PTC’s assets in which Mr. Whitney had an interest, and every entity 

 

3 Everett v. Whitney, et al., Adv. No. 14-05114.

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for whom Mr. Whitney may be liable because they were not sued in the initial adversary 

proceeding. This is a harsh interpretation of an adversary proceeding that primarily sought 

information and a halt to additional transfers. The court finds these facts and this Defendant 

distinguishable from the prior suit against Mr. Whitney. 

Final Judgment on the Merits

The prior decision is a final judgment on the merits. Although the decision is on 

appeal, the Ninth Circuit has held that a final federal court judgment may be the basis for 

claim preclusion despite a pending appeal. See Tripati v. Henman, 857 F.2d 1366, 1367 (9th 

Cir. 1988).

Privity

Where the parties in a prior action are not identical, privity “may exist if “there is 

‘substantial identity’ between the parties, that is, when there is sufficient commonality of 

interest.” Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 322 F.3d 1064, 

1081 (9th Cir. 2003). 

Defendant’s primary argument is that privity should apply because Mr. Whitney is 

personally liable for any judgment against Defendant based on his general partnership 

interest. The mere fact that Mr. Whitney may be financially responsible for another entity’s 

debt does not establish that the two parties are so closely aligned as to be virtual 

representatives of each other. For example, a suit against Defendant for accounting and 

turnover of the Debtor’s assets, and a determination of the operative agreement between third 

parties is nonsensical. But a suit against Whitney, as president of the Debtor and an 

individual directly involved with the transfer of Debtor’s assets held merit. As such, 

Defendant has not established that it is in privity with Whitney for the purpose of these 

claims.

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Having failed to establish an identity of claims or privity, claim preclusion does not 

apply. The parties’ remaining arguments regarding claim preclusion are without merit. 

2. Insolvency

Defendant correctly argues that the Plaintiff bears the burden of proof to establish 

insolvency for all periods earlier than the 90th day prior to the Petition Date. See § 

547(f). The court finds that the Plaintiff satisfied his initial burden through Defendant's 

admission that PTC was insolvent at the time each of the Transfers were received. See RFA # 

2, 7, 13. 

In its defense, Defendant sought to establish that PTC was solvent during the relevant 

periods. In an action to recover a preference or fraudulent transfer, insolvency may be 

determined on the basis of a “balance sheet” test.4

 This correlates with the definition of 

“insolvent” in § 101(32) that a corporation is insolvent if the sum of the entity’s debts is 

greater than all of the entity’s property at a fair valuation. 

Defendant sought to establish that PTC was not insolvent during 2010 based on email 

correspondence of May 4, 2010 from a representative of Defendant, on behalf of PTC, to its 

then-lender during negotiations of a loan extension. The email includes a list of properties 

owned by PTC and affiliated companies and their appraised value. Based on the numbers 

included in the email, the PTC properties had a value of approximately $19 million. PTC's 

witness, Randall Whitney, then compared this value to PTC's total liabilities of $15,111,415 

as set forth in PTC's 2010 balance sheet. 

However, the 2010 balance sheet provided a total asset value of $14,563,204 and 

liabilities of $15,111,415. The court finds the 2010 balance sheet to provide better evidence 

of the value of PTC’s assets than a single email regarding property values sent during a 

 

4 In a fraudulent transfer action, a fragile financial condition may also be established if the transfer left 

the debtor with unreasonably small capital (§ 548(a)(1)(B)(ii)(II)) or if the debtor knowingly incurred 

debt beyond its ability to repay (§ 548(a)(1)(B)(ii)(III)). Neither of these arguments was raised at trial.

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negotiation. Thus, under the balance sheet test, PTC was insolvent in 2010. The balance 

sheet for 2011 also shows PTC to be insolvent. No evidence was presented as to PTC’s 

solvency in 2012.

Prepetition Transfers

Preferential transfers established under § 547(b) may not be avoided to the extent that 

the transfer recipient establishes either that it provided new value to the debtor after the 

transfer was received, § 547(c)(4), or that the transfer was a contemporaneous exchange for 

new value, § 547(c)(1). 

New Value Defense to Preference

The new value defense to a preference is set forth in § 547(c)(4). It provides that a 

transfer may not be avoided to the extent that after the transfer, the creditor gave new value to 

or for the benefit of the debtor not secured by an unavoidable security interest and “on 

account of which the debtor did not make an otherwise unavoidable transfer” to or for the 

benefit of the creditor. The means of calculating and applying subsequent new value to a 

series of transfers was set forth by the Ninth Circuit in Mosier v. Ever-Fresh Food Co. (In re 

IRFM, Inc.), 52 F.3d 228 (9th Cir. 1995). In essence, the analysis requires a comparison of 

each preferential transfer and the new value provided subsequent to such transfers so that 

subsequent advances of new value may be used to offset prior preferences, even if they are 

not immediately prior. 

The Plaintiff established that all transfers made by PTC to Defendant between August 

18, 2011 and July 21, 2012 were preferences. Defendant did not provide any evidence of new 

value provided in a specific amount after any of these transfers. Instead, Mr. Whitney 

testified about general work performed by Defendant on PTC’s behalf. The primary evidence 

provided in support of his testimony are agendas of Defendant meetings held between July 6 

and October 5, 2009, which include as agenda items work that Mr. Whitney testified was on 

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behalf of PTC. Accepting Mr. Whitney’s testimony as true, no evidence was provided of new 

value provided by Defendant after August 2011 – thus, no evidence of subsequent new value 

was provided. Additionally, notably absent from the evidence provided are invoices or any 

means of determining the value of any work provided by Defendant for PTC’s benefit. On 

this basis, the court finds that Defendant failed to establish a new value defense to the 

preferential transfers.

Contemporaneous Exchange Defense to Preference

The contemporaneous exchange defense is set forth in § 547(c)(1). It provides that to 

the extent the parties intended the transfer to be a contemporaneous exchange for new value 

and it was in fact a substantially contemporaneous exchange, then such transfer may not be 

avoided. The classic example of this is payment by check at the time goods are received from 

a debtor. 

As above, Defendant did not provide any evidence of value provided by it to PTC 

between August 18, 2011 and July 21, 2012. Thus, there is no basis to find that any of the 

transfers received during this time were intended to be contemporaneous exchanges for new 

value. The court finds that Defendant failed to establish a contemporaneous exchange 

defense to the preferential transfers.

Postpetition Transfers

Value provided is not generally recognized as a defense to avoidance of post-petition 

transfers pursuant to § 549. Further, no evidence was provided by Defendant of post-petition 

value it provided to PTC in exchange for the transfers and Defendant did not argue that the 

transfers were made in the ordinary course of PTC’s business.

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3. Property of the Estate

Finally, Defendant argues that the transfers were not property of the estate as a lease 

agreement controlled the relationship – and right to funds – between PTC and PTV. This 

argument was the subject of trial in a separate adversary proceeding arising out of this 

bankruptcy case. As stated more fully in the Amended Decision after Trial entered on 

November 4, 2014,5 the court did not find this argument persuasive and ruled that a 

management agreement remained the governing agreement between the parties. Defendant 

asserts that as it was not a party to the prior litigation, and the prior decision remains on 

appeal, this remains a disputed issue in this adversary proceeding.

In this case, Plaintiff established by Defendant’s admission that each Transfer was a 

transfer of an interest of the Debtor in property. Defendant sought to rebut its own admission 

through Mr. Whitney’s testimony, along with the management agreement, lease, lease 

extension and lease amendment. Defendant’s evidence also included the transcript from the 

trial in the prior adversary proceeding. On the basis of the evidence presented, the court does 

not find Defendant’s argument persuasive in this adversary proceeding—particularly when 

taking into consideration the testimony introduced through the prior trial transcript. The 

evidence presented is insufficient to overcome Defendant’s admission that each transfer was a 

transfer of an interest in Debtor’s property.

4. Conclusion

For the reasons stated herein, the court finds that Plaintiff established that Defendant 

received $22,024.15 in Transfers that are avoided pursuant to §§ 547, 548 or 549, and 

recoverable from Defendant pursuant to § 550. Accordingly, judgment for Plaintiff is being 

entered contemporaneous with this Decision.

***END OF MEMORANDUM DECISION***

 

5 Everett v. Whitney, et al., Adversary Proc. No. 14-5114, Docket # 210.

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COURT SERVICE LIST

Via ECF:

All Recipients

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