Court Opinion

ID: 4226375
Source: CourtListenerOpinion
Date Created: 2017-12-06 21:01:18.308695+00
Date Added: 2024-06-11T13:26:34.803595
License: Public Domain

FILED
                                                               DEC 04 2017
 1                         NOT FOR PUBLICATION
                                                           SUSAN M. SPRAUL, CLERK
 2                                                           U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
                              OF THE NINTH CIRCUIT
 4
 5   In re:                        )        BAP No. CC-17-1048-KuSA
                                   )
 6   MARDIROS MIHRANIAN,           )        Bk. No. 2:13-bk-39026-BR
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     SAM S. LESLIE, Chapter 7      )
 9   Trustee,                      )
                                   )
10                  Appellant,     )
                                   )
11   v.                            )        M E M O R A N D U M*
                                   )
12   HAIG LEO MIHRANIAN; MICHAEL   )
     MIHRANIAN; SUSAN CHOBANIAN;   )
13   TAKOUHIE BARTAMIAN; MEDICAL   )
     CLINIC AND SURGICAL           )
14   SPECIALTIES OF GLENDALE, INC.,)
                                   )
15                  Appellees.     )
     ______________________________)
16
                   Argued and Submitted on November 30, 2017
17                          at Pasadena, California
18                          Filed - December 4, 2017
19               Appeal from the United States Bankruptcy Court
                     for the Central District of California
20
              Honorable Barry Russell, Bankruptcy Judge, Presiding
21                     _____________________________________
22   Appearances:     Robert Michael Aronson argued for appellant Sam
                      Leslie, Chapter 7 Trustee; David B. Golubchik of
23                    Levene, Neale, Bender, Yoo & Brill L.L.P. argued
                      for appellees Haig Leo Mihranian, Michael
24                    Mihranian, Susan Chobanian, Takouhie Bartamian,
                      and Medical Clinic and Surgical Specialties of
25
26       *
          This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
   have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.

                                      -1-
 1                   Glendale, Inc.
                     ______________________________________
 2
     Before:   KURTZ, SPRAKER, and ALSTON,** Bankruptcy Judges.
 3
          Chapter 71 trustee, Sam S. Leslie (Trustee), filed a motion
 4
     to substantively consolidate the estate of the debtor, Mardiros
 5
     Mihranian (Debtor), with the estates of non-debtor parties which
 6
     included:   Debtor’s (1) sons, Haig Mihranian (Haig) and Michael
 7
     Mihranian (Michael); (2) ex-wife, Susan Chobanian (Susan);
 8
     (3) office manager, Takouhie Bartamian (Takouhie); and
 9
     (4) Debtor’s solely owned corporation, Medical Clinic and
10
     Surgical Specialities of Glendale, Inc. (MCSSG) (collectively,
11
     the Non-Debtor Parties).
12
          Trustee alleged that the financial affairs of Debtor,
13
     Susan, and MCSSG were so commingled such that it would be
14
     impossible to disentangle them without considerable expense and
15
     effort.   Trustee further asserted that Debtor, individually, or
16
     through Susan or MCSSG, had made numerous transfers to Takouhie
17
     and Debtor’s sons, which were potentially subject to fraudulent
18
     conveyance claims.
19
          The bankruptcy court denied Trustee’s motion, finding that
20
     the entanglement alleged by Trustee was not that complex and
21
     could be resolved by forensic accounting.   The court further
22
     found that there was no evidence showing who the creditors of
23
     the Non-Debtor Parties were and what the effect of consolidation
24
25       **
           Hon. Christopher M. Alston, United States Bankruptcy
26 Judge for the Western District of Washington, sitting by
   designation.
27
        1
          Unless otherwise indicated, all chapter and section
28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                     -2-
 1   would be on those creditors.
 2            We may affirm on any ground supported by the record and we
 3   do so here because there is no evidence in the record showing
 4   that the creditors of the Non-Debtor Parties were served with
 5   notice of Trustee’s motion thereby depriving them of an
 6   opportunity to be heard.      In addition, Trustee did not identify
 7   those creditors or provide any evidence showing the nature of
 8   their debt.      It is thus impossible to tell whether substantive
 9   consolidation would be equitable or fair to the absent and
10   unidentified creditors of the Non-Debtor Parties.       Accordingly,
11   we AFFIRM.
12                                    I. FACTS
13            Debtor, a medical doctor, filed a chapter 7 petition in
14   December 2013.2     His schedules showed that he owned no real
15   property and had no secured debt.        Debtor’s amended Schedule F
16   showed his unsecured debt consisted of two large judgments
17   against him and several malpractice lawsuits.       Debtor listed his
18   100% ownership in MCSSG with a value of $100 which Debtor
19   claimed as exempt.
20   A.       The Judgment Creditor
21            Creditor Paykar Construction, Inc. (Paykar) obtained a
22   judgment against Debtor and Susan for over $259,000 in 2000.
23   Paykar assigned the right to collect the judgment to S. Kohn dba
24
25        2
          Debtor and MCSSG are no strangers to bankruptcy. In 1993,
26 MCSSG filed a chapter 11 petition. At the same time, Debtor and
   Susan filed a chapter 11 petition. In 1998, MCSSG filed a
27 chapter 11 petition. In early 2014, MCSSG again filed a
   chapter 11 petition. All these cases were dismissed without plan
28 confirmation.

                                        -3-
 1   SK Judgment Enforcement (Kohn).
 2        In July 2010, Kohn filed an action to renew the judgment
 3   and moved for summary judgment.   The state court granted the
 4   unopposed motion for summary judgment finding that: (1) MCSSG
 5   owed $587,588 in damages, $636,561 in interest and costs
 6   according to the cost memorandum; (2) Susan owed $288,865 in
 7   damages and $288,653 in interest and costs according to the cost
 8   memorandum; and (3) Debtor owed $291,865 in damages and $315,694
 9   in interest and costs according to the cost memorandum.    Kohn’s
10   attorney submitted a judgment, but it was never signed or
11   entered by the state court.
12        Although there was no entry of the judgment, Kohn pursued
13   collection and sought the appointment of a receiver.   During
14   those proceedings, Kohn learned that the judgment was not
15   properly entered.   Kohn then filed a motion in the state court
16   seeking nunc pro tunc entry of the judgment.   The hearing on the
17   motion was stayed due to Debtor’s bankruptcy filing.
18        In late December 2013, Kohn filed a motion for relief from
19   stay to pursue the pending state court matter, which was granted
20   by the bankruptcy court.   Subsequently, the state court granted
21   Kohn’s motion for entry of judgment, but decided to enter the
22   judgment as January 23, 2013, and not nunc pro tunc.   In October
23   2014, the state court entered a correct form of judgment in
24   favor of Kohn in the following amounts:   (1) Debtor was jointly
25   and severally liable for the amount of $80,362.55, and
26   separately liable for the amount of $50,904.42, for a total
27   judgment of $131,256.97; (2) MCSSG was jointly and severally
28   liable for the amount of $80,362.66, and separately liable for

                                    -4-
 1   the amount of $770,159.48, for a total judgment of $850,522.03;
 2   and (3) Susan was jointly and severally liable for the amount of
 3   $80,362.55.   Susan paid the joint and several debt, but Debtor
 4   still owed his separate liability in the amount of $50,894.00.
 5        Kohn also filed an adversary proceeding against Debtor
 6   seeking nondischargeability of the judgment debt under
 7   § 523(a)(2) and (6).   [Adv. No. 2:14-ap-01171].   The bankruptcy
 8   court found the judgment debt in the amount of $50,894.00
 9   nondischargeable and entered judgment in favor of Kohn.
10   B.   The Preference/Fraudulent Transfer Adversary Proceedings
11        In December 2015, Trustee commenced adversary proceedings
12   against Takouhie, Susan, Haig, and Michael, to collect corporate
13   transfers made by MCSSG under §§ 547 and 548.   The bankruptcy
14   court dismissed these adversary proceedings with prejudice while
15   Trustee’s substantive consolidation motion was pending.   On
16   appeal, the Panel affirmed the bankruptcy court’s rulings.     See
17   Leslie v. Mihranian (In re Mihranian), Adv. No. 2:15-ap-01668-
18   BR, 2017 WL 2775044 (9th Cir. BAP June 26, 2017); Leslie v.
19   Mihranian (In re Mihranian), Adv. No. 2:15-ap-01667-BR, 2017 WL
20   2775036 (9th Cir. BAP June 26, 2107); Leslie v. Mihranian
21   (In re Mihranian), Adv. No. 2:15-ap-01665-BR, 2017 WL 277043
22   (9th Cir. BAP June 26, 2107); Leslie v. Mihranian
23   (In re Mihranian), Adv. No. 2:15-ap-01666-BR, 2017 WL 2774245
24   (9th Cir. BAP June 26, 2107).
25   C.   The Motion For Substantive Consolidation
26        In June 2016, Trustee filed his motion to substantively
27   consolidate Debtor’s estate with the estates of the Non-Debtor
28   Parties.   The primary basis for Trustee’s motion was Debtor’s

                                     -5-
 1   alleged twenty-year scheme to defraud his judgment creditors.
 2   According to Trustee, Debtor and Susan devised a scheme to
 3   remove their assets from the reach of their judgment creditors
 4   by:   (1) transferring title to their residence to Takouhie for
 5   minimal consideration; (2) siphoning off millions of dollars
 6   from medical billings owed to Debtor, MCSSG, and Susan and
 7   transferring those monies to Takouhie, their disabled son
 8   Michael, and their other son Haig; (3) maintaining a phony
 9   divorce to keep assets away from creditors; and (4) depositing
10   funds into Susan’s deceased mother’s account to maintain the
11   illusion that the funds were her separate property and could not
12   be deemed community property.    Trustee’s expert estimated that
13   between $4.5 and $5 million dollars in cash were diverted away
14   from Debtor and MCSSG along with Debtor’s residence.
15         Trustee argued that his request for substantive
16   consolidation met the entanglement requirement set forth in
17   Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir.
18   2000).   Due to the millions of dollars flowing in and out of
19   MCSSG into the bank accounts of Haig, Mary (Susan’s mother) and
20   Takouhie, coupled with the lack of a complete set of books and
21   records, Trustee asserted that he could not accurately trace and
22   unscramble the commingling that had occurred.   Trustee further
23   argued that any effort at unscrambling would be so substantial
24   and burdensome as to threaten the realization of any net assets
25   for Debtor’s creditors and end up being needlessly expensive and
26   possibly futile.   In support of his motion, Trustee submitted
27   numerous declarations with hundreds of exhibits allegedly
28   showing the fraudulent scheme.

                                      -6-
 1        In opposition, the Non-Debtor Parties argued that Trustee
 2   had not made the required showing of impossible entanglement or
 3   cost necessary to justify consolidation.    According to the
 4   Non-Debtor Parties, their financial information was not a
 5   confusing entanglement of affairs and that any entanglement was
 6   completely among themselves and not with Debtor.
 7        They also asserted that consolidation would be inequitable
 8   and unjust because Trustee analyzed the fairness to creditors
 9   based only on the estate’s creditors and did not consider
10   fairness as to the Non-Debtor Parties’ creditors.    They further
11   argued that there was no showing of benefit to all creditors and
12   noted that Trustee had not provided notice to their creditors.
13   Finally, the Non-Debtor Parties refuted Trustee’s allegations
14   regarding numerous transfers, alleging that many of them had
15   never occurred.
16        The bankruptcy court held an evidentiary hearing on
17   January 25, 2017.   A number of evidentiary objections were
18   resolved and no witnesses were cross-examined.    After argument,
19   the bankruptcy court denied Trustee’s motion and placed its
20   findings and conclusions on the record.    The court found that
21   the entanglement alleged by Trustee was not that complex and
22   could be resolved by forensic accounting.    The court further
23   found that Trustee failed to show that consolidation was not
24   prejudicial to the creditors of the Non-Debtor Parties — Trustee
25   did not know who the creditors were or the nature of their debt.
26   The bankruptcy court implicitly found that the equities weighed
27   in favor of the Non-Debtor Parties and their creditors.
28        The bankruptcy court entered the order denying Trustee’s

                                    -7-
 1   motion on February 2, 2017.        Trustee filed a timely notice of
 2   appeal.3
 3                                II.   JURISDICTION
 4           The bankruptcy court had jurisdiction over this proceeding
 5   under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (O).            We have
 6   jurisdiction under 28 U.S.C. § 158.
 7                                   III.    ISSUE
 8           Whether the bankruptcy court erred by denying Trustee’s
 9   motion to substantively consolidate Debtor’s estate with the
10   estates of the Non-Debtor Parties.
11                          IV.    STANDARDS OF REVIEW
12           Substantive consolidation presents a mixed question of law
13   and fact that we review de novo.             In re Bonham, 229 F.3d at 763.
14   A mixed question exists when the relevant facts are established,
15   the legal standard is clear, and the issue is whether the facts
16   satisfy the legal standard.        Wechsler v. Macke Int’l Trade, Inc.
17   (In re Macke Int’l Trade, Inc.), 370 B.R. 236, 245 (9th Cir. BAP
18   2007).
19           De novo review requires that we consider a matter anew, as
20   if no decision had been made previously.            B–Real, LLC v.
21   Chaussee (In re Chaussee), 399 B.R. 225, 229 (9th Cir. BAP
22   2008).
23           We review findings of fact for clear error.         A finding of
24   fact is clearly erroneous if illogical, implausible or “without
25   support in inferences that may be drawn from the facts in the
26
         3
27        A motions panel found the order on appeal sufficiently
   final for purposes of appeal. Alternatively, to the extent the
28 order was not final, the motions panel granted leave to appeal.

                                            -8-
 1   record.”   United States v. Hinkson, 585 F.3d 1247, 1262 (9th
 2   Cir. 2009) (en banc).
 3        We may affirm the bankruptcy court on any ground supported
 4   by the record.   Heers v. Parsons (In re Heers), 529 B.R. 734,
 5   740 (9th Cir. BAP 2015).
 6                              V.   DISCUSSION
 7   A.   Substantive Consolidation:    Legal Standards
 8        Substantive consolidation is an uncodified, equitable
 9   doctrine allowing the bankruptcy court, for purposes of the
10   bankruptcy, to “combine the assets and liabilities of separate
11   and distinct—but related—legal entities into a single pool and
12   treat them as though they belong to a single entity.”
13   In re Bonham, 229 F.3d at 764.    Although it is a case-by-case
14   inquiry, the Ninth Circuit has adopted a two factor test to
15   guide the determination of whether substantive consolidation is
16   appropriate:   “(1) whether creditors dealt with the entities as
17   a single economic unit and did not rely on their separate
18   identity in extending credit; or (2) whether the affairs of the
19   debtor are so entangled that consolidation will benefit all
20   creditors.”    Id. at 766 (quotation omitted) (adopting the test
21   set forth by the Second Circuit in Union Sav. Bank v.
22   Augie/Restivo Banking Co., Ltd. (In re Augie/Restivo Baking Co.,
23   Ltd.), 860 F.2d 515, 519 (2d Cir. 1988)).    Either factor is
24   sufficient to support substantive consolidation.     Id.
25        However, “when the Bonham case is considered in its
26   complete context, it is clear that the Ninth Circuit did not
27   require bankruptcy courts to look only to the two [factors]...
28   set forth above, in some ‘Pavlovian’ way.”    In re Bashas’ Inc.,

                                      -9-
 1   437 B.R. 874, 929 (Bankr. D. Ariz. 2010) (citing In re Bonham,
 2   229 F.3d at 767).   “The basic rules, and the discretion to apply
 3   them, stem solely and completely from a weighing of the
 4   equities, and a decision which emanates from one guiding light:
 5   “Is this reasonable under the circumstances?”    Id. at 929.
 6   B.   Analysis
 7        Trustee relied upon the second Bonham factor in support of
 8   his motion for substantive consolidation, contending that
 9   Debtor’s and the Non-Debtor Parties’s affairs were so entangled
10   that no net assets could be realized for all the creditors
11   without substantial time and expense.   Substantive consolidation
12   is appropriate under this factor when “the affairs of the
13   debtors are so entangled that consolidation will benefit all
14   creditors.”   In re Bonham, 229 F.3d at 765.   The language
15   “benefit of all creditors” does not mean each and every
16   creditor.   Rather, it means benefit to the creditor body as a
17   whole.   Substantive consolidation is premised on a sole aim:
18   fairness to all creditors.   In re Bonham, 229 F.3d at 766, 767
19   (emphasis added).
20        Here, fairness to all creditors was not shown.    “‘Courts
21   have stated that, at a minimum, due to the nature of substantive
22   consolidation of debtor and non-debtor entities, notice must be
23   provided to all creditors, and such creditors must have an
24   opportunity to be heard.’”   SE Prop. Holdings, LLC v. Stewart
25   (In re Stewart), 571 B.R. 460, 473 (Bankr. W.D. Okl. 2017)
26   (quoting Kapila v. S & G Fin. Servs., LLC (In re S & G Fin.
27   Servs. of S. Fla., Inc.), 451 B.R. 573, 585 (Bank. S.D. Fla.
28   2011) and collecting cases); see also In re Bonham, 229 F.3d at

                                    -10-
 1   765 n.9 (“[A] bankruptcy court may order substantive
 2   consolidation as a contested matter upon motion by the involved
 3   parties, as was done in the instant appeal, or via an adversary
 4   proceeding or other procedural device, as long as there is
 5   notice and an opportunity to be heard.”   Emphasis added);
 6   Crawforth v. Wheeler (In re Wheeler), 444 B.R. 598, 609 (Bankr.
 7   D. Idaho 2011) (“‘[R]esort to consolidation should not be
 8   Pavlovian, but...should be used sparingly,’ with a heightened
 9   degree of due process and due consideration for the harm or
10   economic prejudice that such a remedy would occasion.”) (citing
11   In re Bonham, 229 F.3d at 767).   Trustee’s failure to serve the
12   creditors of the Non-Debtor Parties with notice of his motion
13   for substantive consolidation deprived them of an opportunity to
14   be heard.   This alone precluded substantive consolidation.
15        Furthermore, although substantive consolidation would
16   clearly benefit Debtor’s judgment creditor Kohn, Trustee
17   provided no evidence that showed application of the doctrine was
18   fair to the creditors of the Non-Debtor Parties.   Nor could he
19   when he did not know who those creditors were or the nature of
20   their debt.   Indeed, the bankruptcy court observed that some
21   debt may simply be reoccurring debt.   “Because substantive
22   consolidation is purely an equitable remedy, a court should not
23   employ it when it would benefit one set of creditors at the
24   expense of another unless the proponent can advance some
25   equitable reason for such a redistribution.”   In re Archdiocese
26   of St. Paul and Minneapolis, 553 B.R. 693 (Bankr. D. Minn. 2016)
27   (citing In re Huntco Inc., 302 B.R. 35, 40 (Bankr. E.D. Mo.
28   2003)).   Trustee has not advanced any equitable reason for a

                                    -11-
 1   redistribution especially when he could not identify the
 2   creditors of the Non-Debtor Parties or the nature of their debt.
 3        In light of the above, substantive consolidation was
 4   neither equitable nor reasonable under the circumstances.
 5   Accordingly, the bankruptcy court properly denied Trustee’s
 6   motion for substantive consolidation.
 7                           VI.   CONCLUSION
 8        For the reasons stated, we AFFIRM.
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