Court Opinion

ID: 4300554
Source: CourtListenerOpinion
Date Created: 2018-08-02 18:00:48.648574+00
Date Added: 2024-06-11T14:41:43.317395
License: Public Domain

FILED
                                                                             AUG 02 2018
                           NOT FOR PUBLICATION
                                                                         SUSAN M. SPRAUL, CLERK
                                                                           U.S. BKCY. APP. PANEL
                                                                           OF THE NINTH CIRCUIT

           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                               BAP No. CC-17-1290-KuFS
WALLDESIGN, INC.,
                                                     Bk. No. 8:12-bk-10105-CB
             Debtor.
FRANCOIS FRERES USA, INC.

                    Appellant,

v.                                                    MEMORANDUM*

BRIAN WEISS, Trustee of the Walldesign
Liquidation Trust,

                    Appellee.

                     Argued and Submitted on July 27, 2018
                            at Pasadena, California

                                Filed – August 2, 2018

               Appeal from the United States Bankruptcy Court
                    for the Central District of California

          Honorable Catherine E. Bauer , Bankruptcy Judge, Presiding

      *
        This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Appearances:          John Gary Warner argued for appellant Francois Freres
                      USA, Inc.

Before: KURTZ, FARIS, and SPRAKER, Bankruptcy Judges.

                                   INTRODUCTION

      Michael Bellow, the sole shareholder and president of Walldesign,

Inc., paid $5,928.66 to appellant Francois Freres USA, Inc. (Freres) with a

check drawn on Walldesign’s checking account. The payment was for

french oak barrels used to ferment and store wine at the Bellow Family

Vineyard (BFV). After Walldesign filed a chapter 111 bankruptcy petition,

the bankruptcy court found the payment from Walldesign’s checking

account to Freres was a fraudulent transfer subject to turnover. Freres

turned over $5,928.66 to appellee, Brian Weiss, the liquidation trustee for

the Walldesign Liquidation Trust (Liquidation Trustee).2

      Freres then filed a proof of claim for $5,928.66. The Liquidation

Trustee objected, contending that Freres was not entitled to a claim based

on the fraudulent transfer payment under § 502(h) because no

consideration had been given to Walldesign and the claim was untimely.

      1
        Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
      2
          Mr. Weiss has not participated in this appeal.

                                              2
The bankruptcy court agreed and entered an order disallowing Freres’

proof of claim. Freres did not appeal that decision. After the appeal

deadline had passed, Freres filed a motion for reconsideration based on

Civil Rule 60(b)(1) and (6), and Rule 3008.3 The bankruptcy court denied

the motion. This appeal followed. For the reasons explained below, we

AFFIRM.

                           FACTUAL BACKGROUND

      Freres is an American entity owned by a French company which

manufactures and distributes wooden oak barrels used by wineries to

ferment and store wine. In July 2007, Freres sold french oak barrels to BFV.

Mr. Bellow, Walldesign’s sole shareholder and president, paid $5,928.66 to

Freres with a check drawn from Walldesign’s checking account.

      Walldesign (Debtor) filed a chapter 11 petition in 2012. Brian Weiss

was appointed the Liquidation Trustee for the Walldesign Liquidation

Trust. The bankruptcy court set a deadline of May 1, 2012, as the last date

for creditors to file and serve all proofs of claims against Debtor’s estate.

      In 2013, the Official Committee of Unsecured Creditors (Committee)

filed an adversary proceeding against Freres seeking to avoid the payment

made by Mr. Bellow (using Walldesign’s funds) to Freres on the basis that

      3
        Because Freres filed its motion for reconsideration after the appeal period
expired, our review in this appeal is limited to the bankruptcy court’s order denying
Freres’ motion for reconsideration. United Student Funds, Inc. v. Wylie (In re Wylie),
349 B.R. 204, 209 (9th Cir. BAP 2006).

                                            3
it was a fraudulent transfer subject to turnover under §§ 544(b) and 550(a).

Following a motion for summary judgment, the bankruptcy court entered

judgment against Freres in the amount of $5,928.66 for the avoidance and

recovery of the fraudulent transfer made by Debtor to Freres. Freres turned

over that amount to the Liquidation Trustee.

      On January 19, 2016, Freres filed proof of claim 129-1, asserting a

general unsecured claim against Debtor in the amount of $5,928.66 for

“Goods sold.” In support of the claim, Freres provided an

Acknowledgment of Full Satisfaction of Judgment, filed by the Liquidation

Trustee in the adversary proceeding and a check in the amount of $5,928.66

from Freres and payable to Debtor.

      The Liquidation Trustee filed a motion seeking to disallow the claim

on the basis that (1) Freres was not entitled to assert a claim for recovery of

an avoided fraudulent transfer under § 502(h) because it had given no

consideration for the avoided fraudulent transfer and (2) under Rule

3002(3), claims arising from an avoidance judgment must be filed within

thirty days after the judgment becomes final, and Freres’ claim was filed

nearly 120 days after the final order avoiding the fraudulent transfer. The

Liquidation Trustee further argued that even if Freres had a valid claim, it

should be disallowed as untimely filed.

      Freres responded, contending that it provided consideration for its

claim. Freres asserted that the Liquidation Trustee had taken control of

                                       4
BFV, which still had the wine barrels, and sought to keep the barrels

without paying for them. Freres further argued that the bankruptcy court

had not set a claims filing deadline nor could there be such a deadline

when the Liquidation Trustee continued to litigate creditor claims in

various courts.

      At the hearing on the matter, the bankruptcy court explained to

Freres that the Liquidation Trustee was not running the winery business,

but was attempting to sell the underlying real property which was owned

by Debtor. The court told Freres to contact the Liquidation Trustee or the

Bellow family member who was running the winery to see what could be

worked out with respect to the barrels as they were not owned by Debtor’s

estate. The bankruptcy court also found that Debtor had not received

consideration for the payment it made to Freres and disallowed Freres’

proof of claim. At the end of the hearing, Freres’ counsel confirmed with

the court that the only basis for its ruling was that no consideration was

given to Debtor.

      Ten months later, on June 26, 2017, the bankruptcy court entered the

order disallowing Freres’ proof of claim (Disallowance Order) and no

appeal was taken.

      On August 7, 2017, Freres filed a motion for reconsideration

(Motion), contending that the bankruptcy court erred by holding that it

was not entitled to a claim under § 502(h). Freres argued that it returned

                                      5
the $5,928.66 transfer to Debtor and therefore was entitled to a return of

"the consideration it paid" under § 502(h).

      Freres also asserted that the bankruptcy court erred in finding that its

proof of claim was time barred. Freres acknowledged that its proof of claim

was filed after the bar date. However, since the bar date was not

jurisdictional under Weil v. Elliott, 859 F.3d 812, 815 (9th Cir. 2017), Freres

reasoned that the bankruptcy court could reconsider and allow its claim.

      The Liquidation Trustee opposed, contending that none of Freres’

arguments constituted “cause” for reconsideration under § 502(j) or

provided a basis for reconsideration under Civil Rule 60(b). According to

the Liquidation Trustee, the arguments were a rehash of arguments

previously resolved by the bankruptcy court’s Disallowance Order. The

Liquidation Trustee further argued that the bankruptcy court properly held

that Freres did not have a claim under § 502(h) because Freres did not

provide consideration to Debtor for the fraudulent transfer. The

Liquidation Trustee also asserted that the court properly held the claim

was untimely as it was filed months after the deadlines set forth in the

notice of the bar date and the Bankruptcy Code for the filing of claims

arising from an avoidance judgment. Finally, the Liquidation Trustee

maintained that the case of Weil v. Elliott, which held that the deadline to

file a nondischargeability action under § 727 was nonjurisdictional, was

inapplicable to the bankruptcy court’s disallowance of Freres’ proof of

                                        6
claim.

      The bankruptcy court heard the Motion on September 13, 2017. The

bankruptcy court explained to Freres that there was no value given by

Freres to Debtor. Freres’ counsel argued that it was Freres’ $5,928.66

payment to the Liquidation Trustee which triggered its right to file a claim.

The bankruptcy court disagreed, stating that paying back a fraudulent

transfer claim was not giving value to Debtor. The court entered an order

denying Freres’ Motion on September 27, 2017. Freres filed a timely notice

of appeal from that order.

                               JURISDICTION

      The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334

and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

      Whether the bankruptcy court abused its discretion in denying

Freres’ motion for reconsideration.

                          STANDARD OF REVIEW

      We review for an abuse of discretion a bankruptcy court's decision

on: (1) a reconsideration motion under § 502(j) and Rule 3008, Heath v. Am.

Express Travel Related Servs. Co. (In re Heath), 331 B.R. 424, 429 (9th Cir. BAP

2005), and (2) a Civil Rule 60(b) reconsideration motion, Lal v. California,

610 F.3d 518, 523 (9th Cir. 2010).

      A bankruptcy court abuses its discretion if it applies the wrong legal

                                        7
standard, misapplies the correct legal standard, or makes factual findings

that are illogical, implausible, or without support in inferences that may be

drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,

653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc)).

                                DISCUSSION

      An allowed or disallowed proof of claim "may be reconsidered for

cause." § 502(j); Rule 3008. And a "reconsidered claim may be allowed or

disallowed according to the equities of the case." § 502(j). When "the time

for appeal has expired, a [§ 502(j)] motion to reconsider should be treated

as a motion for relief from judgment under Bankruptcy Rule 9024." S.G.

Wilson Comp. v. Cleanmaster Indus., Inc. (In re Cleanmaster Indus., Inc.), 106
B.R. 628, 630 (9th Cir. BAP 1989). Rule 9024 applies Civil Rule 60 in

bankruptcy proceedings.

      In its Motion, Freres relied upon Rule 60(b)(1) and (6) which allows a

trial court to set aside an order for "(1) mistake, inadvertence, surprise, or

excusable neglect; . . . or (6) any other reason justifying relief from the

operation of the [order]." Freres failed to show it was entitled to

reconsideration on these grounds. The thrust of Freres’ argument in its

Motion and on appeal is that the bankruptcy court erred by finding that

Freres had not given consideration to Debtor in exchange for the transfer so

as to fall within the scope of § 502(h). This issue was addressed by the

                                         8
bankruptcy court in its ruling on the disallowance of Freres’ proof of claim.

Accordingly, Freres’ remedy was to file a timely notice of appeal from that

ruling, which it did not do.

      Instead, Freres filed its Motion, reiterating arguments that the

bankruptcy court previously considered and rejected when disallowing its

proof of claim. These rehashed arguments do not merit reconsideration. See

Van Kiver v. United States, 962 F.2d 1241, 1243 (10th Cir. 1991); Eugenio v.

Cont’l Pac., LLC (In re Eugenio), Case No. HI-13-1459, 2015 WL 500175, *4

(9th Cir. BAP Feb. 5, 2015); Branam v. Crowder (In re Branam), 226 B.R. 45, 54

(9th Cir. BAP 1998). On this ground alone, the bankruptcy court did not

abuse its considerable discretion in denying Freres’ Motion. See McDowell

v. Calderon, 197 F.3d 1253, 1255 n.1 (9th Cir. 1999) (Courts enjoy

considerable discretion in deciding reconsideration motions).

      Even so, the bankruptcy court did not err by disallowing Freres’

proof of claim. Section 502(d) provides:

      Notwithstanding subsections (a) and (b) of this section, the
      court shall disallow any claim of any entity from which
      property is recoverable under section 542, 543, 550, or 553 of
      this title or that is a transferee of a transfer avoidable under
      section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this
      title, unless such entity or transferee has paid the amount, or
      turned over any such property, for which such entity or
      transferee is liable under section 522(I), 542, 543, 550, or 553 of
      this title.

                                        9
      Under this provision, until Freres paid the amount for which it was

liable under § 550, its claim was "disallowed." Once Freres repaid the

estate, its claim was no longer disallowed by operation of § 502(d).

      Nothing in [§] 502(d), however, mandates that once an entity
      pays the ‘amount recoverable,’ such entity is thereby entitled to
      distributions from the estate. To be clear, under the plain
      language of the statute, [§] 502(d) simply provides that until a
      creditor pays what it owes to an estate, any claim it may have is
      disallowed. That is all. No portion of this provision, nor any
      other in the Bankruptcy Code, states that once an entity pays
      what it owes the estate, such entity is unconditionally entitled
      to participate in distributions from the estate.

RNI-NV Ltd. P’ship v. Field (In re Maui Indus. Loan & Fin. Co.), 580 B.R. 886,

900-902 (D. Haw. 2018).

      Although Freres repaid the estate, its claim was subject to the

remaining provisions of § 502. Section 502(h) provides:

      A claim arising from the recovery of property under section
      522, 550, or 553 of this title shall be determined, and shall be
      allowed under subsection (a), (b), or (c) of this section, or
      disallowed under subsection (d) or (e) of this section, the same
      as if such claim had arisen before the date of the filing of the
      petition.

Under § 502(a), "[a] claim or interest, proof of which is filed under section

501 of this title, is deemed allowed, unless a party in interest . . . objects."

The Liquidation Trustee, a party in interest in this case, objected to Freres’

claim on the basis that no consideration had been given to Debtor in

                                        10
exchange for its payment to Freres. The bankruptcy court properly

sustained the objection as the "claim" was unenforceable against Debtor or

its property on this basis. See § 502(b)(1). Simply put, the french oak barrels

went to BFV, not Debtor, and thus there was no underlying debt.

      Contrary to Freres’ arguments, the case of Gowan v. HSBC Mortgage

Corp. (In re Dreier LLP), Case No. 08-15051, 2012 WL 4867376 (Bankr.

S.D.N.Y. Oct. 12, 2012), is instructive and on point. There, the bankruptcy

court rejected the contention that a § 502(h) claim encompasses the totality

of the avoided transfer and held that such a claim is limited to the

consideration given for the transfer, stating: "If the transferee did not give

any consideration for the fraudulent transfer, there is nothing to reinstate,

and the return of the fraudulently transferred funds does not give rise to an

allowable claim." Id. at *3 (citing 4 Alan Resnick & Henry J. Sommer,

Collier on Bankruptcy ¶ 502.09[2] at 502–72 (16th ed. 2012) ("The amount of

the claim allowable under this section [502(h)] is not the value of the

property recovered but rather the value of the consideration paid by the

transferee for the property recovered.").

      The court in In re Best Products Company examined § 502(h) in detail,

stating:

      Section 502(h) of the Bankruptcy Code provides that the claim
      of a creditor arising from the recovery of property under
      section 550, among others, shall be allowed or disallowed the
      same as if the claim had arisen prepetition. And section 502(d),
      much like section 57(g) of the former Bankruptcy Act, disallows

                                       11
       the claim of any recipient of a fraudulent transfer unless the
       recipient has paid the amount or turned over any property for
       which it is liable under section 550. Thus, there is an
       implication in section 550 that a transferee of a fraudulent
       transfer will have a claim when the transfer is disgorged.

       This is not to say that every person who is the recipient of a
       fraudulent transfer is entitled to a claim against the estate. For if
       the transferee gave no consideration for the transfer, there is no
       underlying debt.

168 B.R. 35, 56 (Bankr. S.D.N.Y. 1994) (emphasis added), appeal dismissed,

177 B.R. 791 (S.D.N.Y. 1995), aff'd, 68 F.3d 26 (2d Cir. 1995).

       The Best Products bankruptcy court added that § 502(h) is predicated

on the principle "that when a fraudulent transfer is avoided, the parties are

restored to their previous positions." Id. at 57; see also Tronox, Inc. v. Kerr

McGee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013)

("§ 502(h) does not create a 'claim arising from the recovery of property'

under § 550 and merely provides that any such claim is a prepetition claim

entitled to a share of recovery from the estate on the same basis as all other

prepetition claims") and In re Maui Indus. Loan & Fin. Co., 580 B.R. at 900-

902.

       Freres’ citation to Misty Management Corp. v. Lockwood also supports

the bankruptcy court’s conclusion. 539 F.2d 1205, 1214 (9th Cir. 1976).

There, the Ninth Circuit noted that a transferee guilty of fraudulent

behavior may nevertheless prove a claim against the bankrupt estate once

                                        12
he returns the fraudulently conveyed property to the estate. Id. The Ninth

Circuit reasoned, "A rule to the contrary would allow the estate to recover

the voidable conveyance and to retain whatever consideration it had paid

therefor. Such a result would clearly be inequitable." Id.

      Freres acknowledges that so long as the creditor has given value to

either the debtor or the debtor’s bankruptcy estate, that creditor is entitled

to be treated as a prepetition creditor. However, contrary to Freres’

contention, there is nothing in the record that shows Freres gave value to

Debtor in exchange for Debtor’s payment to Freres for $5,928.66. Returning

monies to the bankruptcy estate for which he did not have a previously

existing claim did not constitute value to the estate to create a proof of

claim.

      In the end, regardless whether Freres’ proof of claim was timely or

not, the bankruptcy court did not abuse its discretion by refusing to

reconsider the disallowance of Freres’ proof of claim.

                               CONCLUSION

      For the reasons explained above, we AFFIRM.

                                       13