Court Opinion

ID: 4436621
Source: CourtListenerOpinion
Date Created: 2019-09-09 17:00:33.978247+00
Date Added: 2024-06-11T09:37:04.429663
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE MARDIROS HAIG MIHRANIAN,            No. 17-60090
                         Debtor.
                                          Agency No.
                                           17-1048
SAM S. LESLIE, Chapter 7 Trustee,
                          Appellant,
                                           OPINION
                 v.

HAIG LEO MIHRANIAN; MICHAEL
MIHRANIAN; SUSAN CHOBANIAN;
TAKOUHIE BARTAMIAN; MEDICAL
CLINIC AND SURGICAL SPECIALTIES
OF GLENDALE, INC.,
                       Appellees.

             Appeal from the Ninth Circuit
              Bankruptcy Appellate Panel
Kurtz, Spraker, and Alston, Bankruptcy Judges, Presiding

        Argued and Submitted August 13, 2019
                Pasadena, California

                Filed September 9, 2019
2                         IN RE MIHRANIAN

    Before: Mary M. Schroeder and Susan P. Graber, Circuit
        Judges, and Michael H. Watson,* District Judge.

                     Opinion by Judge Watson

                            SUMMARY**

                             Bankruptcy

   The panel affirmed a decision of the Bankruptcy
Appellate Panel affirming the bankruptcy court’s denial of a
Chapter 7 trustee’s motion to substantively consolidate a
debtor’s estate with the estates of various non-debtors.

    The panel held that a party moving for substantive
consolidation must give notice of the motion to creditors of
a putative consolidated non-debtor. Because no such notice
was given, the panel affirmed.

      *
      The Honorable Michael H. Watson, United States District Judge for
the Southern District of Ohio, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                      IN RE MIHRANIAN                        3

                         COUNSEL

Robert M. Aronson (argued), Law Office of Robert M.
Aronson APC, Los Angeles, California, for Appellant.

David B. Golubchik (argued) and John-Patrick M. Fritz,
Levene Neale Bender Yoo & Brill LLP, Los Angeles,
California, for Appellees.

                         OPINION

WATSON, District Judge:

    Sam S. Leslie, the Chapter 7 Trustee, appeals the decision
of the Bankruptcy Appellate Panel for the Ninth Circuit
(“BAP”) affirming the bankruptcy court’s denial of a motion
to substantively consolidate (“SubCon Motion”) Debtor
Mardiros Mihranian’s estate with the estates of various non-
debtors. We affirm.

     Beyond the Debtor, the pertinent parties in this case,
whom we collectively refer to as the “Non-Debtors,” include
Debtor’s ex-wife, Susan Chobanian; Debtor’s and Susan’s
two sons, Michael and Haig Mihranian; Debtor’s medical
business, Medical Clinic and Surgical Specialties of
Glendale, Inc. (“MCSSG”); and MCSSG’s long-time office
manager, Takouhie Bartamian. Two years after Debtor
initiated his bankruptcy case, Trustee filed separate adversary
actions to recover fraudulent transfers allegedly made to
Susan, Haig, Michael, and Bartamian. Adv. No. 2:15-ap-
01667-BR (Susan); Adv. No. 2:15-ap-01668-BR (Haig); Adv.
No. 2:15-ap-01666-BR (Michael); Adv. No. 2:15-ap-01665-
BR (Bartamian). While the adversary actions were pending,
4                     IN RE MIHRANIAN

Trustee filed the SubCon Motion in the bankruptcy action,
seeking to substantively consolidate Debtor’s estates with the
estates of Susan, Haig, Michael, Bartamian, and MCSSG.
Essentially, Trustee sought the same relief—recovery of
Debtor’s assets that allegedly were kept from judgment
creditors through fraudulent transfers—in both the adversary
actions and through the SubCon Motion. After permitting
Trustee to amend the complaints in the adversary actions
three times, the bankruptcy court granted the adversary
defendants’ motions to dismiss for failure to establish that
Debtor was the initial transferor of the alleged fraudulent
transfers, and those dismissals were upheld on appeal.

    Later, the bankruptcy court denied the SubCon Motion,
providing its reasoning on the record at the hearing. During
the hearing, the bankruptcy court asked Trustee’s counsel
several times whether he had given notice of the SubCon
Motion to Non-Debtors’ creditors. Additionally, the
bankruptcy court concluded that the information Trustee
needed to disentangle Debtor’s assets from MCSSG’s or
Susan’s assets was likely available through proper discovery,
which Debtor had not sought to obtain until after the SubCon
Motion was filed. Accordingly, the bankruptcy court
concluded that Trustee had not proved that Debtor’s assets
were entangled with Non-Debtors’ assets to such an extent as
would justify substantive consolidation.

    Trustee appealed the denial to the BAP, which affirmed
because Trustee failed to serve the SubCon Motion on Non-
Debtors’ creditors. Leslie v. Mihranian (In re Mihranian),
No. CC-17-1048-KuSA, 2017 WL 6003345, at *1 (B.A.P. 9th
Cir. Dec. 4, 2017). Trustee appeals to us, arguing that the law
does not require a moving party to give notice of a SubCon
Motion to a putative consolidated non-debtor’s creditors and
                           IN RE MIHRANIAN                                 5

that, even if such notice is required, he provided the requisite
notice.1

    “On appeal this court reviews decisions of the BAP de
novo, and thus reviews the bankruptcy court’s decision under
the same standards used by the BAP.” Gaughan v. Edward
Dittlof Revocable Tr. (In re Costas), 555 F.3d 790, 792 (9th
Cir. 2009) (internal quotation marks and citation omitted).
Thus, we review de novo the BAP’s legal conclusion that
Non-Debtors’ creditors should have received notice of the
SubCon Motion and an opportunity to be heard.

    Substantive consolidation is not provided for in the
Bankruptcy Code but is considered a general equitable power
of bankruptcy courts. Alexander v. Compton (In re Bonham),
229 F.3d 750, 763 (9th Cir. 2000). We explained the concept
and history of substantive consolidation in In re Bonham:

         Orders of substantive consolidation combine
         the assets and liabilities of separate and
         distinct—but related—legal entities into a
         single pool and treat them as though they
         belong to a single entity.        Substantive
         consolidation enables a bankruptcy court to
         disregard separate corporate entities . . . in
         order to reach assets for the satisfaction of
         debts of a related corporation.           The
         consolidated assets create a single fund from

    1
       Trustee also argues that the bankruptcy court clearly erred in failing
to find entanglement sufficient to warrant substantive consolidation on the
merits. Because we hold that notice of a SubCon Motion must be given
to Non-Debtors’ creditors and that such notice was not given in this case,
we need not reach this argument.
6                           IN RE MIHRANIAN

          which all claims against the consolidated
          debtors are satisfied . . . . Without the check
          of substantive consolidation, debtors could
          insulate money through transfers among inter-
          company shell corporations with impunity.

Id. at 764 (internal quotation marks and citations omitted).
Many courts, including this court, permit the substantive
consolidation of both debtor and non-debtor entities. See id.
at 765. The sole aim of substantive consolidation is “fairness
to all creditors.” Id. (internal quotation marks omitted). We
have adopted the Second Circuit’s two-pronged test for
substantive consolidation,2 but we have not yet determined
whether a party moving for substantive consolidation must
give notice of the motion to creditors of a putative
consolidated non-debtor. Several considerations support such
a notice requirement.

    First, caselaw in this circuit regarding consolidation of
two or more debtors’ estates supports extending a notice
requirement to a putative consolidated non-debtor’s creditors,
who should be afforded just as much—if not more—notice as
a putative consolidated debtor’s creditors. See Withers v.
White (In re Foley), 4 F.2d 154, 157 (9th Cir. 1925)
(modifying an order consolidating the estates of two debtors
after a majority concluded that “no such adjudication should
[have been] made without first giving the creditors their day
in court”). In other circuits, most courts that have addressed

     2
       Under this test, substantive consolidation is appropriate if either:
“(1) . . . creditors dealt with the entities as a single economic unit and did
not rely on their separate identity in extending credit; or (2) . . . the affairs
of the debtor are so entangled that consolidation will benefit all creditors.”
In re Bonham, 229 F.3d at at 766 (internal quotation marks omitted).
                     IN RE MIHRANIAN                        7

this issue require giving notice to a non-debtor’s creditors
prior to substantive consolidation. See, e.g., SE Prop.
Holdings, LLC v. Stewart (In re Stewart), 571 B.R. 460, 473
(Bankr. W.D. Okla. 2017); Mukamal v. Ark Capital Grp.,
LLC (In re Kodsi), No. 13-40134-LMI, 2015 WL 222493, at
*2 (Bankr. S.D. Fla. Jan. 14, 2015); Fid. & Deposit Co. of
Md. v. U.S. Bank N.A. (In re Kimball Hill, Inc.), No. 13 C
07146, 2014 WL 5615650, at *4 (N.D. Ill. Nov. 4, 2014);
United States v. AAPC, Inc. (In re AAPC, Inc.), 277 B.R. 785,
789 (Bankr. D. Utah 2002); Raslavich v. Ira S. Davis Storage
Co. (In re Ira S. Davis, Inc.), No. 93-0530S, 1993 WL
384501, at *4 (E.D. Pa. Sept. 22, 1993); Boston Valuation
Grp., Inc. v. Hall (In re Tremont Place Realty Tr.), 159 B.R.
624, 625 n.1 (Bankr. D. Mass. 1993); Morse Operations, Inc.
v. Robins Le-Cocq, Inc. (In re Lease-A-Fleet, Inc.), 141 B.R.
869, 873 (Bankr. E.D. Pa. 1992); In re Julien Co., 120 B.R.
930, 935 (W.D. Tenn. 1990); In re Royal Crown Bottling Co.
of Boaz, Inc., 26 B.R. 451, 452 (Bankr. N.D. Ala. 1983); cf.
Audette v. Kasemir (In re Concepts Am., Inc.), No. 14 B
34232, 2018 WL 2085615, at *3 (Bankr. N.D. Ill. May 3,
2018); Yaquinto v. Ward (In re Ward), 558 B.R. 771,
799–800 (Bankr. N.D. Texas 2016); In re Global Ocean
Carriers Ltd., 251 B.R. 31, 34 (Bankr. D. Del. 2000).
Although several cases outside this circuit have affirmed
substantive consolidation without requiring separate notice to
the putative consolidated entity’s creditors, see Farmers &
Traders State Bank of Meredosia v. Magill (In re Meredosia
Harbor & Fleeting Serv., Inc.), 545 F.2d 583, 589 (7th Cir.
1976); Simon v. New Ctr. Hosp. (In re New Ctr. Hosp.), 187
B.R. 560, 566 (E.D. Mich. 1995); In re Baker & Getty Fin.
Servs., Inc., 78 B.R. 139, 143 (N.D. Ohio 1987), that
8                        IN RE MIHRANIAN

approach is the “minority view.”3 Kapila v. S&G Fin. Servs,
LLC (In re S&G Fin. Servs. of S. Fla., Inc.), 451 B.R. 573,
585 n.14 (Bankr. S.D. Fla. 2011).

    Second, if substantive consolidation is an equitable order
the “sole aim” of which is “fairness to all creditors,” In re
Bonham, 229 F.3d at 765 (internal quotation marks and
citations omitted), then notice and an opportunity to be heard
must be given to creditors of the putative consolidated
parties—whose claims would be equitably distributed under
the consolidation order—and not just to the consolidated
parties themselves. That way, the bankruptcy court can hear
from any objecting creditor before issuing its decision on
consolidation and can ensure that the consolidation truly is
fair to all affected creditors.

    Third, and in the same vein, substantive consolidation
“seriously . . . ‘affects the substantive rights of the creditors
of the different estates.’” Id. at 762 (quoting Adv. Ctte. Note
to Bankr. R. 1015). It is logical to require that notice be
given to the actual parties whose substantive rights will be
“seriously affected” by the order so that they have an
opportunity to be heard.

    Fourth, the first prong of the In re Bonham test essentially
requires notice to the putative consolidated parties’ creditors,
not just the putative consolidated parties. Under that prong,
substantive consolidation is warranted where creditors dealt
with the debtor and non-debtors as a single economic unit.

    3
      Moreover, in those cases, the creditors were either functionally on
notice by being present at the consolidation hearing (Meredosia), the
creditors were unable to avoid consolidation (New Ctr. Hosp.), or due
process was eventually provided (Baker & Getty).
                      IN RE MIHRANIAN                        9

The burden-shifting test for this prong places the burden on
an objecting creditor to overcome a presumption that it did
not rely on the separate credit of the putative consolidated
entities. Id. at 767 (citing Drabkin v. Midland-Ross Corp. (In
re Auto-Train Corp.), 810 F.2d 270, 276 (D.C. Cir. 1987)).
A creditor must be given notice of the motion for substantive
consolidation and an opportunity to be heard in order to meet
its burden of overcoming the presumption.

    For all of these reasons, the BAP correctly concluded that
a party moving for substantive consolidation must provide
notice of the motion to the creditors of a putative
consolidated non-debtor.

     In this case, no such notice was given. We reject
Trustee’s argument that he provided notice to the same extent
as was provided in In re Bonham. In that case, the defendants
in the adversary actions, who were given notice of the motion
for substantive consolidation, were the creditors of the
putative consolidated parties; here, the notified parties were
the putative consolidated parties themselves, not their
creditors. Trustee’s assertion that he provided the same
notice as was given in In re Bonham therefore fails.

    Moreover, a review of the record reveals that the BAP did
not clearly err in concluding that Trustee failed to adequately
research and serve Non-Debtors’ creditors. Instead, Trustee
relied on knowledge of MCSSG’s and Susan’s creditors that
was several years old. He admitted that he did not know or
ask whether Bartamian had any creditors and simply assumed
from one of her bank statements that her only creditor was the
owner of her mortgage. Michael’s and Haig’s creditors were
not discussed at the hearing on the SubCon Motion, and there
is no evidence in the record concerning any attempts Trustee
10                   IN RE MIHRANIAN

may have made to discover Haig’s or Michael’s creditors.
Trustee thus failed to show that he adequately researched the
identity of, and provided notice to, Non-Debtors’ creditors.

     AFFIRMED.