Court Opinion

ID: 866398
Source: CourtListenerOpinion
Date Created: 2013-05-01 20:05:14.218134+00
Date Added: 2024-06-11T15:26:34.760029
License: Public Domain

FILED
                           NOT FOR PUBLICATION                              APR 30 2013

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U .S. C O U R T OF APPE ALS

                            FOR THE NINTH CIRCUIT

In the Matter of: FITNESS HOLDINGS               No. 11-56677
INTERNATIONAL, INC.,
                                                 D.C. No. 2:10-cv-00647-AG
              Debtor,

                                                 MEMORANDUM *
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS, of the
ESTATE OF FITNESS HOLDINGS
INTERNATIONAL, INC.,

              Appellant,

  v.

HANCOCK PARK CAPITAL II, L.P., a
Delaware Limited Partnership; PACIFIC
WESTERN BANK; KENTON VAN
HARTEN; MICHAEL FOURTICQ, Sr.;
HANCOCK PARK ASSOCIATES, III;
HANCOCK PARK ASSOCIATES,

              Appellees.

                   Appeal from the United States District Court
                      for the Central District of California
                   Andrew J. Guilford, District Judge, Presiding

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
                       Argued and Submitted February 4, 2013
                                Pasadena, California

Before: CALLAHAN, IKUTA, and HURWITZ, Circuit Judges.

      In this Chapter 7 bankruptcy case, the bankruptcy court dismissed all the

trustee’s claims against defendants under Rule 12(b)(6) of the Federal Rules of

Civil Procedure. The district court affirmed. We have jurisdiction under 28 U.S.C.

§§ 158(d)(1) and 1291, and now affirm in part, reverse in part, and vacate and

remand in part.   1

                                            1

      As explained in our opinion in In re Fitness Holdings Int’l, the district court

erred in concluding that the trustee’s argument that Hancock Park’s loan to Fitness

Holdings should be recharacterized as equity was not cognizable as a matter of

law. No. 11-56677, Slip op. at ___. Because of this legal error, the district court

failed to consider whether the trustee plausibly alleged that the $11,995,500

transfer from Hancock Park to Fitness Holdings should be recharacterized as

creating an equity interest rather than debt. As a result, the district court failed to

      1
        We address trustee’s claim that the complaint sufficiently alleged that
Fitness Holdings’ transfer to Hancock Park was avoidable under 11 U.S.C.
§ 548(a)(1)(B) (Claims 2 and 7 of the First Amended Complaint) in an opinion
filed concurrently with this disposition.

                                            2
apply the correct standard in considering whether the trustee’s allegations that

Fitness Holdings made its transfer to Hancock Park without reasonably equivalent

value plausibly gave rise to an entitlement to relief. Fitness Holdings, No. 11-

56677, slip op. at __. Accordingly, we vacated the district court’s dismissal of the

11 U.S.C. § 548(a)(1)(B) constructive fraudulent conveyance claim and remanded

for further proceedings. Fitness Holdings, No. 11-56677, slip op. at __.

      The district court’s legal error also infected its analysis of many of the

trustee’s other claims. First, because the district court erred in failing to consider

whether applicable state fraudulent conveyance law allowed a court to

recharacterize a loan as an equity interest, it failed to apply the correct standard in

considering whether the trustee’s allegations that Fitness Holdings transferred

$11,995,500 to Hancock Park without receiving reasonably equivalent value

plausibly alleged a claim for relief under 11 U.S.C. § 544(b)(1), which incorporates

applicable state law (claims 3, 4 and 5 of the First Amended Complaint).

      Second, the district court’s erroneous assumption that a court lacked

authority to recharacterize Hancock Park’s $11,995,500 as equity rather than debt

prevented the court from properly evaluating the trustee’s allegations (claim 1 of

the First Amended Complaint) that Fitness Holdings’ transfer of $11,995,500 to

                                            3
Hancock Park in return for an equity investment was actually fraudulent for

purposes of 11 U.S.C. § 548(a)(1)(A).

      Third, because the court failed to properly address the fraudulent transfer

claims, it also did not properly address the claim for recovery of an avoided

transfer under 11 U.S.C. § 550(a) (claim 6 of the First Amended Complaint).

      Finally, the court’s erroneous assumption prevented it from properly

evaluating the trustee’s allegations (in claims 9 and 10 of the First Amendment

Complaint) that Hancock Park, Van Harten and Forticq breached their fiduciary

duties and aided and abetted the breach of fiduciary duties by causing Fitness

Holdings to transfer of $11.9 million to Hancock Park.

      Because the district court did not review these claims (claims 1, 3, 4, 5, 6, 9,

and 10 of the First Amended Complaint) under the correct standard, we vacate

dismissal of these claims and remand them to the district court to consider them in

the first instance. See Salmon Spawning & Recovery Alliance v. Gutierrez, 545

F.3d 1220, 1230 n.6 (9th Cir. 2008).

                                           2

      We affirm the district court’s dismissal of the trustee’s claims that Fitness

Holdings’ transfer of a security interest in its assets to Pacific Western should be

avoided as an actually fraudulent transfer (claims 10, 11, and 13 of the original

                                           4
complaint). The complaint asserts only that Fitness Holdings conveyed a security

interest to Pacific Western in order to obtain a $25 million loan. We cannot

reasonably infer that Fitness Holdings was attempting to “hinder, delay, or

defraud” its creditors, § 548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1), simply

because it took on secured debt to replace unsecured debt; borrowers regularly give

security interests to obtain financing. Because the complaint fails to plausibly

allege any other facts showing that the trustee has an entitlement to relief, the

district court properly dismissed the claims alleging an actually fraudulent transfer

to Pacific Western.

      The district court also properly dismissed the trustee’s claims that Fitness

Holdings’ transfer of a security interest in its assets to Pacific Western should be

avoided as a constructively fraudulent transfer (claims 12 and 14 of the original

complaint). Because the complaint alleges that Fitness Holding granted Pacific

Western the security interest in exchange for a $25 million loan, and does not

allege that the value of the security interest exceeded the value of the loan, the

trustee failed to plausibly allege that the security interest was given for less than

reasonably equivalent value, which is a necessary element of a claim for a

constructively fraudulent transfer under both the Bankruptcy Code and state law.

§§ 548(a)(1)(B)(i); 548(d)(2)(A)(i); § 544(b)(1); Cal. Civ. Code § 3439.04(a)(2).

                                            5
      Because the district court properly dismissed the trustee’s claims for

constructively and actually fraudulent transfers, the dismissal of the trustee’s claim

for avoidance of these transfers (claim 15 of the original complaint) was also

correct. See 11 U.S.C. § 550.

                                           3

      The trustee’s allegations (in claim 8 of the First Amended Complaint) that

insiders “contrived” to benefit themselves by knowingly funneling money to

themselves out of a failing company plausibly alleged the elements of a claim for

equitable subordination, namely: “‘(1) that the [defendants] engaged in some type

of inequitable conduct, (2) that the misconduct injured creditors or conferred unfair

advantage on the claimant, and (3) that subordination would not be inconsistent

with the Bankruptcy Code.’” In re First Alliance Mortg. Co., 471 F.3d 977, 1006

(9th Cir. 2006) (quoting In re Lazar, 83 F.3d 306, 309 (9th Cir. 1996)). We

therefore reverse the district court’s dismissal of this claim. Each party will bear

its own costs on appeal.

AFFIRMED IN PART, REVERSED IN PART, VACATED IN PART, AND

REMANDED.

                                           6