Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: July 21, 2011
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. SV-10-14811-VK, Adv. No. SV-10-01225-VK. Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding .
In January 2011, the bankruptcy case and the underlying adversary proceeding related to this appeal were assigned to Judge Victoria S. Kaufman upon the retirement of Judge Kathleen Thompson. As a consequence, although Judge Kaufman entered the final order leading to this appeal on February 10, 2011, that order was based entirely on Judge Thompson's prior orders.
For WRIGHT FLIGHT AVIATION, INC. (10-1520), Appellant: Jeffrey F. Gersh, Rochelle A. Herzog, Attorney, GERSH DERBY, Attorneys at Law, Encino, CA; David B. Shemano, Attorney, PEITZMAN, WEG & KEMPINSKY, LLP, Los Angeles, CA.
For BRAD D. KRASNOFF, Chapter 7 Trustee, Chapter 7 Trustee, (10-1520), Appellee: James M. Donovan, Attorney, Michael J. Glenn, Attorney, LAW OFFICES OF JAMES M. DONOVAN, Los Angeles, CA.
For WRIGHT FLIGHT AVIATION, INC. (10-1521), Appellant: Jeffrey F. Gersh, Rochelle A. Herzog, Attorney, GERSH DERBY, Attorneys at Law, Encino, CA.
For BRAD D. KRASNOFF, Chapter 7 Trustee, Chapter 7 Trustee (10-1521), Appellee: James M. Donovan, Attorney, Michael J. Glenn, Attorney, LAW OFFICES OF JAMES M. DONOVAN, Los Angeles, CA.
For Mach I Aviation Inc. (1:10-bk-14811-VK), Debtor: John D Monte, Sherman Oaks, CA.
For Brad D Krasnoff (TR) (1:10-bk-14811-VK), Trustee: Michael J Glenn, Los Angeles, CA.
For Wright Flight Aviation, Inc., a Nevada Corporation (1:10-ap-01225-VK), Plaintiff: Jeffrey F Gersh, LEAD ATTORNEY, Rochelle A Herzog, Encino, CA.
Mach I Aviation Inc. (1:10-ap-01225-VK), Defendant, Pro se, Studio City, CA.
For Brad D Krasnoff (TR) (1:10-ap-01225-VK), Trustee: Michael J Glenn, The Law Offices of James Donovan, Los Angeles, CA.
For Brad D Krasnoff (TR) (1:10-ap-01225-VK), Counter-Claimant: Michael J Glenn, Los Angeles, CA.
For Wright Flight Aviation, Inc., a Nevada Corporation (1:10-ap-01225-VK), Counter-Defendant: Rochelle A Herzog, Encino, CA.
Before: MARKELL, BRANDT, and PAPPAS, Bankruptcy Judges.
Hon. Philip H. Brandt, Bankruptcy Judge for the District of Washington, sitting by designation.
MEMORANDUM
INTRODUCTION
This case is about the ownership of an aircraft - fast, but not supersonic. The bankruptcy court ruled on summary judgment that the original owner had lost title to the debtor before debtor filed its bankruptcy case. The bankruptcy court further ruled that, because the original owner's state court action to recover the aircraft had not been reduced to judgment before the debtor filed its case, the chapter 7 trustee's interest in the aircraft was superior, and the original owner was limited to a claim against the bankruptcy estate.
Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and all Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All Civil Rule references are to the Federal Rules of Civil Procedure.
Holding that title had not passed to the debtor under the Uniform Commercial Code, and that the original owner's equitable causes of action are not claims under the Bankruptcy Code, we REVERSE and REMAND.
As this appeal involves a summary judgment motion, no facts have been found. As a consequence, unless otherwise indicated, this statement of facts draws on the allegations and contentions of the appellee.
A. The Key Players and the Events Leading up to the Disputed Ownership of the Aircraft
Nathan East (" East") is a professional musician and an airplane enthusiast. Before 2001, East owned and controlled Northwing Aviation, LLC (" Northwing") which held title to a Lancair IV-P experimental airplane, FAA tail number N424E (" N424E"). David Riggs (" Riggs") was an acquaintance of East's who liked to pilot airplanes. Through Northwing, East leased N424E to Riggs who in turn agreed to pay, among other things, N424E's operating and maintenance expenses. Ultimately, N424E was destroyed in an accident. East used the insurance proceeds from the accident to purchase a new airplane, a 1996 Lancair IV-P Aircraft, FAA Tail number N484E (" Aircraft"). According to East, the Aircraft is unique in the private aviation world because of its high level of performance; in short, it's fast.
Riggs is also a felon who has been convicted of bank, wire and passport fraud and who had served time in the federal penitentiary in Leavenworth, Kansas. East contends that he did not learn of Riggs' past until 2008. See Decl. of Nathan East (Oct. 14, 2010) at ¶ 21 and ex. 8 thereto.
Ownership and control of the Aircraft are at the heart of this appeal. East claims that Riggs used false pretenses first to obtain control of, and then to steal, the Aircraft. According to East, Riggs began his deception by suggesting that East form a Nevada corporation to hold title to the Aircraft. Riggs represented that he was both willing and able to form the corporation on East's behalf. East relied on Riggs to form the Nevada corporation because East himself lacked the relevant expertise and because he was at the time fully occupied with his obligations as a professional musician.
In October 2001, Riggs formed Wright Flight Aviation, Inc. (" Wright Flight"), as a Nevada corporation to own and operate the Aircraft. East maintains that only he and his wife were supposed to own and control Wright Flight and that he never agreed nor authorized Riggs to be a shareholder, director, or officer of Wright Flight. Riggs repeatedly assured East that Riggs had taken care of all corporate formalities consistent with East's instructions.
Despite these assurances, Riggs named himself as the sole officer of Wright Flight when he formed it in 2001. He then continued as an officer and/or director until August 2007. East contends that Riggs was able to conceal his true actions regarding Wright Flight because Riggs kept Wright Flight's corporate records.
On or about November 15, 2001, Riggs and Wright Flight entered into a written lease agreement for the use and maintenance of the Aircraft (the " Lease Agreement"). East signed the Lease Agreement on behalf of Wright Flight and Riggs signed the Lease Agreement on his own behalf. The lease terms were similar to those of Riggs' prior lease of N424E. In exchange for his use of the Aircraft, Riggs agreed to pay all fees and costs associated with the Aircraft's registration, insurance, storage, repair and maintenance. The initial lease term was for three years, but the parties extended it, and Riggs continued to use the Aircraft pursuant to the Lease Agreement.
On the surface, this arrangement seemed to work without incident until 2007. About that time, however, Riggs created a document entitled " Aircraft Loan Agreement." This Agreement, dated January 14, 2007, states that it is between Wright Flight and Mach I Aviation, Inc., the debtor in this case and also a Nevada corporation (" Mach I"). The Aircraft Loan Agreement formalizes and documents a purported loan of $150,000 from Mach I to Wright Flight. Riggs signed the Aircraft Loan Agreement twice - once as Wright Flight's corporate secretary, and once as Mach I's chief executive officer. East never signed it. Riggs then executed a second document on behalf of Wright Flight. This document, also dated January 14, 2007, granted Mach I a security interest in the Aircraft to secure Wright Flight's $150,000 debt (" Security Agreement"). East never signed this document either. Indeed, East contends that he never found out about either agreement until years later.
The Aircraft Loan Agreement indicated that Mach I had lent $150,000 to Wright Flight to fund various repairs to the Aircraft - repairs necessitated by damage incurred during Riggs' use of the Aircraft. If true, this purpose would be contrary to the Lease Agreement, which obligated Riggs to pay for such repairs.
Nothing in the record indicates compliance by either Mach I or Wright Flight with Nev. Rev. Stat. Ann. § 78.140, which restricts transactions involving interested officers or directors. To paraphrase the statute, Nev. Rev. Stat. Ann. § 78.140 validates transactions involving interested officers or directors if any of four circumstances occur: (a) the disinterested directors knowingly and in good faith vote to authorize, approve or ratify the transaction; (b) a majority of shareholders knowingly and in good faith vote to approve or ratify the transaction, (c) the interested officer or director is unaware of his or her financial interest in the transaction at the time the transaction is brought before the directors for action, or (d) the transaction is fair to the corporation at the time it is acted upon. See Nev. Rev. Stat. Ann. § 78.140, subsection 2 (West 2009).
Sometime in late 2007, East discovered that Riggs had not followed East's instructions regarding whom to name as the officers and directors of Wright Flight. In response, on August 28, 2007, East filed a report with the Nevada Secretary of State removing Riggs as an officer and director of Wright Flight, and naming East and his wife as the sole officers and directors of the corporation.
When Riggs formed Wright Flight in 2001, he named himself the sole officer of Wright Flight. In 2002 and 2003, Riggs filed annual reports with the Nevada Secretary of State naming himself the sole officer of Wright Flight. In 2004, Riggs filed a report with the Nevada Secretary of State naming himself as Secretary (naming East as President and Treasurer). In 2005, Riggs filed a report with the Nevada Secretary of State naming himself as Secretary and Director (naming East as President and Treasurer).
Also in 2007, East discovered that Riggs had damaged the Aircraft in 2006 and that Riggs had failed to obtain insurance for the Aircraft as required in the Lease Agreement. East thereafter terminated the Lease Agreement with Riggs, and took exclusive possession of the Aircraft.
All appeared calm with respect to the Aircraft until December 2009, when East received a telephone call from a man named Gary Zinger (" Zinger"). Zinger told East that he had been hired to repossess the Aircraft on behalf of Mach I. East met with Zinger in January 2010 and it was then that he saw, for the first time, the Aircraft Loan Agreement, the Security Agreement, and a February 2009 letter to Wright Flight purporting to declare Wright Flight in default under the Loan Agreement.
After conferring with East, Zinger declined to repossess the Aircraft on behalf of Mach I. Zinger did, however, " red tag" the Aircraft. According to East, a " red tagged" plane cannot be used by anyone. Since Zinger " red tagged" the Aircraft, Wright Flight has held the Aircraft at Whiteman Airport in Pacoima, California.
The record is devoid of anything that could give a definitive meaning to the practice of " red tagging" an aircraft, and we hold that it does not have a meaning sufficiently well-known to be the subject of judicial notice under Rule 201 of the Federal Rules of Evidence. Prior cases indicate that unusable or unsafe aircraft parts are given a " red tag" to indicate their unsafe nature. See United States v. Ruhe, 191 F.3d 376 (4th Cir. 1999); United States v. Butler, 494 F.2d 1246 (10th Cir. 1974); ABC, Inc. v. Shanks, 1 S.W.3d 230 (Tex. App. 1999).
On February 22, 2010, Wright Flight filed a civil action in Los Angeles Superior Court (LASC Case No. BC 432305) against, among others, Mach I and its alleged principal Riggs. The complaint stated causes of action for declaratory relief, conversion, and cancellation of written instruments including the Aircraft Loan Agreement and the Security Agreement (" State Court Action").
On the same day Wright Flight filed the State Court Action, Mach I, acting through Riggs, filed a " Certificate of Repossession of Encumbered Aircraft" (" Repossession Certificate") with the FAA in Oklahoma City. The Repossession Certificate incorrectly certified that Mach I had repossessed the Aircraft. Mach I also filed an application with the FAA requesting transfer of the Aircraft's registration to Mach l. On March 1, 2010, in apparent reliance upon the inaccurate Repossession Certificate, the FAA transferred registration of the Aircraft from Wright Flight to Mach I and issued a certificate reflecting the transfer of registration (" FAA Registration Certificate").
On March 4, 2010, Wright Flight, Riggs, and the other parties to the State Court Action stipulated to entry of a thirty-day temporary restraining order providing that 1) no one would attempt to make further efforts to repossess or convey title to the Aircraft until the court had rendered a decision on Wright Flight's injunction request, and 2) no one would operate, fly or move the Aircraft without the written consent of the other parties. Riggs also agreed that he would provide Wright Flight with documentation to substantiate Mach I's purported security interest in the Aircraft. The initial stipulation was voluntarily extended for an additional thirty days on April 9, 2010.
In apparent violation of the stipulation, East submitted to the FAA on March 16, 2010 a bill of sale in the name of Mach I, attempting to transfer registration to the Aircraft back to Wright Flight. The FAA apparently received but did not record either the bill of sale or the registration transfer application that East submitted with the bill of sale.
B. Mach I's Bankruptcy Case and Wright Flight's Adversary Proceeding
On April 25, 2010, roughly eight weeks after the State Court Action commenced, Riggs filed voluntary chapter 7 petitions for himself, Mach I, and other related entities. The Aircraft was listed on Mach I's Schedule B, Personal Property, and valued at $250,000. The schedules filed with the Mach I bankruptcy petition also listed Wright Flight's State Court Action as well as two other state court proceedings.
Questions concerning the validity of Riggs' authorization of Mach I's bankruptcy filing arose during the course of the summary judgment proceedings, as discussed below.
On June 1, 2010, Wright Flight filed a complaint (" Adversary Complaint") in Mach I's bankruptcy case against Brad D. Krasnoff, Mach I's chapter 7 trustee (" Trustee"). The Adversary Complaint sought declaratory relief, cancellation of written instruments, and, if necessary, transfer of title to the Aircraft. Unlike its then-stayed State Court Action, Wright Flight did not plead a claim for conversion.
The Trustee timely answered the Adversary Complaint and pled a counterclaim for breach of contract. He shortly thereafter filed a summary judgment motion (" Summary Judgment Motion"). In the Summary Judgment Motion, the Trustee did not challenge any of the factual allegations made by Wright Flight/East in the Adversary Complaint. Indeed, the Summary Judgment Motion was not supported by any affidavits or declarations. Rather, the Trustee argued that, since Wright Flight was entitled to monetary damages as a remedy for the theft of the Aircraft, Wright Flight was limited to filing a proof of claim against the estate and was not entitled to any equitable relief with respect to the Aircraft. The Trustee also argued that, since Wright Flight had not at the time of Mach I's bankruptcy filing reduced its constructive trust claim in the State Court Action to judgment, the Trustee's rights to the Aircraft under § 544 were superior to Wright Flight's. Finally, the Trustee claimed that Mach I had title to the Aircraft when it filed, and thus the Aircraft was property of the estate.
Wright Flight opposed, and supported its opposition with a statement of genuine issues in dispute, a request for judicial notice, and the declarations of both Nathan East and Jeffrey Gersh. These documents essentially indicate that, among other things, 1) the Aircraft Loan Agreement and the Security Agreement were invalid under Nevada and California law, 2) Mach I's purported security interest in the Aircraft was never properly perfected, 3) the law did not permit a thief to have superior title to the true owner, 4) the Trustee stood in the shoes of the thief so the Trustee's title could not be superior to the true owner, and 5) it was not clear the matter should be heard at all since Riggs was not and likely never had been an officer or director of Mach I.
The Trustee filed a reply in support of the Summary Judgment Motion (" Reply"). The Reply did not challenge or dispute any of the factual assertions contained in Wright Flight's opposition papers. Nor did the Trustee ever address the questions raised regarding Riggs's relationship to and authority to act on behalf of Mach I. He simply stood on his original assertions.
During the hearing on the Summary Judgment Motion, both Wright Flight's counsel and the bankruptcy court expressed doubt regarding the validity of Mach I's bankruptcy petition and Riggs's authority to sign the petition on behalf of Mach I. Wright Flight did not, however, raise the authority argument by way of a motion to dismiss, and the bankruptcy court did not rule on the issue. Nor did the Trustee address the jurisdictional concerns raised by Wright Flight.
Mach I's bankruptcy petition was signed by Riggs, supposedly as Mach I's President. However, the Nevada Secretary of State's records reflect that, from 2004 through 2009, Riggs was neither an officer nor a director of Mach I. Instead, the records reflect that a Mr. Chas Bain was the sole officer and director of Mach I during this time period.
Absent a valid, properly-filed bankruptcy petition, the bankruptcy court would lack jurisdiction over the matter. See Price v. Gurney, 324 U.S. 100, 106, 65 S.Ct. 513, 89 L.Ed. 776 (1945) (" If the District Court finds that those who purport to act on behalf of the corporation have not been granted authority by local law to institute the proceedings, [the District Court] has no alternative but to dismiss the petition."). Accord Hager v. Gibson, 108 F.3d 35, 39 (4th Cir. 1997).
On November 9, 2010, the bankruptcy court entered an order granting summary judgment in favor of the Trustee (" Summary Judgment Order") and issued a statement of uncontroverted facts and conclusions of law. On November 22, 2010, Wright Flight filed a motion for reconsideration (the " Reconsideration Motion") which the bankruptcy court denied. On December 28, 2010, Wright Flight timely filed notices of appeal from both the Summary Judgment Order and the order denying the Reconsideration Motion.
On February 10, 2011, pursuant to a stipulation between the parties, the bankruptcy court entered summary judgment in favor of the Trustee pursuant to Rule 7054 (which incorporates Civil Rule 54(b)). On March 7, 2011, the bankruptcy court entered an order granting Wright Flight a stay pending appeal.
JURISDICTION
Subject to questions regarding Mach I's authority to file its bankruptcy petition, the bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 1334 and 157(b)(2)(A), (E) and (K), and we have jurisdiction under 28 U.S.C. § 158(a)(1).
Although Wright Flight questioned Riggs' authority to file a bankruptcy petition on behalf of Mach I, it never formally moved to dismiss Mach I's case. But even if we were to vacate the summary judgment on the ground that the bankruptcy court's jurisdiction over the matter had not been established, the net result would be a remand for further proceedings, the result we reach below. Although the record is insufficiently developed for us to determine in the first instance that Riggs lacked the requisite authority to file a petition on behalf of Mach I, there is a substantial question as to Riggs' authority that the bankruptcy court should address. On remand, the bankruptcy court should address this issue before it further considers the merits of the Adversary Complaint.
Based on our disposition of this appeal, we do not need to reach any issues regarding the bankruptcy court's denial of the Reconsideration Motion. Furthermore, Wright Flight neither briefed nor argued any such issues on appeal, so they have been waived. See In re Bankr. Petition Preparers who are not Certified Pursuant to Requirements of the Ariz. Sup. Ct., 307 B.R. 134, 141 (9th Cir. BAP 2004) (issues not specifically and distinctly argued in the opening brief are deemed waived) (citing Laboa v. Calderon, 224 F.3d 972, 980 n.6 (9th Cir. 2000)).
1. Did the bankruptcy court err when it granted the Summary Judgment Motion based on § 544(a)?
2. Did the bankruptcy court err by treating Wright Flight's Adversary Complaint as a claim under § 101(5)(B)?
STANDARDS OF REVIEW
We review de novo the bankruptcy court's decision to grant summary judgment. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009); Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007). Viewing the evidence in the light most favorable to the non-moving party (i.e., Wright Flight), we determine whether the bankruptcy court correctly found that there are no genuine issues of material fact and that the moving party (i.e., Trustee) is entitled to judgment as a matter of law. Jesinger v. Nev. Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994).
DISCUSSION
A. The bankruptcy incorrectly determined that title to the Aircraft was transferred from Wright Flight to Mach I.
The bankruptcy court implicitly determined that Wright Flight had lost, and that Mach I had acquired, title to the Aircraft before Mach I filed its bankruptcy case. As a consequence, the most that Wright Flight has is a damages claim for fraud, conversion, or some other common law theory, and to the extent these theories lead to a change of title, they are subordinate to the Trustee's position as a hypothetical lien creditor under § 544(a)(1). In light of the uncontroverted facts, we disagree.
In general, § 544(a)(1) empowers the Trustee to avoid certain prepetition interests in property of the debtor to the extent that the interest could have been avoided by a hypothetical judicial lien creditor at the time the bankruptcy was filed. The Trustee's argument under § 544(a)(1) was premised on his belief " that title to the Aircraft was in the name of Mach I as of the date Mach I filed its bankruptcy Petition." See Trustee's Opposition to Wright Flight's Reconsideration Motion (November 30, 2010) at 5:27-28.
This argument is misplaced. To the extent the trustee alleges that he has title, his claim to possession derives from § 541(a). By contrast, his § 544(a) argument assumes title in the estate, and uses § 544(a) to defeat and subordinate Wright Flights' common law avoidance claims under, among other things, fraud and conversion.
Notwithstanding the Trustee's belief, the record does not establish that title to the Aircraft ever vested in Mach I. As explained below, the uncontroverted facts demonstrate that, at best, Mach I had a contested security interest in the Aircraft for $150,000 on the petition date.
The Trustee alternately relies on several instances where Wright Flight supposedly admitted that title vested in Mach I as a result of the so-called foreclosure process and/or the issuance of the FAA Registration Certificate. The Trustee's reliance on Wright Flight's inartful statements concerning title is misplaced. Wright Flight consistently argued that Mach I never acquired valid title to the Aircraft. Wright Flight best explained its position at the hearing on the Reconsideration Motion, when its counsel stated, " You have to look at how this all happened. You have to understand that the documents are, in essence, a fraud perpetrated upon the FAA that resulted in registration being transferred, not title." Hearing Transcript (Dec. 14, 2010) at 5:18-21.
Before bankruptcy, Mach I neither " repossessed" nor " foreclosed" upon the Aircraft. Whatever the act of " red tagging" the Aircraft accomplished, the Trustee can point us to no authority that such an action effected either a repossession or transfer of title to the Aircraft. Although the parties did not fully explain the procedure, and thus it was inappropriate to enter summary judgment based on the procedure's effect, " red tagging" apparently can occur for a variety of reasons, including a maintenance issue that makes the airplane or its key components unusable. In short, a material issue of fact remains as to the effect of " red tagging" the Aircraft on possession or title.
For additional discussion of red tagging, please refer to note 7, supra.
Moreover, there is nothing in the record to suggest that either Mach I or Zinger (Mach I's repossession agent) ever wrested physical control of the Aircraft from Wright Flight. To the contrary, all of the evidence in the record tends to show that Wright Flight has maintained physical custody and control of the Aircraft to this day.
The Trustee acknowledged at oral argument that Article 9 of the Uniform Commercial Code governs the foreclosure process related to the Aircraft, and hence whether Mach I now owns the Aircraft. But the Trustee's pleadings and the record do not establish that any transfer of title occurred under Article 9. Under Article 9, for example, even if Mach I had repossessed the Aircraft (which it did not), taking possession does not by itself constitute foreclosure and transfer of title. Generally speaking, foreclosure and transfer of title must be accomplished by a sale, lease or other disposition of the collateral, or by compliance with the strict foreclosure procedures in Article 9. See Crosby v. Reed (In re Crosby), 176 B.R. 189, 191 (9th Cir. BAP 1994) (holding that secured creditors did not accept repossessed collateral in satisfaction of debt when they temporarily retained the collateral before sale but never carried out any of the steps required for strict foreclosure), aff'd, 85 F.3d 634 (table)(9th Cir. 1996); see also Cal. Comm. Code § § 9610; 9620 - 9623. Given the absence of any evidence of the effect of " red tagging" on possession or title, there remains a material issue of fact as to whether Riggs or Mach I divested Wright Flight of title before Mach I filed its bankruptcy case.
The Trustee strenuously argued to the bankruptcy court that the FAA Registration Certificate transferred title from Wright Flight to Mach I, and the bankruptcy court apparently credited this argument. This was error, and requires a short explanation of the statutes governing aircraft registration.
Pursuant to 49 U.S.C. § 44103(c), a certificate of registration issued by the FAA is " not evidence of ownership of an aircraft in a proceeding in which ownership is or may be in issue." 49 U.S.C. § 44103(c)(West 2011)(emphasis added). Simply put, 49 U.S.C. § 44103(c) " shows that between two parties claiming title to an aircraft, FAA registration is meaningless." Sec'y of U.S. Air Force v. Commemorative Air Force, 585 F.3d 895, 900 (6th Cir. 2009); Koppie v. United States, 1 F.3d 651, 653 (7th Cir.1993) (certificate of registration is " worthless as far as proving ownership"); Hamilton v. Moore Flying, Inc. (In re Hamilton), 197 B.R. 305, 306 (Bankr. E.D. Ark. 1996) (in turnover proceeding, court finds that " registration with the FAA is not evidence of ownership . . . ."). Since ownership of the Aircraft is most definitely at issue in this case, the bankruptcy court erred in giving any weight to the FAA Registration Certificate as evidence of a disposition under Article 9.
B. The bankruptcy court misconstrued the Adversary Complaint.
The bankruptcy court made the following conclusions of law:
2. Wright Flight seeks recovery for the wrongful conversion of the Aircraft by Mach I. The Aircraft is personal property. Under California law, damages for the wrongful conversion of personal property is presumed to be first, the value of the property at the time of the conversion, with interest from that time, or, an amount sufficient to indemnify the party injured for the loss which is the natural, reasonable, and proximate result of the wrongful act complained of and which a proper degree of prudence on its part would not have averted; and second, a fair compensation for the time and money properly expended in the pursuit of the property. California Civil Code § 3336.
3. Whether or not Plaintiff Wright Flight establishes a right to any of the equitable relief sought in its Complaint, its right to damages for conversion under California law provides an adequate alternative under California law.
4. The relief sought, therefore, in Plaintiff's Complaint is a claim within the definition of claims set forth in 11 U.S.C. § 101(5)(A), (B).
Statement of Uncontroverted Facts and Conclusions of Law (Nov. 9, 2010) at 4:3-21 (emphasis added). Alternately stated, the court concluded as a matter of law that Wright Flight's Adversary Complaint sought relief on account of Mach I's conversion of the Aircraft. That simply is incorrect.
The Trustee moved for Summary Judgment largely on the proposition that Wright Flight's Adversary Complaint sought relief for conversion. This view mischaracterizes the relief sought in the Adversary Complaint. Neither the word " conversion" nor any claim for relief resembling conversion is included in Wright Flight's Adversary Complaint. On its face, the relief sought in the Adversary Complaint consists of three claims for relief, each couched entirely in equitable terms.
In California, " 'Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion are [1] the plaintiff's ownership or right to possession of the property at the time of the conversion; [2] the defendant's conversion by a wrongful act or disposition of property rights; and [3] damages.'" Plummer v. Day/Eisenberg, LLP, 184 Cal.App.4th 38, 45, 108 Cal.Rptr.3d 455, 460-461 (2010)(citing Farmers Ins. Exchange v. Zerin 53 Cal.App.4th 445, 451-452, 61 Cal.Rptr.2d 707 (1997)). Although each of these elements may be found at different locations within the Adversary Complaint, they are not set forth together or pled as a claim for relief therein.
Wright Flight's First Claim for Relief sought a declaration that the Aircraft Loan Agreement and the Security Agreement were a sham and the product of fraud, and that neither Mach I nor Riggs acquired any right to or interest in the Aircraft by virtue of these documents. Wright Flight's Second Claim for Relief sought cancellation of the various written instruments that Mach I had presented in support of its purported loan to Wright Flight and its supposed foreclosure of the Aircraft. Finally, its Third Claim for Relief sought (to the extent it had lost title) to have the title to the Aircraft transferred back to Wright Flight from Mach I.
Thus, the Adversary Complaint set forth three equitable claims for relief based on the allegedly fraudulent circumstances and documentation surrounding Mach I's purported interest in the Aircraft. Notwithstanding the contents of the Adversary Complaint, the Trustee in the summary judgment proceedings treated Wright Flight's equitable claims as an alternative claim for conversion. The bankruptcy court adopted in toto the conclusions of law proffered by the Trustee, including the Trustee's mischaracterization of Wright Flight's Adversary Complaint. Consequently, the court erred because it did not inquire into the legal questions actually posed by the Adversary Complaint. Instead, the court followed the Trustee's lead to a legal issue not actually before the court, arising from a nonexistent claim for conversion.
C. The bankruptcy court incorrectly determined that the Adversary Complaint constituted a claim under § 101(5)(B).
The Trustee argued and the bankruptcy court ruled that the equitable relief sought by Wright Flight could be given a dollar value. As such, the court held that Wright Flight's Adversary Complaint was within the definition of " claim" for bankruptcy purposes. Therefore, the court opined that Wright Flight's " claim" was a proper subject for the claims administration process, but not for an adversary proceeding. We disagree.
Under § 101(5)(B), " claim" means a
right to payment, whether or not such right has been reduced to judgment, or a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
Congress gave the term " claim" the " broadest available definition." F.C.C. v. NextWave Pers. Commc'ns, 537 U.S. 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003)(quoting Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)(internal quotation marks omitted)).
On the other hand, " [i]f the only remedy allowed by law is non-monetary, then the equitable remedy is not considered a claim for purposes of bankruptcy and it survives the discharge of the debtor." TKO Prop., LLC v. Young (In re Young), 214 B.R. 905, 912 (Bankr. D. Idaho 1997) (citing In re Aslan, 65 B.R. 826, 831 (Bankr. C.D.Cal. 1986)). See also 2 Collier on Bankruptcy ¶ 101.05[5] (Alan Resnick & Henry Sommer, eds., 16th ed. 2011) (" When there is no money damage alternative to state court ordered equitable remedies such as resulting trust, partition in kind, or deed reformation, they do not fit the definition of claim under section 101(5)").
According to Young, Congress enacted this provision,
We thus must look to applicable nonbankruptcy law, in this case California law, to determine whether a money judgment would give Wright Flight a viable alternative to its requested equitable remedies. See, e.g., In re Ben Franklin Hotel Assocs., 186 F.3d 301, 306 (3d Cir. 1999) (money damages not a " viable alternative" to equitable reinstatement of a partnership interest in a partnership owning unique commercial property); Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994) (equitable relief for violation of restrictive, reciprocal land covenant not a claim); Sheerin v. Davis (In re Davis), 3 F.3d 113 (5th Cir. 1993) (equitable remedies of resulting trust, partition in kind, deed reformation are not claims); In re Young, 214 B.R. at 912. If money damages are not a viable alternative, then Wright Flight's equitable remedies should not be treated as a claim under § 101(5)(B), and the Trustee's argument fails.
Here, the bankruptcy court ruled in part that Wright Flight's Adversary Complaint sought a recovery for wrongful conversion of the Aircraft and that the primary remedy for conversion under California law is damages equal to the value of the converted property. However, as discussed above, the bankruptcy court erred when it construed the Adversary Complaint as including a claim for conversion. In fact, the Adversary Complaint seeks only equitable remedies for which there are no readily equivalent claims for relief for monetary damages.
Applying the analytic framework from Ben Franklin Hotel, Young, and similar cases, Wright Flight's claims for relief do not constitute claims within the meaning of § 101(5)(B). Wright Flight's equitable claims for declaratory relief, cancellation of documents, and for quiet title to its property have no precise or viable damage alternatives. See In re Ben Franklin Hotel Assocs., 186 F.3d at 306 (no claim exists if under nonbankruptcy law money damages are not " a viable alternative").
Under California law, a claim for the recovery of specific property and damages for wrongful retention (which Wright Flight pled in its Adversary Complaint), and a claim for damages arising from the conversion of the property (which Wright Flight did not plead), are distinct claims for relief with distinct remedies. See, e.g., Taylor v. Forte Hotels Int'l, 235 Cal.App.3d 1119, 1 Cal.Rptr.2d 189 (1991). California law permits the recovery of personal property and the recovery of damages for the wrongful retention of that property. Therefore, the remedies sought by Wright Flight in its Third Claim for Relief (Transfer of Title) are cumulative and not mutually exclusive. Furthermore, Wright Flight was prepared to waive its claim for monetary relief to the extent that this cumulative claim confused the issues regarding its requested equitable relief.
In sum, even though Wright Flight's Adversary Complaint potentially could have given rise to a right to payment if Wright Flight had pled a claim for relief for conversion, that is not how Wright Flight pled its case, nor are money damages a viable alternative to the equitable relief sought. Accordingly, the bankruptcy court incorrectly determined that Wright Flight's requested equitable relief constituted a " claim" under § 101(5)(B).
CONCLUSION
For all of the reasons set forth above, the summary judgment of the bankruptcy court is REVERSED, and this matter is REMANDED to the bankruptcy court for further proceedings.
The fact that Wright Flight was pursuing a conversion cause of action in the State Court Action is not dispositive of the claims for relief that Wright Flight could or did plead in the Bankruptcy Court. The Adversary Complaint speaks for itself.
to cause the liquidation or estimation of contingent rights of payment for which there may be an alternate equitable remedy with the result that the equitable remedy will be susceptible to being discharged in bankruptcy.
In re Young, 214 B.R. at 912 (quoting 124 Cong. Rec. H11089 (Sept. 28, 1978)).