Asa Hami’s e-Bulletin re Tracht Gut

Dear constituency list members of the Insolvency Law Committee, the following is a recent case update:

SUMMARY

The Bankruptcy Appellate Panel of the Ninth Circuit affirmed the bankruptcy court’s dismissal, with prejudice, of a debtor’s fraudulent transfer action seeking to avoid the sale of tax-defaulted real property because: (i) the complaint failed to allege sufficient facts, (ii) the debtor unduly delayed in seeking to amend the complaint, and (iii) amendment of the complaint was futile, since a properly conducted sale of tax-defaulted real property establishes reasonably equivalent value as a matter of law.  Tracht Gut, LLC v. County of Los Angeles (In re Tracht Gut, LLC), 12-20308 (MT); CC-13-1229-PaTaD (B.A.P. 9th Cir. Jan. 3, 2014).  To read the full decision, click here:  http://cdn.ca9.uscourts.gov/datastore/bap/2014/01/03/TrachtGut-13-1229.pdf. 

FACTS AND THE BANKRUPTCY COURT’S DECISION

In April of 2012, Tracht Gut, LLC (“Debtor”) purchased two parcels of real property, both located in Los Angeles County.  Both properties were tax-defaulted pursuant to California tax law and subject to the Los Angeles County Tax Collector’s (the “County“) power to sell three years after default.  The County conducted a tax sale of the properties in October of 2012.  The tax sale was regularly conducted in accordance with all applicable statutory requirements.  Debtor subsequently filed a petition under chapter 11 in November of 2012.  Although the tax sale occurred pre-petition, tax deeds transferring title of the properties were not recorded until after Debtor had filed bankruptcy.

In December of 2012, Debtor commenced an adversary proceeding against the County, seeking to avoid the tax sales as fraudulent transfers, asserting the post-petition recordation of the tax deeds violated the automatic stay, and other ancillary claims.  The bankruptcy court granted the County’s motion to dismiss under Fed. R. Civ. P. 12(b)(6) and denied Debtor leave to amend the complaint. 

The court noted that Debtor’s complaint was clearly filed as a “placeholder” and was “unbelievably bad.”  The court did not to grant leave to amend for several reasons.

First, granting leave to amend would be futile because Debtor could never plead any facts to support its fraudulent transfer claim; since the tax sale occurred prior to the bankruptcy filing, the properties were never property of the estate under 11 U.S.C. § 541.  Second, post-petition recording of the tax deeds could not violate the automatic stay in 11 U.S.C. § 362 because it was “solely a ministerial action.”  Third, Debtor could never allege that a duly conducted tax sale of the subject properties could be the basis of an action under 11 U.S.C. §§ 548 and 549. 

The court later denied Debtor’s motion for reconsideration to amend the complaint, in large part because Debtor waited too long to attempt amendment. 

THE BANKRUPTCY APPELLATE PANEL’S HOLDING AND ANALYSIS

The Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) affirmed.   

Addressing Debtor’s claims, the BAP held the court’s dismissal of the complaint was proper because “even liberally read, Debtor’s complaint presented no factual matter to support its prayer for relief.”  The BAP agreed with the bankruptcy court’s rationale, holding that the two properties never became property of the estate under 11 U.S.C. § 541, and further that the recording of the tax deeds post-petition would not have violated the automatic stay, since that type of ministerial act is not enjoined by the stay. 

The BAP affirmed the court’s denial of leave to amend, holding that the court’s two bases for denying leave to amend–undue delay and futility–were adequate to sustain the decision.  The BAP held Debtor’s right to amend the complaint as a matter of course had expired 21 days after service of the County’s 12(b)(6) motion, and Debtor was culpable for its failure to exercise diligence in seeking to amend the complaint.  The BAP further held that any amendment to Debtor’s fraudulent transfer claim would be futile because a duly conducted tax sale of tax-defaulted real property under California law conclusively establishes an exchange of “reasonably equivalent value,” and Debtor did not assert any irregularities or actual fraud in connection with the tax sale.

AUTHOR’S COMMENT

This decision is a valuable reminder that a complaint must contain more than mere recitations of the statutory elements of a claim.  If a deficient complaint is initially filed as a placeholder, it should be amended as soon as possible—and certainly within the statutory period for amendment as a matter of right. 

These materials were written by Asa S. Hami, an attorney at SulmeyerKupetz APC in Los Angeles, California (ahami@sulmeyerlaw.com).  Mr. Hami is a member of the Insolvency Law Committee.  Editorial contributions were provided by ILC member Ori Katz, a partner at Sheppard Mullin in San Francisco, California.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee