Published on:

Bankruptcy Court Order Invalidating Sale of Real Estate Affirmed by Ninth Circuit

Coolcaesar [GFDL (http://www.gnu.org/licenses/fdl.html), CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0/deed.en)], via Wikimedia CommonsThe Ninth Circuit Court of Appeals affirmed a bankruptcy court order invalidating the sale of real estate located in Mexico, based on a finding that the sale was an unauthorized transfer made after the debtors filed their bankruptcy petition. In re Icenhower, No. 10-55933, slip op. (9th Cir., Jul. 3, 2014). The purchasers of the real estate appealed the bankruptcy court’s order, raising several points of error about the court’s jurisdiction over real property in Mexico and its application of U.S. law. They also challenged the court’s finding that the purchase of the property was conducted in bad faith.

The debtors purchased an interest in a coastal villa in Jalisco, Mexico in 1995. Because of legal restrictions on land ownership within 50 kilometers of the coast by foreigners, the debtors did not hold title to the property but rather had a beneficial interest in a trust that gave them the right to use it.

In March 2002, the debtors purchased a shell company called H&G. They transferred the villa interest to H&G on the same day. H&G agreed to pay the debtors $100,000 for the villa interest and assume $140,000 of debt. Almost two years later, in December 2003, the debtors filed for bankruptcy. H&G sold the villa interest to the appellants for $1.5 million in June 2004.

The bankruptcy trustee filed two actions to avoid the sale of the villa interest. One claimed that the sale to H&G was a “fraudulent pre-petition transfer,” and the other that the sale to the appellants was an “unauthorized postpetition transfer” because H&G was the debtors’ “alter ego.” Id. at 7. After a bench trial in June 2008, the bankruptcy court ruled that H&G was an alter ego of the debtors, and that the sale of the villa interest to the appellants was invalid.

According to its findings, H&G never made the promised cash payment for the villa interest, and the debtors retained control over the villa even after the sale to H&G. The court also found that H&G’s president and director, the only person to hold an officer or director position, “served in a purely titular capacity” and answered to the debtors. Id. at 6. Prior to closing the sale of the villa interest, the court found that the debtors negotiated a lower purchase price based on debts owed to them personally, not to H&G. It ordered the appellants to convey the villa interest to Kismet Acquisition, LLC, which had purchased the assets of the bankruptcy estate and been substituted for the trustee.

The appeal primarily concerned questions of jurisdiction over real property, conflicts of law between nations, and choice-of-law clauses in contracts. The Ninth Circuit affirmed the bankruptcy court’s order. On the question of whether the court erred in finding that the appellants acted in bad faith, the Ninth Circuit held that the appellants had actual or constructive notice of “numerous red flags surrounding the sale,” id. at 16. In a separate ruling issued about a week earlier, the Ninth Circuit affirmed a sanctions order against the appellants for failing to convey the property to Kismet as ordered. In re Icenhower, No. 12-56329, slip op. (9th. Cir., Jun. 26, 2014).

Bankruptcy attorney Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies since 1997, helping them rebuild their finances with dignity and respect. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-939.

More Blog Posts:

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Creditor Challenges Debtor’s Transfer of Business Assets to Himself Prior to Chapter 13 Bankruptcy Filing, Los Angeles Bankruptcy Lawyer Blawg, December 16, 2013

Quitclaim Deed Deemed a Fraudulent Transfer by California District Court, Los Angeles Bankruptcy Lawyer Blawg, November 26, 2013

Photo credit: Coolcaesar [GFDL, CC BY-SA 3.0], via Wikimedia Commons.