In 2010, a California property developer, Momentum, signed a contract to have an oil well drilled on its real estate. About 2 years into the drilling, in 2012, Momentum, transferred the property to a related but separate entity, Pyramid, for 55¢, without notifying the drilling company. The drilling company apparently did not strike oil, because Momentum sued for breach of contract in 2014, even though it no longer owned the land (an obvious legal contradiction).
Momentum lost at trial (possibly for lack of standing, i.e., it no longer owned the land, and hence, the contract), and a judgment for the drilling company was entered in May 2018 (less than seven years after the 55¢ transfer).
Momentum promptly (June 2018) filed for Chapter 7 (liquidation) bankruptcy, saying that it had no assets.
The bankruptcy put the 55¢ sale in the spotlight. A “fraudulent transfer” is defined as a conveyance intentionally done to deprive creditors of the asset, or a transfer for less than reasonable value, which is made when the debtor is insolvent, or which transfer renders the debtor insolvent. 11 US Code Sec. 548 (a)(1)(A)-(B); Uniform Voidable Transactions Act, § 4(a), at 19.
The bankruptcy Trustee (Diane Weil) discovered the relationship between Momentum and Pyramid, and sued to undo the land deal, as a transfer intended to frustrate creditors. This is an interesting argument, because Momentum sued the drilling company, and not the other way around. The Trustee could have reasoned that the common ownership and management of Pyramid and Momentum was suspicious, and the 2012 transfer could render a countersuit against Momentum meaningless.
The bankruptcy court allowed the Trustee’s suit. California’s Universal Voidable Transactions Act (Civil Code Sec. 3439.09) has a 7-year statute of repose (the maximum time to sue for a wrongful act, even where the other party has not been harmed), and Bankruptcy Code Sec. 546 extends for 2 years the Trustee’s ability to sue on any fraud claim that exists at the time the bankruptcy is filed.
In this case,
1) Momentum in 2012 sold the property to its sister entity, Pyramid, for 55 cents without notifying the oil driller;
2) Momentum became liable for the fraudulent transfer in May 2018, when it lost the Superior Court case against the driller;
3) Momentum filed for Chapter 7 bankruptcy in June 2018;
4) Because California’s 7-year statute of repose for the fraudulent transfer had not expired when Momentum filed for bankruptcy in 2018, the bankruptcy Trustee had an additional 2 years (a maximum of 7 + 2 years) to begin fraud proceedings in the bankruptcy court, with intent to undo the sale and take control of the property, under 11 USC Sec. 546.
The Trustee began her fraudulent transfer proceedings against Momentum and Pyramid in 2019, pursuant to California law. The bankruptcy court held that the Trustee’s action was timely, and the Bankruptcy Appellate Panel affirmed.
WEIL v. PYRAMID CENTER, INC. (IN RE MOMENTUM DEV. LLC), 649 B.R. 33 (9th Circuit Bankruptcy Appellate Panel; Filed March 2, 2023)
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