Case Name: California State Labor Commissioner v. Cypress 3, Inc., et al.

Case No.: 16-CV-292543

Demurrer by Defendants Cypress 3, Inc., Arehil 5, LLC, Bessie Arellano, and Vicente Arellano to the Complaint of Plaintiff California State Labor Commissioner

Factual and Procedural Background

This is an action for fraudulent transfer. Plaintiff California State Labor Commissioner (“Plaintiff”) seeks to enforce judgments for the payment of wages and penalties awarded to the original judgment creditors, Virginia Ramos and Samuel Ramos (“Original Judgment Creditors”), against defendant Cypress 3, Inc. (“Cypress”). (Complaint, ¶ 1.) Cypress was a residential home care business operated by defendants Bessie Arellano and Vicente Arellano (collectively, the “Arellanos”), who were 50 percent shareholders of Cypress. (Id., at ¶ 2.) A few weeks after the Original Judgment Creditors were awarded monetary damages against Cypress, Cypress closed down and filed a bankruptcy petition. (Id., at ¶ 3.) Subsequently, the Original Judgment Creditors assigned their judgments to Plaintiff. (Id., at ¶¶ 1, 4.)

Since the judgments were entered, Cypress has not made any payments to Plaintiff or the Original Judgment Creditors and Plaintiff “has been unable to enforce the judgment[s] because Defendants have obstructed, delayed, and hindered Plaintiff’s collection of these claims through abuse of corporate protections and acts of fraud and fraudulent transfer.” (Complaint, ¶¶ 1, 5.) Specifically, Cypress overpaid rent to defendant Arehil 5, LLC (“Arehil”), an entity owned solely by the Arellanos and/or their adult children, from 2007 to 2014; the Arellanos transferred title of four properties to Arehil for zero or nominal value; and the Arellanos and Arehil caused of transfer of the tangible and intangible assets of Cypress—including goodwill, clients/patients, business relationships, revenue streams, and/or the services of employees—for no consideration or less than the reasonably equivalent value. (Id., at ¶¶ 6-7.) The asset transfers left Cypress insolvent and without assets to satisfy the judgments. (Id., at ¶¶ 8-10.)

Based on the foregoing, Plaintiff filed a complaint against Cypress, Arehil, and the Arellanos (collectively, “Defendants”), alleging causes of action for: (1) constructive fraudulent transfer; (2) intentional fraudulent transfer; (3) violation of Business and Professions Code section 17200, et seq.; (4) alter ego liability; (5) improper distribution of corporate assets under Corporations Code section 316; and (6) improper shareholder distribution under Corporations Code sections 2009-2011.

On May 5, 2016, Defendants filed the instant demurrer to the complaint. Plaintiff filed papers in opposition to the demurrer on May 31, 2016.[1]

Discussion

Defendants demur to each and every cause of action of the complaint on the ground of lack of subject matter jurisdiction. (See Code Civ. Proc., § 430.10, subd. (a).)

  1. Request for Judicial Notice

Defendants’ request for judicial notice of various documents filed in the bankruptcy case of In re Cypress 3, Inc. (United States Bankruptcy Court, Northern District of California, Case No. 14-54278 ASW) and printouts from the bankruptcy court’s online docket is GRANTED. (See Request for Judicial Notice (“RJN”), Exs. A-K; see also Evid. Code, § 452, subd. (d); People v. Woodell (1998) 17 Cal.4th 448, 455.)

  1. Legal Standard

“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.’ ” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

III. Analysis

Defendants argue that the Court lacks subject matter jurisdiction of the causes of action alleged in the complaint because Cypress filed a petition for Chapter 7 bankruptcy; the claims set forth in the complaint relate to Cypress’ pre-bankruptcy assets; the appointed bankruptcy trustee filed a Trustee’s Report of No Distribution, certifying that he had not received any property and there was no property available for distribution from the estate; the bankruptcy court issued a Final Decree, discharging the trustee and closing the bankruptcy case; Plaintiff did not file a Proof of Claim in the bankruptcy case; the bankruptcy court has exclusive jurisdiction over bankruptcy cases and the property of the debtor, Cypress; this jurisdiction also includes related civil proceedings, such as the present action; the bankruptcy court’s jurisdiction may be dormant after case closure, but still exists; and Plaintiff should have raised these claims in the bankruptcy court. (See Mem. Ps. & As., pp. 4-6.)

In opposition, Plaintiff argues that this Court has subject matter jurisdiction over the claims alleged in the complaint because a corporation’s debts are not discharged in Chapter 7 bankruptcy proceedings; the bankruptcy proceedings are closed such that there is no stay on the enforcement of debt by creditors; the filing of the Trustee’s Report of No Distribution was essentially a “no asset” report, constituting an abandonment of any interest the bankruptcy trustee had in Cypress’ pre-bankruptcy assets; since the trustee chose to abandon Cypress’ assets, any such property is no longer property of the estate subject to the jurisdiction of the bankruptcy court; and after the abandonment of the property and closure of the case, a plaintiff may properly bring claims for fraudulent transfer.

 

As Plaintiff persuasively argues, the case of Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828 (“Brenelli”) is instructive on this issue. In Brenelli, the appellant was awarded a judgment against the respondent corporation in a prior case. (Id., at p. 1833.) Before the appellant could execute on its judgment, the respondent filed a Chapter 7 bankruptcy petition. (Ibid.) The bankruptcy trustee filed a “no asset” report and the court closed the bankruptcy case.[2] (Id., at pp. 1833, 1842.) No part of appellant’s judgment was satisfied through the bankruptcy estate. (Id., at p. 1833.) Thereafter, the appellant commenced a civil action against the corporation and its individual shareholders, alleging claims for alter ego liability, fraudulent conveyance, conspiracy to fraudulently transfer corporate assets, accounting of profits, intentional misrepresentation of fact, suppression of fact, conspiracy to defraud, and conversion.

(Ibid.) The trial court sustained the respondent’s demurrer without leave to amend to the counts for fraudulent conveyance, conspiracy to fraudulently transfer, and an accounting of profits because it held only a bankruptcy trustee, and not an individual creditor, could pursue a fraudulent conveyance action. (Id., at pp. 1834, 1842.)

 

On appeal, the appellant contended an individual creditor may maintain a fraudulent conveyance action against corporate shareholders where the corporate debtor’s bankruptcy case was closed. (Brenelli, supra, 29 Cal.App.4th at p. 1842.) Agreeing with appellant, the Court of Appeal pointed out that the cases respondent relied on for the proposition that a bankruptcy trustee had exclusive authority over an action for fraudulent transfer did not apply because they involved actions to set aside fraudulent conveyances brought while a bankruptcy case was still open and under the jurisdiction of the bankruptcy court. (Ibid.) The court found that the “no-asset” report was tantamount to an abandonment of the trustee’s interest in the property and the trustee was divested of control of the property because the case was closed and the property was no longer part of the bankruptcy estate. (Ibid.) Because the trustee chose to abandon its interest in the property, any such property was no longer subject to the jurisdiction of the bankruptcy court. (Brenelli, supra, 29 Cal.App.4th at p. 1845.) Thus, the Court of Appeal held that “it was error for the trial court to sustain the demurrer without leave to amend to [the] appellant’s claims for fraudulent conveyance and related claims, on the basis the bankruptcy trustee had exclusive jurisdiction.” (Ibid.)

 

The facts of this case are analogous to Brenelli. The Original Judgment Creditors obtained judgments against Cypress in a prior case and assigned those judgments to Plaintiff. (Complaint, ¶¶ 1-4.) Before Plaintiff was able to execute those judgments, Cypress filed a petition for Chapter 7 bankruptcy. (Ibid.) The bankruptcy trustee appointed in the Chapter 7 proceeding eventually filed a Trustee’s Report of No Distribution, indicating that he neither received any property nor paid any money on account of the estate, he made a diligent inquiry into the whereabouts of property belonging to the estate, there was no property available for distribution from the estate over above that exempted by law, $200 in assets were abandoned, no assets were exempt, the claims scheduled totaled $268,980.07, and he requested to be discharged from his duties as trustee. (RJN, Ex. I.) The Trustee’s Report of No Distribution is substantially similar to the “no asset” report at issue in Brenelli and, therefore, constitutes an abandonment of the bankruptcy trustee’s interest in Cypress’ property. (See Brenelli, supra, 29 Cal.App.4th at p. 1842; see also RJN, Ex. I.) Since the bankruptcy case was closed on the same date the report was issued, Cypress’ property is no longer subject to the jurisdiction of the bankruptcy court. (See Brenelli, supra, 29 Cal.App.4th at pp. 1842, 1845; see also RJN, Ex. J.) Consequently, Defendants fail to demonstrate that the causes of action set forth in the complaint are within the exclusive jurisdiction of the bankruptcy court such that this Court lacks subject matter jurisdiction.

 

Accordingly, the demurrer to the complaint is OVERRULED.

[1] Plaintiff’s opposition was filed four court days late as opposition papers were due on May 24, 2016, nine court days before the hearing. (See Code Civ. Proc., § 1005, subd. (b).) Plaintiff indicates that Defendants’ counsel stipulated to the late filing of the opposition and “if Defense Counsel decides to file a reply, the parties stipulate to a new hearing date.” (Ntc. of Opp’n., p. 2:9-11.) While the parties may have come to an agreement regarding the late filing of the opposition, no such stipulation has been filed with or become an order of the Court and Plaintiff did not otherwise seek or obtain the Court’s permission to file its opposition after the statutory deadline. (See Code Civ. Proc., § 1005, subd. (b) [providing that only “[t]he court, or a judge thereof, may prescribe a shorter time”].) Consequently, the late-filing of the opposition was improper. The Court has discretion—but is not required—to refuse to consider any late-filed paper. (Cal. Rules of Court, rule 3.1300(d).) In order to move the case forward, the Court, in its discretion, will consider the opposition. Plaintiff is admonished that all future filings must comply with the Code of Civil Procedure and California Rules of Court.

[2] The “no asset” report “stated: ‘The undersigned, duly appointed Chapter 7 Trustee of the estate of the above-mentioned debtor(s), reports that he/she has neither received any property nor paid any money on account of this estate; that he/she has made diligent inquiry into the whereabouts of property belonging to the estate; that he/she has no objections to the exemptions claimed; and that assets scheduled and not claimed exempt are encumbered beyond value, or are otherwise of negligible value and the Trustee asserts no interest in them. ‘Wherefore, the Trustee requests that this report be approved, that he/she be discharged from office, and his/her bond exonerated, and for all other applicable orders.’ ” (Brenelli, supra, 29 Cal.App.4th at p. 1842, fn. 5.)