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In re Advanced Packaging and Products Co.

January 12, 2010

IN RE ADVANCED PACKAGING AND PRODUCTS COMPANY, DEBTOR.
GINGER ROOT OFFICE ASSOCIATES, LLC, APPELLANT,
v.
DAVID Y. FARMER, CHAPTER 7 TRUSTEE, APPELLEE.



The opinion of the court was delivered by: Margaret M. Morrow United States District Judge

BANKRUPTCY NO. ND 08-11392-RR

ORDER AFFIRMING AND REVERSING JUDGMENTS OF THE UNITED STATES BANKRUPTCY COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA

Appellant Ginger Root Office Associates, LLC ("Ginger Root") appeals an order of the bankruptcy court granting a motion for summary judgment filed by the bankruptcy trustee of Advanced Packaging and Products Company in Ginger Root's adversary proceeding against him. The trustee argued that Ginger Root's alter ego claim against PJH Brands was an asset of the Advanced Packaging and Products Company bankruptcy estate under 11 U.S.C. § 541(a)(1), and the bankruptcy court agreed.*fn1 Ginger Root also appeals the bankruptcy court's subsequent order approving the estate's sale of the alter ego claim to PJH Brands.*fn2 The bankruptcy court's summary judgment order was entered on June 26, 2009, and its order approving the sale was entered on July 29, 2009; appellant filed timely notices of appeal as to both orders under 28 U.S.C. § 158(c)(2) and Rule 8002(a) of the Federal Rules of Bankruptcy Procedure.*fn3 This court has jurisdiction to hear appeals from "final judgments, orders, and decrees" of the bankruptcy court. 28 U.S.C. § 158(a).

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Ginger Root's Alter Ego Claim

The facts underlying Ginger Root's alter ego claim are not in dispute.*fn4 From 1989 to 2007, Advanced Packaging and Products Company ("APP") leased property located at 16131 Maple Avenue in Gardena, California from Ginger Root and its predecessors in interest.*fn5 APP conducted business operations on the property that included manufacturing, assembling, packaging, mixing, distributing and warehousing paint, paint supplies, aerosol and related materials.*fn6 During the course of its operations at the property, APP stored "hazardous substances" as that term is defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA'), 42 U.S.C. § 9601 et seq.*fn7

One or more releases of hazardous substances occurred while APP was leasing the property, and subsequent investigations have revealed elevated levels of hazardous substances in the soil and groundwater.*fn8 As early as 2004, Ginger Root began demanding that APP remediate the site.*fn9 On January 9, 2006, a fire occurred at the property, resulting in a substantial additional release of hazardous substances in APP's storage yard and onto adjacent property through fire-suppression runoff.*fn10 As a result, the Environmental Protection Agency asserted jurisdiction over the site, and issued an administrative order requiring removal of above-ground contamination at the property.*fn11

The California Regional Water Quality Control Board requested groundwater sampling, which indicated elevated levels of hazardous substances in the soil and groundwater at the property.*fn12

As a result of this environmental contamination, Ginger Root alleges that the market value of the property has diminished,*fn13 and that it is now liable for continued environmental cleanup and monitoring costs under CERCLA and similar regulations.*fn14 Further, Ginger Root alleges that it incurred damages in the form of necessary repair costs following the 2006 fire and subsequent environmental investigations.*fn15 Finally, Ginger Root seeks breach of contract damages for APP's failure to pay rent, and for the potential liability it faces as a result of the fire and related release of hazardous substances.*fn16

1. Ginger Root's State Court Claims

On June 20, 2006, Ginger Root filed a cross-complaint in Los Angeles Superior Court against APP, PJH Brands and Steven Renshaw, seeking damages caused by the 2006 fire.*fn17 Many of Ginger Root's state court claims have now been settled, and the only remaining cross-defendants are APP and PJH Brands ("PJHB").*fn18 Ginger Root is pursuing claims against APP and PJHB for negligence, breach of contract and nuisance.*fn19 Additionally, it seeks declaratory relief regarding the companies' obligations under the lease to defend and indemnify it against third-party claims.*fn20

While each of these claims is alleged collectively against APP and PJHB, Ginger Root asserts that it has sued PJHB both "individually and as an alter ego of APP."*fn21 Indeed, Ginger Root's state court complaint contains several allegations related to PJHB's liability as an alter ego, including: (1) that "APP was insufficiently capitalized"; (2) that PJHB "utilized the assets, funds, equipment, and/or capital of APP for [its] own purposes and use"; (3) that "APP was merely a shell, conduit, and/or instrumentality through which [PJHB conducted its] personal business"; (4) that PJHB "exercised such complete control over APP and its business activities... that its separateness, individuality, and independence from [PJHB] did not exist"; and (5) that "corporate formalities recognizing the separateness of APP as an entity separate and apart from [PJHB] were not observed."*fn22

2. Ginger Root's Federal Claims

On August 24, 2007, Ginger Root filed a federal action against APP, PJHB and Steven Renshaw based on below-ground contamination of soil and groundwater at the property due to long-term releases of hazardous substances.*fn23 Renshaw was dismissed on December 31, 2008, and APP's default was entered on February 18, 2009, leaving PJHB as the sole active defendant. While Ginger Root's federal complaint pleads seven causes of action, it represents that it is pursuing only three claims against APP and PJHB: (1) cost recovery under CERCLA, (2) breach of the lease agreement, and (3) continuing public nuisance.*fn24 The CERCLA and nuisance claims are asserted against "defendants" collectively, while the breach of contract claim contains specific allegations against each of APP and PJHB.*fn25

Like its state court complaint, Ginger Root's federal complaint alleges an alter ego claim against PJHB. The federal complaint, however, contains none of the allegations found in the state court complaint concerning PJHB's control of APP or APP's undercapitalization. Instead, it states simply that "PJHB is the parent corporation of APP, and is the alter ego of APP."*fn26

While not clearly alleged in either complaint, Ginger Root argues PJHB's alter ego liability is based on its "active[ ] participati[on] in the acts and releases of hazardous substances caused by APP."*fn27 Ginger Root's summary judgment filings adduce no evidence to support this claim, however. Instead, they merely suggest that evidence exists that "will show that PJHB is liable under CERCLA for the acts and releases of hazardous substances caused by APP;... [and]... that PJHB is liable for the contamination cased by APP."*fn28

B. The Bankruptcy Court's Summary Judgment Order

While the state and federal actions were pending, on June 18, 2008, APPfiled a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.*fn29 Appellee David Y. Farmer ("Trustee") was subsequently appointed trustee of the bankruptcy estate.*fn30 The Trustee included an alter ego claim against PJHB, valued at $325,000, among the assets of the bankruptcy estate.*fn31

On February 3, 2009, he filed a complaint in bankruptcy court, seeking declaratory relief that the alter ego claim asserted by Ginger Root in both the federal and state cases was the property of the bankruptcy estate under 11. U.S.C. § 541(a)(1).*fn32 At the time of this filing, the Trustee had already negotiated a potential sale of the claims to -- or more aptly stated, had settled the claims with -- PJHB.*fn33 The Trustee subsequently filed a motion for summary judgment regarding the estate's ownership of the claims,*fn34 which Ginger Root opposed.*fn35 Ginger Root filed a cross-motion for summary judgment, asserting that its alter ego claim was not the property of APP's bankruptcy estate.*fn36

On June 26, 2009, the bankruptcy court heard the cross-motions.*fn37 Rejecting Ginger Root's arguments to the contrary, the bankruptcy court found that it had not alleged in either its state or federal complaint that PJHB acted independently of APP in connection with operations on the property. The court noted at the hearing on the motions that "there [was] nothing in [the complaints] that alleges that PJHB was operating on the property independently, for its own purposes, other than as the alter ego of APP."*fn38 Consequently, the bankruptcy court concluded that Ginger Root's alter ego claim against PJHB was general in nature, and was the property of APP's bankruptcy estate. It stated: "[T]here's no theory stated that PJHB did anything independently of APP. It was its alter ego, and [Ginger Root] may now want to reanalyze the complaint so that [it] think[s] it states that PJHB did something affirmative all on its own, but my reading of... each of the complaints, is that PJHB is alleged to be the alter ego of APP and, as such, is also liable, which outside of bankruptcy might be perfectly fine. However, the Trustee can administer an alter ego claim for relief for the benefit of all of the creditors."*fn39

Accordingly, the bankruptcy court granted the Trustee's motion and denied Ginger Root's cross-motion, signing an order prepared by the Trustee.*fn40 At the conclusion of the hearing, Ginger Root sought to clarify the scope of the bankruptcy court's order, i.e., to confirm that "to the extent that we have direct claims, those are not property of the estate?"*fn41 The bankruptcy court responded: "If you have direct claims because PJHB was out there with its little PJHB hat on, doing bad things, then you have a direct claim and not an alter ego claim, but... I'm not ruling on that."*fn42 On July 2, 2009, Ginger Root appealed the bankruptcy court's order granting the Trustee's motion for summary judgment. It elected to have the appeal heard by the district court.*fn43

C. The Bankruptcy Court's Approval of the Sale of the Alter Ego Claim

On February 5, 2009, just after filing his motion for summary judgment on the alter ego claim, the Trustee filed a motion seeking authority from the bankruptcy court to enter into an asset purchase agreement with PJHB.*fn44 Although the Trustee did not request authority actually to sell the assets, he sought preliminary authorization to enter into the agreement so that he could receive the nonrefundable deposit of $26,719.45 that PJHB had committed to pay, and that the Trustee required to fund litigation with Ginger Root regarding ownership of the alter ego claim.*fn45 The sale itself was subject to the contingency that the Trustee secure rights to the alter ego claim, which was the primary asset covered by the agreement. The agreement provided that if the Trustee's ownership of the alter ego claim was recognized, PJHB would pay the estate an additional $80,000 to finalize sale of the asset to PJHB;*fn46 if the Trustee was not successful in his adversary proceeding against Ginger Root, however, PJHB could not recoup the deposit it paid to the Trustee.*fn47

While the alter ego claim was the primary asset that the Trustee contemplated transferring, the proposed agreement sold rights to two other claims to PJHB as well. These were: (1) the right to pursue a request previously made by APP to the RWQCB for reimbursement of $600,000 in remediation work and (2) the right to seek recovery from Ginger Root for miscellaneous equipment left at the property.*fn48 The agreement allowed third parties to outbid PJHB's offered purchase price for the rights, and the Trustee gave notice to APP's creditors of the proposed agreement.*fn49

Although Ginger Root filed an objection, arguing that the alter ego claim was not property of the estate,*fn50 the bankruptcy court granted the Trustee's motion on March 3, 2009, and authorized him to enter into the proposed agreement. ...


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