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Diaz-Barba v. Kismet Acquisition

May 20, 2010


The opinion of the court was delivered by: Honorable Barry Ted Moskowitz United States District Judge


Alejandro Diaz-Barba and Martha Margarita Barba de la Torre have appealed under 28 US.C. § 158(a)(1) from a judgment of the United States Bankruptcy Court for the Southern District of California. For the following reasons, the Court AFFIRMS the judgment.


This is an appeal from a judgment in two bankruptcy avoidance actions. The object of those avoidance actions was the sale of a coastal villa in Mexico (the "Villa"). The Villa is at the heart of this dispute, and both Appellants and Appellee claim that they are its lawful owners.

A. The Icenhowers Purchase the Villa

The Villa has been the object of litigation and bought and sold several times in recent history. In 1995, the D. Donald Lonie, Jr., Family Trust ("Lonie Trust") owned the beneficial interest in the Villa.*fn1 (Excerpts of Record ("ER") 18--51, June 2, 2008 Consolidated Findings of Fact and Conclusions of Law ("FFCL") ¶ 3.) The Lonie Trust agreed to sell its interest in the Villa to Jerry and Donna Icenhower (collectively the "Icenhowers" or "Debtors"). (Id.) Mr. Icenhower executed promissory notes in exchange for the Villa, but a dispute arose regarding the notes and the Lonie Trust sued the Icenhowers in the United States District Court for the Southern District of California.*fn2 (Id.)

The lawsuit sought a determination of the parties' respective rights in the Villa. (Id. at ¶ 4.) The Lonie Trust prevailed, and in 2003 the district court entered judgment against the Icenhowers. (Id. at ¶ 5.) The judgment required the Icenhowers to either (1) pay damages of about $1.36 million and re-register a lien on the Villa as security for the damages; or (2) reconvey the Villa to the Lonie Trust, free of any encumbrances. (Id.)

B. The Icenhowers Transfer the Villa to a Shell Corporation

But before the district court entered that judgment, the Icenhowers had already transferred the Villa to Howell & Gardner Investors, Inc. ("H&G"), a shell corporation. (Id. at ¶ 16.) The Icenhowers received virtually nothing in exchange for transferring the Villa to H&G. (Id.) And under the terms of the sale, Mr. Icenhower retained total control over the Villa. (Id. at ¶ 17.) Not only did Mr. Icenhower control the Villa, but Mr. Icenhower also controlled H&G; it had no real corporate existence apart from him and had no business purpose other than as a sham company to hold the Icenhowers' assets. (Id. at ¶ 14.) Thus, when the district court entered judgment against the Icenhowers and ordered them to either pay damages or return the Villa to the Lonie Trust, H&G-and not the Icenhowers-purportedly owned the Villa.

C. The Icenhowers File for Bankruptcy

Shortly after the district court entered judgment against the Icenhowers, on December 15, 2003 the Icenhowers responded by filing a Chapter 7 bankruptcy petition. (FFCL ¶ 6.) During the course of the bankruptcy, the Icenhowers (or "Debtors") disclosed that they had transferred the Villa to H&G. (Id. at ¶ 44.) And in August 2004, the bankruptcy trustee filed a fraudulent conveyance action to avoid the transfer and recover the Villa (the "Fraudulent Transfer Action"). (Id. at ¶ 45.) But by the time the Court entered a preliminary injunction preventing H&G from transferring the Villa, Mr. Icenhower had caused the Villa to be transferred yet again-this time to Appellants Martha Barba Diaz*fn3 and her son Alejandro Diaz-Barba (collectively the "Diaz Family"). (Id. at ¶ 37.)

D. The Diaz Family Agrees to Purchase the Villa and Conducts Due Diligence

Mr. Icenhower met Mr. Diaz through a mutual friend, and Mr. Diaz understood Mr. Icenhower to be the manager of the Villa. (Id. at ¶ 27.) Mr. Diaz was interested in purchasing the Villa, and during 2003 and 2004 they negotiated and finally agreed on a purchase price of $1.5 million. (Id. at ¶¶ 28--29.) After agreeing on the price, Mr. Diaz began his due diligence. (Id. at ¶ 29.)

While Mr. Diaz conducted his due diligence, Mr. Icenhower asked him for a $100,000 personal loan to invest in a golf-pro shop. (Id. at ¶ 29.) Mr. Icenhower made only one payment on the loan before he filed for bankruptcy in December 2003. (Id. at ¶ 29.) Although Mr. Icenhower did not tell Mr. Diaz of the filing, Mr. Diaz received notice of the bankruptcy because Debtors listed the $100,000 loan in their filing. (Id. at ¶ 31.)

Mr. Diaz was shocked and concerned about the bankruptcy, but Mr. Icenhower assured Mr. Diaz that he was forced to file due to an unfair judgment against him. (Id. at ¶ 32.) Mr. Icenhower further assured Mr. Diaz that he would pay back the $100,000 personal loan through an equivalent reduction in the purchase price of the Villa. (Id.) Mr. Diaz accepted Mr. Icenhower's explanation and did not believe he needed to separately investigate why, given that H&G purportedly owned the Villa, Mr. Icenhower had authority to lower the sales price of the Villa to repay Mr. Icenhower's personal loan. (Id.)

The Diaz Family hired Eduardo Sanchez, a lawyer licensed only in Mexico, to conduct due diligence on their purchase of H&G's interest in the Villa. (Id. at ¶ 33.) The scope of Mr. Sanchez's due diligence was the following: (1) he confirmed H&G's corporate existence by obtaining its Articles of Incorporation; (2) he confirmed from the State of Nevada that H&G was in good standing; (3) he obtained a corporate resolution authorizing Craig Kelley, H&G's sole office and director, to sell the Villa; and (4) he reviewed the property records in the property office in Autlan, Mexico and determined that the previous transfers of the Villa were legally correct and that there were no liens or claims against it. (Id. at ¶ 34.)

There were several things, however, that Mr. Sanchez did not review or confirm. Because he viewed the transaction as governed by Mexican law, he did not review any relevant U.S. law. (Id. at ¶ 35.) Although Mr. Sanchez had H&G's Articles of Incorporation, which required shareholder authorization for a transaction selling substantially all of H&G's assets, he never requested or obtained that authorization. (Id.) Nor was he concerned that Mr. Icenhower asked the Diaz Family to pay consideration to entities other than H&G for transfer of the Villa. (Id.) He knew of Mr. Icenhower's personal bankruptcy, but was unconcerned about this too because he viewed the transaction as a purchase from H&G, not Mr. Icenhower. (Id.) He did not check either the bankruptcy court or call the bankruptcy trustee. (Id.) Lastly, although Mr. Icenhower had warned Mr. Diaz that the trustee was looking into the Debtors' sale of the Villa to H&G, Mr. Sanchez testified that he was unaware that the transaction was under review. (Id.)

E. Mr. Icenhower and the Diaz Family Close the Deal

Still, Mr. Sanchez and the Diaz Family proceeded with the transaction. In June 2004, the Diaz Family executed a purchase agreement for the Villa. (FFCL ¶ 37.) The actual agreed price was $1.5 million. (Id.) But the stated consideration in the purchase agreement was $7,508,800 Mexican pesos, equivalent to $658,071 USD. (Id.) The Diaz Family, their lawyer, and Mr. Icenhower admitted that the lower price was a ruse to avoid Mexican taxes. (Id.)

Mr. Icenhower, Mr. Diaz, Mr. Sanchez, and Mr. Kelley (H&G's sole officer and director) were present at the closing in Chula Vista, California. (Id. at ¶ 38.) Although Mr. Kelley signed the transaction documents on behalf of H&G, he was only a passive participant and followed Mr. Icenhower's directions. (Id.) The Diaz Family only paid $25,000 of the purchase price directly to H&G. (Id. at ¶ 39.) At the closing, Mr. Icenhower directed them to pay the balance to third parties: $675,000 USD to Buckeye International Funding, Inc.; $398,663 USD to Western Financial Assets, Inc.; and $191,567 USD to Icenhower Investments. (Id. at ¶ 39.) The $675,000 was paid from an account owned by Ms. Barba Diaz, and the other two payments were made from accounts owned by Mr. Diaz. (SER 416--18.)

Neither Mr. Diaz nor Mr. Sanchez thought it odd that Mr. Icenhower directed them to pay virtually all of the consideration to third parties and not to H&G. (FFCL ¶ 40.) In addition, although the Villa constituted all the property H&G owned, there was no shareholder resolution authorizing the sale as required by H&G's Articles of Incorporation. (Id. at ¶ 41.)

F. The Bankruptcy Trustee Files Actions to Avoid the Transfers of the Villa

As mentioned above, the bankruptcy trustee filed the Fraudulent Transfer Action to avoid the transfer from Debtors to H&G in August 2004. (FFCL ¶ 45.) Once the trustee learned that H&G had transferred the Villa to the Diaz Family, the trustee added them as defendants in that action. (Id. at ¶ 46.) Later, in August 2006, the trustee filed an alter ego and avoidance action, seeking a finding that H&G was the Debtors' alter ego and for substantive consolidation of Debtors and H&G nunc pro tunc to the petition date, and to recover the post-petition transfer of the Villa (the "Post-petition Transfer Action") (collectively with Fraudulent Transfer Action, "Avoidance and Recovery Actions"). (Id. at ¶ 48.)

During the course of the Avoidance and Recovery Actions, Kismet Acquisition, LLC ("Kismet" or "Appellee") intervened and purchased the estate's assets, including those actions. (Id. at ¶ 50--51.) Kismet replaced the trustee in the actions and is the Appellee here. (Id. at ¶ 52.)

G. The Bankruptcy Court's Findings of Fact and Conclusions of Law

After the conclusion of a bench trial in the Avoidance and Recovery Actions, the bankruptcy court issued its findings of fact and conclusions of law. Its findings of fact were substantially similar to the facts recited above. Based on these facts, the bankruptcy court made several conclusions of law.

First, based on the claims in the Post-petition Transfer Action, the court held that H&G was Debtors' alter ego. The Court therefore consolidated H&G's assets with the bankruptcy estate nunc pro tunc to the petition date. The consolidation had the effect of treating the Villa as part of the bankruptcy estate as of the date of filing.

Second, based on the consolidation, the Villa's transfer to the Diaz Family was avoidable under 11 U.S.C. § 549 as an unauthorized post-petition transfer. The bankruptcy court ruled that the Diaz Family had no defense to the avoidance because they admitted knowledge of Debtors' bankruptcy filing. As a result of the avoidance, the court could recover the Villa under 11 U.S.C. § 550(a)(1);

Third, the court alternatively held based on the claims in the Fraudulent Transfer Action, that the Villa's transfer to H&G was a fraudulent transfer and therefore avoidable. And the court could recover the Villa from the Diaz Family under 11 U.S.C. § 550(a)(2) because, due to their insufficient due diligence in light of all the red flags, they were not good-faith transferees.

In its Amended Consolidated Judgment ("ACJ"), the bankruptcy court ordered the Diaz Family to undo the avoided transfer and convey the Villa to a fideicomiso trust naming Kismet as the sole beneficiary. Alternatively, Kismet could elect to receive a make-whole monetary judgment. The Diaz Family eventually satisfied an oral amendment to the judgment after the bankruptcy court entered coercive and remedial sanctions.

The Diaz Family appeals the ACJ.


The Court has jurisdiction over the appeals under 28 U.S.C. § 158(a). The Court reviews the bankruptcy court's factual findings for clear error. See Harsh Investment Corp. v. Bialac (In re Bialac), 712 F.2d 426, 429 (9th Cir. 1983). Conclusions of law are subject to de novo review, id., as are most mixed questions of fact and law, Biggs v. Stovin (In re Luz Int'l., Ltd.), 219 B.R. 837, 840 (B.A.P. 9th Cir. 1998).


A. Local-Action Doctrine

Appellants first argue that in avoiding the Villa's transfer from H&G to them, and ordering Appellants to transfer the Villa to Kismet, the bankruptcy court exceeded its jurisdiction. The bankruptcy court, they argue, purportedly exercised in rem jurisdiction over the Villa. But because the Villa is in Mexico, Appellants contend, it is beyond the in rem jurisdiction of the court. In support of this argument, Appellants invoke the local-action doctrine.

The local-action doctrine is a common-law doctrine that prevents federal courts from exercising subject-matter jurisdiction*fn4 over certain actions involving out-of-state real property. When "the remedies [a party] seeks would act directly upon the land itself, jurisdiction is properly exercised in the state where the land is situated." See U.S. v. Byrne, 291 F.3d 1056, 1060 (9th Cir. 2002) (emphasis added). Local actions are essentially actions in rem and may only be prosecuted "where the thing on which they are founded is situated." Casey v. Adams, 102 U.S. 66, 68 (1880).

On the other hand, causes of action that are related to a particular defendant are called transitory actions. Unlike local actions, which must be brought where the res at issue is located, transitory actions may be brought in any district where the court has in personam jurisdiction over that defendant. See Massie v. Watts, 10 U.S. (6 Cranch) 148, 160 (1810).

Although the line between transitory and local actions is not always clear, what is clear is that actions for fraud are transitory. Massie, 10 U.S. (6 Cranch) at 160 ("[T]his court is of opinion that, in a case of fraud... the jurisdiction of a court of chancery is sustainable wherever the person be found, although lands not within the jurisdiction of that court may be affected by the decree."); Safeway Stores, 743 F.2d at 506--09; Neet v. Holmesk 19 Cal. 2d 605, 611 (1942) (same is true under California law). Similarly, actions filed by a bankruptcy trustee to avoid a fraudulent transfer under 11 U.S.C. § 548 are also transitory. Coffey v. Managed Properties, 85 F.2d 88, 90 (2d Cir. 1936); Kalso Systemet, Inc. v. Jacobs, 474 F. Supp. 666, 668--69 (D.C.N.Y. 1979); see also Safeway Stores, Inc., 743 F.2d at 506--09 (listing cases holding actions to avoid fraudulent transfer are transitory); Sax v. Sax, 294 F.2d 133, 136--37 (5th Cir. 1961) (suit to avoid fraudulent conveyance is transitory); Tcherepnin v. Franz, 439 F. Supp. 1340, 1345 (D.C. Ill. 1977) ("It is well-settled that in an action to set aside a fraudulent conveyance of land the court has jurisdiction wherever the person can be found, although lands not within the jurisdiction may be affected by the court's decree."). But c.f. Mann v. Hanil Bank, 900 F. Supp. 1077 (E.D. Wis. 1995) (holding non-bankruptcy fraudulent transfer action is local in nature). The Court holds that actions to avoid a fraudulent conveyance are transitory and may be brought wherever the court has in personam jurisdiction over the defendant.

In transitory actions, a court may use its in personam jurisdiction over a defendant to indirectly act upon out-of-state real property. See, e.g., Fall v. Eastin, 215 U.S. 1, 8 (1909) ("A court of equity, having authority to act upon the person, may indirectly act upon real estate in another state, through the instrumentality of this authority over the person."); Sax, 294 F.2d at 137 (court could declare agreement invalid due to fraud and use coercive sanctions to compel action with respect to out-of-state property). Using its in personam jurisdiction, at least one court in this jurisdiction has transferred interests in Mexican land by ordering defendants to effect the transfer themselves. See Brady v. Brown, 51 F.3d 810, 819 (9th Cir. 1995) (affirming district court's judgment requiring defendants to execute power of attorney transferring interests in Mexican land into fideicomiso trust).

Here, the bankruptcy court had in personam jurisdiction over Appellants and therefore had jurisdiction to hear the Avoidance and Recovery Actions. Avoidance actions are transitory, see, e.g., Coffey, 85 F.2d at 90, andcases cited supra, and transitory actions may be brought wherever the court has in personam jurisdiction over the defendants, e.g., Watts, 10 U.S. (6 Cranch) at 160. Furthermore, once it had avoided the transfers, the bankruptcy court had the authority to recover the property because it could do so through its in personam power over Appellants. See, e.g., Central Virginia Cmty. ...

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