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In re Branford Partners

September 6, 2010

IN RE BRANFORD PARTNERS, LLC, DEBTOR.
ALL-TEX, INC., APPELLANT,
v.
BERT FORNACIARI & LINDA FORNACIARI, INDIVIDUALLY AND AS CO-TRUSTEES OF THE FORNACIARI FAMILY REVOCABLE TRUST DATED JANUARY 15, 2002, APPELLEES.
ALL-TEX, INC. APPELLANT,
v.
BRANFORD PARTNERS, LLC, APPELLEE.



The opinion of the court was delivered by: Percy Anderson United States District Judge

Bankruptcy Court Case No. SV06--12551 KT Adversary Case No. 07--1117 KT

OPINION AFFIRMING BANKRUPTCY COURT ORDERS

Before the Court is appellant All-Tex, Inc.'s ("All-Tex") appeal of the United States Bankruptcy Court for the Central District of California's ("bankruptcy court") January 18, 2008 order granting summary judgment in favor of appellees Bert and Linda Fornaciari, both individually and as co-trustees of the Fornaciari Family Revocable Trust Dated January 15, 2002 ("FFRT").*fn1 (Case No. 08--1362.) Also before the Court is All-Tex's appeal of the bankruptcy court's January 18, 2008 order granting summary judgment in favor of appellee Branford Partners, LLC ("Debtor"). (Case No. 08--1364.) Because the bankruptcy court's orders granting summary judgment in favor of both the Fornaciaris and Debtor addressed the same issues, and because All-Tex submits the same briefing in both appeals, the Court addresses both appeals in a single order. Pursuant to Federal Rule of Civil Procedure 78, Local Rule 7-15, and Federal Rule of Bankruptcy Procedure 8012, the Court finds that this matter is appropriate for decision without oral argument.

I. FACTUAL & PROCEDURAL BACKGROUND

In December of 1999, Bert and Linda Fornaciari loaned $6,000,000 to Sunquest Development, LLC ("Sunquest") for Sunquest's purchase of a parcel of industrial land ("Parcel A") located at 12450 Branford Street, Los Angeles, California. On December 17, 1999, Sunquest executed a promissory note ("Fornaciari Note") in favor of the Fornaciaris in the amount of $6,000,000. The Fornaciari Note was secured by a first deed of trust ("Deed of Trust") on Parcel A. Additionally, the Fornaciaris acquired a 20% interest in Sunquest, becoming equity 'members' of the company.

All-Tex alleges that it contracted with Sunquest on October 26, 2000 to purchase land on which Sunquest would construct a facility. All-Tex asserts that Sunquest's successors breached this contract before filing for bankruptcy. However, the Fornaciaris contend that there has never been a finding that such a contract existed or that Sunquest breached it.

On December 16, 2002, Sunquest and Plutus Alternative Strategies ("PAS"), one of Sunquest's equity members, entered into an agreement ("Operating Agreement") to form a new entity called Sunquest Development II ("Sunquest II"), which later changed its name to Branford Partners, LLC (the Debtor that filed the underlying bankruptcy case). In March of 2003, PAS owned 99% of Sunquest II, and Sunquest owned 1%. As 20% owners of Sunquest, the Fornaciaris owned 20% of the 1% of Sunquest II. Sunquest II acquired two parcels ("Parcels B & C") adjacent to Parcel A.

On December 29, 2003, Sunquest II executed an "Amended and Restated Promissory Note Secured by Deed of Trust" in favor of the Fornaciaris. The same day, Sunquest, Sunquest II, and the Fornaciaris executed a "Loan Assumption Agreement and Modification of Deed of Trust" ("Loan Assumption Agreement"), pursuant to which the Fornaciari Note was restructured and assumed by Sunquest II, and the Fornaciaris acquired an interest in Parcels B and C.

Also on December 29, 2003, PAS, the Fornaciaris, and another equity member of Sunquest II called Pinnacle West, LLC ("PW"), executed a "Second Amendment to Operating Agreement of Sunquest Development II, LLC" ("Second Amendment") which extinguished the Fornaciaris' original equity ownership in Sunquest, but made the FFRT an equity member of Sunquest II on certain terms and conditions. It also transferred Sunquest's equity membership interest in Sunquest II to PW.

Later, Sunquest II changed its name to Bradford Partners, LLC and eventually filed for bankruptcy. Parcels A, B, & C were sold, and the Fornaciaris and All-Tex filed claims to the proceeds. All-Tex then filed an adversary proceeding against both the Fornaciaris and Debtor asserting that its claim has priority over the Fornaciaris' claim because the Second Amendment had the effect of subordinating the Fornaciari Note to claims of unsecured third-party creditors such as All-Tex. The Fornaciaris and Debtor each moved for summary judgment on substantially the same grounds. The bankruptcy court granted both motions for summary judgment, and issued virtually identical orders in each. All-Tex then filed these appeals on the issue of whether the bankruptcy court erred as a matter of law in its interpretation of the distribution provisions in the Operating Agreement and the Second Amendment.

II. STANDARD OF REVIEW

The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. Sousa v. Miguel (In re U.S. Trustee), 32 F.3d 1370, 1372 (9th Cir. 1994); Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990). The Court's review here is de novo because only the bankruptcy court's conclusions of law regarding the interpretation of the Operating Agreement and Second Amendment are at issue.

III. ANALYSIS

All-Tex argues that, prior to the Second Amendment, the Operating Agreement provided for how Sunquest II would distribute money, including funds received upon the sale of the Debtor's assets. Specifically, All-Tex points to the ...


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