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Screen Capital Int'l Corp. v. Library Asset Acquisition Co.

United States District Court, C.D. California

April 25, 2014

Screen Capital International Corp.
Library Asset Acquisition Company, Ltd. (In re R2D2, LLC); Screen Capital International Corp.
Library Asset Acquisition Company, Ltd. (In re Capitol Films Development, LLC); Screen Capital International Corp.
Library Asset Acquisition Company, Ltd. (In re CapCo Group, LLC); Screen Capital International Corp.
Library Asset Acquisition Company, Ltd. (In re CT-1 Holdings, LLC);

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[Copyrighted Material Omitted]

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Attorneys for Plaintiff(s): Not Present.

Attorneys for Defendant(s): Not Present.

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Proceedings: (In Chambers) Order AFFIRMING in Part and REVERSING and REMANDING in Part Bankruptcy Court's Order Granting Library Asset Acquisition Company's Motion to Dismiss the Second Amended Complaint

The Honorable Philip S. Gutierrez, United States District Judge.

Before the Court is an appeal from bankruptcy matter In re R2D2, LLC, USBC No. 2:10-bk-19924-BR. Dkt. # 1.[1] In this appeal, Plaintiff Screen Capital International Corp. (" SCIC" or " Appellant" ) challenges a July 22, 2013 Order from the United States Bankruptcy Court for the Central District of California (" Bankruptcy Court" ) granting Defendant Library Asset Acquisition Company, Ltd.'s (" LAAC" ) Motion to Dismiss the Second Amended Complaint (" SAC" ).[2] The Court finds the

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appeal appropriate for decision without oral argument. Fed.R.Civ.P. 78(b); L.R. 7-15. After considering the papers filed in support and opposition, the Court AFFIRMS in part and REVERSES and REMANDS in part the Bankruptcy Court's July 22, 2013 Order granting LAAC's Motion to Dismiss.

I. Background

SCIC brings these actions against TFC Library, LLC (" TFC" ), LAAC, and Zelus, LLC (" Zelus" ), pursuant to a stipulation transferring standing from the Chapter 11 Trustee of the bankruptcy estates of the Debtors (" Trustee" ) to SCIC. AOB at 4; SAC ¶ 8.[3] SCIC's claims in this action arise from an alleged conspiracy by David Bergstein (" Bergstein" ) and Ronald Tutor (" Tutor" ), the Members and Managers of R2D2, to " strip R2D2 and its affiliates of any and all assets of value before the creditors notice[d] and the companies collapsed." SAC ¶ ¶ 2-3. As part of this alleged conspiracy, R2D2 created a set of co-conspiring companies, including LAAC, and moved assets between these companies " without regard to creditors' rights in such assets, and at all times by keeping creditors guessing as to where their source of recovery might lie. . . ." Id. ¶ 3. Specifically, SCIC alleges a grand scheme to:

(1) have the Debtors borrow or guarantee over $100 million in debt and utilize large amounts of loan funds to pay the personal expenses of insiders. . . (2) transfer the underlying collateral (the TFC Library)[4] away from the Debtors, and (3) acquire the underlying debt and foreclose on the TFC Library, all for the benefit of the other insiders and to the detriment of legitimate third-party creditors.

AOB at 4; see SAC ¶ ¶ 56-57. The Court summarizes the relevant parts of this alleged conspiracy below.

Between January 2006 and February 2008, " one or more of the Debtors" obtained a series of loans (" Zwirn Loans" ) from entities related to D.B. Zwirn, a New York hedge fund (" Zwirn" ). SAC ¶ 26. These loans included approximately $45 million in loans made by Zwirn to ThinkFilm and unspecified " affiliated entities" (the " ThinkFilm Loans" ). Id. Bergstein and Tutor executed various guarantees on these loans. Id. ¶ ¶ 26-31. Bergstein and Tutor then restricted the Zwirn Loans " so that their liens were worth acquiring with Tutor's money, then caus[ed] enough distress to Zwirn that they sold the Zwirn Loans at an attractive price . . . ." Id. ¶ 36. Then, from March to July 2008, Zwirn entered into a series of " Global Amendments" with CT-1, ThinkFilm, and certain affiliated entities (" Borrowers" ). Id. SCIC alleges that these Global Amendments were intended to ensure that all of the Borrowers would default under the Zwirn loans, and thus to lay the foundation for Bergstein and Tutor's plot to foreclose on the Borrowers' assets. Id.

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SCIC alleges that as the first phase of their alleged " conspiracy," Bergstein and Tutor drafted--and backdated--an Asset Purchase Agreement (" APA" ), which transferred the rights in the films within the TFC Library from a number of " Sellers" and unnamed " Seller Affiliates" to TFC.[5] SAC ¶ ¶ 58-59, Ex. 2. In exchange for these transfers, the parties to the October 24, 2008 APA agreed on an aggregate purchase price of $46.5 million, comprised of a minimum cash amount of $500,000 and the assumption by TFC of the Sellers' liabilities, including their debt obligations under the ThinkFilm Loans. Id. ¶ 75, Ex 2 at § 2.4.

SCIC also alleges that LAAC entered into a Note Purchase and Sale Agreement (" NPA" ) on March 12, 2009, in which LAAC agreed to purchase all of the Zwirn loans from Zwirn for $108 million. Id. ¶ 76. However, the NPA was amended so that LAAC only purchased: (1) the BWT Loans, which were defined in the NPA; and (2) the ThinkFilm Loans and all related rights and collateral, including the TFC Library. Id. ¶ 81.

Based on this alleged conspiracy, SCIC filed separate adversary proceedings on behalf of R2D2, CFD, CapCo, and CT-1 (collectively, the " Appealing Debtors" ), against TFC, LAAC, and Zelus. See AOB at 4. On July 22, 2013, the Bankruptcy Court granted LAAC's Motion to Dismiss the SAC. 2 ER 7. SCIC's claims for disallowance and equitable subordination were dismissed without prejudice, but the Bankruptcy Court ordered that SCIC could only pursue these two claims through a motion filed in accordance with Bankruptcy Rule 3007(a) and 9014, rather than through an adversary proceeding. 2 ER 7, at 474.

SCIC now appeals the Bankruptcy Court's dismissal of its claims for: (1) avoidance and recovery of the fraudulent transfer of rights to the TFC Library, pursuant to the APA; (2) avoidance and recovery of the preferential transfer of rights to the TFC Library, pursuant to the APA; (3) an accounting; (4) declaratory judgments that LAAC lacks the right and authority to foreclose on the TFC Library, and that LAAC's Section 1111(b) election is not viable; [6] (5) recharacterization of LAAC's debt; (6) conspiracy to aid and abet breach of fiduciary duty; [7] and (7) injunctive relief [8] (collectively, the " Dismissed Claims" ). AOB at 4; see generally SAC. SCIC also challenges the Bankruptcy Court's (a) holding that the Appealing Debtors' equitable subordination claims can only be brought pursuant to a motion, and (b) denial of leave to amend the Dismissed Claims. AOB at 28-30.

II. Jurisdiction

The Bankruptcy Court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(1). This Court has jurisdiction under 28 U.S.C. § 158(a)(1). In relevant part, 28 U.S.C. § 158(a) provides: " The district courts of the United States shall have jurisdiction to hear appeals . . . from final

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judgments, orders, and decrees." 28 U.S.C. § 158(a). Although the Bankruptcy Court dismissed SCIC's equitable subordination claim " without prejudice," this was a final order which foreclosed SCIC's ability to bring this claim within an adversary proceeding, as the Bankruptcy Court further held that " any such relief must be sought pursuant to a motion filed win accordance with Bankruptcy Rules 2007(a) and 9014." 1 ER 7, at 461. See In re Davis, 177 B.R. 907, 910 (9th Cir. B.A.P. 1995) (finding that the bankruptcy court's dismissal of a complaint without prejudice was " final," as the bankruptcy court contemplated that the action could only be brought again by filing a new adversary proceeding). On appeal, the district court may affirm, modify, or reverse a bankruptcy court's judgment, order, or decree, or remand with instructions for further proceedings. See Fed. R. Bankr. P. 8013.

III. Standard of Review

" A district court reviews a bankruptcy court's conclusions of law and interpretation of the Bankruptcy Code de novo. " In re Orange County Nursery, Inc., 439 B.R. 144, 148 (C.D. Cal. 2010) (citations omitted); see also Greene v. Savage, 583 F.3d 614, 618 (9th Cir. 2009). As such, the Court reviews de novo the Bankruptcy Court's dismissal of SCIC's claims against LAAC. See In re Daewoo Motor Am., Inc., 471 B.R. 721, 748 (C.D. Cal. 2012) (holding that a grant of a motion to dismiss is reviewed de novo ); In re JMC Telecom LLC, 416 B.R. 738, 741 (C.D. Cal. 2009) (holding that an appeal of an order granting a motion to dismiss raises only questions of law because a " Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint" ). The Court reviews the Bankruptcy Court's findings of fact for clear error. In re Thomas, 428 F.3d 1266, 1268 (9th Cir. 2005).

Finally, the Court reviews the Bankruptcy Court's decision to deny SCIC leave to amend under an abuse of discretion standard. Leadsinger, Inc. v. VMG Music Pub'g, 512 F.3d 522, 532 (9th Cir. 2008) (" We review a denial of leave to amend for abuse of discretion." ) (citing Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002)). An abuse of discretion occurs when a court " misapprehend[s] the law with respect to the underlying issues in the litigation," or " rests its conclusions on clearly erroneous findings of fact." Chalk v. United States Dist. Court, 840 F.2d 701, 704 (9th Cir. 1988).

IV. Legal Standard

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant may move to dismiss a cause of action if the plaintiff fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). In evaluating the sufficiency of a complaint under Rule 12(b)(6), courts should be mindful that the Federal Rules of Civil Procedure generally require only that the complaint contain " a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required to survive a Rule 12(b)(6) motion to dismiss, a complaint that " offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Rather, the complaint must allege sufficient facts to support a plausible claim for relief. Id.

In evaluating a Rule 12(b)(6) motion, the Court must engage in a two-step analysis. See id. at 679. First, the Court must accept as true all non-conclusory,

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factual allegations made in the complaint. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993). Based upon these allegations, the Court must draw all reasonable inferences in favor of the plaintiff. Doe v. United States, 419 F.3d 1058, 1062 (9th Cir. 2005). Second, after accepting as true all non-conclusory allegations and drawing all reasonable inferences in favor of the plaintiff, the Court must determine whether the complaint alleges a plausible claim for relief. Iqbal, 556 U.S. at 679. Despite the liberal pleading standards of Rule 8, conclusory allegations will not save a complaint from dismissal. Id. at 678-79.

Ruling on a motion to dismiss will be " a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but it has not show[n]--that the pleader is entitled to relief." Id. at 679 (alteration in original; internal quotation marks and citation omitted). Furthermore, in ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider exhibits attached to the complaint, matters subject to judicial notice, or documents relied on by the complaint whose authenticity no party questions. See Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007); Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001); United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (" A court may . . . consider certain materials--documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice-without converting the motion to dismiss into a motion for summary judgment." ); Fed.R.Civ.P. 10(c) (" A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes." ). The Court is ...

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