In re: Leslie Lopez Roman and Donna Barahona Roman
CC-17-1112-TaLS CC-17-1133-TaLS
| 9th Cir. BAP | Nov 20, 2017Background
- Debtors Leslie and Donna Roman sold an energy drink packaged to mimic 5-Hour ENERGY; plaintiffs (Innovation Ventures & International IP Holdings, "5-Hour ENERGY Owners") sued and obtained orders freezing the Romans’ Bank of America accounts holding $426,030.53 (the "Funds").
- More than 90 days before the Romans’ bankruptcy petition, the parties entered a stipulation ("First Agreement") releasing the freeze in exchange for transfer of the Funds into the Romans’ counsel’s account (the "Account").
- Six days before bankruptcy the parties executed a Settlement Agreement requiring payment of the $426,030.53 from the Account to the 5-Hour ENERGY Owners; three days prepetition counsel transferred the Funds to plaintiffs’ counsel.
- The Chapter 7 Trustee sued under 11 U.S.C. § 547 to avoid and recover the transfer as a preference; the parties filed cross-motions for summary judgment focused on which transfer (into the Account >90 days prepetition, or from the Account within 90 days) divested the debtors’ interest.
- The bankruptcy court denied the Trustee’s motion and granted the 5-Hour ENERGY Owners’ motion, ruling state-law questions immaterial and treating the debtors’ estate interest as limited while funds sat in the Account.
- The Bankruptcy Appellate Panel affirmed that funds were not in custodia legis, found genuine issues on the escrow/trust intent questions (precluding summary judgment for either party on those grounds), and reversed the grant of summary judgment because the bankruptcy court failed to apply relevant state law to determine the estate’s property interest.
Issues
| Issue | Trustee's Argument | 5-Hour ENERGY Owners' Argument | Held |
|---|---|---|---|
| Were the Funds held in custodia legis (beyond trustee's reach) when placed in counsel's Account? | Not in custodia legis; trustee can avoid a subsequent transfer within 90 days. | Funds were effectively in court custody under the First Agreement and order. | Funds were not in custodia legis; First Agreement reserved party control, unlike the exclusive control in Keller. |
| Did the First Agreement create an escrow that stripped debtors of an equitable interest prepetition? | Yes — if escrow, transfer into Account (>90 days) removed estate interest; trustee sought summary judgment. | Plaintiffs argued escrow or other doctrines removed debtors’ interest; but they conceded factual dispute below. | Genuine dispute of material fact on intent/grantee prevents summary judgment for either party on escrow theory. |
| Do newly raised trust theories (constructive/express trust) support affirmance? | Trustee opposed novel theories; argued they were waived and factually undeveloped. | Plaintiffs raised constructive and express trust arguments on appeal to bar avoidance. | Appellate court declined to consider undeveloped trust theories as grounds for summary judgment; record insufficient and issue was waived below. |
| Was the bankruptcy court correct to resolve the dispute without applying state law? | State law governs the contours of debtor’s property interest; court must apply it. | Bankruptcy court: federal law alone controlled because First Agreement unambiguous. | Court erred: state (nonbankruptcy) law must be consulted to determine the debtor/estate interest; reversal and remand required. |
Key Cases Cited
- Begier v. I.R.S., 496 U.S. 53 (1990) (definition of property interest for bankruptcy avoidance purposes)
- Butner v. United States, 440 U.S. 48 (1979) (state law defines property rights absent federal rule)
- Travelers Casualty & Surety Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007) (federal courts look to nonbankruptcy law to determine property interests)
- Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119 (9th Cir. 2014) (standard of review for summary judgment)
- Keller v. Keller (In re Keller), 185 B.R. 796 (9th Cir. BAP 1995) (funds held in a court-retained jurisdictional scheme can be treated in custodia legis)
- In re Scanlon, 239 F.3d 1195 (7th Cir. 2001) (escrow/estate-interest analysis under state law)
- Adams v. Anderson (In re Superior Stamp & Coin Corp.), 223 F.3d 1004 (9th Cir. 2000) (discussion of diminution-of-estate doctrine)