937 F.3d 1214
9th Cir.2019Background
- Debtor Mardiros Mihranian filed Chapter 7; Trustee Sam S. Leslie sought to recover alleged fraudulent transfers to several non-debtors (ex-wife Susan Chobanian, sons Michael and Haig, employee Takouhie Bartamian, and Debtor’s medical business MCSSG) via separate adversary actions and a motion to substantively consolidate (SubCon Motion).
- Trustee amended the adversary complaints three times; the bankruptcy court dismissed the adversary defendants for failure to show Debtor was the initial transferor; dismissals were affirmed on appeal.
- Trustee separately moved to substantively consolidate Debtor’s estate with the non-debtor estates to reach assets; the bankruptcy court denied the SubCon Motion after questioning whether Trustee had given notice to the non-debtors’ creditors and finding insufficient proof of entanglement.
- The BAP affirmed the denial, holding Trustee failed to serve the SubCon Motion on the non-debtors’ creditors.
- Trustee appealed to the Ninth Circuit arguing notice to non-debtors’ creditors was not required and, alternatively, that he had given adequate notice.
- The Ninth Circuit affirmed, holding that a moving party must give notice to creditors of a putative consolidated non-debtor and that Trustee had not adequately researched or served those creditors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether notice of a substantive consolidation motion must be given to creditors of a putative consolidated non-debtor | Trustee: law does not require notice to non-debtors’ creditors; or he did provide adequate notice | BAP/Non-Debtors: notice required and was not given here | Notice to creditors of putative consolidated non-debtors is required; Trustee failed to provide it |
| Whether Trustee provided adequate notice to non-debtors’ creditors in this case | Trustee: gave similar notice as in precedent (In re Bonham) or otherwise satisfied notice duties | BAP/Non-Debtors: notice was given only to non-debtors themselves, not their creditors; Trustee did not research creditors | Trustee did not adequately research or serve non-debtors’ creditors; notice was insufficient |
| Whether court must reach merits (entanglement) if notice defect exists | Trustee: court should decide on entanglement merits; he argued substantive consolidation warranted | Non-Debtors: procedural defect (lack of notice) is dispositive | Court did not reach merits because lack of required notice was dispositive |
| Standard of review for BAP’s legal conclusions | Trustee: N/A (appeal of BAP) | BAP: legal conclusions reviewed de novo by Ninth Circuit | Ninth Circuit reviews BAP de novo and affirmed BAP’s legal conclusion on notice requirement |
Key Cases Cited
- Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir. 2000) (adopts two-prong test for substantive consolidation; equity-based remedy focused on fairness to creditors)
- Gaughan v. Edward Dittlof Revocable Tr. (In re Costas), 555 F.3d 790 (9th Cir. 2009) (appellate review of BAP decisions is de novo for legal questions)
- Farmers & Traders State Bank v. Magill (In re Meredosia Harbor & Fleeting Serv., Inc.), 545 F.2d 583 (7th Cir. 1976) (example of substantive consolidation affirmed without separate notice to non-debtor creditors)
- Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp.), 810 F.2d 270 (D.C. Cir. 1987) (discusses burden-shifting presumption and creditor reliance under consolidation analysis)