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In re Beale

February 20, 2008


The opinion of the court was delivered by: Judge Joan B. Gottschall District Court

Chapter 7

Adversary No. 04 A 2416

Hon. Bruce W. Black


Defendants Gregory Kemp ("Kemp"), Jon Miho ("Miho"), Airport Trade Center, LLC, JPPM Investments, LLC, Nimitz-Paiea, Inc. ("NPI"), Paiea Holdings, Inc., Paiea Properties and TGK Investments, LLC (collectively "Paiea Defendants") filed a motion for leave to appeal an interlocutory order entered by Judge Bruce W. Black of the United States Bankruptcy Court for the Northern District of Illinois. For the reasons stated below, the motion is denied.


On March 5, 2004, various creditors filed a Chapter 7 petition against Joseph S. Beale ("Beale" or "Debtor"). The Bankruptcy Court entered an Order for Relief adjudicating Beale a Chapter 7 debtor on April 5, 2004. The Bankruptcy Court appointed Andrew J. Maxwell ("Trustee") as trustee for the Debtor's bankruptcy estate. In part, the Trustee's theory is that, shortly before his personal bankruptcy was adjudicated, Beale spearheaded a complex series of business transactions designed to shield his personal assets. Two primary events that took place four months before Beale's personal bankruptcy lie at the heart of the claims at issue here: the transfer of ownership of property and the removal of Beale as a corporate officer.

First, in November 2003, Paiea Properties, a Hawaii limited partnership, sold two pieces of property ("Property") to a group of companies for $12.2 million in promissory notes.*fn1 Paiea Properties was owned by NPI and PLP Holdings, Inc. ("PLP"), two Hawaii corporations. Beale was a shareholder in both NPI and PLP, owning a 45% share of each. The remaining 55% of both companies was held by Kemp (45%) and Miho (10%). Thus, Beale owned 45% of the corporations that owned the partnership that received over $12 million for the Property. Second, around the same time as the sale, NPI directors removed Beale as President and appointed Kemp.

The Trustee alleges that as a result of these two events, Beale "transferred some $5.49 million in value to his family members and business associates . . . and emerged with a net debt of nearly $1 million." Trustee's Answer in Opp'n to the Paiea Entities' Mot. for Leave to Appeal at 3. Essentially, the Trustee alleges that the sole purpose of the events at issue was to divert assets from Beale's control so that they could not be reached by his creditors and that this constitutes a fraudulent transfer from the bankruptcy estate. On October 31, 2006, the Trustee filed an amendment to the third amended complaint. The amendment included Counts 64 to 70*fn2 against the Paiea Defendants, which were "based on: (a) their role in effecting the fraudulent transfer of the Debtor's interest in and control of the . . . Property; and (b) their oppression of the Estate's interest in the entity that owns the . . . Property through mismanagement and misconduct in operating same." Amendment to the 3d Am. Adversary Compl. ¶ 9.

The Paiea Defendants filed a motion to dismiss the amendment to the third amended complaint pursuant to Rule 12(b)(6).*fn3 They argued that "the overriding issue in this case . . . is whether the Trustee's fraudulent transfer claims fail as a matter of law in the absence of allegations that Beale transferred assets that he owned." Mem. in Supp. of Mot. to Dismiss at 1. They argued that a shareholder is not the owner of a corporation's assets and because Beale was simply a shareholder of NPI and PLP, the Property was not his to transfer. In response, the Trustee argued that the substance, not the form, of the transfer is controlling, Trustee's Response § II(A), and that the unrecovered transfer of all of the Debtor's rights of control is itself actionable as a fraudulent transfer, id. § II(B). On March 14, 2007, the Bankruptcy Court heard oral argument and subsequently denied the motion to dismiss, stating that the court agreed with the Trustee's position.


The Paiea Defendants seek leave to appeal two questions of law that "address the scope of a debtor's assets under [the Uniform Fraudulent Transfer Act ('UFTA')]" and were, according to the Paiea Defendants, incorrectly decided by the Bankruptcy Court when it denied their motion to dismiss. Paiea Entities' Mem. of Law in Supp. of Their Mot. for Leave to Appeal at 6.

A. Legal Standard

A bankruptcy court's denial of a motion to dismiss is an interlocutory order. The defendants may appeal an interlocutory order only with leave of the district court. See 28 U.S.C. ยง 158(a) ("The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of [Title 28]."). The manner in which the district court is to exercise its discretion implicates the same criteria as would an interlocutory appeal from a district court order. ...

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