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Kismet Acquisition LLC v. Diaz-Barba (In re Icenhower)

Kismet Acquisition, LLC v. Icenhower (In re Icenhower), No. 10-55933 (9th Cir. July 3, 2014).
The bankruptcy court properly avoided the debtors’ prepetition and postpetition transfers of an interest in Mexican real property.
Procedural context:
The trustee brought two adversary proceedings. In the first action, the trustee sought to avoid the debtors’ prepetition transfer of their interest in Mexican real property to a Nevada corporation, and in the second action, the trustee sought to avoid the corporation’s transfer of the same property to two joint buyers, the Diazes. After commencing those actions, the trustee conveyed the estate’s assets to Kismet, and Kismet was substituted for the trustee as plaintiff in both actions. The bankruptcy court ruled for Kismet in both actions. The district court affirmed on appeal. The Diazes appealed to the Ninth Circuit, which affirmed.
In 1995, the debtors bought the interest of a family trust in a Mexican trust holding a Mexican coastal villa. In 2002, while a lawsuit was pending against the debtors, they purchased H&G, a Nevada shell corporation, and the debtors conveyed the villa interest to H&G. The debtors filed their petition on December 15, 2003. In January 2004, the debtors disclosed to their creditors their 2002 transfer of the villa interest to H&G. On June 7, 2004, H&G sold the villa interest to the Diazes. The trustee commenced the fraudulent-conveyance action on August 23, 2004, and the postpetition-transfer action on August 3, 2006. On November 30, 2006, the trustee conveyed the estate property to Kismet. The bankruptcy court ruled for Kismet in both actions. The court found that H&G was the debtor’s alter ego and substantively consolidated H&G with the estate. As such, H&G’s postpetition transfer of the villa interest to the Diazes was avoidable under 11 U.S.C. § 549(a). In the postpetition-transfer action, the court ordered the Diazes to take all actions necessary to transfer the villa interest to Kismet. Alternatively, at Kismet’s option, the court reserved jurisdiction to enter a monetary judgment in favor of Kismet. On May 21, 2010, the district court affirmed the bankruptcy court’s judgments in both actions. The Ninth Circuit rejected each of the Diazes’ arguments. The Diazes conceded that they waived any constitutional objection that they could have raised under Stern v. Marshall to the bankruptcy court’s entry of final judgments in the two actions. Notwithstanding the “local-action doctrine,” under 28 U.S.C. § 1334(e), the bankruptcy court had exclusive in rem jurisdiction over the interest in the villa. Congress intended extraterritorial application of the Bankruptcy Code to property of the estate, so the bankruptcy court properly applied U.S. law to the villa. Determination of whether the estate included the villa interest was a core proceeding, so the bankruptcy court was not required to defer to a provision in the contract by which the debtors conveyed the villa interest to the Diazes that required litigation in Mexico. There was no true conflict between the bankruptcy court’s judgments and Mexican law, so the judgments did not conflict with comity due acts of Mexico. Mexico was not a necessary or indispensable party to the two actions. The bankruptcy court properly applied U.S., not Mexican, law to determine whether the Diazes were good-faith purchasers of the villa interest. The bankruptcy court properly imputed to one of the Diazes knowledge held by her son and their attorney, which warranted finding that she acted in bad faith.
Jerome Ferris (author), N. Randy Smith, and Paul J. Watford, Circuit Judges

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