Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 1 of 8 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION IN RE: ) ) ITT EDUCATIONAL SERVICES, INC., et al. 1 ) Case No. 16-07207-JMC-7A ) Debtors. ) Jointly Administered ) ) DEBORAH J. CARUSO, the Chapter 7 Trustee ) for the Bankruptcy Estate of ITT Educational ) Services, Inc., ) ) Plaintiff, ) Adversary No. ) vs. ) ) HUNG DUONG, ) ) Defendant. ) COMPLAINT TO AVOID AND RECOVER PREFERENTIAL AND POSTPETITION TRANSFERS Deborah J. Caruso, the chapter 7 trustee in this case (the Trustee ), and the plaintiff in the above-captioned adversary proceeding, by counsel, for her Complaint to Avoid and Recover Preferential and Postpetition Transfers (this Complaint ) against the defendant Hung Duong ( Mr. Duong ), alleges as follows: Parties, Jurisdiction, Venue and Consent to Bankruptcy Court Jurisdiction 1. On September 16, 2016 (the Petition Date ), ITT Educational Services, Inc. ( ITT ) filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code ( Bankruptcy Code ). 2. The Trustee was appointed interim trustee in ITT s bankruptcy case on the 1 The debtors in these cases, along with the last four digits of their respective federal tax identification numbers are ITT Educational Services, Inc. [1311]; ESI Service Corp. [2117]; and Daniel Webster College, Inc. [5980].
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 2 of 8 Petition Date pursuant to section 701(a)(1) of the Bankruptcy Code. The Trustee became the case trustee in ITT s bankruptcy case following the conclusion of the first meeting of creditors on November 1, 2016, pursuant to section 702(d) of the Bankruptcy Code. Pursuant to section 323 of the Bankruptcy Code, the Trustee is the representative of ITT s bankruptcy estate with full capacity to prosecute this action. 3. Mr. Duong is a natural person residing in the State of California. 4. This adversary proceeding is commenced pursuant to sections 502, 547, 549 and 550 of the Bankruptcy Code and Rule 7001(1) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ). 5. The United States District Court for the Southern District of Indiana has jurisdiction over this proceeding pursuant to 28 U.S.C. 157 and 1334. In accordance with 28 U.S.C. 157(a), jurisdiction has properly been referred to this Court pursuant to S.D. Ind. L.R. 83-8. 6. This matter is a core proceeding within the meaning of 28 U.S.C. 157(b)(2)(F) and (O). 7. Venue is proper in this Court pursuant to 28 U.S.C. 1409(a). 8. In accordance with Bankruptcy Rule 7008(a) and Local Rule B-7008-1, the Trustee consents to the entry of final orders and/or judgments by this Court. Facts Common to All Counts 9. Mr. Duong obtained a judgment against ITT on September 9, 2016 in the sum of $862,381.25 (the Judgment ) following a jury trial in the Alameda County Superior Court, Case No. RG14724442, Hung Duong v. ITT Educational Services, Inc., et al. (the California Litigation ). A true and correct copy of the Judgment is attached as Exhibit 1 and incorporated 2
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 3 of 8 herein. 10. The Judgment provided that Mr. Duong is entitled to recover costs and attorneys fees in an amount to be determined by the Court. As of the Petition Date when the automatic stay was imposed, the California court had not yet entered an order determining the amount of the attorneys fee award. 11. On the Petition Date, Mr. Duong recorded Abstracts of Judgment in Los Angeles County (California) and San Bernardino County (California), which are counties where ITT owns real estate. True and correct copies of the Abstracts of Judgment are attached as Exhibits 2 and 3, respectively, and incorporated herein. 12. ITT s Voluntary Petition for Non-Individuals Filing for Bankruptcy [Doc 1] was filed on the Petition Date at 5:13 p.m. Eastern Daylight Time. 13. The Abstract of Judgment recorded in Los Angeles County reflects it was recorded on the Petition Date at 1:00 p.m. California time (Pacific Daylight Time, PDT ). 14. The Abstract of Judgment recorded in San Bernardino County reflects it was recorded on the Petition Date at 4:23 p.m. PDT. 15. Pursuant to California law, the recording of an abstract of judgment operates as a lien on real estate owned by the judgment debtor located in the county where the document is recorded. See CAL. CODE CIV. PROC. 697.310(a) ( [A] judgment lien on real property is created... by recording an abstract of a money judgment with the county recorder. ); In re Rector, 2006 Bankr. LEXIS 2963, *12 (Bankr. E.D. Cal. Oct. 23, 2006) (The recording of an abstract of judgment creates a judicial lien on the property of the judgment debtor). 16. ITT owns real property in Los Angeles County commonly known as 650 West Cienega Avenue, San Dimas, California. 3
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 4 of 8 17. ITT owns real property in San Bernardino County commonly known as 670 East Carneigie Drive, San Bernardino, California. COUNT I (Avoidance of Preferential Transfers Pursuant to 11 U.S.C. 547) 18. The Trustee incorporates and restates the allegations contained in paragraphs 1 through 17, as if fully set forth herein, and further alleges as follows: 19. The judgment liens created as a result of Mr. Duong s recordation of the Abstracts of Judgment in Los Angeles County and San Bernardino County (the Prepetition Transfers ) constitute transfers of an interest of ITT in property under sections 101(54) and 547 of the Bankruptcy Code. In re Rhoads, 130 B.R. 565, 568 (Bankr. C.D. Cal. 1991) ( The filing of an abstract of judgment constitutes a transfer of property within the meaning of 547(b) and, if filed within ninety days of the bankruptcy filing, establishes the transfer element of an avoidable preference). 20. The Prepetition Transfers were for the benefit of Mr. Duong and took place on or within ninety (90) days of the Petition Date. Prior v. Farm Bureau Oil Co. (In re Prior), 176 B.R. 485, 491 (Bankr. S.D. Ill. 1995) ( [F]or purposes of 547(b), a transfer is deemed to have been made when a judicial lien attaches to the debtor s property under state law. ); Nelson Co. v. Counsel for the Official Comm. Of Unsecured Creditors (In re Nelson Co.), 959 F.2d 1260, 1264 (3rd Cir. 1992) (The transfer under 547(b) occurred when the confessed judgment was filed and docketed). 21. The Prepetition Transfers were for or on account of an antecedent debt owed by ITT before the Prepetition Transfers were made. 22. The Prepetition Transfers were made while ITT was insolvent. 4
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 5 of 8 23. The Prepetition Transfers will enable Mr. Duong to receive more than Mr. Duong would receive if the case were a case under chapter 7 of the Bankruptcy Code, the Prepetition Transfers had not been made and Mr. Duong received payment of such debt to the extent provided by the provision of the Bankruptcy Code. 24. Pursuant to section 547 of the Bankruptcy Code, the Trustee is entitled to a judgment against Mr. Duong avoiding the Prepetition Transfers. WHEREFORE, the Trustee requests judgment in its favor and against Mr. Duong (i) declaring that the Prepetition Transfers are avoidable preferences pursuant to section 547 of the Bankruptcy Code; (ii) avoiding the Prepetition Transfers; and (iii) granting the Trustee all other just and proper relief. COUNT II (Avoidance of Postpetition Transfers Pursuant to 11 U.S.C. 549) 25. The Trustee incorporates and restates the allegations contained in paragraphs 1 through 24, as if fully set forth herein, and further alleges as follows: 26. As noted above, the Abstract of Judgment recorded in Los Angeles County reflects it was recorded on the Petition Date at 1:00 p.m. PDT and the Abstract of Judgment recorded in San Bernardino County reflects it was recorded on the Petition Date at 4:23 p.m. PDT. 27. ITT s Voluntary Petition for Non-Individuals Filing for Bankruptcy [Doc 1] was filed on the Petition Date at 5:13 p.m. Eastern Daylight Time. 28. To the extent either or both the judgment liens arising from the recording of the Abstracts of Judgment in Los Angeles County and/or San Bernardino County are deemed to have been created after the filing of ITT s bankruptcy case (the Postpetition Transfers ), they are void under section 362(a) of the Bankruptcy Code or constitute unauthorized postpetition 5
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 6 of 8 transfers avoidable pursuant to section 549 of the Bankruptcy Code. See Meoli v. Huntington Nat'l Bank (In re Teleservices Group, Inc.), 444 B.R. 767, 809 (Bankr. W.D Mich. 2011) (The time of the transfer relative to the petition date determines whether the transfer is postpetition). 29. The Postpetition Transfers were not authorized under the Bankruptcy Code or by the Bankruptcy Court. 30. The Postpetition Transfers were not conducted in a manner consistent with ITT s ordinary business practices, Mr. Duong is not a bona fide purchaser of the real property impacted by the Postpetition Transfers and the Postpetition Transfers were not for present fair equivalent value. 31. The Postpetition Transfers were made solely for the benefit of Mr. Duong, and not for the benefit of ITT or other creditors of ITT. WHEREFORE, the Trustee requests judgment in her favor and against Mr. Duong (i) declaring that, to the extent the judgment liens arising from the recording of the Abstracts of Judgment in Los Angeles County and/or San Bernardino County are deemed to have been created after the commencement of ITT s bankruptcy case, the Postpetition Transfers are void because they are in violation of section 362(a) of the Bankruptcy Code or are avoidable pursuant to section 549 of the Bankruptcy Code; (ii) avoiding the Postpetition Transfers; and (ii) granting the Trustee all other just and proper relief. COUNT III (Recovery of Avoided Transfers Pursuant to 11 U.S.C. 550) 32. The Trustee incorporates and restates the allegations contained in paragraphs 1 through 31, as if fully set forth herein, and further alleges as follows: 33. Section 550(a) of the Bankruptcy Code provides that the trustee may recover for the benefit of the estate the property transferred or the value of such property, if the transfer is 6
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 7 of 8 avoided under sections 547 or 549 of the Bankruptcy Code. 34. The Prepetition and Postpetition Transfers discussed in the preceding counts may be recovered by the Trustee pursuant to section 550(a)(1) of the Bankruptcy Code to the extent they are avoided. WHEREFORE, the Trustee requests judgment in her favor and against Mr. Duong (i) declaring that the Trustee may recover the Prepetition and Postpetition Transfers from Mr. Duong for the benefit of the estate pursuant to section 550(a)(1) of the Bankruptcy Code; and (ii) granting the Trustee all other just and proper relief. COUNT IV (Disallowance of Claims Pursuant to 11 U.S.C. 502(d) and 550) 35. The Trustee incorporates and restates the allegations contained in paragraphs 1 through 34, as if fully set forth herein, and further alleges as follows: 36. Section 502(d) of the Bankruptcy Code provides that, unless an entity from which property is recoverable under section 550 of the Bankruptcy Code or that is a transferee of a transfer avoidable under 547 or 549 of the Bankruptcy Code turns over any such property for which such entity or transferee is liable under section 550 of the Bankruptcy Code, any claims of such entity or transferee shall be disallowed. 37. Mr. Duong has not released the judgment liens created as a result of his recording the Abstracts of Judgment in Los Angeles County and San Bernardino County. Therefore, any claim that Mr. Duong has filed or will file in the bankruptcy case or that Mr. Duong otherwise asserts against the estate must be disallowed until such time as the judgment liens are released. WHEREFORE, the Trustee requests judgment in her favor and against Mr. Duong (i) disallowing any and all claims of Mr. Duong against the estate pursuant to sections 502(d) and 550 of the Bankruptcy Code; and (ii) granting the Trustee all other just and proper relief. 7
Case 16-07207-JMC-7A Doc 1009 Filed 01/25/17 EOD 01/25/17 11:43:32 Pg 8 of 8 Respectfully submitted, RUBIN & LEVIN, P.C. By: /s/ James E. Rossow, Jr. James E. Rossow, Jr. James E. Rossow Jr. (Atty. No. 21063-29) Joshua W. Casselman (Atty. No. 27055-49) RUBIN & LEVIN, P.C. 135 N. Pennsylvania Street, Suite 1400 Indianapolis, Indiana 46204 Tel: (317) 634-0300 Fax: (317) 263-9411 Email: jim@rubin-levin.net jcasselman@rubin-levin.net Attorneys for Deborah J. Caruso, Trustee g:\wp80\trustee\caruso\itt educational - 86723901\adversary proceedings\hung duong\preference complaint - mrt revised.doc 8
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