RGW Constructions, Inc. v. Weinstein

Background

RGW Constructions, Inc. was the prime contractor for certain California Department of Transportation work on the I-880 freeway in Oakland, California. Bay Area Drilling Inc. (BAD) was RGW’s subcontractor, and Mark F. Lucido solely owned and controlled BAD.

After BAD allegedly breached its subcontracts with RGW, an arbitration panel issued RGW an award. In January 2020, the Alameda County Superior Court entered judgment against BAD for $1,781,538.79.

BAD later filed for Chapter 7 bankruptcy, and Marlene G. Weinstein was appointed trustee. RGW sought relief from the bankruptcy stay to pursue various actions in the Alameda County proceedings, including enforcing the judgment and seeking to add Lucido and MFE to the judgment as BAD’s alter egos. The bankruptcy court denied some of those requests without prejudice and granted the remaining requests for relief from the stay.

In April 2021, Lucido filed for Chapter 11 bankruptcy. RGW filed a claim in that case based on alter ego liability, interest, sanctions, attorney’s fees, and costs. RGW sought to hold Lucido responsible for the judgment against BAD. RGW also filed a related adversary proceeding seeking to add Lucido to the state-court judgment as BAD’s alter ego, deny a discharge, and obtain an accounting.

The BAD Chapter 7 trustee objected to RGW’s claim in Lucido’s Chapter 11 case. The trustee argued that RGW’s alter ego claims belonged to the BAD bankruptcy estate and that pursuing them violated the automatic stay. The trustee also argued that RGW’s claim duplicated the trustee’s earlier-filed claim. The bankruptcy court sustained the objection except as to RGW’s sanctions claim.

Issues and standard of review

RGW appealed the bankruptcy court’s order. The district court had jurisdiction under 28 U.S.C. § 158(a)(1), which permits district-court appeals from final bankruptcy orders. It reviewed legal conclusions de novo, meaning it considered the legal issue independently rather than deferring to the bankruptcy court. The question whether RGW’s claim belonged to the bankruptcy estate was a legal question subject to that review.

RGW argued that the bankruptcy court wrongly concluded that only the trustee could pursue claims based on Lucido’s alleged fraudulent transfers and asset diversions. RGW also argued that the bankruptcy court failed to consider whether the trustee’s objection was barred by laches, an equitable defense based on an inexcusable delay in asserting a known right.

Analysis

A bankruptcy trustee generally has standing to bring claims belonging to the debtor corporation, but not claims belonging to the corporation’s creditors. State law determines who owns a claim. The parties agreed that California law applied.

Under California law, an alter ego theory is not itself a claim for substantive relief. Instead, it is a procedural mechanism for asserting a separate underlying claim, such as a claim based on a company’s breach of contract. A trustee may pursue an alter ego theory when the underlying claim belongs to the debtor corporation. If the trustee has standing to assert that claim, the trustee’s standing is exclusive and creditors cannot pursue it themselves.

The district court concluded that RGW’s underlying claim was its own claim to hold Lucido liable for the judgment arising from BAD’s breach of RGW’s subcontracts. The court treated RGW’s allegations that Lucido diverted BAD’s assets as evidence supporting the alter ego theory, rather than as the basis of a separate substantive claim for injury to BAD. Because RGW was pursuing liability for its own judgment, and the trustee did not claim a right to enforce that judgment against BAD, RGW’s claim did not belong to the trustee.

The court therefore held that the bankruptcy court erred to the extent it disallowed any part of RGW’s claim. Because the district court found that the claim belonged to RGW, it did not decide whether the bankruptcy court had implicitly ruled on laches or whether any such ruling was erroneous.

Disposition

The district court reversed the bankruptcy court’s order sustaining the objection to Claim 10, except for the phrase allowing RGW an allowed claim of $3,450 based on a sanctions award against Mark Lucido. The district court ordered the clerk to close the case.