Schoenmann v. Chen et al

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1 This Memorandum Decision constitutes the court’s findings
of fact and conclusions of law under Fed. R. Bankr. P. 7052.
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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 03-32157DM
GEORGE QUINN CHEN, 	)
)
Debtor. 	) Chapter 7
___________________________________)
E. LYNN SCHOENMANN, as Trustee of 	) Adversary Proceeding
the Chapter 7 Estate of George 	) No. 07-3108DM
Quinn Chen, Debtor, 	)
)
Plaintiff, 	)
)
v. 	)
)
GEORGE QUINN CHEN, an individual 	)
CYNTHIA WONG, an individual, 	)
SHANGHAI 1930 LLC, a California 	)
limited liability company, and 	)
SHANGHAI 1930 RESTAURANT PARTNERS, )
L.P., a California limited partner-)
ship, 	)
)
Defendants. )
___________________________________)
MEMORANDUM DECISION ON MOTION TO RECONSIDER
I. BACKGROUND 1
On January 1, 2002, debtor, George Quinn Chen (“Chen”) and
Cynthia Wong (“Wong”), husband and wife, executed a document
purporting to transfer 51% of Chen’s 100% interest in Shanghai
Signed and Filed: August 04, 2009
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
August 05, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 1 of 8

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2 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and
to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as
enacted and promulgated prior to the effective date of The
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. 109-8, 119 Stat. 23.
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1930, LLC (“the LLC”) to Wong, which they believed effectuated a
transmutation of Chen’s separate property to Wong’s separate
property under Cal. Fam. Code § 852. 	Shanghai 1930 is a
restaurant Chen founded in 1997. 	The restaurant is owned by
Shanghai 1930 Restaurant Partners, L.P. 	The LLC is the general
partner of the L.P., and it owns approximately 70% of the
partnership. 	The transfer of Chen’s 51% ownership interest in the
LLC to Wong was in exchange for her agreement to manage the day-
to-day operations of the restaurant. 	She has successfully managed
the restaurant since that time.
Chen filed a chapter 13 bankruptcy 2 on July 25, 2003, which
was later converted to chapter 11 then to chapter 7. 	In 2007, the
chapter 7 trustee (“Trustee”) sought to sell the estate’s interest
in the LLC. 	She contended that the estate held 100% of the
ownership interest in the LLC pursuant to section 541(a). 	Wong
objected, contending that she owned 51% of the LLC.
On November 14, 2007, the court approved the sale of the
estate’s interest in the LLC to Wong, leaving open the question of
what percentage of the LLC belonged to the estate. 	Wong paid the
estate $75,000, plus she agreed to pay an additional $300,000 if
it was later determined that the estate owned 100% of the LLC
shares. 	If the estate owned anything less than a 100% interest,
then Wong owed nothing more. 	The Trustee holds a deposit from
Wong for $150,000 to be credited against the $300,000 contingent
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 2 of 8

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consideration, if owed.
The Trustee’s first cause of action in this adversary
proceeding sought to declare that the estate owned a 100% interest
in the LLC on the sale date. 	On August 26, 2008, Defendants filed
their Motion for Summary Judgment on Plaintiff’s First Cause of
Action, contending that Wong owned a 51% interest on that date as
her separate property. 	Accordingly, Defendants argued, Wong owed
nothing beyond the $75,000 to the Trustee for the shares. 	The
Trustee filed her Opposition and Cross-Motion for Partial Summary
Judgment on this issue on September 12, 2008.
The court determined that the transfer document executed on
January 1, 2002, by Chen and Wong failed to comply with the
transmutation requirements of Cal. Fam. Code § 852 and thus it
only effectuated a transfer of Chen’s 100% separate property
interest in the LLC to the community property of the marital
estate. 	As a result, on November 14, 2008, the court denied
Defendants’ motion and granted the Trustee’s cross-motion,
determining that the estate owned 100% of the LLC shares at the
time of sale and thus Wong had to tender the agreed payment to the
Trustee.
Pursuant to Rule 9024 and Fed. R. Civ. P. 60(b)(1),
Defendants, with new counsel, filed a Motion to Reconsider Order
Granting Cross-Motion for Summary Judgment on this issue on April
20, 2009. 	Defendants believed that their previous counsel
overlooked an important provision of California family law that
would have given the court a separate and independent ground on
which to render summary judgment in their favor. 	They argued that
even though their transmutation effort failed on January 1, 2002,
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 3 of 8

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Wong’s services at the restaurant, which she contends are her
separate property, increased the value of Chen’s separate
property, the LLC shares. 	Thus she is entitled to a reimbursement
right under Cal. Fam. Code § 2640(c) in the form of LLC shares.
Accordingly, Defendants contend that the Trustee is not entitled
to any additional consideration for Wong’s purchase of the
estate’s interest in the LLC since Wong had obtained an equitable
interest in at least some portion of the LLC shares by the time of
the sale in November 2007. 	The Trustee filed her opposition to
Defendants’ motion on May 15, 2009.
At the May 27 hearing on Defendants’ motion, counsel for
Defendants cited cases and raised new arguments not presented in
their brief. 	In light of this, the court allowed the Trustee to
file a supplemental response to address the new cases and
arguments raised by Defendants. 	The Trustee filed her response on
June 15, 2009, and the matter was deemed submitted.
As explained below, leaving aside the Fed. R. Civ. P.
60(b)(1) procedural issues raised by the Trustee, the court
rejects Defendants’ arguments and therefore denies their motion.
II. DISCUSSION
In support of their claim of Wong’s reimbursement right,
Defendants rely on Cal. Fam. Code § 2640(c) which provides in
relevant part:
§ 2640. Contribution to the acquisition of property of the
community property estate; waivers; amount of reimbursement
. . . .
(c) 	A 	party 	shall 	be 	reimbursed 	for 	the 	party's 	separate
property 	contributions 	to 	the 	acquisition 	of 	property 	of
the 	other 	spouse's 	separate 	property 	estate 	during 	the
marriage, unless there has been a transmutation in writing
. 	. 	. 	or 	a 	written 	waiver 	of 	the 	right 	to 	reimbursement.
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 4 of 8

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Cal. Fam. Code § 2640(c) became effective on January 1, 2005.
Prior to the enactment of subsection (c), a reimbursement right
under § 2640 applied only in cases where one spouse used his or
her separate property to acquire community property. 	Although §
2640 appears to apply only in cases of “acquisition,” it has been
interpreted to include a reimbursement right to a spouse who
contributed his or her separate property to “improve” community
property. 	See In re Marriage of Cross, 94 Cal. App. 4th 1143
(2001). 	Presumably, even with the addition of subsection (c),
this interpretation has not changed.
Therefore, as of January 1, 2005, upon dissolution a spouse
can obtain a reimbursement right if he or she contributed his or
her separate property, generally in monetary form, to acquire or
improve the other spouse’s separate property. 	Defendants concede
that subsection (c), which gives rise to Wong’s potential claim,
did not exist until 2005.
Generally, legislative enactments are presumed to operate
prospectively and not retroactively, unless the legislature
intends otherwise. 	McCoy v. Bank of Am. (In re McCoy), 111 B.R.
276, 281 (9th Cir. BAP 1990)(citing In re Marriage of Bouquet, 16
Cal. 3d. 583, 587 (1976)). 	Nothing in the legislative history
regarding subsection (c) suggests that it be applied
retroactively, and, in fact, retroactively applying § 2640 would
result in an unconstitutional deprivation of the other spouse’s
property rights; to apply it deprives the owner-spouse of due
process. 	Walrath v. Walrath (In re Marriage of Walrath), 17 Cal.
4th 907, 915 (1998). 	Therefore, Wong’s reimbursement right of an
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 5 of 8

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3 Defendants cited two cases to support their argument that a
spouse’s contribution of separate property services to the
improvement of the other spouse’s property can form the basis of a
Cal. Fam. Code § 2640(c) reimbursement right - Nicolson v. Saprks
(In re Marriage of Nicolson), 104 Cal. App. 4th 289, 296 (2002),
and Cross v. Cross (In re Marriage of Cross), 94 Cal. App. 4th
1143 (2001). 	Neither of these cases support their position.
First, both cases were decided before subsection (c) was enacted,
which provides the basis for Wong’s claim. 	Second, neither of the
cases discuss “services” but contemplate only the contribution of
funds that improved community, not separate, property.
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interest in the LLC shares, if any, could have only began accruing
after January 1, 2005. 	The sale occurred in November 2007. 	In
the typical dissolution case, Wong’s reimbursement right claim, if
any, would constitute only the equitable interest she accrued in
the LLC shares from January 1, 2005 to November 14, 2007.
However, even if subsection (c) applies to that relevant time
period, the Defendants have another problem to overcome. 	They
contend that Wong’s services to the restaurant are her separate
property, which gives rise to her reimbursement right. 	That
argument must fail, as long established California law holds that
a spouse’s effort, time and skill provided during the marriage are
community assets. 	Worth v. Worth (In re Marriage of Worth), 195
Cal. App. 3d 768, 773 (1987). 	Further, even if Wong’s services
constituted her separate property, the Defendants offer no
authority to support their position that services which improve
the other spouse’s separate property, as opposed to expenditures
or contributions of funds, can entitle the non-owner spouse to a
reimbursement right under Cal. Fam. Code § 2640(c). 3
Even presuming Defendants are correct in their legal theories
regarding Wong’s services, and that subsection (c) could apply to
the equitable interest she accrued in the LLC shares from January
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1, 2005 to November 14, 2007, the issue of bankruptcy in this case
defeats their claim entirely.
The characterization of property as separate or community as
of the date of the petition, so as to be included or excluded from
property of the estate, is determined under applicable state law.
McCoy, 111 B.R. 276, 279 (9th Cir. BAP 1990)(citing 4 Collier on
Bankruptcy ¶ 541.15 (15th ed. 1988)). 	However, once that
determination is made, federal bankruptcy law dictates to what
extent that interest is property of the estate. 	In re N.S.
Garrott & Sons, 772 F.2d 462, 466 (8th Cir. 1985); 11 U.S.C. §
541. 	Furthermore, when a debtor files bankruptcy, an automatic
stay immediately arises pursuant to section 362(a). 	It effects an
immediate freeze of the status quo by precluding and nullifying
most postpetition actions against the debtor in nonbankruptcy
fora, judicial or nonjudicial, as well as most extrajudicial acts
against the debtor, or affecting property in which the debtor, or
the debtor's estate, has a legal, equitable or possessory
interest. 	I.C.C. v. Holmes Transp., Inc. 931 F.2d 984, 987 (1st
Cir. 1991); Hillis Motors Inc. v. Haw. Auto. Dealers’ Ass’n, 997
F.2d 581, 585 (9th Cir. 1993).
Here, there was no division of the marital estate property or
an effective transmutation under state law prior to Chen’s
bankruptcy. 	Therefore, as of the petition date, July 25, 2003,
Chen held a 100% ownership interest in the LLC as his separate
property, and thus it was property of Chen’s estate under section
541. 	As property of the estate, absent an agreement with the
Trustee or order from this court, the automatic stay of section
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362(a) effected an immediate freeze of the status quo, this
preventing any of Chen’s 100% interest in the LLC shares from
being transmuted into Wong’s separate property. 	Therefore, as a
matter of law, Wong has no reimbursement right of the LLC shares
under Cal. Fam. Code § 2640(c).
Yet another problem with Defendants’ position is the fact
that what Wong’s efforts improved was the restaurant, which is
owned by Shanghai 1930 Restaurant Partners, L.P. 	Therefore,
because of this “double-entity” issue, the court is not persuaded
that Wong’s efforts that benefitted the limited partnership would
entitle her to a reimbursement right of shares of the LLC.
Defendants did not cite, and the court could not locate, any
California case that supports their position on this issue.
Finally, all cases cited by the Defendants involved the
division of property upon dissolution. 	Since there was no
dissolution here, the court finds no basis to conclude that Cal.
Fam. Code § 2640(c) is even applicable to the facts of this case.
III. CONCLUSION
For the reasons stated above, the court denies Defendants
motion to reconsider. 	The Trustee’s second and third causes of
action have been taken under submission, and a memorandum decision
will soon be issued disposing of those actions. 	A final judgment
on this motion and the remaining causes of action is to follow.
* * * END OF MEMORANDUM DECISION * * *
Case: 07-03108 Doc# 79 Filed: 08/04/09 Entered: 08/05/09 14:37:17 Page 8 of 8