                                                                             FILED
                    UNITED STATES COURT OF APPEALS                            MAY 20 2013

                                                                        MOLLY C. DWYER, CLERK
                            FOR THE NINTH CIRCUIT                          U .S. C O U R T OF APPE ALS




In the Matter of: FITNESS HOLDINGS               No. 11-56677
INTERNATIONAL, INC.,
                                                 D.C. No. 2:10-cv-00647-AG
              Debtor,                            Central District of California,
                                                 Los Angeles

OFFICIAL COMMITTEE OF
UNSECURED CREDITORS, of the                      ORDER
ESTATE OF FITNESS HOLDINGS
INTERNATIONAL, INC.,

              Appellant,

  v.

HANCOCK PARK CAPITAL II, L.P., a
Delaware Limited Partnership; PACIFIC
WESTERN BANK; KENTON VAN
HARTEN; MICHAEL FOURTICQ, Sr.;
HANCOCK PARK ASSOCIATES, III;
HANCOCK PARK ASSOCIATES,

              Appellees.



Before: CALLAHAN, IKUTA, and HURWITZ, Circuit Judges.

       Pacific Western Bank’s Petition for Clarification or Rehearing is

GRANTED IN PART AND DENIED IN PART. Its request for clarification is

GRANTED. The clarifications are made in the amended memorandum disposition

filed concurrently with this order. Its request for a rehearing is DENIED.
No further petitions for rehearing or rehearing en banc will be entertained.




                                   2
                                                                           FILED
                           NOT FOR PUBLICATION                              MAY 20 2013

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U .S. C O U R T OF APPE ALS




                            FOR THE NINTH CIRCUIT



In the Matter of: FITNESS HOLDINGS               No. 11-56677
INTERNATIONAL, INC.,
                                                 D.C. No. 2:10-cv-00647-AG
              Debtor,
                                                 AMENDED
                                                 MEMORANDUM *
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS, of the
ESTATE OF FITNESS HOLDINGS
INTERNATIONAL, INC.,

              Appellant,

  v.

HANCOCK PARK CAPITAL II, L.P., a
Delaware Limited Partnership; PACIFIC
WESTERN BANK; KENTON VAN
HARTEN; MICHAEL FOURTICQ, Sr.;
HANCOCK PARK ASSOCIATES, III;
HANCOCK PARK ASSOCIATES,

              Appellees.



                   Appeal from the United States District Court
                      for the Central District of California
                   Andrew J. Guilford, District Judge, Presiding


        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
                          Argued and Submitted February 4, 2013
                                   Pasadena, California

Before: CALLAHAN, IKUTA, and HURWITZ, Circuit Judges.

      In this Chapter 7 bankruptcy case, the bankruptcy court dismissed all the

trustee’s claims against defendants under Rule 12(b)(6) of the Federal Rules of

Civil Procedure. The bankruptcy court affirmed. We have jurisdiction under 28

U.S.C. §§ 158(d)(1) and 1291, and now affirm in part, reverse in part, and vacate

and remand in part.   1



                                            1

      As explained in our opinion in In re Fitness Holdings Int’l, the district court

erred in concluding that the trustee’s argument that Hancock Park’s loan to Fitness

Holdings should be recharacterized as equity was not cognizable as a matter of

law. No. 11-56677, Slip op. at ___. Because of this legal error, the district court

failed to consider whether the trustee plausibly alleged that the $11,995,500

transfer from Hancock Park to Fitness Holdings should be recharacterized as

creating an equity interest rather than debt. As a result, the district court failed to



      1
        We address trustee’s claim that the complaint sufficiently alleged that
Fitness Holdings’ transfer to Hancock Park was avoidable under 11 U.S.C.
§ 548(a)(1)(B) (Claims 2 and 7 of the First Amended Complaint) in an opinion
filed concurrently with this disposition.

                                            2
apply the correct standard in considering whether the trustee’s allegations that

Fitness Holdings made its transfer to Hancock Park without reasonably equivalent

value plausibly gave rise to an entitlement to relief. Fitness Holdings, No. 11-

56677, slip op. at __. Accordingly, we vacated the district court’s dismissal of the

11 U.S.C. § 548(a)(1)(B) constructive fraudulent conveyance claim and remanded

for further proceedings. Fitness Holdings, No. 11-56677, slip op. at __.

      The district court’s legal error also infected its analysis of many of the

trustee’s other claims. First, because the district court erred in failing to consider

whether applicable state fraudulent conveyance law allowed a court to

recharacterize a loan as an equity interest, it failed to apply the correct standard in

considering whether the trustee’s allegations that Fitness Holdings transferred

$11,995,500 to Hancock Park without receiving reasonably equivalent value

plausibly alleged a claim for relief under 11 U.S.C. § 544(b)(1), which incorporates

applicable state law (claims 3, 4 and 5 of the First Amended Complaint).

      Second, the district court’s erroneous assumption that a court lacked

authority to recharacterize Hancock Park’s $11,995,500 as equity rather than debt

prevented the court from properly evaluating the trustee’s allegations (claim 1 of

the First Amended Complaint) that Fitness Holdings’ transfer of $11,995,500 to




                                            3
Hancock Park in return for an equity investment was actually fraudulent for

purposes of 11 U.S.C. § 548(a)(1)(A).

      Third, because the court failed to properly address the fraudulent transfer

claims, it also did not properly address the claim for recovery of an avoided

transfer under 11 U.S.C. § 550(a) (claim 6 of the First Amended Complaint).

      Finally, the court’s erroneous assumption prevented it from properly

evaluating the trustee’s allegations that Hancock Park, Van Harten and Fourticq

breached their fiduciary duties to Fitness Holdings (claim 9 of the First Amended

Complaint), and that Pacific Western aided and abetted the alleged breach of

fiduciary duties (claim 10 of the First Amended Complaint).

      Because the district court did not review these claims (claims 1, 3, 4, 5, 6, 9,

and 10 of the First Amended Complaint) under the correct standard, we vacate

dismissal of these claims and remand them to the district court to consider them in

the first instance. See Salmon Spawning & Recovery Alliance v. Gutierrez, 545

F.3d 1220, 1230 n.6 (9th Cir. 2008). We likewise decline to reach the merits of

Pacific Western’s argument that the in pari delicto doctrine shields it from aiding

and abetting liability, and leave it to the district court to consider this theory on

remand.

                                            2


                                            4
      We affirm the district court’s dismissal of the trustee’s claims that Fitness

Holdings’ transfer of a security interest in its assets to Pacific Western should be

avoided as an actually fraudulent transfer (claims 10, 11, and 13 of the original

complaint). The complaint asserts only that Fitness Holdings conveyed a security

interest to Pacific Western in order to obtain a $25 million loan. We cannot

reasonably infer that Fitness Holdings was attempting to “hinder, delay, or

defraud” its creditors, § 548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1), simply

because it took on secured debt to replace unsecured debt; borrowers regularly give

security interests to obtain financing. Because the complaint fails to plausibly

allege any other facts showing that the trustee has an entitlement to relief, the

district court properly dismissed the claims alleging an actually fraudulent transfer

to Pacific Western.

      The district court also properly dismissed the trustee’s claims that Fitness

Holdings’ transfer of a security interest in its assets to Pacific Western should be

avoided as a constructively fraudulent transfer (claims 12 and 14 of the original

complaint). Because the complaint alleges that Fitness Holding granted Pacific

Western the security interest in exchange for a $25 million loan, and does not

allege that the value of the security interest exceeded the value of the loan, the

trustee failed to plausibly allege that the security interest was given for less than


                                            5
reasonably equivalent value, which is a necessary element of a claim for a

constructively fraudulent transfer under both the Bankruptcy Code and state law.

§§ 548(a)(1)(B)(i); 548(d)(2)(A)(i); § 544(b)(1); Cal. Civ. Code § 3439.04(a)(2).

      Because the district court properly dismissed the trustee’s claims for

constructively and actually fraudulent transfers, the dismissal of the trustee’s claim

for avoidance of these transfers (claim 15 of the original complaint) was also

correct. See 11 U.S.C. § 550.

                                           3

      The trustee’s allegations (in claim 8 of the First Amended Complaint) that

insiders “contrived” to benefit themselves by knowingly funneling money to

themselves out of a failing company plausibly alleged the elements of a claim for

equitable subordination, namely: “‘(1) that the [defendants] engaged in some type

of inequitable conduct, (2) that the misconduct injured creditors or conferred unfair

advantage on the claimant, and (3) that subordination would not be inconsistent

with the Bankruptcy Code.’” In re First Alliance Mortg. Co., 471 F.3d 977, 1006

(9th Cir. 2006) (quoting In re Lazar, 83 F.3d 306, 309 (9th Cir. 1996)). We

therefore reverse the district court’s dismissal of this claim. Each party will bear

its own costs on appeal.




                                           6
AFFIRMED IN PART, REVERSED IN PART, VACATED IN PART, AND

REMANDED.




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