The Court apportioned disputed attorneys’
fees and costs according to whether the work related to capped (future
rent) or uncapped damages (ordinary contract breaches). In
re Kupfer, 579 B.R. 222 (Bankr. N.D. Cal. 2017).
On remand, the Bankruptcy Court was tasked with allocating disputed
attorney fees ($137,250) and costs ($56,934) as capped pursuant to §
502(b)(6) or uncapped. “Fees attributable to litigating Creditors’ claims
for future rent are capped, because such claims would not arise were the
leases not terminated.” However, fees attributable to past rent and
counterclaims concerning ordinary contract breaches, independent of lease
termination, are not capped, because Creditors were entitled to these
independent of the lease termination. The Bankruptcy Court declined to
apply the 61.539 percent of damages applicable to lost future rent (i.e.
the capped amount) to its determination of the capped and uncapped amount
of disputed fees and costs. Instead, the Court reviewed time sheets,
analyzing the actual work performed to see if it related to the future
rent or to the past rent and other issues tried. Based on this analysis,
the Bankruptcy Court determined that 87.877 percent of the disputed fees
were not capped. The Bankruptcy Court then applied this same percentage to
the disputed costs (which consisted entirely of fees for the arbitrators’
services), rather than using the alternative methods urged by the parties.
Debtors argued that using the move-out dates would designate 25% of
disputed costs to past rent and 75% to future rent. Creditors argued that
virtually all of the work performed by the arbitrators related to past
rent issues.
Limited substantive consolidation
order did not eliminate mutuality concerns for setoff.
In re Cook Inlet Energy, LLC, 580 B.R. 842 (Bankr. D. Alaska
2018).
A parent company and its subsidiary, both Alaska entities, filed
bankruptcy, their cases were substantively consolidated, and a joint plan
of reorganization was confirmed that permanently enjoined any setoff
assertions or right of recoupment against either debtor. Both debtors
engaged in natural gas exploration and production, for which Alaska
provided certain state tax credits, but occasionally audited those
credits. After the plan was confirmed, Alaska began to audit the tax
credits paid to the subsidiary prior to the bankruptcy case and claimed it
could offset any overpayments to the subsidiary against any tax credits
owed to the parent. The debtors sought an order stating this was precluded
by the confirmed plan. Although confirmation of the debtors’ plan
discharged Alaska’s claims for affirmative recovery of any pre-petition
tax claims it might have had against one debtor, the confirmed plan did
not preclude a defensive offset. Alaska, however, did not have the right
to offset its liability to a debtor by any amounts owed to it by a
co-debtor pursuant to 11 U.S.C. § 553(a) because any proposed offsets
involved separate entities in different capacities and mutuality was
lacking.
Claim for redemption amount asserted
by former member of debtor-LLC had to be subordinated.
In re Ameriflex Engineering LLC, 587 B.R. 108 (Bankr. D.
Oregon).
Creditor was expelled as a member of an LLC. Prior to the LLC’s
bankruptcy filing, creditor got an arbitration panel award for the value
of his membership interest. As of the filing date, the award had not been
confirmed by a court as a judgment. LLC then filed for bankruptcy and
sought to subordinate the creditor’s claim under 510(b). Even though the
arbitration award was not an award of damages, as a final and
non-appealable determination of what should have been paid to the creditor
for his interest in the LLC, the award became the functional equivalent of
a damages award when the debtor failed to purchase his interest within the
required time. The creditor’s interest was effectively converted to an
unsecured claim when he was expelled and the arbitration panel determined
the proper purchase price. As such, his claim had to be subordinated below
other non-priority, unsecured creditors. His interest, however, was not
subordinated below the interests of the other members, as he was not an
equity interest holder on the date that the debtor filed for bankruptcy.
TURNOVER AND
AVOIDANCE ACTIONS
The “safe harbor” of § 546(e) does not
exclude a transaction from a preference analysis simply because a
financial institution was involved in some limited way.
Merit Management Group, LP v. FTI Consulting, Inc., 138 S.Ct.
883 (2018).
When determining if a transfer is fraudulent, and whether the safe
harbor for financial netting applies, the plain meaning of 11 U.S.C. §
546(e) dictates that the only relevant transfer for purposes of the safe
harbor is the transfer that the trustee seeks to avoid (i.e., A -- D). The
intermediate transfers (referred to in the decision as A -- B -- C -- D)
which might involve banks who could, independently assert the safe harbor,
do not control. “The language of 546(e), the specific context in which the
language is used, and the broader statutory structure all support the
conclusion that the relevant transfer for purposes of the 546(e) safe
harbor inquiry is the overarching transfer that the trustee seeks to
avoid.”
Ninth Circuit certifies to DC Court of
Appeals question of bankrupt law firm’s ability to recover fees paid to
former partners who are now part of new firms (Jewel v. Boxer issue).
Diamond v. Hogan Lovells US LLP, 883 F.3d 1140 (9th Cir. 2018).
The Ninth Circuit held that it would certify three questions: (1)
whether a dissociated partner owes duty to his or her former law firm to
account for profits earned post-departure on ongoing legal matters; (2)
whether, if a dissociated partner owes a duty to account for profits in
such circumstances, a partner’s former law firm is allowed to recover
those profits; and (3) what interest, if any, a dissolved law firm has in
profits earned on matters in progress at time of dissolution.
Creditors who received misappropriated
funds from debtor’s principal were initial transferees, not subsequent
transferees entitled to safe harbor.
Matter of Walldesign, Inc., 872 F.3d 954 (9th Cir. 2018).
The Ninth Circuit held that innocent third parties could be held liable
for fraudulent transfers by a corporate insider. A corporate president
maintained a false bank account using corporate funds and paid his
personal creditors using company money. The corporate president was not
the initial transferee under 11 U.S.C. § 550(a)(1) because he did not have
dominion over the funds in a personal capacity. The president was strictly
liable as the party for whose benefit the transfers were made. The
recipients, his personal creditors, were liable as initial transferees
because they received funds directly from the corporate debtor. The court
notes that the corporate president did not establish ownership of the
company funds he used by operating a separate, secret account in the
corporation’s name. Legally, the corporate president never had legal title
to the funds he had secreted. Adding his spouse did not result in a change
of ownership either.
A “transfer” occurs for purposes of §
549 when the check clears the debtor’s bank account.
In re Cresta Technology Corporation, 583 B.R. 224 (B.A.P. 9th
Cir. 2018).
The debtor’s principal paid the debtor’s bankruptcy attorney via a
cashier’s check and then obtained a regular check from the debtor, which
he deposited in his account. The check cleared debtor’s account four days
later, but the debtor filed bankruptcy on the same day the check was
deposited. The trustee argued that a transfer via ordinary check occurs
for § 549 purposes when the check clears, which is a well-established rule
for preference cases under § 547. The debtor’s principal argued that the
transfer took place upon delivery, thus the transfer was a pre-petition
transfer to which he had a “contemporaneous exchange” defense under § 547.
The Bankruptcy Court granted the trustee’s motion for summary judgment and
the case was appealed to the BAP. The BAP affirmed. It relied on the U.S.
Supreme Court ruling in Barnhill, which overruled Ninth Circuit law
holding that a transfer for § 547(b) purposes occurs on delivery. The BAP
held that § 547 defenses only apply when the delivery and honoring of the
check occur pre-petition. The court noted that the cases interpreting
Barnhill have consistently held that it is not limited to § 547 and that
its interpretation of the term “transfer” under § 101(54) as concerns an
ordinary check applies to all provisions of the Code, not just § 547. As
such, the date an ordinary check is honored also applies to § 549 and the
principal was held to have received a post-petition transfer that was
unauthorized and must be returned.
Bankruptcy Courts have authority to
issue order directing fugitive debtor to sign consent directive.
In re Mastro, 585 B.R. 587 (B.A.P. 9TH CIR. 2018).
Involuntary Chapter 7 debtor fled the country in an effort to avoid
turning over certain assets. When extradition efforts failed, trustee
sought to have the Bankruptcy Court compel debtor to sign a consent
directive in an attempt to identify debtor’s foreign accounts. The
Bankruptcy Court held it did not have the authority to do so. The BAP
reversed and remanded, concluding that a chapter 7 trustee has the power
under the Bankruptcy Code to request a consent directive and a Bankruptcy
Court has authority under § 105(a) and Bankruptcy Rule 2004 to issue one.
Debt need not be undisputed for
turnover purposes.
In re Process America, Inc., 588 B.R. 82 (Bankr. C.D. Cal. 2018).
This dispute concerned a motion for turnover related to a 2004 contract
concerning credit and debit processing. The debt owing under the contract
was disputed. The Bankruptcy Court noted that there is a split in
authority among the Circuits (but not the Ninth Circuit) about the issue,
which split was examined by an Oklahoma Bankruptcy Court decision. Judge
Tighe agreed with the plain language analysis of the Oklahoma Bankruptcy
Court, concluding that § 542(b) does not include a requirement that a debt
be undisputed in order to be subject to turnover. The court then held that
turnover of disputed funds could be ordered when the creditor has filed a
proof of claim and subjected itself to the Bankruptcy Court’s
jurisdiction.
Miscellaneous (e.g., chapter 15 issues, attorney disciplinary issues,
etc.)
The officers of a union
trust fund cannot be considered fiduciaries of funds that were never
contributed to the fund, thus avoiding liability under ERISA.
Glazing Health and Welfare Fund v. Lamek, 896 F.3d 908 (9th Cir.
2018).
This case involves union health and insurance deposits that were not
made by a company’s management. The union trust funds sought to hold the
individuals liable for failing, as fiduciaries, to make required payments.
The Ninth Circuit held that a fiduciary duty only arises when funds are
actually contributed to the fund. In other words, even if an ERISA plan
treats unpaid contributions as plan assets, the employer who fails to make
the contribution is not a fiduciary with respect to those funds.
Bankruptcy Court
improperly excluded evidence under the sham affidavit rule.
In re EPD Investment Co., LLC, 587 B.R. 711 (C.D. Cal. 2018).
Chapter 7 trustee filed adversary complaint against defendants for
avoidance of fraudulent transfers and moved for summary adjudication. The
Bankruptcy Court made Report and Recommendation (R&R) and proposed
findings of action and conclusion of law granting trustee’s motion for
District Court to consider. Defendants objected to the R&R, arguing that
the Bankruptcy Court improperly excluded evidence which would have raised
a factual dispute precluding summary adjudication.
The Bankruptcy Court excluded evidence under the sham affidavit rule,
which provides that a party cannot create an issue of fact precluding
summary judgment by introducing an affidavit contradicting his prior
testimony. The District Court rejected the R&R, concluding that the
exclusion of the evidence was in error because it did not necessarily
contradict prior testimony under the facts. Further, in rejecting the
evidence, the Bankruptcy Court improperly resolved a disputed fact by
accepting plaintiff’s evidence.
Chapter 7 trustees should not purchase
estate property at foreclosure sales, no matter how good a deal they get.
In re Leeds, 589 B.R. 186 (Bankr. D. Nev. 2018).
Debtor filed a chapter 7 case in Las Vegas in 2011. Her real property,
valued at $307,000, was hopelessly underwater at that point. Her
homeowner’s association later foreclosed on the property and a firm called
SFR Investments Pool 1, LLC paid $42,000 to purchase it. Under Nevada law,
the homeowner’s association lien had priority over all liens so the
foreclosure sale had the effect of wiping out Bank of America’s first
priority lien of more than $600,000. No one, including the homeowners’
association or the other parties to the foreclosure ever asked for relief
from stay during the pendency of the chapter 7 case. Several years later,
the foreclosing trustee brought an interpleader action to distribute the
proceeds of sale and sought retroactive relief from stay. Bank of America
opposed when it realized its lien could be restored if the sale was held
void. While the procedural background of the case is complex, the basis
for the decision is not: It shortly came to light that SFR, which
purchased the property at the foreclosure sale, was in fact owned by the
chapter 7 trustee in Debtor’s case, Rosenberg. The Bankruptcy Court’s
decision is a detailed analysis of which actions in the complex case
violated the stay and which did not. It is an outright indictment of
self-dealing and fiduciary fraud by Rosenberg. It is not surprising that
the Bankruptcy Court found, on a motion for annulment of the automatic
stay ab initio, that the facts did not satisfy the applicable test for
relief from stay nunc pro tunc found in In re Fjeldstad, 293 B.R.
12 (B.A.P. 9th Cir. 2003).
*Judge Stephen L. Johnson was appointed to the bench in the
Northern District of California by the Ninth Circuit Court of Appeals in
2010.
*Jennifer C. Hayes is a partner of Finestone Hayes LLP, a San
Francisco law firm specializing in insolvency law, bankruptcy law, and
business disputes. Prior to her current firm, Ms. Hayes was a partner at
the international law firm, Dentons.
*Ori Katz is a partner in the Finance and Bankruptcy practice
group in the San Francisco office of Sheppard, Mullin, Richter & Hampton
LLP, where he is also the Co-Office Managing Partner. He specializes in
business bankruptcies and other aspects of insolvency law
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