IN RE: ADAMSON APPAREL, INC., Debtor.
ARNOLD H. SIMON, Appellee ALBERTA P. STAHL, CHAPTER 7 TRUSTEE OF ADAMSON APPAREL, INC., Appellant,
Argued and Submitted, Pasadena, California December
Appeal from the United States District Court for the Central District of California. D.C. No. 2:11-cv-01204-VAP. Virginia Phillips, District Judge, Presiding.
Affirming the district court's affirmance of the bankruptcy court's judgment after a bench trial in an adversary proceeding, the panel held that a corporate insider who personally guaranteed his corporation's loan is absolved of any preference liability to which he might otherwise have been subjected, where he had previously waived his indemnification rights against the corporation, he had a bona fide basis for doing so, and he took no subsequent actions to negate the economic impact of that waiver.
The panel held that the insider did not have any preference liability regarding a pre-petition payment of the loan because, in light of his indemnification waiver, he was not a creditor of the corporation, which was a chapter 7 debtor. The panel declined to follow a line of bankruptcy court cases holding that an insider guarantor is subject to preference liability where a transfer works to his benefit, even if he has unconditionally waived all claims against the debtor.
Dissenting, Judge Graber wrote that she would follow every bankruptcy court to have decided the issue and hold that insider-guarantors such as the insider here are creditors. She also wrote that, in deciding that the waiver was valid, the majority erred by making a finding regarding the purpose of a payment made by the insider and in relying on a statement made by counsel at oral argument.
James K.T. Hunter (argued) and Malhar S. Pagay, Pachulski Stang Ziehl & Jones LLP, Los Angeles, California, for Appellant.
Leslie A. Cohen (argued) and J'aime K. Williams, Leslie Cohen Law PC, Santa Monica, California, for Appellee.
Before: Ronald Lee Gilman,[*] Susan P. Graber, and Consuelo M. Callahan, Circuit Judges. GRABER, Circuit Judge, dissenting.
GILMAN, Circuit Judge
This case presents an unresolved issue of bankruptcy law. The question is whether a corporate insider who personally guaranteed his corporation's loan is absolved of any preference liability to which he might otherwise have been subjected, where he had previously waived his indemnification rights against the corporation, he had a bona fide basis for doing so, and he took no subsequent actions to negate the economic impact of that waiver. Bankruptcy courts have split on this issue, and neither party has been able to cite to any district-or appellate-court decision addressing the question.
Both the bankruptcy court and the district court below ruled in favor of the corporate insider. For the reasons set forth below, we AFFIRM the judgment of the district court.
A. The loan, pledges, and guaranties
Adamson Apparel, Inc. (Adamson) manufactures and sells clothing and accessories. On April 18, 2002, Adamson took out a multimillion-dollar loan from CIT Group Commercial Services, Inc. (CIT). To secure the loan, Adamson granted CIT a lien on its inventory and accounts receivable.
Arnold H. Simon, Adamson's president and CEO, subsequently entered into two separate agreements with CIT to guarantee the loan: a Cash Collateral Pledge Agreement (the Pledge) and a Limited Guaranty (the Guaranty). In these agreements, Simon took responsibility for Adamson's debt in the event that Adamson was unable to fully repay the loan. Simon would ordinarily have been entitled to have Adamson reimburse him for any amount that he was obligated to pay on the corporation's behalf to settle the loan with CIT, but the agreements waived that right to indemnification. (As used throughout this opinion, Simon's right to " indemnification" encompasses his rights to subrogation, reimbursement, or any other form of repayment.)
Over the next 18 months, the Pledge and the Guaranty were revised several times. Both agreements were initially signed on November 12, 2002. The Guaranty was updated on February 11, 2003, then " amended and restated" on April 9, 2003. Both documents were further " amended and restated" on April 25, 2003, then updated again on August 5, 2003. A letter dated December 2, 2003 increased the amount that had been guaranteed in the August 5, 2003 update of the Pledge.
Toward the end of 2003, an entity known as BP Clothing L.L.C. purchased a large amount of merchandise from Adamson. On December 18, 2003, Adamson instructed BP Clothing to transfer the purchase price (specifically, $4,989,934.65) to CIT in partial satisfaction of the debt owed by Adamson to CIT, this being the very debt guaranteed by Simon. Adamson filed for bankruptcy under Chapter 11 of the Bankruptcy Code nine months later. On or about March 31, 2004, Simon paid the balance of the loan, totaling over $3.5 million, from his personal funds.
B. Lower-court proceedings
After Adamson filed for Chapter 11 bankruptcy in September 2004, the Committee of Unsecured Creditors (the Committee) was appointed to represent the interests of Adamson's unsecured creditors. The Committee filed this adversary action against Simon under a preference-liability theory. Preference liability is " a mechanism that allows [a] debtor or trustee to recover from creditors who received payments in the weeks or months prior to the bankruptcy so that they can be distributed to all bankruptcy estate creditors in accordance with their priority." Leslie A. Cohen & J'aime K. Williams, Guarantor Preference Liability, 31 Cal. Bankr. J. 795, 795 (2011). The Committee sought to recover from Simon the $4,989,934.65 paid by BP Clothing to CIT in December 2003, arguing that Simon was a corporate insider who received a preference because he had guaranteed the loan from CIT. Any reduction in that debt was therefore to his benefit.
In June 2007, Simon filed a motion for summary judgment, contending that because he had waived his right to claim indemnification from Adamson, he was not a creditor and therefore not subject to preference liability. The bankruptcy court granted that motion the following month. It held that Simon had fully waived his right to indemnification, which eliminated his status as a creditor for preference-liability purposes. The Committee appealed to the district court.
The district court reversed the grant of summary judgment and remanded the case to the bankruptcy court for further factual development. It pointed out that an ambiguity existed between the Pledge and the Guaranty as to whether Simon had fully and irrevocably waived his right to indemnification. The case was remanded
to the bankruptcy court for a resolution of this issue.
A bench trial in bankruptcy court took place in September 2010. At trial, Simon testified that he understood at all times that he would never have any right to seek indemnification from Adamson for any funds that he expended to settle its debt to CIT. He told the court that CIT had required him to include the indemnification waiver in the Pledge and the Guaranty, although his own preference would have been to retain the right to seek reimbursement. Simon also pointed out that he had never filed a proof of claim in Adamson's bankruptcy case.
In addition to Simon's testimony, the bankruptcy court took a plethora of documentary evidence under consideration. The court entered its decision in favor of Simon in December 2010. It held that the Committee had failed to carry its burden of establishing Simon's " creditor" status under 11 U.S.C. § § 101(10) & 547(b). Simon's testimony as to his understanding of his rights under the Pledge and the Guaranty, together with his failure to file a proof of claim in Adamson's bankruptcy case, defeated the Committee's arguments based on the ambiguous wording of the documents. The bankruptcy court subsequently entered judgment in favor of Simon, holding that he was exempt from preference liability because he was not a creditor of Adamson.
The Committee again appealed to the district court, which affirmed the judgment of the bankruptcy court in August 2012. It held that the bankruptcy court did not commit clear error in concluding that the Committee had failed to establish that Simon was a creditor of Adamson. This timely appeal followed, with the duly appointed Trustee being substituted for the Committee after Adamson's bankruptcy case was converted from Chapter 11 to Chapter 7.
A. Standard of review
" We review de novo the district court's decision on appeal from the bankruptcy court, applying the same standards applied by the district court, without deference to the district court." In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th Cir. 2012) (citation omitted). The bankruptcy court's findings of fact are reviewed under the clear-error standard, and its conclusions of law are reviewed de novo. Id. The parties agree that New York state law governs the substance of this case in accordance with the choice-of-law provisions in the contracts at issue.
B. Simon's status as an alleged creditor of Adamson
Title 11 U.S.C. § 547(b)(1) requires that the transfer of assets in question must be " to or for the benefit of a creditor" in order for preference liability to attach. In relevant part, a creditor is defined in § 101(10) of the Bankruptcy Code as an " entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(10). A claim is further defined as a " right to payment" or a " right to an equitable remedy for breach of performance if such breach gives rise to a right to payment." 11. U.S.C. § 101(5). The Trustee bears the burden of establishing that Simon meets this definition, as well as satisfying each of the other preference-liability requirements, in order to prevail on its claim against him. 11 U.S.C. ...