The authors gratefully acknowledge the assistance of Stephen Finestone
and Ryan Witthans of Finestone Hayes LLP, the summer associates,
and clerks of Sheppard Mullin Richter & Hampton LLP, and Laurent Chen
and Ken Conlan, Law Clerks to the Honorable Stephen Johnson.
This article is a reprint of a portion of the Recent Developments in
Business Bankruptcy 2018 originally prepared for the Bay Area Bankruptcy
Forum and the San Francisco Bar Association.
Because the Ninth Circuit’s mixed question of fact and law for the
non-statutory insider test is more factual than legal, an appellate court
should review this aspect of a non-statutory insider determination under a
U.S. Bank Nat. Ass’n ex rel. CWCapital Asset Management LLC v.
Village at Lakeridge, LLC, 138 S. Ct. 960 (2018).
The case arises out of a debtor’s efforts to cramdown its chapter 11
plan of reorganization. Debtor’s primary debts were $10 million on a bank
loan and $2.76 million owed to its parent company, MBP. Debtor could
separately classify the bank and MBP but, as an insider, MBP’s vote could
not be the basis for a cramdown plan. A member of MBP’s board and one of
debtor’s officers, Bartlett, approached a third party, Rabkin, and sold
him MBP’s claim for $5,000. Rabkin voted in favor of Debtor’s plan. The
bank argued that Rabkin was a non-statutory insider, based upon his
romantic relationship with Barlett and the fact that the purchase of MBP’s
claim was not an arm’s length transaction. The Bankruptcy Court rejected
the bank’s argument, noting that the investment was a speculative one for
which Rabkin conducted adequate due diligence and, even though there was a
romantic relationship, Rabkin and Bartlett lived in separate homes and had
independent finances. The Ninth Circuit affirmed, holding (in a split
decision) that the determination of non-insider status was entitled to
The Supreme Court noted that analysis of the non-statutory insider
issue involved three issues: one purely legal, the second purely factual,
and the third a combination of the two. The legal issue was the
appropriate test to decide if someone is a non-statutory insider. A
court’s determination as to this issue is reviewed without deference. The
second issue – the factual findings regarding Bartlett’s and Rabkin’s
romantic relationship and Rabkin’s motivation for purchasing the claim,
are reviewed for clear error. What remains is a mixed question of law and
fact: “Given all the basic facts found, was Rabkin’s purchase of MBP’s
claim conducted as if the two were strangers to each other?” The Court
explained the considerations that go into different standards of review
and concluded that the Ninth Circuit properly applied the clear-error
standard to the lower court’s determination on the mixed question of law
Both concurring opinions note that the decision should not be
interpreted as an approval of the Ninth Circuit’s non-statutory insider
test. These opinions mention that, because the two prongs of the Ninth
Circuit’s test are conjunctive, a finding that the transaction was arm’s
length will inoculate a transaction regardless of the closeness of the
relationship with debtor as long as the relationship is not specifically
defined by the Code. This critique suggests the Supreme Court may consider
the issue in a later case and might cause the Ninth Circuit to reconsider
its conclusions in an appropriate case.
The 14-day appeal period in Bankruptcy Rule 8004 is jurisdictional
so appeals that are filed late can be dismissed.
In re Wilkins, 587 B.R. 97 (B.A.P. 9th Cir. 2018).
By a single notice of appeal, Debtor appealed separate orders of the
Bankruptcy Court converting her case to Chapter 7, granting the trustee’s
motion to sell her real property, and granting a turnover order. The
notice of appeal Debtor filed was not timely. The BAP issued a “notice of
deficiency” requesting the parties “explain why these appeals should not
be dismissed.” After reviewing the parties’ submission, the BAP in fact
dismissed the appeal for lack of jurisdiction because it found the appeal
Soon after that, the Supreme Court issued a decision in Hamer v.
Neighborhood Housing Servs. of Chicago, ___ U.S. ___, 138 S. Ct. 13
(2017), holding that Federal Rule of Appellate Procedure 4(a)(5)(C),
limiting the length of extensions to file appeals, was not a
jurisdictional rule but a “claims processing rule” that was subject to
waiver or forfeiture. Thus, violation of the rule did not mandate
dismissal of an appeal. The BAP issued an order for briefing on whether
its dismissal of the appeal filed by Debtor was inappropriate.
The BAP held the 14-day deadline for filing a notice of appeal in Rule
8002(a) is jurisdictional and not a “claims processing rule”. First, the
BAP determined there is a statutory basis for applying the 14-day time
limit in that 28 U.S.C. § 158(c)(2) expressly refers to Rule 8002(a) as
providing the time for appeal. Second, appeals to the BAP and District
Court are to be taken, under § 158(c)(2), “in the same manner as appeals
in civil proceedings are taken to the courts of appeal from the district
courts.” The process of appealing in a civil case to the court of appeal
has long been considered jurisdictional. Finally, it found public policy
reasons to justify the decision, including the frequent time limits in
bankruptcy cases which serve to expedite the administration of estates.
When a case is remanded to a trial court after appeal, the Rule of
Mandate constrains the trial court from altering decisions that were
appealed and decided. Matters not decided by the appellate court on appeal
can be modified by the trial court on remand.
In re de Jong, 588 B.R. 879 (B.A.P. 9th Cir. 2018).
This case addresses the standards that apply when Bankruptcy Court
decisions are reversed and remanded on appeal, and then appealed again.
The Debtors operated a dairy in Arizona on leased land. The lease was
terminated and the land was sold at auction in 2013 but Debtors refused to
leave, later filing their own bankruptcy case. They finally vacated the
property in 2014. The new landowner filed a claim for pre- and
post-petition damages associated with Debtors’ willful failure to vacate,
e.g., trespass. The decision involved the calculation of damages
associated with silage, or food, that the dairy cows ate during the
holdover tenancy. The Bankruptcy Court held a trial and entered a decision
awarding pre- and post-petition damages, which Debtors appealed. The
decision was reversed and remanded for recalculation of damages associated
post-petition silage. In its remand, the BAP made no mention of
recalculating the silage charges for the pre-petition period even though
those charges suffered the same flaw in calculation as the post-petition
charges that were remanded. On remand, the Bankruptcy Court modified the
damage award for the post-petition silage but it refused to change the
(obviously wrong) award to correct the pre-petition silage damage claim.
It held the BAP’s remand did not include the pre-petition silage charges.
So Debtors appealed again. In this second appeal, the BAP stated that the
Rule of Mandate means that a lower court commits jurisdictional error if
it contradicts the mandate. However, the Rule of Mandate does not prohibit
a trial court from reexamining issues that were not decided on appeal and
made part of the mandate. Because the mandate was silent on the issue of
pre-petition damages, the Bankruptcy Court had the power to change its
mind on the question of the damage award related to those charges. This
decision has been appealed to the Ninth Circuit.
Parties are not necessarily barred from appealing a decision just
because they did not object to the relief at the Bankruptcy Court.
Matter of Point Center Financial, Inc., 890 F.3d 1188 (9th Cir.
Debtor filed a chapter 11 which later converted to chapter 7. In
January 2014, the Bankruptcy Court imposed a deadline to assume all
executory contracts by February 2014. Long after that deadline passed, the
chapter 7 trustee moved to assume an operating agreement for an LLC. No
one objected and the court granted the motion. Prior to entry of order,
however, certain parties filed an emergency motion for reconsideration and
sought an order vacating the prior order approving assumption. The
Bankruptcy Court denied the motions, concluding, among other things, that
the appellant was not likely to prevail on appeal. The District Court
dismissed an appeal finding the appellant had no standing because it had
not objected to the original motion despite having notice. The Ninth
Circuit reversed. It held that standing is a prudential concern and is
satisfied if appellant is a “person aggrieved.” A person is aggrieved if
they are “directly and adversely affected pecuniarily” by a Bankruptcy
Court order. An order that diminishes one’s property, increases one’s
burdens, or detrimentally affects one’s rights affects a pecuniary
interest. The appellants could make such claims and therefore had standing
as persons aggrieved. A party can waive that right or forfeit it, however.
The Ninth Circuit held there was no waiver here because the parties
objected to the entry of the order and the Bankruptcy Court considered
their arguments on reconsideration. It could not make a finding on whether
he parties had forfeited their rights, however, and remanded on that basis
Automatic Stay / Jurisdiction, Standing, or Process
Ship owner’s bankruptcy filing did not divest the District Court of
in rem jurisdiction over ship. The automatic stay does not apply to
maritime liens. The Bankruptcy Court had no authority to sell the ship
free and clear of a maritime lien.
Barnes v. Sea Hawaii Rafting, LLC, 886 F.3d 758 (9th Cir. 2018).
Barnes, a seaman, was severely injured at the outset of a night
snorkeling trip in Kona. The ship (the Tehani) exploded, and the hatch
struck Barnes on his back and head, making him no longer able to work or
drive a car. SHR, the company that owned the Tehani, lacked insurance to
cover Barnes’ medical expenses. Barnes sued SHR and the Tehani in District
Court seeking “maintenance and cure.” Shortly before trial, SHR filed a
Chapter 7 petition. The Bankruptcy Court partially lifted the stay to
permit the District Court to adjudicate Barnes’ maritime lien against the
Tehani. The Bankruptcy Court then approved the Trustee’s sale of the
Tehani free and clear of Barnes’ lien under 363(f)(4). Barnes appealed the
District Court’s orders regarding in rem jurisdiction over the Tehani. The
Trustee argued that, even if the District Court erred, Barnes’ claims were
moot, because the Bankruptcy Court authorized the sale of the Tehani free
and clear of liens. The Ninth Circuit rejected this argument, holding that
the Bankruptcy Court lacked jurisdiction to dispose of Barnes’ maritime
lien. First, the automatic stay did not apply to Barnes’ claims to enforce
his maritime lien, because § 362(a)(4) is limited to land-based
transactions where: (1) a recording of a lien interest is required; and
(2) the creditor first-in-time is entitled to priority. Unlike these liens
a maritime lien is a “sacred lien” entitled to protection “as long as a
plank of the ship remains.” Second, the Bankruptcy Court lacked
jurisdiction to adjudicate Barnes’ maritime lien because the admiralty
court had already obtained jurisdiction over the Tehani. When there are
two courts with jurisdiction over the subject matter, the court that first
obtains jurisdiction retains it without interference from the second
court. Third, even if the Bankruptcy Court had in rem jurisdiction over
the Tehani, the Bankruptcy Court lacked the ability to sell the Tehani
free and clear of Barnes’ maritime lien, which would have required
application of maritime law (and not 363(f)) and Barnes’ voluntary
submission to the Bankruptcy Court’s jurisdiction for this purpose.
When property has been pawned before a bankruptcy case is filed, the
pawnbroker must obtain relief from stay to give the notice of redemption
required by California law.
In re Sorensen, 586 B.R. 327 (B.A.P. 9th Cir. 2018).
In a case of first impression, the BAP determined that the right to
redeem pawned property is part of the bankruptcy estate and that a
pawnbroker must obtain relief from stay to give the statutory ten-day
notice to the debtor of the termination of her loan and the right to
redeem her property. Failure to obtain relief from stay renders the
pawnbroker’s notice void. Debtor pawned five pieces of jewelry. Under
California law, she had four months to pay back the loan. If the borrower
does not pay back the loan within the four months, the pawnbroker issues a
loan termination notice, which triggers a ten-day period to redeem the
jewelry. If the jewelry is not redeemed within the ten days, it becomes
the pawnbroker’s. Here, debtor filed a Chapter 13 prior to the four-month
expiration date. The pawnbroker provided notice of the loan termination
post-petition. Litigation ensued over the pawnbroker’s right to serve the
notice without first obtaining relief from stay. The pawnbroker relied on
Bankruptcy Code § 541(a)(8), which excludes certain property from the
estate. The BAP ruled that the termination notice, triggering the ten-day
redemption period, is an act to exercise control over property, or to
enforce a lien, or to collect a debt. The termination was therefore void
and Debtor could seek to redeem her property.
Debtor whose real property was affected by in rem order for relief
from stay under 11 U.S.C. § 362(d)(4) cannot maintain action alleging that
order, entered in the bankruptcy case of a third party, was improper on
due process grounds.
In re Greenstein, 576 B.R. 139 (Bankr. C.D. Cal. 2017).
When repeated bankruptcy cases are filed to stall foreclosure of real
property, § 362(d)(4) authorizes the Bankruptcy Court to enter an “in rem”
order that is effective to terminate the stay in a later filed case
relating to the same real property. Those orders can be recorded. In a
prior bankruptcy case not involving the debtor, the Bankruptcy Court
entered an in rem order. Debtor in the new case was not party to that
proceeding and received no notice of the in rem application or order.
Debtor filed a bankruptcy case seeking to stop a foreclosure but the
lender, relying on the in rem order, foreclosed on debtor’s property.
Judge Barash of the Central District wrote a lengthy opinion holding that
the in rem order was effective in the later filed case. Acknowledging that
the Bankruptcy Code does not require notice be given to non-debtor
parties, and disagreeing with the BAP, he held that a non-debtor whose
property may be the subject of an in rem order should be given notice of
that possibility. However, failing to give such notice does not mean there
is a failure of due process: § 362(d)(4) permits a debtor in a later case
to move to vacate such an order. So long as the debtor in the new case has
notice of her right to vacate the order, there is no due process
A plan can eliminate a “due-on-sale” clause in its treatment without
violating § 1111(b). The need for an impaired, assenting class in a
cramdown plan applies on a per-plan basis (not a per-debtor basis).
In re Transwest Resort Properties, Inc., 881 F.3d 724 (9th Cir.
A group of related debtors holding real estate assets filed five
Chapter 11 cases, which were jointly administered. The Debtors filed a
joint plan of reorganization. The primary lender, whose claim was
undersecured, made a § 1111(b) election. The plan provided for payment of
the entire secured claim over twenty-one years, with a large balloon
payment at the end. The plan included a due-on-sale clause, but provided
that the clause did not apply if the property was sold between years five
to fifteen. Lender rejected the plan, but several classes accepted it.
Lender opposed confirmation on the basis that temporary elimination of the
due-on-sale clause was not fair and equitable and violated its § 1111(b)
election rights. Lender also opposed the plan because, as to one of the
debtors, it was the only class voting on the plan. Thus, there was no
class accepting the plan as to that debtor. The Bankruptcy Court approved
the plan. Lender appealed, and the District Court affirmed. On appeal to
the Ninth Circuit, the Circuit affirmed, holding that nothing in the code
requires an inclusion of a due-on-sale clause (see, e.g., §
1129(b)(2)(A)(i)(I)). With respect to the “per plan” - “per debtor”
dispute, the Court held that § 1129(a)(10) supported a “per plan”
approach. (disagreeing with a Bankruptcy Court in Delaware – In re
Tribune, 464 B.R. 126 (Bankr. D. Del. 2011)).
Plan votes could not be designated for bad faith based on partial
purchase offer made to protect another, secured claim.
In re Fagerdala USA - Lompoc, Inc., 891 F.3d 848 (9th Cir.
To designate a creditor’s vote under 11 U.S.C. § 1126 rejecting a
Chapter 11 plan for bad faith a court must consider the creditor’s
motivation, and not the effect of the creditor’s actions. Offering to
purchase only some of the unsecured claims, even if done solely to block
the plan, is not enough by itself to establish bad faith.
Chapter 11 debtor moved to designate secured creditor’s vote against
the plan, claiming secured creditor had attempted to block the plan in bad
faith. Secured creditor had purchased a numerical majority of the
unsecured claims in an explicit effort to block the plan. Secured creditor
did not offer to purchase every unsecured claim, and the ones it did
purchase did not equal a majority in terms of value. The Bankruptcy Court
granted debtor’s motion, finding secured creditor’s move ensured an unfair
advantage because of the value discrepancy and the fact that secured
creditor did not offer to purchase all of the unsecured claims. The Ninth
To designate a vote for bad faith under § 1126, a court must find a
creditor is seeking to secure an untoward advantage over other creditors
for some ulterior motive. Creditors are not required to act in the best
interest of other creditors or the debtor. A creditor is not acting in bad
faith when it is simply looking out for its own best interests. Blocking a
plan is not necessarily in bad faith. Likewise, a creditor who does not
offer to buy every unsecured claim is not necessarily acting in bad faith
(though proof of such an offer would be evidence of good faith). The lower
court’s refusal to look at secured creditor’s motivation, and instead to
look at the effect of secured creditor’s actions, was reversible error.
Appealing counsel were deemed to have waived opposition to the
settlement by not filing an objection on their firms’ behalf and by
limiting their appearance on behalf of their respective clients.
Reid and Hellyer v. Laski (In re Wrightwood Guest Ranch, LLC),
896 F.3d 1109 (9th Cir. 2018).
Laski was appointed as the Chapter 11 trustee in an involuntary case.
Reid & Hellyer (“RH”) was appointed as counsel for the creditors’
committee. Walter Wilhelm Bauer (“WWB”) represented the debtor. GreenLake
Real Estate Fund, LLC (“GreenLake”) was a secured creditor with a claim of
$9.6 million secured against Debtor’s real property. GreenLake and the
Trustee entered into an agreement providing: (i) GreenLake would be a
stalking horse bidder at $8.5 million; (ii) it would limit its secured
claim to that amount; (iii) it would carve out $150,000 to pay unsecured
creditors and $350,000 to pay Laski and his counsel as a surcharge under §
506(c). The committee and two unsecured creditors filed objections to the
settlement. Neither RH nor WWB filed an objection. RH and WWB appeared at
the hearing on behalf of their clients, but did not appear on their own
behalf. The Bankruptcy Court approved the settlement. RH and WWB appealed
the order approving the settlement to the District Court. The District
Court granted a motion to dismiss the appeals based upon lack of standing
and equitable mootness. The law firms appealed to the Ninth Circuit,
arguing that the Bankruptcy Court understood that they were objecting on
their own behalf as well. The Ninth Circuit clarified that the parties had
standing to appeal, as objection and appearance are not prudential
standing requirements. It held, however, that the firms had both waived
and forfeited their rights by not appearing at the hearing on the
settlement in their capacities as administrative creditors, even though
their arguments at the hearing were the type of arguments that an
administrative creditor would make.
A Chapter 11 petition lacking requisite authority by the board must
Sino Clean Energy, Inc. v. Seiden (In re Sino Clean Energy, Inc.),
901 F.3d 1139 (9th Cir. 2018).
A receiver was appointed over a Nevada corporation. The receiver
replaced the corporation’s board of directors with a sole director. After
the receiver replaced the board, the former chairman purported to
reconstitute the former board and then file a Chapter 11 petition for the
corporation. The Bankruptcy Court dismissed the petition as having been
filed without corporate authority because the former board had been
replaced by the receiver with a new, sole director. Under Nevada law, a
majority of the board then in office is necessary for the transaction of
business. Here, the individuals who filed the petition were not members of
the board of directors at the time they filed the petition. The Ninth
Circuit distinguished a 2006 Arizona Bankruptcy Court decision (Corporate
& Leisure) heavily relied upon by the appellants holding that, no matter
the equitable considerations, state law dictates who can file a bankruptcy
petition on behalf of a corporation. The Ninth Circuit stated that it
understood Corporate & Leisure as announcing a more limited holding that,
when a state court purports to enjoin a corporation for filing bankruptcy
altogether, federal law preempts that injunction.
Commencement of Case / Eligibility / Involuntary
Even part of a debt being in dispute renders the entire debt in
“bona fide dispute” for purposes of § 303.
Montana Dept. of Revenue v. Blixseth, 581 B.R. 882 (D. Nev.
Three taxing authorities filed an involuntary bankruptcy case against
Timothy Blixseth. Blixseth reached settlements with two of the taxing
authorities, who withdrew their support of the involuntary petitions nunc
pro tunc to the petition date. The Bankruptcy Court then granted
Blixseth’s motion to dismiss the petition, on the grounds that the
petition lacked the support of three qualifying creditors, as is required
when an alleged debtor has twelve or more qualifying creditors, which
Blixseth had established. A qualifying creditor is one whose claim is not
contingent as to liability or the subject of a bona fide dispute as to
liability or amount. Qualifying creditors do not include employees,
insiders, and any transferee of a voidable transfer. The taxing authority
creditor (Montana) had failed to discharge its burden of establishing that
some of Blixseth’s creditors should be excluded from the count (e.g. as
having received a preferential, fraudulent, or postpetition transfer). 11
U.S.C. § 303(b)(1). On appeal, Montana argued that the Bankruptcy Court
erred when it determined that 11 U.S.C. § 303(b), as amended in 2005, now
provides that any bona fide dispute as to the amount of a petitioning
creditor’s claim is sufficient to render that creditor unqualified under
the statute (e.g. even if $99,900 of a $100,000 debt was undisputed but
$100 was disputed). Examining § 303(b)’s history and the plain language of
§ 303(b), the District Court concluded that § 303(b) unambiguously
disqualifies a creditor whose claim is the subject of any bona fide
dispute as to amount. The court held that this interpretation did not lead
to an absurd result given the Bankruptcy Code’s dual purposes of ensuring
the orderly disposition of creditors’ claims and protecting debtors from
Consumer, Exemption, and Discharge
A debt incurred to purchase a home in a distant location to
accommodate an executive’s relocation does not qualify as “consumer debt”
and cannot be the basis of a motion to dismiss under 11 U.S.C. § 707(b).
In re Cherrett, 873 F.3d 1060 (9th Cir. 2017).
Debtor worked in hotel administration in Wyoming and was offered an
attractive executive job in Colorado. Due to family reasons and finances,
he agree to relocate to Colorado only when his employer offered to lend
him $500,000 to purchase a residence. His employment later ended. He then
filed a bankruptcy case. His former employer (and the home lender) sought
dismissal under 11 U.S.C. § 707(b)(1). That section permits a Bankruptcy
Court to dismiss the case of a debtor with “primarily consumer debts if
the granting of relief would be an abuse of the Bankruptcy Code.” The
Bankruptcy Court denied the motion, concluding that debtor’s obligation on
the $500,000 loan was not a “consumer debt.” The BAP and Ninth Circuit
both affirmed. A debt is a “consumer debt” when it is “incurred by an
individual primarily for a person, family, or household purpose.” 11
U.S.C. § 101(8). To make that determination, the court must evaluate
whether Debtor had a business purpose in acquiring the property. Below
market rate loans and employer-sponsored loans may not qualify as consumer
debts when the employee is seeking to further a career rather than for a
household or family purpose.
A lawsuit alleging that Debtor has come into title on property
fraudulently can substitute for a formal objection to a claim of
In re Lee, 889 F.3d 639 (9th Cir. 2018).
Debtor had financial problems and consulted with bankruptcy counsel.
Later, Debtor transferred two parcels of real property into a tenancy by
the entireties. When he filed his chapter 7 bankruptcy petition, he
claimed the real properties as exempt under Hawaii state law. The chapter
7 trustee filed an adversary proceeding alleging the transfer of title to
be a fraudulent conveyance and, after trial, the Bankruptcy Court granted
judgment in the trustee’s favor. Later, the trustee moved for turnover of
the properties and debtor refused, contending the trustee failed to file a
Rule 4003 objection to the exemptions within 30 days of the bankruptcy
filing. The Ninth Circuit affirmed the Bankruptcy Court’s turnover order.
It held Rule 4003 requires no particular form of objection. It found the
adversary proceeding the trustee filed was an adequate substitute for the
formal Rule 4003 objection because it was filed within 30 days of the §
341(a) meeting, was property served, and “its sole purpose was to prevent
[Debtor] from retaining the exemptions.”
Creditors’ subjective good faith belief that the discharge did not
apply to their claim is a defense to a motion for contempt for violation
of the discharge.
In re Taggart, 888 F.3d 438 (9th Cir. 2018), but see IRS v.
Murphy, No. 17-1601 (1st Cir. June 7, 2018) (counter to Taggart)
(retired Justice David Souter sitting by designation).
This is a factually complex case involving creditors’ return to state
court to invalidate the debtor’s pre-petition transfer of his interest in
a limited liability company and then to recover fees related to debtor’s
post-discharge “return to the fray.” The Ninth Circuit affirmed the BAP’s
ruling and reiterated the test for determining whether a creditor has run
afoul of debtor’s discharge. By clear and convincing evidence, the debtor
must establish that the creditor “(1) knew the discharge injunction was
applicable and (2) intended the actions which violated the injunction.”
Knowledge of the applicability of the discharge injunction to a creditor’s
action must be proved as a fact and not inferred based on the creditor’s
knowledge of the bankruptcy case. A good faith belief (even though
ultimately wrong) is a defense even if the belief is unreasonable. In this
case, the creditors’ reliance on a determination by the state court that
debtor had “returned to the fray” was a good faith belief even though the
state court ruling was later overturned on appeal.
A state court judgment that is deemed
interest at the state, not federal, rate.
In re Hamilton, 584 B.R. 310 (B.A.P. 9th Cir. 2018).
Debtors were executives in educational testing company, SDTS. They
later took the know-how, materials, and customer lists from that company
and started a new company. SDTS sued debtors in state court for breach of
fiduciary duty, breach of duty of loyalty, intentional interference with
prospective economic advantage and obtained a $2 million judgment. When
debtors filed chapter 11 case, SDTS brought a 11 U.S.C. § 523(a)(6)
nondischargeability complaint contending the judgment was not
dischargeable. This case deals with two issues, the proper standard for a
§ 523(a)(6) determination and the calculation of interest on a state court
judgment that is later found nondischargeable. As for the first, the BAP
found that § 523(a)(6) requires a “willful” injury. This does not require
proof of specific intent to cause harm but can be shown when the debtor
either had a subjective motive to inflict injury or believed it was
substantially certain to result as of his conduct. As to the second, a
creditor is entitled to postjudgment interest at the state rate, not the
much lower federal rate, when a judgment is determined to be
nondischargeable. Generally speaking, that is because the Bankruptcy Court
does not enter a new money judgment, it is simply determining, in the
context of § 523(a), that a previously obtained money judgment is
nondischargeable under federal law.
When a lease is assumed under Bankruptcy Code § 365(p), it does not
also need to be reaffirmed to be enforceable as a post discharge
Bobka v. Toyota Motor Credit Corporation, 586 B.R. 470 (S.D.
Section 365(p) provides a debtor a mechanism to assume a lease that is
affirmatively rejected by a trustee or deemed rejected by operation of
law. This section establishes a multi-step process for assumption,
beginning with the debtor’s offer to assume the lease. The final step is a
signed writing memorializing the terms of the assumption. In a related
statute, § 524 establishes the steps required for the debtor to reaffirm a
pre-petition obligation. The steps of § 524 are different than those of §
365(p) as, among other requirements, § 524 requires specified disclosures
and the filing of a reaffirmation agreement. The question before the
District Court was whether a lease assumed under § 365(p) had to be
accompanied by a reaffirmation agreement under § 524 for the lessor to
enforce the lease in the event the debtor committed a post-petition
default. While noting that several courts nationwide require reaffirmation
of an assumed lease, the District Court sided with other cases holding
that such reaffirmation was unnecessary for the lease to be deemed assumed
and enforceable. The decision includes a well-articulated effort at
statutory construction and an analysis of the policies behind Sections
365(p) and 524.
Debtors cannot circumvent the provisions of a model chapter 13 plan
by adding additional provisions modifying the plan period from a fixed
term to one with an indefinite duration.
In re Escarcega, 573 B.R. 219 (B.A.P. 9th Cir. 2017).
Debtors’ counsel sought to modify the terms of the District’s new model
plan to allow the plan to be for an indefinite period rather than a fixed
term, and in so doing sought to create a situation in which a debtor could
terminate a plan early and still receive a discharge. The Bankruptcy Court
rejected this effort and the matters were appealed to the BAP. The BAP
affirmed the “well-reasoned” rulings, finding that the modified provisions
were inconsistent with Sections 1328 and 1329. These code sections, when
considered together, require a fixed term to allow for the possibility
that a debtor’s financial situation might change, and provide unsecured
creditors a mechanism to seek modification of the plan in such
circumstances. Of note, the plans provided that, once the allowed secured,
priority, and administrative claims were paid, the plan would be deemed
completed and no further payments would be required. The BAP determined
that a plan with this provision violated Sections 1325(a) and (b). The BAP
noted with disapproval the standing trustee’s failure to object to the
plans, which objection would have triggered the application of § 1325(b),
and her apparent acquiescence to the special provisions.
When a creditor has violated the discharge injunction the Bankruptcy
Court has authority to award only “relatively mild” punitive damages.
In re Marino, 577 B.R. 772 (B.A.P. 9th Cir. 2017).
Debtors filed a motion for contempt against their mortgage lender
(Ocwen) which, post-discharge, sent numerous letters and made many phone
calls, even though Debtors had surrendered the property and Ocwen had
obtained relief from stay and foreclosed. The Bankruptcy Court granted
$119,000 in emotional distress damages ($1,000 for each improper contact).
Debtors appealed the Bankruptcy Court’s failure to award punitive damages.
Ocwen appealed the court’s denial of its motion for reconsideration. The
BAP held that there is no meaningful difference between “punitive damages”
and “noncompensatory fines” and noted that the Ninth Circuit permits a
Bankruptcy Court to award “noncompensatory fines”; however any such award
must be “relatively mild.” The BAP further noted that a District Court is
not limited in granting punitive damages and punishing contempt and
suggested that the Bankruptcy Court might choose to issue proposed
findings and a recommended judgment on punitive damages to the District
Court or refer the matter to the District Court for criminal contempt
Under the Supremacy Clause, the Bankruptcy Code preempts Cal. Civ.
Code § 2930 and a sold out junior lien cannot be enforced against real
property subsequently acquired by a debtor who has obtained a discharge.
In re Wagabaza, 582 B.R. 486 (Bankr. C.D. Cal. 2018).
Chapter 7 debtor’s real property had two liens attached to it prior to
debtor’s discharge. The senior lienholder foreclosed, which extinguished
the junior lien. Debtor’s sister bought the property from the foreclosing
lender and allowed debtor to live in the property. Seven years after
discharge, debtor was able to qualify for her own mortgage and reacquired
the property from her sister. When debtor went back on title, the junior
lienholder tried to reimpose its lien arising out of its trust deed on the
property under California Civil Code § 2930.
The court held that debtor’s discharge extinguished her personal
liability on the junior lien, so at the time she reacquired the property,
she owed no money to the junior lienholder and there is no consideration
for the lien. Moreover, the junior lienholder had no lien when debtor
received her discharge because the senior lienholder had foreclosed.
Furthermore, under § 552(a), property acquired by a debtor postpetition is
not subject to any lien resulting from any security agreement entered into
by the debtor before the commencement of the case. To the extent § 2930 of
the Cal. Civil Code compels a different result, it is preempted by the
Bankruptcy Code under the Supremacy Clause.
A truck lender’s purchase money security interest did not secure the
portion of the claim attributable to optional contracts financed by the
Debtor in connection with the purchase.
In re Jones, 583 B.R. 749 (Bankr. W.D. Wash. 2018).
On an issue of first impression, the court held that optional contracts
for gap insurance and vehicle maintenance should not be treated as secured
under the “hanging paragraph” of § 1325(a). The collateral (a truck) did
not secure the amounts financed to pay for the optional contracts, which
were not part of the “price” for purposes of the lender’s PMSI. Similar to
negative equity (In re Penrod), the optional contracts were not
sufficiently related to the purchase of the truck to fall within the
definition of “price” under (Washington’s version of) § 9-103 of the UCC.
The contracts were optional, and not akin to sales tax and license fees,
which are required payments in order to obtain a vehicle. The court then
determined the amount of the bifurcated claim under § 506(c) by
calculating how to allocate the prepetition payments made on the loan. The
court held that, under the “dual status rule”, which allows part of a loan
to have purchase money status and the remainder to be secured by a regular
security interest, the prepetition payments should be allocated as
follows: by subtracting the amount found to be unsecured from the total
amount financed ($61,062 (total price) -$3,946 (price of the optional
contracts)) and using that percentage to allocate prepetition payments
between secured and unsecured portions.
A state-court judgment arising out of debtor’s harassing,
disparaging text messages satisfied the requirements of
non-dischargeability under § 1328(a)(4).
Plys v. Ang (In re Ang and Komori), 589 B.R. 165 (Bankr. S.D.
Cal. Aug. 16, 2018).
Plaintiff and his friends received over twenty disparaging text
messages concerning the paternity of his infant child. Through
investigation and police involvement, plaintiff tracked defendant down as
the sender. Plaintiff sued in small claims court and obtained a judgment
for $10,150, plus costs and attorney’s fees. Defendant then filed Chapter
13. Plaintiff filed an untimely complaint under Bankruptcy Code Sections
523(a)(2), (a)(4) and (a)(6), which were dismissed. Plaintiff then brought
a complaint under § 1328(a)(4), which provides, inter alia, that civil
awards based on willful or malicious personal injury or wrongful death are
nondischargeable. There is no deadline for bringing a claim under this
subsection. The court noted that there are few cases interpreting §
1328(a)(4). It noted that, unlike § 523(a)(6), a court need only find the
defendant’s conduct is willful or malicious. The court also wrestled with
the issue of whether the “personal injury” referenced in § 1328(a)(4)
related only to physical injury or included non-physical injury as well.
The court concluded that § 1328(a)(4) is intended to include non-physical
injury. The court then concluded that defendant’s conduct was willful and
malicious, as he intended to harass and cause plaintiff emotional
distress, likening the state court claim to private nuisance, which the
court deemed a personal injury. The claim was therefore excepted from
discharge under § 1328(a)(4).
Small company buy-sell stockholder agreement is not an executory
contract and cannot be assumed.
In re Eutsler, 585 B.R. 231 (B.A.P. 9th Cir. 2017).
Debtor Eutsler and business partner Dorr incorporated Softbase
Development, Inc., splitting the stock. Later, they sold 49% of the stock
to minority shareholders. They also entered into a Buy-Sell Agreement
which provided that the company, or another shareholder, could purchase
the stock of any shareholder who suffered a “terminating event” such as a
bankruptcy filing. The agreement required the parties to give notice to
the other contracting parties of such events. Later, Eutsler filed a
chapter 13 case. He gave notice to Dorr but not the minority shareholders.
His confirmed chapter 13 plan ignored the existence of the Buy-Sell
Agreement (e.g., it was not assumed or rejected). When they learned of the
bankruptcy filing, the minority shareholders moved for relief from stay so
they could purchase debtor Eutsler shares. The Bankruptcy Court denied the
motion, holding that that the Buy-Sell Agreement was not an executory
contract. The BAP affirmed, concluding that the Bankruptcy Court did not
clearly err on this question of fact.
A contract is executory if the obligation of both the debtor and the
other party are so far unperformed that the failure of either to complete
performance would constitute a material breach. The Bankruptcy Court must
determine whether, under state law, a party’s remaining unperformed
obligations would excuse the other party from performing. In the option
context, the Ninth Circuit has held that a “paid-for but not exercised
option” is not an executory contract. The minority shareholders had not
exercised their right to purchase. Consequently, Debtor’s failure to
notify them of the bankruptcy and his remaining obligations was only a
basis for an award of damages. This obligation did not render the Buy-Sell
Issue and Claim Preclusion (and other estoppel
Section 502(b)(4) can limit the reasonableness of an attorneys’ fees
claim, even if a prepetition state court judgment determines the amount of
In re CWS Enterprises, Inc., 870 F.3d 1106 (9th Cir. 2017).
In a pre-petition arbitration between a client and his attorneys, the
arbitrator determined that the contingency fee contract was not
unconscionable and held that the terms of the fee contract were
reasonable. The arbitrator’s award was confirmed as a judgment by the
Superior Court. The client filed bankruptcy prior to enforcement of the
judgment and challenged the amount of the claim as unreasonable under
Bankruptcy Code § 502(b)(4). The Bankruptcy Court applied a lodestar to
counsel’s hours and reduced the award from $2.5 million to $440,250,
finding that “reasonableness” under state law was different than that
required by the bankruptcy code. The District Court reversed, and debtor
appealed. The Ninth Circuit held: The bankruptcy code’s reasonableness cap
limits a pre-petition attorney fee claim even if the fees were allowed
under state law and have been reduced to a judgment. The Court adopted the
following approach used by the 10th Circuit: an acknowledgement or
determination that the fee contract was breached; an assessment of the
damages under state law; a determination under § 502(b)(4) of the
reasonableness of the damages provided by application of state law; and a
reduction of the claim to the extent it is excessive. Having adopted the
approach, however, the Ninth Circuit held that the arbitrator’s award had
determined that the contingency contract was not unconscionable and
determined that the fee was reasonable given the amount of work put into
the case and the risk of non-payment. Having so held, the arbitrator’s
decision was entitled to issue preclusive effect.
Court refused to grant motion to vacate large sanctions award, but
agreed to vacate the damages portion, noting that the sanctions decision
is not to be given preclusive effect.
In re Sundquist, 580 B.R. 536 (Bankr. E.D. Cal. 2018).
After the Court awarded the debtors approximately $6 million and
required Bank of America to pay public interest entities $40 million for
the Bank’s gross misconduct in violating the automatic stay, debtors and
the bank reached a settlement. The settlement provided for payment to the
debtors of approximately $9 million. As required by the settlement, the
bank and debtors moved to vacate the judgment and dismiss the adversary
proceeding. Likening the bank’s requirement that the debtors cooperate in
this effort to a “hostage standoff”, the court denied the request. The
court adopted a cautious approach to the effort to “buy and bury” the
negative judgment. It noted that the portion of its previous decision
cancelling the fee contract of debtors’ prior counsel and awarding $70,000
was on appeal. It determined that the bank’s concern over claim preclusion
was resolved by the comprehensive release provided by the debtors. The
bank’s concern that the decision might be used by third parties for
preclusive effect, which the court deemed remote, was resolved by the
court vacating the damages award and ruling that the findings were not
“sufficiently firm” to receive preclusive effect within the meaning of the
Restatement (Second) of Judgments in any subsequent litigation with third
parties. The Court’s large punitive damage award to public interest
entities was resolved by two factors: (i) the entities, which were
previously allowed to intervene, appeared and advised the court that they
did not wish to stand in the way of debtors’ settlement; and (ii) debtors
agreed to contribute $300,000 to the public interest entities, thereby
recognizing the public interest component of the court’s ruling. The court
noted, however, that its previous opinion would remain on the public
State court judgment against debtor for abuse of process did not
establish a claim under § 523(a)(6).
Herrera v. Scott (In re Scott), 588 B.R. 122 (Bankr. D. Idaho
Debtor sued his neighbors in Idaho state court for injunctive relief
and defamation. The neighbors counterclaimed for breach of quiet enjoyment
and abuse of process. A jury found against debtor on the abuse-of-process
claim and awarded damages totaling $150,000. After debtor filed
bankruptcy, the judgment creditor filed an action under § 523(a)(6) and
moved for summary judgment based upon the jury’s finding. As to the
“willful” requirement of § 523(a)(6), the jury’s finding that debtor’s
abuse of process was “willful” and that he intended to use the process as
a “threat or club” was sufficient. Turning to the “maliciousness” prong, a
plaintiff must prove that an act is: (1) wrongful, (2) done intentionally,
(3) necessarily causing injury, and (4) without just cause or excuse. The
court found that the state court judgment satisfied elements 1, 2 and 4,
but did not satisfy the third element related to damages. The jury
presumably awarded damages to cover the cost of renovations to plaintiffs’
property, but there was no evidence of what the damages would have been if
they had not renovated their house. Therefore, the record did not
establish that plaintiffs were “necessarily” injured by the abuse of
Jurisdiction, Standing, and Process
Post-discovery delay in filing a fraudulent transfer action does not
preclude equitable tolling.
In re Milby, 875 F.3d 1229 (9th Cir. 2017).
The estate of debtor discovered debtor’s allegedly fraudulent transfers
days before the statute of limitations on avoidance claims was set to
expire. The complaint was not filed until almost a year after the
discovery. The Bankruptcy Court dismissed the action as time-barred and
held that the delay in filing after the discovery of the transfers
precluded equitable tolling. The BAP reversed, holding that post-discovery
delay is irrelevant to whether equitable tolling applies.
The Ninth Circuit held that both the Bankruptcy Court and the BAP got
it wrong. A litigant seeking equitable tolling bears the burden of
establishing two elements: (1) that he has been pursuing his rights
diligently, and (2) that some extraordinary circumstance stood in his way
and prevented timely filing. The second element was not in dispute, as all
the courts agreed that extraordinary circumstances existed. The Bankruptcy
Court held that the failure to file a complaint after the extraordinary
circumstances had ceased but before the limitations period would normally
expire erred in being too restrictive. The BAP, by holding that
post-discovery diligence is never relevant to whether equitable tolling
applies, erred by being too permissive. Instead, the Ninth Circuit held
that courts may consider a plaintiff’s diligence, after extraordinary
circumstances have passed, as one factor in determining diligence. In this
case, the court held that it would be unreasonable to expect the estate to
file a complaint less than one week after discovery and before the statute
of limitations expired. The complaint here was filed nearly a year after
discovery which the Ninth Circuit concluded satisfied the diligence
element in view of all the circumstances.
Discussing the sort of evidence that can be considered by a trial
court on a motion to dismiss.
Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988 (9th Cir.
This is not a bankruptcy case but it applies to federal litigation. The
defendant, a pharmaceutical development company, was attempting to bring
to market a drug for obese persons. Plaintiff was an investor in
defendant’s stock. When the company’s stock value dropped plaintiff
brought a lawsuit alleging the company violated the securities laws by
misrepresenting facts and concealing adverse information. Defendant
brought a motion to dismiss the lawsuit under Rule 12(b)(6) (failure to
state a claim). Defendant requested the court take ‘judicial notice’ of
market analyses, blog posts, Forbes magazine internet articles, SEC
filings, USPTO files, among other things, in support of its motion to
dismiss. Alternatively, it argued the court could find those documents
were ‘incorporated by reference’ in the complaint. The District Court
granted the motion to dismiss and the Ninth Circuit reversed. The District
Court committed error in its analysis of both issues. In the context of a
motion to dismiss, the court can take judicial notice under Evidence Rule
201, but should only do so if the facts are not subject to reasonable
dispute. The Ninth Circuit held that the events taking place on an
investor conference call, and the reports of a European regulator, among
other things, could not be judicially noticed because the underlying facts
were subject to dispute. Further, documents are ‘incorporated by
reference’ only if the “plaintiff refers extensively to the document or
the document forms the basis for the plaintiff’s claim.” Some of the
documents the District Court considered were not “extensively” referred to
in the complaint. Others were referred to but did not obviously form the
basis of Plaintiff’s complaint. Finally, some introduced factual
questions. The Ninth Circuit set out a categorical rule that, “[I]t is
improper to assume the truth of an incorporated document if such
assumptions only serve to dispute facts stated in the well-pleaded
complaint. This admonition is, of course, consistent with the prohibition
against resolving factual disputes at the pleading stage.”
The parties to a contract may delegate the question of arbitrability
(or, whether a dispute qualifies for arbitration) to the arbitrator.
Arbitration clauses are not terminated by a discharge in bankruptcy.
Crooks v. Wells Fargo Bank, N.A., 312 F.Supp. 3d 932 (S.D. Cal.
Debtor purchased a car financed by Wells Fargo Bank. Debtor later filed
a chapter 7 case and obtained a discharge of her personal liability on the
loan. After she obtained a discharge, Wells Fargo Bank “pulled a credit
report” on Debtor. She sued in District Court alleging violations of the
Federal Fair Credit Reporting Act. Because the financing agreement
included an arbitration provision, Wells Fargo Bank moved to compel
arbitration under the Federal Arbitration Act. The court held the standard
for determining if the FAA applies has two “gateway issues”: (1) whether a
valid agreement to arbitrate exists and, if it does, (2) whether the
agreement encompasses the dispute at issue. The burden of proof lies with
the party resisting arbitration.
The primary issue in the case considered whether the parties can
delegate to the arbitrator the gateway issue of arbitrability, that is,
whether the arbitration agreement covers the dispute that the parties
agreed to arbitrate. Case law has held that it is permissible to do so if
the agreement so provides. Here, it did. The secondary issue concerned
Debtor’s contention that the arbitration provision was void due to her
chapter 7 discharge. The District Court held that such provisions were not
terminated by the discharge. Further, the District Court declined to
exercise its discretion to except the case from arbitration, finding the
purpose of the provision did not conflict with the Bankruptcy Code.
When faced with concurrent motions to remand and to transfer, the
court should consider the remand motion first except under rare
In re Caesars Entertainment Operating Company, Inc., 588 B.R.
233 (B.A.P. 9th Cir. 2018).
In state court action removed to federal court based on debtors’
Chapter 11 filing, concurrent motions were filed for remand and for
transfer of venue. The Bankruptcy Court decided the remand motion first,
which the court granted, and then denied the motion to transfer as moot.
The BAP held that the Bankruptcy Court did not abuse its discretion in
deciding the remand motion first. When faced with concurrent motions to
remand and to transfer, courts should resolve the motion to remand first,
and only in “rare circumstances” should transfer motions be considered
before remand motions. The BAP dismissed the appeal of the remand order
because it is not reviewable on appeal pursuant to 28 U.S.C. § 1447(d).
Bankruptcy Court does not have “related to” post-confirmation
jurisdiction over a proceeding removed from state court between
non-debtors, even if the outcome of the action may affect claims against
In re International Manufacturing Group, Inc., 574 B.R. 717
(Bankr. E.D. Cal 2017).
Plaintiffs and defendants in a state court action were both defendants
in separate adversary proceedings maintained by the chapter 11 trustee.
Because of this connection, the defendants removed the state court action,
which did not pertain to the trustee’s actions and did not involve the
trustee, to the Bankruptcy Court. The state court action did not involve
bankruptcy law. The Bankruptcy Court held that it did not have “related
to” postconfirmation jurisdiction over the removed action because it was
essentially a dispute between non-debtor parties. The fact that a judgment
in the state court action might reduce the prevailing party’s claims
against the estate did not confer “related to” postconfirmation
A party’s failure to comply with specific requirements of a local
rule regarding a jury demand does not result in a waiver of a party’s jury
trial right when its demand was timely and otherwise proper under FRCP
In re Daley, 584 B.R. 911 (Bankr. C.D. Cal. 2018).
Defendant in an adversary proceeding answered the complaint and
included a demand for jury trial. It failed to state whether it consented
to jury trial in the Bankruptcy Court. The local rules permit the
Bankruptcy Court to conduct trials with the consent of the parties.
Plaintiff argued the failure to include a statement regarding consent,
which was expressly required by the Bankruptcy Local Rules, constituted a
waiver of the right to jury in an Article III court. The Bankruptcy Court
disagreed, finding the local rule could not work as a waiver in view of
Federal Rule of Civil Procedure 38, which does not expressly require such
Part 2 of Recent Developments continued in RN#66.
*Judge Stephen L. Johnson was appointed to the bench in
the Northern District of California by the Ninth Circuit Court of Appeals
*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.