A.B.C. Learning Centres Ltd. v. RCS Capital Development, LLC (In re RCS Capital Development, LLC)
- Citation:
- A.B.C. Learning Centres Ltd.; ABC Developmental Learning Centers (USA), Inc., v. RCS Capital Development, LLC; American Childcare Properties, LLC; ACCP I, LLC., (In re: RCS Capital Development , LLC; American Childcare Properties, LLC; ACCP I, LLC) BAP No. AZ-12-1381-JuTaAh (2013)
- Tag(s):
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- Ruling:
- B.A.P. AFFIRMS the bankruptcy court's ruling granting RCS's Motion for Summary Judgment which allows the setoff and denies ABC's cross MSJ. Additionally, the Court REVERSES and REMANDS the bankruptcy court's decision on the amount of ABC's claim because the petition date is the proper date for converting ABC's claim to U.S. Dollars under § 502(b).
- Procedural context:
- Appellants, A.B.C. Learning Centres Limited (ABC Learning) filed a proof of claim (POC) for approximately $41M in ACCP's chapter 11 bankruptcy case. This claim arose out of a pending lawsuit filed by ABC against ACCP, RCS, Kenneth Krynski, and Las Vegas CLA Partners. After objecting to ABC's POC's, RCS filed a motion for summary judgment (MSJ), contending that it was entitled to set off its claim against ABC for $57M arising out of a liquidated judgment that it obtained in Arizona against ABC's POC for $41M that was based on a civil action in Nevada. ABC filed a cross-motion and partial MSJ. The bankruptcy court granted RCS's MSJ and denied ABC's. This appeal followed, upon which the B.A.P. affirmed the bankruptcy court's ruling granting RCS's MSJ, and reversed and remanded ABC's claim.
- Facts:
- ABC Learning were operators of childcare centers around the world. ABC Learning representatives approached RCS Capital Development (RCS) - run by the Sodjas family - to expand their operations by entering into an agreement with RCS for the purchase of RCS's childcare centers. ABC then breached the development agreement they had with RCS. In October of 2008, RCS sued ABC for breach of contract in Arizona state court, and was awarded $57M total judgment. ABC appealed and lost.
ABC then entered into another agreement with ACCP, run by Krynski, who would purchase and development child care properties. Due to financial constraints, in June of 2008, ACCP and ABC entered into a Termination and Release Agreement. Meanwhile, RCS commenced steps to acquire Krynski's membership in ACCP for the purpose of obtaining setoff rights against ABC in connection with the Arizona Action. On October 12, 2011, RCS filed for Chapter 11 bankruptcy protection. ABC filed a POC for $41M in regards to their Nevada Action. RCS objected based on the exchange rate used because the original amount was in Australian dollars.
On a cross motion, RCS moved for summary judgment contending that it was entitled to set off against the ABC from the Nevada Action for the debt owed to RCS arising out of the Arizona Action. RCS conceded the obligation for purposes of summary judgement setoff issue. On May 22, 2012, the bankruptcy court heard the matter and granted RCS's motion, finding that RCS's purchase of Krynski's membership interest and subsequent assumption of liabilities in the Dissolution, Distribution, and Liquidation Agreements, was a de facto merger and there was no defense for the the setoff.
The issues in the case were: (a) whether the bankruptcy court erred in granting RCS's MSJ for setoff? Here, the Court found that although RCS is a creditor of ABC, it cannot be using § 553 to achieve setoff in its own capacity as a creditor in its own case. Rather, RCS - a chapter 11 debtor - is asserting its prepetition defense of setoff against ABC's claims asserted against RCS in the Nevada Action. Accordingly, the Court found that § 558 is the applicable statute in this case.
(b) whether the bankruptcy court erred in denying ABC's cross MSJ on the legal and equitable defenses asserted? Here, the Court found that RCS's motion conceded the existence of the full amount of ABC's monetary claim for the purpose of asserting its setoff argument and the court effectively ruled that conceded claim was "paid" by the setoff. As a result, ABC is owed no further debt and has no grounds for further complaint. In essence, the bankruptcy court's denial of the ABC motion was compelled by it ruling in favor of RCS on the setoff issue.
(c) whether the bankruptcy court erred in calculating the amount of ABC's claim by using the 'breach date' for converting ABC's claim to U.S. Dollars rather than the petition date as stated in § 502(b)? The Court said that the plain language of §502(b) commands that the bankruptcy court "shall" determine the amount of such claim in lawful currency of the United States as of the petition date. The Court found that the lower bankruptcy court did err in calculating the exchange rate using the breach date rather than the petition date as mandated by § 502(b).
- Judge(s):
- Jury, Taylor, and Ahart, Bankruptcy Judges
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