Grantham v. Cory (In re Flamingo 55, Inc.)

Summarized by Laury Macauley , Macauley Law Group, a Professional Corporation
14 years 7 months ago

Citation:

---F.3d--- (9th Cir. 2011); Case No. 10-15755 (July 25, 2011)

Tag(s):

9th Circuit

Ruling:

The Court of Appeals for the Ninth Circuit ("Ninth Circuit") affirmed the decision of the District Court and upheld a ruling by the Bankruptcy Court that had ordered the disallowance of a subrogation claim of a creditor pursuant to the provisions of Bankruptcy Code Section 509. The Ninth Circuit rejected the creditor's contention that, as a co-obligor on the debt with the Debtor, it was entitled to subrogation within the plain meaning of the provisions of Section 509(a). Instead, the Court ruled that the creditor, as a principal obligor of a loan with the debtor, was precluded from subrogation in accordance with Bankruptcy Code Section 509(b)(2). And, in so holding, the Ninth Circuit specifically clarified the Bankruptcy Court's opinion that it was the creditor's status as a "joint borrower" on the debt (and not as a guarantor, surety, or accomodation co-maker) that distinguished the situation at issue and precluded the application of Section 509(a). However, in its opinion, the Ninth Circuit rejected and overruled the Bankruptcy Court's finding that the foreclosure of real property belonging to the creditor could not constitute a "payment" within the meaning of Bankruptcy Code Sectin 509(a)--a payment of cash is not necessarily required before subrogation rights can be asserted.

Procedural context:

Appeal from the United States District Court for the District of Nevada (Judge Jones) affirming the order of the Bankruptcy Court for the District of Nevada (Judge Markell) disallowing a claim of a creditor for subrogation pursuant to 11 U.S.C. Section 509(a).

Facts:

Appellants Gregory Grantham and John Saba were investors who were charged with liquidating the failed Broadway-Acacia LLC ("BA"), which entity had been a partner or co-venturer with the Debtor, Flamingo 55, Inc. ("Flamingo"). After a series of schemes and transactions by unscrupulous co-members of BA, BA and Flamingo had both executed a note in favor of Datacom on account of a loan taken out to purchase real property, which note was cross-collateralized by California and Nevada property. Eventually, BA and Flamingo defaulted on the note, and Datacom foreclosed on the California real property belonging solely to BA. By this time, an involuntary petition under Chapter 7 of the Bankruptcy Code had been filed against Flamingo, and a Chapter 7 trustee had been appointed. BA filed a claim against the Chapter 7 estate, asserting subrogation rights on account of the value of the real property lost to Datacom in foreclosure. After an objection by the Trustee, the Bankruptcy Court disallowed BA's claim, holding that its subrogation claim was precluded by Bankrutpcy Code Section 509(b)(2) as an entity that had "received the consideration for the claim held by...[the] creditor." 11 U.S.C. Section 509(b)(2).

Judge(s):

The Honorable Diarmuid F. O'Scannlain; The Honorable Ferdinand F. Fernandez; The Honorable Jay S. Bybee.

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