- Case Type:
- Consumer
- Case Status:
- Affirmed
- Citation:
- BAP No. CC-21-1081-SFL (9th Circuit, Mar 21,2022) Published
- Tag(s):
-
- Ruling:
- A damages award for breach of a settlement agreement that (i) required one party to transfer his interests in various entities to another person in exchange for payments over time, (ii) made the entities liable for paying a significant portion of the settlement payments, and (iii) required the transferee to subordinate his distributions for the entities until the settlement payments were paid in full, is sufficiently related to the sale of securities to make such damages award subject to subordination under 11 U.S.C. § 510(b).
- Procedural context:
- Following discovery disputes and the conversion of the base case from a chapter 11 to a chapter 7 proceeding, the bankruptcy court granted the chapter 7 trustee's motion for summary judgment on a claim for subordination, under 11 U.S.C. § 510(b), of a creditor's damages award.
- Facts:
- Bruce Eileff, the debtor, and Todd Kurtin ran a series of real estate investment and development projects. Each was an equal partner, and each project was owned and run through a separate business entity or group of entities, either limited liability companies or corporations or limited partnerships (the Joint Entities).
In 2003, Kurtin sued Eiliff and his separately on development entities. Kurtin claimed that Eiliff and his entities breached various contracts, breached fiduciary duties, embezzled funds, and engaged in constructively fraudulent transactions. Eiliff counterclaimed against Kurtin and his separately owned entities, asserting similar claims.
In 2005, the parties entered into a settlement agreement. The settlement agreement resolved the litigation and ended the parties' business relationships. Kurtin was required to transfer his interest in the entities to Eiliff. Eiliff agreed to indemnify Kurtin for any liabilities arising from the Joint Entities. In addition, Kurtin was to receive from Eiliff and the Joint Entities $48.8 million. Only the Joint Entities were liable for the final $27.8 million of the settlement.
The settlement agreement granted Kurtin a security interest "in the projects on by the Joint Entities" to secure the Joint Entities' obligations to pay Kurtin under the settlement agreement. The settlement agreement prohibited islands from taking any distribution from any of the Joint Entities if such distribution would keep the Joint Entities from being able to pay the settlement amount to Kurtin.
The Joint Entities failed to pay Kurtin all amounts due under the settlement agreement. This entitled Kurtin to have a judgment entered against the Joint Entities for roughly $22.5 million. The trial court refused to enter the judgment because the Joint Entities were not parties to the lawsuit when the settlement agreement was executed.
Kurtin then exercised the arbitration right under the settlement agreement. The arbitration provision gave the arbitrator the right to modify the settlement agreement if the arbitrator determined the material term was missing. The arbitrator determined that the settlement agreement failed to provide Kurtin with the benefit of his bargain and ruled that Kurtin had the right to require eyelet to transfer to Kurtin or his designee olive Eiliff's right, title, and interest, whether direct or indirect, into any or all of the Joint Entities.
Kurtin never sought to enforce this new right.
Instead, Kurtin sued Eiliff and the Joint Entities in 2007. Kurtin alleged that Eiliff breached the settlement agreement by taking distributions from the Joint Entities that prevented the Joint Entities from being able to make the payments required under the settlement agreement.
The jury returned a verdict against Eiliff in the amount of $24,411,433.86, and judgment was entered in that amount. A new trial was held on the amount of Kurtin's damages. At the conclusion of that trial, the state court entered a judgment against Eiliff for $33,892,117.62 based solely on Eiliff's breach of the distribution restriction in the settlement agreement. Kurtin then recorded an abstract of judgment against Eiliff and two of these separate entities included in the judgment, Morse Properties, LLC (Morse), and 4627 Camden, LLC (Camden).
In October 2019, Eiliff, Morris, and Camden each filed Chapter 11 bankruptcy petitions. After three other entities filed Chapter 11 petitions, the bankruptcy court substantively consolidated cases and appointed a Chapter 11 trustee. The consolidated case was then converted to a chapter 7, and a chapter 7 trustee was appointed.
Within weeks of his bankruptcy filing, Eiliff commenced an adversary proceeding against Kurtin. The adversary proceeding ultimately asserted claims that Kurtin's damages judgment should be subordinated under section 510(b) and that Kurtin's judgment liens should be assigned to the estate under section 510(c)(2).
- Judge(s):
- SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges
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