Case Type:
Case Status:
Reversed and Remanded
22-1006 & 22-1007 (9th Circuit, Aug 05,2022) Not Published
In an appeal by a chapter 11 debtor of a bankruptcy court’s judgment for it and against three persons and denial of motion to amend, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) found error in that tribunal’s dismissal of DR’s claims for an unperfected security interest’s avoidance, a contract’s invalidity, and a claim’s disallowance and, despite seeing no error in its fraud finding, remanded for more precise findings as to assets’ value and bases for the damages’ calculation and, with remand so required anyway, for judgment’s modification as to wrongly dismissed claims too.
Procedural context:
Before Fall Line Tree Service, Inc. (Fall Line or DR) filed as a small business debtor under subchapter V in the U.S. Bankruptcy Court for the Eastern District of California (BC), the parties had fought over the DR’s failure to pay back two promissory notes by which it had financed the Assets’ acquisition (collectively, Notes): the $386,849 “Inventory Note” and the $270,000 “Purchase Price Note”. Post-petition, the three persons from whom the DR had purchased the assets of its retail business (Assets)—Dick Yost Yaghlegian, Lauren Yaghlegian, and the DLSK Family Trust (collectively, Yaghlegians)—filed two proofs of claims based on the DR’s prepetition failure to pay these notes. Not content to to reorganize and pay the Yaghlegians, the DR filed an adversary proceeding that generally alleged that the purchase price substantially exceeded the value of the Assets and that the Yaghlegians, through fraud, induced the DR’s owners, Mr. and Mrs. Nichols, to agree to the price. The complaint contained nine claims for relief: (1) Avoidance of Unperfected Security Interest; (2) Declaratory Relief – Invalidity of Contract; (3) Avoidance and Recovery of Preferential Transfers; (4) Fraud; (5) Fraudulent Proof of Claim; (6) Disallowance of Claim – Proof of Claim No. 5; (7) Disallowance of Claim – Proof of Claim No. 4; (8) Fraudulent, Unlawful and Unfair Business Practices; and (9) Breach of Contract. After trial, the DR added two more claims for relief for (10) promissory fraud and (11) fraud by way of concealment. Problems started with the BC’s ruling. As laid out in its oral findings of fact and conclusions of law, the BC agreed that the Yaghlegians intentionally misled Mr. and Mrs. Nichols and awarded Debtor $123,324 in damages for fraud. The BC further found that the contract underlying the Purchase Price Note, was “made for the purpose of furthering [a] matter or thing prohibited by statute or to aid or assist any party therein” and was therefore “void as a matter of California law.” Based on these two rulings, the BC concluded determined that the Purchase Price Note was unenforceable. However, while the findings included discussion of relevant case law, they contained “almost no[ne] … of the math supporting the damages award.” Just as problematically, the oral ruling left the Inventory Note fully payable but suggested that it could be partially paid through offset of the fraud judgment. And, finally, the BC failed to incorporate its findings as to cancellation of the Purchase Price Note and the avoidance of the security interest in the Assets into the judgment. Naturally, shortly after its entry, the DR therefore filed a motion asking the BC to amend the judgment. After the BC denied the motion to amend, the DR timely appealed.
Fall Line owns and operates, as it did before the relevant petition’s filing, a retail sporting goods business located in South Lake Tahoe known as “The Village Board Shop.” Prepetition, it had acquired the business’ assets (Assets) from the Yaghlegians in in a seller-financed transaction. The Asset’s purchase price, including the inventory, was approximately $700,000. The DR paid a down payment and executed the Notes for the remainder of the purchase price; both the Notes stated that they were secured by the Assets. After the DR’s inability to pay the Notes prompted foreclosure threats, Fall Line became the DR by filing a chapter 11 case.
Laura S. Taylor; William J. Lafferty III; and Julia W. Brand

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