Case Type:
Case Status:
22-1081 (9th Circuit, Jan 17,2023) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the decision of the U.S. Bankruptcy Court for the District of Nevada (BC) sustaining the objection of Geo-Logic Associates, Inc. (GLA), a creditor of debtor Metal Recovery Solutions Inc. (DR or MRS), to claims for the consulting fees and patent license fees filed by Differential Engineering Inc. (DIF), finding the BC to have correctly concluded that GLA had rebutted both claims' prima facie validity and rightly considered the obligations underlying the CR's promissory note and UCC-1 financing statement in doing so.
Procedural context:
After MRS, a debtor owned by Thom Seal (Seal) and his wife, filed a chapter 7 case, DIF, an entity whose sole shareholder and president was Seal himself, filed two claims: one for the consulting fees and the other for the patent license fees. Each claim was supported by the promissory note and UCC-1 financing statement. GLA objected to the claims. Applying the kind of rigorous scrutiny reserved for insider claims, as DIF was by virtue of its connection to Seal, the DR's co-owner, the BC sustained the objection to the claims. DIF timely appealed.
For years, much was done in the shadows. Prepetition, Seal was the sole shareholder and president of the DIF, and he and his wife owned MRS. Though the owner, Seal provided consulting services to MRS pursuant to a consulting agreement. This agreement included the use of specialized so-called "Hydro-Jex" technology for which Seal eventually obtained a patent by causing MRS to enter into a patent license agreement with DIF, a separate creation of Seal's, which provided for the retroactive payment of patent license fees. Sometime after this deal's execution, GLA, a creditor of MRS, obtained an arbitration award subsequently entered as a judgment against MRS based on the latter's contract with GLA for a mining project in Mexico . At the time of this award, MRS assumed further financial obligations by signing promissory notes in favor of DIF for the amounts allegedly owed to DIF under the two agreements and providing UCC-1 financing statements to secure these notes. As MRS was thusly entangled, Seal caused MRS to make distributions of $1.2 million to himself and his wife as shareholders of MRS.
Julia W. Brand; Robert J. Faris; and William J. Lafferty III

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