In re: TBH19, LLC

Case Type:
Case Status:
2:19-BK-23823-VZ, 2022 WL 16782946 (B.A.P. 9th Cir. Nov. 8, 2022) (9th Circuit, Nov 08,2022) Not Published
Appellants failed to raise § 502(e) in bankruptcy court and thus waived the issue on appeal. BAP found that § 502(e) did not apply because the Estate no longer had a co-obligation with a guarantor, irrespective of whether the claim was contingent. BAP also found that bankruptcy court sufficiently considered the A&C factors and did not abuse its discretion in approving a 9019 Settlement. Trustee was not required to accept an offer to litigate the claim objection without certainty that the Estate would receive benefits at least as beneficial as those under the Settlement.
Procedural context:
Appeal from the bankruptcy court for the Central District of California granting chapter 7 trustee's motion to approve compromise under FRBP 9019, reviewed for abuse of discretion.
Debtor TBH19, LLC, owned extraordinary real property located in Beverly Hills, California (the "Property"). In 2015, it borrowed $40 million from DBD, secured by a senior lien on the Property. Debtor also obtained secured borrowing from Appellant HAR-BD, LLC. Glorya Kaufman guarantied repayment of the DBD loan in a transaction that included a Reimbursement and Indemnity Agreement and a Subordination and Intercreditor Agreement (the "Guaranty Transaction"). In that agreement, Debtor also broadly agreed to indemnify Kaufman for amounts paid to DBD and expenses incurred in connection with the DBD guaranty. Debtor defaulted. Litigation in state court then commenced: (1) DBD sued Kaufman; (2) Kaufman answered and cross-complained against DBD, Debtor, and its owner; (3) Debtor and others sued Appellants, Kaufman, DBD, and others; and (4) DBD cross-complained against Debtor, Har-BD, Kaufman, and others. After the filing of the state court cases, Debtor filed a chapter 11 bankruptcy petition. Kaufman filed an approximately $72,927,668.00 proof of claim, comprised of: (1) at least $4,777,059.50 in accrued and unpaid guaranty fees; (2) at least $66,148,017.00 based on Debtor's indemnification obligations; and (3) at least $2,002,591.50 based on her contractual right to reimbursement of costs and fees, including attorney's fees in the bankruptcy case and the state court cases. Debtor objected to the claim. In part, it argued that the claim should be disallowed under § 502(e)(l)(B). The bankruptcy court held its decision on the claim objection in abeyance pending resolution of the state court proceedings. The bankruptcy court later converted Debtor's case to chapter 7, and the chapter 7 trustee then settled with DBD. DBD agreed that the Estate could retain a portion of the Property sale proceeds as a carveout for payment of administrative expenses and unsecured claims if a prompt sale occurred; the maximum carve-out was 6.25% of the first $60 million of sale proceeds. The bankruptcy court later approved sale of the Property for $63.1 million, and the Estate received a sale carveout of $3.75 million. From the proceeds over $60 million, Trustee paid sale related costs. After payments for costs of sale, Trustee held an additional $560,775.62 in escrow ("Escrow Proceeds"). Subsequently, Trustee and ¬¬¬¬Kaufman reached the Kaufman Settlement, allowing the Kaufman Claim as a general unsecured claim for $17,778,861.52, and retained secured status as to the Escrow Proceeds subject to senior liens but agreed to allow the Estate to receive a 6.25% carve out of the $560,775, or $35,048.47 ("Escrow Carveout"). The settlement ended all pending litigation between Kaufman and the Estate with the parties bearing their own costs; the parties exchanged mutual releases; and Kaufman agreed not to object to administrative expenses. Trustee brought a 9019 Motion ("9019 Motion") to approve the Kaufman Settlement and argued that the settlement was in the best interest of the creditors and the Estate under the factors set forth in Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986). Appellants opposed the 9019 Motion, arguing that the Kaufman Settlement failed to provide the Estate with any valuable consideration. They argued that the primary component of the Kaufman Claim, the indemnification obligation, was contingent due to the ongoing state court litigation between Kaufman and DBD because Kaufman might successfully eliminate any liability on her guaranty. Finally, Appellants offered to assume the risk and burden of "litigating the validity and amount of Kaufman's disputed contingent claim." This offer did not include assumption of state court litigation costs and risks. The bankruptcy court granted the motion. It found that the Trustee's declaration addressed all A & C Properties factors, and, thus, he carried his burden. It also found in particular that the controversy was complex and unusual; Appellants' opposition was not supported by any evidence placing the Trustee's admissible evidence in material dispute; and Appellants were impermissibly attempting to substitute their judgment for the Trustee's.
Hon. Laura S. Taylor; Hon. Gary A. Spraker; Hon. Scott H. Gan

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