- Latus v. Shumate Spokane, LLC (In re Shumate Spokane, LLC), BAP No. EW-14-1302-TaPaJu, 2015 WL 5013358 (B.A.P. 9th Cir. Aug. 25, 2015)
- Affirming the bankruptcy court, the Bankruptcy Appellate Panel for the Ninth Circuit held that (1) the debtor’s former employees’ claim seeking to surcharge the debtor’s secured lenders under section 506(c) of the Bankruptcy Code must be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure because the BAP concluded former employees lacked standing to assert the claim as only a bankruptcy trustee can assert such a claim, and the bankruptcy could not exercise its equitable powers under section 105(a) to grant the former employees derivative standing; and (2) the bankruptcy court properly granted summary judgment in favor of the secured lenders as to the former employees’ quantum meruit, unjust enrichment, and Fair Labor Standards Act claims.
- Procedural context:
- The bankruptcy court entered an order dismissing the former employees’ section 506(c) claim and granting summary judgment in favor of the secured lenders as to the former employees’ quantum meruit, unjust enrichment, and Fair Labor Standards Act claims. After the former employees appealed, the BAP dismissed the appeal, finding that the bankruptcy court’s order was not a final order because it did resolve the claims against three non-moving defendants. After the bankruptcy court dismissed the remaining claims, the former employees again appealed. The BAP reviewed de novo.
- Prior to filing, the debtor operated Harley-Davidson sales and repair shops. Approximately nine months after it filed, the debtor sold substantially all of its assets pursuant to section 363 of the Bankruptcy Code. The sale order provided for the payment in full of the Harley-Davidson Credit Corporation’s secured claim, less a carve-out and surcharge, and part of GE Capital Franchise Finance Corporation’s claim, less a carve-out and surcharge. According to one of the secured creditors, the debtor did not appear to be operating for at least six months before the sale. Similarly, the debtor’s monthly operating reports indicated that the debtor had no employees, $0 in sales revenue, and $0 in sales revenues. Following the sale, several former employees of the debtor commenced an adversary proceeding against the debtor, the debtor’s secured lenders, and several individuals. The former employees immediately amended their complaint seeking recoveries under section 506(c), quantum meruit and unjust enrichment theories, and the Fair Labor Standards Act. After the secured lenders moved to dismiss for failure state a claim for relief, the former employees moved for leave to amend. The bankruptcy court dismissed the section 506(c) claim with prejudice, finding that the secured creditors’ collateral could not be surcharged because it was no longer part of the bankruptcy estate following the sale, and granted the motion to amend as to the remaining three claims. The former employees then filed a second amended complaint, which the secured lenders answered. After the parties submitted additional evidence and supplemental argument, the bankruptcy court (1) again dismissed the section 506(c) claim and (2) granted summary judgment in favor of the secured lenders with respect the remaining claims.
- Taylor, Pappas, Jury, Bankruptcy Judges
Analysis: Bankrupt Borrowers Won’t Forfeit Coronavirus Aid Payments to Creditors Under Stimulus Package
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