Official Committee of Unsecured Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings International, Inc.)
- Summarized by James Webster , Law Office of James Portman Webster, PLLC
- 10 years 1 month ago
- 11-56677 D.C. No. 2:10-cv-00647-AG
- The Ninth Circuit VACATED the District Court's decision (which affirmed the Bankruptcy Court) and REMANDED to the District Court. Finding contrary to the District Court, the Ninth Circuit held that a court has the authority to re-characterize a purported loan repayment as an equity distribution for the purpose of avoidance under section 548(a). The Court held that a transaction creates a "debt" only if it creates a "right to payment" under state law. REMAND for further proceedings. AMENDED ORDER: Request for rehearing denied. Request for Clarification granted. The clarification is the District Court dismissed the following claims under the wrong standard, and should be remanded to use the correct standard regarding claims for fraudulent transfer, breach of fiduciary duty, whether reasonably equivalent value was given, and constructive fraudulent conveyance. The Court did not reach the merits of the in pari delicti doctrine and remanded to the District Court. Affirm District Court ruling that there was nothing in pleadings that demonstrated an intent to hinder, delay or defraud creditors because unsecured debt was converted into secured debt. The Trustee did not allege a necessary element of constructively fraudulent transfer. The Trustee's allegation that the insiders contrived to benefit themselves out of a failing company is sufficient to allow for a equitable subordination claim.
- Procedural context:
- The Official Committee of Unsecured Creditors, of the Estate of Fitness Holdings International, Inc. (the "Committee") sued to avoid alleged constructive fraudulent transfers from entities that received funds from Debtor that were originally characterized as payments on debt. The Bankruptcy Court dismissed the complaint finding that it lacked the authority to re-characterize the transfers for purposes of avoidance under section 548(a). The District Court affirmed the Bankruptcy Court and the Committee appealed to the Ninth Circuit.
- In the five years prior to the filing of the Debtor's bankruptcy petition, shareholders of Fitness transferred funds to the Debtor that were paid back and recorded as debt repayments. The Committee sought to re-characterize the transactions as equity investments and shareholder distributions that were avoidable based on the allegation that the Debtor was insolvent at the time of, or as a result of, the transfers to shareholders.
- CALLAHAN, IKUTA AND HURWITZ
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