Stahl v. Simon (In re Adamson Apparel, Inc.)

No. 12-57059 / D.C. No. 2:11-cv-01204-VAP
In a 2-1 decision (with a dissenting opinion), the Ninth Circuit affirmed the California District Court’s order affirming the Bankruptcy Court’s judgment in favor of and absolving the debtor’s insider from any preference liability.
Procedural context:
The Bankruptcy Court ruled that a corporate debtor’s insider and guarantor is not liable on a preference claim where the insider waived, pre-petition, all indemnity rights against the corporate debtor and, therefore, is not a creditor of the debtor. The District Court affirmed the ruling on appeal. Appellant further appealed to the Ninth Circuit.
The Debtor, Adamson Apparel, Inc. (Debtor), manufactured and sold clothing and accessories. In 2002, Debtor entered into a multi-million dollar loan agreement with CIT Group Commercial Services (CIT). The loan was secured by the Debtor’s inventory and receivables. Shortly thereafter, Debtor’s principal, Arnold Simon (Simon), entered into two separate agreements with CIT to guaranty the loan; the first, a Pledge Agreement, and the second, a Limited Guaranty. In late 2003, a buyer made a large purchase of merchandise from the Debtor. Simon instructed the buyer to tender the purchase price ($4,989,934.65) directly to CIT in partial satisfaction of the loan. Nine months later, Debtor filed its chapter 11 petition. A few months prior to the Debtor’s filing of its petition, Simon paid CIT the balance owing on the loan from his personal funds (approximately $3.5 million). During the chapter 11 case, the Committee filed an action against Simon seeking to recover the amount of the purchase price tendered by the buyer to CIT, contending that Simon, as a guarantor of the CIT loan and an insider of the Debtor, received a preference. At trial, Simon argued that pursuant to the Limited Guaranty, he waived all rights of indemnification against the Debtor and, therefore, he was not a ‘creditor’ of the Debtor, one of the elements to establish a preference claim. The Committee countered that under the Pledge Agreement, Simon’s indemnity rights were merely ‘delayed’ (until CIT was paid in full), and not extinguished, thus maintaining his creditor status. Noting an ambiguity between the Pledge Agreement and Limited Guaranty, the Bankruptcy Court considered further evidence including the fact that Simon had not filed a claim against the Debtor in its bankruptcy case. Based on Simon’s testimony of his understanding of his rights under the two agreements, and the fact that Simon did not file a claim in the bankruptcy case, the Bankruptcy Court determined that the Committee failed to establish Simon as a ‘creditor,’ and entered judgment in favor of Simon, ruling that he was ‘exempt from preference liability.’ On appeal, the District Court affirmed. On appeal to the Ninth Circuit, the Appellant Trustee (substituting in for the Committee upon conversion of the case to chapter 7) argued that notwithstanding the plain language of the statute, Simon, as an insider guarantor, should be liable for the preferential transfer that benefitted him, even though he unconditionally waived his indemnification claims against the Debtor, citing to a series of cases emanating from and following Levit v Ingersoll Rand Fin. Corp. (In re Deprizio), 874 F.2d 1186 (7th Cir. 1989). The Ninth Circuit noted two separate lines of cases developed after Deprizio, one line favoring Simon and holding that bona fide indemnification waivers are valid and excuse an insider from preference liability. The other line of cases, favoring the Trustee, hold that such indemnification waivers are “sham” waivers and therefore invalid. In evaluating the instant waiver, the Ninth Circuit adopted a case-by-case approach based on the totality of the facts surrounding an indemnification waiver to determine if such waiver was a “sham.” Determining that (i) CIT holding a claim secured by the inventory and receivables of the Debtor from which it could be satisfied regardless of Simon’s guaranty, (ii) Simon not filing a claim in the bankruptcy case, (iii) Simon did not possess a unilateral right to acquire CIT’s position, and (iv) no evidence was presented to indicate that CIT’s loan was the only company debt guaranteed by Simon, the Ninth Circuit concluded that the indemnification waiver by Simon was not a “sham.” Finding the waiver valid, the Ninth Circuit ruled that Simon was not a creditor of the Debtor as defined under the Bankruptcy Code. Facing imminent defeat, the Trustee urged the Court to exercise its equitable powers and consider public policy, arguing that Simon, in fact, received a benefit from the buyer’s direct payment to CIT, to the detriment of Debtor’s other creditors. The Ninth Circuit noted that its equitable powers are constrained by the text of a clearly drafted statute. Norwest Bank Worthington v Ahlers, 485 U.S. 197 (1988). The Ninth Circuit affirmed.

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