BUSINESS LAW NEWS, ISSUE 3, 2022

INTRODUCTION

In Spyglass Media Group v. Cohen (In re Weinstein Co. Holdings LLC), the United States Court of Appeals for the Third Circuit ruled that a work-for-hire contract to produce the 2012 film Silver Linings Playbook in exchange for a share of the film’s future receipts was not an executory contract in the Weinstein Company’s (“TWC”) 2018 bankruptcy case.

An executory contract under section 365 of the Bankruptcy Code may only be assumed and assigned to a buyer if all defaults are cured or the debtor provides adequate assurance of prompt cure. Thus, the determination that a contract is executory can make the purchase of assets from a bankruptcy estate more expensive. Whether a contract is executory can mean the difference between a contract counterparty getting paid in full, versus getting paid much less, or nothing, as a general unsecured creditor of a debtor in bankruptcy.

If a contract is determined to be nonexecutory, the rights of the debtor under the contract may be sold to a buyer pursuant to section 363 “free and clear” of the debtor’s past obligations. Accordingly, a debtor may transfer its rights and obligations under the contract, and existing defaults under the contract need not be cured.05 If a contract is not executory, claims for breach or default existing as of the petition date are rendered unsecured claims against the debtor’s estate.

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October 4, 2021

Dear constituency list members of the Insolvency Law Committee

The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

Deciding a previously unresolved issue, United States Bankruptcy Judge Christopher B. Latham, of the Southern District of California, held that a legal fee award entered in a civil action that is litigated parallel to and intertwined with ongoing dissolution proceedings comes within the scope of a discharge exception under 11 U.S.C. section 523(a)(15), in that it is “in the course of a divorce or separation” or “in connection with [an]… other order of a court of record.” In re Bohrer, 2021 WL 1915991 (Bankr. S.D. Cal. 2021).

Here’s a link to the writeup on the CLA website:  click here.

To read the full opinion, click here.

Westlaw’s CFN recently published a write-up by Danning Gill Partner Uzzi Raanan about In re Lockhart-Johnson, 2021 WL 3186115 (B.A.P. 9th Cir. 2021). Deciding a previously unresolved issue, the Ninth Circuit Bankruptcy Appellate Panel held that, to assert a nondischargeability claim against the non-filing spouse of a debtor, a plaintiff must affirmatively obtain a nondischargeability determination by commencing an adversary proceeding against the non-debtor spouse within 60 days after the meeting of creditors.

The BAP acknowledged that neither the Federal Rules of Bankruptcy Procedure nor other courts had previously addressed how a creditor can assert its community claim when nondischargeable acts were committed by the non-filing spouse, or “expressly provide[d] the procedure for asserting hypothetical nondischargeability or objections to discharge under § 524.”

The full write up can be found on Westlaw: click here.

As it does each year, the Business Law Section (BLS) of the California Lawyers Association (CLA) recently published in its Business Law News (BLN) an update on developments affecting insolvency and commercial finance law in California and the Ninth Circuit. Partner Uzzi Raanan contributed to this project a number of case law summaries discussing bankruptcy and related state law issues, and edited the summaries written by other contributors. A copy of the article can be found here.

DAILY JOURNAL
November 23, 2020
By Zev Shechtman, et al.

It’s time for Congress to address bankruptcy venue

What do the Dodgers, American Apparel, Rubio’s Fish Tacos, California Pizza Kitchen, MGM Studios, and Pacific Sunwear have in common?  Each is an iconic Southern California brand.  But that’s not all they have in common.  These companies are members of a growing list of California companies that strategically elected to file for bankruptcy outside of California.  By filing for bankruptcy in faraway states, they deprived local employees, vendors and creditors from participating in the bankruptcy process.  Read more —

Business Law News – California Lawyers Association
Issue 3 2020

By Zev Shechtman

This article covers recent developments in bankruptcy, including with respect to the Small Business Reorganization Act, under which qualified small businesses may file for relief under subchapter V of chapter 11, authorizing a streamlined reorganization process. Additionally, the article addresses litigation arising from the Small Business Administration’s blanket denial of Payroll Protection Program funds to debtors in bankruptcy.

Click Here to Read More

Daily Journal
July 15, 2020
By Zev Shechtman

With unemployment and economic distress reaching levels unseen since the Great Depression, businesses and their employees may be seriously considering all of their financial options — including filing for bankruptcy protection. A business considering bankruptcy may have questions relating to employment claims. For example, can employment claims be eliminated or otherwise adjusted in bankruptcy? Can employment lawsuits continue even after the bankruptcy case is filed? How are employment class actions resolved in bankruptcy? For employee plaintiffs who are creditors, how will the bankruptcy filing of the employer defendant impact the employees’ claim? Do employees get priority treatment above other types of creditors? Finally, what happens if an employee plaintiff files a personal bankruptcy case — can he or she still pursue the lawsuit while in bankruptcy?

Click Here to read more.

August 14 2020

Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.

SUMMARY

On July 23, 2020, in Speier v. Brace, __ P.3d __, __, 2020 WL 4211750, 2020 Cal. LEXIS 4642 (July 23, 2020), the California Supreme Court issued an opinion answering questions posed by the Ninth Circuit Court of Appeals in Brace v. Speier (In re Brace), 908 F.3d 531 (9th Cir. 2018). In sum, the Court held that:

• The “form of title” presumption in California Evidence Code § 662 does not apply when it conflicts with the community property presumption in California Family Code § 760.
• Property acquired by spouses as joint tenants, with community funds, before January 1, 1975, is presumed to be separate property.
• Property acquired by spouses as joint tenants, with community funds, on or after January 1, 1975, is presumed to be community property.
• A grant deed from a third party, in itself, is not sufficient to overcome the community property presumption. What is required depends on whether the property was acquired before or after January 1, 1985.
• If the property was acquired before January 1, 1985, the community property presumption may be rebutted by substantial evidence of an oral or written agreement or a common understanding between the spouses. A court may consider the fact that title was taken as joint tenants as part of its determination as to whether such an agreement or understanding existed.
• If the property was acquired on or after January 1, 1985, there must be a written transmutation that satisfies the requirements of Family Code § 852. A grant deed, in itself, is not sufficient to transmute community property into separate property.

To read the California Supreme Court’s decision, click here.

BACKGROUND

Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands. At some point, although it is not clear when, they also acquired a rental property in San Bernardino. They took title to each property as “husband and wife as joint tenants.”

In 2011, Mr. Brace filed a chapter 7 petition. After some preliminary legal issues were resolved, the bankruptcy court needed to decide whether the bankruptcy estate owned 100%, or just 50%, of each property.

In 2015, the bankruptcy court entered a judgment in favor of the chapter 7 trustee. The bankruptcy court determined that the properties were community property and, therefore, entirely property of the bankruptcy estate. See 11 U.S.C. § 541(a)(2).

In a published decision, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit affirmed. Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017). The BAP’s decision was the subject of an ILC e-Bulletin authored by Michael W. Davis and published on October 16, 2017. Mr. Davis’s e-Bulletin may be found here.

The Braces appealed to the Ninth Circuit. In a published order , the Ninth Circuit requested that the California Supreme Court decide the following certified question.

Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?

Brace v. Speier (In re Brace), 908 F.3d 531 (9th Cir. 2018). The Ninth Circuit’s request was the subject of an ILC e-Bulletin authored by John N. Tedford, IV, and published on March 18, 2019. Mr. Tedford’s e-Bulletin may be found here.

The California Supreme Court reformulated the question as follows:

[W]hether the form of title presumption set forth in Evidence Code section 662 applies to the characterization of property in disputes between a married couple and a bankruptcy trustee when it conflicts with the community property presumption set forth in Family Code section 760.

The Court’s answer – a thorough 45-page majority opinion and a 12-page concurring and dissenting opinion by Justice Kruger – examines a “snarl of conflicting presumptions” going back to the 1800s. In the end, for property acquired after January 1, 1975, the Court adopted a bright-line rule that the California Legislature declined to expressly adopt in the 1980s.

THE COURT’S REASONING

1850–1930: The Community Property Presumption and the Married Woman’s Presumption

The California Legislature first enacted a general community property presumption in 1850. In 1872, it enacted former Civil Code § 164: “All other property acquired after marriage, by either husband or wife, or both, is community property.” However, the early community property system afforded a wife no management or control over community property.

In 1889, the Legislature enacted the so-called “married woman’s presumption.” First, if property was conveyed to a married woman by an instrument in writing, it was presumed to be her separate property. Second, if property was conveyed to a married woman and to her husband, the portion conveyed to her was presumed to be taken as a tenant in common unless a different intention was expressed in the instrument.

The fact that the phrase “unless a different intention is expressed in the instrument” appeared only as part of the married woman’s presumption is key. According to the majority, the married woman’s presumption is the only place in which the form of title, in itself, determined whether jointly titled property was characterized as community or separate property. As discussed below, the married woman’s presumption does not apply to property acquired on and after January 1, 1975. Therefore, according to the majority, neither does the rule that allowed the form of title to determine the character of the property.

1931–1932: The Siberell Rule

In some cases, former Civil Code § 164 led courts to determine that the wife owned 75% of property jointly deeded to a husband and wife. One such case was Dunn v. Mullan, 211 Cal. 583 (1931). After both spouses died, the Court determined that the wife had a separate interest in half of the property as a tenant in common, but that did not mean that the husband had a separate interest in the other half. Rather, under the general community property presumption, the other half of the property was community property. The wife’s 75% interest was probated to her heirs, and the husband’s 25% interest was probated to his.

The following year, the Court decided a key case called Siberell v. Siberell, 214 Cal. 767 (1932). Siberell was a dissolution action in which the wife argued that she had a 75% interest in a house titled in joint tenancy. In rather sweeping terms, for two reasons, the Siberell Court declined to extend Dunn’s rule to joint tenancy deeds in the context of divorce.

First, the Siberell Court stated that “from the very nature of the estate, as between husband and wife, a community estate and a joint tenancy cannot exist at the same time in the same property. The use of community funds to purchase the property and the taking of title thereto in the name of the spouses as joint tenants is tantamount to a binding agreement between them that the same shall not thereafter be held as community property but instead as a joint tenancy with all the characteristics of such an estate.”

Second, the Siberell Court said that, on its face, Civil Code § 164 had no application to a case where a different intention was expressed in the instrument. The Siberell Court concluded that the deed conveying title to the spouses as joint tenants was “an expression of the intention to hold the property otherwise than as community property and that the equal interest of the spouses must therefore be classed as their separate but joint estate in the property.”

As formulated by Justice Kruger in her concurring and dissenting opinion, the “Siberell rule” is as follows: “[S]pouses who take title to property as joint tenants are presumed to have intended to transmute their community property to separate property.”

In Brace, the majority interpreted Siberell narrowly. According to the majority, Siberell addressed a peculiar circumstance arising from the tension between the married woman’s presumption and fundamental concepts of joint tenancy. Also according to the majority, the decision in Siberell was limited to dissolution actions between spouses. The majority noted that less than one year earlier, in Hulse v. Lawson, 212 Cal. 614 (1931), the Court had held that one spouse’s creditor could reach the entirety of a couple’s property held in joint tenancy because it was community property. To the Brace majority, the fact that Siberell reached a different result in the dissolution context without disavowing Hulse indicates that the scope of Siberell’s holding is limited.

Justice Kruger, on the other hand, argued that Siberell’s holding was not limited to dissolution actions. She cited cases that applied the Siberell rule outside the dissolution context, including to claims made by third party creditors. She also noted that the Legislature understood Siberell to apply outside of the dissolution context in 1965 when it abrogated the Siberell rule for certain types of property held in joint tenancy, but solely for purposes of dissolution proceedings. According to Justice Kruger, there would not have been any need to limit the 1965 legislation (discussed below) to dissolution proceedings if the Siberell rule did not apply outside of the dissolution context.

1933–1974: Legislature’s Adoption of the Siberell Rule Where the Deed Identified the Spouses as Husband and Wife, and Extension of the Community Property Presumption to Certain Property Held As Joint Tenants (But Only When Dividing Property in a Dissolution Proceeding)

In 1935, the Legislature amended the married woman’s presumption in former Civil Code § 164 to add that a conveyance to spouses describing them as husband and wife created a presumption of community property “unless a different intention is expressed in the instrument.” According to the Brace majority, this phrase suggests that the Legislature approved of the Siberell view that an instrument that vests title as a joint tenancy expresses a “different intention” of the parties.

Over the years, courts applied the Siberell rule and the statutory presumption in the context of both divorce proceedings and disputes involving third-party creditors. Doing so was particularly difficult in the divorce context, because courts were often unable to award the family home to one of the spouses.

The Legislature recognized that most spouses took title to their homes as joint tenants without really realizing what it meant to own property as joint tenants. Therefore, in 1965, the Legislature amended Civil Code § 164 to provide that when spouses acquired a single family residence as joint tenants, for purposes of division of the property upon divorce, the property was presumed to be community property.

1975–1984: Landmark Reforms Giving Spouses Equal Management over Community Property, and Prospective Abolition of the Married Woman’s Presumption

In 1973, the Legislature enacted landmark reforms to the community property system. Among other things, wives were allocated equal management rights over community property. The Brace majority observed that this “eroded the original impetus for” the married woman’s presumption, which was prospectively eliminated as of January 1, 1975. According to the majority, the Legislature also prospectively eliminated the 1935 language in former Civil Code § 164 (property jointly deeded to “husband and wife” is presumptively community property “unless a different intention is expressed in the instrument”).

According to the majority, the 1973 legislation eliminated (prospectively) the basis for the Siberell rule privileging the form of title. Thus, “as a result of the 1973 legislation, the form of title in property jointly held by a married couple can defeat the general community property presumption only for property acquired before 1975.” For property acquired on or after January 1, 1975, the general community property presumption applies.

Justice Kruger disagreed. She argued that Siberell remained good law after the 1973 amendments went into effect. She pointed out that, at the time, courts and the Legislature treated the Siberell form of title presumption as if it survived the 1973 amendments. According to Justice Kruger, it was the 1984 amendments (discussed below), not the 1973 amendments, that changed this aspect of the law.

During this time period, a transmutation could be shown by an oral or written agreement or a common understanding between the spouses.

1985-Present: Adoption of Strict Transmutation Requirements

In 1984, the Legislature enacted California’s present-day transmutation statutes. Under those statutes, for property acquired on or after January 1, 1985, a transmutation “is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” This strict requirement was enacted to curb the risk of fraud, undue influence, and litigation arising from informal agreements between the spouses.

In 1992, the Legislature created the Family Code. Today:

• The general community property presumption is found in Family Code § 760. Unlike the former Civil Code provisions which also contained the married woman’s presumption, Family Code § 760 does not permit the community property presumption to be rebutted simply by the manner in which a married couple takes title.
• The married woman’s presumption and the post-Siberell rule allowing form of title to rebut the community property presumption are found in Family Code § 803 and apply only to property acquired before 1975.
• The transmutation requirements are found in Family Code §§ 850-853. Although a deed may expressly declare that title is vested as joint tenants, it does not contain language which expressly states that the characterization or ownership of the property is being changed between the spouses. Therefore, the form of the deed does not constitute an express declaration that transmutes community funds into separate property.
• The community property presumption applicable at divorce is found in Family Code § 2581 and extends to all property acquired by the parties during marriage in joint form, including joint tenancy. Section 2581 limits the type of evidence that may be used to rebut the presumption.

The Court rejected the notion that Evidence Code § 662 trumps Family Code § 760. The Court stated that ruling otherwise would carve a major hole in the community property system and would run counter to the intent of the 1973 legislation that prospectively eliminated separate property inferences from form of title.

The Court also rejected the Braces’ argument that because Family Code § 2581 establishes a community property presumption in the context of divorce, spouses hold property as joint tenants in their dealings with third parties. According to the Court, the general community property presumption may be rebutted by tracing. However, the community property presumption in Family Code § 2581 can only be rebutted by (1) a clear statement in the title document that the property is separate property and not community property, or (2) proof that the parties made a written agreement that the property is separate property. “Thus, the import of Family Code section 2581 is that it establishes a stronger presumption of community property at dissolution when title is held in joint form, while the general community property presumption, rebuttable by tracing, applies at dissolution to property not held in joint form.”

Finally, the Court said that its approach does not undermine the stability of title in the context of probate. The Court noted that courts have consistently held that, for property titled in joint tenancy, the form of title controls at death. The Court also found support for this proposition in Family Code § 2040 (requiring certain language in a divorce summons) and Civil Code § 682.1 (creating “community property with a right of survivorship” as a new form of title). The Court stated that its decision “does not alter the well-established default rule that form of title controls at death.”

In sum: “The particular manner in which property is acquired, titled, or held by a married couple is conceptually and legally distinct from the underlying character of the spouses’ ownership of the property as separate or community.”

AUTHOR’S COMMENTARY

First, when spouses purchase a home in California, they usually don’t give much thought as to how title should be held. Historically, spouses have taken title as joint tenants so that, when one spouse dies, the ownership interest of the deceased spouse automatically transfers to the surviving spouse. This “right of survivorship” is convenient because it avoids the need for a probate. But most people don’t realize that if the joint tenancy is given full effect each spouse separately owns a one-half interest in the property and has the power to transfer his or her one-half interest without the other spouse’s consent. Obviously, this is not what most spouses intend when they buy a family home. Brace brings things back in line with spouses’ expectations.

Second, for both of the properties at issue in Brace, the Court’s answers to the seemingly academic questions of what presumption applies for property acquired before 1975, and what rules apply to property acquired from 1975 through 1984, will make a difference.  For example, the Braces purchased their Redlands residence in the late 1970s.  Under the majority rule, because the residence was acquired after January 1, 1975, it is presumed to be community property.  But because it was acquired before 1985, the Braces can theoretically rebut the presumption by providing substantial evidence of an oral or written agreement or a common understanding between the spouses.  (I say “theoretically” because it appears that the bankruptcy court may have already found that no such agreement or understanding existed.)  In contrast, if Justice Kruger’s minority view had prevailed, each of the Braces would be presumed to have a separate property joint tenancy interest in the residence; it would then be the Trustee’s burden to rebut that presumption.

Third, in 2003, the Ninth Circuit held that the community property presumption is rebutted when spouses acquire real property from a third party as joint tenants, and that there is a rebuttable presumption that “‘where the deed names the spouses as joint tenants . . . the property [is] in fact held in joint tenancy.’” Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243-44 (9th Cir. 2003) (quoting Hansen v. Hansen, 233 Cal.App.2d 575, 594 (1965)). Brace effectively overrules Summers. So under Brace’s ruling, money that used to go to non-debtor spouses will go to pay costs of administration and creditors.

Fourth, when the California Law Revision Commission recommended in 1983 that the Legislature enact transmutation requirements now found in Family Code §§ 850-853, it also recommended the following new statute:

Except as otherwise provided by statute, the form of title to property acquired by a married person during marriage does not create a presumption or inference as to the character of the property, and is not in itself evidence sufficient to rebut the presumptions established by this article.

The perceived need for such a provision bolsters Justice Kruger’s conclusion that the Siberell rule survived the 1973 amendments. Notably, the Estate Planning, Trust and Probate Law Section of the California State Bar opposed it on the grounds that “the form of title should create a presumption as to the character of the property.” See In re Marriage of Brooks, 169 Cal.App.4th 176, 189 (2008). To allow for additional time to consider the proposed presumptions and their effect, this provision was deleted from a then-pending bill. Id. The Court arguably has now adopted a rule that the Legislature declined to enact.

Fifth, while in my view the Court reached the right conclusion, I struggle to reconcile it with Family Code § 2581. Brace effectively holds that property acquired by spouses in joint form is presumed to be community property. If that has been the law all along since 1975 or 1985, there seems to be no reason for § 2581 to establish that rule specifically for the purpose of division of property in divorce proceedings.

Finally, the case will now return to the Ninth Circuit for further proceedings.  As to the residence in Redlands, I predict that the Ninth Circuit will affirm because (a) the parties stipulated below that the property was acquired in 1977 or 1978, and (b) the bankruptcy court applied the correct legal standard by presuming that the property was community property.  Unless the Ninth Circuit concludes that the bankruptcy court erroneously determined that the Braces failed to rebut the presumption, the judgment should stand.

On the other hand, as to the rental property in San Bernardino, the Ninth Circuit may remand for one of two reasons.  First, evidence in the record does not appear to conclusively establish the date on which the property was acquired; if that is the case, the Ninth Circuit cannot determine from the record whether the bankruptcy court correctly presumed that the property was community property.  Second, based on public records, it appears that the Braces acquired the property in 1973; if that is the case, and if the parties stipulate to (or the Ninth Circuit takes judicial notice of) that fact, the Ninth Circuit may rule that the bankruptcy court applied the wrong legal standard and must determine in the first instance whether the evidence at trial rebutted the separate property presumption.  Either way, remand seems appropriate.

These materials were written by John N. Tedford, IV, of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles (jtedford@DanningGill.com). Editorial contributions were provided by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal., Ret.).

Best regards,
Insolvency Law Committee

Co-Chair
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
kandrassy@swelawfirm.com

Co-Chair
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC
rudolph@sullivanhill.com

Co-Vice Chair
Michael W. Davis
DTO Law
mdavis@dtolaw.com

Co-Vice Chair
Michael J. Gomez
Frandzel Robins Bloom & Csato, L.C.
mgomez@frandzel.com

March 26, 2020

Dear constituency list members of the Insolvency Law Committee:

The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

The Fifth Circuit Court of Appeals rejects lower court ruling that a bankruptcy trustee could avoid prepetition transfers and recover their values under 11 U.S.C. section 550(a), when the immediate transferee had returned the funds in question to the debtor prepetition, as such recovery would violate the prohibition against double recovery in Section 550(d). Matter of DeBerry, ___ F.3d ___, 2019 WL 7046904 (5th Cir. 2019).

To view the full opinion, click here.

Facts:

A few months before debtor Curtis DeBerry filed for bankruptcy under chapter 7, his wife Kathy DeBerry (maiden name Whitlock) opened a joint Wells Fargo bank account with her sister-in-law Cheri Whitlock. Mrs. DeBerry allegedly wanted to use the account to transfer funds to her adult children who were away at school. As the appellate court noted, it is not clear why the joint account was needed to accomplish this goal.

Mrs. DeBerry was briefly on the joint account with Ms. Whitlock but removed herself after about three days. However, she instructed Ms. Whitlock about how the money in the account, which was funded with a $275,000 check written on a DeBerry joint account, should be disbursed. At Mrs. DeBerry’s request, Ms. Whitlock authorized transfers of $33,500 to a culinary school attended by the DeBerry’ daughter, $9,200 to Marla Bainbridge, whom Ms. Whitlock did not know, $32,000 to Mrs. DeBerry’s personal bank account, which was held in her name alone, and $200,000 to an account owned by the debtor’s LLC, “MBC”. All transfers were made within two months of when the account was opened.

Ms. Whitlock testified that she never questioned requests that she make the above transfers, as the funds belonged to Mrs. DeBerry. She was merely helping her sister-in-law.

About four months after the last two transfers, Mr. DeBerry filed his chapter 7 case. His trustee sued Ms. Whitlock for fraudulent transfer and sought to recover from her $241,500 under Section 550(a). The trustee settled with the DeBerry daughter regarding the $33,500 transfer.

Ms. Whitlock raised two defenses: (1) she was never a “transferee” of the funds in question, as she was merely a “conduit” for the DeBerrys, and (2) the funds she transferred to her sister-in-law and to MBC represented a return of funds to the debtor, so the trustee could not recover the funds from her a second time.

The bankruptcy court held that Ms. Whitlock was the “initial transferee” of the funds under Section 550(a)(1), as they became her sole property and she had dominion and control over the money. The more difficult question was whether allowing the trustee to recover from Ms. Whitlock would result in an impermissible double recovery to the debtor’s estate. Section 550(d) states, “The trustee is entitled to only a single satisfaction under subsection (a) of this section.”

The bankruptcy court ruled that the single satisfaction rule does not apply when the funds in question were returned prior to the petition date. It therefore entered a judgment for the trustee, holding Ms. Whitlock liable for the entire $241,500.

The district court affirmed the trial court’s ruling and Ms. Whitlock appealed to the Fifth Circuit Court of Appeals.

Reasoning:

The court of appeals reversed the trial court’s ruling, holding that a transferee who received but returned a fraudulent transfer prepetition cannot be required to return the assets a second time when the transferor subsequently files for bankruptcy.

The court rejected the Trustee’s argument that a plain reading of Section 550(d) establishes that the single-satisfaction rule does not apply when funds are returned to the debtor prepetition, rather than post-petition. The Trustee had asserted that if funds were returned to the debtor without a need to sue under Section 550(a), it could not be argued later that the trustee had utilized his rights under that section and thus there was no double-recovery under Section 550(d). The Trustee had relied on the language in Section 550(d), which states that, “[t]he trustee is entitled to only a single satisfaction under subsection (a) of this section.” (Emphasis added.) Thus, if Ms. Whitlock returned the funds to the debtor prepetition, the trustee had not received a prior recovery under Section 550(a) to trigger the single-recovery rule.

The appellate court concluded that the word “satisfaction” used in Section 550(d) “presupposes an obligation.” If Ms. Whitlock returned the funds in question, she satisfied her obligation leaving no right of action for the trustee to pursue in an avoidance action.

Similarly, the appellate court rejected an argument that all prior cases reviewing this issue were distinguishable as they found that the recovery by a trustee would have resulted in a windfall for the bankruptcy estates. Here, the estate never received the funds in question as they were spent by the debtor prepetition. The DeBerry court responded that the debtor’s decision to fritter his funds away prepetition was not relevant to the trustee’s subsequent fraudulent transfer claims against Ms. Whitlock. After all, the debtor could have dissipated the funds in question whether or not they had ever been transferred to Ms. Whitlock.

The Court of Appeals acknowledged in a footnote that the bankruptcy court never decided whether the transfers to Mrs. DeBerry and MBC amounted to a return of funds to the debtor and left the issue for the bankruptcy court to resolve on remand.

Author’s Comments:

The appellate court’s opinion appears to reach the correct result, as the lower courts’ rulings in favor of the trustee appear counter-intuitive on their face. As the appellate court notes, the trial court’s ruling contradicted all other decisions in cases where the issue arose, raising questions as to what motivated the lower court to rule in the trustee’s favor and the district court to affirm that decision.

It is entirely possible that the lower court’s ruling relied on facts and legal arguments that were not fully discussed in the appellate court’s decision. However, barring such explanation, it is hard to imagine a state of the law where a transferee of a fraudulent transfer who returned the funds prepetition could be required to repay the funds a second time pursuant to an avoidance action brought in the transferor’s subsequent bankruptcy case. After all, what were the bankruptcy estate’s damages if Ms. Whitlock indeed returned the funds in question to the debtor prepetition?

These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomas Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomas Reuters.

Best regards,
Insolvency Law Committee

Co-Chair
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
kandrassy@swelawfirm.com

Co-Chair
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC
rudolph@sullivanhill.com

Co-Vice Chair
Michael W. Davis
Brutzkus Gubner Rozansky Seror Weber LLP
mdavis@bg.law

Co-Vice Chair
Michael J. Gomez
Frandzel Robins Bloom & Csato, L.C.
mgomez@frandzel.com

By Sonia Singh and Zev Shechtman

In Mission Product Holding, Inc. v. Tempnology, LLC, resolving a circuit split, the Supreme Court determined that a licensor’s choice to reject an executory trademark license agreement under 11 U.S.C. § 365(a) functions as a breach of contract, not a rescission.  The decision established an important precedent in the interpretation of executory contracts under the Bankruptcy Code.

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