Elissa Miller v. Bhc Interim Funding II ( 2015 )

FILED
NOT FOR PUBLICATION
DEC 16 2015
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: PARADIGM INTERNATIONAL, No. 13-56517
INC.,
D.C. No. 2:13-cv-01582-R
Debtor,
MEMORANDUM*
ELISSA MILLER, Chapter 7 Trustee,
Plaintiff - Appellant,
v.
BHC INTERIM FUNDING II, L.P.,
Defendant - Appellee.
Appeal from the United States District Court
for the Central District of California
Manuel L. Real, District Judge, Presiding
Argued and Submitted October 23, 2015
Pasadena, California
Before: KLEINFELD, RAWLINSON, and NGUYEN, Circuit Judges.
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Appellant Elissa Miller, the bankruptcy trustee (the “Trustee”) of Paradigm
International, Inc. (“Paradigm”), appeals the district court’s judgment in favor of
appellee BHC Interim Funding II L.P. (“BHC”). We have jurisdiction pursuant to
28 U.S.C. § 1291, and we affirm.
1. The district court did not clearly err in finding that the payment BHC
obtained through an asset-backed guaranty (the “Guaranty”) from Paradigm was
not a “distribution” under Fla. Stat. § 607.06401. See, e.g., Goldstein v.
Commissioner, 298 F.2d 562, 566 (9th Cir. 1962) (“Whether or not a corporation
distributes a dividend or something else is a question of fact . . . . No one factor is
determinative . . . [and] [t]he trier of fact must consider and weigh all the different
facts involved before reaching its decision.”); Official Committee of Unsecured
Creditors v. Liberty Savings Bank, FSB (In re Toy King Distributors, Inc.), 256
B.R. 1, 163 (Bankr. M.D. Fla. 2000) (“Whether a payment constitutes a dividend is
a ‘question of fact to be determined by the Court and no one factor is
determinative.’”) (citations omitted)). Rather, the record supports the district
court’s determination that the Guaranty was a commitment from Paradigm to pay
its corporate-affiliate’s indebtedness in the event of default.
2. The district court also correctly determined that the burden of proof on
the fraudulent transfer claim remained on the Trustee. See, e.g., Whitehouse v. Six
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Corp., 40 Cal. App. 4th 527, 533-34 (1995). The Guaranty and the stock pledge
were negotiated and executed as part of an arm’s length transaction among
sophisticated parties, and the Trustee failed to show that BHC was an “insider”
when Paradigm’s contingent obligations actually arose or that Paradigm was
controlled by BHC.
The Trustee failed to show that BHC received a fraudulent transfer.
Paradigm was solvent when the Guaranty was executed, and the loan agreements
were negotiated with a third party (BHC) that specialized in corporate lending and
conducted extensive due diligence before agreeing to the loan. Cf. Toy King, 256
B.R. at 97-98, 119-20 (describing why creditors controlled the debtor and were
insiders at the time of the loan). While there were indicia of possible
fraud—including that the Guaranty was issued from a wholly owned subsidiary at
the command of a parent corporation for no reasonably equivalent value—the
district court correctly observed that “those are only two of many non-exclusive
factors” in the analysis. See, e.g., Wyzard v. Goller, 23 Cal. App. 4th 1183, 1190
& n.4 (1994) (noting that even the existence of several “badges of fraud” may be
insufficient to raise a triable issue of material fact). Moreover, the Trustee failed to
identify any direct evidence of an intent to defraud, and neither the 2007 loan
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transaction nor Paradigm’s financial obligations were concealed from the creditors
here, none of whom held debts antecedent to the Guaranty.
3. The Trustee’s common law fraud claim also fails due to the absence of an
intent to defraud. See Robinson Helicopter Co. v. Dana Corp., 102 P.3d 268, 274
(Cal. 2004) (common law fraud requires knowledge of falsity and intent to
defraud). Contrary to the Trustee’s arguments, an implicit promise to pay only out
of Paradigm’s “earned surplus” is at odds with the express language in the
Guaranty promising the absolute and unconditional payment of all obligations
under the loan, secured by substantially all of Paradigm’s assets.
The Trustee also failed to show that the payment under the Guaranty was
constructively fraudulent. There was no evidence that at the time the Guaranty was
executed, Paradigm was: (1) engaged or about to engage in business for which the
remaining assets were unreasonably small; or (2) intended to incur or reasonably
should have believed it would incur debts beyond its ability to repay. Cal. Civ.
Code § 3439.04(a)(2)(A)-(B). In fact, Paradigm and its affiliates were not
undercapitalized at the time and were able to pay debts as they came due. The
affiliate’s default occurred almost two years after BHC issued the loan and
received the Guaranty, which was secured not only by Paradigm’s assets, but also
by the assets of additional Pacific CMA, Inc. subsidiaries.
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4. The district court properly rejected the Trustee’s claim that the Guaranty
resulted in an “insider” preferential transfer under Section 547(b) of the
Bankruptcy Code. As explained above, BHC was not an “insider,” and Paradigm
was not insolvent at the time the Guaranty was executed. See 11 U.S.C. §
547(b)(3) (indicating that prerequisite for preferential transfer claim is insolvency).
The Trustee did not show that BHC—as a secured creditor—received more
through the Guaranty than it would have received in a hypothetical Chapter 7 case
had the payment not occurred. See id. § 547(b)(5); Battan v. TransAmerica
Commercial Financial Corp. (In re Smith’s Home Furnishings, Inc.), 265 F.3d
959, 963 (9th Cir. 2001) (transfer is not preferential unless it enables the transferee
creditor to receive more than he or she would have received in a hypothetical
Chapter 7 case); Committee of Creditors v. Koch Oil Co. (In re Powerene Oil Co.),
59 F.3d 969, 972 (9th Cir. 1995) (same).
5. Finally, the Trustee did not establish any basis for subordination. The
contractual language did not require BHC to subordinate payments under the
Guaranty in favor of other creditors. The agreement states that the lien and
security interest in issue are enforceable “only to the maximum extent that would
not cause this Guaranty or such lien and security interest to constitute a Fraudulent
Conveyance.” Since the court correctly determined that BHC’s enforcement of the
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Guaranty was not a fraudulent conveyance, there is no basis for contractual
subordination under 11 U.S.C. § 510(a).
Likewise, there was no basis for equitable subordination. See, e.g., Henry v.
Lehman Commercial Paper, Inc. (In re First Alliance Mortgage Co.), 471 F.3d
977, 1006 (9th Cir. 2006). BHC had the right to obtain payment under the
Guaranty as a secured creditor, and there was no evidence of fraud or concealment.
Accordingly, the district court properly rejected the Trustee’s claim for equitable
subordination. See id. (“Although equitable subordination can apply to an ordinary
creditor, the circumstances are ‘few and far between.’”) (quoting ABF Capital
Mgmt. v. Kidder Peabody & Co., Inc. (In re Granite Partners, L.P.), 210 B.R. 508,
515 (Bkrtcy. S.D.N.Y.1997)).
AFFIRMED.
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