Carolyn A. Dye v. Communications Ventures III

FILED
NOT FOR PUBLICATION MAR 30 2016
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: FLASHCOM, INC., No. 13-57161
Debtor, D.C. No. 8:11-cv-01883-FMO
CAROLYN A. DYE, MEMORANDUM*
Appellant,
v.
COMMUNICATIONS VENTURES III,
LP; et al.,
Appellees.
In the Matter of: FLASHCOM, INC., a No. 13-57162
California Corporation,
D.C. No. 5:13-cv-00114-FMO
Debtor,
CAROLYN A. DYE, Liquidating Trustee
and DAVID R. WEINSTEIN,
Appellants,
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
v.
COMMUNICATIONS VENTURES III,
LP; et al.,
Appellees.
Appeal from the United States District Court
for the Central District of California
Fernando M. Olguin, District Judge, Presiding
Argued and Submitted March 9, 2016
Pasadena, California
Before: REINHARDT, MURGUIA, and OWENS, Circuit Judges.
Carolyn Dye, the bankruptcy trustee for Flashcom, appeals the bankruptcy
court’s judgment and sanctions imposed on her attorney and her personally for
violation of Federal Rule of Bankruptcy Procedure 9011. We affirm.
The Trustee seeks to recover $9 million from the VC Funds and their
employees (Defendants) under the theory that Flashcom’s payment to Andra for
her common stock, or agreement to make that payment, was a fraudulent transfer
pursuant to 11 U.S.C. § 548 and that the payment was a “preference” under § 547.
1. To recover the payment as a preference, the Trustee must show among
other things that (1) Flashcom was insolvent at time of the payment, § 547(b)(3),
and (2) that the Defendants are “entit[ies] for whose benefit such transfer was
2
made” under § 550(a)(1). The bankruptcy court found at trial that Flashcom was
solvent, which is not surprising because contemporaneous arm’s length
transactions valued Flashcom’s equity at roughly $400 million. The court also
found that the transfer was not made to benefit Defendants under § 550.
The Trustee contends that § 547(b)(3) was satisfied as a matter of law
because when Andra settled with the Trustee she stipulated to the entry of a
judgment stating that § 547(b)’s criteria were met. Although we are doubtful of
the Trustee’s argument, we need not address it because she does not challenge the
bankruptcy court’s § 550 finding. Thus any error with respect to § 547(b) would be
harmless. See Fed. R. Bankr. P. 9005; Fed. R. Civ. P. 61. Although the Trustee
mentions the issue in her statement of issues and summary of the argument
sections, she does not argue the point in the body of the arguments section. This
3
waives the issue. See Martinez-Serrano v. INS, 94 F.3d 1256, 1259 (9th Cir.
1996).1
Even if we were to reach the merits, we would uphold the bankruptcy
court’s § 550 ruling. Section 550(a) requires that “the debtor must have been
motivated by an intent to benefit the individual or entity from whom the trustee
seeks to recover. It is not enough that an entity benefit from the transfer; the
transfer must have been made for his benefit.” Danning v. Miller (In re Bullion
Reserve of N. Am.), 922 F.2d 544, 547 (9th Cir. 1991) (internal quotation and
citation omitted). The bankruptcy court found that Flashcom did not intend to
benefit the Defendants. We review for clear error. See Boyer v. Belavilas, 474 F.3d
375, 377 (7th Cir. 2007). The bankruptcy court first observed that any obligation
of Defendants to Andra had been extinguished by the time of the transfer. More
1
We briefly address the Trustee’s arguments about errors in the solvency
trial because such errors might affect her state law claim. Those arguments are,
however, without merit. It was appropriate for the judge, in a bench trial, to defer
consideration of the Daubert motion until after the testimony was given and the
judge gave well reasoned explanations for admitting that testimony. The Trustee
relies on Estate of Barabin v. AstenJohnson, Inc., which is plainly inapposite. See
740 F.3d 457, 464 (9th Cir. 2014).
Similarly, the bankruptcy judge correctly determined that Flashcom should
be valued as a going concern because it was not on its deathbed, as shown by the
fact that it had just raised $84 million in equity from arm’s length parties, had
recently received an unqualified audit, and was easily accessing credit markets. See
Wolkowitz v. Am. Research Corp. (In re DAK Indus., Inc.), 170 F.3d 1197, 1199
(9th Cir. 1999).
4
important, it concluded that Andra’s common stock was substantially equivalent to
the new Series B shares. This meant that the VC Funds agreement to buy Andra’s
shares at a 15% discount compared to the price for the Series B shares was
advantageous for the VC Funds. Thus the court found that the only effect of
Flashcom buying Andra’s shares instead of the VC Funds doing so was that the
Funds paid more for the Flashcom shares they purchased in February 2000 than
they would have under the original agreement.
The court’s finding is not illogical, implausible, or without support in the
record and therefore is not clearly erroneous. See United States v. Hinkson, 585
F.3d 1247, 1261-62 (9th Cir. 2009) (en banc). The court correctly found that the
new Series B shares and Andra’s common shares were very similar, and would be
identical after an IPO. While the Series B shares offered some limited benefits not
given to common shares in the event that Flashcom was purchased for less than
$400 million or in the highly unlikely event of a solvent liquidation, it was not
erroneous for the court to conclude that the 15% discount the VC Funds had
negotiated was a favorable price. Therefore, if the VC Funds did not want to use
the discount themselves, other investors would have been willing to buy Andra’s
common shares at this price in the “Unit Purchase,” leaving the VC Funds no
5
obligation. Flashcom cannot have intended to benefit the VC Funds by relieving
them of what was in essence an asset.2
2. The bankruptcy court granted summary judgment for Defendants on the
Trustee’s constructive fraudulent transfer claim under § 548(a)(1)(B)(i) because
Flashcom received “reasonably equivalent value.” A debtor receives reasonably
equivalent value if there is no negative net effect on the estate. See Frontier Bank
v. Brown (In re N. Merch., Inc.), 371 F.3d 1056, 1059 (9th Cir. 2004). We
examine the net effect of an integrated transaction as a whole and do not
formalistically look at only some part of it. See id.
We conclude that even viewing the evidence in the light most favorable to
the Trustee, Flashcom’s repurchase of Andra’s shares must be analyzed along with
the Series B offering, the net effect of which was positive¯$75 million of new
funds. The undisputed evidence showed the new equity sale and the repurchase
were interdependent. First, it was Flashcom’s investment banker who convinced
Flashcom to simplify the offering by issuing an additional $9 million of new Series
2
The Trustee points out that in denying summary judgment to Defendants on
the preference issue in 2004, the bankruptcy court found that drawing all
reasonable inferences for the Trustee, Defendants were benefitted parties under
§ 550. Insofar as the Trustee asks us to rely on this finding, she ignores the posture
of the order. When the Trustee then moved for summary judgment on § 550, the
bankruptcy court denied it, finding that there were material issues of disputed facts.
6
B shares and using the proceeds to retire Andra’s shares. This plan yielded
Flashcom the exact same amount of new funds on net as the Unit Purchase, but
allowed it to sell only one security, the Series B shares, instead of marketing both
Andra’s common shares and the new Series B shares. Second, the arm’s length
outside investors explicitly conditioned their purchase of the Series B shares on the
release of Andra’s legal claims against Flashcom, which in turn depended on
Flashcom’s repurchase of her shares.
The Trustee maintains that there were actually two separate transactions
here: (1) the VC Funds foist a losing contract on Flashcom and (2) Flashcom
independently raises new equity. We do not, however, find the Trustee’s evidence
sufficient for a reasonable trier of fact to conclude that the apparently
interdependent transactions should be analyzed separately. The facts of this case
closely parallel Official Comm. of Unsecured Creditors of Phar-Mor, Inc. v. Action
Indus., Inc. (In re Phar-Mor, Inc. Sec. Litig.), 185 B.R. 497, 504 (W.D. Pa. 1995).
That court granted summary judgment for the defendants, rejecting the same
argument that the Trustee makes here that outside investors would have purchased
new equity even without the buyback. It concluded that although the plaintiff
“would have us ignore the express provisions of the stock purchase agreement[,] . .
7
. [w]e will not do so.” Id.3 The same is true here. The grant of summary judgment
was appropriate.
In addition, we conclude that any error in granting summary judgment for
Defendants was harmless because, as with the preference claim, the Trustee cannot
recover under § 548 unless she shows Defendants met § 550(a). The § 550
analysis is very similar to the one discussed above. The only difference is that at
the time Flashcom agreed to buy Andra’s shares, Defendants’ contract with Andra
was still extant. Nevertheless we still conclude that the Defendants do not satisfy
§ 550(a)(1) because, as discussed, Flashcom did not intend to benefit the VC Funds
by taking on what was an asset for the Funds.
3. The bankruptcy court sanctioned Dye, her counsel, David Weinstein, and
his firm for bringing a motion in limine seeking to prevent Defendants from
contesting § 547(b) because of the stipulated judgment. This theory had already
been rejected four times. At pretrial conference, the court warned that “[Plaintiffs]
can bring whatever motion they want [on this question]. . . . And if Rule 11
sanctions are appropriate, then they may be imposed.” Dye and her counsel
3
The Trustee’s only evidence suggesting that there are separate transactions
is that the VC Funds had previously agreed to buy Andra’s shares, but this is not
enough. It would be speculative to conclude on this evidence that the VC Funds
induced third parties to create the appearance of an integrated transaction to cover
up the Funds having constructively defrauded Flashcom. See LVRC Holdings LLC
v. Brekka, 581 F.3d 1127, 1136 (9th Cir. 2009).
8
nevertheless pushed on, bringing the motion in limine. The bankruptcy court
found the motion frivolously sought relief that was contrary to law of the case
without citing a change in the law or the facts, and that the motion was brought
with an improper purpose. The court sanctioned Dye, Weinstein, and his firm
jointly $60,000.
The bankruptcy court did not abuse its discretion. We have frequently
upheld sanctions for filing motions that duplicate one that was previously denied.
See, e.g., Nugget Hydroelectric, L.P. v. Pac. Gas & Elec. Co., 981 F.2d 429, 438-
39 (9th Cir. 1992); Pipe Trades Council of N. Cal., U.A. Local 159 v. Underground
Contractors Ass’n of N. Cal., 835 F.2d 1275, 1281 (9th Cir. 1988). Dye and
Weinstein contend that the bankruptcy court erred in finding their motion contrary
to law of the case because a denial of summary judgment cannot establish law of
the case. We disagree: a court’s decisions on purely legal issues, like the
interpretation of § 547 and § 550 at issue here, establish law of the case, even in a
denial of summary judgment. See Christianson v. Colt Indus. Operating Corp., 486
U.S. 800, 815-16 (1988) (stating that law of the case applies “when a court decides
upon a rule of law”) (internal quotation and citation omitted). It was not improper
for Dye and Weinstein to seek reconsideration of the ruling nor to seek
interlocutory appeal and reconsideration of the denial thereof, as they did. After
9
that, however, trying to litigate the issue again without a change in the law or facts
was frivolous.
The bankruptcy court also found an intent to injure Defendants because Dye
and Weinstein knew that their filing would force Defendants to defend, yet again,
their right to litigate the § 547 question. Dye and Weinstein were warned by the
court concerning sanctions. In light of this, finding intent to injure was not
illogical, implausible, or without support in the record.
We also do not find the decision to award $60,000 an abuse of discretion.
The bankruptcy court found that defendants had reasonably expended $97,000
responding to the motion in limine and bringing sanctions. Rule 9011 specifically
authorizes the award of fees for bringing sanctions. Fed. R. Bankr. P.
9011(c)(1)(A). The court nevertheless concluded that $60,000 was sufficient to
deter repetition of such vexatious litigation by Dye and Weinstein and “others
similarly situated.” Dye and Weinstein contend that $60,000 still exceeds
Defendants’ reasonable fees. Even if the bankruptcy court were confined to
considering solely the Defendants’ fees, however, we find $60,000 to have been
reasonable. It was also proper to defer considering sanctions, at Dye’s own
10
request, until after trial. This did not make awarding sanctions at that later date
punitive.4
AFFIRMED
4
Dye’s argument that she was not on notice that she would be personally
held responsible is without merit. “The Bankruptcy Code forbids reimbursing
trustees for expenses incurred in actions not ‘reasonably likely to benefit the
debtor’s estate,’” including sanctionable litigation conduct. See Maxwell v. KPMG
LLP, 520 F.3d 713, 718-719 (7th Cir. 2008) (quoting 11 U.S.C. §
330(a)(4)(A)(ii)(I)). It was thus clear that the sanctions motion ran against her
personally.
11
FILED
Dye v. Communications Ventures III et al., 13-57161, 13-57162 MAR 30 2016
MOLLY C. DWYER, CLERK
Reinhardt, J., concurring in part and dissenting in part: U.S. COURT OF APPEALS
I join in the disposition except with respect to the sanctions. Having
reviewed the record, I conclude that the Trustee’s counsel firmly believed that his
legal position was correct and filed the motion in limine to serve the interests of his
client and obviate the need for an extensive trial. He did not do so to harass or
injure the Defendants. There was no improper purpose.
As to frivolousness, the bankruptcy judge stated that the Trustee would have
to overcome a presumption in favor of the initial rulings, but he hardly made it
clear that he would view a motion giving additional reasons for reconsideration to
be sanctionable: “The Court will follow Judge Ryan's rulings on those claims
unless the Plaintiff has shown that there's reason that the Court should reconsider
Judge Ryan's rulings . . . So the ball will be in the Plaintiff's court on that.”
Indeed, the fact that Defendants spent $35,000 responding to the motion in limine
suggests that they felt there were new arguments in that motion that had not been
addressed in their previous briefing.
Sanctions are “an extraordinary remedy, one to be exercised with extreme
caution.” Operating Eng'rs Pension Trust v. A–C Company, 859 F.2d 1336, 1345
(9th Cir.1988). “Such sanctions can have an unintended detrimental impact on an
attorney's career and personal well-being.” Conn v. Borjorquez, 967 F.2d 1418,
1421 (9th Cir. 1992). Because I do not believe that the bankruptcy court here
exercised that extreme caution, I respectfully dissent as to sanctions.