All posts in Cases

Off-topic but fun: Tesla shareholders prevail against Musk $55 billion bonus.

I mentioned a few times to my UWLA Business Assns students last semester that there was a pending derivative lawsuit by some Tesla shareholders against Elon Musk that went to trial in Oct 2022 but no decision to date.  Well the decision came down yesterday and it was against Elon Musk. 

I really expected it to go the other way.  The 201 page decision is here.  As we learned, it is a duty of loyalty and care issue as to Musk since something is going from the corp into his pocket (a lot of stock), and a duty of care issue as to the rest of the board.  As to loyalty, the transfer to him is presumed to be unfair to the corp unless he did not participate in making the decision.  He argued that he did not and further, the bonus program was approved in advance by disinterested directors as well as disinterested shareholders.  Based on that, he argued that it was the unhappy shareholders’ burden to establish that the transaction was not fair to Tesla.  

The court, after taking testimony for five days, and considering 1700 exhibits, (and reading a few Musk biographies I think) found that the directors were not disinterested, and the shareholders were misled, at least enough to diminish the consequences of the vote, and therefore it was Musk’s burden to establish fairness which he did not do.  

I’ve just started working my way through the decision.  I’m going to prepare a case summary which I will upload which it is complete.       

Are findings of fact and conclusions of law required? Answer, sort of.

Nice quote from a district court memorandum I am reading.

Appellant does argue that the Bankruptcy Court was required to render findings of fact and conclusions of
law as required by Federal Rule of Civil Procedure 52(a), citing Rediger Investment Corporation v. H
Granados Communications, Inc. (In re H Granados Communications, Inc.)
, 503 B.R. 726, 732 (B.A.P. 9th
Cir. 2013). But that authority itself demonstrates that “[w]here the bankruptcy court rules without
articulating its findings, . . . there is no reversible error where the record provides the reviewing court with
a full, complete, and clear view of the issues on appeal” and that a “[r]eview of the record suffices when it
contains clear references to the factual basis supporting the bankruptcy court’s ultimate conclusions.” Id. at
732-33. This is the case here. This Court has no difficulty in understanding why the Bankruptcy Court
ruled in the way it did. As such, any failure by the Bankruptcy Court to follow the dictates of Rule 52(a) is
not reversible error.

Nice explanation of the difference between recoupment and set off from the 9th Circuit.

In re Gardens Regional Hospital and Medical Center, Inc.  975 F.3d 926 (9th Cir. September, 2020)

Historically, “[s]etoff allowed a reduction of [the] plaintiff’s claim by the amount of a liquidated claim of the plaintiff to the defendant; recoupment allowed a defendant to assert a claim arising out of the same transaction as the plaintiff’s claim.”  “The defining characteristic of setoff—as opposed to recoupment—is that, in a setoff, ‘the mutual debt and claim . . . are generally those arising from different transactions.’” [emphasis in original]   “[R]ecoupment is not the adjustment of separate mutual debts but the process of defining the amount owed under a single claim.”  “[R]ecoupment is in the nature of a right to reduce the amount of a claim, and does not involve establishing the existence of independent obligations.”  But “courts should apply the recoupment doctrine in bankruptcy cases only when ‘it would . . . be inequitable for the debtor to enjoy the benefits of that transaction without meeting its obligations.’”

Payment of an antecedent debt cannot be a fraudulent transfer per Civil Code section 3432

Universal Home Improvement v. Robertson, 51 Cal. App. 5th 116 (July 2020)

Issue:   Can a transfer of property with actual intent to delay, hinder or defraud creditors be avoided when the transfer is in satisfaction of a bona fide debt?

Holding:   No, Civil Code section 3432 specifically permits a person to “pay one creditor in preference to another.”

In the middle of certain litigation, Robertson transferred her interests in certain property to her sister.  Plaintiff filed this complaint later seeking to avoid the transfer as a fraudulent transfer arguing that the transfer was with actual intent to delay, hinder or defraud creditors.  Robertson’s defense was that even if done with actual fraud, the transfer to her sister was in payment of a bona fide debt which is permitted under Civil Code section 3432, which provides as follows: “A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another.”  The court heard significant evidence and concluded that the debt was actually owed to the sister and that the value of the property transferred was less than the debt.  Plaintiff argued that the debt was barred by the statute of limitations.  The court ruled that the statute had not run because of previous transfers and that even if it did, the statute of limitations is a defense that can be waived.  Plaintiff also argued that it established 7 of the 12 “badges of fraud” in section 3439.04(b) and that should be given precedence over the argument that the transfer was in payment of an antecedent debt.  The court ruled that “[T]he existence of one or more badges of fraud is not a mathematical formula and does not compel a finding one way or another.”  “Put simply, this court believes and therefore finds that the transfer that is the subject of this litigation was a good faith satisfaction of a legitimate debt.”

The court of appeals affirmed.  Recognizing that such transfers should be given strict scrutiny, it said, “Judge Swope’s conclusions are spot on. And plaintiffs’ arguments to the contrary are easily rejected.”

The lower court also awarded costs to defendant based on the cost of proving up facts at trial that were denied in a previous Requests for Admissions.  The court of appeals reversed that noting that the requests were made “within 30 days of the filing of the complaint”  It stated:

Frankly, we are troubled that a defendant can at the very inception of litigation, at a time when, as best we can tell, no discovery had taken place, and certainly no deposition, serve RFAs essentially seeking responses admitting that plaintiff had no case, and then, if plaintiff ultimately proves unsuccessful, recover costs of proof attorney fees, as here. This, it could be said, is tantamount to a form of strict liability: make a claim; deny an early-served RFA that the claim has no merit; vigorously pursue the claim; lose the claim; and pay. That cannot be the law. And we will not affirm the award here, for several reasons.

Is a transfer of an overencumbered asset with actual intent to defraud creditors an avoidable transfer?

Working away on my 9th Circuit Case Summaries (before the Lakers game starts).  Stadtmueller v. Sarkisian (In re Medina), — B.R. —, 2020 WL 4742491 (9th Cir. BAP  Aug, 2020) caught my eye.  The transferor relied on and the BAP discussed a California case Mehrtash v. Mehrtash, 93 Cal. App. 4th 75, 80 (2001).  There the debtor transferred a home which was over-encumbered.  The BAP noted that CCC section 3439.01(m) defines asset as “Asset’ means property of a debtor, but the term does not include the following: (1) Property to the extent it is encumbered by a valid lien.”  The California court ruled in Mehrtash (according to the BAP) that the transfer could not be unwound even if made with actual fraud because the home is not an “asset” under the UVTA.  That does not mean that unwinding an actual fraud transfer requires a showing of damages.

All things In Twyne’s Case

I have seen this case cited here and there, supposedly the genesis of the now familiar concept that a transfer of property with actual intent to delay, hinder or defraud creditors may be avoided.  But yesterday I stumbled on Prof. Bob Lawless’s post on Credit Slips about this fascinating new law review article by Northwestern Law Professor Emily Kadens, entitled New Light on Twyne’s CaseThe article is here.  She writes, “Twyne’s Case today stands for the point that even transfers made for good consideration can be fraudulent if they were made with the intent to defraud other creditors. ”

The facts are surprisingly familiar.  In 1600, the undersheriff of Hampshire, Brian Chamberlain, is instructed by a creditor to execute a writ and seize property of one John Pearce.   When he gets to Pearce’s farm, he is told the sheep, the cattle, grains, “leases,” and everything else is owned by John Twyne, not John Pearce.  Twyne was a cousin of Pearce and a man of some stature and wealth.  There is a confrontation over the next two-three days (called a “riot” in the legal papers of the time) but when the dust settles, nothing is removed from the farm.  It seems that months earlier, Twyne  agreed in writing to pay certain of Pearce’s debts in exchange for a transfer of Pearce’s property to Twyne.  Possession of the property remained with Pearce, apparently not unusual since it wasn’t that easy to move sheep, cattle and grain and the arrangement provided that if Pearce came up with the money, he would get his property back.   The paperwork of course was confusing, contradictory in places, incomplete and the “deeds” may have been back-dated.  But the court later agreed that “Twyne gave greater consideration than the total worth of Pearce’s property.” Read more…

Brace Yourself! Nice program coming up on the new California Supreme Court analysis of community property

“BRACE YOURSELF”
THE SHOCKWAVE CAUSED BY THE CALIFORNIA SUPREME COURT’S DECISION IN BRACE, THE EXTENT OF ITS IMPACT ON BANKRUPTCY CASES, OTHER COMMUNITY PROPERTY ISSUES, AND AN UPDATE ON RECENT HOMESTEAD CASES

Panelists:
Hon. Margaret M. Mann, United States Bankruptcy Judge, Southern District of California
D. Edward Hays, Marshack Hays LLP
Roksana D. Moradi-Brovia, Resnik Hayes Moradi LLP

Moderator:
Richard Marshack, Marshack Hays LLP

Topics to Include:
• What will be estate property when filing for just one spouse?
• How can a transmutation avoid the result in Brace?
• Are transmutations avoidable as fraudulent transfers?
• Is bankruptcy advisable when a divorce is pending?
• What claims will community property pay?
• The type of interest in property required to support a homestead under In re Nolan, __ B.R. __ (Bankr. C.D.Cal. July 21, 2020, J. Clarkson)

Thursday, September 10, 2020

Hosted by the Inland Empire Bankruptcy Forum – the flyer is here.  Brace Flyer_IEBF_9-10-209(b)

You know Legal and Equitable Rights, but have you heard of a Reversionary Right?

What happens when two spouses file two separate bankruptcy cases?  I will use Spouse 1 and Spouse 2 both to distinguish the spouses but also to establish the order of filing — first and second.  Spouse 1 files first followed by Spouse 2 later.

Do the community assets of Spouse 1 get included in Spouse 2’s bankruptcy case?  Not so says the Court in this published decision but Spouse 2 does have a “Reversionary Right” to those assets.

Here’s what happened in this published Chapter 13 Moreno case from Riverside.

Read more…

Judgment creditor request for attorney’s fee for bankruptcy court efforts.

I found this in a tentative by the very thoughtful Judge Ernest Robles.  Can judgment creditors get attorneys fees for their efforts in bankruptcy court?  Yes, but they have to do it right.

In re Harris, 2:20-12839

B. The Attorneys’ Fees Motion is Denied

The Attorneys’ Fees Motion is denied without prejudice because the Court lacks jurisdiction to award attorneys’ fees under 42 U.S.C. § 1988 on account of the Judgment.

The Bankruptcy Court has jurisdiction over “all cases under title 11.” 28 U.S.C. § 1334(a). “Generally, in the bankruptcy context, the word ‘case’ is a term of art which refers to ‘that which is commenced by the filing of a petition; it is the “whole ball of wax,” the chapter 7, 9, 11, 12 or 13 case.’” Blevins Elec., Inc. v. First Am. Nat’l Bank (In re Blevins Elec., Inc.), 185 B.R. 250, 253 (Bankr. E.D. Tenn. 1995). Read more…

Watch 9th Circuit oral argument in the Taggart case

You might have thought Taggart was resolved by the Supreme Court, eh?  No “it goes on Judah,” from my favorite movie Ben Hur.

The Supreme Court reversed the prior ruling of the 9th Circuit in Taggart and sent it back to the 9th Circuit.  The 9th Circuit required new briefs, basically starting the appeal over.  They are back to reviewing the ruling by the BAP that the creditor here did not violate the discharge injunction when it asked for postpetition attorneys fees in state court litigation that had begun prepetition.  The BAP had ruled that the creditor had a reasonable belief that he was not violating the discharge injunction.  The 9th Circuit had affirmed saying it’s purely subjective, even if the subjective belief is unreasonable.  The Supreme Court reversed saying it is not purely subjective – the test is whether there is a fair ground of doubt.

Dan Geyser argues for the debtor.  You may recall he came to Los Angeles from his home in Texas last summer to do a program with Prof Dan Bussell and me for the Central District Consumer Bankruptcy Attorney’s Assn (cdcbaa).   He had just finished arguing four cases that term at the Supreme Court.  You can watch the oral argument here.  https://www.ca9.uscourts.gov/media/view_video.php?pk_vid=0000017600