Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

136 S.Ct. 1581Supreme Court of the United States

HUSKY INTERNATIONALELECTRONICS, INC., petitioner

v.Daniel Lee RITZ, Jr.

No. 15–145.|

Argued March 1, 2016.|

Decided May 16, 2016.

SynopsisBackground: Creditor, a seller of electronic devicecomponents, brought adversary proceeding against Chapter7 debtor, the individual who was in financial control ofthe company that had purchased components from creditor,seeking to pierce corporate veil in order to hold debtorpersonally liable on corporate debt, and to except debtfrom discharge on, inter alia, a “false pretenses, falserepresentation, or actual fraud” theory. Following trial, theUnited States Bankruptcy Court for the Southern District ofTexas, Jeff Bohm, J., 459 B.R. 623, entered judgment in favorof debtor, and creditor appealed. The District Court, MelindaHarmon, J., 513 B.R. 510, affirmed. Creditor appealed. TheCourt of Appeals for the Fifth Circuit, Carolyn Dineen King,Circuit Judge, 787 F.3d 312, affirmed. Certiorari was granted.

[Holding:] The Supreme Court, Justice Sotomayor, held thatthe term “actual fraud,” as used in the discharge exceptionfor debts obtained by false pretenses, a false representation,or actual fraud, encompasses forms of fraud, like fraudulentconveyance schemes, that can be effected without a falserepresentation.

Reversed and remanded.

Justice Thomas filed a dissenting opinion.

*1583 Syllabus *

Chrysalis Manufacturing Corp. incurred a debt to petitionerHusky International Electronics, Inc., of nearly $164,000.

Respondent Daniel Lee Ritz, Jr., Chrysalis' director and partowner at the time, drained Chrysalis of assets available topay the debt by transferring large sums of money to otherentities Ritz controlled. Husky sued Ritz to recover on thedebt. Ritz then filed for Chapter 7 bankruptcy, promptingHusky to file a complaint in Ritz' bankruptcy case, seekingto hold him personally liable and contending that the debtwas not dischargeable because Ritz' intercompany-transferscheme constituted “actual fraud” under the BankruptcyCode's discharge exceptions. 11 U.S.C. § 523(a)(2)(A).

The District Court held that Ritz was personally liable understate law but also held that the debt was not “obtainedby ... actual fraud” under § 523(a)(2)(A) and thus could bedischarged in bankruptcy. The Fifth Circuit affirmed, holdingthat a misrepresentation from a debtor to a creditor is anecessary element of “actual fraud” and was lacking in thiscase, because Ritz made no false representations to Huskyregarding the transfer of Chrysalis' assets.

Held : The term “actual fraud” in § 523(a)(2)(A) encompassesfraudulent conveyance schemes, even when those schemes donot involve a false representation. Pp. 1586 – 1590.

*1584 (a) It is sensible to presume that when Congressamended the Bankruptcy Code in 1978 and added to debtsobtained by “false pretenses or false representations” anadditional bankruptcy discharge exception for debts obtainedby “actual fraud,” it did not intend the term “actual fraud”to mean the same thing as the already-existing term “falserepresentations.” See United States v. Quality Stores, Inc.,572 U.S. ––––, ––––, 134 S.Ct. 1395, 188 L.Ed.2d 413. Evenstronger evidence that “actual fraud” encompasses the kind ofconduct alleged to have occurred here is found in the phrase'shistorical meaning. At common law, “actual fraud” meantfraud committed with wrongful intent, Neal v. Clark, 95 U.S.704, 709, 24 L.Ed. 586. And the term “fraud” has, since thebeginnings of bankruptcy practice, been used to describe assettransfers that, like Ritz' scheme, impair a creditor's ability tocollect a debt.

One of the first bankruptcy Acts, the Fraudulent ConveyancesAct of 1571, 13 Eliz., ch. 5, identified as “fraud” conveyancesmade with “[i]ntent to delay hynder or defraude [c]reditors.”The degree to which that statute remains embedded infraud-related laws today, see, e.g., BFP v. Resolution TrustCorporation, 511 U.S. 531, 540, 114 S.Ct. 1757, 128 L.Ed.2d556, clarifies that the common-law term “actual fraud” isbroad enough to incorporate fraudulent conveyances. The

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

common law also indicates that fraudulent conveyances donot require a misrepresentation from a debtor to a creditor,see id., at 541, 114 S.Ct. 1757 as they lie not in dishonestlyinducing a creditor to extend a debt but in the acts ofconcealment and hindrance. Pp. 1586 – 1588.

(b) Interpreting “actual fraud” in § 523(a)(2)(A) to encompassfraudulent conveyances would not, as Ritz contends, renderduplicative two of § 523's other discharge exceptions, §§523(a)(4), (6), given that “actual fraud” captures muchconduct not covered by those other provisions. Nor doesthis interpretation create a redundancy in § 727(a)(2),which is meaningfully different from § 523(a)(2)(A). It isalso not incompatible with § 523(a)(2)(A)'s “obtained by”requirement. Even though the transferor of a fraudulentconveyance does not obtain assets or debts throughthe fraudulent conveyance, the transferee—who, with therequisite intent, also commits fraud—does. At minimum,those debts would not be dischargeable under § 523(a)(2)(A). Finally, reading the phrase “actual fraud” to restrict,rather than expand, the discharge exception's reach woulduntenably require reading the disjunctive “or” in the phrase“false pretenses, a false representation, or actual fraud” tomean “by.” Pp. 1588 – 1590.

787 F.3d 312, reversed and remanded.

SOTOMAYOR, J., delivered the opinion of the Court,in which ROBERTS, C.J., and KENNEDY, GINSBURG,BREYER, ALITO, and KAGAN, JJ., joined. THOMAS, J.,filed a dissenting opinion.

Attorneys and Law Firms

Shay Dvoretzky, Washington, DC, for petitioner.

Sarah E. Harrington, for the United States as amicus curiae,by special leave of the Court, supporting the petitioner.

Erin E. Murphy, Washington, DC, for the respondent.

Jeffrey L. Dorrell, Hanszen Laporte, Houston, TX, ShayDvoretzky, Christopher DiPompeo, Anthony J. Dick, EmilyJ. Kennedy, Jones Day, Washington, DC, for petitioner.

William D. Weber, Weber Law Firm, P.C., Houston, TX,Erin E. Murphy, Stephen V. Potenza, Andrew N. Ferguson,*1585 Bancroft PLLC, Washington, DC, for respondent.

Opinion

Justice SOTOMAYOR delivered the opinion of the Court.

The Bankruptcy Code prohibits debtors from dischargingdebts “obtained by ... false pretenses, a false representation,or actual fraud.” 11 U.S.C. § 523(a)(2)(A). The Fifth Circuitheld that a debt is “obtained by ... actual fraud” only if thedebtor's fraud involves a false representation to a creditor.That ruling deepened an existing split among the Circuitsover whether “actual fraud” requires a false representation orwhether it encompasses other traditional forms of fraud thatcan be accomplished without a false representation, such as afraudulent conveyance of property made to evade payment tocreditors. We granted certiorari to resolve that split and nowreverse.

I

Husky International Electronics, Inc., is a Colorado-basedsupplier of components used in electronic devices. Between2003 and 2007, Husky sold its products to ChrysalisManufacturing Corp., and Chrysalis incurred a debt to Huskyof $163,999.38. During the same period, respondent DanielLee Ritz, Jr., served as a director of Chrysalis and owned atleast 30% of Chrysalis' common stock.

All parties agree that between 2006 and 2007, Ritz drainedChrysalis of assets it could have used to pay its debts tocreditors like Husky by transferring large sums of Chrysalis'funds to other entities Ritz controlled. For instance—andRitz' actions were by no means limited to these examples—Ritz transferred $52,600 to CapNet Risk Management, Inc.,a company he owned in full; $121,831 to CapNet SecuritiesCorp., a company in which he owned an 85% interest; and$99,386.90 to Dynalyst Manufacturing Corp., a company inwhich he owned a 25% interest.

In May 2009, Husky filed a lawsuit against Ritz seeking tohold him personally responsible for Chrysalis' $163,999.38debt. Husky argued that Ritz' intercompany-transfer schemewas “actual fraud” for purposes of a Texas law that allowscreditors to hold shareholders responsible for corporate debt.See Tex. Bus. Orgs. Code Ann. § 21.223(b) (West 2012).In December 2009, Ritz filed for Chapter 7 bankruptcy inthe United States Bankruptcy Court for the Southern Districtof Texas. Husky then initiated an adversarial proceeding inRitz' bankruptcy case again seeking to hold Ritz personally

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

liable for Chrysalis' debt. Husky also contended that Ritzcould not discharge that debt in bankruptcy because the sameintercompany-transfer scheme constituted “actual fraud”

under 11 U.S.C. § 523(a)(2)(A)'s exemption to discharge. 1

The District Court held that Ritz was personally liable for thedebt under Texas law, but that the debt was not “obtained by ...actual fraud” under § 523(a)(2)(A) and could be dischargedin his bankruptcy.

The Fifth Circuit affirmed. It did not address whether Ritzwas responsible for Chrysalis' debt under Texas law becauseit agreed with the District Court that Ritz *1586 did notcommit “actual fraud” under § 523(a)(2)(A). Before the FifthCircuit, Husky argued that Ritz' asset-transfer scheme waseffectuated through a series of fraudulent conveyances—ortransfers intended to obstruct the collection of debt. And,Husky said, such transfers are a recognizable form of “actualfraud.” The Fifth Circuit disagreed, holding that a necessaryelement of “actual fraud” is a misrepresentation from thedebtor to the creditor, as when a person applying for creditadds an extra zero to her income or falsifies her employmenthistory. In re Ritz, 787 F.3d 312, 316 (2015). In transferringChrysalis' assets, Ritz may have hindered Husky's abilityto recover its debt, but the Fifth Circuit found that he didnot make any false representations to Husky regarding thoseassets or the transfers and therefore did not commit “actualfraud.”

[1] We reverse. The term “actual fraud” in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyanceschemes, that can be effected without a false representation.

II

A

Before 1978, the Bankruptcy Code prohibited debtors fromdischarging debts obtained by “false pretenses or falserepresentations.” § 35(a)(2) (1976 ed.). In the BankruptcyReform Act of 1978, Congress added “actual fraud” to thatlist. 92 Stat. 2590. The prohibition now reads: “A dischargeunder [Chapters 7, 11, 12, or 13] of this title does notdischarge an individual debtor from any debt ... for money,property, services, or an extension, renewal, or refinancingof credit, to the extent obtained by ... false pretenses, a falserepresentation, or actual fraud.” § 523(a)(2)(A) (2012 ed.).

[2] When “ ‘Congress acts to amend a statute, we presumeit intends its amendment to have real and substantial effect.’” United States v. Quality Stores, Inc., 572 U.S. ––––, ––––,134 S.Ct. 1395, 1401, 188 L.Ed.2d 413 (2014). It is thereforesensible to start with the presumption that Congress didnot intend “actual fraud” to mean the same thing as “afalse representation,” as the Fifth Circuit's holding suggests.But the historical meaning of “actual fraud” provides evenstronger evidence that the phrase has long encompassed thekind of conduct alleged to have occurred here: a transferscheme designed to hinder the collection of debt.

[3] [4] [5] [6] This Court has historically construedthe terms in § 523(a)(2)(A) to contain the “elements that thecommon law has defined them to include.” Field v. Mans,516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).“Actual fraud” has two parts: actual and fraud. The word“actual” has a simple meaning in the context of common-lawfraud: It denotes any fraud that “involv[es] moral turpitude orintentional wrong.” Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed.586 (1878). “Actual” fraud stands in contrast to “implied”fraud or fraud “in law,” which describe acts of deception that“may exist without the imputation of bad faith or immorality.”Ibid. Thus, anything that counts as “fraud” and is done withwrongful intent is “actual fraud.”

[7] Although “fraud” connotes deception or trickerygenerally, the term is difficult to define more precisely. See1 J. Story, Commentaries on Equity Jurisprudence § 189, p.221 (6th ed. 1853) (Story) (“Fraud ... being so various in itsnature, and so extensive in its application to human concerns,it would be difficult to enumerate all the instances in whichCourts of *1587 Equity will grant relief under this head”).There is no need to adopt a definition for all times and allcircumstances here because, from the beginning of Englishbankruptcy practice, courts and legislatures have used theterm “fraud” to describe a debtor's transfer of assets that, likeRitz' scheme, impairs a creditor's ability to collect the debt.

[8] One of the first bankruptcy acts, the Statute of 13Elizabeth, has long been relied upon as a restatement ofthe law of so-called fraudulent conveyances (also knownas “fraudulent transfers” or “fraudulent alienations”). Seegenerally G. Glenn, The Law of Fraudulent Conveyances89–92 (1931). That statute, also called the FraudulentConveyances Act of 1571, identified as fraud “faignedcovenous and fraudulent Feoffmentes Gyftes GrauntesAlienations [and] Conveyaunces” made with “Intent to

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

delaye hynder or defraude Creditors.” 13 Eliz. ch. 5. Inmodern terms, Parliament made it fraudulent to hide assetsfrom creditors by giving them to one's family, friends, orassociates. The principles of the Statute of 13 Elizabeth—and even some of its language—continue to be in wide usetoday. See BFP v. Resolution Trust Corporation, 511 U.S.531, 540, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (“Themodern law of fraudulent transfers had its origin in theStatute of 13 Elizabeth”); id., at 541, 114 S.Ct. 1757 (“EveryAmerican bankruptcy law has incorporated a fraudulenttransfer provision”); Story § 353, at 393 (“[T]he statute of13 Elizabeth ... has been universally adopted in America,as the basis of our jurisprudence on the same subject”);Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504,1505–1506 (C.A.1 1987) (Breyer, J.) (“Mass. Gen. Laws ch.109A, §§ 1–13 ... is a uniform state law that codifies bothcommon and statutory law stretching back at least to 1571 andthe Statute of Elizabeth”). The degree to which this statuteremains embedded in laws related to fraud today clarifiesthat the common-law term “actual fraud” is broad enough toincorporate a fraudulent conveyance.

[9] [10] [11] Equally important, the common law alsoindicates that fraudulent conveyances, although a “fraud,” donot require a misrepresentation from a debtor to a creditor. Asa basic point, fraudulent conveyances are not an inducement-based fraud. Fraudulent conveyances typically involve “atransfer to a close relative, a secret transfer, a transfer oftitle without transfer of possession, or grossly inadequateconsideration.” BFP, 511 U.S., at 540–541, 114 S.Ct. 1757(citing Twyne's Case, 3 Co. Rep. 80b, 76 Eng. Rep. 809 (K.B.1601)); O. Bump, Fraudulent Conveyances: A Treatise UponConveyances Made by Debtors To Defraud Creditors 31–60 (3d ed. 1882). In such cases, the fraudulent conduct isnot in dishonestly inducing a creditor to extend a debt. It isin the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a falserepresentation from the debtor to the creditor are limited.The debtor may have the opportunity to put forward a falserepresentation if the creditor inquires into the whereaboutsof the debtor's assets, but that could hardly be considered adefining feature of this kind of fraud.

[12] Relatedly, under the Statute of 13 Elizabeth and thelaws that followed, both the debtor and the recipient ofthe conveyed assets were liable for fraud even though therecipient of a fraudulent conveyance of course made norepresentation, true or false, to the debtor's creditor. Thefamous Twyne's Case, which this Court relied upon in BFP,

illustrates this point. See Twyne's Case, 76 Eng. Rep., at823 (convicting Twyne of fraud under the Statute of 13Elizabeth, even though he was *1588 the recipient ofa debtor's conveyance). That principle underlies the now-common understanding that a “conveyance which hinders,delays or defrauds creditors shall be void as against [therecipient] unless ... th[at] party ... received it in good faith andfor consideration.” Glenn, Law of Fraudulent Conveyances§ 233, at 312. That principle also underscores the point thata false representation has never been a required element of“actual fraud,” and we decline to adopt it as one today.

B

Ritz concedes that fraudulent conveyances are a form of

“actual fraud,” 2 but contends that 11 U.S.C. § 523(a)(2)(A)'s particular use of the phrase means something else. Ritz'strained reading of the provision finds little support.

First, Ritz contends that interpreting “actual fraud” in §523(a)(2)(A) to encompass fraudulent conveyances wouldrender duplicative two other exceptions to discharge in §523. Section 523(a)(4) exempts from discharge “any debt ...for fraud or defalcation while acting in a fiduciary capacity,embezzlement, or larceny.” And § 523(a)(6) exempts “anydebt ... for willful and malicious injury by the debtor toanother entity or to the property of another entity.”

[13] [14] Ritz makes the unremarkable point that thetraditional definition of “actual fraud” will cover someof the same conduct as those exceptions: for example, atrustee who fraudulently conveys away his trust's assets.But Ritz' interpretation does not avoid duplication, nor doesour interpretation fail to preserve a meaningful differencebetween § 523(a)(2)(A) and §§ 523(a)(4), (6). Just as afiduciary who engages in a fraudulent conveyance may findhis debt exempted from discharge under either § 523(a)(2)(A) or § 523(a)(4), so too would a fiduciary who engages inone of the fraudulent misrepresentations that form the coreof Ritz' preferred interpretation of § 523(a)(2)(A). The sameis true for § 523(a)(6). The debtors who commit fraudulentconveyances and the debtors who make false representationsunder § 523(a)(2)(A) could likewise also inflict “willfuland malicious injury” under § 523(a)(6). There is, in short,overlap, but that overlap appears inevitable.

[15] [16] And, of course, our interpretation of “actualfraud” in § 523(a)(2)(A) also preserves meaningful

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

distinctions between that provision and §§ 523(a)(4), (a)(6). Section 523(a)(4), for instance, covers only debts forfraud while acting as a fiduciary, whereas § 523(a)(2)(A)has no similar limitation. Nothing in our interpretation altersthat distinction. And § 523(a)(6) covers debts “for willfuland malicious injury,” whether or not that injury is theresult of fraud, see Kawaauhau v. Geiger, 523 U.S. 57, 61,118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (discussing injuriesresulting from “ ‘intentional torts' ”), whereas § 523(a)(2)(A) covers only fraudulent acts. Nothing in our interpretationalters that distinction either. Thus, given the clear differencesbetween these provisions, we see no reason to craft anartificial definition of “actual fraud” merely to avoid narrowredundancies in § 523 that appear unavoidable.

[17] [18] [19] Ritz also says that our interpretationcreates redundancy with a separate section of the BankruptcyCode, § 727(a)(2), which prevents a debtor from dischargingall of his debts if, within the *1589 year preceding thebankruptcy petition, he “transferred, removed, destroyed,mutilated, or concealed” property “with intent to hinder,delay, or defraud a creditor or an officer of the estate chargedwith custody of property.” Although the two provisions couldcover some of the same conduct, they are meaningfullydifferent. Section 727(a)(2) is broader than § 523(a)(2)(A) inscope—preventing an offending debtor from discharging alldebt in bankruptcy. But it is narrower than § 523(a)(2)(A)in timing—applying only if the debtor fraudulently conveysassets in the year preceding the bankruptcy filing. In short,while § 727(a)(2) is a blunt remedy for actions that hinder theentire bankruptcy process, § 523(a)(2)(A) is a tailored remedyfor behavior connected to specific debts.

Ritz' next point of resistance rests on § 523(a)(2)(A)'s requirement that the relevant debt be “for money,property, services, or ... credit ... obtained by ... actualfraud.” (Emphasis added.) The argument, which the dissentalso emphasizes, has two parts: First, it posits that fraudulentconveyances (unlike other forms of actual fraud) cannotbe used to “obtai[n]” debt because they function insteadto hide valuables that a debtor already possesses. Brief forRespondent 20, 31. There is, the dissent says, no debt atthe end of a fraudulent conveyance that could be said to “‘resul[t] from’ ” or be “ ‘traceable to’ ” the fraud. Post, at 1591(quoting Field, 516 U.S., at 61, 64, 116 S.Ct. 437). Second,it urges that “actual fraud” not be interpreted to encompassforms of fraud that are incompatible with the provision's“obtained by” requirement.

[20] [21] It is of course true that the transferor does not“obtai [n]” debts in a fraudulent conveyance. But the recipientof the transfer—who, with the requisite intent, also commitsfraud—can “obtai[n]” assets “by” his or her participationin the fraud. See, e.g., McClellan v. Cantrell, 217 F.3d890 (C.A.7 2000); see also supra, at 1587 – 1588. If thatrecipient later files for bankruptcy, any debts “traceable to”the fraudulent conveyance, see Field, 516 U.S., at 61, 116S.Ct. 437; post, at 1591, will be nondischargable under §523(a)(2)(A). Thus, at least sometimes a debt “obtained by”a fraudulent conveyance scheme could be nondischargeableunder § 523(a)(2)(A). Such circumstances may be rarebecause a person who receives fraudulently conveyed assetsis not necessarily (or even likely to be) a debtor on the

verge of bankruptcy, 3 but they make clear that fraudulentconveyances are not wholly incompatible with the “obtainedby” requirement.

[22] The dissent presses further still, contending that thephrase “obtained by ... actual fraud” requires not only that therelevant debts “resul [t] from” or be “traceable to” fraud butalso that they “result from fraud at the inception of a credittransaction.” Post, at 1591 (emphasis added). Nothing in thetext of § 523(a)(2)(A) supports that additional requirement.The dissent bases its conclusion on this Court's opinionin Field, in which the Court noted that certain forms ofbankruptcy fraud require a degree of direct reliance by acreditor on an action taken by a debtor. But Field discussedsuch “reliance” only in setting forth the requirements of theform of fraud alleged in that case—namely, fraud perpetratedthrough a misrepresentation to a creditor. *1590 See 516U.S., at 61, 116 S.Ct. 437. The Court was not establishinga “reliance” requirement for frauds that are not premised onsuch a misrepresentation.

Finally, Ritz argues that Congress added the phrase “actualfraud” to § 523(a)(2)(A) not to expand the exception's reach,but to restrict it. In Ritz' view, “actual fraud” was insertedas the last item in a disjunctive list—“false pretenses, a falserepresentation, or actual fraud”—in order to make clear thatthe “false pretenses” and “false representation[s]” covered bythe provision needed to be intentional. Brief for Respondent29–31. Ritz asks us, in other words, to ignore what he believesis Congress' “imprudent use of the word ‘or,’ ” id., at 32, andread the final item in the list to modify and limit the others.In essence, he asks us to change the word “or” to “by.” Thatis an argument that defeats itself. We can think of no otherexample, nor could petitioner point to any at oral argument,

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

in which this Court has attempted such an unusual statutorymodification.

* * *

Because we must give the phrase “actual fraud” in § 523(a)(2)(A) the meaning it has long held, we interpret “actual fraud” toencompass fraudulent conveyance schemes, even when thoseschemes do not involve a false representation. We thereforereverse the judgment of the Fifth Circuit and remand the casefor further proceedings consistent with this opinion.

So ordered.

Justice THOMAS, dissenting.The Bankruptcy Code exempts from discharge “any debt ...for money, property, [or] services ... to the extent obtainedby ... false pretenses, a false representation, or actual fraud.”11 U.S.C. § 523(a)(2)(A) (emphasis added). The Court holdsthat “actual fraud” encompasses fraudulent transfer schemeseffectuated without any false representation to a creditorand concludes that a debt for goods may “sometimes” be“obtained by” a fraudulent transfer scheme. Ante, at 1585– 1586, 1589. Because § 523(a)(2)(A) does not apply soexpansively, I respectfully dissent.

I

In my view, “actual fraud” within the meaning of § 523(a)(2) does not encompass fraudulent transfer schemes. Thereare two types of fraudulent transfer schemes: “transfers madewith actual intent to hinder, delay, or defraud creditors,referred to as actual fraudulent transfers” and “transfers madefor less than reasonably equivalent value when a debtor wasin financial trouble, [which is] referred to as constructivefraudulent transfers.” 2 Bankruptcy Law Manual § 9A:29,p. 333 (5th ed. 2015). I do not quibble with the majority'sconclusion that the common-law definition of “actual fraud”included fraudulent transfers. Ante, at 1586 – 1588. And Iagree that, generally, we should give a common-law termof art its established common-law meaning. Ante, at 1586.Nevertheless, the “general rule that a common-law term ofart should be given its established common-law meaning”gives way “where that meaning does not fit.” United Statesv. Castleman, 572 U.S. ––––, ––––, 134 S.Ct. 1405, 1410,188 L.Ed.2d 426 (2014) (internal quotation marks omitted).Ultimately, “[s]tatutory language must be read in context and

a phrase gathers meaning from the words around it.” Jones v.United States, 527 U.S. 373, 389, 119 S.Ct. 2090, 144 L.Ed.2d370 (1999) (internal quotation marks omitted). In my view,context dictates that “actual fraud” ordinarily does not includefraudulent transfers because “that meaning does not fit” withthe rest of § 523(a)(2). Castleman, *1591 supra, at ––––,134 S.Ct., at 1410 (internal quotation marks omitted).

Section 523(a)(2) covers only situations in which “money,property, [or] services” are “obtained by ... actual fraud,”and results in a debt. See Cohen v. de la Cruz, 523 U.S.213, 218, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Thestatutory phrase “obtained by” is an important limitation onthe reach of the provision. Section 523(a)(2)(A) applies onlywhen the fraudulent conduct occurs at the inception of thedebt, i.e., when the debtor commits a fraudulent act to inducethe creditor to part with his money, property, services, orcredit. The logical conclusion then is that “actual fraud”—as it is used in the statute—covers only those situations inwhich some sort of fraudulent conduct caused the creditorto enter into a transaction with the debtor. A fraudulenttransfer generally does not fit that mold, unless, perhaps, thefraudulent transferor and the fraudulent transferee conspiredto fraudulently drain the assets of the creditor. But thefraudulent transfer here, like all but the rarest fraudulenttransfers, did not trick the creditor into selling his goods to thebuyer, Chrysalis Manufacturing Corporation. It follows thatthe goods that resulted in the debt here were not “obtainedby” actual fraud. § 523(a)(2)(A).

A

I reach this conclusion based on the plain meaning of thephrase “obtained by,” which has an “inherent” “elementof causation,” and refers to those debts “resulting from”or “traceable to” fraud. Field v. Mans, 516 U.S. 59, 61,64, 66, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). As I havestated, “in order for a creditor to establish that a debt is notdischargeable, he must demonstrate that there is a causalnexus between the fraud and the debt.” Archer v. Warner,538 U.S. 314, 325, 123 S.Ct. 1462, 155 L.Ed.2d 454 (2003)(THOMAS, J., dissenting) (relying on Field, supra, at 61, 64,116 S.Ct. 437 and Cohen, supra, at 218, 118 S.Ct. 1212).There is also “[n]o ... doub[t] that some degree of relianceis required to satisfy th[is] element of causation.” Field, 516U.S., at 66, 116 S.Ct. 437. The upshot of the phrase “obtainedby” is that § 523(a)(2) covers only those debts that resultfrom fraud at the inception of a credit transaction. Such a

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7

debt caused by fraud necessarily “follows a transfer of valueor extension of credit induced by falsity or fraud.” Ibid.(emphasis added).

Bankruptcy treatises confirm that “[t]he phrase ‘to the extentobtained by’ is properly read as meaning ‘obtained from’ thecreditor.” 3 W. Norton & W. Norton, Bankruptcy Law andPractice § 57:15, p. 57–35 (3d ed. 2015). The “term ‘by’refers to the manner in which such money, property, servicesis obtained and the creditor defrauded.” Ibid. According toCollier on Bankruptcy, to invoke § 523(a)(2)(A) based on“actual fraud,” a creditor “must establish” that he “justifiablyrelied” on the debtor's “representation,” which the debtor“knew to be false” and made “with the intent and purposeof deceiving the” creditor and that the creditor “sustaineda loss or damage as the proximate consequence.” 4 Collieron Bankruptcy ¶ 523.08[1][e], p. 523–47 (A. Resnick &H. Sommer eds., 16th ed. 2015). Norton Bankruptcy Lawand Practice is in accord: Section 523(a)(2)(A) requiresa “misrepresentation,” “knowledge of falsity,” “intent todefraud,” “justifiable reliance,” and “resulting damage.” 3Norton, supra, § 57:15, at 57–33 to 57–34.

B

Applying those principles here, Husky cannot invoke § 523(a)(2)(A) to except the debt owed to it from discharge because,ordinarily, it would be nonsensical to say *1592 that afraudulent transfer created the debt at issue. As the majoritynotes, the debt at issue did not originate from any transactionbetween Ritz and Husky. Ante, at 1585. Instead, Huskysold goods to Chrysalis, a company that Ritz financiallycontrolled. Ibid. In turn, Chrysalis—not Ritz—incurred a debtto Husky of $163,999.38 for the goods. Ante, at 1585. As theBankruptcy Court found, there is no evidence that Ritz made“any oral or written representations to Husky inducing Huskyto enter into a contract with Chrysalis.” In re Ritz, 459 B.R.623, 628 (S.D.Tex.2011). In fact, the only communicationbetween Ritz and Husky occurred after Husky and Chrysalisentered into the contract and after Husky had shipped thegoods to Chrysalis. Ibid. The Bankruptcy Court also foundthat there was no evidence that Ritz transferred the funds toavoid Chrysalis' obligations to pay the debt it owed to Husky—an unsecured creditor. Id., at 635. Because Husky doesnot contend that Ritz fraudulently induced it to sell goods toChrysalis and cannot show that the constructive fraudulentconveyance had anything to do with its decision to contract

with Chrysalis, Husky has not established that § 523(a)(2)(a)covers any debt owed to it.

II

The majority reaches the opposite conclusion and holdsthat § 523(a)(2) may prevent an individual debtor fromobtaining a discharge even if (1) the debtor makes no falserepresentation to the creditor, (2) the creditor does not relyon any of the debtor's actions or inactions, and (3) therewas no actual fraudulent conveyance at the inception of thecredit transaction between the creditor and the debtor. Ante,at 1587 – 1588, 1589. It does so by giving new meaning to thephrase “obtained by” in cases involving fraudulent transfers,disregarding our case law, and second-guessing Congress'choices. Ante, at 1589.

The majority admits that a transferor “does not ‘obtai[n]’debts in a fraudulent conveyance,” but contends that “therecipient of the transfer—who, with the requisite intent,also commits fraud—can ‘obtain’ assets ‘by’ his or herparticipation in the fraud.” Ibid. (brackets omitted). “Ifthat recipient later files for bankruptcy, any debts traceableto the fraudulent conveyance,” the majority states, “willbe nondischargable under § 523(a)(2)(A).” Ibid. (internalquotation marks omitted). The majority thus holds that “atleast sometimes a debt ‘obtained by’ a fraudulent conveyancescheme could be nondischargeable under § 523(a)(2)(A).”Ibid. But § 523(a)(2)(A) does not exempt from discharge anydebts “traceable to the fraudulent conveyance.” Instead, §523(a)(2)(A) exempts from discharge “any debt for” goodsthat are “obtained by” actual fraud. And, as explained, it isextremely rare that a creditor will use an actual fraudulenttransfer scheme to induce a creditor to depart with property,services, money, or credit. See supra, at 1590 – 1591.

In reaching its conclusion, the majority also disregards thisCourt's precedents interpreting § 523(a)(2)(A), presumablybecause those cases did not involve fraudulent transfers. Themajority cites Field only for the elemental proposition thatthis Court “has historically construed the terms in § 523(a)(2)(A) to contain the ‘elements that the common law has definedthem to include.’ ” Ante, at 1586 (quoting 516 U.S., at 69,116 S.Ct. 437). The majority omits Field 's conclusion thatone of the elements of “actual fraud” in § 523(a)(2)(A) is“reliance ” on some sort of false statement, misrepresentation,or omission. Id., at 70, 116 S.Ct. 437 (emphasis added).To be sure, like the rest of our cases interpreting § 523(a)

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8

(2)(A), Field involves *1593 a false statement. But thatfactual distinction is immaterial. Cases like Field—whichinterpret the phrase “obtained by”—are as relevant in casesthat involve false statements and misrepresentations as theyare in a case like this one. After all, “obtained by” modifiesfalse pretenses, false representations, and actual fraud in §523(a)(2)(A). And in no case has this Court suggested—nevermind held—that § 523(a)(2)(A) may apply to circumstancesin which there was no false statement, misrepresentation, oromission when the debt was first obtained.

The majority ostensibly creates a new definition of “obtainedby” because it thinks that this move is necessary to avoidrendering “actual fraud” superfluous. See ante, at 1586, 1588– 1589. Not so. Actual fraud is broader than false pretensesor false representations, and “consists of any deceit, artifice,trick, or design involving direct and active operation ofthe mind, used to circumvent and cheat another.” 4 Collieron Bankruptcy ¶ 523.08 [1][e], at 523–46. “Unlike falsepretenses or false representation, actual fraud, within themeaning of the dischargeability exception, can focus ona promise of future performance made with intent not toperform.” 2F Bankruptcy Service § 27:211, p. 59 (Supp. Jan.2016). In this way, “the actual fraud” exception “permit[s] thecourts to except from discharge debts incurred without intentto repay, or by use of other false implied representations,without the need to stretch the false pretenses and falserepresentations language.” Zaretsky, The Fraud Exceptionto Discharge Under the New Bankruptcy Code, 53 Am.Bankruptcy L.J. 253, 257 (1979). Some courts, for example,have held that “a debtor commits actual fraud within themeaning of § 523(a)(2)(A) when he incurs credit carddebt with no actual, subjective intent to repay it,” but hasnot made an affirmatively false representation or engagedin false pretense. In re Morrow, 488 B.R. 471, 479–480(Bkrtcy.Ct.N.D.Ga.2012); see also, e.g., In re Alam, 314 B.R.834, 841 (Bkrtcy.Ct.N.D.Ga.2004). Defining actual fraudthis way does not render that term superfluous and—unlikethe majority's definition—does not render “obtained by” anullity.

Regardless, even if there is some overlap between thedefinitions of “false pretenses,” “false representations,” and“actual fraud,” “[r]edundancies across statutes are not unusual

events in drafting.” Connecticut Nat. Bank v. Germain,503 U.S. 249, 253, 112 S.Ct. 1146, 117 L.Ed.2d 391(1992). “[T]he canon against surplusage assists only wherea competing interpretation gives effect to every clause andword of a statute.” Marx v. General Revenue Corp., 568U.S. ––––, ––––, 133 S.Ct. 1166, 1177, 185 L.Ed.2d 242(2013) (internal quotation marks omitted). “But, in thiscase, no interpretation of [§ 523(a)(2)(A) ] gives effect toevery word.” Ibid. Under either my reading or the majority'sreading, “actual fraud” is broader than and subsumes “falsepretenses” and “false representations.” Accordingly, that“actual fraud” may introduce some redundancy in the statuteis not dispositive.

At bottom, the majority's attempt to broaden § 523(a)(2)(A)to cover fraudulent transfers impermissibly second-guessesCongress' choices. When Congress wants to stop a debtorfrom discharging a debt that he has concealed through afraudulent transfer scheme, it ordinarily says so. See § 727(a)(2) (stating that a court shall grant the debtor a dischargeunless the debtor engages in an actual fraudulent transferscheme within a certain time of filing a bankruptcy petition).If Congress wanted § 523(a)(2)(A) to cover fraudulenttransfer situations, “it would have spoken more clearly to thateffect.” *1594 Staples v. United States, 511 U.S. 600, 620,114 S.Ct. 1793, 128 L.Ed.2d 608 (1994). Ultimately, “it is notfor us to substitute our view of policy for the legislation whichhas been passed by Congress.” Florida Dept. of Revenue v.Piccadilly Cafeterias, Inc., 554 U.S. 33, 52, 128 S.Ct. 2326,171 L.Ed.2d 203 (2008) (ellipsis and internal quotation marksomitted).

* * *

The majority today departs from the plain language of §523(a)(2)(A), as interpreted by our precedents. Because Ifind no support for the Court's conclusion in the text of theBankruptcy Code, I respectfully dissent.

All Citations

136 S.Ct. 1581, 62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op.Serv. 5016, 2016 Daily Journal D.A.R. 4574

Footnotes* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the

convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50L.Ed. 499.

Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

62 Bankr.Ct.Dec. 156, 14 Cal. Daily Op. Serv. 5016, 2016 Daily Journal D.A.R. 4574

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

1 Husky also alleged that Ritz' debt should be exempted from discharge under two other exceptions, see 11 U.S.C. §523(a)(4) (excepting debts for fraud “while acting in a fiduciary capacity”); § 523(a)(6) (excepting debts for “willful andmalicious injury”), but does not press those claims in this petition.

2 See Tr. of Oral Arg. 30 (Justice KAGAN: “[Y]ou're not contesting that fraudulent conveyance is a form of actual fraud;is that right?” Ms. Murphy: “[Y]es, that's right”); id., at 27 (Ms. Murphy: “[T]o be clear, we don't dispute that fraudulentconveyance is a form of actual fraud”).

3 Ritz' situation may be unusual in this regard because Husky contends that Ritz was both the transferor and the transfereein his fraudulent conveyance scheme, having transferred Chrysalis assets to other companies he controlled. We takeno position on that contention here and leave it to the Fifth Circuit to decide on remand whether the debt to Husky was“obtained by” Ritz' asset-transfer scheme.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Ex Parte Application of Gissin, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2865616Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

RULINGS BY SUMMARY ORDER DO NOT HAVEPRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY1, 2007, IS PERMITTED AND IS GOVERNED BYFEDERAL RULE OF APPELLATE PROCEDURE32.1 AND THIS COURT'S LOCAL RULE 32.1.1.

WHEN CITING A SUMMARY ORDER IN ADOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIXOR AN ELECTRONIC DATABASE (WITH THE

NOTATION “SUMMARY ORDER”). A PARTY CITINGA SUMMARY ORDER MUST SERVE A COPY OF IT

ON ANY PARTY NOT REPRESENTED BY COUNSEL.United States Court of Appeals,

Second Circuit.

In re Ex parte APPLICATION OF Guy GISSIN,solely in his capacity as court appointed

liquidator of Sybil Europe Public Co. Limited,for an order pursuant to 28 U.S.C. 1782 to

conduct discovery for use in a foreign hearingGuy Gissin, Petitioner–Appellee,

v.Alan Freedman, Moore Capital Management,

LLC, LM Moore SP Investments,

Ltd., Respondents–Appellants. 1

No. 16–370–cv.|

May 17, 2016.

Appeal from the United States District Court for the SouthernDistrict of New York (Hellerstein, J.).

Attorneys and Law Firms

Christopher M. Egleson, Sidley Austin LLP (Christina PrusakChianese, Nancy Chung, on the brief), New York, NY, forAppellants.

Michael S. Devorkin, Golenbock Eiseman Assor Bell &Peskoe LLP (Alexander K. Parachini, on the brief), NewYork, NY, for Appellee.

Present ROSEMARY S. POOLER, DEBRA ANNLIVINGSTON and SUSAN L. CARNEY, Circuit Judges.

SUMMARY ORDER

*1 ON CONSIDERATION WHEREOF, IT ISHEREBY ORDERED, ADJUDGED, AND DECREEDthat the order of said District Court be and it hereby isAFFIRMED.

Alan Freedman, Moore Capital Management, LLC, andLM Moore SP Investments, Ltd. (together, the “MooreDefendants”) appeal from the January 7, 2016 and February5, 2016 orders of the United States District Court for theSouthern District of New York (Hellerstein, J.) grantingthe application of Guy Gissin for discovery pursuant to 28U.S.C. § 1782. We assume the parties' familiarity with theunderlying facts, procedural history, and specification ofissues for review.

Gissin seeks to obtain evidence pursuant to Section 1782,which allows district courts to issue orders that allow partiesto take discovery in the United States “for use in a proceedingin a foreign or international tribunal.” 28 U.S.C. § 1782(a).On appeal, the only argument advanced is that the discoverysought is not “for use” in a foreign proceeding, and thus doesnot fall within the parameters of Section 1782.

We agree with the district court that Lancaster FactoringCo. v. Mangone, 90 F.3d 38, 42 (2d Cir.1996) controls theoutcome here. There, our Court held that a foreign bankruptcyproceeding “is within the intended scope of § 1782.” Id. Werejected respondent's argument that the discovery was not foruse in a foreign proceeding “because Lancaster may or maynot exercise its option to acquire whatever claims it may findand may or may not decide to commence a proceeding topursue those claims.” Id. “[R]egardless of what may happenin the future, there is already a proceeding pending, to wit,the bankruptcy proceeding in Milan.” Id.; see also In reApplication of Hill, No. M19–117(RJH), 2005 WL 1330769,at * 5 (S.D.N.Y. June 3, 2005) (granting Section 1782 petitionto liquidator in a Hong Kong liquidation proceeding, notingthat “[t]he fact that the Liquidators may use the fruits ofdiscovery to pursue potential claims against third parties doesnot undermine their equally legitimate goals of reconstructingfinancial records, evaluating key transactions and identifyingand recovering the debtors' assets”).

In re Ex Parte Application of Gissin, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

We have considered the remainder of the Moore Defendants'arguments and find them to be without merit. Accordingly,the order of the district court hereby is AFFIRMED.

All Citations

--- Fed.Appx. ----, 2016 WL 2865616 (Mem)

Footnotes1 The Clerk of the Court is respectfully directed to amend the caption as above.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2343322Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1 generallygoverning citation of judicial decisions issued

on or after Jan. 1, 2007. See also U.S.Ct. ofAppeals 3rd Cir. App. I, IOP 5.1, 5.3, and 5.7.

United States Court of Appeals,Third Circuit.

In Re ENERGY FUTUREHOLDINGS CORP., et al., Debtors.

Delaware Trust Company f/k/a CSC Trust CompanyDelaware, as Indenture Trustee, Appellant.

No. 15–1591.|

Submitted Under Third CircuitL.A.R. 34.1(a) March 23, 2016.

|Filed May 4, 2016.

SynopsisBackground: Order was entered by the United StatesBankruptcy Court for the District of Delaware, approving firstlien settlement between Chapter 11 debtors and noteholders,and creditor appealed. The District Court, Andrews, J., 527B.R. 157, affirmed. Appeal was taken.

Holdings: The Court of Appeals, Shwartz, Circuit Judge,held that:

[1] tender offer was merely effective means ofcommunicating proposed settlement;

[2] bankruptcy court acted within its discretion in approvingproposed settlement; and

[3] settlement was not improper sub rosa plan.

Affirmed.

Appeal from the United States District Court for the Districtof Delaware, (D.C. No. 1–14–cv–00723), District Judge:Hon. Richard G. Andrews.

Attorneys and Law Firms

Iskender H. Catto, Esq., McDermott Will & Emery, StephenE. Hessler, Esq., Edward O. Sassower, Esq., Brian Schartz,Esq., James H.M. Sprayregen, Esq., Kirkland & Ellis,William A. Romanowicz, Esq., First Data Corporation, NewYork, NY, Mark D. Collins, Esq., Daniel J. Defranceschi,Esq., Jason M. Madron, Esq., Richards, Layton & Finger,Shannon Dougherty, Esq., David M. Klauder, Esq., O'Kelly,Ernst, Bielli & Wallen, Thomas F. Driscoll, III, Esq.,Bifferato, Wilmington, DE, Michael P. Esser, Esq., MarkE. McKane, Esq., Kirkland & Ellis, San Francisco, CA,P. Stephen Gidiere, III, Esq., Jeremy L. Retherford, Esq.,Balch & Bingham, W. Clark Watson, Esq., Birmingham,AL, Jeremy L. Graves, Esq., Gibson Dunn, Denver, CO,William A. Guerrieri, Esq., Richard Howell, Esq., Chad J.Husnick, Esq., Marc Kieselstein, Esq., Todd F. Maynes,Esq., Andrew R. McGaan, Esq., William T. Pruitt, Esq.,Anthony V. Sexton, Esq., Kirkland & Ellis, Jeff J. Marwil,Esq., Proskauer Rose, Tyler D. Semmelman, Esq., Steven N.Serajeddini, Esq., Mark K. Thomas, Esq., Proskauer Rose,Peter J. Young, Esq., Chicago, IL, Bridget O'Connor, Esq.,National Labor Relations Board, Michael A. Petrino, Esq.,Bryan M. Stephany, Esq., kirkland & ellis, Washington, DC,Michael L. Raiff, Esq., Michael A. Rosenthal, Esq., GibsonDunn, Dallas, TX, for Debtors.

Patricia Chen, Esq., Justin Florence, Esq., Erin R.MacGowan, Esq ., D. Ross Martin, Esq., Ropes & Gray,Boston, MA, James H. Millar, Esq., Drinker Biddle & Reath,Keith H. Wofford, Esq., Ropes & Gray, New York, NY,Norman L. Pernick, Esq., J. Kate Stickles, Esq., Cole Schotz,Todd C. Schiltz, Esq., Drinker Biddle & Reath, Wilmington,DE, for Appellant.

Before GREENAWAY, JR., VANASKIE, and SHWARTZ,Circuit Judges.

OPINION *

SHWARTZ, Circuit Judge.

*1 Debtor Energy Future Holdings Corp. (“EFH”) and itssubsidiaries, including Energy Future Intermediate HoldingsCorp. (“EFIH”) (collectively, “Debtors”), with the approval

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

of the Bankruptcy Court, settled claims with certaincreditors holding notes secured by a lien on Debtors'assets. Delaware Trust Company, as indenture trustee (the“Trustee”), asserts that the settlement involved a tender offerthat is impermissible in bankruptcy and that the settlementviolates core principles of the bankruptcy process. Becausethe settlement was consistent with bankruptcy law, we willaffirm.

I

Debtors comprise the largest electrical energy company inTexas. Their creditors included EFIH noteholders. Each notewas governed by an indenture and some were secured by afirst lien on Debtors' assets (the “First Lien Notes”). One setof the First Lien Notes represents a principal amount of $500million with an interest rate of 6 7/8%, due in 2017 (the “67/8% Notes”). The other set of Notes represents a principalamount of approximately $3.5 billion with an interest rate of10%, due in 2020 (the “10% Notes”). Each indenture containsa provision providing for a “make-whole” premium, whichwould “compensate noteholders for the loss of future interestresulting from an early refinancing.” Appellant's Br. 9. Thus,the make-whole premium would require Debtors to makeadditional payments to the First Lien Noteholders if the Noteswere redeemed before their final maturity.

Debtors sought to restructure this debt in 2012 and begannegotiating with creditors, including some of the First LienNoteholders. Following almost two years of negotiation,Debtors and several large creditors, most notably PacificInvestment Management Company (“PIMCO”), WesternAsset Management Company (“WAMCO”), and FidelityInvestments (“Fidelity”), agreed to a Restructuring SupportAgreement (“RSA”), initially intended to accomplish a“global restructuring” of the Debtors' entities and debt.Although the idea of a global restructuring was eventuallyabandoned, under the RSA, these entities agreed to refinancethe First Lien Notes, release any claim to a make-whole

premium, and provide additional financing. 1

Because the RSA did not resolve all of their financialproblems, Debtors filed for bankruptcy under Chapter 11in the United States Bankruptcy Court for the District of

Delaware. 2 One week after filing their bankruptcy petition,Debtors initiated what the parties have labeled a “tenderoffer” directed to the First Lien Noteholders that embodied

certain terms set forth in the RSA. The goal of this offer wasto settle disputes with all First Lien Noteholders.

The offer was to remain open for thirty-one days, and offeredeach First Lien Noteholder 105% of the Notes' principalamount and 101% of the accrued interest in exchange for therelease of any potential claim to the make-whole premium.The offer contained a “step down” procedure, reducing theprincipal premium from 5% to 3 .25% after fourteen days.The offer notified the First Lien Noteholders that the offerwas subject to Bankruptcy Court approval and that Debtorsintended to initiate litigation to disallow the make-whole

premium claims. 3 Under the make-whole provision, due tothe lower interest rate and earlier redemption date, the 6 7/8%Noteholders' make-whole premium would have been smallerthan that of the 10% Noteholders. Thus, under the termsof the offer,, holders of the 6 7/8% Notes would receive agreater percentage of a possible recovery for the make-wholepremium than the 10% Noteholders.

*2 Ultimately, 97% of the 6 7/8% Noteholders acceptedthe offer, while only 34% of the 10% Noteholders did so.Noteholders who declined the offer retained their full claimand the right to litigate and obtain full value for their make-whole premium.

Nine days after initiating the offer, Debtors filed a motionfor approval of the settlement pursuant to 11 U.S.C. § 363(b)and Fed. R. Bankr.P. 9019. The Trustee, on behalf of thenon-settling First Lien Noteholders, objected to Debtors'request for approval of the settlement. Following a hearing atwhich it heard testimony about the benefits of the settlement,including that the offer would save the estate over ten milliondollars each month in interest payments, the BankruptcyCourt approved the settlement, holding that there wereno “incidents of discriminatory treatment” in the Debtors'approach to settlement and that the plan was a proper useof estate assets. JA 169. The District Court affirmed theBankruptcy Court's approval order. The Trustee appeals.

II 4

A

A bankruptcy court has the authority to “approve acompromise or settlement” of a claim “after notice [tothe debtor, trustee, and creditors] and a hearing” on the

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

compromise. Fed. R. Bankr.P. 9019(a). The bankruptcycourt must then decide whether the settlement is “fair andequitable,” In re Nutraquest Inc., 434 F.3d 639, 644 (3dCir.2006) (quoting Protective Comm. for Indep. Stockholdersof TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424,88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)), and “assess and balancethe value of the claim that is being compromised against thevalue to the estate of ... accept [ing] ... the compromise” byconsidering: “(1) the probability of success in ligation; (2)the likely difficulties in collection; (3) the complexity of thelitigation involved, and the expense, inconvenience and delaynecessarily attending it; and (4) the paramount interest of thecreditors.” In re Martin, 91 F.3d 389, 393 (3d Cir.1996).

In this case, the Trustee challenges the conclusion that thesettlement is fair and equitable. In short, it asserts that useof tender offers as a means to settle claims is impermissibleunder Chapter 11. It also argues that the offer violatesthe equal treatment principle. Finally, it contends that thesettlement constituted an impermissible sub rosa plan. Wewill address each argument in turn.

A

[1] Although the parties have called the arrangement here a“tender offer,” in this case it was simply a means to conveya settlement offer to certain creditors who were expected tomake claims against the assets of the bankruptcy estate.

Under 11 U.S.C. § 363(b), a debtor may use estate propertyoutside the ordinary course of business, upon notice and ahearing, to settle claims with the approval of the bankruptcycourt. Northview Motors, Inc. v. Chrysler Motors Corp.,186 F.3d 346, 350 (3d Cir.1999); seeFed. R. Bankr.P. 9019(providing for bankruptcy court approval of settlements).The bankruptcy court is charged with ensuring that suchsettlements are “fair and equitable .” See Martin, 91F.3d at 393 (citation omitted). Of course, this includesconfirming that the proposed settlement does not contravenethe Bankruptcy Code.

*3 To the extent the offer allowed noteholders to receivepayment in exchange for abandoning their make-wholeclaims constitutes a type of “tender offer,” it clearly didnot violate the Bankruptcy Code. The “tender offer” herewas merely a mechanism to communicate the settlementoffer. It detailed the proposed terms of the offer, set forththe reasons for the offer, explained the dispute over make-

whole premiums and informed creditors of Debtors' intentionto litigate the validity of the claims, disclosed associatedrisk factors, and notified all offerees that the settlement wassubject to court approval. Practically speaking, the “tenderoffer” in this case was equivalent to a detailed settlementmemorandum in any other case.

Moreover, the Trustee has failed to identify any section ofthe Bankruptcy Code that forbids settlements using a tender

offer process. 5 All of the code sections on which the Trusteerelies relate to reorganization plans, such as § 1125 (requiringcourt approval for solicitation of a plan), § 1126(c) (providingfor class voting on plans), and § 1128 (plan confirmation),and “class-based” procedures for negotiation inherent to thebankruptcy process. None of the sections apply to court-approved settlements entered before the plan confirmationprocess has begun. Thus, there is nothing to show the use ofsuch a process contravenes the Bankruptcy Code.

[2] Having concluded that the settlement offer here did notviolate the Code, we next examine whether the BankruptcyCourt acted within its discretion in approving the settlement.We conclude that it did.

The Bankruptcy Court's decision reflects thoroughconsideration of the Martin factors concerning the complexityof the litigation over the make-whole claims and the delaysassociated with such a suit. The EFH bankruptcy is large andcomplicated. The parties were well aware of the likelihoodof protracted litigation regarding the recovery on the make-whole premiums. Thus, the settlement offer significantlyreduced the “complexity and inconvenience” of the litigation.Nutraquest, 434 F.3d at 646.

The Martin factor concerning the fairness to creditors alsosupported approving the settlement. The settlement hereprovided each First Lien Noteholder the ability to recoverthe same proportion of its principal and accrued interest, andmade clear Debtors' intent to challenge the validity of themake-whole premiums, placing each creditor on notice thatits entitlement to such a premium might be eliminated in full.The settlement further detailed numerous risk factors relatedto the bankruptcy proceeding. In addition, it provided thata noteholder who chose not to settle preserved its claim atthe same level of priority. Finally, the settlement immediatelysaved the estate millions of dollars each month and thus

provided more assets to satisfy all creditors. 6

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

In sum, the offer here is not precluded by the Bankruptcy

Code 7 and the Bankruptcy Court acted within its discretionto approve the offer as a means to settle certain claims againstthe estate.

B

*4 [3] We next address the Trustee's contention thatbecause holders of the various First Lien Notes receiveddifferent percentages of the potential full value of the make-whole premiums, the settlement violates the BankruptcyCode's “equal treatment” rule, 11 U.S.C. § 1123(a)(4).

Section 1123(a)(4) embodies the principle that all similarlysituated creditors in bankruptcy are entitled to equaltreatment. However, under its plain language, the provisionapplies only to a plan of reorganization, and thereforenot to pre-confirmation settlements. See id. SupremeCourt precedent and the Bankruptcy Code itself allow forsettlements to be reached outside of the confirmation process.See TMT Trailer Ferry, 390 U.S. at 424; Fed. R. Bankr.P.9019. Thus, we must read the Code's requirements togetherwith the recognition of the importance of compromise inbankruptcy. See Nutraquest, 434 F.3d at 645; 9 Collier onBankruptcy ¶ 9019.01 (16th ed. rev.2015) ( “Compromisesare favored in bankruptcy.”).

As we observed in In re Jevic Holding Corp., 787 F.3d 173(3d Cir.2015), petition for cert. filed, 84 U.S.L.W. 3285 (U.S.

Nov. 16, 2015) (No. 15–649), 8 core bankruptcy principles,such as the absolute priority rule and the equal treatmentrule, see In re W.R. Grace & Co., 729 F.3d 332, 343 (3dCir.2013), which apply in the plan confirmation process, arenot categorically applied in the settlement context. Instead,we adopted a flexible approach that permits the approvalof settlement that may not comply with such rules so longas the bankruptcy court “ensur[es] the evenhanded andpredictable treatment of creditors.” Jevic, 787 F.3d at 178.This does not mean, however, that such rules can be ignored.Indeed, a settlement's fidelity to the requirements of theBankruptcy Code will generally be the most important factorin determining whether a settlement is fair and equitable. Id.at 184.

Even though Jevic teaches that a bankruptcy court has latitudein declining to apply confirmation plan rules in connectionwith settlements, it makes clear that a bankruptcy court cannotdisregard the central tenets of the bankruptcy system. See id.

at 180–85. When a debtor files its petition, it enters into aprocess in which a bankruptcy court is responsible for bothprotecting estate assets and the interests of the creditors. Asto creditors, a bankruptcy court is obligated to ensure thatthe creditors are treated in an “evenhanded and predictable”fashion, both in and outside of the settlement context. Id. at184. Thus, it “may approve settlements that deviate” fromtreating similarly situated creditors equally “only if [it] ha[s]‘specific and credible grounds to justify the deviation.” Id.(quoting In re Iridium Operating, LLC, 478 F.3d 452, 466(2d Cir.2007)). We must therefore decide whether there hasbeen a deviation from the equal treatment rule here, and, ifso, whether the Bankruptcy Court had adequate reasons fordoing so.

*5 A review of the record demonstrates that the BankruptcyCourt properly concluded that there was in fact equaltreatment. First, each First Lien Noteholder was offered105% of the principal note amount, and 101% of theaccrued interest. Thus, each Noteholder was offered the samepercentage of both principal and accrued interest. Second,each was offered the opportunity to retain its rights to seek a“make whole remedy.” Thus, any Noteholder who chose notto settle maintained its entire claim against the estate, fullysecured by the estate's assets.

Unlike Jevic, wherein the settlement barred an entire classof creditors from relief, no group of eligible creditorswas deprived of the opportunity to participate. Thus, thesettlement offer presented each First Lien Noteholder witha choice and left each to decide whether the potential torecover the make-whole premium in full was worth foregoinga guaranteed premium payment upon settlement. This is allthat the Bankruptcy Code requires. W.R. Grace & Co., 729F.3d at 327 (“[C]ourts have interpreted the same treatmentrequirement to mean that all claimants in a class must havethe same opportunity for recovery.” (internal quotation marksomitted)).

Although the settlement offer results in differing outcomeswhen viewed through the lens of the total potential recoveryon the make-whole premium, mere differences in potentialfinal outcomes resulting from choices made by individualcreditors do not violate the equal treatment protections of §1123(a)(4). See In re Wash. Mut., Inc., 442 B.R. 314, 355(Bankr.D.Del.2011) (citing In re Dana Corp., 412 B.R. 53,62 (S.D.N.Y.2008)). As the Bankruptcy Court observed, “itcertainly isn't unfair discriminatory treatment when we lookat simply the fact of the difference between the realization on

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

what the make[-w]hole premium might or might not be.” 9

JA 169–70.

Finally, the settlement does not negatively impact theuninvolved creditors and, in fact, actually helps them. It isundisputed that the proposal, the settlement allowed the estateto save well over ten million dollars each month in interestpayments. As a result, many junior creditors supported andbenefitted from the settlement because the savings increasedthe amount of money available to satisfy lower priorityclaims.

For these reasons, the settlement is not inconsistent with theequal treatment rule.

C

[4] Finally, the Trustee contends that the pre-petitionarrangement with PIMCO, WAMCO, and Fidelity and thesettlement offer constitute an improper sub rosa plan. Whena transaction or settlement in bankruptcy has the effect of“dictating some of the terms of any future reorganizationplan,” a court deems the transaction impermissible becauseit “short circuits the requirements of Chapter 11 ... by

establishing the terms of the plan sub rosa in connection witha sale of assets.” Jevic, 787 F.3d at 187 (Scirica, J., concurringin part and dissenting in part) (quoting In re Braniff Airways,Inc., 700 F.2d 935, 940 (5th Cir.1983)). The “hallmark of sucha plan is that it dictates the terms of a reorganization plan.”Id. at 188.

*6 The settlement here does not constitute a sub rosa plan.Outside of the settling noteholders, there is no indication, andthe Trustee has provided no evidence showing, that any othercreditor's recovery is impacted by the settlement, or that anyrequirement of Chapter 11 is subverted by the plan. Becausethe settlement neither subverts the bankruptcy process norimpermissibly dictates the outcome to other creditors, it is nota sub rosa plan.

III

For the foregoing reasons, we will affirm.

All Citations

--- Fed.Appx. ----, 2016 WL 2343322

Footnotes* This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7, does not constitute binding precedent.

1 These creditors also provided additional debtor-in-possession financing and negotiated a “Most Favored Nations”provision, which provided that if any creditor later received a recovery higher than the amount specified in the RSA before“EFIH First Lien DIP Financing is fully funded pursuant to a final order entered by the Bankruptcy Court,” the RSA wouldbe immediately adjusted to provide the same recovery. JA 552.

2 On the petition date, Debtors also moved for approval of the loans and refinancing of the First Lien Notes, and soughta ruling that no make-whole premiums were payable.

3 The Bankruptcy Court has since disallowed the make-whole premium. This ruling is the subject of a separate appeal.

4 The District Court had jurisdiction over the bankruptcy appeal under 28 U.S.C. § 158(a)(1). We exercise appellatejurisdiction over the appeal from the District Court's final order pursuant to 28 U.S.C. §§ 158(d)(1) and 1291. We reviewfindings of fact made by the bankruptcy court for clear error, and review questions of law de novo. Lebron v. Mechem Fin.Inc., 27 F.3d 937, 942 (3d Cir.1994). We review the approval of a settlement for an abuse of discretion. In re Nutraquest,Inc., 434 F.3d 639, 644 (3d Cir.2006). Under this standard,

[w]e do not disturb an exercise of discretion unless there is a definite and firm conviction that the court ... committeda clear error of judgment in the conclusion it reached upon a weighing of the relevant factors. Put another way, for usto find an abuse of discretion[,] the ... decision must rest on a clearly erroneous finding of fact, an errant conclusionof law or an improper application of law to fact.

Id. at 645 (alteration in original) (internal citation and quotation marks omitted).

5 Indeed, as the parties note, the tender offer process has been used to settle claims in other bankruptcy cases. See In reStandard Oil & Expl. of Del., Inc., 136 B.R. 141, 144–53 (Bankr.W.D.Mich.1992); see also In re AMR Corp., 485 B.R. 279(Bankr.S.D.N.Y. May 23, 2013); In re Eastman Kodak Co., 479 B.R. 280 (Bankr.S.D.N.Y. Dec.19, 2012). The Trusteeargues that the tender offers in these cases are inapposite comparisons because the debtors there sought approval from

In re Energy Future Holdings Corp., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

the Bankruptcy Court prior to launching their tender offer. While pre-launch approval may be preferable where possible,we see no reason to hold that the order of events dictates whether a settlement achieved by a tender offer is fair andequitable. The Bankruptcy Court retains the discretion to determine whether the circumstances and timing surroundingan offer undermine its fairness.

6 Despite these benefits, the Trustee argues with some force that the nature of the settlement's rollout undermines itsoverall fairness. Only select creditors participated in the initial negotiations, and the offer was released within a week ofthe bankruptcy petition's filing. In addition, the offer was conveyed without prior Bankruptcy Court approval, and the step-down provision required noteholders to decide very quickly whether to sign on or risk their premium payment droppingfrom 5% to 3.25% fourteen days after the tender offer's initiation. Under the framework of In re Jevic Holding Corp., 787F.3d 173 (3d Cir.2015), this kind of behavior may undermine the equity of a settlement, because creditors may not havean adequate opportunity to assess their options and decide whether to accept a settlement. If the detriment to non-settlingcreditors is sufficient, it may also indicate that the settlement should not be approved under Martin. Nutraquest, 434 F.3dat 647 (discussing the Martin requirement that the settlement be in the interest of creditors). On balance, however, thissettlement was fair and equitable.

The vast majority of First Lien Noteholders were sophisticated financial entities, and there is no indication that anycreditor was misled or denied the chance to negotiate or participate in the settlement process. Finally, althoughbankruptcy court approval should generally be sought at the earliest time possible, the offering memorandum clearlydetailed the terms of the settlement, associated risks, and the need for court approval, and hence provided sufficientnotice of its terms. Thus, the pre-approval activities do not undermine our conclusion that the Bankruptcy Court did notabuse its discretion in holding that the settlement was fair and equitable.

7 This is not a blanket endorsement of all tender offers in bankruptcy. Rather, like other means for achieving settlementsin a bankruptcy case, each tender offer must be reviewed on a case-by-case basis. See In re Allegheny Int'l, 118 B.R.282, 295–96 (Bankr.W.D.Pa.1990) (rejecting a tender offer used to circumvent bankruptcy procedures). Any danger witha tender offer results from the specific offer itself and how it is used, and not from an inherent problem with tender offersas a means to settle bankruptcy claims.

8 On February 29, 2016, the Supreme Court invited the Solicitor General to file a brief expressing the views of the UnitedStates. 577 U.S. ––––, available at http://www.supremecourt.gov/orders/courtorders/022916zor_7lho.pdf (last accessedMar. 3, 2016).

9 The Bankruptcy Court also noted that PIMCO, WAMCO, and Fidelity received some additional consideration, such asthe most favored nations clause, but this was not discriminatory, because those creditors provided additional benefits tothe estate through backstop funding commitments and additional financing.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2731676United States Court of Appeals,

Third Circuit.

In re NET PAY SOLUTIONS, INC., d/b/a Net Pay Payroll Services, Debtor

Markian R. Slobodian, Appellantv.

United States of America Internal Revenue Service.

No. 15–2833.|

Argued March 2, 2016.|

Filed May 10, 2016.

SynopsisBackground: Chapter 7 trustee brought adversaryproceeding against the United States seeking to avoid certainpurportedly preferential payments that bankrupt payrollservice company had made to the Internal Revenue Service(IRS) during the 90-day preference period. The DistrictCourt granted trustee's motion to withdraw the referencefrom the United States Bankruptcy Court for the MiddleDistrict of Pennsylvania, and following discovery, partiesfiled cross-motions for summary judgment. The DistrictCourt, Christopher C. Conner, Chief Judge, 533 B.R. 126,granted the IRS's motion and denied trustee's motion, andtrustee appealed.

Holdings: Addressing issue of first impression regardingpreference threshold, the Court of Appeals, Hardiman, CircuitJudge, held that:

[1] to satisfy $5,850 threshold on avoidance of transfers aspreferential, trustee seeking to avoid multiple small-dollarpayments that bankrupt payroll service provider had made onbehalf of multiple clients to the IRS could not rely on fact thatall of these payments were made to same payee, the IRS, asadequate basis for aggregating payments, and

[2] service provider's payment of $32,297 in trust-fund taxesowed by one of its client did not represent transfer of“interest of the debtor in property,” and was not avoidable aspreference.

Affirmed.

On Appeal from the United States District Court for theMiddle District of Pennsylvania, (D.C. No. 1:13–cv–02677),District Judge: Honorable Christopher C. Conner.

Attorneys and Law Firms

Markian R. Slobodian (Argued), Harrisburg, PA, forAppellant.

Ivan C. Dale (Argued), Michael J. Haungs, Ari D. Kunofsky,Esq., U.S. Department of Justice, Tax Division, Washington,D.C., for Appellee.

Before SMITH and HARDIMAN, Circuit Judges. *

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

*1 Markian Slobodian, in his capacity as trustee of debtorNet Pay Services, Inc., appeals the District Court's summaryjudgment in favor of the Internal Revenue Service. TheDistrict Court denied Slobodian's motion to avoid fivealleged preferential transfers under 11 U.S.C. § 547(b) of theBankruptcy Code. The District Court held that four of thefive payments were not avoidable because of their minimalvalue. And although the fifth payment was sufficiently largeto constitute a preference, it was not avoidable because thefunds were not property of Net Pay's estate. For the reasonsthat follow, we will affirm.

I

The facts of this case are straightforward. Before it filed forprotection under Chapter 7 of the Bankruptcy Code, Net Paymanaged its clients' payrolls and handled their employmenttaxes pursuant to a form contract called a “Payroll ServicesAgreement,” which required clients to provide their employeepayroll information so Net Pay could determine the taxes andwages they owed. The Agreement gave clients the optionof authorizing Net Pay to transfer funds from their bankaccounts into Net Pay's account and to remit those funds tothe clients' employees, the IRS, and other taxing authorities.The Agreement also established an independent contractorrelationship between Net Pay and its clients, disclaiming“any relationship of employment, agency, joint venture,

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

partnership, or any other fiduciary relationship of any kind.”App. 189.

At issue in this appeal are five transfers Net Pay made onbehalf of its clients to the Internal Revenue Service on May5, 2011—almost three months before it filed its Chapter7 petition. These transfers included: (1) $32,297 on behalfof Altus Capital Partners, Inc.; (2) $5,338 on behalf ofHealthCare Systems Connections, Inc.; (3) $1,143 on behalfof Project Services, LLC; (4) $352.84 for an unknown client;and (5) $281.13 for another unknown client. The day afterthese transfers were made, Net Pay informed its clients thatit was “ceasing business operations including all payrollprocessing.” App. 267.

As trustee for Net Pay, Slobodian sought to recover themonies represented by these five payments, arguing that they

were avoidable preferential transfers. 1 Slobodian and theIRS filed cross-motions for summary judgment. The District

Court granted the IRS judgment as a matter of law. 2

The District Court concluded that four of the five transferswere not subject to recovery as preference payments becausethey were less than the minimum amount established bylaw ($5,850). 11 U.S.C. § 547(c)(9) (2013). Recognizingthat four of the payments were beneath that threshold, theTrustee argued that because the payments exceeded $5,850in the aggregate, the statutory threshold did not apply. TheDistrict Court disagreed, reasoning that distinct transfers maybe aggregated for purposes of defeating the threshold onlyif they are “ ‘transactionally related’ to the same debt.”Slobodian v. U.S. ex rel. Comm'r, 533 B.R. 126, 132–133(M.D.Pa.2015). Because the payments of $5,338, $1,143,$353, and $281 were “separate and unrelated transactionsin satisfaction of independent antecedent debts” to differentcreditors, the Court held that they could not be aggregated tosatisfy the statutory minimum. Id. at 133.

*2 As for the $32,297 payment Net Pay made on behalfof Altus, which plainly exceeded the statutory minimum, thequestion remained whether it was a “transfer of an interestof the debtor in property.” 11 U.S.C. § 547(b) (emphasisadded). To evaluate that question, the District Court noted thatsection 7501(a) of the Internal Revenue Code creates a specialstatutory trust in favor of the United States for taxes withheldfrom employee paychecks (otherwise known as “trust fund”taxes). Informed by the Supreme Court's opinion interpretingthat provision in Begier v. Commissioner, 496 U.S. 53, 110S.Ct. 2258, 110 L.Ed.2d 46 (1990), the District Court held that

Net Pay lacked an interest in the transferred funds becausethey were held in trust under § 7501(a) at the moment theywere withheld.

Notwithstanding this evidence, the Trustee emphasized that$6,527.90 of the Altus payment was designated for employer,non-trust-fund tax obligations unaffected by § 7501(a). TheDistrict Court saw the evidence differently, finding that thepayroll summary offered by Net Pay in support of thisassertion failed to “identify what portion of Altus's non-trust fund and trust fund tax obligations were outstanding atthe time.” Id. at 137 (emphasis added). Because there wasunrefuted evidence that the IRS applied the entire $32,297toward Altus's trust fund tax obligations, the Court held thatthe payment was not avoidable as a preference.

[1] [2] This timely appeal followed. 3

II

[3] We begin with the Trustee's argument that the foursmaller value transfers may be aggregated to exceed theBankruptcy Code's minimum threshold for the avoidance of

preferential transfers. 4 We have not had occasion to examinethis provision, which states that the “trustee may not avoid ...a transfer ... if, in a case filed by a debtor whose debts are notprimarily consumer debts, the aggregate value of all propertythat constitutes or is affected by such transfer is less than

$5,850.” 5 11 U.S.C. § 547(c)(9).

A

[4] Although section 547(c)(9) is less than pellucid, itis clear that the “aggregate value” of “all property” that“constitutes or is affected by” a debtor's “transfer to or for thebenefit of a creditor” must be at least $5,850 to be avoidableas a preference. 11 U.S.C. § 547(b)(1), (c)(9). But thisleaves unanswered the question whether small-value transfersfor the benefit of different creditors and based on distinctdebts can be aggregated and avoided as preferential. Citingan interpretive rule—“the singular includes the plural,” 11U.S.C. § 102(7)—the Trustee reads the Bankruptcy Code toallow the aggregation of transfers that individually fall belowthe threshold, as long as they were all to the same transferee.We reject the Trustee's reading. As we shall explain, whenread in context, § 547(c)(9) precludes aggregation of multiple

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

preferential transfers for the benefit of different creditors ondistinct debts.

1

[5] [6] A “central policy” of the Bankruptcy Code is“[e]quality of distribution among creditors.” Begier, 496 U.S.at 58. “According to that policy, creditors of equal priorityshould receive pro rata shares of the debtor's property.”Id. The power of bankruptcy trustees to avoid preferentialtransfers that benefit certain creditors over others is criticalto this system. “This mechanism prevents the debtor fromfavoring one creditor over others by transferring propertyshortly before filing for bankruptcy.” Id. The fear is that“[i]f preference law fails to preserve absolute equality inliquidation, those creditors who are aware of this failurewill compete for position during insolvency rather thancooperating fully in an attempt to maximize the value ofthe firm.” Note, Preferential Transfers and the Value of theInsolvent Firm, 87 Yale L.J. 1449, 1455 (1978); see alsoIn re Molded Acoustical Prods., Inc., 18 F.3d 217, 219 (3dCir.1994) (“[T]he preference rule aims to ensure that creditorsare treated equitably, both by deterring the failing debtor fromtreating preferentially its most obstreperous or demandingcreditors in an effort to stave off a hard ride into bankruptcy,and by discouraging the creditors from racing to dismemberthe debtor.”).

*3 [7] The Bankruptcy Code includes certain exceptionsto the general preference rules. For example, a trusteemay not avoid a transfer made “in the ordinary courseof business,” 11 U.S.C. § 547(c)(2), “because it does notdetract from the general policy of the preference sectionto discourage unusual action by either the debtor or hiscreditors during the debtor's slide into bankruptcy.” UnionBank v. Wolas, 502 U.S. 151, 160, 112 S.Ct. 527, 116 L.Ed.2d514 (1991) (internal quotation marks omitted). Indeed, itfurthers bankruptcy policies by “encourage[ing] creditors tocontinue dealing with distressed debtors on normal businessterms” and “promot[ing] equality of distribution by ensuringthat creditors are treated equitably.” In re Pillowtex Corp.,427 B.R. 301, 306 (Bankr.D.Del.2010) (citing In re MoldedAcoustical Prods., Inc., 18 F.3d 217, 219 (3d Cir.1994)).

[8] The § 547(c)(9) minimum threshold is a relatively new

addition to the Code. 6 See Bankruptcy Abuse Preventionand Consumer Protection Act of 2005, Pub. L. 109–8, 119Stat. 23 (April 20, 2005). This provision was intended to

benefit creditors who had to decide whether small-valuepreference actions were worth defending. See Kevin C.Driscoll Jr., Bankruptcy 2005: New Landscape for PreferenceProceedings, Am. Bankr. Inst. J., June 2005, at 1, 56. Giventhat “spending $10,000 in legal fees to defeat a $5,000preference is a Pyrrhic victory,” many “defendants in thesesmaller preferences chose to settle otherwise defendableclaims.” Id. Accordingly, as one court has observed, theessential function of the minimum threshold is to “discourage[ ] litigation over relatively insignificant transfer amounts”in order to “promote commercial and judicial efficiency, notonly by reducing litigation over nominal amounts, but alsoby preventing creditors with smaller claims from waivingotherwise meritorious defenses simply because the costsassociated with defending against trustees' avoidance actionsexceed any anticipated benefits.” In re Bay Area Glass, Inc.,454 B.R. 86, 90 (B.A.P. 9th Cir.2011).

2

In view of this statutory scheme, the Trustee's argumentmakes little sense. An individual creditor's ability to invokethe minimum threshold as a defense would depend not onlyupon whether the transfer from which it benefitted was lessthan $5,850, but also on whether the debtor had made anytransfers (large or small) for the benefit of other creditors,and whether all transfers taken together exceed the statutorythreshold. As the following hypothetical demonstrates, thiscannot be the law.

Assume a debtor has 1,000 creditors to whom it paid$5,000 each during the preference period. If we acceptedthe Trustee's argument, the debtor's estate would be able torecover this $5,000,000 and none of those creditors would beable to invoke the $5,850 minimum threshold as a defense.This would render § 547(c)(9) ineffective. In fact, the statute'sonly effect would be to apply in the very few bankruptcieswhere creditors were paid, in the aggregate, less than $5,850during the preference period. Because this construction would

render the minimum threshold an “empty promise,” 7 Kingv. Burwell, ––– U.S. ––––, ––––, 135 S.Ct. 2480, 2495, 192L.Ed.2d 483 (2015), we must reject it.

*4 The Supreme Court has recognized that “[a] provisionthat may seem ambiguous in isolation is often clarifiedby the remainder of the statutory scheme ... because onlyone of the permissible meanings produces a substantiveeffect that is compatible with the rest of the law.” United

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs.,Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740(1988) (internal citation omitted). Section 547(c)(9) is sucha provision. And close inspection of the statutory schemereveals that an interpretation of the minimum threshold thatfails to distinguish between creditors is incompatible with thepreference regime.

B

[9] Unlike the Trustee's argument, the District Court'sreading of § 547(c)(9) is faithful both to the text of thestatute and the law as a whole. To reiterate, the defenseprovides that a debtor's “transfer to or for the benefit ofa creditor” may not be avoided if the “aggregate value”of “all property” that “constitutes or is affected by suchtransfer” is “less than $5,850.” 11 U.S.C. § 547(b)(1), (c)(9).In context, this language requires that creditors be consideredindependently. Hence, a creditor who has received the benefitof a prepetition transfer less than that threshold may invokethe defense regardless of what other creditors have received.This comports with section 547's text, which speaks totransfers “to or for the benefit of a creditor.” 11 U.S.C. §547(b)(1). It also accords with the interpretation reached bya number of bankruptcy courts. See, e.g., In re Pickens, 2007WL 1650140, at *4 (Bankr.N.D.Iowa June 4, 2007) (“Trusteecannot aggregate the total transfers of both [creditors] inthis action to reach the $5,000 limit. Since the parties agreethat [one creditor] received more than $5,000 in paymentsduring the preference period, she is barred from asserting §547(c)(9) as an affirmative defense as to those payments.”);In re Nelson, 419 B.R. 338, 341 (Bankr.W.D.Ky.2009)(“[Creditors] are to be considered individually when applying§ 547(c)(8).”).

The text and context of § 547(c)(9) also demonstrate thatthe minimum threshold contemplates a transfer-by-transferanalysis. In this respect, the Trustee is wrong to describethe threshold as internally inconsistent. See Net Pay Br. 15(“The language of [§ 547(c)(9) ] is internally contradictoryor at best ambiguous because the term ‘aggregate’ impliesa summation of various transfers, while the language ‘suchtransfer’ implies the defense should be applied on a paymentby payment basis.”) (quoting In re Carter, 506 B.R. 83, 87(Bankr.D.Ariz.2014)). In fact, the provision anticipates that asingle transfer might be composed of more than one type ofproperty and instructs that “all property that constitutes or isaffected by ” that transfer should be aggregated for purposes

of determining whether the threshold is met. 11 U.S.C. §

547(c)(9) (emphases added). 8

[10] This does not mean, of course, that courts mustapply the minimum threshold in a mindless way that wouldpermit wily debtors to thwart the law by structuring multipletransfers in amounts less than the threshold. Although§ 547(c)(9) envisions creditor-by-creditor and transfer-by-transfer analyses, both the statutory scheme and the rulethat the singular includes the plural require that ostensiblydistinct transfers may nevertheless be aggregated if they are,in effect, a single transfer on account of the same debt. See4 Norton Bankr. L. & Prac. 3d § 66:33 (“Courts look behindthe form of multiple transfers to avoid [strategic separation oftransfers on the same underlying obligation]. When a numberof less than [$5,850] transfers occur between two parties, itis appropriate to treat the transfers as one transaction if theyare, in fact, conducted pursuant to a single, common plan.”);Commercial Bankruptcy Litigation § 11:20 n. 3 (“Multipletransfers to a single creditor may be aggregated where theunderlying facts and circumstances indicate the transfers werepart of a common plan.”) (emphasis added); Andrea Coles–Bjerre, Bankruptcy Theory and the Acceptance of Ambiguity,80 Am. Bankr. L.J. 327, 354 n. 85 (2006) (recognizing that“aggregation within a transfer—whatever those bounds maybe—is different from aggregation across transfers”).

*5 [11] In sum, the Trustee's reliance on § 102(7) (“thesingular includes the plural”) cannot bear the weight hehas placed upon it. As the District Court observed, if thatprovision had the effect of allowing the debtor to aggregateany and all transfers, “inclusion of the word ‘aggregate’ inthe provision would be entirely superfluous.” Slobodian, 533B.R. at 133; see also Bennett v. Spear, 520 U.S. 154, 173,117 S.Ct. 1154, 137 L.Ed.2d 281 (1997) (“It is the cardinalprinciple of statutory construction ... to give effect, if possible,to every clause and word of a statute.”) (internal quotationmarks omitted); Corley v. United States, 556 U.S. 303, 314,129 S.Ct. 1558, 173 L.Ed.2d 443 (2009) (explaining that“one of the most basic interpretive canons” is that “[a] statuteshould be construed so that effect is given to all its provisions,so that no part will be inoperative or superfluous, void orinsignificant”) (internal quotation marks omitted). As theforegoing explanation demonstrates, the fact that the singularincludes the plural simply means that (1) a creditor mayinvoke the defense for multiple, independently qualifyingtransfers (i.e., it's not a “one-and-done” defense) and (2) aparty may defeat the defense where the challenged transfers

are strategically divided yet transactionally related. 9

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

* * *

In light of our interpretation of § 547(c)(9), we hold thatNet Pay's four small-value transfers may not be aggregatedto exceed the minimum threshold for avoidable preferences.Each payment involved a different creditor (i.e., a differentNet Pay client), unrelated antecedent debts, and distinct taxliabilities. Accordingly, the District Court did not err when itheld that the payments of $5,338, $1,143, $353, and $281 tothe IRS are not avoidable preferences.

III

[12] We now consider Net Pay's $32,297 payment to theIRS on behalf of Altus, which obviously is not subject tothe minimum threshold defense of § 547(c)(9). The questionpresented with respect to this payment is whether it was “aninterest of the debtor in property.” 11 U.S.C. § 547(b). TheDistrict Court held that because Altus's funds were held byNet Pay in a special statutory trust pursuant to 26 U.S.C. §7501(a), Net Pay had no interest in them. We agree.

A

The Internal Revenue Code provides that “[w]henever anyperson is required to collect or withhold any internal revenuetax from any other person and to pay over such tax to theUnited States, the amount of tax so collected or withheld shallbe held to be a special fund in trust for the United States.”26 U.S.C. § 7501(a). This “any person”/“any other person”language is a vague way of saying that the provision appliesto federal taxes that Congress requires employers to withholdfrom their employees' paychecks, otherwise known as “trustfund taxes.” Begier, 496 U.S. at 54; In re Calabrese, 689 F.3d312, 316 (3d Cir.2012).

The Supreme Court interpreted § 7501(a) in Begier, whichinvolved an airline that declared bankruptcy after payingcertain withholding taxes to the IRS. 496 U.S. at 55–56. Theairline had commingled some of the trust fund taxes thatit withheld from its employees with money in its generaloperating account, and then transferred funds to the IRS insatisfaction of its trust fund tax obligations from both thecommingled general account and a segregated tax-fund-onlyaccount. Id. When the airline tried to avoid all these payments

as preferential transfers, the IRS countered that the airlinenever had an interest in the funds because of § 7501(a). Id.at 56–57.

*6 The Court began its analysis by defining “interest of thedebtor in property.” Noting that “the purpose of the avoidanceprovision is to preserve the property includable within thebankruptcy estate,” the Court reasoned that “ ‘property of thedebtor’ subject to the preferential transfer provision is bestunderstood as that property that would have been part of theestate had it not been transferred before the commencementof bankruptcy proceedings.” Id. at 58. The Court then turnedto the Code's definition of “property of the estate,” whichincludes “all legal or equitable interests of the debtor inproperty as of the commencement of the case” but excludesproperty in which the debtor holds “only legal title and notan equitable interest.” Id. at 59 (quoting 11 U.S.C. § 541(a),(d)). Because a debtor “does not own an equitable interest inproperty he holds in trust for another,” the Court concludedthat such property is not subject to § 547(b). Id.

Having established the legal framework, the Court articulateda two-pronged inquiry for deciding whether a prepetitiontransfer from a debtor to the IRS is unavoidable under §7501(a): (1) whether a special statutory trust was created withrespect to a certain dollar amount in the first place; and (2)if so, whether the assets used to pay the IRS were assetsbelonging to that trust. Id. at 57–67. On the first question, theairline argued that even though § 7501(a) creates a statutorytrust extending to “the amount of tax ... collected or withheld,”a trust fund tax is not “collected or withheld” until specificfunds are either sent to the IRS with the relevant return orplaced in a segregated fund. Id. at 60. The Supreme Courtdisagreed, holding that the trust was created at the momentthe relevant taxes were withheld, and that “[w]ithholding ...occurs at the time of payment to the employee of his netwages.” Id. at 60–61. It followed that the airline createda special trust for the benefit of the United States once itwithheld the funds from its employees' paychecks. Id. at 60–62.

The Court then considered the second prong of the trustinquiry: whether the assets the airline used to pay theIRS belonged to that trust. Id at 57–67. Absent statutoryguidance on this tracing question, the Court first consideredthe common law. Id. at 62. But the Court found that unhelpfulbecause, “[u]nder common law principles, a trust is createdin property; a trust therefore does not come into existenceuntil the settler identifies an ascertainable interest in property

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

to be the trust res.” Id. (emphasis added). The statute'sapproach is “radically different.” Id. It provides that “theamount of [trust-fund] tax ... collected or withheld shall beheld to be a special fund in trust for the United States.” Id.(quoting § 7501(a)) (alteration in original). Hence, rather thanenvisioning a particular property to be the trust res, § 7501(a)“creates a trust in an abstract ‘amount’—a dollar figure nottied to any particular assets—rather than in the actual dollars

withheld.” 10 Id. It therefore made no sense for the Courtto apply common law tracing rules to the particular dollarswithheld and the particular dollars paid to the IRS. Id. at 62–63.

*7 Having rejected the strict tracing rule of the common law,the Court was faced with a dilemma. “Congress,” the Courtsurmised, “expected that the IRS would have to show someconnection between the § 7501 trust and the assets sought tobe applied to a debtor's trust-fund tax obligations.” Id. at 65–66. The question was how much of a connection? Relying onlegislative history as “persuasive evidence of Congressional

intent,” 11 the Court held that courts should allow the IRSto apply “reasonable assumptions” to govern the tracing ofwithheld funds. Id. at 64–66 & n. 5. One such assumptionidentified by the Court is “that any voluntary prepetitionpayment of trust-fund taxes out of the debtor's assets is nota transfer of the debtor's property.” Id. at 67. Hence, “thedebtor's act of voluntarily paying its trust-fund tax obligation... is alone sufficient to establish the required nexus betweenthe ‘amount’ held in trust and the funds paid.” Id. at 66–67.In other words, “the bankruptcy trustee could not avoid anyvoluntary prepetition payment of trust-fund taxes, regardlessof the source of the funds.” Id. at 66. Because the airline hadvoluntarily paid its trust fund tax obligation out of its assets,the Court held that the transferred amount had merely beenheld in trust by the airline and thus could not be avoided asa preference. Id. at 67.

B

Our rather detailed exposition on Begier is necessary herebecause there is only one meaningful difference between thatcase and this appeal: here, the debtor is an intermediary thatwithheld and paid taxes on behalf of its client-employers.According to the Trustee, this distinction makes all thedifference because the “obvious meaning of the statute is thatin order for a trust to be created, a person who is requiredto collect the tax must actually withhold the tax.” Net PayBr. 11. Because Net Pay's clients, not Net Pay itself, were

required to withhold the taxes at issue, the Trustee suggeststhat those withholdings escape the statute. Id. at 11–12. Weare not persuaded.

Section 7501(a) provides that “[w]henever any person isrequired to collect or withhold any internal revenue tax fromany other person and to pay over such tax to the UnitedStates, the amount of tax so collected or withheld shall beheld to be a special fund in trust for the United States.” 26U.S.C. § 7501(a). Net Pay's clients indisputably were persons“required to collect or withhold any internal revenue tax from[their employees] and to pay over such tax to the UnitedStates.” 26 U.S.C. § 7501(a). And the provision does notsay that clients themselves must be the only ones involvedin the withholding process in order for trust principles tobe implicated. It simply says that whenever an employer isrequired to withhold employee taxes, the “amount of tax” thatis “so collected or withheld shall be held to be a special fundin trust for the United States.” 26 U.S.C. § 7501(a). Nothingthere suggests that an employer may avoid the fact that anamount required by law is being held in trust for the UnitedStates merely by outsourcing payroll processing to a thirdparty. In fact, reading the statute that way would contraveneBegier, which instructs that “[n]othing in § 7501 indicates ...that Congress wanted the IRS to be protected only insofar asdictated by the debtor's whim.” 496 U.S. at 61. In effect, NetPay's construction amends the statute to read: Whenever anyperson is required to collect or withhold any internal revenuetax from any other person and to pay over such tax to theUnited States, the amount of tax so collected or withheld bythe person so required, and only if by that person alone, shallbe held to be a special fund in trust for the United States. Sucha limit is present neither in the statute's text nor in the SupremeCourt's opinion in Begier.

*8 The Trustee cites various cases in support of itsinterpretation, but none carry the day. He quotes seeminglyhelpful language from In re Warnaco Group, Inc., but omitscrucial details. Warnaco involved a staffing company (ProStaff) that provided the debtor with employees in exchangefor fees and reimbursements. 2006 WL 278152, at *1(S.D.N.Y. Feb. 2, 2006). Rejecting Pro Staff's argument thatcertain payments from the debtor to Pro Staff representedemployees' withheld taxes and were not avoidable, theDistrict Court distinguished Begier because “[i]n that case,the employer, and no one else, withheld taxes.” Id. at5. Although this snippet appears to support the Trustee'sargument that third-party involvement vitiates trust status,the real reason the situation was distinguishable from Begier

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7

was that the transfers the debtor sought to avoid were notpayments of withholding taxes, but rather, reimbursements toPro Staff “for monies already paid by Pro Staff to employeesfor salaries, taxing authorities and insurance premiums.” Id.at 5 (emphasis added). As the court explained, “none ofthe amount paid to Pro Staff was specifically and directlyreserved for withholding taxes. Rather, Pro Staff could dowith that money as it saw fit.” Id. Thus, the arrangementin Warnaco differed markedly from the one at issue in thiscase, where the amount paid to the IRS was reserved by theemployer (Altus) for withholding taxes.

The bankruptcy court's decision in In re U.S. WirelessCorp. is similarly inapposite. Net Pay cites that case for theproposition that trust status is dependent upon the identity ofthe person who does the withholding. But U.S. Wireless saysno such thing. Rather, it merely held that no statutory trust wascreated when the debtor-company forgot to withhold taxesfrom an employee's paycheck and then simply paid the taxesitself. 333 B.R. 688, 695 (Bankr.D.Del.2005). Because “thestatute's own terms limit the trust to the amount so ‘collectedor withheld,’ ” the bankruptcy court reasoned, the fact thatthe debtor “never collected or withheld any money from [theemployee]” meant that “no trust could have been created” andthat “[t]he property belonged to the [debtor] and is, therefore,potentially recoverable.” Id. Here, by contrast, we are dealingwith amounts that were properly withheld and paid over to

the IRS. 12

* * *

Section 7501(a)'s language is broad enough to cover the factsof this case. It makes no difference that Net Pay's customersused the company as an intermediary to withhold and pay itsemployees' taxes. The Altus payment represented an amountit was “required to ... withhold,” 26 U.S.C. § 7501(a), andthat was so withheld pursuant to the contract between Altusand Net Pay. The Tax Code thus deems the amount to havebeen “held to be a special fund in trust for the United States.”26 U.S.C. § 7501(a). And because the amount was paid outof Altus's assets, the traceability nexus is met. See Begier,496 U.S. at 66–67. Accordingly, the District Court did not errwhen it held that Net Pay lacked any interest in the propertyand may not avoid the transfer.

C

*9 [13] The Trustee argues that even if the statutorytrust provision applies, $6,527.90 of the Altus paymentmay be avoided as a preference because it was marked foremployer, non-trust-fund tax obligations. An internal payrollsummary indicates that Altus had generated $25,769.90 intrust fund taxes and $6,527.90 in non-trust-fund taxes duringthe period covered by the summary: April 1–May 31, 2011.Accordingly, the Trustee argues that it's unclear that the entire$32,297 sum was applied to Altus's trust fund tax obligations.

[14] The District Court did not err in holding that there isno genuine issue of material fact as to whether the entireAltus payment was applied to Altus's trust fund obligations.The record shows that on April 28, 2011, Net Pay withdrew$114,335 from Altus's bank account, of which $32,297 wasdesignated for payment to the IRS on or before May 6,2011. Both trust-fund and non-trust-fund portions of federalemployment taxes were generated throughout the quarter asAltus's employees earned wages. See Donelan Phelps & Co.v. United States, 876 F.2d 1373, 1374–75 (8th Cir.1989);Calabrese, 689 F.3d at 316. Critically, the moment whentaxes accrue is irrelevant to which portion of the tax liabilityis actually paid. Consistent with standard IRS practice, non-trust-fund taxes are deemed to be paid first, even thoughthey may accrue later in that quarter. In re Ribs–R–Us, Inc.,828 F.2d 199, 201 (3d Cir.1997); see also Westerman v.United States, 718 F.3d 743, 749 (8th Cir.2013). There wasunrebutted testimony on the record to this effect. And whilethe document upon which the Trustee relies does not identifywhat portion of Altus's non-trust-fund and trust fund taxobligations were outstanding at the time, the record does.In the relevant period, Altus owed $164,504 in employmenttaxes. Of that amount, $137,521 consisted of trust fund taxes,and $26,983 consisted of non-trust-fund taxes. By the timethe IRS received the $32,297 transfer from Net Pay, Altus hadmade deposits exceeding its $26,983 non-trust-fund liabilityfor the second quarter of 2011. Consequently, the $32,297payment was applied to Altus's trust fund tax liability.

[15] [16] Stated differently, Altus was required to withhold$137,521 from its employees' wages during the relevantperiod, and that “amount of tax so collected or withheld [was]held to be a special fund in trust for the United States.”26 U.S.C. § 7501(a). This is further demonstrated by theconsequence of Net Pay's logic: were some portion of thatamount to revert to Net Pay's estate, Altus would be on thehook for that exact amount in unpaid trust fund taxes. Becausewhat matters for purposes of the statutory trust is the overall“amount” withheld, and because there is unrebutted evidence

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8

that the full $32,297 was withheld by Altus and paid overto the IRS, the District Court correctly held that there is nogenuine issue of material fact as to whether the entire Altuspayment was applied to Altus's trust fund obligations and was

held in trust by Net Pay for the United States. 13

IV

*10 [17] Our legal analysis is supported by commonsense. It is hard to fathom that Net Pay's clients intendedanything other than to “transfer only bare legal title” to NetPay with respect to the funds meant for payment to the IRS.Galford v. Burkhouse, 330 Pa.Super. 21, 478 A.2d 1328, 1334(Pa.Super.Ct.1984). Of course, “[w]hether the money is heldin trust must be determined ... not merely by reliance oncommon sense, but also by application of traditional legal

doctrines.” In re Penn Cent. Transp. Co., 486 F.2d 519,524 (3d Cir.1973). Here, as we have explained, those legaldoctrines cohere with common sense.

Net Pay is not entitled to recoup the money it transferred tothe IRS on behalf of its clients. Four of its transfers may notbe challenged as preferences because they did not meet thestatutory threshold of 11 U.S.C. § 547(c)(9), and the Altuspayment may not be avoided because Net Pay lacked anequitable interest in the property by operation of 26 U.S.C.§ 7501(a). For these reasons, we will affirm the judgment ofthe District Court.

All Citations

--- F.3d ----, 2016 WL 2731676, 117 A.F.T.R.2d 2016-1492,2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

Footnotes* The Honorable Dolores K. Sloviter assumed inactive status on April 4, 2016, after the argument and conference in this

case, but before filing of the opinion. This opinion is filed by a quorum of the panel pursuant to 28 U.S.C. § 46(d) andThird Circuit I.O.P. Chapter 12.

1 The Bankruptcy Code allows trustees to “avoid any transfer of an interest of the debtor in property (1) to or for thebenefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;(3) made while the debtor was insolvent; (4) made ... on or within 90 days before the date of the filing of the petition ...(5) that enables such creditor to receive more than such creditor would receive” in the debtor's bankruptcy proceedings.11 U.S.C. § 547(b).

2 The District Court had withdrawn the reference from the bankruptcy court pursuant to 28 U.S.C. § 157(d).

3 The District Court had jurisdiction pursuant to 28 U.S.C. § 157 and 28 U.S.C. § 1334. We have jurisdiction under 28U.S.C. § 1291. We review the District Court's summary judgment de novo, applying the same standard as the DistrictCourt. Viera v. Life Ins. Co. of N. Am., 642 F.3d 407, 413 (3d Cir.2011). Summary judgment is proper “if the movant showsthat there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R. Civ. P. 56(a). “In conducting our review, we view the record in the light most favorable to the non-moving party anddraw all reasonable inferences in that party's favor.” Aleynikov v. Goldman Sachs Grp., 765 F.3d 350, 358 (3d Cir.2014).

4 Assuming the Government's interpretation of the § 7501(a) trust provision is correct, it would not affect the four smallertransfers, which related to non-trust-fund taxes not covered by § 7501(a). On the other hand, if Net Pay's arrangementswith its clients created a trust relationship under state or federal law, Net Pay would not have an interest in any of theproperty transferred to the IRS. See infra at 19–21 n. 13.

5 This dollar amount has since been increased, but the old amount controls. See Revision of Certain Dollar Amounts in theBankruptcy Code Prescribed Under Section 104(A) of the Code, 75 Fed. Reg. 8747, 8748 (Feb. 21, 2013); 11 U.S.C.§ 104(c). The IRS has the burden of proving the unavoidability of a transfer under § 547(c)(9). J.P. Fyfe, Inc. of Fla. v.Bradco Supply Corp., 891 F.2d 66, 71 (3d Cir.1989); 11 U.S.C. § 547(g).

6 A longer standing, nearly identical provision set a lower threshold for consumer cases: “The trustee may not avoid ... atransfer ... if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of allproperty that constitutes or is affected by such transfer is less than $600.” 11 U.S.C. § 547(c)(8).

7 The Trustee's suggestion at oral argument that aggregation should be liberally permitted when a number of transfers forthe benefit of independent creditors are made to a single transferee might limit these concerns to some extent, but it hasno basis in the text of the statute, which speaks in terms of debtors and creditors, not of transferees. Net Pay concededas much. See Net Pay Reply Br. 4 (“The statute does not focus on the identity of the recipient of the transfer.”).

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

8 One bankruptcy court reached this conclusion in a preference action against a debtor's prepetition transfer of both cashand a security interest in property to each of two different creditors, wherein the cash and security interest independentlyfell below the minimum threshold but collectively exceeded it. See Pickens, 2007 WL 1650140, at *3–4. There, thecourt held that the trustee could not “aggregate the total transfers of both [creditors]” and that the property transferredto each creditor—cash and the security interest—could only be aggregated with respect to each creditor if they were“transactionally related.” Id. at *5.

9 The authorities relied on by the Trustee are consistent with this approach. Although each decision invokes § 102(7)in allowing aggregation of multiple preferences, the critical distinction is that the challenged payments in each casewere made for the benefit of a single creditor on account of a single debt. See In re Hailes, 77 F.3d 873, 874–75 (5thCir.1996) (several transfers to a single creditor on account of a single judgment debt); In re Carter, 506 B.R. at 85–86 (multiple payments but just one creditor and one debt); In re Transcon. Refrigerated Lines, Inc., 438 B.R. 520, 521(Bankr.M.D.Pa.2010) (permitting aggregation of three separate transfers to a single creditor in satisfaction of a singledebt); In re Bunner, 145 B.R. 266, 267 (Bankr.C.D.Ill.1992) (same, with respect to separate garnishment payments); Inre Alarcon, 186 B.R. 135, 137 (Bankr.D.N.M.1995) (same); see also Pickens, 2007 WL 1650140, at *4 (“Cases arisingunder the consumer small preference exception are not helpful as they, almost without exception, consider multiple smallpayments to a single creditor on a single debt, with the majority of the cases considering wage garnishment.”) (emphasesadded).

10 Some have called into question the propriety of using trust law when applying § 7501(a). See In re Catholic Diocese ofWilmington, Inc., 432 B.R. 135, 156 (Bankr.D.Del.2010) (“Not only does the ‘§ 7501 trust’ at issue in Begier not fit ‘thecommon law paradigm,’ it is not even a ‘trust’ as that term is used under the law. You simply cannot have a trust withouttrust property. The ‘amount of tax’ is not property. Rather, it is the value of the property.”); Begier, 496 U.S. at 68 (Scalia,J., concurring) (“One ‘traces' a fund only after one identifies the fund in the first place. The problem here is not ‘followingthe res' of the tax trust, but identifying the res to begin with.”).

11 The Court likely would have arrived at the same conclusion even without its reliance on legislative history. See Begier, 496U.S. at 70 (Scalia, J., concurring) (“If the Court had applied to the text of the statute the standard tools of legal reasoning,instead of scouring the legislative history for some scrap that is on point (and therefore ipso facto relevant, no matter howunlikely a source of congressional reliance or attention), it would have reached the same result it does today.”).

12 One bankruptcy court decision does support Net Pay's interpretation. See In re FirstPay, Inc., 2012 WL 3778952(Bankr.D.Md. Aug.30, 2012). But that decision—which also involved a payroll-company debtor—is virtually devoid ofanalysis. See id. at *5 (“In the present case, in contrast to Begier, FirstPay was not holding the subject funds in a statutorytrust for the IRS pursuant to 26 U.S.C. § 7501, as the funds were not collected or withheld by FirstPay to meet its owntrust-fund tax obligations.”) (emphasis added). Rather than correcting this faulty and conclusory reasoning, the FourthCircuit simply held that the relevant funds were held in a state-law trust and did not consider whether the federal statutorytrust provision applied. See In re FirstPay, Inc., 773 F.3d 583, 592–94 (4th Cir.2014).

13 Although the foregoing resolves this appeal on the same grounds as the District Court, we note that, under Pennsylvaniastate law, Net Pay would not be entitled to the money at issue even if its interpretation of the minimum threshold andthe federal trust provision were correct. Absent federal preemption, we look to state law to determine the nature of adebtor's interest in property. Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Propertyinterests are created and defined by state law .... [u]nless some federal interest requires a different result.”). Net Pay'sagreements with its customers designate Pennsylvania law as the governing law. Assuming arguendo that federal law issilent and that Pennsylvania law does not conflict with federal interests, we would conclude that the funds were held in aresulting trust (i.e., one implied by the circumstances) under Pennsylvania law. The Government has produced more thansufficient evidence “showing circumstances which raise an inference that in making the conveyance to [Net Pay], therewas no intention [by Net Pay's customers] to give [Net Pay] the beneficial interest in the property.” Mooney v. GreaterNew Castle Dev. Corp., 510 Pa. 516, 510 A.2d 344, 346 (Pa.1986). See also In re Vosburgh's Estate, 279 Pa. 329, 123 A.813, 815 (Pa.1924) (“[E]very person who receives money to be paid to another or to be applied to a particular purpose isa trustee, if so applied, as well as when not so applied.”). Were it otherwise, Net Pay would not have bothered to contractfor a set-off right and security interest to secure payment of service fees since, as it claims, all the money it received fromits customers would have been its property anyway. And without an equitable interest in the money withdrawn from eachclient's account, § 547(b) does not apply. See 11 U.S.C. § 547(b) (requiring the debtor to have an interest in the propertyin order to avoid a transfer); Begier, 496 U.S. at 59 (observing that “[b]ecause the debtor does not own an equitableinterest in property he holds in trust for another, that interest is not ‘property of the estate’ ”).

In re Net Pay Solutions, Inc., --- F.3d ---- (2016)

117 A.F.T.R.2d 2016-1492, 2016-1 USTC P 50,277, 62 Bankr.Ct.Dec. 157

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 10

Moreover, even if we were to determine that Pennsylvania law conflicts with an important federal interest such thatfederal law governs the “interest of the debtor in property” inquiry, we would conclude that Net Pay held the fundsin trust pursuant to federal common law. In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1056 (3d Cir.1993) (“Federalcommon law imposes a trust when an entity acts as a conduit, collecting money from one source and forwarding it toits intended recipient.”); see also In re Penn Central Transp. Co., 486 F.2d 519, 523–27 (3d Cir.1973) (en banc).As for the tracing requirement—which in either case calls for application of federal rather than state tracing rules, seeCity of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95–96 (3d Cir.1994)—we agree with the Fourth Circuit that “the law willpresume that any funds received, held, and ultimately transferred by a trustee in accordance with the trust purpose areindeed trust funds.” FirstPay, 773 F.3d at 595. As stated, the Trustee has not rebutted this presumption; the funds paidto the IRS are clearly traceable to the funds deposited into Net Pay's account just days before the transfers at issue.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2990988Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1generally governing citation of judicial

decisions issued on or after Jan. 1, 2007. Seealso U.S.Ct. of Appeals 4th Cir. Rule 32.1.

United States Court of Appeals,Fourth Circuit.

Martin P. Sheehan, Trustee of the BankruptcyEstate of AGS, Inc., Plaintiff-Appellant,

v.Allen G. Saoud, Defendant-Appellee,

andGeorgia D. Daniel; Fred D. Scott; WestVirginia Dermatology Associates, Inc.;

Robert R. Fraser; Central West VirginiaDermatology Associates, Inc., Defendants,

United States of America, Intervenor/Defendant.

No. 15–1338|

Argued: March 24, 2016|

Decided: May 24, 2016

Appeal from the United States District Court for the NorthernDistrict of West Virginia, at Clarksburg. Irene M. Keeley,District Judge. (1:11-cv-00163-IMK-JSK)

Attorneys and Law Firms

ARGUED: Martin Patrick Sheehan, SHEEHAN &NUGENT, P.L.L.C., Wheeling, West Virginia, for Appellant.Paul J. Harris, HARRIS LAW OFFICES, Wheeling, WestVirginia, for Appellee. ON BRIEF: Patrick S. Cassidy,CASSIDY, COGAN, SHAPELL & VOEGELIN, L.C.,Wheeling, West Virginia, for Appellant.

Before WILKINSON and NIEMEYER, Circuit Judges, andDavid C. NORTON, United States District Judge for theDistrict of South Carolina, sitting by designation.

Opinion

Affirmed by unpublished opinion. Judge Norton wrote theopinion, in which Judge Wilkinson and Judge Niemeyerjoined.

Unpublished opinions are not binding precedent in thiscircuit.

NORTON, District Judge:

*1 This case is on appeal from a post-trial judgment awardedby the Honorable Irene M. Keeley, United States DistrictJudge for the Northern District of West Virginia. For thereasons set forth below, we affirm the district court's ruling.

I.

Appellant Martin P. Sheehan (“Sheehan”) is the trustee ofthe bankruptcy estate of AGS, Inc. (“AGS”). Appellee AllenG. Saoud (“Saoud”) was a licensed doctor of OsteopathicMedicine, specializing in dermatology, who owned andoperated AGS as a medical corporation in West Virginia.On January 25, 2005, the United States filed charges againstSaoud, alleging that between May 1998 and June 2004, Saoudsubmitted unsupported medical billing claims to Medicareand Medicaid. Saoud entered into a settlement agreementwith the United States under which he was required to pay$310,800.58 in penalties, but he was not required to admitliability. The settlement agreement also excluded Saoud fromparticipating in Medicare, Medicaid, and all other federalhealth programs, for ten years. Thereafter, on March 31,2006, Saoud sold AGS to Georgia G. Daniel (“Daniel”),a nurse practitioner who previously worked in Saoud'sdermatology practice, for $1,000,000.00. Under the terms ofthe contract between Daniel and Saoud, Daniel would not bepersonally liable for AGS's liabilities. Daniel also would notbe personally liable to Saoud for the purchase price.

After Saoud sold AGS to Daniel, various transfers were madefrom AGS to Saoud and Daniel. Relevant to this appeal, AGS

paid Saoud $50,000.00 in 2008. 1 Additionally, a certifiedcopy of a deed recorded in Harrison County, West Virginiashows that real estate titled to AGS was sold to MedStar RealEstate Development on March 23, 2005 for $460,000.00. Theproceeds of the sale were not paid to AGS but rather to AGSDevelopment Company, another entity controlled by Saoud.

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

Further, Daniel received a combined $418,675.00 from AGSin 2006, 2007, and 2008.

On May 9, 2009, AGS filed for Chapter 7 bankruptcy relief.The Bankruptcy Court appointed Sheehan to serve as Trustee.Saoud signed the original petition for bankruptcy relief, inwhich he identified himself as the President and Owner ofAGS. However, during a meeting of creditors held on June 18,2009, Saoud subsequently indicated that he had sold his stockin AGS to Daniel. Saoud confirmed that he was not an owneror officer of AGS during a continued meeting of creditorsheld on August 18, 2009. On May 12, 2010, Saoud claimedthat Daniel signed a corporate resolution authorizing Saoudto file a bankruptcy petition on behalf of AGS. On August23, 2010, Daniel testified that she did not authorize Saoud toseek bankruptcy relief on behalf of AGS and denied that thesignature on the corporate resolution was in fact hers. Saoudfiled a motion to dismiss the bankruptcy petition, and Sheehanopposed the motion. On November 11, 2010, the BankruptcyCourt for the Northern District of West Virginia denied themotion to dismiss.

*2 In December 2012, a federal grand jury returned atwenty-three count indictment charging Saoud with healthcare fraud, concealing a material fact in a health carematter, corruptly endeavoring to obstruct and impede thedue administration of the internal revenue laws, making afalse oath or account in relation to a bankruptcy case, andmaking a false statement to a federal agent. In May 2013, thegrand jury returned a superseding indictment containing noadditional charges. Subsequently, on June 4, 2013, the grandjury returned a third superseding indictment, which addednew charges of health care fraud and aggravated identity theft.On June 25, 2013, Saoud was convicted after a jury trial ofthirteen counts of health care fraud, one count of aggravatedidentity theft, one count of concealing a material fact in ahealth care matter, one count of corruptly endeavoring toobstruct and impede the due administration of the internalrevenue laws, five counts of making a false oath or accountin relation to a bankruptcy case, and one count of making afalse statement to a federal agent. Saoud was sentenced toninety-nine months' imprisonment on March 25, 2014, andreceived a fine of $2,630,000.00. The Fourth Circuit affirmedhis convictions and sentence in December 2014. United Statesv. Saoud, 595 Fed.Appx. 182, 183–84 (4th Cir. 2014).

Sheehan, in his capacity as trustee of AGS, filed acomplaint on October 13, 2011, in the United States DistrictCourt for the Northern District of West Virginia. Sheehan

subsequently filed an amended complaint on October 6, 2014,

against Appellee Saoud, Daniel, Fred D. Scott (“Scott”), 2

Robert R. Fraser (“Fraser”), 3 and Central West VirginiaDermatology Associates, Inc. (“CWVDA”), asserting thefollowing six causes of action: Count I alleged thatCWVDA failed to complete payments to AGS and remainsindebted to AGS for $634,159.00; Count II alleged that theagreements between Saoud, Daniel, and Scott were voidableas fraudulent transfers pursuant to 11 U.S.C. § 547, becausethe agreements constituted a scheme to defraud AGS'screditors by transferring AGS's assets for less than reasonablyequivalent value, causing AGS to become insolvent; CountIII alleged that the transfers were voidable by a trusteein bankruptcy pursuant to the powers established under11 U.S.C. § 544 and under the West Virginia UniformFraudulent Transfer Act (“WVUFTA”), W. Va. Code §§41-1A-1 et seq.; Count IV alleged that the actions outlinedabove constitute a civil conspiracy to violate the WVUFTAand are actionable as a civil conspiracy; Count V allegedthat Fraser aided and abetted the scheme to defraud AGS'screditors under the WVUFTA; and Count VI alleged thatSaoud committed bankruptcy fraud and used the UnitedStates mails to effectuate his scheme to defraud. Sheehansought to recoup the $50,000.00 that AGS paid to Saoud in2008, the $418,000.00 paid to Daniel after the sale, and the$460,000.00 from the sale of certain real estate AGS owned.

Daniel and Fraser settled with Sheehan and were dismissedas defendants on May 15, 2012. The district court thereforedismissed Count V, against Fraser only, as moot. On October20, 2014, Sheehan filed a motion for summary judgmentagainst Saoud, and Scott filed a motion for summaryjudgment against Sheehan's claims and Saoud's cross claims.On January 28, 2015, the court granted in part and deniedin part Scott's motion for summary judgment and deniedSheehan's motion for summary judgment. J.A. 111–161. Thecourt granted Scott's motion for summary judgment as toCount IV, holding that a claim under the WVUFTA was basedin contract and not tort and therefore could not support acivil conspiracy action. J.A. 133, 158–59. The court furtherfound that even if Sheehan had pleaded a tort, the factualallegations contained in his amended complaint were “whollyinadequate” to support a civil conspiracy claim. J.A. 133–34. Sheehan thereafter abandoned Counts I, II, and VI andpursued only Counts III and IV. J.A. 160, 187. Sheehansought to recoup the $50,000.00 that AGS paid to Saoud in2008 and the $460,000.00 from the sale of certain real estateAGS owned. J.A. 314–315. However, in light of the court'sruling on the statute of limitations issues relating to the money

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

transfers, as fully set forth below, the only question submittedto the jury involved the real estate transfer. J.A. 340.

*3 A jury trial was held on March 2–3, 2015. The juryreturned a verdict on March 3, 2015. The jury found thatSheehan did not “file suit within one year after he knew,or reasonably could have discovered, the real estate transferfrom AGS to MedStar Real Estate and Development, LLC,for $460,000.00 ....” J.A. 230. The jury unanimously found infavor of Saoud. The district court affirmed the verdict, J.A.233, and Sheehan filed a notice of appeal on April 1, 2015.J.A. 236.

II.

We review the denial of summary judgment de novo,applying the same standards as the district court. See Hensonv. Liggett Group, Inc., 61 F.3d 270, 274 (4th Cir.1995).In reviewing a denial of summary judgment, we view allfacts and reasonable inferences drawn therefrom in the lightmost favorable to the nonmoving party. PBM Prods., LLC v.Mead Johnson & Co., 639 F.3d 111, 119–20 (4th Cir. 2011).Summary judgment is appropriate if there is no genuine issueof material fact and the movant is entitled to judgment asmatter of law. Fed. R. Civ. P. 56(a); Glynn v. EDO Corp., 710F.3d 209, 213 (4th Cir. 2013).

We review the denial of a motion for judgment as a matter oflaw de novo, viewing the evidence in the light most favorableto the nonmovant, and “draw [ing] all reasonable inferencesin her favor without weighing the evidence or assessing thewitnesses' credibility.” Ocheltree v. Scollon Prod., Inc., 335F.3d 325, 331 (4th Cir. 2003) (quoting Anderson v. G.D.C.,Inc., 281 F.3d 452, 457 (4th Cir. 2002)). Judgment as a matterof law is proper only if “there can be but one reasonableconclusion as to the verdict.” Id. (quoting Anderson v. LibertyLobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d202 (1986)).

III.

Sheehan raises the following issues on appeal: “(1) whetherthe district court erred when it concluded that the doctrineof adverse domination did not toll the statute of limitations/repose under the West Virginia Uniform Fraudulent TransferAct; (2) whether the district court erred in applying the statuteof limitations/repose to find that evidence of a transfer in

2008 was outside the statute of limitations/repose because itwas a payment due under what purported to be a contractsigned in 2005; (3) whether the district court erred inconcluding that a cause of action for civil conspiracy underWest Virginia law could not be based on a violation ofthe West Virginia Uniform Fraudulent Transfer Act evenwhere plaintiff attempted to prove a subjective violation ofthe statute with ‘actual intent to hinder, delay, or defraud.’ ”Appellant's Br. 1.

A.

We turn first to Sheehan's contention that the districtcourt erred when it concluded that the doctrine of adversedomination did not toll the statute of limitations or reposeunder the WVUFTA.

As a threshold matter, Sheehan failed to properly preservethis issue for appeal. During the Rule 50 hearing on March2, 2015, Sheehan's attorney had the following exchange withJudge Keeley:

Court: [M]y finding is that that is the transfer or that is theobligation and that those later payments are not the transferand it certainly was, not only could, but was reasonablydiscovered by the Trustee, as pled in paragraph 18 ofdocument 51 of the bankruptcy proceedings on 9/9/10,discovered at least at that point in time and therefore I amgoing to grant the motion under Rule 50 and dismiss thatpart of the claim and it will not carry to the jury. So—andI'm ruling on that as a matter of law. So I think that what'sleft and what goes to the jury is the real estate transaction,which is four hundred and sixty thousand dollars. It goesto the jury. Is there anything left? ... Now in light of that, isthe question of adverse domination still in the case?

*4 Mr. Cassidy: We don't need it. We don't need it now.The Court: Okay. So there's no adverse domination.

J.A. 340–41. Based on the aforementioned passage from thehearing and the court's entire discussion regarding adversedomination with Mr. Cassidy, Sheehan's trial counsel, itis clear that Sheehan abandoned his adverse dominationarguments prior to the trial, and the court never made a rulingin that regard. See J.A. 315–40. Therefore, Sheehan failedto properly preserve this issue for appeal. See In re UnderSeal, 749 F.3d 276, 285–86 (4th Cir. 2014) (discussing theconsequences of failing to preserve a claim for appeal); seealso Corti v. Storage Tech. Corp., 304 F.3d 336, 343 (4th

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

Cir. 2002) (Niemeyer, J., concurring) (“[I]t remains the lawof this circuit that when a party to a civil action fails toraise a point at trial, that party waives review of the issueunless there are exceptional or extraordinary circumstancesjustifying review.”).

However, even if Sheehan had properly preserved the issuefor appeal, the statute of repose would still have expiredone month prior to Sheehan filing suit, regardless of theapplication of adverse domination. A creditor must bring suitto enforce the provisions of the WVUFTA, W. Va. Code §40–1A–4(a)(1)–(2), within “four years after the transfer wasmade or the obligation incurred, or, if later, within one yearafter the transfer or obligation was or could reasonably havebeen discovered by the claimant.” W. Va. Code § 40-1A-9(emphasis added). Because Sheehan filed suit on October 13,2011, October 13, 2007 is the latest date on which the allegedfraudulent transfers could have occurred such that he mayobtain relief, unless Sheehan establishes that he could notreasonably have discovered the alleged fraudulent transferor obligation more than one year before filing suit. Sheehanargues that the statute of limitations should be tolled by thedoctrine of adverse domination, giving him four years fromthe date on which he was appointed to bring suit.

“Adverse domination is an equitable doctrine that tollsstatutes of limitations for claims by corporations against itsofficers, directors, lawyers and accountants for so long as thecorporation is controlled by those acting against its interests.”Clark v. Milam, 192 W.Va. 398, 452 S.E.2d 714, 718 (1994)(citing Int'l Rys. of Central Am. v. United Fruit Co., 373 F.2d408, 412 (2d Cir. 1967)). The adverse domination doctrinetolls the statute “so long as there is no one who knows of andis able and willing to redress the misconduct of those whoare committing the torts against the corporate plaintiff.” Clarkv. Allen, 139 F.3d 888 (4th Cir. 1998) (quoting Milam, 452S.E.2d at 719). “[T]he defendants have the burden of showingthat there was someone who had the knowledge, ability andmotivation to bring suit during the period in which defendantscontrolled the corporation.” Id. (quoting Hecht v. ResolutionTrust Corp., 333 Md. 324, 635 A.2d 394, 408 (1994)) (internalquotation marks omitted).

Sheehan cites several cases from the Tenth Circuit in supportof his appeal and relies on two unpublished Tenth Circuitopinions as “particularly legally similar.” Appellant's Br. 15–16 (citing Wing v. Buchanan, 533 Fed.Appx. 807 (10th Cir.2013); Wing v. Dockstader, 482 Fed.Appx. 361 (10th Cir.2012)). Both unpublished opinions involved a series of cases

that stemmed from the collapse of VesCor Capital and thereceiver's subsequent attempts to recover VesCor's allegedfraudulent transfers to investors. Buchanan, 533 Fed.Appx. at809. Analyzing statute of limitations issues in Buchanan, the

court recognized that under Utah's Fraudulent Transfer Act, 4

a plaintiff seeking to recoup transfers based on allegations ofactual fraud must file his complaint “within four years afterthe transfer was made or the obligation was incurred or, iflater, within one year after the transfer or obligation was orcould reasonably have been discovered by the claimant.” Id.at 810. At issue was when the discovery period began to run.Id. The court applied the doctrine of adverse domination tohold that the discovery period would not begin to run until thebad actors controlling the entity were removed. Id. The courtheld that, based on the record, it could not determine how toapply the discovery rule to the alleged fraudulent transfers. Id.at 811. The court remanded the case back to the district court“to determine which of the alleged fraudulent transfers ‘couldreasonably have been discovered’ by the bankruptcy trustee—thus triggering the one-year statute of limitations.” Id.

*5 In Dockstader, applying the statute of repose discussedabove, the court held that the receiver could not reasonablyhave discovered any fraudulent transfer prior to hisappointment. 482 Fed.Appx. at 364. The court recognizedthe adverse domination doctrine and found that “[b]ecausethe [r]eceiver was appointed on May 5, 2008 and filed thisaction just over five months later,” the receiver's claims weretimely. Id. The Tenth Circuit's holdings in Buchanan andDockstader do not support Sheehan's position because evenafter recognizing the doctrine of adverse domination, thecourt applied the one-year statute of repose under Utah'sFraudulent Transfer Act—the same one-year statute of reposeunder the WVUFTA.

Applying the same reasoning as the Tenth Circuit inBuchanan and Dockstader, Sheehan's claims are barred. OnSeptember 9, 2010, Sheehan filed an opposition to Saoud'smotion to withdraw the bankruptcy petition in which hestated:

The Trustee has identified severalvaluable causes of action to recoverassets for the bankruptcy estate ofAGS, Inc. These include actions torecover fraudulent and preferentialtransfers to Allen G. Saoud andGeorgia Daniel.

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

J.A. 337. The district court held that the statute of limitationscould only be tolled until this date because Sheehan clearlyhad knowledge of the fraudulent transfers by that time.The district court then applied the one-year statute ofrepose outlined above. It is clear that not only couldSheehan reasonably have discovered the fraudulent transfersby September 9, 2010, but that he did in fact discoverthe alleged fraudulent transfers as of that date. Unlike thebankruptcy trustees in Buchanan and Dockstader, Sheehanhad knowledge of the alleged fraudulent transfers more thana year before he filed suit. Thus, even if the doctrine ofadverse domination were to apply, the statute of reposeexpired one year after Sheehan's September 9, 2010 filing inthe Bankruptcy Court and one month before Sheehan filedsuit on October 13, 2011.

Accordingly, even if Sheehan had properly preserved theadverse domination issue for appeal, he would not be entitledto the relief requested.

B.

Sheehan next argues that the district court erred by concludingthat his action to recover the $50,000.00 payment from AGSto Saoud in 2008 was barred by the four-year statute oflimitations because the payment was made in connection with

the 2006 sale to Daniel. Appellant's Br. 17. 5

To enforce the provisions of the WVUFTA, the creditor mustbring suit “within four years after the transfer was made orthe obligation was incurred or, if later, within one year afterthe transfer or obligation was or could reasonably have beendiscovered by the claimant.” W. Va. Code Ann. § 40-1A-9.West Virginia Code section 40-1A-6(d) provides that:

A transfer is not made until thedebtor has acquired rights in theasset transferred and an obligation isincurred. If the obligation is oral, atransfer is made when the obligationbecomes effective. If the obligation isevidenced by a writing, the obligationbecomes effective when the writing isdelivered to or for the benefit of theobligee.

W. Va. Code Ann. § 40-1A-6(d) (emphasis added). Thedistrict court found that the 2008 payment was made pursuant

to AGS's obligation incurred on the 2006 sale instrument.Therefore, the “transfer”—as defined under the WVUFTA—occurred in 2006, beginning the running of the statute oflimitations at that time. The district court found that even ifthe discovery rule as outlined in the statute of repose applies,the clock stopped running on September 9, 2010. Once again,Sheehan's knowledge of the alleged fraudulent transfers bySeptember 9, 2010, at the latest, is evidenced by his filingwith the bankruptcy court. See J.A. 337. Therefore, becauseSheehan did not file suit until October 13, 2011, more thana month after the statute of repose expired, the district courtheld that Sheehan's WVUFTA claims relating to the 2008transfer were barred by the statute of repose.

*6 The district court based its ruling on LaRosa v.LaRosa, 482 Fed.Appx. 750 (4th Cir. 2012), an unpublishedFourth Circuit opinion. In LaRosa, two brothers loanedtheir cousin and his wife (“the debtors”) $800,000.00. Id.at 751. The cousin was the sole shareholder of a companycalled Cheyenne. Id.. In 2001, Cheyenne entered into a loanagreement with a bank that permitted Cheyenne to borrowup to $950,000.00 on a line of credit. Id. at 753. The cousinpledged a series of securities to secure the line of credit. Id.. In2003, the cousin's son drew down $700,000.00 on the line ofcredit with the bank, and Cheyenne purchased over a milliondollars in annuities with the money. Id. The annuities wereowned and controlled by Cheyenne but the accounts wereused to transfer money to the cousin's son according to a shamland renewal lease. Id. The district court found the schemefraudulent under the WVUFTA and awarded the creditors$700,000.00. Id.

On appeal of the judgment, this Court addressed whetherthe plaintiffs' WVUFTA claim “based on a corporation'sdrawdown on its line of credit and purchase of annuities wastime-barred.” Id. at 751. This Court held that the “transfer” inquestion was not the 2003 drawdown but rather the originalestablishment of the line of credit in 2001. Id. at 755.Therefore, the Court held that because the creditors did notfile their claim within four years of the establishment of theline of credit, their claim was barred by the WVUFTA statuteof repose. Id. at 753 (“Because the language and history ofthe statute of repose make clear that it runs from the dateof the security pledge, we reverse the district court and holdthat the Creditors' WVUFTA claim on the line of credit wastime-barred.”). Judge Keeley relied on this Court's reasoningin LaRosa to hold that the 2008 transfer was an obligationincurred under the 2006 sales contract. J.A. 152; 339–40.Therefore, because Sheehan did not file suit until October

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

13, 2011, his claim was barred by the four year statute oflimitations. Id.

A dissenting opinion in LaRosa interpreted the term“transfer” under the WVUFTA differently than the majority.LaRosa, 482 Fed.Appx. at 758–59. Analyzing the statute oflimitations provisions of the WVUFTA, the dissent stated thefollowing:

By employing the definite article, the last clause, “withinfour years after the transfer was made,” refers back tothe opening clause—“[a] cause of action with respect toa fraudulent transfer.” West Virginia's statute, therefore,does not extinguish fraudulent transfer suits by referenceto related, but nonfraudulent, transfers. Instead, like anysensible statute of repose, the provision only bars causes ofaction for fraudulent transfers that have accrued.

LaRosa, 482 Fed.Appx. at 759 (quoting W. Va. Code Ann.§ 40-1A-9). Because there was no suggestion in the recordthat there was any fraudulent intent or purpose in creating theline of credit, the dissent found that the actionable fraudulenttransfer occurred in 2003 when the $700,000.00 drawdowntook place. Id. Therefore, the creditors properly brought theirclaim within the four-year statute of limitations. Id.

Sheehan argues that LaRosa is easily distinguishable becausethe sale of AGS to Daniel in 2006 was “of dubious legality”because an “osteopath cannot transfer a medical practice to anon-osteopath under West Virginia law.” Appellant's Br. 20.However, the district court never deemed the sale illegal orvoidable. Further, there is no indication that the district court'sapplication of the holding in LaRosa would be altered if thetransfer was “illegal.” All fraudulent transfers are “illegal”;thus, just because a transfer is made pursuant to an illegalcontract does not change the statute of limitations analysisunder the WVUFTA.

On March 31, 2006, Daniel and Saoud executed a documentin which Daniel agreed to purchase AGS from Saoud for$1,000,000.00. J.A. 62. Under the purchase agreements,the name, corporate standing, disposable medical supplies,and goodwill were included; however, the cash in theaccount, accounts receivable, equipment, and software wereall excluded from the sale. Id. Further, Daniel was notliable under the agreement for “any liabilities that havebeen incurred by [Saoud] while he has been President of[AGS] or any liabilities that [AGS] currently has.” Id. Asecond document, also signed by Saoud and Daniel on March31, 2006, recognizes Daniel's purchase of AGS and states:

“Daniel is also not responsible personally for payback of thepurchase price.” J.A. 63.

*7 Under the plain language of section 40A-1A-6, the statuteof limitations began to run in 2006. As stated above, “[a]transfer is not made until the debtor has acquired rightsin the asset transferred and an obligation is incurred.” W.Va. Code § 40-1A-6(d). If the obligation is evidenced by awriting, the obligation becomes effective when the writing isdelivered to or for the benefit of the obligee. Id. Saoud andDaniel signed documents transferring ownership in AGS toDaniel on March 31, 2006. Under the March 31, 2006 saledocuments, Daniel acquired rights in AGS and AGS incurredan obligation to pay Saoud the purchase price. Sheehandoes not dispute that the 2008 money transfer was madepursuant to the March 31, 2006 sale documents. Becausethe obligation was evidenced by a writing, AGS's obligationbecame effective that day. Therefore, the alleged fraudulent“transfer”—as defined under the WVUFTA—took place onMarch 31, 2006. The statute of limitations expired on March31, 2010, and the statute of repose expired on September 9,2011, one month before Sheehan filed suit.

Notably, if applied to this case, the dissent's reasoning inLaRosa would also not alter the outcome, because Sheehanalleged that Saoud's 2006 sale of AGS to Daniel wasfraudulent in and of itself. See Appellant's Br. 18. Therefore,unlike the underlying facts in LaRosa, Sheehan allegesthat both the 2008 money transfer and the 2006 sale werefraudulent. Thus, the statute of limitations expired under theanalysis of both the majority and dissent in LaRosa. For thesereasons, we affirm the district court's ruling that Sheehan'sWVUFTA claims are barred by the statute of repose.

C.

Lastly, Sheehan argues that the district court erred in holdingthat a cause of action for civil conspiracy could not be basedon a violation of the WVUFTA. Appellant's Br. 21. Sheehanargues that the statute makes actionable a transfer made with“actual intent to hinder delay or defraud creditors” and istherefore a tort. Id. (citing W. Va. Code § 40-1A-4(a)(1)).

First and foremost, because the district court had a validindependent basis to support its ruling beyond holding that aWVUFTA violation cannot support a civil conspiracy claim,it is not necessary for the Court to decide this issue. In additionto finding that the WVUFTA did not provide a basis for a

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7

civil conspiracy claim, the district court alternatively heldthat Sheehan failed to adequately plead fraud. In its orderon Scott's and Sheehan's motions for summary judgment, thedistrict court stated the following when it addressed Sheehan'scivil conspiracy claim under Count IV:

Following a careful weighing of thematter, the Court agrees with Scottthat a violation of the WVUFTAsounds in contract; thus, Sheehan,by having relief on the WVUFTA,has failed to plead a tort. Moreover,even if he had pleaded a tort byalleging a violation of the WVUFTA,Sheehan's factual allegations arewholly inadequate regarding how andwhen the defendants engaged in civilconspiracy.

J.A. 133–34 (emphasis added). 6 Addressing the same claimagainst Saoud, the court stated as follows:

[A] violation of the WVUFTA doesnot sound in tort as is required toestablish a civil conspiracy claimunder West Virginia law. Therefore,Sheehan has failed to plead adequatelythe claim of civil conspiracy alleged inCount IV of the amended complaint.

J.A. 158–59. Further, during the final pretrial conferenceon February 18, 2015, the court again addressed the civilconspiracy claim in Count IV, stating the following:

Mr. Sheehan never pled a civilconspiracy and to the extent that you'rearguing here today that he did, I thinkyou need to go take a look at theamended complaint and if you thinkhe pled a plain vanilla fraud tort civilconspiracy, you ought to look at yourfacts there because under Rule 9 Iwould have kicked it out had anybodymoved. ... Had it been pled, it iswoefully inadequate. It's never beenfixed. It's not a claim that could evergo to trial.

J.A. 273–74. Notably, in his brief, Sheehan states in afootnote: “The District Court also found a procedural defaultto be applicable. That default is an independent basis for

decision [sic] and is not contested in this appeal.” Appellant'sBr. 21 (emphasis added). Sheehan does argue, on the otherhand, that the district court's ruling with respect to theadequacy of the pleadings was an exercise in judicial activismbecause Saoud never moved to dismiss the complaint.However, the court is not required to ignore an obvious failureto allege facts setting forth a plausible claim for relief. Wellerv. Dep't of Soc. Servs., 901 F.2d 387, 391 (4th Cir. 1990).In such a circumstance, the court is authorized to dismiss aclaim sua sponte under Federal Rule of Civil Procedure 12(b)(6), as long as there is notice and an opportunity to be heard.See United Auto Workers v. Gaston Festivals, Inc., 43 F.3d902, 905–06 (4th Cir. 1995) (affirming the district court'ssua sponte dismissal of plaintiff's claims); see also Saifullahv. Johnson, 1991 WL 240479 (4th Cir. Nov. 20, 1991)(unpublished) (“A court may, on its own initiative, dismissa civil complaint for failing to state a claim.”). Therefore,the district court's alternative holding that Sheehan failed toadequately plead his civil conspiracy claim, uncontested onappeal, was proper and provides an independent basis foraffirming the district court's ruling.

*8 Notwithstanding the foregoing, the Court will addressthe merits of Sheehan's arguments. Sheehan argues that aviolation of the WVUFTA can support a civil conspiracyclaim as sounding in tort because the first prong deemsfraudulent a transfer or obligation incurred by a debtor “[w]ithactual intent to hinder, delay or defraud any creditor of thedebtor.” W. Va. Code Ann. § 40-1A-4(a)(1). West Virginiarecognizes a cause of action for civil conspiracy. Kessel v.Leavitt, 204 W.Va. 95, 511 S.E.2d 720, 753 (1998) ( “Thelaw of this State recognizes a cause of action sounding incivil conspiracy.”). “[A] civil conspiracy is a combination oftwo or more persons by concerted action to accomplish anunlawful purpose or to accomplish some purpose, not in itselfunlawful, by unlawful means.” Dixon v. Am. Indus. LeasingCo., 162 W.Va. 832, 253 S.E.2d 150, 152 (1979). “The causeof action is not created by the conspiracy but by the wrongfulacts done by the defendants to the injury of the plaintiff.”Id. Therefore, civil conspiracy is not a stand-alone cause ofaction, but is rather “a legal doctrine under which liabilityfor a tort may be imposed on people who did not actuallycommit a tort themselves but who shared a common planfor its commission with the actual perpetrator(s).” Dunn v.Rockwell, 225 W.Va. 43, 689 S.E.2d 255, 269 (2009) (citingKessel, 511 S.E.2d at 754). As such, courts in West Virginiadismiss civil conspiracy claims when they are not supportedby an underlying tort. See, e.g., Long v. M & M Transp., LLC,44 F.Supp.3d 636, 652 (N.D.W. Va. 2014) (“[B]ecause the

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8

Court granted summary judgment as to the deliberate intentand outrage claims, there is no underlying tort to supportthe civil conspiracy claim. Accordingly, this claim fails as amatter of law.”).

The district court recognized that “case law in West Virginiais bereft of guidance as to whether [a conspiracy claimfor violation of the WVUFTA] sounds in contract or tort.”J.A. 132. However, the district court looked for guidanceelsewhere and noted cases from other jurisdictions that haveadopted the Uniform Fraudulent Transfer Act and whosecourts have held that a violation of the act is not a tort. J.A.132–33 (citing F.D.I.C. v. S. Prawer & Co., 829 F.Supp. 453,455 (D. Me. 1993) (“The Court is satisfied that violationof ... Maine's Uniform Fraudulent Transfers Act ... is nota tort.”)). After carefully weighing the matter, the districtcourt determined that a violation of the WVUFTA sounds incontract, and therefore does not support a civil conspiracyclaim. J.A. 133.

The WVUFTA provides two separate prongs under which atransfer made by a debtor may be deemed fraudulent as to thecreditor. The first prong provides that a transfer is fraudulentif the debtor made the transfer or incurred the obligation“[w]ith actual intent to hinder, delay or defraud any creditorof the debtor.” W. Va. Code Ann. § 40-1A-4(a)(1). A transfermay also be deemed fraudulent under the second prong if thedebtor made the transfer or incurred the obligation:

Without receiving a reasonablyequivalent value in exchange for thetransfer or obligation and the debtor:(i) Was engaged or was about toengage in a business or a transactionfor which the remaining assets of thedebtor were unreasonably small inrelation to the business or transaction;or (ii) Intended to incur, or believedor reasonably should have believedthat he (or she) would incur, debtsbeyond his (or her) ability to pay asthey became due.

W. Va. Code Ann. § 40-1A-4(a)(2). Therefore, a plaintiffis only required to demonstrate actual intent to establish afraudulent transfer under the first prong.

Although the Fourth Circuit has not addressed the issue,courts from varying jurisdictions have refused to recognizeviolations of the Uniform Fraudulent Transfer Act as torts.

See, e.g., United States v. Neidorf, 522 F.2d 916, 917–18(9th Cir. 1975); Desmond v. Moffie, 375 F.2d 742, 743(1st Cir. 1967) (finding fraudulent conveyance claim underMassachusetts Uniform Fraudulent Conveyance Act to bea contract rather than tort action for purposes of applyingappropriate statute of limitations); S. Prawer, 829 F.Supp. at456 (finding fraudulent conveyance claim not to be a tortclaim for purposes of the Federal Tort Claims Act); Branchv. Fed. Deposit Ins. Corp., 825 F.Supp. 384 (D. Mass. 1993)(finding fraudulent conveyance claim not to be a tort claim forpurposes of the Federal Tort Claims Act); Fed. Deposit Ins.Corp. v. Martinez Almodovar, 671 F.Supp. 851, 871 (D.P.R.1987) (finding fraudulent conveyance claim not to be a tortfor purposes of choosing appropriate statute of limitations);In re Fedders N. Am., Inc., 405 B.R. 527, 549 (Bankr. D. Del.2009) (“Likewise, the authorities are also clear that there is nosuch thing as liability for ... conspiracy to commit a fraudulenttransfer as a matter of federal law under the Code.”); Freemanv. First Union Nat'l Bank, 865 So.2d 1272, 1277 (Fla. 2004)(“We simply can see no language in FUFTA that suggests anintent to create an independent tort for damages.”).

*9 However, a handful of courts from other jurisdictionshave recognized violations of the Uniform FraudulentTransfer Act as torts. See, e.g., Alliant Tax Credit Fund 31–A,Ltd. v. Murphy, 2011 WL 3156339, at *8 (N.D. Ga. July26, 2011) (“Although Plaintiffs' claim for civil conspiracydoes not furnish an independent cause of action on whichto hold Defendants liable, it can be used to establish someof Defendants' liability for fraudulent transfers under theUFTA.”); Valvanis v. Milgroom, 529 F.Supp.2d 1190, 1203(D. Haw. 2007) (“[T]he underlying actionable tort for theconspiracy claim is the fraudulent transfer of the HawaiiProperty [under the HUFTA].”); Gutierrez v. Givens, 1F.Supp.2d 1077, 1087 (S.D. Cal. 1998) (“The Court findsthat a triable issue of fact exists as to whether Colonialmay be found liable for a civil conspiracy to violate theUFTA.”); In re Advanced Telecomm. Network, Inc., 2013WL 414654, at *3 (Bankr. M.D. Fla. Feb. 4, 2013) (“TheAmended Complaint properly pleads civil conspiracy againstthe Defendants to the extent it alleges they knowingly agreedand aided the Allens in violating the UFTA's constructivefraudulent transfer provisions.”); In re Penn Packing Co.,42 B.R. 502, 505 (Bankr. E.D. Pa. 1984) (Pennsylvania'sfraudulent conveyance act claim a tort for purposes ofchoosing Pennsylvania statute of limitations); Banco PopularN. Am. v. Gandi, 184 N.J. 161, 876 A.2d 253, 263 (2005)(recognizing a claim for civil conspiracy for aiding andabetting a fraudulent transfer under the UFTA); Double Oak

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

Const., LLC v. Cornerstone Dev. Int'l, LLC, 97 P.3d 140,146 (Colo. App. 2003) (“[W]e conclude that a transfer inviolation of CUFTA is a legal wrong which will support aconspiracy claim.”); McElhanon v. Hing, 151 Ariz. 386, 728P.2d 256, 263 (Ariz. Ct. App. 1985) aff'd in part, vacated inpart, 151 Ariz. 403, 728 P.2d 273 (1986) (“[U]pon passage ofthe Uniform Fraudulent Conveyances Act, a conveyance todefraud a general creditor became a legal wrong, properly thesubject of a suit for civil conspiracy.”).

Further, while very few have addressed the issue, some circuitcourts have recognized a cause of action for civil conspiracybased on a violation of the Uniform Fraudulent Transfer Act.See, e.g., CNH Capital Am. LLC v. Hunt Tractor, Inc., 568Fed.Appx. 461, 473 (6th Cir. 2014), as amended (July 2,2014) (recognizing that Kentucky law allows recovery froma transferee or transferor for civil conspiracy to commit afraudulent conveyance, but denying relief because defendantwas neither the transferee nor the transferor); Chepstow Ltd.v. Hunt, 381 F.3d 1077, 1090 (11th Cir. 2004) (recognizinga cause of action for civil conspiracy based on the UFTAunder Georgia law against non-transferee defendants); ForumIns. Co. v. Comparet, 62 Fed.Appx. 151, 153 (9th Cir. 2003)(“California allows for a cause of action for conspiracy tocommit fraudulent transfers, and allows a plaintiff to recoverlegal damages on such a cause of action.”). However, in thesecases, the circuit courts applied the law as already decided bystate courts recognizing such civil conspiracy claims.

As outlined above, there are two prongs of the WVUFTA,only one of which requires proof of fraudulent intent.Conceivably, a plaintiff could adequately plead a violationof the WVUFTA under the first prong with actual intentto hinder, delay, or defraud, sufficient to support a civilconspiracy claim. However, a violation of the second prongwould not be sufficient to support a civil conspiracy claim.Therefore, the Court cannot hold, as a matter of law, thata violation of the WVUFTA can support a claim for civilconspiracy in all circumstances. Further, the Court is reticentto expand the bounds of West Virginia policy by recognizing

a civil conspiracy claim for violation of the WVUFTAfor the first time. “Absent a strong countervailing federalinterest, the federal court ... should not elbow its wayinto this controversy to render what may be an uncertainand ephemeral interpretation of state law.” Time WarnerEntm't–Advance/Newhouse P'ship v. Carteret–Craven Elec.Membership Corp., 506 F.3d 304, 314 (4th Cir. 2007)(quoting Mitcheson v. Harris, 955 F.2d 235, 238 (4th Cir.1992)). Therefore, the Court declines to make such a policydetermination to recognize that a violation of the WVUFTAsounds in tort.

Regardless, even if the court were to recognize that a violationof the WVUFTA sounds in tort, Sheehan's civil conspiracyclaim would be barred by the statute of repose as fullyset forth above. In West Virginia, “the statute of limitationfor a civil conspiracy claim is determined by the nature ofthe underlying conduct on which the claim of conspiracyis based.” Dunn v. Rockwell, 225 W.Va. 43, 689 S.E.2d255, 269 (2009). Therefore, because the statute of limitationsfor Sheehan's WVUFTA claim expired, it necessarily mustfollow that the statute of limitations for Sheehan's civilconspiracy claim has also expired. Thus, the Court affirms thedistrict court's dismissal of Sheehan's claims for violation ofthe WVUFTA.

IV.

*10 For the reasons set forth above, we conclude thatSheehan's WVUFTA and civil conspiracy claims are barredby the applicable statute of limitations. We therefore affirmthe district court's dismissal of Sheehan's claims.

AFFIRMED

All Citations

--- Fed.Appx. ----, 2016 WL 2990988

Footnotes1 In the underlying action, Sheehan originally sought $250,000.00 from Saoud, representative of the total value of all

transfers AGS made to Saoud after the sale to Danial. See J.A. 54–55. However, the only transfer subject to this appealis the 2008 transfer of $50,000.00 from AGS to Saoud.

2 Scott practiced dermatology with Saoud at AGS, served as director of CWVDA, and was involved in some of thetransactions at issue.

3 Fraser is an accountant who prepared tax returns for Daniel and CWVDA.

4 The Utah Uniform Fraudulent Transfer Act and the WVUFTA have the same statute of limitations and repose provisions.

Sheehan v. Saoud, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 10

5 Although Sheehan states in his brief that the transfer at issue occurred in 2005, it is clear from the entirety of Sheehan'sbrief that he is referring to the March 31, 2006 sale of AGS to Daniel, and therefore the 2008 payment of $50,000.00to Saoud. See Appellant's Br. 17–19. Further, during oral argument, the parties clarified that the transfer in dispute isindeed the $50,000.00 transfer from AGS to Saoud.

6 Scott is not a party to this appeal. Although this quote comes from the portion of the court's order addressing Scott'smotion for summary judgment, the court subsequently recognized its prior discussion of the civil conspiracy claim andapplied the reasoning to its disposition of Sheehan's motion for summary judgment on Count IV. J.A. 158–59.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 3063261United States Court of Appeals,

Fifth Circuit.

In the Matter of: Abdul Karim Pirani, Debtor.Abdul Karim Pirani, Appellant,

v.Malik Baharia; Abdul Hamid Gilani; Nadirshah

Lalani; HMN Partners, L.L.C., Appellees.

No. 15–40538|

Filed May 27, 2016

SynopsisBackground: Chapter 11 debtor filed adversary complaintagainst investors holding 50-percent stake in business schemeformulated by debtor and his brother to buy, renovate,and operate hotel, asserting a claim for breach of guarantyagreement that had been assigned to him by lender andseeking to recover full amount of alleged deficiency on note.Investors asserted counterclaims for breach of settlementagreement and breach of fiduciary duty. Following trial, theUnited States Bankruptcy Court for the Eastern District ofTexas entered judgment for investors, and debtor appealed.The District Court affirmed, and debtor appealed.

Holdings: The Court Of Appeals, Stephen A. Higginson,Circuit Judge, held that:

[1] under Texas law, res judicata did not bar investors' breach-of-contract counterclaim;

[2] debtor was personally bound by promises made by “theCompany” in the settlement agreement to release investorsfrom their personal guaranties;

[3] debtor's promise to release investors from their personalguaranties was not subject to a condition precedent, but wasa covenant;

[4] although the district court properly dismissed debtor'sbreach-of-guaranty claim against investors, his claim forbreach of guaranty against the company formed to hold theirinterest in the hotel could go forward;

[5] under Texas law, as predicted by the Court of Appeals,if investors' company failed to prove its no-deficiencydefense, then debtor's recovery would be limited to company'scontributive share of the $300,000 that debtor paid lender forthe note and guaranty, that is, $50,000; and

[6] in awarding attorney fees to investors on the basis of theirsuccessful claim for breach of the settlement agreement, thebankruptcy court erred in failing to segregate the time spenton or “advancing” that claim from the time spent on otherclaims on which investors did not prevail.

Affirmed in part, vacated in part, and remanded.

Appeal from the United States District Court for the EasternDistrict of Texas

Attorneys and Law Firms

Kenneth Edwin Carroll, Lisa M. Lucas, Jeffrey MichaelSutherland, Carrington, Coleman, Sloman & Blumenthal,L.L.P., John Joseph Gitlin, Dallas, TX, for Appellant.

Collin Dwayne Porterfield, Honolulu, HI, for Appellees.

Before HIGGINBOTHAM, SOUTHWICK, andHIGGINSON, Circuit Judges.

Opinion

STEPHEN A. HIGGINSON, Circuit Judge:

*1 This is an appeal from a district court's order affirminga bankruptcy court judgment rendered after trial in anadversary action. The adversary action comprises the claims,counterclaims, and affirmative defenses between two sides ofa business scheme to buy, renovate, and operate a Days Inn inSherman, Texas. Abdul Karim Pirani—appellant here—andhis brother, Nasim Aziz, formed the plan to buy the hotel.Appellees are the investors that the brothers convinced to buya fifty-percent stake in the scheme—Malik Baharia, AbdulHamid Gilani, and Nadirshah Lalani—and the company thatthe three investors formed to hold their membership interest.

I.

In 2008, two brothers, Pirani and Aziz, decided to buyand renovate a Days Inn in Sherman, Texas. They formeda purchasing entity for the hotel, Circle Sherman, LLC,

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

and looked for investors. Eventually, they recruited threeindividuals—Baharia, Gilani, and Lalani—who agreed to buya fifty-percent stake in Circle Sherman. The three investorsformed HNM Partners, LLC, to hold their membershipinterest.

In February 2009, the brothers and the investors borrowedclose to $2.5 million for the project. To receive the loan,both brothers and all three investors signed three documentsin favor of their lender, One World Bank: (1) a note, whichset out the terms of the loan; (2) a deed of trust, whichsecured the loan with a lien on the hotel; and (3) a guarantyagreement, in which they agreed to guarantee, “jointly andseverally,” full payment of the loan in the event of a defaulton the note. The two brothers signed the guaranty agreementin their individual capacities. The three investors signed fortheir company, HNM, and also in their individual capacities.

Almost immediately after obtaining the loan, the two sidesfell out over the planned renovations of the hotel. By April,HNM had sued the brothers in state court. By August, theparties had settled, having agreed that Circle Sherman wouldbuy back HNM's fifty-percent stake in the company, withthe brothers promising to personally guarantee the purchaseprice.

The settlement agreement also contains a promise that Gilani,Baharia, and Lalani would be released from their personalguaranties under the guaranty agreement with One WorldBank. Specifically, section 3.2 of the settlement agreementprovides:

In the event that the Company obtainsa third party investor for the purposeof purchasing HNM's MembershipInterest, the Company shall in goodfaith make best efforts to have theBank release Gilani, Baharia andLalani from their personal guarantiesof the Loan. If the Company is unableto obtain a release from the Bank of theguaranties, Gilani, Baharia and Lalaniagree to continue to be guarantors ofthe Loan until July 9, 2012 at whichtime they shall be released eitherthrough the Company's refinancing ofthe Loan or sale of the Hotel.

“Company” is defined four different ways in the agreement.First, the opening paragraph of the settlement agreement

defines the parties as follows: “Baharia ... Gilani ... [and]Lalani ... for themselves individually and on behalf of HNMPartners, LLC (collectively ‘HNM’) on the one hand” and“Aziz ... [and] Pirani, for themselves and on behalf of CircleSherman, LLC (collectively the ‘Company’) on the other.”Second, section 3.1(a) of the agreement provides: “NasimAziz, Abdul Karim Pirani and HNM Partners LLC are the solemembers of Circle Sherman LLC (‘the Company’).” Finally,sections 4.1 and 4.2, which govern the parties' respectivelitigation releases, provide two more definitions.

*2 Shortly thereafter, Circle Sherman defaulted on thenote. One World Bank demanded payment from each of theguarantors and eventually sued all of the guarantors in Texasstate court. Thereafter, it foreclosed on the hotel, which soldfor $2,350,000, leaving a deficiency of $828,190.13. Thebrothers and the investors raised a no-deficiency affirmativedefense to One World Bank's demand for payment, arguingthat the hotel was worth significantly more than it sold for atforeclosure.

Within the bank litigation, Baharia, Gilani, Lalani, and HNMfiled three breach-of-contract crossclaims against CircleSherman and the brothers. First, they claimed that CircleSherman and the brothers had breached their settlementagreement by failing to buy back HNM's membership interest(the “payment claim”). Second, they claimed that CircleSherman and the brothers had breached the settlementagreement by failing to secure the release of Baharia, Gilani,and Lalani from the guaranty agreement (the “release claim”).Finally, they claimed that Circle Sherman and the brothershad breached the settlement agreement by defaulting on thenote. The state court granted summary judgment in favor ofHNM on the payment claim.

The state court set a date for trial on the brothers' andinvestors' common no-deficiency defense against One WorldBank's demand for payment. On the (literal) eve of trial, OneWorld Bank, Pirani, and Aziz notified the court that they had“settled” with each other, and the next day they did not appearin court. Only the three members of HNM showed up for trial.

Under One World Bank's settlement agreement with Piraniand Aziz, One World Bank assigned the note, the guarantyagreement, and all of the bank's claims against HNM to athird-party entity—owned by Pirani—that later transferredthe note, guaranty agreement, and claims to Pirani. Inexchange, Pirani—through the third-party—paid One WorldBank $300,000.

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

After One World Bank and the brothers notified the courtof their settlement and failed to appear at trial, the courtdismissed, without prejudice, the bank's claim against HNMand the three investors. It then severed HNM's paymentcrossclaim against the brothers, on which it had alreadygranted summary judgment in favor of HNM, into a separatesuit, and dismissed, without prejudice, Baharia, Gilani,Lalani, and HNM's remaining crossclaims against CircleSherman and the brothers, on the ground that the remainingcrossclaims were “derivative of and subject to the [bank]'sclaim” against HNM. In the severed case containing only thepayment claim, the court issued an agreed final judgment infavor of Baharia, Gilani, Lalani, and HNM for $616,181.16:the amount that Circle Sherman had promised to pay to buyback HNM's fifty-percent membership interest, plus interest.

In July 2012, Pirani filed for bankruptcy. In the bankruptcyproceeding, HNM filed a proof of claim against Pirani'sbankruptcy estate based on the state-court agreed finaljudgment on the payment claim. Pirani then initiated thisadversary proceeding, bringing a claim against HNM andBaharia, Gilani, and Lalani for breach of the guarantyagreement that had been assigned to him by the bank.He sought to recover $828,190.13—the full amount of thealleged deficiency on the note. As an affirmative defenseagainst Pirani's guaranty claim, HNM and the three investorsasserted that no deficiency existed with respect to the note,because the hotel's fair market value at the time of foreclosureexceeded the foreclosure sale price by more than the allegeddeficiency. They also counterclaimed for breach of thesettlement agreement and breach of fiduciary duty. Piraniargued that the counterclaims were barred by res judicata.

*3 After a trial in the adversary proceeding, the bankruptcycourt issued findings of fact and conclusions of law, in whichit held that Baharia, Gilani, Lalani, and HNM's counterclaimfor breach of the settlement agreement was not barred byres judicata; that Pirani was bound by and had breachedthe settlement agreement; that Pirani's claim for breach ofthe guaranty agreement was barred by his breach of thesettlement agreement; and that the HNM parties were entitledto attorney's fees and costs on the basis of their successfulclaim for breach of the settlement agreement. The districtcourt affirmed the bankruptcy court judgment, and this appealfollowed.

II.

[1] [2] We review the bankruptcy court's findings of fact forclear error and its conclusions of law de novo. See In re Bayhi,528 F.3d 393, 402 (5th Cir.2008). When, as here, a districtcourt has affirmed the bankruptcy court's factual findings,we will reverse only if we are left with the definite and firmconviction that an error has been made. See id.

III.

A.

Pirani first challenges the district court's affirmance ofthe bankruptcy court's holding that res judicata didnot bar Baharia, Gilani, and Lalani's breach-of-contractcounterclaim. Baharia, Gilani, and Lalani contend that Piranipromised in the settlement agreement to secure their releasefrom their personal guaranties under the guaranty agreement,and that he breached the agreement by failing to do so. Piraniargues that the counterclaim is based on the same contract—the settlement agreement—that formed the basis of Baharia,Gilani, Lalani, and HNM's claim for payment that went tofinal judgment in the severed state-court action. As a result,he contends, Baharia, Gilani, and Lalani, should not be ableto bring a claim that they could have brought in the earlierstate-court action.

[3] To determine the preclusive effect of an earlier state-court judgment, federal courts apply the preclusion law of thestate that rendered the judgment. See Weaver v. Tex. CapitalBank N.A., 660 F.3d 900, 906 (5th Cir.2011). The agreed finaljudgment at issue here was issued by a Texas state court.Thus, Texas preclusion law applies.

[4] [5] [6] [7] In Texas, claim preclusion, or res judicata,bars a party from bringing a claim in a later case when:“(1) there is a prior final judgment on the merits ...; (2)the parties in the second action are the same or in privitywith those in the first action; and (3) the second actionis based on the same claims as were raised or could havebeen raised in the first action.” Id. (citing Igal v. BrightstarInfo. Tech. Grp., Inc., 250 S.W.3d 78, 86 (Tex.2008)). TheTexas Supreme Court follows the transactional approach tores judicata. See Barr v. Resolution Tr. Corp., 837 S.W.2d627, 631 (Tex.1992). Under the transactional approach, res

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

judicata precludes relitigation of claims that arise out of thesame subject matter as an earlier suit and that, “throughthe exercise of diligence,” could have been litigated in theearlier suit between the parties. Id. When “there is a legalrelationship, such as [ ] a lease or contract, all claims arisingfrom that relationship will arise from the same subject matterand be subject to res judicata.” Weaver, 660 F.3d at 907(quoting Sanders v. Blockbuster, Inc., 127 S.W.3d 382, 386(Tex.Ct.App.2004)); see also id. at 907 & n. 8 (collectingcases). Thus, res judicata will preclude litigation of claimsarising out of a contract that were or could have been litigatedin an earlier action concerning that same contract.

[8] Nonetheless, a “logical corollary” to the rule that resjudicata bars claims that “could have been litigated in anearlier action,” is that res judicata “cannot preclude litigationof claims that a trial court explicitly separates or seversfrom that action.” Van Dyke v. Boswell, O'Toole, Davis &Pickering, 697 S.W.2d 381, 384 (Tex.1985). For example, inIngersoll–Rand Co. v. Valero Energy Corp., 997 S.W.2d 203,205 (Tex.1999), Valero sued two defendants, Ingersoll andKellogg, for malfunctioning equipment. Kellogg defended onthe basis of an indemnification agreement, and the districtcourt granted partial summary judgment for Kellogg on thebasis of the agreement. Id. After Kellogg won summaryjudgment on indemnification—and nearly five years afterValero initiated the lawsuit—Kellogg filed a claim forattorney's fees, also under the indemnification agreement. Id.at 206. Thereafter, the trial court severed the payment claimfrom the other claims in the case so that Valero could appealthe decision. Id. at 205. The court of appeals affirmed, andthe summary judgment became final. Id. Valero then movedfor summary judgment on the attorney's fees issue in theoriginal action, arguing that the claim for fees was barred byres judicata. Id. The Texas Supreme Court held that the claimswere not barred: “Kellogg filed its claim one month beforeseverance in the original action while summary judgment wasstill interlocutory. As such, the claim was properly preservedthrough the severance order for later adjudication, and resjudicata does not bar it.” Id. at 211.

*4 [9] Here, in the state-court action brought by the bank,Baharia, Gilani, Lalani, and HNM filed the release claim asa crossclaim against Pirani. The state court granted partialsummary judgment in favor of Baharia, Gilani, Lalani, andHNM on another of their crossclaims, the payment claim.Then, like the trial court in Ingersoll–Rand, the trial courtsevered the payment claim on which it had already grantedsummary judgment. Thus, as in Ingersoll–Rand, the release

claim was filed “in the original action while summaryjudgment was still interlocutory.” Id. This means that “theclaim was properly preserved through the severance order forlater adjudication, and res judicata does not bar it.” Id. HencePirani's res judicata argument fails.

B.

Pirani next challenges the district court's affirmance ofthe bankruptcy court's judgment that Pirani breached hissettlement agreement with Baharia, Gilani, and Lalani. Thebankruptcy court held that Pirani had agreed in the settlementagreement to secure the release of the three investors fromtheir personal guaranties of the note, and that he had breachedthe settlement agreement by failing to do so. Pirani respondsin two ways.

1.

[10] [11] [12] [13] Pirani first argues that he was notpersonally bound by the promise to release Baharia, Gilani,and Lalani from their personal guaranties. Under Texas law,a party breaches a contract by failing or refusing to dosomething he has promised to do. Mays v. Pierce, 203 S.W.3d564, 575 (Tex.Ct.App.2006). Here, Pirani contends that henever personally promised to secure the release of Gilani,Baharia, and Lalani from their personal guaranties. Instead,he contends that section 3.2 of the settlement agreement, thesection promising the releases, bound only Circle Sherman.That section provides:

In the event that the Company obtainsa third party investor for the purposeof purchasing HNM's MembershipInterest, the Company shall in goodfaith make best efforts to have theBank release Gilani, Baharia andLalani from their personal guarantiesof the Loan. If the Company is unableto obtain a release from the Bank of theguaranties, Gilani, Baharia and Lalaniagree to continue to be guarantors ofthe Loan until July 9, 2012 at whichtime they shall be released eitherthrough the Company's refinancing ofthe Loan or sale of the Hotel.

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

Pirani points out that only “the Company” is directly named inthe section; neither he nor Aziz are mentioned by name. Thus,he reasons, only “the Company”—which he contends refersto only Circle Sherman—promised to secure the releases.In contrast, Baharia, Gilani, and Lalani contend—and boththe bankruptcy court and district court held—that Pirani isincluded in the meaning of the phrase “the Company” insection 3.2 of the settlement agreement, and thus is bound by

the promise to secure the releases. 1 The question presented,therefore, is whether Pirani is part of “the Company” for thepurposes of section 3.2.

i.

*5 [14] [15] [16] [17] [18] The settlement agreementprovides that it is to be interpreted according to Texas law.When construing a written contract under Texas law, acourt must “ascertain the true intentions of the parties asexpressed in the writing itself.” Kachina Pipeline Co., Inc.v. Lillis, 471 S.W.3d 445, 450 (Tex.2015) (quoting ItalianCowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341S.W.3d 323, 333 (Tex.2011)). To achieve this goal, courtsshould “examine and consider the entire writing in an effortto harmonize and give effect to all the provisions of thecontract so that none will be rendered meaningless.” In reServ. Corp. Int'l, 355 S.W.3d 655, 661 (Tex.2011) (quotingSeagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d342, 345 (Tex.2006)). The court can also consider “thefacts and circumstances surrounding a contract, including‘the commercial or other setting in which the contract wasnegotiated and other objectively determinable factors thatgive context to the parties' transaction.’ ” Kachina Pipeline,471 S.W.3d at 450 (quoting Americo Life, Inc. v. Myer, 440S.W.3d 18, 22 (Tex.2014)). “No single provision taken alonewill be given controlling effect [.]” Id. (quoting Tawes v.Barnes, 340 S.W.3d 419, 425 (Tex.2011)). Absent ambiguity,the writing alone is deemed to express the intention of theparties. See In re El Paso Refinery, L P, 171 F.3d 249, 257(5th Cir.1999) (applying Texas law).

[19] [20] [21] Whether a contract is ambiguous is aquestion of law for the court. See Progressive Cty. Mut.Ins. Co. v. Kelley, 284 S.W.3d 805, 808 (Tex.2009). If thecontract can be given a “certain or definite legal meaning orinterpretation, then it is not ambiguous.” Lenape Res. Corp.v. Tenn. Gas Pipeline Co., 925 S.W.2d 565, 574 (Tex.1996).Nor is a contract ambiguous “merely because the parties

disagree on its meaning.” Seagull Energy, 207 S.W.3d at 345.Rather, ambiguity exists only if the contract's “meaning isuncertain,” Lenape, 925 S.W.2d at 574, or if the languageis “susceptible to two or more reasonable interpretations,”Seagull Energy, 207 S.W.3d at 345.

[22] [23] When contractual provisions arguably conflict,Texas courts employ canons of construction as tools toharmonize them. See G.T. Leach Builders, LLC v. SapphireV.P., LP, 458 S.W.3d 502, 532 (Tex.2015). Those canonsinclude the rules that (1) specific provisions control overgeneral provisions, see Forbau v. Aetna Life Ins. Co., 876S.W.2d 132, 133–34 (Tex.1994); (2) provisions stated earlierin an agreement are favored over subsequent provisions, seeCoker v. Coker, 650 S.W.2d 391, 393 (Tex.1983); and (3) theinterpretation of an agreement should not render any materialterms meaningless, see Kachina Pipeline, 471 S.W.3d at 450.

ii.

[24] The issue is whether Pirani is personally bound bypromises made by “the Company” in section 3.2. “Whencontracting parties set forth their own definitions of theterms they employ, the courts are not at liberty to disregardthese definitions and substitute other meanings.” HealthcareCable Sys., Inc. v. Good Shepherd Hosp., Inc., 180 S.W.3d787, 791 (Tex.Ct.App.2005). Here, the parties chose andset forth a definition of the term “the Company” in theopening paragraph of their agreement. That paragraph definesthe parties as “Baharia ... Gilani ... [and] Lalani ... forthemselves individually and on behalf of HNM Partners,LLC (collectively ‘HNM’) on the one hand” and “Aziz ...[and] Pirani, for themselves and on behalf of Circle Sherman,LLC (collectively the ‘Company’ ) on the other.” Per thisdefinition, “the Company” includes Pirani.

Pirani argues that this definition should not apply to section3.2, relying on a second mention of “the Company” that

appears in subsection 3.1(a). 2 Subsection 3.1(a) providesthat “Nasim Aziz, Abdul Karim Pirani and HNM PartnersLLC are the sole members of Circle Sherman LLC (‘theCompany’).” Working with this definition, Pirani contendsthat the “the Company” in subsection 3.1(a) refers to onlyCircle Sherman, the entity listed last in the sentence, rather

than to all of the parties listed (which would include him). 3

From there, he argues that his proposed “Circle Sherman”definition of “the Company” should be read to apply to all

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

of article 3—that is, to sections 3.1 through 3.5 4 —and thus,to section 3.2. He contends that this approach is supportedby the canon of construction that “a specific contractualprovision controls over [a] general provision concerning thesame issue,” Exxon Corp. v. Emerald Oil & Gas Co., L.C.,348 S.W.3d 194, 215 (Tex.2011). Thus, he reasons, the courtshould read the definition of “the Company” provided inthe opening paragraph as a “general rule” and the definitionprovided by subsection 3.1(a) as an “exception” applicable toall of article 3. See NuStar Energy, L.P. v. Diamond OffshoreCo., 402 S.W.3d 461, 466 (Tex.Ct.App.2013) (“[P]artiesmay choose to set out a general rule in one provision andexceptions to that rule in other provisions.”).

*6 In response, HNM argues that subsection 3.1(a)'sdefinition of “the Company” applies only within section 3.1.We agree. The full text of section 3.1 provides:

3.1 Until the Purchase Price (including any interest andsales profit) is paid in full to HNM, HNM shall retainits Membership Interest in the Company. Notwithstandingthe foregoing, HNM shall not be liable for any lossesincurred by the Company nor be entitled to any profitsof the company and shall not be subject to any capitalcalls by the Company. The Parties agree that the followingprovisions of the order of the Court signed on or about May1, 2009 in the Litigation shall govern the relationship ofthe Company's Members:

a. Nasim Aziz, Abdul Karim Pirani, and HNM PartnersLLC are the sole members of Circle Sherman LLC (“theCompany”);

b. The Company is a member-managed Company, andeach of the foregoing members has an equal vote in themanagement of the business and affairs of the Company,and the affirmative vote of a majority of the members ofthe Company constitutes an act of the governing authorityand is valid and binding on the Company;

c. Nasim Aziz has had the sole and exclusive authority tomanage both the renovation and operations of the Hotelsince December 2008. That authority shall continue as aresult of this Agreement, and the Parties hereby ratify theprior resolutions of the Company in this respect;

d. HNM Partners, LLC or its representatives shall not takeany action to impede Nasim Aziz in the proper carryingout of his authority to manage both the renovation andoperations of the Hotel.

The italicized text states in clear terms the scope andfunction of the provisions that follow: those provisions(that is, subsections 3.1(a)-(d)) set out principles governingthe relationship between the members of Circle Shermanwith respect to the management and government of CircleSherman until HNM receives the purchase price for itsmembership interest. A straightforward reading of section3.1 provides no reason to apply those provisions outsideof section 3.1. Cf. Antonin Scalia and Bryan A. Garner,Reading Law 156 (2012) (explaining scope-of-subpartscanon, according to which material within an indentedsubpart relates only to that subpart). Thus, subsection 3.1(a)'sdefinition does not apply to section 3.2. Hence we apply theoverall definition from the opening paragraph, which includesPirani. See Healthcare Cable, 180 S.W.3d at 791; see alsoCoker, 650 S.W.2d at 393 (restating rule that provisionsstated earlier in an agreement are favored over subsequentprovisions). Pirani is bound by the promise to secure thereleases.

[25] The overall context of the agreement also supports thisresult. Under Texas law, courts are expressly permitted totake into account the “objectively determinable” “facts andcircumstances surrounding [the] contract” that “give contextto the parties' transaction.” Kachina Pipeline, 471 S.W.3dat 450 (citation omitted). Here, the most critical relevantcircumstance is that the contract is a settlement agreement,drafted and entered into for the purpose of settling claimsbetween two sides to a dispute. Those two sides are definedin the opening paragraph, with “the Company” encompassingall parties on the brothers' side of the dispute. In the context ofa settlement agreement, section 3.2 makes the most sense ifthe promise to secure releases for Gilani, Baharia, and Lalaniis binding all of the parties on the other side of the dispute.

*7 Pirani responds that his preferred definition of “theCompany” must nonetheless apply to all of article 3 becausethe term “the Company” makes more sense elsewhere inarticle 3 if it is read to mean only Circle Sherman and not alsoAziz and Pirani. For example, in section 3.3, the agreementaddresses “HNM's membership interest in the Company.”HNM does not have a “membership interest” in Aziz orPirani. The problem with this argument is that other articlesof the contract contain similar examples. In article 2, forinstance, subsection 2.1(c) sets forth obligations that will betriggered “[i]n the event that the Company defaults on anyof its debt obligations,” and subsection 2.1(d) discusses thepayment of “all valid liabilities of the Company.” It does notmake sense for the settlement agreement to include provisions

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7

relating to Aziz or Pirani's personal “debt obligations” or“valid liabilities.” Hence the phrase “the Company” in theseprovisions would read more logically if taken to mean onlyCircle Sherman. And yet these subsections are found in article2, which no one argues should be governed by the definitionof “the Company” found in subsection 3.1(a).

As stated above, we are “not at liberty to disregard [the]definitions” set forth by the parties. Healthcare Cable,180 S.W.3d at 791. Here, the parties chose and set fortha definition of the term “the Company” in the openingparagraph of their agreement. That the parties drafted laterprovisions of the contract with inattention to the definitionthey chose does not give us license to rewrite section 3.2 byapplying subsection 3.1(a) beyond its specified purpose andscope. “The Company” in section 3.2 includes Pirani.

2.

[26] Second, Pirani argues that, even if he is personallybound by section 3.2's promise to release, that promise wassubject to unfulfilled conditions precedent. Again, section 3.2provides:

In the event that the Company obtainsa third party investor for the purposeof purchasing HNM's MembershipInterest, the Company shall in goodfaith make best efforts to have theBank release Gilani, Baharia andLalani from their personal guarantiesof the Loan. If the Company is unableto obtain a release from the Bankof the guaranties, Gilani, Bahariaand Lalani agree to continue to beguarantors of the Loan until July 9,

2012 at which time they shall bereleased either through the Company'srefinancing of the Loan or sale of theHotel.

The bankruptcy court relied on the second sentence, italicizedabove, to hold that

Pirani agreed ... to release thedefendants no later than July 9, 2012,through the sale of the Hotel orthe refinancing of Circle Sherman'sindebtedness to [One World Bank

(“OWB”) ]. Pirani did not have theability to release the defendants atthe time of the Settlement Agreement,but he obtained that ability whenhe acquired the Note and guaranteesfrom OWB in March 2012. He failedto do so. Instead, he has pursuedthe defendants, embroiling them inyears of litigation and the attendantexpenses, for what he claims theyshould have paid to OWB under theguaranty agreement.

Pirani argues that this holding was error, because the lastportion of section 3.2's second sentence, which specifieshow the investors will be released (“either through theCompany's refinancing of the Loan or sale of the Hotel”)establishes conditions precedent to the promise. He assertsthat both “refinancing” or “sale” of the hotel were “physicallyimpossible” as of August 2011, when One World Bankforeclosed on the hotel. Thus, he reasons, the conditions couldnot be fulfilled, and the promise was never triggered. Piranibriefed this issue below, but the district court did not directlyaddress it.

In response, HNM argues that the second sentence constitutesan unconditional promise that the individual members ofHNM “would be released no later than July 9, 2012.” HNMcontends that the language about “refinancing” or “sale” ofthe hotel should be read not as a condition but as an additionalcovenant.

[27] [28] [29] [30] [31] Under Texas law,“[c]onditions precedent to an obligation to perform are thoseacts or events, which occur subsequently to the making of acontract, that must occur before there is a right to immediateperformance and before there is a breach of contractualduty.” Hohenberg Bros. Co. v. George E. Gibbons & Co.,537 S.W.2d 1, 3 (Tex.1976). “Because of their harshnessin operation, conditions are not favorites of the law.” Id.(quoting Sirtex Oil Indust., Inc. v. Erigan, 403 S.W.2d 784(Tex.1966)). When “the intent of the parties is doubtfulor where a condition would impose an absured [sic] orimpossible result[,] then the agreement will be interpreted ascreating a covenant rather than a condition.” Id. Similarly,“[s]ince forfeitures are not favored, courts are inclined toconstrue the provisions in a contract as covenants rather thanas conditions. If the terms of a contract are fairly susceptibleof an interpretation which will prevent a forfeiture, they will

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8

be so construed.” Id. (quoting Henshaw v. Texas Nat. Res.Found., 147 Tex. 436, 444, 216 S.W.2d 566, 570 (1949)).

*8 [32] Texas courts look for particular language whenevaluating whether a term constitutes a condition precedent.See Criswell v. European Crossroads Shopping Ctr., Ltd.,792 S.W.2d 945, 948 (Tex.1990). In particular, “a term suchas ‘if,’ ‘provided that,’ ‘on condition that,’ or some similarphrase of conditional language must normally be included.If no such language is used, the terms will be construed asa covenant in order to prevent a forfeiture.” Id. This is notbecause there is a strict “requirement that such phrases beutilized,” but because “their absence is probative of the partiesintention that a promise be made, rather than a conditionimposed.” Id.

Here, the contested language reads: “If the Company is unableto obtain a release from the Bank of the guaranties, Gilani,Baharia and Lalani agree to continue to be guarantors of theLoan until July 9, 2012 at which time they shall be releasedeither through the Company's refinancing of the Loan or saleof the Hotel.” The language that we have italicized indicatesthat the parties drafted this sentence as a mandatory provision;Gilani, Baharia, and Lalani agreed to remain guarantors only“until” July 9, 2012, after which point they expected to bereleased. The sentence employs the mandatory term “shall.”Moreover, the sentence lacks conditional language such as“if,” “provided that,” or “on condition that,” before the phrase“through the Company's refinancing of the Loan or sale of theHotel.” Thus, the sentence does not express a clear intentionto impose a condition on the promise to secure the release.Hence we hold that the “refinancing” and “sale” languageconstituted a covenant, not a condition precedent. Pirani wasbound by the promise to release Gilani, Baharia, and Lalanifrom their personal guaranties. He did not do so. Thus, thedistrict court did not err in affirming the bankruptcy courtjudgment that Pirani breached the settlement agreement.

C.

[33] Pirani next challenges the district court's affirmance ofthe bankruptcy court's dismissal of his breach-of-guarantyclaim against Gilani, Baharia, Lalani, and HNM. Thebankruptcy court dismissed the breach-of-guaranty claim onthe ground that Pirani should not be permitted to sue thedefendants for breach of a guaranty agreement from which hehad promised to have them released. This result was correctwith respect to Gilani, Baharia, and Lalani. As shown above,

Pirani promised to have them released from their personalguaranties—a promise he had the power to fulfill as soonas he received title to the note and guaranty agreement.He cannot “profit from [his] own breach,” Berryman's S.Fork, Inc. v. J. Baxter Brinkmann Int'l Corp., 418 S.W.3d172, 186 (Tex.App.2013), by suing them under a guaranteeagreement that he had the obligation and power to releasethem from. This logic does not extend to HNM, however,because the settlement agreement does not include a promiseto release HNM from its guaranty obligations; it promises torelease only Gilani, Baharia, and Lalani from their personalguaranties. Hence Pirani's claim for breach-of-guaranty maygo forward against HNM.

Pirani seeks to recover HNM's contributive share of the fullamount of the post-foreclosure deficiency, which he assertswas $828,190.13. HNM responds in two ways.

1.

[34] First, HNM argues, as an affirmative defense, thatthere was no deficiency on the note. Pirani responds thatbankruptcy court never made a finding on the deficiencyissue. Thus, he contends, the issue is not properly before thiscourt on appeal. Under Texas law, any party against whom adeficiency action is brought can “by motion ... request that thecourt in which the action is pending determine the fair marketvalue of the real property as of the date of the foreclosuresale.” Tex. Prop. Code § 51.003(b). “If the court determinesthat the fair market value is greater than the sale price of thereal property at the foreclosure sale, then the persons againstwhom recovery of the deficiency is sought are entitled toan offset against the deficiency” for the amount that the fairmarket value exceeded the sale price. Id. § 51.003(c). Theproperty code provides that the fair market value “shall bedetermined by the finder of fact after the introduction by theparties of competent evidence of the value.” Id. § 51.003(b).HNM bears the burden of proof on the issue of fair marketvalue. See Cabot Capital Corp. v. USDR, Inc., 346 S.W.3d634, 639 (Tex.Ct.App.2009).

*9 [35] [36] Here, the bankruptcy court never issuedfindings of fact with respect to fair market value. On appeal,HNM cites to “market value evidence” in the record: (1)documents filed by Pirani in the bank case, including amotion for partial summary judgment, an affidavit fromCircle Sherman's real estate agent, and the parties' motion fordetermination of fair market value; (2) the “Schedule A” that

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

Pirani filed in the bankruptcy proceeding; (3) Pirani's 2011tax return; and (4) an appraisal by Will Galbraith. In additionto these documents, the record also contains the transcriptof Galbraith's testimony in the bankruptcy court trial. Evenso, the Texas Property Code specifies that fair market valueis a question of fact for the fact-finder. Tex. Prop. Code §51.003(b). Also, as a “general rule,” federal appellate courttypically do not consider an issue not passed upon below.Shanks v. AlliedSignal, Inc., 169 F.3d 988, 993 n. 6 (5thCir.1999). In addition, although this court has the transcriptof Galbraith's testimony, the bankruptcy court is the courtthat heard the testimony live. For these reasons, we decline tomake a factual determination with respect to fair market valuein the first instance and leave it to the bankruptcy court onremand to make a factual finding as to the fair market valueof the hotel at the time of foreclosure.

2.

[37] [38] Second, HNM argues that, even if there is adeficiency, the bankruptcy court correctly held that Piranicannot sue for the full amount of that deficiency, but rather,is limited to HNM's contributive share of $300,000—theamount that Pirani paid to the bank for the note and guaranty.The guaranty agreement, by its terms, is governed by Texaslaw. To determine Texas law on the scope of recoveryavailable to a guarantor who purchases an underlying noteand sues his coguarantors as an assignee, this court shouldfirst look to final decisions of the Texas Supreme Court. SeeHowe ex rel. Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627(5th Cir.2000). Here, no decision of the Texas Supreme Courtanswers the question, so the court must make an “Erie guess”and “determine as best it can” how the Texas Supreme Courtwould decide the issue. Id. (citing Krieser v. Hobbs, 166 F.3d736, 738 (5th Cir.1999)). In making its Erie guess, this courtmay look to the decisions of Texas intermediate appellatecourts, which provide “a datum for ascertaining state lawwhich is not to be disregarded by a federal court unless itis convinced by other persuasive data that the highest courtof the state would decide otherwise.” Id. (quoting Labiche v.Legal Sec. Life Ins. Co., 31 F.3d 350, 352 (5th Cir.1994)).

[39] Texas law permits a guarantor to purchase anunderlying note and guaranty agreement and assert, asassignee, a cause of action against his coguarantors. See Byrdv. Estate of Nelms, 154 S.W.3d 149, 163 (Tex.Ct.App.2004).In that situation, the guarantor's right to sue as an assigneeon the note and guaranty agreement is “limited as a matter of

law to the contributive share of its co-guarantors.” Id. at 165.Contributive shares are calculated by taking the total amountof liability and dividing by the number of coguarantors. Seeid. Here, there were six guarantors: Aziz and Pirani; Gilani,Baharia and Lalani; and HNM. Thus, from each coguarantor,Pirani would be able to recover one-sixth of the amountfor which he can make a claim for under the note andguaranty. See id. (“There are six guarantors; therefore, Byrd'scontributive share would be one-sixth of the note.”).

[40] That leaves the question of what amount should formthe basis for calculating the contributive shares. Pirani wantsto base the calculation on the full amount of the allegeddeficiency. He contends that he should be able to sue for thefull deficiency because he is suing not as a coguarantor forcontribution but as the assignee of the bank. Pirani's positionis not supported by Texas law. In Byrd, six coguarantorspersonally guaranteed a note. See id. at 153–54. Thereafter,the property securing the note was sold, leaving a roughly$1 million balance on the note. See id. at 154. The NelmsPartnership and another coguarantor together paid off the

note completely, each paying half of the amount due. 5 Seeid. The Nelms Partnership sued the four other coguarantorson the note and guaranty. See id. The court calculated thecontributive shares that its coguarantors owed it based on theamount that it had paid—one half of the note—not on the fullamount of the note. See id. at 165. This was a straightforwardapplication of the principle that “there can be no recover untilafter payment by the party seeking contribution.” McGehee v.Hagan, 367 S.W.3d 848, 853 (Tex.Ct.App.2012) (emphasisadded); see also Lavender v. Bunch, 216 S.W.3d 548, 554(Tex.App.2007) (“For well over a hundred years, it has been a‘general and familiar rule of law’ that, as among coguarantors,each will bear his proportional part of the burden to the effectthat should one of them pay more than his proportional part,the others will contribute equally to indemnify him for anyamount in excess of his proportional part.” (emphasis added)).In short, “[t]he assignment of an underlying note and guarantyagreement to a guarantor does not change the status of theguarantor in relation to his co-guarantors.” Byrd, 154 S.W.3dat 164.

*10 The Byrd court also cited approvingly Mandolfo v.Chudy, 253 Neb. 927, 573 N.W.2d 135, 139 (1998), in whichthe Nebraska Supreme Court held that “assignment does notalter [parties'] status as coguarantors of [a] note.” In that case,the intermediate court of appeals had reasoned persuasivelyas to why a guarantor can sue his coguarantors only for

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 10

contribution, regardless of having obtained an “assignment”from a creditor. As the court of appeals explained:

Calling [the transaction with thecreditor] a purchase and hiring alawyer to draft papers to label thetransaction as a purchase does notmake it such; the reality is that it is apayment of the debt.... No matter howmany times a farmer calls his cow ahorse, it is still a cow. Regardless oflabels, be it purchase or payment, cowor horse, the [guarantor is] still limitedin [its] rights against [its coguarantor]by the law which operates betweencoguarantors.

Mandolfo v. Chudy, 5 Neb.App. 792, 564 N.W.2d 266, 272(1997). In keeping with that logic, the Byrd court held that “asa matter of law, the relationship between guarantors restrictsrecovery to their contributive share.” Byrd, 154 S.W.3d at164. Contribution is based on what a co-guarantor paid. SeeMcGehee, 367 S.W.3d at 853; Lavender, 216 S.W.3d at 554.Thus, if HNM fails to prove its no-deficiency defense, thenPirani's recovery should be limited to HNM's contributiveshare of the $300,000 that Pirani paid for the note andguaranty—that is, $50,000.

D.

[41] Finally, Pirani challenges the district court's affirmanceof the bankruptcy court's award of $100,000 in attorney's feesand $10,000 in costs to Gilani, Baharia, Lalani, and HNM. InTexas, attorney's fees are recoverable only when authorizedby statute or contract. See Tony Gullo Motors I, L.P. v. Chapa,212 S.W.3d 299, 310–11 (Tex.2006). Texas statute providesthat a prevailing party on a contract claim “may recoverreasonable attorney's fees ... in addition to the amount ofa valid claim and costs.” Tex. Civ. Prac. & Rem. Code §

38.001(8). 6 Here, the bankruptcy court made the attorney'sfee award under that statute, on the basis of Gilani, Baharia,and Lalani's successful claim for breach of the settlementagreement. Pirani argues that the award should be reversedfor two reasons.

[42] [43] [44] First, Pirani argues that the award was notsupported by legally sufficient evidence. He cites Long v.Griffin, 442 S.W.3d 253, 255 (Tex.2014), for the proposition

that, under Texas law, “sufficient evidence” consists of, “at aminimum,” evidence of “services performed, who performedthem and at what hourly rate, when they were performed,and how much time the work required.” Pirani mistakesthe method under which the bankruptcy court awarded thefees. The decision in Long concerned the proof requiredunder the lodestar method. Id. It is true that “a partychoosing the lodestar method of proving attorney's fees mustprovide evidence of the time expended on specific tasksto enable the fact finder to meaningfully review the feeapplication.” Id. at 253. Here, however, the court awardedthe fees according to the “traditional method,” which appliesto breach-of-contract claims, and under which “documentaryevidence is not a prerequisite.” Metroplex Mailing Servs.,LLC v. RR Donnelley & Sons Co., 410 S.W.3d 889, 900(Tex.Ct.App.2013). Instead, under the traditional approach,Texas courts have “consistently ... held that an attorney'stestimony about his experience, the total amount of fees, andthe reasonableness of the fees charged is sufficient to supportan award.” Id. Here, Gilani, Baharia, and Lalani's attorney,Collin Porterfield, testified before the bankruptcy court abouthis experience, the time he had to take from other work towork on the case, the total amount of fees, and his opinionas to the reasonableness of the fees. Porterfield's testimony isenough to support an attorney's fee award under the traditionalmethod.

*11 [45] [46] Second, Pirani argues that the evidenceproduced by Gilani, Baharia, and Lalani failed to adequatelysegregate the fees attributable to claims for which fees arerecoverable under Texas law from those attributable to claimsfor which they are not. Even under the traditional approach,“if any attorney's fees relate solely to a claim for which suchfees are unrecoverable, a claimant must segregate recoverablefrom unrecoverable fees.” Tony Gullo Motors, 212 S.W.3d at313. The only exception to that rule occurs when “discretelegal services advance both a recoverable and unrecoverableeclaim.” Id. at 313–14. In that situation, the fees are consideredto be “so intertwined that they need not be segregated.” Id.at 314.

Here, Porterfield began billing on a flat-fee, rather than anhourly, basis starting in November 2011. He testified that,after that point, he stopped tracking his hours. He also testifiedthat he had not segregated the hours he spent on the breach-of-contract crossclaim from the other claims in the state-courtcase brought by One World Bank, nor had he segregated thehours spent on the breach-of-contract counterclaim from the

Matter of Pirani, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 176

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 11

other claims in the bankruptcy proceeding. Nonetheless, thebankruptcy court stated:

The issue of whether Pirani hadbreached the Settlement Agreementwas central to the parties' dispute andintertwined with the parties' variousclaims and counterclaims. Most ofthe work done by the defendants'attorney would have been necessaryeven if they had not asserted othercounterclaims and defenses.

This was error. Texas law does not require Porterfield to“keep separate time records” of when he worked on particularclaims; instead, an “opinion would have sufficed” stating thepercentage of time that would have been necessary even inthe absence of the other claims. Id. Here, though, Porterfieldprovided no such opinion in his testimony. It is “often ...impossible to state as a matter of law the extent to whichcertain claims can or cannot be segregated; the issue is more

a mixed question of law and fact” for the fact-finder. Id.at 313. Thus, “an unsegregated damages award requires aremand.” Id. at 314. The bankruptcy court on remand shouldtake additional testimony with respect to what percentage ofthe attorney's fees were attributable to the breach-of-contractclaim on which Gilani, Baharia, and Lalani prevailed, or werefor work that, while focused on a claim for which fees are notrecoverable, also “advanced” the breach-of-contract claim.Id. at 313.

IV.

The order of the district court is affirmed in part and vacatedin part. We remand for additional proceedings consistent withthis opinion.

All Citations

--- F.3d ----, 2016 WL 3063261, 62 Bankr.Ct.Dec. 176

Footnotes1 As a preliminary matter, Baharia, Gilani, and Lalani contend, consistent with the district court's analysis, that Pirani is

estopped from arguing for his proposed definition of “the Company” because he stipulated in the parties' joint pretrialorder that “[t]he Settlement Agreement defines ... all of [Pirani], Aziz and Circle Sherman as ‘the Company.’ ” “It is awell-settled rule[ ] that a joint pretrial order signed by both parties supersedes all pleadings and governs the issues andevidence to be presented at trial.” Kona Tech. Corp. v. S. Pac. Transp. Co., 225 F.3d 595, 604 (5th Cir.2000) (quotingMcGehee v. Certainteed Corp., 101 F.3d 1078, 1080 (5th Cir.1996)). The pretrial order controls the scope and course ofthe trial, Fed. R. Civ. P. 16, and a party waives an issue not included the order, Kona Tech., 225 F.3d at 604. AlthoughPirani's stipulation in the pretrial order as to the definition of “the Company” further reinforces our analysis, we do not relyon it to the extent that the stipulation addresses a question of law. See In re El Paso Refinery, L P, 171 F.3d 249, 257(5th Cir.1999) (noting that the proper interpretation of a contract is a question of law).

2 Sections 4.1 and 4.2, which govern the parties' respective litigation releases, provide two more definitions of “theCompany,” but those sections are not relevant to the analysis here.

3 The district court rejected this contention. We share the district court's skepticism as to Pirani's reading of subsection3.1(a), but ultimately reject Pirani's argument for a different reason and thus need not decide the issue. See HealthcareCable, 180 S.W.3d at 792 (concluding that a parenthetically defined term was ambiguous because the court was “awareof no rule of construction, grammar, or punctuation that [would] permit [it] to determine precisely to what portion of thepreceding sentence or other portion of a document [the] parenthetically-defined term refers”).

4 The section that should be labeled “3.5”—the one after section 3.4—is labeled “3.2” in the agreement. This appears tobe a clerical error.

5 There is a slight discrepancy in the numbers in Byrd. The opinion states that the full amount due on the note was$1,052,758. Byrd, 154 S.W.3d at 154. It also states that the Nelms Partnership paid half that balance, which would be$526,379. Id. Later, though, the opinion states that the Nelms Partnership paid $525,061.47 on the note. Id. at 165. Thecourt based the amount that the Nelms Partnership could recover from its coguarantors on the latter figure. Id.

6 The settlement agreement also provides that the “prevailing party in any action or proceeding brought to enforce anyterm or provision of [the agreement] shall be entitled to reasonable attorney's fees and expenses[.]”

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2620300United States Court of Appeals,

Ninth Circuit.

In the Matter of EPD INVESTMENT COMPANY,LLC, and Jerrold S. Pressman, Debtors.Poshow Ann Kirkland, individually and

as Trustee of the Bright Conscience TrustDated September 9, 2009, Appellant,

v.Jason M. Rund, Chapter 7 Trustee; John

C. Kirkland, an individual, Appellees.In the Matter of EPD Investment Company,

LLC, and Jerrold S. Pressman, Debtors.John C. Kirkland, an individual, Appellant,

v.Jason M. Rund, Chapter 7 Trustee, Appellee.

Nos. 14–55740, 14–56478.|

Argued and Submitted April 8, 2016.|

Filed May 9, 2016.

SynopsisBackground: Chapter 7 trustee filed adversary proceedingagainst debtors' attorney and attorney's wife, assertingfraudulent conveyance, subordination, and disallowancecauses of action. The Bankruptcy Court denied defendants'motion to compel arbitration. Defendants appealed. TheUnited States District Court for the Central District ofCalifornia, S. James Otero, J., affirmed. Defendants appealed.

Holdings: The Court of Appeals, Silverman, Circuit Judge,held that:

[1] bankruptcy court acted within its discretion in denyingdefendants' motion to compel arbitration;

[2] trustee's fraudulent conveyance claims remained statutorycore proceedings, even after attorney filed answer andrequested a jury trial; and

[3] arbitration provisions contained in agreements betweendebtors and attorney did not apply to the fraudulent transferclaims.

Affirmed.

West Headnotes (11)

[1] BankruptcyScope of Review in General

On appeal from decision of the district courtreviewing a decision of the bankruptcy court,the Court of Appeals generally reviews thebankruptcy court's decision independently andwithout deference to the district court's decision.

Cases that cite this headnote

[2] BankruptcyConclusions of Law; De Novo Review

BankruptcyClear Error

Court of Appeals reviews a bankruptcy court'sfindings of fact for clear error and its conclusionsof law de novo.

Cases that cite this headnote

[3] BankruptcySubmission to Arbitration

In a core bankruptcy proceeding, a bankruptcycourt has discretion to decline to enforce anotherwise applicable arbitration provision onlyif arbitration would conflict with the underlyingpurposes of the Bankruptcy Code.

Cases that cite this headnote

[4] BankruptcyConclusions of Law; De Novo Review

Court of Appeals reviews de novo whethera bankruptcy court, as a matter of law, hasdiscretion to deny a motion to compel arbitration.

Cases that cite this headnote

[5] Bankruptcy

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

Discretion

If the Court of Appeals concludes that thebankruptcy court had discretion to deny a motionto compel arbitration, the Court of Appeals thenreviews the exercise of discretion only for abuseof discretion.

Cases that cite this headnote

[6] BankruptcyDiscretion

When a bankruptcy court considers conflictingpolicies, the Court of Appeals acknowledgesthe bankruptcy court's exercise of discretion indenying a motion to compel arbitration anddefers to its determinations that arbitration willjeopardize a core bankruptcy proceeding.

Cases that cite this headnote

[7] BankruptcyRecovery of Preferences or Fraudulent

Conveyances

BankruptcyClaims or Proceedings Against Estate or

Debtor; Relief from Stay

BankruptcySubmission to Arbitration

Bankruptcy court acted within its discretion, inChapter 7 trustee's adversary proceeding againstdebtor's attorney and attorney's wife, in denyingthe defendants' motion to compel arbitration;trustee's fraudulent conveyance, subordination,and disallowance causes of action were coreproceedings, thereby giving bankruptcy courtdiscretion to weigh the competing bankruptcyand arbitration interests at stake, and given thatbankruptcy court had supervised debtors' casesfor nearly three years, during which trustee filedmore than 100 other adversary proceedings withthe bankruptcy court, compelling arbitrationwould conflict with Bankruptcy Code purposesof having bankruptcy law issues decided bybankruptcy courts, of centralizing resolution ofbankruptcy disputes, and of protecting partiesfrom piecemeal litigation. 28 U.S.C.A. § 157(b)(2)(B, H).

Cases that cite this headnote

[8] BankruptcyRecovery of Preferences or Fraudulent

Conveyances

BankruptcySubmission to Arbitration

Chapter 7 trustee's fraudulent conveyance claimsagainst debtors' attorney and attorney's wife inadversary proceeding remained statutory coreproceedings, even after attorney filed answerand requested a jury trial, and thus bankruptcycourt retained discretion to deny attorney's andwife's motion to compel arbitration. 28 U.S.C.A.§ 157(b)(2)(B, H).

Cases that cite this headnote

[9] Alternative Dispute ResolutionPersons Affected or Bound

BankruptcySubmission to Arbitration

Arbitration provisions contained in agreementsbetween debtors and their attorney did notapply to fraudulent transfer claims asserted byChapter 7 trustee under federal and Californialaw in adversary proceeding against debtors'attorney and attorney's wife; for the purposeof the fraudulent transfer claims, trustee stoodin the shoes of the creditors, not the debtors,and the creditors did not sign the arbitrationagreements at issue. 11 U.S.C.A. §§ 544, 548;West's Ann.Cal.Civ.Code § 3439.04.

Cases that cite this headnote

[10] Alternative Dispute ResolutionPersons Affected or Bound

Only the parties to an arbitration agreement arebound by it.

Cases that cite this headnote

[11] BankruptcyPresentation of Grounds for Review

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

On appeal from district court's decisionupholding bankruptcy court's denial ofdefendants' motion to compel arbitration inadversary proceeding filed by Chapter 7 trustee,defendants waived their argument that the plainlanguage of some of the arbitration agreementsrequired an arbitrator to decide whether thetrustee's claims were arbitrable, where thisargument was not presented to bankruptcycourt, and record disclosed no exceptionalcircumstances for not having raised the issuebelow.

Cases that cite this headnote

Attorneys and Law Firms

David M. Axelrad, Steven S. Fleischman, and John F. Querio(argued), Horvitz & Levy LLP, Encino, CA, for AppellantsPoshow Ann Kirkland, individually and as Trustee of theBright Conscience Trust dated September 9, 2009, and JohnC. Kirkland.

Jeffrey I. Golden, Weiland Golden Smiley Wang Ekvall &Strok LLP, Costa Mesa, CA, for Appellant John C. Kirkland.

Steven T. Gubner, Corey R. Weber (argued), and MichaelW. Davis, Brutzkus Gubner Rozansky Seror Weber LLP,Woodland Hills, CA, for Appellee Jason M. Rund, Chapter7 Trustee.

Appeals from the United States District Court for theCentral District of California, S. James Otero, District Judge,Presiding. D.C. Nos. 2:13–cv–09023–SJO, 2:13–cv–08768–SJO.

Before: BARRY G. SILVERMAN and SUSAN P. GRABER,

Circuit Judges, and JENNIFER A. DORSEY, * DistrictJudge.

OPINION

SILVERMAN, Circuit Judge:

*1 At issue in this appeal is whether a bankruptcy court erredin denying a motion to compel arbitration. We hold that it haddiscretion to decide the motion and that it did not abuse itsdiscretion in denying it. We therefore affirm.

Plaintiff Jason Rund is the Chapter 7 Trustee for theestates of both EPD Investment Co. (“EPD”) and JerroldS. Pressman, whose separately filed bankruptcy cases havebeen substantively consolidated. Defendant John Kirklandis an attorney who acted as counsel for Pressman andEPD. Defendant Poshow Ann Kirkland is John's wife andthe trustee of the Bright Conscience Trust, to which Johnassigned interests he held in the debtors.

In October 2012, the Trustee filed an adversary proceedingagainst John and Poshow (as trustee of the trust), seekingto disallow the trust's proofs of claim, and to avoidfraudulent transfers under federal and state law. The Trusteesubsequently filed the operative second amended complaint,in which he alleges, among other things, that: (1) EPDoperated as a Ponzi scheme and, in mid–2009, stoppedmaking payments to all but a few favored creditors; (2) whileacting as counsel for EPD and Pressman, John invested orlent at least $150,000 to EPD; (3) after EPD stopped makingpayments to creditors, John transferred his interests in EPDto his family trust (the Bright Conscience Trust) and/or hiswife as trustee; (4) the trust in turn filed a financing statementagainst all assets of EPD and Pressman; (5) John knew aboutthe Ponzi scheme and knew that filing the financing statementwas a fraudulent conveyance; and (6) John arranged forPressman, through EPD, to make John's monthly mortgagepayments to his lender while John was aware of the Ponzischeme.

John moved the bankruptcy court to compel arbitration ofthe adversary proceeding. He argued that he had numerousagreements with EPD and Pressman, each of which includedbroad arbitration clauses requiring binding private arbitration,and that the Trustee's causes of action fell within the scopeof those clauses. He also argued that the Trustee's claimsagainst him were disguised non-core matters; however, heacknowledged that the Trustee's fraudulent transfer claimswere statutorily core matters under 28 U.S.C. § 157(b)(2)(H). Notably, John made no argument to the bankruptcy courtthat, pursuant to some of the agreements, an arbitrator mustdecide issues of arbitrability. Poshow later joined the motionto compel.

The Trustee raised various arguments in opposition; however,he did not argue to the bankruptcy court that he was not boundby the pre-petition agreements signed by the debtors.

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

The bankruptcy court denied John's motion to compelarbitration. The bankruptcy court ruled that the Trustee'scauses of action were core matters. Applying our decisionin Continental Insurance Co. v. Thorpe Insulation Co.(In re Thorpe Insulation Co.), 671 F.3d 1011, 1021 (9thCir.2012), the bankruptcy court further ruled that allowingarbitration would conflict with the underlying purposesof the Bankruptcy Code. The bankruptcy court's decisionspecifically noted that: (1) the Trustee did not challenge theapplicability of the arbitration provisions to the claims citedin the complaint; and (2) John acknowledged that claims torecover fraudulent transfers could be characterized as coreproceedings.

*2 After the bankruptcy court ruled, John and Poshowappealed the bankruptcy court's decision to the district court,and John moved the bankruptcy court to issue a stay pendingappeal.

While his stay motion was pending, John answered thecomplaint. He demanded a jury trial and argued thatthe bankruptcy court lacked jurisdiction to adjudicate theTrustee's claims against John because he had neither fileda proof of claim nor consented to jurisdiction. Cognizantthat this development might affect the analysis of whether tocompel arbitration, the bankruptcy court granted John a staypending appeal.

The district court affirmed the bankruptcy court. It alsoaddressed for the first time new arguments: (1) from theTrustee, that the arbitration agreements were not enforceableagainst him; and (2) from John, that his answer transformedthe adversary proceeding into a constitutionally non-corematter, which could alter the bankruptcy court's ThorpeInsulation analysis.

The district court determined that the Trustee was not boundto arbitrate the fraudulent conveyance claims, because he wasasserting claims that either belonged to the estate's creditorsor would benefit them, and no creditor had been a party to thearbitration agreement.

The district court further determined that arbitration of thesubordination and disallowance claims would conflict withthe underlying purposes of the Bankruptcy Code, becauseresolution of those causes of action would require factualfindings closely linked to the Trustee's administration of theestate.

John and Poshow timely appeal.

JurisdictionWe have jurisdiction to review the bankruptcy court's orderdenying the motion to compel arbitration, 9 U.S.C. § 16(a)(1)(C), as well as the district court's orders affirming thebankruptcy court, 28 U.S.C. §§ 158, 1291.

Standard of Review[1] [2] Generally, we review a bankruptcy court's decision

independently and without deference to the district court'sdecision. Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102,1109 (9th Cir.2010). This court reviews a bankruptcy court'sfindings of fact for clear error and its conclusions of law denovo. Id.

[3] [4] [5] [6] “[I]n a core [bankruptcy] proceeding....a bankruptcy court has discretion to decline to enforce anotherwise applicable arbitration provision only if arbitrationwould conflict with the underlying purposes of theBankruptcy Code.” In re Thorpe Insulation Co., 671 F.3dat 1021. We review de novo whether a bankruptcy court, asa matter of law, has discretion to deny a motion to compelarbitration. Id. at 1019–20. If we conclude that the bankruptcycourt had discretion, we then review the exercise of discretiononly for abuse of discretion. Id. at 1020. “When a bankruptcycourt considers conflicting policies ..., we acknowledge itsexercise of discretion and defer to its determinations thatarbitration will jeopardize a core bankruptcy proceeding.”Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1131 (9th

Cir.2012). 1

The Bankruptcy Court Did Not Abuse Its Discretion*3 [7] In this case, the bankruptcy court did not abuse

its discretion in denying the Kirklands' motion to compelarbitration. In re Eber, 687 F.3d at 1131; In re ThorpeInsulation Co., 671 F.3d at 1020–21.

On de novo review, we agree with the bankruptcy courtthat the Trustee's fraudulent conveyance, subordination,and disallowance causes of action were core proceedings,thereby giving the bankruptcy court discretion to weighthe competing bankruptcy and arbitration interests at stake.See 28 U.S.C. § 157(b)(2)(B), (H); see also In re ThorpeInsulation Co., 671 F.3d at 1021. The bankruptcy courtproperly applied Thorpe Insulation to determine that thearbitration provisions at issue conflicted with Bankruptcy

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

Code purposes of having bankruptcy law issues decided bybankruptcy courts; of centralizing resolution of bankruptcydisputes; and of protecting parties from piecemeal litigation.See In re Thorpe Insulation Co., 671 F.3d at 1022–23.

The bankruptcy court's Thorpe Insulation analysis wassupported by the record extant at the time the bankruptcycourt ruled because the bankruptcy court had supervised thedebtors' cases for nearly three years, during which the Trusteefiled more than 100 other adversary proceedings with thebankruptcy court.

Stern v. Marshall and Its Progeny Are Inapplicable[8] John now argues that the Trustee's fraudulent

conveyance claims against John are “the constitutionalequivalent of non-core claims” because John has requested ajury trial and has not consented to one before the bankruptcy

court. 2 John argues that, under the Supreme Court's decisionsin Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180L.Ed.2d 475 (2011), and Executive Benefits Insurance Agencyv. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83(2014), the fraudulent conveyance claims against him mustnow be treated as non-core, which means that the bankruptcycourt necessarily lacked discretion to deny his motion tocompel arbitration. We disagree.

As an initial matter, John did not file his answer until afterthe bankruptcy court had denied his motion to compel. Asa result, the bankruptcy court has never had an opportunityto determine in the first instance whether the fraudulentconveyance claims remain a core proceeding in light of theanswer. See Exec. Benefits Ins. Agency, 134 S.Ct. at 2171 (“Itis the bankruptcy court's responsibility to determine whethereach claim before it is core or non-core.”).

In this case, though, that doesn't matter because John's answerdid not take the Trustee's fraudulent conveyance causesof action outside the analytical paradigm that this courtestablished in Thorpe Insulation.

The Trustee's fraudulent conveyance claims against Johnremain statutorily core, see Exec. Benefits Ins. Agency v.Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d553, 565 (9th Cir.2012), aff'd, Exec. Benefits Ins. Agency,––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83, meaningthat Congress has identified that type of claim as one thathistorically fell within the scope of the bankruptcy court'spower. See Exec. Benefits Ins. Agency, 134 S.Ct. at 2171 n.

7. Stern and its progeny simply recognize that sometimesthe bankruptcy court's statutory authority to decide a corematter must give way when that interest conflicts with a non-creditor's constitutional right to entry of a final judgment byan Article III adjudicator. See id. at 2172 (“Stern made clearthat some claims labeled by Congress as ‘core’ may not beadjudicated by a bankruptcy court in the manner designatedby § 157(b).”); In re Bellingham Ins. Agency, 702 F.3d at566 (“Only the power to enter final judgment is abrogated.”).Stern does not affect the statutory designation of matters ascore for the purpose of determining whether the bankruptcycourt has discretion to deny arbitration because that decisionis not itself a final judgment.

*4 In short, while we agree with John that his answer mightaffect the bankruptcy court's ultimate weighing of competingbankruptcy and arbitration policies, we disagree that, as amatter of law, the answer stripped the bankruptcy court ofdiscretion to perform that weighing in the first place. TheTrustee's fraudulent conveyance claim retains its statutory“core” label. As we have explained, when deciding motionsto compel arbitration, nothing more is required.

Other ArgumentsWe briefly consider other arguments raised by the parties.

Enforceability and the “Otherwise Applicable ArbitrationProvision ”[9] The Trustee argues that the arbitration agreements do not

apply to him because his claims fall outside the scope of theagreements. However, the Trustee did not make this argumentto the bankruptcy court, even though John argued there thatthe Trustee's causes of action fell within the scope of John'sprior contractual relationship with the debtors. Accordingly,we have no factual findings from which to evaluate whetherthe agreements are “otherwise applicable.”

The Trustee's failure to present this argument to thebankruptcy court does not affect our ability to reject it here.The bankruptcy court assumed that the agreements wereenforceable against the Trustee, and declined to compelarbitration for other reasons, which we affirm. The districtcourt held that the Trustee was not bound by the agreements.We agree.

[10] The Trustee brought fraudulent transfer claims under11 U.S.C. §§ 544 and 548, and California Civil Code section3439.04. John asserts that all of these claims are subject to the

In re EPD Inv. Co., LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 168, 16 Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

arbitration agreements that he signed with the debtors. But,under § 544, the Trustee is empowered only to bring claimsthat might be brought “by a creditor holding an unsecuredclaim.” 11 U.S.C. § 554(b)(1). And California Civil Codesection 3439.04(a)(1) permits a creditor to bring a claim forfraudulent transfer that a debtor made with intent to hinder,delay, or defraud a creditor of the debtor. For the purpose ofthese claims, the Trustee stands in the shoes of the creditors,not the debtors. Only the parties to an arbitration agreementare bound by it. Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, 87 L.Ed.2d444 (1985). The creditors did not sign the arbitration clausesat issue here. As a result, arbitration agreements signed by thedebtors cannot apply to claims under § 544 or California CivilCode section 3439.04. See Allegaert v. Perot, 548 F.2d 432(2d Cir.1977) (so holding). As to these claims, then, the courthad no discretion to allow arbitration.

Arbitrability

[11] The Kirklands argue that the plain language of someof the arbitration agreements requires an arbitrator to decidewhether the Trustee's claims are arbitrable. This argumentwas not presented to the bankruptcy court, and the recorddiscloses no exceptional circumstances for not having raisedthe issue below. Int'l Union of Bricklayers & Allied CraftsmanLocal Union No. 20 v. Martin Jaska, Inc., 752 F.2d 1401,1404 (9th Cir.1985) (holding that we do not review anissue not raised below unless necessary to prevent manifestinjustice; proponent must show exceptional circumstanceswhy the issue was not raised below). Accordingly, this issuewas waived.

*5 AFFIRMED.

All Citations

--- F.3d ----, 2016 WL 2620300, 62 Bankr.Ct.Dec. 168, 16Cal. Daily Op. Serv. 4811, 2016 Daily Journal D.A.R. 4424

Footnotes* The Honorable Jennifer A. Dorsey, United States District Judge for the District of Nevada, sitting by designation.

1 The Eber court wrote that we generally review motions to compel arbitration de novo, explaining that factual findings arereviewed for clear error and legal conclusions de novo. 687 F.3d at 1126. The Eber court went on to acknowledge that wedefer to a bankruptcy court's exercise of discretion when the bankruptcy court determines that arbitration will jeopardize acore bankruptcy proceeding. Id. at 1131. We perceive no conflict between the standards of review announced in Thorpeand Eber that would affect the outcome in this case because, under both Thorpe and Eber: (1) questions of law containedin a motion to compel arbitration are reviewed de novo; and (2) the bankruptcy court is entitled to discretion when decidingwhether arbitration would conflict with a core bankruptcy proceeding.

2 Poshow filed a proof of claim on behalf of the trust and has, accordingly, consented to bankruptcy court jurisdiction. SeeWellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1949, 191 L.Ed.2d 911 (2015) (bankruptcy courtsmay decide Stern claims submitted to them by consent).

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Castaic Partners II, LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 167, 16 Cal. Daily Op. Serv. 5274, 2016 Daily Journal D.A.R. 4844

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2957150United States Court of Appeals,

Ninth Circuit.

In the Matter of CASTAICPARTNERS II, LLC, Debtor,

Castaic Partners II, LLC, Appellant,v.

Daca–Castaic, LLC, Appellee.In the Matter of Castaic Partners, LLC, Debtor,

Castaic Partners, LLC, Appellant,v.

Daca–Castaic, LLC, Appellee.

Nos. 14–55281, 14–56367.|

Argued and Submitted May 2, 2016.|

Filed May 23, 2016.

SynopsisBackground: Creditor filed motion for stay relief so thatit could proceed with prepetition foreclosure proceedingsinvolving parcels of real property owned by Chapter11 debtors, which opposed motion. The United StatesBankruptcy Court for the Central District of Californiagranted motion. Debtors appealed, but failed to seek stay oforder pending appeal. Creditor foreclosed on the propertiesand acquired them by credit bids at the sales, after which, onUnited States Trustee's (UST) motion, the bankruptcy courtdismissed the underlying cases. The District Court, S. JamesOtero, J., dismissed the appeal as moot. Debtors appealed.

[Holding:] The Court of Appeals, M. Smith, Circuit Judge,held that the appeal was constitutionally moot.

Dismissed.

Attorneys and Law Firms

David M. Gilmore (argued) and Stephen D. Blea, Gilmore,Wood, Vinnard & Magness, Fresno, CA, for Appellants.

Dean T. Kirby, Jr., (argued), Kirby & McGuinn, A P.C., SanDiego, CA, for Appellee.

Appeal from the United States District Court for theCentral District of California, S. James Otero, District Judge,Presiding. D.C. Nos. 2:13–cv–05452–SJO, 2:13–cv–05997–SJO.

Before: MILAN D. SMITH, JR., and JACQUELINE H.

NGUYEN, Circuit Judges, and CLAUDIA WILKEN, *

Senior District Judge.

OPINION

M. SMITH, Circuit Judge:

*1 Debtors–Appellants Castaic Partners, LLC, and CastaicPartners II, LLC, (collectively Castaic) appeal the districtcourt's dismissal of this bankruptcy appeal as moot under11 U.S.C. § 363(m). During the pendency of the appeal, thebankruptcy court dismissed the underlying bankruptcy casesas well. Castaic did not appeal those dismissals, and after 14days, they became final. There is therefore no longer any caseor controversy, and this Court has no power to grant Castaicany effective relief. We dismiss this appeal as moot underArticle III of the Constitution.

FACTS AND PRIOR PROCEEDINGS

Castaic bought certain parcels of real property located inrural Los Angeles County, California, with financing froma number of investors through a Nevada loan-servicingcompany. Shortly thereafter, Castaic defaulted on the loans.That gave rise to what District Judge Robert C. Jones hascalled a “hydra of litigation,” of which this consolidatedappeal represents one head. Richard & Sheila J. McKnight2000 Family Trust v. Barkett, 2011 WL 3159137, at *8(D.Nev. July 26, 2011) (describing related litigation not atissue in this appeal).

Through a complex series of transactions and bankruptciesthat need not trouble us here, Creditor–Appellee DACA–Castaic (DACA) obtained a majority of the beneficialinterests in the loans—and, per Judge Jones, the power toforeclose on them. Richard & Sheila J. McKnight 2000Family Trust v. Barkett, 2012 WL 870503, at *6 (D.Nev. Mar.14, 2012). Relying on Judge Jones's ruling, DACA pursuedforeclosure proceedings and recorded Notices of Trustee'sSale for the properties. The sales were scheduled for July31, 2012. On July 30, Castaic filed for bankruptcy in the

In re Castaic Partners II, LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 167, 16 Cal. Daily Op. Serv. 5274, 2016 Daily Journal D.A.R. 4844

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

Central District of California. Accordingly, the sales werehalted pursuant to the automatic-stay provision of 11 U.S.C.§ 362(a).

DACA moved the bankruptcy court for relief from theautomatic stay so that it could proceed with the foreclosuresales. Castaic opposed the motion, arguing that DACA lackeda valid interest in the properties and therefore did not have

standing to move for relief from stay or foreclose. 1 Thebankruptcy court disagreed and granted DACA the requestedrelief.

Castaic filed a notice of appeal in the district court, but didnot seek a stay of the bankruptcy court's relief order pendingappeal. Accordingly, DACA foreclosed on the propertiesand acquired them by credit bids at the foreclosure sales.Shortly thereafter, on the motion of the United States Trustee,the bankruptcy court dismissed Castaic's bankruptcy casesbecause the properties had been Castaic's only significantassets. Castaic consented to and did not appeal the dismissals.

DISCUSSION

[1] [2] [3] [4] “In bankruptcy, mootness comes in avariety of flavors: constitutional, equitable, and statutory.”Clear Channel Outdoor Inc. v. Knupfer (In re PW, LLC ), 391B.R. 25, 33 (B.A.P. 9th Cir.2008). Constitutional mootnessis jurisdictional and derives from the case-or-controversyrequirement of Article III. Id. Equitable mootness concernswhether changes to the status quo following the order beingappealed make it impractical or inequitable to “unscramblethe eggs.” Id. (quoting Baker & Drake, Inc. v. Pub. Serv.

Comm'n (In re Baker & Drake, Inc.), 35 F.3d 1348, 1352(9th Cir.1994)). Finally, statutory mootness codifies part, butnot all, of the doctrine of equitable mootness. Id. at 35; see11 U.S.C. § 363(m); Onouli–Kona Land Co. v. Estate ofRichards (In re Onouli–Kona Land Co.), 846 F.2d 1170, 1172(9th Cir.1988) (holding that the codification of § 363(m) didnot abrogate the rest of the equitable-mootness doctrine).

*2 [5] [6] [7] [8] [9] This appeal is constitutionally

moot. 2 “The test for mootness of an appeal is whether theappellate court can give the appellant any effective reliefin the event that it decides the matter on the merits in hisfavor.” Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (Inre Thorpe Insulation Co.), 677 F.3d 869, 880 (9th Cir.2012)(quotation marks omitted). If it cannot grant such relief, thematter is moot. See id. In a bankruptcy appeal, when the

underlying bankruptcy case is dismissed and that dismissalis allowed to become final, there is likely no longer anycase or controversy “with respect to issues directly involvingthe reorganization of the estate.” See Olive St. Inv., Inc.v. Howard Sav. Bank, 972 F.2d 214, 215 (8th Cir.1992)(quotation marks omitted).

The Eighth Circuit's decision in Olive St. is instructive. Inthat case, a creditor sought to foreclose on a debtor's propertypledged as collateral for a note. Id. The debtor petitionedfor bankruptcy, triggering an automatic stay, but the creditorsought and obtained relief from the stay. Id. It then held aforeclosure sale and obtained the property on a credit bid. Id.The debtor appealed, but failed to seek a stay of the relieforder. Accordingly, the district court dismissed the appealas equitably moot. Id. The debtor appealed again, but whileits appeal was pending, the bankruptcy court dismissed theunderlying bankruptcy case pursuant to 11 U.S.C. § 1112(b)(1). Id. The debtor appealed that order to the district court, butwhen that court affirmed, the debtor did not pursue an appealto the Court of Appeals. Id. Therefore, the dismissal becamefinal. Id. The Eighth Circuit held that

[o]nce the bankruptcy proceedingis dismissed, neither the goal ofa successful reorganization nor thedebtor's right to the automatic staycontinues to exist. Accordingly, it nolonger serves any purpose to determinewhether the bankruptcy court properlylifted the automatic stay; the appealhas become moot.

Id. at 216 (citing Armel Laminates, Inc. v. Lomas & NettletonCo. (In re Income Prop. Builders, Inc.), 699 F.2d 963, 964(9th Cir.1982) (per curiam)).

[10] The facts of Olive St. are materially identical to thefacts in this case. As in Olive St., the bankruptcy court heredismissed the underlying cases pursuant to § 1112(b) while

an appeal was pending. 3 Then, Castaic failed to appeal the

orders of dismissal. 4 The bankruptcy court here dismissedone case on January 29, 2013, and the other on January 30.Under Federal Rule of Bankruptcy Procedure 8002(a)(1), theorders of dismissal became final 14 days later. At that time,“a bankruptcy court no longer had power to order [a] stay orto award damages allegedly attributable to its vacation.” See

Income Prop. Builders, 699 F.2d at 964. 5 Absent an appealfrom the dismissal orders, we have no power to restore the

In re Castaic Partners II, LLC, --- F.3d ---- (2016)

62 Bankr.Ct.Dec. 167, 16 Cal. Daily Op. Serv. 5274, 2016 Daily Journal D.A.R. 4844

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

bankruptcy proceeding. Id.; see Olive St., 972 F.2d at 216.This appeal is therefore moot.

CONCLUSION

*3 Had Castaic appealed from the order of dismissal, thisCourt might have had some power to grant effective relief.Absent such power, this appeal does not present a justiciablecase or controversy. It is therefore

DISMISSED.

All Citations

--- F.3d ----, 2016 WL 2957150, 62 Bankr.Ct.Dec. 167, 16Cal. Daily Op. Serv. 5274, 2016 Daily Journal D.A.R. 4844

Footnotes* The Honorable Claudia Wilken, Senior District Judge for the U.S. District Court for the Northern District of California,

sitting by designation.

1 Because we dismiss the appeal as moot, we do not reach this argument.

2 The district court determined that this case is statutorily moot. Statutory mootness applies only to sales or leasesconducted pursuant to the authority of 11 U.S.C. §§ 363(b) or (c). § 363(m). Those subsections, in turn, concern salesby the bankruptcy trustee or debtor-in-possession. Here, foreclosure sales were conducted by trustees under the deedsof trust—not the bankruptcy trustee. Thus, statutory mootness is inapplicable in this case.

3 This order of events is permissible because the filing of a notice of appeal does not divest the trial court of jurisdiction overmatters or issues not appealed. See Wade v. State Bar of Arizona (In re Wade ), 115 B.R. 222, 230 (B.A.P. 9th Cir.1990).

4 The only distinction that can be drawn makes no difference: In Olive St., the debtor did appeal the dismissal as far as thedistrict court; in this case, Castaic did not appeal the orders of dismissal at all.

5 Income Property Builders is also materially similar to this case. The primary distinction is that the appeal there wasbrought by a third party claiming a mechanic's lien on the foreclosed property. 699 F.2d at 964.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Lane, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

2016 WL 2641238Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1generally governing citation of judicial

decisions issued on or after Jan. 1, 2007.See also U.S.Ct. of App. 10th Cir. Rule 32.1.

United States Court of Appeals,Tenth Circuit.

In re Robert M. LANE, a/k/a Bob Lane, Debtor.Robert M. Lane, Appellant,

v.Gary A. Barney, Trustee, Chapter7 Trustee; Vikki Lane, Appellees.

No. 15–8102.|

May 10, 2016.

Attorneys and Law Firms

Robert M. Lane, Las Vegas, NV, pro se.

Theodore J. Hartl, John C. Smiley, Lindquist & Vennum,Denver, CO, Brent R. Cohen, Lewis Roca RothgerberChristie, Denver, CO, for Appellees.

Before LUCERO, MATHESON, and BACHARACH,Circuit Judges.

ORDER AND JUDGMENT *

CARLOS F. LUCERO, Circuit Judge.

*1 Proceeding pro se, Robert Lane appealed a bankruptcycourt ruling to the district court, which appeal was dismissedfor lack of standing. Lane appeals. Exercising jurisdictionunder 28 U.S.C. § 158(d)(1), we affirm.

This is one of two related appeals. The other, docket number15–8092, is an appeal from the dismissal of a districtcourt lawsuit in which Lane sought to collaterally challengehis ex-wife's proof of claim against his bankruptcy estateas fraudulent. In the case before us, Lane challenges thebankruptcy court's approval of the settlement of the proof ofclaim. We agree with the district court that Lane cannot assertstanding to pursue this appeal.

It is axiomatic that “the party invoking federal jurisdiction[must] have standing.” Davis v. Fed. Election Comm'n, 554U.S. 724, 732 (2008). Yet Lane repeatedly conceded in thebankruptcy court that he lacked standing. In particular, heagreed to a settlement that provided that he “shall not have anystanding to object, join, or otherwise be heard on any matter orproceeding in any pending or future matter in connection with

administering [his] Bankruptcy Case.” 1 And after a motionwas submitted to the court to approve the settlement of his ex-wife's proof of claim, Lane submitted a letter stating that hewas “not claiming standing.” Despite these concessions, henow reverses course and asserts that he has standing to appeal.

When an issue is intentionally relinquished, abandoned, orconceded in the trial court, it is deemed waived and notsubject to consideration on appeal. Richison v. Ernest Grp.,Inc., 634 F.3d 1123, 1127 (10th Cir.2011); Lyons v. JeffersonBank & Tr., 994 F.2d 716, 720–21 (10th Cir.1993). Havingconceded that he does not have standing in the bankruptcyproceedings, he may not now assert standing in an appealof those proceedings. See In re Merrifield, 214 B.R. 362,365 (B.A.P. 8th Cir.1997) (a debtor that lacks standing totake action in the bankruptcy court also lacks standing on

appeal). 2

The district court's dismissal for lack of standing isAFFIRMED . Lane's motion to proceed in forma pauperisis DENIED. Appellees' motions to dismiss are DENIED asmoot.

All Citations

--- Fed.Appx. ----, 2016 WL 2641238 (Mem)

Footnotes* After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not

materially assist in the determination of this appeal. See Fed. R.App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case istherefore ordered submitted without oral argument. This order and judgment is not binding precedent, except under the

In re Lane, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2

doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive valueconsistent with Fed. R.App. P. 32.1 and 10th Cir. R. 32.1.

1 Lane asserts that he conceded only that he did not have standing in the underlying bankruptcy case. But the plainlanguage of the settlement agreement described that he did not have standing in “any pending or future matter inconnection with administering [his] Bankruptcy Case.” In this action, he seeks to challenge decisions of the bankruptcycourt in administering the bankruptcy case, and this appeal thus arises “in connection with” that case, falling within thescope of the settlement agreement.

2 Because Lane does not have standing to pursue this appeal, we do not reach his argument that the district court judgeshould have been recused.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.