elements or what factors do you look at for rich characterization of debt to equity in the ninth circuit in california this is a relatively new concept in fact this case was the first case the first time we were up here and fitness holding one was the first time that this court rule that you could we characterize  equity previously there was a back to sit in that was relied on by a lot of the courts that said you cannot we characterize so that was the first time we're up here in this court right we determined that you could we characterize in line with all of the other circuit decisions the problem was going back down what the court said is that we have to look to california law for those elements there are no cases in california that directly deal with that and so by bankruptcy court and that is what is this transaction in reality this is not a promise and the forstmann of a promissory note is this is what is the claim in the bankruptcy and principles where we look to see whether a transaction was fraudulent i agree with you on or we should don that we read the the decision and we're trying to fit this square peg around hole if you will in in going back and preparing for argument in this case there was a recent decision which i think  case talked about all of the various factors that you look at for repairing or is a should judge wilson wrote the opinion on that case and i think he did a very good job now the outcome is obviously a factual determination which you have to consider what's interesting about the dow case which this court affirmed on appeal and what was interesting about the affirm and so it was just a short order not published  but what was interesting about it is the parties both stipulated to the law if you will as to how to apply the various issues with respect to reach characterization and this affirmed it i assume that the court if the court this court thought that those elements were not appropriately the court may have not accepted the stipulation so i think we've have some precedent in the similar now did they adopt all of them i again i go back to dial up there was a whole number of elements but if you're looking at the transaction in and of itself is a whole you have to look at not only the paper part of it but how they executed it what was the in don't you just start with a contract you started your argument by saying that court below erred by confining itself to the four corners of the document but doesn't it make sense to look at what the contract says in order to determine whether or not it meets any of those factors i think you start there ok but that's not the end though we wouldn't say in the state court forget bankruptcy for just a minute under state law we wouldn't look at a promissory note to look at a transaction and say because surrounding why did they enter into it what was the execution of it what were the requisite tapes sure that's right i mean even under california is a college different pearl evidence rule the first thing that the court does is to look at the language of the contract to determine whether it's ambiguous and under california's pearl evidence rule as i understand it you can introduce extrinsic evidence in order to convince the court that the language is susceptible to a different interpretation than perhaps what the court is reading and if the court agrees that the language could be interpreted that way then extraneous evidence is admissible under the pearl evidence rule but if the court says no in the face of this language i don't see that interpretation as being reasonable then you stick with the language of the contract isn't that how the parole evidence rule works and that will that is how it would work gain what is the trans at the underlying transaction what was the intent of the parties when they did it what the court what we haven't discussed is the bankruptcy principles bankruptcy is an equitable and say what was this transaction about and can the estate recover those assets that were wrongfully taken away from them and that's what this case is about it's not the interest but in the promissory note and the district court missed that and never considered any of these other factors but looking at the i will but wouldn't you concede that if these are truly debt then the trustee can't recover these assets they would then become their whether security or unsecure they be would you say i am saying that it is a sham transaction structured so that the owners of this company could have figured out a way to get their money back ahead of all of the creditors test for recherche or ization i think that the court in its first opinion answered that question the court held the question is whether there is a right to payment under a political state law and here we agree that the political state law is california law and the cork expressly rejected the idea that equitable principles of bankruptcy rules of the courts own creation federal common law test f but if you take a step back and i think that point was conceded this morning but if you take a step back and look at the remount order it said go look under state law here california state law to determine whether or not this is a legitimate debt i agree your honor and i think it is a r twelve of the which is the where you can find the district court's opinion after going through and analyzing these contracts which is what the asserted right t considers the arguments the assertion the allegations that the trustee makes in the complaint and it concludes correctly that none of these allegations for example forbearance can't be you're stating a conclusion but can you give me language that you want me to really hone in on forgive me for interrupting but i have found your conclusion notes consider the al and what are those allegations the allegations that there was forbearance in other words hancock park did not immediately but i'm interested to know the address for advance party struck a deal on forbearance right i couldn't say it any better myself your honor yes there is a non waiver clause in the contract and i think that the the big picture is under any test and we can dispute what the test says is it do we have five contract law principles do we do it who do we invoke the substance over form but what complicates your position it seems to me is that the parties were arguably one priority well your hon folks who are dealing with themselves they were on both sides of the transit and yes hancock park was the parent corporation of fitness holdings the debtor i agree with that this is a it's an entirely common and perfectly lawful scenario for a parent corporation to provide that financing to its wholly owned subsidiary and i would i would i would argue that particularly in this context you and here i would ask what more could hancock park have done to memorialize its right to payment under these notes it actually treated the notes detail terms with rights to payment it accounted for the interest that was was owed and in the signature irony of this case when there's a claim that is being made by the trustee that there was no intent to treat these as as equity what is the transaction that is being challenged here it is a repayment of the hancock park notes in the june two thousand and seven refinancing and that repayment was funded from a loan from a third party in an arm's length transaction aciphex western bank there's no allegation that they were doing anything other than looking out for their own self interest and they agreed that eleven point nine million dollars of these funds could be used to repay these debt instruments and so what i see the trustee is doing here he's creating a catch twenty two situation for parent corporations that want to provide debt financing or have provided debt financing to their subsidiary on the one hand if the parent does not immediately enforce its right to payment upon a default by its subsidiary well the trustee is going to say that's evidence that you didn't really view this is that it's we're going to reach characterize your debt on the other hand if you do enforce your right insolvency provides creditors with standing to assert derivative actions claims but it's still in the sestet page harm to the not to the individual creditors and though we're in our sixth round of briefing on this issue now the appellant still has this wrong at pages twenty four and twenty these opening very few states harm to creditors is harm to the corporation when the corporation is rendered in solve it and gives rise to a claim brought by or in the name of the extended maturities increased working capital preserve the debtors ability to borrow millions on an unsecured basis in the future and increase the debtors ability to obtain additional borrowing concessions in the future in the form of new guarantees by hancock park and all of this was done with a negligible effect on the balance sheet of the debtor   the arguments presented by counsel but just very quickly i would point out in response to the point made by judge kristen about innocence look can't we step back and say yes there were promissory notes but not conclusive what if the parties simply papered an equity deal with completely bogus promissory notes looking at that from a procedural perspective pleading perspective i found persuasive the points made in mr schneider's opening brief or or response brief at page twenty two where he pointed out simply that concludes are e statements which is what we have in the complaint that these documents actually represented an equity transaction and will merely a cloak conclusory statements are not enough and particularly that plausibility plausible allegations that these notes rep really represented equity which is what's required under the court's prior decision in this case cannot be inferred from facts that have a quote obvious alternative explanation which is not consistent with liability again not my brief but i found mr schneider's point on that issue persuasive here when you get down to the nitty gritty and also what is it that the bankruptcy trustee thinks demonstrated that these were really equity the bankruptcy trustee points to virtually nothing other than the fact that hancock park did not pull the trigger did not enforce the instant the debtor went into default under its notes well of course not its own subsidiary but he says more than that he says they never made a payment and they weren't going to make a payment and they weren't going to be able to make a payment to me he ninth circuit and we have to be very careful about our precedent and as you say this is a new and unexplored area i think the court the ninth circuit's prior opinion in this case had a much broader charge on  trustee perhaps briefed ok and if they didn't brief the argument they didn't brief the argument but i'm just trying to be really clear about the legal principle and it is mysterious to me that the that the bankruptcy court would have been limited  if that were if that's your position would have been limited armory manta looking to the four corners of a problem note or considering usury and again i think this is not my point out i see my time has been sorry about that i which i briefed at length and that really is an absolutely clear point of law in every court that's determined whether california state courts or the courts of appeal across the country and i would like to bring court's attention to three cases this year that have come up since briefing in this case closed which are precisely you know deal decides those three cases what other point you want to make your honor simply that in that week this court could affirm in favor of my client on any of those three grounds but what is really needed because this issue keeps coming up for people in the three cases that i will provide to the court clerk the court ought to establish as every lower court in the circuit already has done when it's considered the issue that in pari dilip though is the rule or to be more specific that yes bankruptcy trustees unlike state court receivers do step into the shoes of the debtor and if the debtor would be barred by and party to lick though so too is the bankruptcy trustee as i say no court that i'm aware of has ever ruled to the contrary and plenty of them have considered precisely that point made by the trustees counsel and they've expressed they rejected it and they've rejected the a case that the trustee relies on pointing out that he's dealt with a very different animal it dealt with receivers bankruptcy trustees by contrast step into the shoes of the debtor under five forty one a one of the code ok thank you very much mr elden your time has expired thank you very much has there been a california case or a case involved applying california law where that was construed to be equity not in this context around so this never happened before it's never been presented as an issue of care which so let's say you're a lawyer and i was your client and i come to you and say i'm i'm interested in making a debt  infusion into my subsidiary who's struggling and i don't want it to i don't want to run the risk that if things don't work out at the end of the road this will be construed equity tell me what i should do well i think what you have to do is you have to analyze the financials instruments you have a condition of the company you have to make sure that there's no other third party financing available which in this case there was because civic western bank kept stepping up and giving them financing you have to make sure that there's sufficient capitalization  material suppliers shipping i can i think i think it depends on the situation if it's a short term loan and it gets repaid back i don't think there's any problem with that but if it's a long term financing that you're never collecting on for subs for millions of dollars then i think that a director has an obligation to protect the company and it has an far and it's not that hard to go to to look at an asset or a company that you can acquire and say we need to capitalize this what's the act of capitalization of this but that's not what they did they did they did it is an l b o so that they could do exactly when the case went back down for the first time judge russell took the bench and walk out and said looked at the defendants and said you're going to file motions to dismiss aren't you because i'm going to grant it and and ok and you'll see it went downhill from there so there was either way no actual discussion about what happened to claim eight the equitable subordination clinton we agreed to dismiss it so we could get the case up to the court of appeal otherwise we felt that we had to be back down there and go through a whole trial when you live that's not after that's that's gone to god i would like to address very briefly military make one more point but you're already two minutes all right three cases up before the ninth circuit where this issue has been addressed i did the brian k decision which recently came out last year where the court avoided addressing that issue i agree with counsel it's important to get that a statutory figure if you will that has certain rights and powers not only of the debtor but is as given to him by the bankruptcy code and all of the