Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-04709/USCOURTS-cand-5_05-cv-04709-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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Case No. C 05-4709 JF

ORDER RE TRUSTEE’S APPEAL

(JFLC2)

**E-Filed 9/29/06**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE 

JTS CORPORATION, a Delaware corporation, fka

ATARI CORPORATION,

 Debtor.

________________________________________

SUZANNE L. DECKER, Trustee,

 Appellant-Plaintiff,

 v.

JACK TRAMIEL, 

 Appellee-Defendant.

Case Number C 05-4709 JF

ORDER RE TRUSTEE’S APPEAL

Appellant-Plaintiff Suzanne L. Decker, the chapter 7 bankruptcy trustee (“the Trustee”)

appeals the bankruptcy court’s judgment in her adversary proceeding against directors, attorneys

and shareholders of the debtor company, JTS Corporation (“JTS”). The Court, having

considered the briefing of the parties as well as the oral arguments presented at the hearing on

September 8, 2006, resolves the appeal as follows:

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I. BACKGROUND

JTS was formed in 1994 to design, manufacture and market a smaller, slimmer hard disk

drive to be used in personal computers. JTS suffered serious financial setbacks in 1996 when it

lost a major contract with Compaq. JTS then merged with Atari Corporation (“Atari”) in order

to obtain much-needed funds. Atari’s chairman of the board, Jack Tramiel (“Tramiel”), became

a member of JTS’s board of directors following the merger. Among the other directors on JTS’s

board at that time were its chairman, Jugi Tandon (“Tandon”), and its president and chief

executive officer, David Mitchell (“Mitchell”). 

Following the merger, JTS liquidated real and intellectual property in an effort to generate

sufficient cash to stay afloat. However, by July 1997 the disk drive market was glutted. JTS

abandoned production of a smaller disk drive and pursued a new business model based on a very

low-cost, high capacity disk drive. These efforts were unavailing. JTS was forced into

bankruptcy through involuntary petition in November 1998 and subsequently filed a voluntary

petition for relief under chapter 11, scheduling assets of $4.2 million and liabilities of $136

million. The case converted to chapter 7 in January 1999.

The Trustee filed an adversary proceeding against JTS’s directors and attorneys as well as

a major shareholder, alleging claims of breach of fiduciary duty, preference, fraudulent

conveyance, equitable subordination, avoidance of transfers, illegal redemption of shares, legal

malpractice, alter ego liability, unfair business practices, aiding and abetting and conspiracy. 

 The bankruptcy court adjudicated certain aspects of the Trustee’s claims in an order

addressing the parties’ cross-motions for summary judgment issued September 30, 2003

(“Summary Judgment Order”). Subsequently, Tandon, Mitchell and the attorney defendants

reached settlement with the Trustee, under which the settling defendants paid the estate $4.5

million. On April 23, 2005, the bankruptcy court issued an order approving good faith

settlement. 

The adversary proceeding went to trial against only one defendant, Tramiel. The

bankruptcy court issued an opinion following trial on September 30, 2005 and entered judgment

on October 31, 2005. The judgment stated that Tramiel was liable in the amount of $1,387,185

Case 5:05-cv-04709-JF Document 20 Filed 09/29/06 Page 2 of 14
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ORDER RE TRUSTEE’S APPEAL

(JFLC2)

plus prejudgment interest and explicitly stated that Tramiel was not entitled to a settlement credit

for the prior $4.5 million settlement of his co-defendants. Tramiel filed a motion to amend the

judgment to permit him a settlement credit. That motion was heard on December 22, 2005 and

was granted on the same date. An amended judgment was entered on January 19, 2006 providing

that Tramiel may apply a settlement credit in the amount of $4.5 against his liability. This

amendment to the judgment in effect reduced Tramiel’s liability to zero, because the $4.5

settlement credit exceeded the amount for which he had been adjudicated liable. 

II. LEGAL STANDARD

A bankruptcy court’s factual findings are reviewed for clear error and its legal

conclusions are reviewed de novo. In re Strand, 375 F.3d 854, 857 (9th Cir. 2004). A

bankruptcy court’s grant of summary judgment is reviewed de novo. In re Lee, 335 B.R. 130,

135 (BAP 9th Cir. 2005).

III. DISCUSSION

The Trustee’s appeal focuses on three transactions addressed by the bankruptcy court,

addressed in turn as follows: 

A. The Real Estate Transaction 

The 1996 merger with Atari did not solve JTS’s cash problems. In mid-1996, JTS’s chief

financial officer approached Tramiel about purchasing a portfolio of eight real properties that

JTS had acquired from Atari as part of the merger. Tramiel agreed to purchase the entire

portfolio of properties for total book value of $10 million, with JTS retaining an option to

repurchase for $10 million within the first year. If JTS exercised the option, Tramiel would keep

the greater of $1 million or the rental income generated by the properties during the one-year

option period. The option expired without being exercised. Tramiel subsequently transferred the

real property portfolio to an entity for the benefit of his children.

The Trustee asserted that the sale of the real properties to Tramiel was avoidable as a

constructive fraudulent conveyance under 11 U.S.C. § 544(b), which provides that a trustee “may

avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor

that is voidable under applicable law by a creditor holding an unsecured claim . . . .” “[T]o the

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extent that a transfer is avoided under section 544 . . . the trustee may recover, for the benefit of

the estate, the property transferred, or, if the court so orders, the value of such property.” 11

U.S.C. § 550(a). “In seeking recovery of such monies, the trustee stands in the overshoes of the

debtor corporation’s unsecured creditors.” In re Agricultural Research & Tech. Group, Inc., 916

F.2d 528, 534 (9th Cir. 1990). 

The Trustee invoked § 544(b) to apply California’s fraudulent conveyance laws. 

Specifically, the Trustee looked to California Civil Code § 3439.04(a), which provides inter

alia that a transfer is fraudulent if made by a debtor who did not receive “reasonably equivalent

value” and either (a) the debtor was engaged or was about to engage in business for which the

debtor’s remaining assets were unreasonably small in relation to the business or (b) the debtor

intended to incur or should have believed that he would incur debts beyond his ability to pay as

they became due. Cal. Civ. Code § 3439.04(a). California Civil Code § 3439.07 sets forth the

remedies for a fraudulent transfer, providing that, “subject to the limitations in Section 3439.08,”

a creditor may obtain “[a]voidance of the transfer or obligation to the extent necessary to satisfy

the creditor’s claim.” Cal. Civ. Code § 3439.07(a). The limiting provision, California Civil

Code § 3439.08, provides that to the extent a transfer is voidable under § 3439.07, a creditor

“may recover judgment for the value of the asset transferred, as adjusted under subdivision (c), or

the amount necessary to satisfy the creditor’s claim, whichever is less.” Cal. Civ. Code §

3439.08(b). Subdivision (c) provides that judgment shall be equal to the value of the asset at the

time of the transfer, “subject to adjustment as the equities may require.” Cal. Civ. Code §

3439.08(c). Subdivision (d) provides an additional limitation, stating that “[n]otwithstanding

voidability of a transfer or an obligation under this chapter, a good faith transferee or obligee is

entitled, to the extent of the value given the debtor for the transfer or obligation, to ... [a]

reduction in the amount of the liability on the judgment.” Cal. Civ. Code § 3439.08(d)(3).

Applying California Civil Code § 3439.04, the bankruptcy court found that JTS did not

receive “reasonably equivalent value” for the properties and that JTS was insolvent at the time of

the transaction. The bankruptcy court’s finding of insolvency appears to be a kind of shorthand

for satisfaction of the requirement that (a) the debtor was engaged or was about to engage in

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business for which the debtor’s remaining assets were unreasonably small in relation to the

business or (b) the debtor intended to incur or should have believed that he would incur debts

beyond his ability to pay as they became due. See Cal. Civ. Code § 3439.04(a)(2). Satisfaction

of these elements is not at issue in this appeal.

With respect to the requirement that the debtor did not receive “reasonably equivalent

value,” the bankruptcy court concluded that the eight properties had an aggregate fair market

value of $15,760,000 at the time of the sale. However, for purposes of determining “reasonably

equivalent value,” the court discounted the fair market value 20% because the properties were

bundled and discounted an additional 5% for the quick sale. The court thus concluded that for

purposes of determining “reasonably equivalent value” at the time of sale the properties fairly

could be valued at $11,820,000. The court further concluded that the value JTS received in

exchange for the properties was the $10 million in cash plus the value of the repurchase option,

which the court put at $432,815. Based on these valuations, the court found that JTS received

$1,387,185 less than the value of the properties sold, and thus did not receive “reasonably

equivalent value.” Accordingly the court concluded the transfer was fraudulent under California

Civil Code § 3439.04.

The court concluded further that the Trustee could avoid the transaction pursuant to

California Civil Code § 3439.07(a)(1). However, it found that Tramiel had acted in good faith in

purchasing the property, and therefore that under California Civil Code § 3439.08(d), Tramiel

was entitled to a reduction of his liability by the amount he had paid JTS. The court thus

concluded that the transfer was avoidable in the amount of $1,387,185 – the fair value of the

property at the time of transfer less the value that Tramiel paid.

Finally, the bankruptcy court concluded that Tramiel was entitled to a credit for the $4.5

million settlement entered into by his co-defendants. Because the credit was greater than

Tramiel’s liability, the bankruptcy court concluded that Tramiel’s net liability was zero.

The Trustee asserts that the bankruptcy court’s calculation of Tramiel’s liability was

erroneous. Specifically, the Trustee asserts that once the avoidability of the transfer is

determined pursuant to state law, the amount of Tramiel’s liability should be determined

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pursuant to 11 U.S.C. § 550(a), which the Trustee asserts imposes liability in the amount of the

full market value of the property transferred and does not make any provision for reduction for

consideration paid. In short, the Trustee asserts that the proper approach is to determine whether

the transfer was fraudulent under California Civil Code § 3439.04, but to omit the specific

limitation on liability for such fraudulent transfer – i.e., reduction in liability in the amount of

value given the debtor – imposed by California Civil Code § 3439.08(d).

(1) Interplay Between Bankruptcy Code And California Fraudulent Transfer

Law

This appears to be a novel issue of law. As noted above, the bankruptcy court’s legal

conclusions are subject to de novo review. The parties have not cited, and the Court has not

discovered, any cases expressly addressing the interplay between 11 U.S.C. §§ 544(b) and 550(a)

on the one hand, and California Civil Code § 3439.08(d) on the other hand. The Trustee relies

heavily upon the Ninth Circuit’s decision in In re Acequia, Inc. for the proposition that once a

transfer is identified as fraudulent under state law, the extent of the recovery is governed solely

by 11 U.S.C. § 550(a). Acequia is not precisely on point, however. In that case, the debtor-inpossession, Acequia, invoked 11 U.S.C. § 544(b) to apply Idaho’s fraudulent conveyance laws,

specifically a provision deeming fraudulent any conveyance made with actual intent to defraud. 

The magistrate judge concluded that the transfer in question was fraudulent under this provision

but, reasoning that Acequia’s rights under § 544(b) derived from those of its unsecured creditors,

limited Acequia’s recovery to the total amount of unsecured claims against the bankruptcy estate. 

The Ninth Circuit held that this limitation was erroneous, stating that once a trustee has

established the right to avoid a transfer under 11 U.S.C. § 544(b) – that is, under applicable state

law – the amount of such recovery is governed by 11 U.S.C. § 550(a). In re Acequia, 34 F.3d

800, 809 (9th Cir. 1994). Consequently, if a trustee establishes that a particular transfer is

avoidable under state law because it is fraudulent as to a particular creditor, the transfer may be

entirely avoided regardless of the size of the creditor’s claim. Id. at 809-10. The extent of the

trustee’s recovery is governed by 11 U.S.C. § 550(a), which requires only that recovery be for

“the benefit of the estate.” 

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The rule of Acequia may be summarized as follows: a trustee may avoid a fraudulent

transfer to the full extent permitted under applicable state law, even if such avoidance exceeds

the amount of the unsecured creditors’ claims, if such avoidance is for “the benefit of the estate.”

The bankruptcy court that adjudicated Tramiel’s liability in this case applied this very rule in In

re Serrato. In that case, the bankruptcy court addressed language in California Civil Code §

3439.07 limiting a creditor’s recovery for fraudulent transfer to the amount necessary to satisfy

the creditor’s claim. The Court held that this express state statutory limitation on a creditor’s

right to recover for fraudulent conveyance did not limit a trustee’s right to recover under 11

U.S.C. §§ 544(b) and 550(a), citing Acequia for the proposition that “[t]he Bankruptcy Code

separates ‘the concepts of avoiding a transfer and recovering from the transferee.’” In re Serrato,

214 B.R. 219, 231 (1997) (quoting Acequia, 34 F.3d at 808). The bankruptcy court also cited

Acequia for the proposition that “[a]lthough the trustee has demonstrated her right to recovery

under state law, she must still establish the amount of recovery pursuant to § 550(a) of the

Bankruptcy Code.” Id.

The question before this Court is whether the limit on liability imposed by California

Civil Code § 3439.08(d), expressly reducing a California creditor’s recovery for fraudulent

transfer, should be disregarded in a similar manner on the ground that the amount of recovery for

a fraudulent transfer is governed solely by 11 U.S.C. § 550(a). As noted above, there do not

appear to be any published opinions squarely addressing this precise issue. However, two

published decisions clearly assume – albeit without discussion – that similar setoff provisions in

other states’ fraudulent conveyance laws apply when those laws are invoked via 11 U.S.C. §

544(b). In In re Agricultural Research & Tech. Group, Inc., the Ninth Circuit noted that under

the applicable Hawaii fraudulent transfer law, a good faith transferee is entitled to recover any

value given in the transaction. Agricultural Research, 916 F.2d at 539. The court ultimately

determined that the transferee had failed to demonstrate good faith, but it is clear from the

decision that had the transferee made a showing of good faith the court would have concluded

that the transferee was entitled to a setoff for value given in the transaction.

The Agricultural Research decision predates Acequia. However, a published bankruptcy

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court decision rendered several years after Acequia reaches the same result. In In re Viscount Air

Services, Inc., the trustee invoked § 544(b) to apply Arizona’s fraudulent conveyance law. In re

Viscount Air Services, Inc., 232 B.R. 416, 432 (Bankr. D. Ariz. 1998). Under Arizona law, a

transferee who takes in “good faith” is entitled to set off the amounts paid for the transfer. Id. at

440. The bankruptcy court found that the transferee acted in good faith and thus was entitled to a

setoff to the extent of monies paid for the transfer, and that to rule otherwise would unfairly

penalize the transferee. Id. The bankruptcy court did not expressly consider the impact of

Acequia and its progeny in reaching this decision.

Because these decisions do not squarely address the relevant issue, their persuasive

authority is quite limited. However, the decisions do demonstrate that at least two courts have

assumed that state law setoff provisions like the one at issue here are swept into 11 U.S.C. §

544(b) along with provisions defining a fraudulent conveyance. Moreover, although the Trustee

correctly points out that California Civil Code § 3439.08(d) properly is characterized as a limit

on liability rather than a limit on avoidability, the statutory provision authorizing avoidance

states expressly that a creditor may obtain avoidance “subject to the limitations in Section

3439.08.” Accordingly, while acknowledging that the appropriate interplay of the Bankruptcy

Code and California’s fraudulent conveyance law is far from clear in the present context, the

Court concludes that the bankruptcy court properly permitted Tramiel to set off the value he gave

for the properties when adjudicating his liability.

(2) Whether Tramiel Acted In Good Faith

The Trustee argues that even if the good faith setoff provided in California Civil Code §

3439.08(d) applies, the bankruptcy court erred in finding that Tramiel acted in good faith. The

bankruptcy court’s factual finding of good faith is reviewed for clear error. After reviewing the

record, as well as the bankruptcy court’s careful reasoning on this point, this Court has no

difficulty concluding that the bankruptcy court’s finding of good faith was not clearly erroneous.

(3) Proper Methodology For Calculating Tramiel’s Liability

This Court agrees with the Trustee that the bankruptcy court erred when it calculated

Tramiel’s liability. Assuming without deciding that the bankruptcy court’s discounting of the

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properties’ fair market value was appropriate for the purpose of determining whether JTS

received “reasonably equivalent value,” the Court is not persuaded that “reasonably equivalent

value” is the appropriate measure of Tramiel’s liability.

The Bankruptcy Code provides that the trustee may recover “the property transferred” or

alternatively “the value of such property.” 11 U.S.C. § 550(a). The statute does not define

“value.” However, the majority of cases addressing the issue have held that fair market value is

the appropriate starting point for determining liability in a fraudulent transfer case. See, e.g., In

re Kemmer, 265 B.R. 224, 236 (Bankr. E.D. Cal. 2001) (holding that appropriate measure of

liability under 11 U.S.C. § 550(a) was the value of the equity transferred, that is, the fair market

value of the property less its encumbrances); In re Walter, 261 B.R. 139, 145 (Bankr. W.D. Pa.

2001) (holding that appropriate measure of liability under 11 U.S.C. § 550(a) is fair market value

of transferred property); In re Vann, 26 B.R. 148, 149 (Bankr. S.D. Ohio 1983) (using fair market

value as measure of liability under 11 U.S.C. § 550(a)); Matter of Nevada Implement Co., 22

B.R. 105, 107 (Bankr. W.D. Mo.1982) (stating that fair market value is appropriate measure of

liability under 11 U.S.C. § 550(a)). The Court thus concludes that the appropriate measure of

liability is the fair market value of what Tramiel acquired – the properties and the rents – less any

value he gave JTS. The bankruptcy court found that the experts had established the fair market

value of the properties to be $15,760,000 and the fair market value of the rents to be $1,387,185,

for a total fair market value of $17,147,185. Tramiel gave JTS $10 million in cash plus an option

to repurchase that the bankruptcy court valued at $432,815, for total value given by Tramiel of

$10,432.815. Tramiel’s liability thus is $17,147,185 with a setoff of $10,432,815, or 

$6,714,370.

(4) Availability Of Settlement Credit

Approximately one year before the adversary action went to trial against Tramiel, the

bankruptcy court approved a settlement agreement between the Trustee, Tandon, Mitchell and

the attorney defendants. The settlement agreement provided that the settling defendants would

pay the Trustee a total of $4.5 million. Settlement Agreement ¶ 1.1. The settlement agreement

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explicitly allocated the $4.5 million to particular claims, as follows:

The Settlement Sum shall be paid as follows: (1) The Attorney Defendants shall

pay $3,075,000 which the Trustee allocates to the claims of malpractice related to

Series B and C and forgiveness of indebtedness. . . . (2) Mitchell shall pay

$600,000 and Tandon shall pay $825,000, which payments the Trustee allocates

to the claims related to the forgiveness of promissory notes and the repurchase of

those shares with those notes.

Id. The settlement agreement contains an integration clause providing that the settlement

agreement contains the full expression of the parties’ agreement. Id. at ¶ 16. All of the settling

defendants signed the settlement agreement.

Pursuant to California Civil Procedure Code § 877, a good faith settlement bars a

nonsettling defendant from seeking contribution from settling defendants, but the nonsettling

defendant’s liability is reduced by the settlement amount to the extent that all defendants are

claimed to be joint tortfeasors. McComber v. Wells, 72 Cal. App. 4th 512, 516-17 (1999). As

noted above, the settlement agreement explicitly allocated the settlement funds to malpractice

claims and other specified claims distinct from the fraudulent transfer claim against Tramiel. 

Accordingly, it appears from the face of the settlement agreement that Tramiel may not obtain a

settlement credit for any of the settlement funds. However, when it approved the settlement

agreement, the bankruptcy court expressly reserved the right to determine whether Tramiel was

liable as a joint tortfeasor on any claim in the event Tramiel made a future request for settlement

credit by Tramiel.

The trial went forward as against Tramiel approximately one year later. Tramiel did not

request a finding of joint liability on any claim, nor did the bankruptcy court make such a finding. 

Based upon the allocation in the settlement agreement and the lack of any finding that Tramiel

was a joint tortfeasor in the settled claims, the bankruptcy court stated explicitly in its original

judgment that Tramiel was not entitled to a settlement credit. 

Upon Tramiel’s post-trial motion, the bankruptcy court entered an amended judgment on

January 19, 2006, providing that Tramiel is entitled to a settlement credit in the amount of $4.5. 

In an opinion recited orally, the bankruptcy court stated that the second amended complaint made

clear that all defendants were considered joint tortfeasors and conspirators. The court also noted

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that the settlement agreement indicated that only “the Trustee” had agreed to the agreement’s

allocation of settlement funds, and there was no evidence that the settling defendants agreed to

this allocation. Finally, the court noted that it had reserved the right to allocate culpability

amongst the defendants upon Tramiel’s request for a credit.

The Trustee characterizes the bankruptcy court’s conclusion that Tramiel is entitled to a

settlement credit as a legal determination. Tramiel characterizes the issue as a factual one. This

Court concludes that the issue presents mixed questions of law and fact. The Court further

concludes that the determination that Tramiel is entitled to a settlement credit was clearly

erroneous. The integrated written settlement agreement clearly and expressly allocates the $4.5

in settlement funds to claims other than the claim upon which Tramiel was found liable. While

the text of the settlement agreement does recite that “the Trustee” allocates the funds in this

particular way, all of the settling defendants signed the integrated written settlement agreement,

indicating their agreement to this term. There is no evidence in the record that any of the settling

defendants disagreed with the allocation recited in the settlement agreement. The bankruptcy

court clearly assumed that the allocation was valid at the time it approved the settlement, and

expressly reserved authority to make a finding of joint liability as to the settled claims at

Tramiel’s request. There is no evidence in the record that Tramiel ever made such a request. 

Accordingly, this Court concludes that Tramiel is not entitled to a settlement credit.

B. Debt Relief

In 1996, JTS granted directors Tandon and Mitchell stock options to purchase one million

shares of JTS common stock at an exercise price of $1 per share. They exercised their options,

using full-recourse promissory notes with the stock pledged as security. Neither made any

payments, and the notes were in default by spring 1997. By July 1997, the value of JTS stock

had plummeted and the two million shares were worth less than the debt Tandon and Mitchell

had incurred to purchase them. Tandon and Mitchell requested relief from these debts. The JTS

board agreed.

The Trustee asserts that the debt relief was an illegal stock purchase under 8 Del. C. §

160, providing in relevant part that “no corporation shall: (1) Purchase or redeem its own shares

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 Claims against directors based upon the internal affairs of the corporation are governed

by the law of the state of incorporation. See In re Sagent Tech., Inc., Deriv. Litig., 278 F. Supp.

2d 1079, 1087 (N.D. Cal. 2003).

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for cash or other property when the capital of the corporation is impaired.” The Trustee asks that

this Court hold Tramiel liable for Tandon’s $1 million debt (it is unclear why the Trustee doesn’t

ask the same for Mitchell’s debt).

The bankruptcy court made very explicit findings that the debt relief was not a purchase

or redemption of shares, but rather an incentive for Tandon and Mitchell to stay with the

company. This Court concludes that those factual findings were not clearly erroneous.

C. Repayment Of Atari Bridge Loan

In late 1997, JTS decided to sell certain intellectual property rights obtained in the merger

with Atari. JTS needed interim financing to maintain its operations while it negotiated the sale. 

The Amber group, consisting of JTS shareholder Amber Arbitrage, Tandon, Mitchell and

Tramiel, put up $3 million secured by the Atari intellectual property. In February 1998 JTS sold

the intellectual property for $ 5 million, repaid the $3 million loan with interest, and had

approximately $2 million more in cash than had been available several months previously. 

While conceding that the bridge loan in essence was an advance on the sale of intellectual

property that enabled JTS to maintain operations for the months needed to consummate the sale,

and that the transaction as a whole resulted in an additional $2 million in corporate funds, the

Trustee asserts that the repayment of the $3 million was a breach of Tramiel’s fiduciary duty and

thus is void. Specifically, the Trustee asserts that because JTS was insolvent at the time the $3

million loan was repaid, repayment of a loan to corporate directors ahead of other creditors was a

per se breach of those directors’ fiduciary duties under Delaware law.1

The bankruptcy court considered and rejected this theory and ultimately granted summary

judgment for the defendants on this claim. The bankruptcy court’s Summary Judgment Order set

forth an extensive history of Delaware law relevant to interested director transactions, and

concluded that even when the corporation is insolvent such a transaction is not per se void. 

Summary Judgment Order at 3-11. The bankruptcy court concluded that under Delaware law,

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the Trustee has the initial burden to establish the existence of an interested director transaction,

and that once this burden is established, the defendants bear the burden of proving that the

transaction was entirely fair to the corporation’s creditors. Id. at 11. The bankruptcy court then

concluded as a matter of law that based upon the undisputed facts in the record the Atari bridge

loan and its repayment were entirely fair to JTS and its creditors.

Delaware case law does not provide a particularly clear road map with respect to

interested director transactions in the context of corporate insolvency. This Court has reviewed

the relevant authorities, dating back to the 1930s, and concludes that the legal standard

articulated by the bankruptcy court is the appropriate one and that the conclusion that the

transaction was fair is well supported by the record. 

IV. ORDER

The judgment of the bankruptcy court is AFFIRMED IN PART and REVERSED IN

PART as follows:

(1) With respect to the real estate transaction, the bankruptcy court’s judgment is

AFFIRMED IN PART AND REVERSED IN PART; Tramiel is liable on the

fraudulent conveyance claim in the amount of $6,714,370 plus prejudgment

interest and is not entitled to a settlement credit;

(2) With respect to the debt relief transaction, the bankruptcy court’s judgment is

AFFIRMED; and 

(3) With respect to the Atari bridge loan, the bankruptcy court’s judgment is

AFFIRMED.

DATED: 9/29/06

__________________________________

JEREMY FOGEL

United States District Judge

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This Order was served on the following persons:

Christian B. Nielsen cbn@robinsonwood.com

Daniel Rapaport drapaport@wendel.com, calendar@wendel.com; gcone@wendel.com

Jeffrey C. Wurms jwurms@wendel.com, calendar@wendel.com; nschrager@wendel.com

Mai T. Buell

Law Offices of Robinson and Wood

227 N. First Street #300

San Jose, CA 95113

Marilyn Morgan

U.S. Bankruptcy Court

280 South First Street, Room 3035

San Jose, CA 95113

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street, Room 3035

San Jose, CA 95113

Case 5:05-cv-04709-JF Document 20 Filed 09/29/06 Page 14 of 14