F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I N R E : A D A M S O N A P P A R

E L , I N C ., Debtor

.

A L B E R T A P. S T A

H L , C H A P T E R 7 T R U S T E E O F A D A M S O N A P P A R E L , I N C ., Appellant
,

v

.

A R N O L D H. S I M O N , A ppellee

. No. 12-57059

D.C. No. 2:11-cv-01204- VAP

OPI N I ON

A ppeal from the United States District Court for the Central District of California Virg inia Phillips, District J udg e, Presiding

Arg ued and Submitted D ecember 11, 2014—Pasadena, California

F iled May

6, 2015

B efore: Ronald L ee Gilman, * Susan P. Graber, and Consuelo M. Callahan, Circuit J udg es.

* T h e Ho n orab l e Ro n ald L ee Gilm an , Sen io r Un ited States Circu it J u dg e f o r th e Six th

Circu it, sittin g b y

d esig n atio n

.I N R E A D A M S O N A P P A R

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Opinion by J udg e Gilman; Dissent by

J udg e Graber

SUMMARY * *

Bankruptcy

Affirming t h e d istrict court’s affirmance of the b a n k ruptcy court’s judg ment a f ter a bench trial in a n adversary proceeding
, the panel held that a corporate insider who personally g uaranteed his corporation’s loan is absolved of any preference liability

to which he mig ht otherwise have been subjected, w here he h ad previously wa ived his indemnification rig h ts ag ainst the corporation, he had a bona fide basis for d oing so, and h e took no subsequent actions to
neg ate the economic impact of that waiver.

The panel held that the insider did not have any preference liability reg arding a pre-petition pay men t o f the loan because, in lig ht of his indemnification w ai v er , he was not a cred i tor of the corporation, which was a c hapter 7 debtor. The panel declined to f ollow a line of b a n k ru p t c y court cases holding that an insider g ua r a n tor is subject to preference liability where a transfer works to his benefit, even if he h as u nconditionally waived all claims ag ainst the debtor.

Dissenting
, J udg e Graber wrote t h at she would f ollow
every b a n k r uptcy court to have decided the issue and hold that insider-g u arantors such as the insider here are creditors.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I N R E A D A M S O N A P P A R

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She a lso wrote that, in deciding that the waiver was valid, the majority erred by making a finding reg arding the purpose o f
a pay ment made by

the insider and in rely ing on a statement made by counsel at oral arg ument.

COUNSEL

J ames K.T. H unter (arg

ued) and Malhar S. Pag ay , Pachulski Stang Z iehl & J ones L L P, L os Ang e l e s, California, for Appellant.

L eslie A. Cohen (ar g ued) and J ’aime K. W illiams, L eslie Cohen L a w PC, Santa Monica, California, for Appellee.

OP INION

GI L MAN, Circuit J udg e:

This case presents an unresolved issue of bankruptcy law. The question is whether a corporate insider who per sonally
g uaranteed his corporation’s loan is absolved o f any preference liability to which he mig ht o therwise h ave been

s u b j e c t e d
, w h e r e h e h a d p r e v i o u s l y w a i v e d h i s indemnification rig h ts ag ainst the c orporation, he had a bona fide basis for doing so, and he took no subsequent actions to neg ate the economic impact of that waiver. B ankruptcy
courts h ave split on this issue, a nd n either party has b een able
to cite to any d istrict- o r appellate-court decision addressing the question.I N R E A D A M S O N A P P A R

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B o th the bankruptcy court and the district court below ruled in favor of the corporate insider. F or the r e as o n s set forth b elow, we AF F IRM the judg ment of the district court.

I. BACK G R OUND

A. The loan, pledges, and guaranties

Adamson Apparel, I nc. (Ad amson) manufactures a nd sells clothing and accessories. On April 18, 2 002, A damson took out a multim i l l i on-dollar loan from CI T Group Commercial Services, I nc. (CI T). To secure t h e loan, Adamson g ranted CI T a lien on its inventory and accounts receivabl e. Arnold H. Simon, Adamson’s p resident a nd C EO, subsequently entered into two separate ag reements w i t h CI T to g uarantee the loan: a C a s h Collateral Pledg e Ag reeme n t (the Pledg e) and a L imited Guaranty (the Guaranty ). I n these a g reements, Simon t o o k responsibility for Adamson’s debt in the event that Adamson was unable to fully repay the loan. Simon would ordinarily h a ve been entitled to h a ve Adamson reimburse him for any amount that he was oblig ated to p ay o n the co r p o r at i o n’s behalf to settle the loan with CI T, but the ag reemen t s w a i ved that rig ht to indemnification. (As used throug hout this opinion, Simon’s rig ht to “indemnification ” encompasses his r ig hts to subrog ation, r e i m

b u rsement, or any other form of repay ment.)

Over t h e nex t 18 months, the Pledg e and the Guaranty

were r evised s e v e ral times. B oth ag reements w ere initially sig ned on N ovember 1 2, 2002. The G uaranty w as u pdated on F ebruary 11, 2003, then “amended and restated” on A pril 9, 2003. B oth d ocuments were further “amended and restated”

on April 25, 2003, then updated ag ain on Aug ust 5, 2003. AI N R E A D A M S O N A P P A R

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letter dated December 2, 2003 increased the amount that h ad been g uaranteed in the Aug ust 5, 2003 update of the Pledg e

.

Toward the end of 2003, an entity known as B P Clothing L .L .C. purchased a larg e amount o f merchandise from Adamson. On December 18, 2 003, Adamson ins t r u cted B P Clothing to trans f

e r the purchase price (specifically
, $4,989,934.65) to CI T in partial satisfaction of the d ebt owed by Adamson to CI T, this b ein g the very debt g uaranteed b y Simon. Adam s o n f

i led for bankruptcy u nder Chapter 11 o f the B ankruptcy

Code nine months later. On or about March 31, 2 0 0 4
, Simon paid the balance of the loan, totaling over $3.5 million, from his personal funds.

B. Low er-court proceedings

After Adamson filed for Chapter 1 1 b a nkruptcy in September 2 004, the Committee of Unsecured Creditors (the Committee) was appointed to represent the interests o f Adamson’s u nsecured creditors. The Commit tee filed this adversary action ag ainst Simon under a preference-liability theory

. Preference liability is “ a mechanism that allows [ a] debtor or trustee to recover from creditors who received
pay ments in the weeks or months pr i o r to the bankruptcy so that they c an be distributed to all bankruptcy estate creditors in accordance with their priority

. ” L eslie A. Cohen & J ’aime K. W illiams, Guarantor Preference Liability
, 31 Cal. B ankr. J

. 795, 795 (2011). T h e Committee soug ht to re co ver from Simon the $4,989,934.65 paid by B P Clo t h i n g to CI T in December 2003, arg uing that Simon was a corporate insider who received a preference b ecause h e had g uaran t e ed the loa n f rom CI T. Any reduction in that d ebt was therefore to his benefit.I N R E A D A M S O N A P P A R

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I n J une 2007, Simon f i l e d a motion for summary judg ment, contending that because h e had waived his rig ht to claim indemnification fr o m Adamson, he was not a creditor and therefore not subj e c t to preference liability

. The bankruptcy court g ranted that motion the following month. I t held that Simon had fully w aived his rig ht to indemnification, which eliminated his status as a c reditor for preference-liability purposes. The Committee appealed to the district court.

The d istrict court r eversed the g rant of summary judg ment and remanded the case to the ba n k r u p t c y court for f urther factual development. I t pointed out that an ambig uity e x isted between the Pledg e and the Guaranty a s to whether Simon had fully and irrevocably waived his r ig ht to indemnification. The case was r emanded to the bankru p tcy court for a resolution of this issue.

A bench trial in bankruptcy court took place in September 2010. At trial, Simon testified that he understood at all times that he would never have a n y rig ht to seek indemnification from Adamson for any funds that he ex pend e d to settle its debt to CI T. He told the c o u r t t h at CI T had required him to i n c l u de the indemnification waiver in the Pledg e and t h e G u a r a n ty , althoug h his own preference would have been to retain the r ig h t to seek reimbursement. Simon also pointed
out that he had n ever filed a proof of c laim i n A d am s o n’s bankruptcy

case.

I n addition to S imon’s testimony
, the bankruptcy court took a plethora of documentary evidence under consideration. The court entered its decision in f avor o f Simon in December 2 0 1 0

. I t held that the Committee had failed to carr y i t s burden o f establishing Simon’s “ creditor” st a t u s underI N R E A D A M S O N A P P A R

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11 U.S.C. § § 101(10) & 547(b). Simon’s testimony a s to his understanding of his rig hts u nde r the Pledg e and the Guaranty , tog e ther with his failure to f ile a proof of claim in Adamson’s bankruptcy case, defea t ed the Committee’s
arg uments b a sed o n the a mbig u ous wording of the documents. The bankruptcy court subsequently entered judg ment in f

a vor of Simon, h olding that he was ex e mpt from preferen ce l i a bility because he was not a creditor o f Adamson.

The Committee ag ain appealed to the district court, which affirmed the judg ment of the b ankruptcy court in Aug ust 2012. I t held that the bankruptcy court d id not commit clear

error in concluding that the Committee had failed to establish that Simon w as a c reditor of Adams o n

. T his timely appeal followed, with the duly appointed Trustee being sub stituted for the Committee after Adamson’s b a nkruptcy c ase was converted from Chapter 11 to Chapter 7.

II. ANALYSIS

A. Standard of

review

“W e review de novo the district court’s d ecision on

a p p e a l f rom the bankruptcy court, apply ing the sam e standards applied by the district court, without deference to the district court.” In re Thorpe I nsulation Co.
, 677 F .3d 869, 879 (9th Cir. 2012) (citation om i t t ed). The bankruptcy court’s find i n g s of f

a c t are reviewed under the clear-error standard, a

nd its conclusion s o f law are reviewed de novo. Id. T he parties a g ree that N e w Y o rk state law g overns the sub s t ance o f this case in accordance w ith the choice-of-law provisions in the contracts at issue.I N R E A D A M S O N A P P A R

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B. Sim on’s status as an alleged creditor of Adam son

Title 11 U.S.C. § 547(b)(1) requires that the transfer o f
assets in question must be “to o r for the b enefit of a creditor” in order for preference liability to attach. I n rel e v a nt part, a creditor is defined in § 101(10) of the B ankruptcy Code as an “entity that has a c l aim ag ainst the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10). A c laim is further defined as a “rig ht to pay ment” o r a “rig ht to an e q u i t a b l e remedy for b reach o f performance if such b reach g ives rise to a rig ht to pay ment.” 11. U .S.C. § 101(5). The Trustee bears the b u r d e n o f establishing that Simon meets th i s d e finition, as well a s satisfy ing each of the other preference-liability requirements, in order to prevail on its claim ag ainst him. 11 U .S.C. § 5 47(g ); see also Universal Serv. Admin. Co. v. PostConfirmation Comm. of Unsecured Cred i t ors of Incomnet Commc’ns Corp. , 463 F .3d 1064, 1070 (9th Cir. 2006).

1. The contracts at issue are am b iguous as to whether Sim on waived his indem nification right

I n support of its arg ument that Simon retains a claim
ag ainst Adamson, the T rustee p oints to the Pledg e documents dated No v e m b e r 12, 2 002 and April 25, 2003. These documents pr o v i d e that Simon “defers all statutory , contrac t u a l, c ommon law, equitable, and all other c laims
ag ainst [ Adamson] ,” including t h ose for “subrog ation, reimbursement, e x oneration, c o ntribution, indemnification, setoff or other r ec o urse,” “[ u] nless and until [ CI T has] received final pa y

ment and satisfaction in full” for the loan. The Trustee arg u es that simply deferring a c laim do e s not

ex ting uish it, so that Simon retains a claim ag a inst A damson and is properly considered a creditor. I t contends t h a t theseI N R E A D A M S O N A P P A R

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Pledg e documents were n ever superseded by a ny subsequent document.

To counter this arg u ment, Simon points out that his Nov e m b er 1 2, 2002 Guaranty states that he “irrevocably waives and ag rees he will n o t e x e r cise any and all rig hts which he has or may have at any time

. . . to assert a ny claim
ag ainst Adamson or any

other party on account of pay ments made under this Guaranty o r otherwise, including

. . . any a nd all ex isting and future rig hts of subrog ation, reimbursement,

ex o neration, c ontribution, and/or indemnity .” That Guaranty

w a s ex ecuted on the same date as the November 12, 20 0 2 Pledg e.

As for the document s d a ted April 25, 2003, they d o not contain a clear waiver of the rig h t of indemnification, but do confirm that the amendment and reinstatement “shall not, in
any manner, be construed to constitute pay ment of, or impair, limit, cancel or ex ting uish or c onstitute a novation in respect of, the indebtedness and other oblig ations and l i ab ilities o f Pledg or evidenced b y o r arising under the Ex isting Guaranty .” The A pril 9
, 2003 version of the Guaranty was in place at the time that the Pledg e w a s a mended o n April 25, 2003 a nd contains an indemnification waiver identical to the

o n e i n the orig inal November 12, 2002 Guaranty

. A n identical w aiver also a

p pears in the A ug u st 5, 2003 update to the Pledg e.

This discrepancy between the deferral of indemnification rig hts in the Pledg e and the unconditional waiver of the same rig hts in the Guaranty c reates an ambig uity on the face of the documents. “Ambig uity is determined b y looking within the four corners of the document, not to outside sources.” Kass

v. Kass
, 6 9 6 N .E.2d 174, 180 ( N.Y. 1998) ( citing W

. W .W

.I N R E A D A M S O N A P P A R

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A s s o cs. v. Giancontieri
, 566 N.E.2d 639, 641–42 (N. Y

. 1990)). “The entire contract must b e reviewed and particular words should be c o n s i d e red, not as if isolated from the
contex t, but i n t h e l ig ht o f the oblig a tion as a whole and the int ention of the p arties as manifested thereby .” Riverside S. P l a n ning Corp. v. CRP/Extell R iverside, L.P.
, 920 N .E.2d 359
, 3 6 3 (N.Y. 2009) (internal q uotation marks omitted). W h ere mu l t i p le documents e x ist in support of the same transaction or purpose, the d o cuments should g e nerally be interpreted as a sing le contract. BW A Corp. v. Alltrans Exp. U.S.A., Inc.
, 493 N.Y.S.2d 1
, 3 (N.Y. App. D i v. 1985). “W h e ther an a g reement is a mbig uous is a question of law for the courts.” Kass
, 6 9 6 N.E.2d at 1 80 ( citing Van W agner Adver. Corp. v. S&

M Enters.
, 492 N.E.2d 756, 758 (N.Y. 1986)).

Here, the district court properly conclud e d that the discrepancy discussed above creates an a m big u ity as to whether Simon’s r ig h t to indemnificatio n was fully waived. One set o f documents say s that the rig ht is simply deferred until CI T has b e e n f

ully paid, while the other set o f documents say s that the waiver is uncondi t ional. B ecause these two positions are in c o n s i s t e nt, we find no error in the district court’s remand of the case to the bankruptcy court to resolve the ambig

u ity

.

2. The bankruptcy court did not com m it clear error in finding that the waiver of Sim on’s indem nification rights was unconditional

W h en a contract is deemed ambig uous, its interpretation becomes a question of f

act, Mellon Bank, N.A. v. United Bank Corp. of N.Y

. , 31 F .3d 113, 116 (2d Cir. 1 994), and we r eview that interpretation u nder the clear-error standard, Dist. LodgeI N R E A D A M S O N A P P A R

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26, Int’l Ass’n o

f Machinists & A e rospace W orkers
, A F

L-CIO

v. United Techs. Corp
., 610 F .3d 44, 54 (2d Cir. 2010). Clear

error ex i s t s when, althoug h there is evidence to support the lower c ourt’s conclusion, the reviewing court is left with the “definite a

nd firm conviction that a mistake has b een made.” ASM Capital, LP v

. Ames Dep’t. S t o r e s, Inc. ( In re Ames Dep’t Stores, Inc .), 582 F .3d 422, 426 (2d Cir. 2009) (citing United States v. U.S. G

ypsum Co.
, 3 33 U.S. 364, 395 (1948)).

The district court was not left with such a conviction, nor

are we. I n a ddition to seeing the unconditional waiver set forth in the Guaranty
, the bank r u p t cy court heard Simon’s testimony that CI T had insisted on the waiver and that Simon h a d n ever questioned its effectiveness. This testimony w a s reinforced by the fact that Simon never f iled a proof of claim in the Adamson bankruptcy case. The bankruptcy court thus had more than sufficient evidence to c o nclude that Simon h ad fully waived his rig ht of indemnification from Adamson.

3. Having

fully waived hi

s r i ght of indem nification and taken no subsequent actions that would negate the

econom ic im

p act of that waiver, Sim on has no claim again s t A dam son a nd thus cannot b e considered a creditor

The Trustee o f

fers no additional theory reg arding any claim that Simon mig h t have ag ainst Adamson that would

cause Simon to meet the definition of a creditor as set forth in the B a nkruptcy Code. I n stead
, i t urg e s this court to join several bankruptcy courts in stepping away from t he plain
tex t of the Code and subjecting a n insider g uar an t or to preference liability where a transfer works to his benefit, even if he h as u nconditionally waived all claims ag ainst the debtor. S e e Miller v. G reystone Bus. Credit II, L.L.C. ( In re U S AI N R E A D A M S O N A P P A R

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Deterge nts, Inc.)
, 418 B .R. 5 33, 541–42 (B ankr. D. Del. 2009); R usse l l v. J

ones ( I n re Pro Page Partners, LLC)
, 292 B .R. 622, 631–33 (B ankr. E.D. Tenn. 2003); Telesphere Liquidating Trust v. G alesi ( I n re Telesphere Commc’ns, Inc.) , 229 B .R. 173, 176 n.3 (B ankr. N.D. I ll. 1999).

The above line o f cases relied upon by the Trustee stems from the Seventh Circuit’s decision in Levit v. Ingersoll Rand Fin. Corp. (

In re Deprizio)
, 8 7 4 F .2d 1186, 1194 (7th Cir. 1989), and C o n gress’s subsequent response to Deprizio in 1994. I n p rinciple, the B ankruptcy Code seeks to effect an equi t a b l e distribution of a debtor’s a ssets to the debtor’s various creditors throug h the Code’s statutory provisions a nd the u se of a bankruptcy trustee. A simple way to achieve that
g oal in many situations is to collect a ll of a debtor’s assets at th e t i me of bankruptcy and apportion those assets ratably to the creditors according to their priority

. B ut Cong r ess has
recog niz ed that such a simple scheme would not be equitable if creditors who sensed financial d iff i culty could demand
pay ment and have their d emands fully satisfied in the period leading u p to the filing of a bankruptcy peti t ion, leaving the remaining creditors with a shortfall. See id. (describing this reasoningin more detail).

To remedy that concern, Cong ress empowered the trustee to set aside any transactions b enefiting a creditor in the 90 day s before the filing of a bankruptcy p etition. See 11 U .S.C. § 547(b). Cong ress apparently decided that 90 d ay s i s an adequate time f

or reasonably alert creditors to notice potential preferential treatment and force a deb t o r t o either pay up o r face an involuntary

bankruptcy

petition.

B u t, as courts have noted a nd Cong r es s has recog niz ed, “[ i] nsiders pose special p roblems.” In re Deprizio
, 874 F .2dI N R E A D A M S O N A P P A R

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at 1195. The B ankruptcy Code defines insiders of a corporation as any director, o f ficer, g eneral partner, or person in control of the corporation, as well as a ny of their relatives. See 11 U .S.C

. § 1 01(31)(B ). The court in Deprizio hig hlig hted the particula r c o m plications that they cause a s follows:

I nsiders will be the first to recog niz e that the firm is i n a downward spiral. I f insiders a nd outsiders had the same preferenc e

- recovery p eriod, insiders who lent money to the firm could u se their knowledg e to advant ag e b y pay ing their own loans preferentially
, then
p u tting off filing the petition in bankrup t c y until the preference period had passed.

In re Deprizio , 874 F .2d at 1195.

Cong r ess responded to t h a t concern by ex tending the preference-recovery p eriod to one y ear for t ransactions that benefit insiders, where the insider is a creditor. The B ankruptcy Code implements this policy throug h 1 1 U

. S .C. § 547(b):

Ex cept [ for certain e x c e ptions not relevant here]
, the trustee may avoid a ny transfer of an i nterest of the debtor in property (1) to o r f o r the benefit of a cr e d i tor; [ and]

. . . (4) made (A) on or within 9 0 day s before the date of the filing o f the p etition; or (B ) betwee n n i n ety day s and one y ear before the date of the filing of the petition, if such creditor at the t i m e o f such transfer was an insider[ .]I N R E A D A M S O N A P P A R

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Fo r o r d i n a r y t ra n s a c t i o n s , t h a t p r o v i s i o n i s straig htforward. B ut what happens when a lender makes a loan to the debto r a nd, as part of the loan, a n insider personally g u arantees the loan? May the trustee avoid
pay ments made to the lender during the ex tended preferencerecovery period? The Seventh Circuit in Deprizio held that, by the p lain tex t of the B ankruptcy Code, the answer is “y es” —the long er preference-recovery period applies to those
pay ments. See In re Deprizio , 874 F .2d at 1200–01.

I n so holding
, the Seventh Circuit reasoned that “[ a]
g uarantor has a conting ent rig ht to pay ment from the debtor: if L ender collects fr om Guarantor, Guarantor succeeds to L ender’s e n titlements and can collect from F irm. So Guarantor is a ‘creditor’ in F irm’s bankruptcy .” Id. at 1190. According ly
, the requirements of § 5 4 7 (b) are met and the long er preference-recovery period of o ne y ear applies to pay ments on loans g uaranteed by insi d e r s

. Other circuit courts, including this one, soon adopted the Seventh Circuit’s analy sis in Deprizio

. See, e.g. , Official Unsecured Creditors C o mm. of Sufolla, Inc. v. U .S. Nat’l Bank of Or. (

In r e Sufolla, Inc.) , 2 F .3d 977, 986 (9th Cir. 1993).

Cong r ess r emedied the p erceived inequity to innocent lenders ensnared by Deprizio and it s p rog eny in a 1994 amendment to the B ankruptcy Code. Under that amendment, which is still in effect, the ex tended recovery period applies
to pay ments made on loans g u aranteed by insider s , b u t the
trustee may seek recovery only f rom the insider a

nd not from the lender. 11 U.S.C. § 550(c).

Two separate lines of cases developed i n D e p rizio ’s wake; one is relied upon b y t h e T rustee and the other b y Simon. The caselaw favorable to Simon d eveloped first, a fterI N R E A D A M S O N A P P A R

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Deprizio was h anded down b ut b e f o r e the 1994 amendment
to the B ankruptcy Code. Those cases conclude that b ona fide indemnification w a i v ers are valid and ex cuse an insider
g uarantor from preference liability

. S ee O ’Neil v. Orix Credit Alliance, Inc. (

In re Ne

. Contracting Co .), 187 B

. R. 420, 423–24 (B ankr. D. Conn. 1995); Hostmann v

. F irst I nterstate Bank o f Or., N.A. (

In re XTI Xonix Techs. Inc.)
, 156 B .R. 821, 833–34 (B ankr. D. Or. 1 993); Hendon v. Assocs. Commercial Corp. ( In re Fastrans)
, 142 B .R. 241, 2 45 (B ankr. E.D. Tenn. 1992). T hey “apply the letter of the statute to the facts before [ them] ” rather than f

ocusing on broader concern s of public policy

. I n re Fastran s , 1 4 2 B. R

. at 246; see also In re Ne. Contracting Co
., 1 87 B. R

. a t 4 2 3; In re XTI Xonix Techs. Inc.
, 156 B .R. at 833–34. B ecause a g uarantor has no leg ally
cog niz able claim ag ainst the borrower’s est a t e o n ce he has waived his rig ht to indemnification, these courts c o ncluded that insider g uarantors who had done so i n go o d faith were not “creditors” u nder the B ankruptcy C ode and therefore were not subject to preference liability

.

The cases relied upon b y the Trustee, on the o t h e r h a nd, conclude that such waivers are si m p l y n o t valid. See In re USA D et e rgents, Inc.
, 418 B

. R. 533, 542 (B ankr. D. Del. 2009); In re Pro Page Partne rs, LLC
, 292 B .R. 622, 631 (B ankr. E.D. Tenn. 2003); In re Telesphere Commc’ns, Inc.
, 229 B .R. 1 73, 176 n.3 (B ankr. N.D. I ll. 1999). As ex p lained by the court in Telesphere
,

such a w aiver has no e c onomic impact—if the principal debtor pay s the note, the i n sider
g uarantor would escape preference liabi l i ty , but if the principal d ebtor does not pay the note, t h e insider could still o btain a claim
ag ainst the debtor, simply by pu r c h asing theI N R E A D A M S O N A P P A R

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l ender’s note rather than pay ing on t h e g uarantee. Thus, the “Depriz io waiver” could only b e seen as an effort to eliminate, b y contract, a provision of the B ankruptcy Code. The attempted waiver of subordination rig hts

was thus h eld to be a sham provision, unenforceable as a matter of public policy

.

In re Telesphere
, 229 B .R. at 176 n.3. The subsequent cases of In re Pro Page P artners , 292 B .R. at 631, and I n r e U S A Detergents
, 418 B .R. at 542, a dopted Telesphere ’s reasoning

. Despite this split o f a u t h o rity in the b ankruptcy courts, no district or ci rc u i t court has y et weig hed in on the validity o f these so-called “

D eprizio waivers.”

W e beg in our a ssessment by not i n g t h at the latter cases’

concern about the possibility of “ sham” w a i v e r s is a valid

one. A savvy insider g uarantor mig h t well ag ree to waive his rig ht to indemnification f rom the corporate deb t o r , but then simply purchase the d ebt from the lender rather than pay it off if the d ebtor is later unable to meet i t s o b l ig ations. Such maneuvering would transform the orig inal g uarantor into the lender directly rather than by way of subrog ation and, in that capacity
, he would cle ar l y have a claim ag ainst the debtor’s bankruptcy estate w ithout t he burden of the o n e-y e ar preference period for insider g uarantors.

B u t the mere possibility o f such avoidance does not mean that it will routinely occur. The post-1994 bankruptcy courts that have considered this question, a s well as our dissenting colleag ue, would establish a br i g h t

- line rule based on a fear of what could happen. W e believe the sounder approach is to consider w hat actually ha s h a ppened. Rather than neg ating

e very Deprizio waiver based on a hy pothetical scenario, t h eI N R E A D A M S O N A P P A R

E L , I N C

. 17

courts should instead ex amine the totality of the facts before them for evidence of “sham” conduct in the c i rcumstances presented. I n the present case , a l l e vidence in the record indicates that the waiver at issue was not a sham.

F irst, CI T held a lien on Ad a m s o n ’s inventory a nd accounts receivable to secure the loan. This lien g ave CI T a priority claim ag ainst these assets of Adamson in the event o f bankruptcy

. CI T’s claim would therefore have been satisfied
to the ex tent of the remai ning inventory and accounts receivable even in the absence of Simon’s g uarantee.

S e c o nd, Simon never f

iled a proof of claim in the bankruptcy c ase. Counse l for both sides acknowledg ed at oral arg u ment that the funds at issue here were not sufficient
to cover Adamson’s entire d e b t t o CI T, and that Simon personally paid CI T over $ 3.5 million to clear Adamson’s debt without ever seeking reimbursem e nt. I f the concern raised by the post-1994 b ankruptcy cases w er e at play h ere, Simon would h ave simply purchased the bala n ce of the CI T
note and then filed a claim as the su c c e s s o r to CI T in the bankruptcy case. I nstead, he personally paid the debt without ever filinga claim ag ainst the estate.

Our dissenting colleag u e, however, is not persuaded that the balance of Adamson’s debt to CI T was paid from Simon’s funds because that question w a s a contested fact in the orig inal trial. B u t as discussed in more detail in the dissent, the Trustee’s counsel acknowledg ed at oral arg ument that Adamson’s debt to CI T—the debt ag ainst w h i c h the December 18, 2003 pay ment from B P Clothing was credited—was “fully paid off on March 31st [ 2004]

. . . when i t g ot the amounts f

rom the cash collateral accounts.” AndI N R E A D A M S O N A P P A R

E L , I N C

. 18

the record makes clear that the cash c o l l ateral accounts in question indisputably

belong ed to Simon.

W e have every rig h t to treat this concession at oral
arg ument as b inding on th e T ru s t ee

. See Hilao v. Estate of Marcos , 393 F .3d 987, 993 (9th Cir. 2004) (“A party (or

. . . a nonparty

) is boun d b y c oncessions made in its brief o r at oral arg ument.”). Out of an abundance of caution, however,

we g a ve the Trustee an opportunity in supplemental briefing
to ex plain her counsel’s statement and to clarify the Trustee’s position on when Adamson’s debt was paid off. B ut the Trustee failed to d i r e c tly address the concession in her

r e s p o nse, instead contending that her counsel’s review “had revealed that the record below does n ot d efinitively establish either when o r from what source the Adamson Apparel debt
to CI T was satisfied.” Despite this somewhat dubious claim of ambig uity
, w e note that the Trustee does not d i s p u t e the key fact that the Adamson debt to CI T h a s been fully p aid without Simon filing a c laim ag ainst the bankruptcy estate. This adds to our confidence that the concession made at oral
arg ument was not simply a “slip of the tong ue.”

And c ontrary to the characteriz ation of the evidence presented in the d issent, the Committee at trial did not a rg ue t h a t t he $3.5 million pay

ment made on March 3 1
, 2004 was for a personal debt th a t Simon owed to CI T. I t instead contended that Simon m a de the $3.5 million pay ment in connection with what the Comm i t t e e called the “Grupo” transaction rather than with the transaction at issue in this

case.

As made clear from the record below, ho w e v er, Grupo Xtra of New York, I nc. wa s a c o mpany that had previously licensed trademarks that were eventually rel i censed toI N R E A D A M S O N A P P A R

E L , I N C

. 19

Adamson Apparel. Be fore g o ing bankrupt, Grupo h ad incurred liabilities to CI T in c o n n e c tion with these trademarks. I n early November 2002, CI T asked Adamson to

assume the l i a b i l i ties and try to collect Grupo’s receivables. The Grupo t r a n s ac tion was thus simply a subset o f Adamson’s indebtedness to CI T. I n short, the $3.5 m i l l ion that Simon paid to CI T on March 31, 2 004 was for Adamson’s benefit, y et Simon never soug ht r eimbursement for any portion of that pay

ment in bankruptcy

.

A third factor i n d i c a ting that the waiver here was not a sham is the f

act that Simon had no unilateral rig ht to purchase the note f rom CI T if Adamson defaulted. Althoug h he could have pursued that possibilit y , C I T was a lso free to refuse to sell him the n o te and i n s t e a d insist on pay ment. This factor mig ht ex plain why Simon did not, in fact, purchase the n ote rather than pay it off when c alled upon to do so

. I f S imon had had a contractual rig ht to purchase t h e note f rom CI T, then we would be more concerned about t h e waiver being a sham.

F inally
, the Trustee presented n o evidence that the debt in question was the only de bt that Simon g uaranteed on Adamson’s behalf. A damson is a closely held corporation, and Simon is its president and CEO. There is no reason to

assume that he did not personally g uarante e additional Adamson d ebts that he has been called upon to satisfy

. Under such circu m s tances, Simon w ould have received n o benefit by satisfy ing CI T’s debt first r ather than any other debts o f
eq u i v a lent mag nitude that he mig ht have personally
g uaranteed. The T r u s tee’s failure ( or inability ) to establish that the CI T loan was the only one personally g uaranteed by Simon further lessens our concern about the bona fide nature of the waiver.I N R E A D A M S O N A P P A R

E L , I N C

. 20

All of t h e se factors lead us to the conclusion that the waiver a t is s u e i n t his case w as n ot a sham. The concern o f the Telesphere line of bankruptcy cases is simply not present where Simon’s waiver pr e v en t ed him from filing a claim to

recover the amount that h e p e rsonally paid to satisfy the balance o f Adamson’s debt to CI T. W e c a n n ot say that a waiver totally eliminating Simon’s rig ht to recover over $3.5 million has no economic substance. Given that the waiver is valid, Simon does n o t have a cl aim ag ainst the A damson
estate and thus does not meet the definition of a c re d i t o r under the B ankruptcy

Code.

Moreover, wh e n faced with a clearly drafted statute, we

are not at liberty to deviate fro m t h e t e x t in favor of a g eneraliz ed notion of p u b l i c policy

. T he Supreme Court decided in Norwest Bank W or t h i n g ton v. Ahlers
, 485 U.S. 197, 206 ( 1988), that “whatever equitable powers remain in the bankruptcy courts must and can only be ex ercised within the confines of the B ankruptcy Code.” I n order to be subject
to preference liability
, a person or an en t i t y must be a creditor. 11 U .S.C. § 547(b). A p erson is a c r e d i t o r only if he has a rig ht to pay

ment fr o m t h e debtor. 1 1 U .S.C. § 1 0 1 ( 1 0). Here, Simon waived a ny such rig ht a t the insistence of CI T. Nothing in the B ankruptcy Code prevented him from doing so, nor does any portion of the Code subject Simon to preference liability simply b ecause he received a benefit—and a conting ent o ne at that—from the pay ment b y B P Clothing to CI T. See In re Deprizio
, 874 F .2d at 1190–92 (holding that corporate insiders were not “cr e ditors” subject
to a preference claim when the c orporation paid the I n ternal Revenue Service for d el i n quent wag e withholding tax es, des p i t e t he benefit that they received by being relieved o f personal liability

for the tax es).I N R E A D A M S O N A P P A R

E L , I N C

. 21

The p ub l i c

- p o licy c o ncern raised by the Trustee in this

case is f ar from frivolous, but that concern is mor e properly addressed to Cong ress, which has the a bility to amend the B ankruptcy Code. This c ourt’s e quitable powers are limited by t h e tex t of the Code as presently worded. Norwest
, 485 U .S. at 206. According ly , we hold that when an insider
g uarantor has a bona fide basis to waive his indemnification rig hts ag ainst the debtor in bankruptcy and ta k e s no subsequent actions that would neg ate the economic impact o f that w aiver, he is absolved of a ny p reference li a b ility to which he mig ht otherwise have been subjected.

III. CONCLUSION

F or all the reasons set for th above, we AF F IRM the judg ment of the district court.

GRAB ER, Circuit J udg e, dissenting :

I respectfully di ssent. The majority ’s conclusion that Arnold Simon is no t a “creditor” for purposes of the B ankrupt cy C o de is w rong f or two independent reasons. F irst, I would follow every bankruptcy court to have decided the issue and hold that insider-g u arantors such as Simon a re “creditors.” The majority errs by looking to ex traneous facts
to decide whether the waiver is valid. Secon d
, e v e n if we

were t o look to a dditional facts, the majority ’s analy sis depends h e av i l y on a “fact” that the bankruptcy court

ex p ressly declined to find.I N R E A D A M S O N A P P A R

E L , I N C

. 22

A. Insiders and the Right to Indemnity

As its president and CEO, Simon is an insider o f Adamson Apparel, I nc. A d amson took out a loan from CI T Group Comme rcial Services, I nc. Simon personally
g uaranteed the loan. Adamson ma d e a p a rtial pay ment o f about $ 5 million on the loan in December 2003. I n September 2004, Adamson filed for bankruptcy

.

Title 11 U.S.C. § 547(b) a

uthoriz es the bankruptcy trustee to avoid certain pre-filing transfers: all transfers made in the 90-day period before f

iling and all transfers made for the benefit of a “creditor” in the one- y ea r period before filing

. B ecause the Decem b e r 2 003 partial pay ment o c curred less than a y ear before f

iling but more than 90 day s before filing
, th e t r u s tee’s ability to avoid the transfer turns on whether Simon was a “creditor” of Adamson in December 2003.

Every bankruptcy court to have addressed this issue since the important 1994 amendments to the B ankruptcy Code have
ag reed: insider-g

uarantors such as Simon are “creditors” for
pu rp o s e s of the Code even if they nominally have waived their rig h t to indemnity

. M iller v. Greystone Bus. Credit II, L.L.C. ( In re USA Detergents

, Inc.)
, 418 B .R. 5 33, 542 (B ankr. D. Del. 2 0 0 9 ); Russell v. Jones ( In re Pro Page Partners, LLC)
, 292 B

. R

. 622, 630–31 (B ankr. E.D. Tenn. 2003); Telesphere Liquidating Trust v. Galesi ( I n re Telesphere Commc’ns, Inc.)
, 229 B .R. 173, 176 n .3 (B ankr. N.D. I ll. 1999). 1 The courts’ reasoning is important:

1 T h e b an k

ru p t c y co u rts th at d ecid ed th e issu e b efo r e th e 1 9 9 4

a men d m en ts all ad d ressed t

h e in eq u itab le situ atio n th at Co n g ress f ix ed in 1 9 9 4

— allo w in g a tru stee to seek th e f u n d s f ro m th e len d

er

. A s th eI N R E A D A M S O N A P P A R

E L , I N C

. 23

[ S] uch a waiver h as no econo mic impact—if the principal debtor pay s the note, the insider
g uarantor would escape preferen c e liability
, but if the pri ncipal d ebtor does not pay the

n o te, the insider could still obtain a cl a i m ag ainst the debtor, simp l y by purchasing the lender’s note rather th a n p ay ing on the
g uarantee. Thus, the [ waiver] cou l d only be

s e e n a s an effort to e liminate, by contract, a provis i o n of the B a

n kruptcy Code. The attempted waiver of subordination rig hts was t h u s h e l d t o b e a s h a m p r o v i s i o n , unenforceable as a matter of public policy

. Telesphere
, 229 B .R. at 177 n.3; see USA Detergents
, 418 B .R. at 542 ( quoting and agr ee ing with that tex t from Telesphere ); Pro Page , 292 B .R. at 630–31 (same).

T h e majority opinion g e nerally ag r e es w ith the quoted analy sis. B ut the maj o r i ty opinion then g oes a step further—looking at additional facts in a n open-ended inquiry into whether the waiver was a “sham.” Maj. op. at 11–21. I disag ree with that ap p r o ach, which is not supported b y precedent o r by the log ic of what Cong ress tried to

a c complish. The waivers are invalid for p urposes o f the B ankruptcy Code because they attempt to defeat the o n e-y e ar look-back period via contract, even thoug h the waivers have

no rea l

- w orld economic impact. T he majority opinion searches for c lues as to whet h e r Simon actually planned to purchase t h e n o te, but that inquiry is irrelevant. B ecause Simon easily could have purchased the note as of December

m aj o rity co rrectly reco g n izes, t h o se cases p lain ly d o n o t ap ply h ere, w h ere th e tru stee seek s th e f

u n d s fro m th e in sid

er

.I N R E A D A M S O N A P P A R

E L , I N C

. 24

2003, the waiver had no real-world effect other than to defeat the B ankruptcy Code’s long er look-back period for insiders. Therefore, Simon was a creditor.

I would follow the unanimous view of the bank ru p t c y courts that have ruled o n this issue and would hold that an i n s ider-g uarantor is a “creditor” for purposes of th e B ankruptcy

Code.

B

. Reliance on a New Fact

The majority opinion’s primary reasoning is that, because Simon later paid $3.5 million toward the Adamson-CI T loan with his personal funds and did not f ile a bankruptcy claim
ag ainst Adamson, we sh ould be less worried that Simon’s waiver o f indemnification rig hts was a sha m

. A s ex p lained above, I disag ree as a matter of law that those facts a re

r e l e v a nt. B ut even if we must consider additional facts, the majority opinion errs by considering a “fact” t h a t t he bankruptcy

court ex pressly

declined to find.

No one d isp utes that, in March 2004, Simon paid CI T about $3.5 million. B ut the reason for that pay ment was hotly disputed before the bankruptcy court. Simon asserted that the
pay ment was in satisfacti o n of the Adamson-CI T loan. Plaintiff st r o n gly disag reed a nd presented evidence that the
pay ment w as to satisfy a personal debt, owed by Simon to CI T
, that had nothing whatsoever to do with Ada mson. F o r

our purposes, if the $3.5 mil l i o n p ay ment was made only to satisfy a p er s o n a l debt, then that pay ment does not demonstrate any

thing with re s p e c t to w hether the w aiver on the Adamson-CI T loan was a “sham.”I N R E A D A M S O N A P P A R

E L , I N C

. 25

E v er y one ag rees that the bankruptcy court d e clined t o reach thi s factual question. I n e ffect, the majority d ecides a d i s p uted issue of fact. B ut “[ t] rial courts find facts. W e d o not.” Fisher v. Roe
, 263 F .3d 906, 912 (9th Cir. 2 0 0 1), overruled in other part by P a y t o n v. W

oodford
, 3 46 F .3d 1204, 1217 n.18 (9th Cir. 2003) (en banc).

Making t h a t f

a ctual finding is all the more eg reg ious because the record strong ly (if n ot conclusively ) sug g ests that the $3.5 mil l i o n pay

ment was not on Adamson’s behalf but

was for a personal debt that Simon h a d acquired with respect to a different transaction and company (Grupo). I n Simon’s favor is Simon’s own self-serving testimony

. I n Plaintiff’s favor is proffered evidence that included:

• F inancial statements by CI T in earl y 2004

s h o w ing (1) that no credit of $3.5 mill i o n appeared and (2) that, as of March 15, 2004—before the $3.5 million pay men t

— Adamson owed CI T less than $200,000.

• A separate note, which nowhere references Adamson and is a personal n ote: “F OR VAL UE RECEI VED, ARNOL D H. SI MON,

a n i n d i v i d u a l ( t h e “ D e b t o r ” )
, h e r e b y unconditionally promises to pay on demand to the order of THE CI T GROUP

. . . $3,379,630.00 . . . .”

• A letter dated J anuary 7, 2003, that desc r i b e s the loan to Simon as “ y our personal loan from CI T.”I N R E A D A M S O N A P P A R

E L , I N C

. 26

• A letter from CI T that describes the loan a s “the personal note to u s dated N ovember 5, 2002 w ith an approx imate amount of $3[ .] 455 M,” w hich incl u d e d interest on the principal
amount.

• A draft sett l ement ag reement in late 2004 that states: “On or about N ovember 5, 2002, CI T made a personal loan to Simon in t h e amount of $ 3,379,630 for which Simon

ex e cuted a Demand Pro m i s s o r y Note

. . . in favor of CI T in said amount.”

• An e mail in late 2 004 that describes the loan in similar terms.

The majority opinion attempts to j u s t i fy its appellate factual finding in two w ay s. F irst, it asserts that, because the personal debt arose as part of the “Grupo t r a n s a ction,” a nd because Adamson a ssumed some of Grupo’s liabilities, “[ t] he Grupo transaction was thus simply a subset of Adamso n ’s indebtedness to CI T.” Maj. o p. at 19. The bankruptcy court

never made factual finding s on these points, so the majority opinion a ttempts to justify one improper factual finding b y making others. Moreover, w hether Adamson as s u m e d c e r t ain l iabilities to CI T is wholly irrelevant to the question of the nature of the debt between Simon and CI T. As noted above and as evidenced by the note i t s e l f a n d by other documents from 2002 and 2003, the debt in question was a personal one, owed by Simon in his individual capacity

. A c c o rding ly
, when Simon paid that p e r s o n a l d ebt, it was for his o wn benefit, not Adamson’s.I N R E A D A M S O N A P P A R

E L , I N C

. 27

S econd, the majority o pinion asserts that Plaintiff ’s lawy er “acknowledg e d at oral arg u ment that

. . . Simon personally paid CI T over $ 3.5 million to clear Adamson’s debt.” Maj. op. at 17. Such an a cknowledg ment would b e a startling concession g iven that the issue was disputed vig orously before the bankruptcy court. Unfortunately for the majority opinion, the transcript of oral a rg ume n t r e veals no such concession.

After oral arg ument, we ordered supplemental briefing on the effect of the following ex chang e:

J UDGE G I L MAN: I ’ve just g ot one question. I want to know, was the debt to CI T fully paid off on December 18, 2 003, when the B P Clothing amount was roug h ly fi v e million was in fact diverted to . . .

ATTORNEY HU N T ER: No, I think it was fully paid off on March 31st when it took the

. . . uh

. . . March 2004, w hen it g o t t he amounts from the cash collateral accounts.

That stateme n t c annot be considered a concession on the question of the reason for the March 2004 pa y m en t

. J udg e Gilm a n as ked whether the debt was fully paid in December 2003, and the lawy er answered “no.” I n contex t, the question

co n c e rned timing
, not the r eason for the 2004 pay ment. Moreover, the lawy er stated only that “I thin k ” that the d ebt

was satisfied by the March 2 004 pay ment. (Emphasis added.) I n the supplemental b riefing
, the lawy er ex plained that, a fter reviewing the record, his statement at oral arg ument had been incorrect.I N R E A D A M S O N A P P A R

E L , I N C

. 28

W e of course have hel d that a “judicial admission is binding ” when a party “ c l e arly and ex pressly conceded [ an issue] on a

ppeal, both i n b r iefing and at oral a rg ument.” United States v. Crawford
, 372 F .3d 1048, 1055 (9t h Cir. 2004) (en banc). And as the majority opinion properly notes,

an unambig uous concession at oral arg ument can b e binding

. Maj. op. at 18. B ut the majority opinion improperly ex tends that principle to a statement at oral arg ument that starts with th e e q u i vocal phrase “I think,” on a topic different from the topic of t h e q u e stion posed, o n a matter that was litig ated

ex t e n s ively before the trial court, and as to which the purported concession later was r e n ounced in a supplemental b r i e f

. See Jonibach Mgmt. Trust v. W artburg Enters., Inc.
, 750 F .3d 486, 4 91 n

. 2 (5th Cir. 2014) (“To qualify as a judicial admission, the statement must be

. . . delibe r a t e , clear, and unequivocal

. . . .” (in t e r n al quotation marks omitted)); Sicor Ltd. v. Cetus Corp.
, 51 F .3d 848, 859–60 (9th Cir. 1 995) (holding that a judicial admission may be retracted). Not only is there no suppo r t f o r t he majority opinion’s incredibly strict application of the j u dicial admissions doctrine, we do ourselves and the litig ants a g reat disservice if lawy ers must b e constantly wary that a mistaken
g uess a bout the content of the factual record, intended to aid the court, will be held ag ainst their clients conclusively

.

I would reverse the bankruptcy court’s holding that Simon

was n ot a “creditor” and would remand for f u rther proceeding s. According ly
, I dissent.