Opinion ID: 718698
Heading Depth: 1
Heading Rank: 3

Heading: analysis

Text: 10 According to 11 U.S.C. § 547(b), 11 [T]he trustee may avoid any transfer of an interest of the debtor in property-- 12 (1) to or for the benefit of a creditor; 13 (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; 14 (3) made while the debtor was insolvent; 15 (4) made-- 16 (A) on or within 90 days before the date of the filing of the petition; 17 ... and 18 (5) that enables such creditor to receive more than such creditor would receive if-- 19 (A) the case were a case under chapter 7 of this title; 20 (B) the transfer had not been made; and 21 (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 22 The burden of proving each of these elements rests on the trustee. 11 U.S.C. § 547(g) (the trustee has the burden of proving the avoidability of a transfer under subsection (b) of this section); Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir.), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824, 100 L.Ed.2d 925 (1988). 23 As our first order of business, we would like to address the issue of who the debtor is in this case. In his capacity as bankruptcy trustee for the legal vestiges of the HedgedInvestments fund, Mr. Sender represents the estates of four entities: HIA Inc., HIA L.P., HIA II L.P., and HSA L.P. Both the bankruptcy court and the district court failed to address squarely the issue of which of these four entities Mr. Sender represents in this case, i.e., which entity is the debtor. Section 547(b) allows the trustee to avoid certain transfers of an interest in the debtor in property so long as the transfers were made on or within 90 days before the date of the filing of the [bankruptcy] petition. 11 U.S.C. § 547(b)(4)(A). 2 As neither Mr. Sender nor Mr. Johnson disputes, HIA Inc. was the only debtor entity of the four Mr. Sender represents to file its petition within ninety days after the transfer to Mr. Johnson. Accordingly, HIA Inc. is the only entity eligible for consideration as the debtor pursuant to Mr. Sender's claim under § 547(b). In other words, Mr. Sender can prevail on his claim under § 547(b) only if he can meet his burden of proof as to each element of that claim qua HIA Inc. 24 Pursuant to § 547(b)'s first enumerated requirement, Mr. Sender had the burden of proving the pre-petition transfer to Mr. Johnson was to or for the benefit of a creditor of HIA Inc. 11 U.S.C. § 547(b)(1). The bankruptcy court found Mr. Johnson was not a creditor of HIA Inc. Noting that an equity security holding does not make the equity holder a creditor, the bankruptcy court asserted: The facts presented indicate that it was the intent of [Mr.] Comstock and [Mr.] Donahue, at the time CCM invested [Mr.] Johnson's $60,000.00, that CCM become an equity security holder in HSA [L.P.].... Therefore, the Court concludes that neither CCM nor [Mr.] Johnson was a creditor of the debtors. The bankruptcy court rejected Mr. Sender's contention that HSA L.P.'s guaranteed return of fifteen percent made Mr. Johnson a creditor. The court reasoned: 25 An investor, based on one transaction, with the specific intent to become an equity security holder, cannot be considered both an equity security holder and a creditor. Either CCM became an equity security holder in HSA [L.P.] as a result of its investment of $60,000 on behalf of [Mr.] Johnson, or it merely made a loan to HSA [L.P.], thereby being entitled to a guaranteed rate of return. 26 The district court disagreed with the bankruptcy court's analysis. According to the district court: 27 [Mr. Johnson] and the other investor limited partners had a legal right to payment of the guaranteed return. While limited partners are not claim holders by virtue of their partnership interests alone, the added factor of guaranteed returns makes them both claim holders and equity security holders for purposes of the Bankruptcy Code. The limited partners are creditors because they are entities with a claim against the debtor that arose ... before the order for relief concerning the debtor. 11 U.S.C. § 101(10). Therefore, the distribution to [Mr. Johnson] was to or for the benefit of a creditor. 28 In this appeal, Mr. Sender predictably advocates the position taken by the district court. He argues Mr. Johnson was a creditor of HIA Inc. because of his legal entitlement to the guaranteed payments of money. 3 Mr. Johnson argues he was not a creditor, contending the fifteen percent guarantee did not convert his equity security holding in HSA L.P. into a claim against HIA Inc. Focusing on the fact that HIA Inc. is the debtor in this case, Mr. Johnson also argues that Mr. Sender presented no evidence at trial to establish that the guarantee from HSA L.P. to its limited partners rendered HIA Inc. liable on that guarantee. 29 We begin our analysis by noting Mr. Johnson cannot be considered a creditor of HIA Inc. merely on the basis of his equity investment in HSA L.P. This is true for two reasons. First, limited partners' interests do not constitute 'claims' as defined under [11 U.S.C. § 101(5) ]. They are equity security holders.... Simply put, an equity interest is not a claim against the debtor.... In re Pine Lake Village Apartment Co., 21 B.R. 478, 480 (Bankr.S.D.N.Y.1982); see also In re Riverside-Linden Inv. Co., 85 B.R. 107, 112 (Bankr.S.D.Cal.1988) ( 'partners in the [debtor] partnership are not claim holders by virtue of their partnership interest ....' ) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 197 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6158), aff'd, 99 B.R. 439 (9th Cir. BAP 1989); 11 U.S.C. § 101(16) (establishing that an interest of a limited partner in a limited partnership is an equity security). As established by 11 U.S.C. § 101(10), creditor means an entity that has a claim against the debtor. Since limited partners do not satisfy this definition on the basis of their partnership interests, they are not creditors on the basis of those interests. See Estes & Hoyt v. Crake (In re Riverside-Linden Inv. Co.), 925 F.2d 320, 323 (9th Cir.1991) (A partnership interest is not a claim.... Partners own the partnership subject to the profits or losses. Creditors, however, hold claims regardless of the performance of the partnership business. Thus, an ownership interest is not a claim against the partnership.). 30 The second, more fundamental, reason why Mr. Johnson did not become a creditor of HIA Inc. merely by virtue of his equity interest in HSA L.P. is because HIA Inc. and HSA L.P. are separate entities. Though HIA Inc. was the managing general partner of HSA L.P., Mr. Sender has given us no factual or legal reason to believe that Mr. Johnson's equity interest in the partnership would make him a creditor of the general partner. 31 Since Mr. Johnson cannot be considered a creditor of HIA Inc. merely because he owned an equity security interest in HSA L.P., Mr. Sender is left to argue that the fifteen percent guaranteed return for the first half of 1990 created a creditor-debtor relationship between Mr. Johnson and HIA Inc. As we have already discussed, this guarantee is evidenced by an exhibit J proffered by Mr. Sender at trial. The exhibit is a letter, and the letterhead indicates it was sent by HSA L.P. The letter is signed by Mr. Donahue on behalf of HIA Inc. as General Partner. Mr. Sender argues that this guarantee from HSA L.P. to its limited partners made Mr. Johnson a creditor of HIA Inc. Mr. Sender focuses his argument on the reasoning and holding in In re St. Charles Preservation Investors, Ltd., 112 B.R. 469 (D.D.C.1990), in which the court was asked to decide whether a partnership agreement that guaranteed limited partners a stated return on their capital investments made the limited partners creditors of the partnership. See id. at 470. The court in St. Charles found the guarantee made the limited partners creditors of the partnership. Id. at 474-75. 32 In reversing the bankruptcy court in this case, the district court relied on the St. Charles decision. Mr. Sender urges us to do the same. There is an important distinction between St. Charles and the instant case that the district court did not address. In St. Charles, the court was faced with whether a guaranteed rate of return from a partnership to its limited partners made the limited partners creditors of the partnership. In this case, the partnership, HSA L.P., is not the debtor. The debtor is HIA Inc., the managing general partner of HSA L.P. Thus, we need not consider whether the 1990 guarantee created a claim by Mr. Johnson against HSA L.P. 4 until we first determine whether Mr. Sender has proven HIA Inc. would be liable on that claim. Mr. Sender's brief devotes one sentence to this issue. He contends HIA Inc. was the general partner of HSA, L.P. and was responsible for the guaranteed minimum returns. Though HIA Inc. might have been the general partner of HSA L.P., that does not a fortiori mean it was equally responsible, along with HSA L.P., for satisfying the guaranteed returns. Whether HIA Inc. as general partner of HSA L.P. was independently responsible for the debts of the partnership is a factual issue Mr. Sender had the burden of proving at trial. The bankruptcy court did not find HIA Inc. was liable for the debts of HSA L.P., and Mr. Sender does not support his statement with cites to uncontroverted evidence in the record that would justify such a finding. 5 33 To be sure, our own review of the scant record provided on appeal suggests HIA Inc. did make some type of assurance that the minimum return would be paid. Exhibit J references the minimum rate-of-return ... against which [HIA Inc.] has pledged corporate assets. The exhibit does not explain which corporate assets HIA Inc. purportedly pledged or how it pledged them. Mr. Comstock shed some light on the so-called pledge in his testimony. When asked whether exhibit J was in fact a guarantee of the minimum rate of return, Mr. Comstock responded, It was always understood by me that it was a limited guarantee backed by an escrow account that Mr. Donahue had maintained at Central Bank of Denver. We have seen nothing in the record to indicate what, if any, funds resided in this escrow account. For all we know, it had no funds. The entire guarantee, in that it seems to have been limited to the escrow account, could have been illusory. Certainly, we cannot affirm a reversal of the bankruptcy court on the speculation that it was not illusory. 34 Given that Mr. Sender has not shown us he met his burden of proving HIA Inc. was independently liable for the debts of HSA L.P., we conclude the bankruptcy court did not clearly err in finding Mr. Johnson was not a creditor of HIA Inc. Since Mr. Johnson was not a creditor of HIA Inc., Mr. Sender cannot satisfy the requirements of 11 U.S.C. § 547(b). 35 For the reasons given above, we REVERSE the decision of the district court to the extent it is inconsistent with this decision.