Court Opinion

ID: 3163379
Source: CourtListenerOpinion
Date Created: 2015-12-16 21:01:09.583347+00
Date Added: 2024-06-11T12:03:59.225686
License: Public Domain

FILED
                             NOT FOR PUBLICATION
                                                                           DEC 16 2015
                    UNITED STATES COURT OF APPEALS                      MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS

                             FOR THE NINTH CIRCUIT

In re: PARADIGM INTERNATIONAL,                   No. 13-56517
INC.,
                                                 D.C. No. 2:13-cv-01582-R
              Debtor,

                                                 MEMORANDUM*
ELISSA MILLER, Chapter 7 Trustee,

              Plaintiff - Appellant,

 v.

BHC INTERIM FUNDING II, L.P.,

              Defendant - Appellee.

                    Appeal from the United States District Court
                       for the Central District of California
                     Manuel L. Real, District Judge, Presiding

                        Argued and Submitted October 23, 2015
                                 Pasadena, California

Before: KLEINFELD, RAWLINSON, and NGUYEN, Circuit Judges.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
      Appellant Elissa Miller, the bankruptcy trustee (the “Trustee”) of Paradigm

International, Inc. (“Paradigm”), appeals the district court’s judgment in favor of

appellee BHC Interim Funding II L.P. (“BHC”). We have jurisdiction pursuant to

28 U.S.C. § 1291, and we affirm.

      1. The district court did not clearly err in finding that the payment BHC

obtained through an asset-backed guaranty (the “Guaranty”) from Paradigm was

not a “distribution” under Fla. Stat. § 607.06401. See, e.g., Goldstein v.

Commissioner, 298 F.2d 562, 566 (9th Cir. 1962) (“Whether or not a corporation

distributes a dividend or something else is a question of fact . . . . No one factor is

determinative . . . [and] [t]he trier of fact must consider and weigh all the different

facts involved before reaching its decision.”); Official Committee of Unsecured

Creditors v. Liberty Savings Bank, FSB (In re Toy King Distributors, Inc.), 256

B.R. 1, 163 (Bankr. M.D. Fla. 2000) (“Whether a payment constitutes a dividend is

a ‘question of fact to be determined by the Court and no one factor is

determinative.’”) (citations omitted)). Rather, the record supports the district

court’s determination that the Guaranty was a commitment from Paradigm to pay

its corporate-affiliate’s indebtedness in the event of default.

      2. The district court also correctly determined that the burden of proof on

the fraudulent transfer claim remained on the Trustee. See, e.g., Whitehouse v. Six

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Corp., 40 Cal. App. 4th 527, 533-34 (1995). The Guaranty and the stock pledge

were negotiated and executed as part of an arm’s length transaction among

sophisticated parties, and the Trustee failed to show that BHC was an “insider”

when Paradigm’s contingent obligations actually arose or that Paradigm was

controlled by BHC.

      The Trustee failed to show that BHC received a fraudulent transfer.

Paradigm was solvent when the Guaranty was executed, and the loan agreements

were negotiated with a third party (BHC) that specialized in corporate lending and

conducted extensive due diligence before agreeing to the loan. Cf. Toy King, 256

B.R. at 97-98, 119-20 (describing why creditors controlled the debtor and were

insiders at the time of the loan). While there were indicia of possible

fraud—including that the Guaranty was issued from a wholly owned subsidiary at

the command of a parent corporation for no reasonably equivalent value—the

district court correctly observed that “those are only two of many non-exclusive

factors” in the analysis. See, e.g., Wyzard v. Goller, 23 Cal. App. 4th 1183, 1190

& n.4 (1994) (noting that even the existence of several “badges of fraud” may be

insufficient to raise a triable issue of material fact). Moreover, the Trustee failed to

identify any direct evidence of an intent to defraud, and neither the 2007 loan

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transaction nor Paradigm’s financial obligations were concealed from the creditors

here, none of whom held debts antecedent to the Guaranty.

      3. The Trustee’s common law fraud claim also fails due to the absence of an

intent to defraud. See Robinson Helicopter Co. v. Dana Corp., 102 P.3d 268, 274

(Cal. 2004) (common law fraud requires knowledge of falsity and intent to

defraud). Contrary to the Trustee’s arguments, an implicit promise to pay only out

of Paradigm’s “earned surplus” is at odds with the express language in the

Guaranty promising the absolute and unconditional payment of all obligations

under the loan, secured by substantially all of Paradigm’s assets.

      The Trustee also failed to show that the payment under the Guaranty was

constructively fraudulent. There was no evidence that at the time the Guaranty was

executed, Paradigm was: (1) engaged or about to engage in business for which the

remaining assets were unreasonably small; or (2) intended to incur or reasonably

should have believed it would incur debts beyond its ability to repay. Cal. Civ.

Code § 3439.04(a)(2)(A)-(B). In fact, Paradigm and its affiliates were not

undercapitalized at the time and were able to pay debts as they came due. The

affiliate’s default occurred almost two years after BHC issued the loan and

received the Guaranty, which was secured not only by Paradigm’s assets, but also

by the assets of additional Pacific CMA, Inc. subsidiaries.

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      4. The district court properly rejected the Trustee’s claim that the Guaranty

resulted in an “insider” preferential transfer under Section 547(b) of the

Bankruptcy Code. As explained above, BHC was not an “insider,” and Paradigm

was not insolvent at the time the Guaranty was executed. See 11 U.S.C. §

547(b)(3) (indicating that prerequisite for preferential transfer claim is insolvency).

The Trustee did not show that BHC—as a secured creditor—received more

through the Guaranty than it would have received in a hypothetical Chapter 7 case

had the payment not occurred. See id. § 547(b)(5); Battan v. TransAmerica

Commercial Financial Corp. (In re Smith’s Home Furnishings, Inc.), 265 F.3d

959, 963 (9th Cir. 2001) (transfer is not preferential unless it enables the transferee

creditor to receive more than he or she would have received in a hypothetical

Chapter 7 case); Committee of Creditors v. Koch Oil Co. (In re Powerene Oil Co.),

59 F.3d 969, 972 (9th Cir. 1995) (same).

      5. Finally, the Trustee did not establish any basis for subordination. The

contractual language did not require BHC to subordinate payments under the

Guaranty in favor of other creditors. The agreement states that the lien and

security interest in issue are enforceable “only to the maximum extent that would

not cause this Guaranty or such lien and security interest to constitute a Fraudulent

Conveyance.” Since the court correctly determined that BHC’s enforcement of the

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Guaranty was not a fraudulent conveyance, there is no basis for contractual

subordination under 11 U.S.C. § 510(a).

      Likewise, there was no basis for equitable subordination. See, e.g., Henry v.

Lehman Commercial Paper, Inc. (In re First Alliance Mortgage Co.), 471 F.3d

977, 1006 (9th Cir. 2006). BHC had the right to obtain payment under the

Guaranty as a secured creditor, and there was no evidence of fraud or concealment.

Accordingly, the district court properly rejected the Trustee’s claim for equitable

subordination. See id. (“Although equitable subordination can apply to an ordinary

creditor, the circumstances are ‘few and far between.’”) (quoting ABF Capital

Mgmt. v. Kidder Peabody & Co., Inc. (In re Granite Partners, L.P.), 210 B.R. 508,

515 (Bkrtcy. S.D.N.Y.1997)).

      AFFIRMED.

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