case 6:13-ap-01127-mj doc 57 filed 06/13/13 entered 06/13 ...€¦ · carol connor cohen mark a....

ARENT FOX LLP ATTORNEYS AT LAW

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DAVID DUBROW (admitted pro hac vice)CAROL CONNOR COHEN (admitted pro hac vice) METTE H. KURTH (SBN 187100) MARK A. ANGELOV (admitted pro hac vice) ARENT FOX LLP 555 West Fifth Street, 48th Floor Los Angeles, CA 90013-1065 Telephone: 213.629.7400 Facsimile: 213.629.7401 [email protected] [email protected] [email protected] [email protected] Attorneys for Ambac Assurance Company, Erste Europaische Pfandbrief-und Kommunalkreditbank AG and Wells Fargo Bank, N.A., as Trustee

UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF CALIFORNIA

RIVERSIDE DIVISION

In re

CITY OF SAN BERNARDINO, CALIFORNIA, Debtor.________ CITY OF SAN BERNARDINO, CALIFORNIA, Plaintiff, v. STATE OF CALIFORNIA; JOHN CHIANG, in his official capacity as State Controller of the State of California; OFFICE OF STATE CONTROLLER, STATE OF CALIFORNIA; ANA J. MATOSANTOS, in her official capacity as the Director of the State of California Department of Finance; CALIFORNIA DEPARTMENT OF FINANCE; LARRY WALKER, in his official capacity as the Auditor Controller, Treasurer, and Tax Collector of the County of San Bernardino; COUNTY OF SAN BERNARDINO; CYNTHIA BRIDGES, in her official capacity as the Executive Director of the CALIFORNIA STATE BOARD OF EQUALIZATION; CALIFORNIA STATE BOARD OF EQUALIZATION, Defendants.

Case No.: 6:12-bk-28006-MJ

Chapter 9

Adv. Proc. 6:13-ap-01127-MJ COMPENDIUM OF CASE DECISIONS NOT IN OFFICIAL REPORTERS CITED IN BRIEF AMICI CURIAE OF THE POB CREDITORS IN SUPPORT OF THE CITY’S MOTION TO ENFORCE AUTOMATIC STAY AND IN OPPOSITION TO THE STATE DEFENDANTS’ MOTION TO DISMISS

HEARING DATE

Date: July 2, 2013 Time: 1:30 p.m. Judge: Honorable Meredith A. Jury Place: United States Bankruptcy Court 3420 Twelfth Street Courtroom 301 Riverside, CA 92501

Case 6:13-ap-01127-MJ Doc 57 Filed 06/13/13 Entered 06/13/13 14:34:47 Desc Main Document of 146


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- 1 -

Ambac Assurance Company, Erste Europäische Pfandbrief-und Kommunalkreditbank

AG, and Wells Fargo, NA, Trustee (collectively the “POB Creditors”) filed their brief amici

curiae in support of the City of San Bernardino’s Motion for Order Enforcing Automatic Stay,

and in opposition to the Motion to Dismiss the First Amended Complaint filed by Defendants

John Chiang, the Office of the State Controller of California, Ana J. Matosantos, and the

California Department of Finance. Cited in the POB Creditors’ brief amici curiae are certain case

decisions not available in the official reporters. Those decisions are attached hereto in the

following order:

A. Alcala v. Bank of Am. Gen. Counsel (In re Alcala), 845 F.2d 1029 (9th Cir. 1988)

(unpublished disposition)

B. Arch Ins. Co. v. Sierra Equip. Rental, Inc., 2012 WL 5897327 (E.D. Cal. Nov. 13,

2012)

C. The Billing Res. v. Fed. Trade Comm’n (In re The Billing Res.), 2007 WL

3254835 (Bankr. N.D. Cal. Nov. 2, 2007)

D. Schoenmann v. State of California, Franchise Tax Board (In re Bryco Funding,

Inc.), 2009 WL 3271309 (Bankr. N.D. Cal. Oct. 9, 2009)

E. Bouma Dairy v. Braun (In re Coast Grain Co.), 2006 WL 6810917 (B.A.P. 9th

Cir. Jan. 31, 2006)

F. Conrad v. NMTC Inc. (In re Conrad), 2007 WL 3273441 (Bankr. W.D. Wash.

Nov. 2, 2007)

G. Chiang v. Neilson (In re Death Row Records, Inc.), 2012 WL 952292 (B.A.P. 9th

Cir. Mar. 21, 2012)

H. IndyMac Bancorp, Inc. v. Fed. Deposit Ins. Corp. (In re IndyMac Bankcorp, Inc.),

2012 WL 1037481 (Bankr. C.D. Cal. Mar. 29, 2012)

I. In re Jefferson Cnty., Ala., 2013 WL 1613240 (Bankr. N.D. Ala. Apr. 15, 2013)

J. Kaisha v. Dodson, 2008 WL 3398778 (N.D. Cal. Aug. 11, 2008)

K. In re Linda Vista Cinemas, L.L.C., 2010 WL 2105613 (Bankr. D. Ariz. May 25,

2010)



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L. Weiss v. United States, 2000 WL 1052983 (E.D. Pa. July 31, 2000)

Dated: June 13, 2013 Respectfully submitted,

DAVID L. DUBROW CAROL CONNOR COHEN MARK A. ANGELOV ARENT FOX LLP

By: /s/ Mette H. Kurth METTE H. KURTH Counsel for Ambac Assurance Company, Erste Europäische Pfandbrief-und Kommunalkreditbank AG and Wells Fargo Bank, N.A., as Trustee


EXHIBIT A


In re Alcala, 845 F.2d 1029 (1988)

© 2013 Thomson Reuters. No claim to original U.S. Government Works. 1

Unpublished Disposition845 F.2d 1029

NOTICE: THIS IS AN UNPUBLISHED OPINION.(The Court's decision is referenced in a “Table of

Decisions Without Reported Opinions” appearingin the Federal Reporter. Use FI CTA9 Rule 36-3 for

rules regarding the citation of unpublished opinions.)United States Court of Appeals, Ninth Circuit.

In re Gilbert and Darlene ALCALA.Gilbert and Darlene ALCALA, Plaintiffs-Appellants,

v.BANK OF AMERICA GENERAL COUNSEL,

Edward D. Jellen, Trustee, Defendants-Appellees.

No. 87-2438. | Submitted April

15, 1988 * . | Decided April 26, 1988.

N.D.Cal.

AFFIRMED.

On Appeal from the United States District Court for theNorthern District of California. D. Lowell Jensen, DistrictJudge, Presiding.

Before SNEED, HUG, and KOZINSKI, Circuit Judges.

Opinion

MEMORANDUM **

*1 The Alcalas, debtors in a Chapter 7 bankruptcyproceeding, seek reversal of the district court's affirmanceof an order of the bankruptcy court. That order denied theAlcalas' motion to confirm abandoned property and grantedthe bankruptcy trustee's motion for an order authorizingcompromise. We affirm the district court's order.

The Alcalas first argue that the bankruptcy court lackedjurisdiction over their claims for “wrongful forcing intobankruptcy” and emotional distress because the claims aroseafter their bankruptcy petition. The Alcalas offer no real

support for their contention. The events from which theirdamages arose, certain alleged breaches of contract and fraud,occurred before their Chapter 7 petition was filed. Therefore,the causes of action accrued pre-petition and are part of theestate vested in the trustee. 11 U.S.C. § 541(a)(2) (1982).

We need not address the Alcalas' arguments based on section70(a) of the Bankruptcy Act and the cases construing it,except to note that the Bankruptcy Act had already beensuperseded by the Bankruptcy Code when the petition inthis case was filed. The Act has no bearing on this case.Moreover, contrary to the Alcalas' assertion, their prospectiveadvantage claim does not come within the ambit of thefuture earnings exception to estate property embodied in theCode. 11 U.S.C. § 541(a)(6). The claim does not constitute“earnings from services performed by an individual debtorafter the commencement of the case.” Id. In fact, the Alcalasnowhere assert that they performed any such services.

The Alcalas' second argument is that the bankruptcy courtabused its discretion in failing to abstain while the state courtdetermined their capacity to sue and the transferability of theircauses of action. We can discern no reason that the bankruptcycourt should have abstained. 28 U.S.C. § 1334(c)(2) does notrequire abstention here because the estate's ownership of thedebtor's property is an issue that arises under Title 11. See11 U.S.C. § 541. The Alcalas' other contention, that the statecourt should have been allowed to determine the assignabilityof the causes of action, also has no merit. As we have held, theassignability under state law of causes of action is no longeran issue in determining whether property is to be included inthe estate. Sierra Switchboard Co. v. Westinghouse ElectricCo., 789 F.2d 705, 708-09 (9th Cir.1986) (construing 11U.S.C. § 541). Therefore, the bankruptcy court did not abuseits discretion in failing to abstain pending a state courtdecision on assignability.

Having found no merit in any of appellants' arguments, weaffirm with costs to appellee.

AFFIRMED.

Parallel Citations

1988 WL 40558 (Table)

Footnotes

* The panel finds this case appropriate for submission without oral argument pursuant to Fed.R.App.P. 34(a) and 9th Cir.R. 34-4.


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In re Alcala, 845 F.2d 1029 (1988)


** This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th

Cir.R. 36-3.

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EXHIBIT B


Arch Ins. Co. v. Sierra Equipment Rental, Inc., Slip Copy (2012)


2012 WL 5897327Only the Westlaw citation is currently available.

United States District Court,E.D. California.

ARCH INSURANCE COMPANY,a Missouri corporation, Plaintiff,

v.SIERRA EQUIPMENT RENTAL, INC., a California

corporation, Melvin R. Weir, Carolyn Scarola, astrustee of the Dry Creek Ranches Trust, Defendants.

No. CIV S–12–0617 KJM KJN. | Nov. 13, 2012.

Attorneys and Law Firms

Andrew J. Ramos, Andrew Joel Van Ornum, Bennett JinchulLee, Watt, Tieder, Hoffar & Fitzgerald, LLP, San Francisco,CA, for Plaintiff.Kevin F. Rooney, Pinnacle Law Group,LLP, San Francisco, CA, Chris Kuhner, Eric A. Nyberg,Kornfield Nyberg Bendes & Kuhner, PC, Oakland, CA, forDefendants.

Opinion

ORDER

K.J. MUELLER, District Judge.

*1 This case was on the court's calendar on November 9,2012 for hearing of the following motions filed by plaintiffArch Insurance Company (“Arch”): Motion for PreliminaryInjunction against defendants Sierra Equipment Rental Inc.(“Sierra”), Melvin R. Weir and Carolyn Scarola, as trusteeof the Dry Creek Ranches Trust (“DCR”); Motion forTemporary Restraining Order against proposed defendantsCarolyn Scarola, Karrie Kindell, Roy Lanza and HustBrothers, Inc. (“Hust”) (ECF 58); and Motion for Leave toFile a First Amended Complaint and Modify the PretrialScheduling Order (ECF 52). Sierra, Weir and Scarola filedan opposition to the Motion for Leave to Amend (ECF60) but did not submit a written opposition to the Motionfor Preliminary Injunction. There was no response filed orappearance made in response to the Motion for TemporaryRestraining Order. At hearing, Andrew Ramos appeared forArch; Kevin Rooney appeared for Sierra and Weir; BruceCornelius appeared for Carolyn Scarola individually; andChris Kuhner appeared for Carolyn Scarola as Dry CreekRanches Trustee.

For the reasons explained below, the court GRANTS Arch'sMotion for Preliminary Injunction and Motion for Leave toFile a First Amended Complaint and Modify the PretrialScheduling Order, but DENIES Arch's Motion for TemporaryRestraining Order without prejudice.

I. BackgroundArch's claims arise from its issuance of surety bonds to Sierrafor Sierra's contracted construction projects for the State ofCalifornia Department of Transportation (“CalTrans”) andTutor–Saliba between December 2009 and January 2011.(ECF 2 ¶¶ 9–10.) In its original complaint filed on March

9, 2012, Arch alleged that Sierra, Weir, Scarola, 1 andthe Dry Creek Ranch Trust (collectively, “Indemnitors”)executed a General Indemnity Agreement (“GIA”) promisingto indemnify Arch against any losses that Arch might incurfrom issuing the bonds. On January 31, 2012, Sierra notifiedArch that it needed $3 million in financial assistance afterdefaulting on its project for CalTrans. (ECF 2 ¶¶ 19–20.)In turn, Arch requested that Sierra and Indemnitors deposit$1,461,918.83 in collateral, the amount Arch estimated it hadreceived in claims, discharge Arch from the bonds, and allowArch to inspect books and records, consistent with the termsof the GIA. (Id. ¶ 21.) Arch asserts that Sierra and Indemnitorshave not complied with these obligations under the GIA. (Id.¶¶ 28–30.) The court issued an order for a writ of attachmenton May 18, 2012 allowing Arch to attach defendants' propertyin the amount of $1,661,980, which included attorney's fees.(ECF 36.)

Through its declarations submitted in support of its Motionfor Preliminary Injunction, Arch has established that itprovided three surety bonds to Sierra in the amounts of$11,311,521.95, $5,655,760.98 and $6,532,874.00. (Decl.of William Pearce ¶ 6, ECF 59.) Subsequently, Arch paid$3,500,000.00 to CalTrans for the difference between thecontracted price and the actual completion price. (Id. ¶ 7.)Arch also made numerous payments to various other partiesregarding the same project, totaling more than $1,440,840.00.(Id. ¶¶ 8–9.) Arch's total losses on its bonds to Sierra are$5,355,243.74. (Id. ¶ 10.) Indemnitors were obligated underthe GIA to reimburse Arch for these losses. (Id. ¶ 11.)

*2 After filing its original complaint, Arch subpoenaeddefendants' bank records and discovered the facts onwhich it bases the present motions. (Decl. of Andrew J.Ramos, ¶¶ 9–11, ECF 54.) Arch's forensic accountant, Mary


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Lynn Kotansky, reviewed transactions between Sierra andCalTrans. (Decl. of Mary Lynn Kotansky ¶¶ 3–4, ECF 58–6.) CalTrans paid Sierra a total of $2,783,907.13 for theconstruction project. (Id. ¶ 5.) Kotansky was unable to locatedeposits into Sierra's Bank of Marin account corresponding

to $2,019,492.57 of those payments from CalTrans. 2 (Id. ¶8.) Kotansky also determined that on the same date that Sierrareceived $465,355.15 from CalTrans in Sierra's account,Sierra President Karrie Kindell wrote a check from the sameaccount to Weir personally for $300,000.00, which Kotanskyconcluded came from the CalTrans payment. (Id. ¶¶ 9–10;Decl. of Andrew J. Ramos ¶¶ 12–15, ECF 54; Exs. CE, ECF57.) Arch provided evidence that Weir withdrew $100,000from Sierra's Bank of America account after Arch requestedthat Sierra and Indemnitors pay collateral owed under theGIA, (Decl. of Andrew J. Ramos ¶¶ 18–19, Exs. F–G, ECF57), and that Scarola withdrew $100,000 from DCR's accountafter Arch filed its initial complaint (Decl. of Andrew J.Ramos ¶ 21, Ex. H, ECF 57) and an additional $25,000from DCR's account after the court's issuance of a writ ofattachment (Decl. of Andrew J. Ramos ¶ 22, Exs. I, K, ECF57). Arch also asserts that Roy Lanza, a co-owner of DCR'sproperty in Butte County, withdrew $165,000 from DCR'saccount with Gold Country Bank after Arch requested thatIndemnitors pay collateral. (Decl. of Andrew J. Ramos ¶¶ 26–29, Ex. L–N, ECF 54.)

Additionally, Arch provided evidence that DCR received$268,331.00 from the sale of its cattle in September 2012,which was paid to Weir and Hust Brothers, Inc. (“Hust”).(Id. ¶¶ 32–35.) The Bill of Sale for the cattle represented thatthey belonged to Hust, and Weir told the livestock auctionhe wanted the sale to proceed in Hust's name, but the saleproceeded in DCR's name because a brand inspector forthe State of California Department of Food and Agriculturedetermined the cattle were DCR's. (Decl. of Cris Carlson, ¶¶5–8, ECF 58–4.)

Defendants contest that DCR received funds from the cattlesale and asserts that DCR's funds “were used to pay[DCR] expenses; including but not limited to walnut orchardmaintenance, feed for cattle, rent for trucks, watering for theproperties and other necessary expenses.” (Decl. of CarolynS. Scarola ¶¶ 5–6, ECF 61.)

II. Motion to AmendIn its original complaint filed on March 9, 2012, Archalleged claims for (1) breach of contract against Sierra

and Indemnitors, (2) promissory estoppel against Sierra andIndemnitors, (3) a claim for conspiracy to commit fraudagainst Sierra, Indemnitors, and Scarola, (4) a claim fornegligent misrepresentation against Sierra, Indemnitors, andScarola, and (5) a claim for intentional misrepresentationagainst Scarola. (ECF 2.) Arch sought (1) declaratory reliefagainst Sierra and Indemnitors, (2) damages of at least$75,000, plus attorneys' fees, for each of Arch's claimsfor breach of contract, promissory estoppel, conspiracy tocommit fraud, negligent misrepresentation, and intentionalrepresentation, (3) specific performance of the GIA by Sierraand Indemnitors, and (4) injunctive relief/quia timet againstSierra and Indemnitors. (Id.)

*3 Arch's proposed First Amended Complaint (“FAC”)omits the third, fourth, or fifth causes of action of Arch'soriginal complaint and includes several new claims, includingclaims against new defendants. (ECF 55.) The proposedFAC includes (1) a claim for conversion against Indemnitors,(2) a claim for conspiracy to convert against Indemnitorsand Kindell, (3) a claim for conversion against DCR Trust,Weir, Scarola, Lanza and Hust, (4) a claim for fraudagainst Indemnitors, (5) a claim for violation of the UniformFraudulent Transfer Act (“UFTA”), Cal. Civ.Code § 3439,et seq. against all defendants, and (6) a claim for conspiracyto violate the Uniform Fraudulent Transfer Act againstIndemnitors, Scarola, Kindell, Lanza and Hust. (Id.) Inaddition to its original requests for relief, Arch requestsdamages of at least $75,000, plus attorneys' fees, for each ofArch's additional claims and injunctive relief under its claimsfor conversion and violations of UFTA. (Id.)

Federal Rule of Civil Procedure 15(a)(2) states “[t]he courtshould freely give leave [to amend its pleading] when justiceso requires” and the Ninth Circuit has “stressed Rule 15'spolicy of favoring amendments.” Ascon Properties, Inc. v.Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir.1989). “Inexercising its discretion [regarding granting or denying leaveto amend] ‘a court must be guided by the underlying purposeof Rule 15–to facilitate decision on the merits rather thanon the pleadings or technicalities.’ ” DCD Programs, Ltd.v. Leighton, 833 F.2d 183, 186 (9th Cir.1987) (quotingUnited States v. Webb, 655 F.2d 977, 979 (9th Cir.1981)).However, “the liberality in granting leave to amend is subjectto several limitations. Leave need not be granted where theamendment of the complaint would cause the opposing partyundue prejudice, is sought in bad faith, constitutes an exercisein futility, or creates undue delay.” Ascon Properties, 866F.2d at 1160 (internal citations omitted). In addition, a court


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should look to whether the plaintiff has previously amendedthe complaint, as “the district court's discretion is especiallybroad ‘where the court has already given a plaintiff one ormore opportunities to amend [its] complaint.’ ” Id. at 1161(quoting Leighton, 833 F.2d at 186 n. 3).

Arch argues it should be allowed to file a FAC becausenone of the factors enumerated in Ascon Properties applies.The court agrees. There will be no undue prejudice to thedefendants because discovery is ongoing, thirteen monthsremain before the current trial date, and Arch's proposedchanges to the pretrial scheduling order would allow theparties additional time to complete discovery and prepare fortrial without unduly delaying trial. (Pl.'s Mem. in Supp. ofMot. to Amend Compl. at 6, 9, ECF 53.) Moreover, Arch filedits motion to amend its complaint as soon as it learned of newfacts and only six months after the original complaint. (Id. at6.) Finally, there is no indication that Arch's proposed claimsare futile or that they are brought in bad faith. Defendantshave not offered a reason to overcome the Ninth Circuit'spreference towards amending complaints; their sole argumentis that they do not have the resources to litigate the claims.(Defs.' Joint Mem. in Supp. of Opp'n of Mot. to AmendCompl. at 4, ECF 60.) Prejudice to a defendant from theaddition of new claims to a complaint generally is found onlywhen the plaintiff has substantially delayed requesting leaveto amend. E.g., United States v. Pend Oreille Public UtilityDist. No. 1, 28 F.3d 1544, 1552–53 (9th Cir.1994); MorongoBand of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9thCir.1990). The motion to amend is granted.

III. Motion for Preliminary Injunction*4 Arch seeks a preliminary injunction freezing the assets

of Sierra and Indemnitors. As provided by Federal Rule ofCivil Procedure 65, a court may issue a preliminary injunctionto preserve the relative position of the parties pending atrial on the merits. University of Texas v. Camenisch, 451U.S. 390, 395, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981). Theparty seeking injunctive relief must show that “he is likely tosucceed on the merits, that he is likely to suffer irreparableharm in the absence of preliminary relief, that the balance ofequities tips in his favor, and that an injunction is in the publicinterest.” Winter v. Natural Resources Defense Council, Inc.,555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008); Munafv. Green, 553 U.S. 674, 689–90, 128 S.Ct. 2207, 171 L.Ed.2d1 (2008).

Before the Winter decision, the Ninth Circuit employed a“sliding scale” or “serious question” test, which allowed a

court to balance the elements of the test “so that a strongershowing of one element may offset a weaker showing ofanother.” See Clear Channel Outdoor, Inc. v. City of LosAngeles, 340 F.3d 810, 813 (9th Cir.2003). Recently, theCircuit found that its sliding scale test survived Winter: acourt may issue a preliminary injunction when a plaintiffraises serious questions going to the merits and demonstratesthat the balance of hardships tips sharply in his favor, so longas the court also considers the remaining two prongs of theWinter test. Alliance for the Wild Rockies v. Cottrell, 632 F.3d1127, 1135 (9th Cir.2011).

A. Authority to Issue Preliminary Injunction FreezingAssetsA court may not issue a preliminary injunction freezing aparty's assets unless the party seeking the injunction has stateda cause of action for equitable relief. In re Focus Media, Inc.,387 F.3d 1077, 1084–85 (9th Cir.2004); U.S. ex rel. Rahmanv. Oncology Assocs., 198 F.3d 489, 496 (4th Cir.1999). Acreditor's demand for money damages based on a claim forbreach of contract alone does not allow the court to issuea preliminary injunction restraining the defendant's assets.Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund,Inc., 527 U.S. 308, 333, 119 S.Ct. 1961, 144 L.Ed.2d 319(1999). Additionally, granting a preliminary injunction isonly appropriate “to preserve the status quo pending judgmentwhere the legal remedy might prove inadequate and thepreliminary relief furthers the court's ability to grant the finalrelief requested.” In re Focus Media Inc., 387 F.3d at 1085(quoting Oncology Assocs., 198 F.3d at 496–97).

The court finds that it has authority here to grant a preliminaryinjunction freezing defendants' assets based on Arch's claims.Arch's original complaint and proposed FAC include acause of action for promissory estoppel and a request forspecific performance, both based in equity. Heine v. Bd.

of Levee Com'rs, 19 Wall. 655, 86 U.S. 655, 659, 22L.Ed. 223 (1873) (doctrine of specific performance is an“acknowledged ground” of equity jurisdiction); San DiegoCity Firefighters, Local 145, AFL–CIO v. Bd. of Admin. ofSan Diego City Employees' Ret. Sys., 206 Cal.App.4th 594,618, 141 Cal.Rptr.3d 860 (2012) (“Promissory estoppel isa doctrine which employs equitable principles to satisfy therequirement that consideration must be given in exchangefor the promise sought to be enforced.” (citations omitted)).Additionally, Arch requests injunctive relief in its complaint,the same type of relief it seeks through its present request forpreliminary injunction. See In re Focus Media, 387 F.3d at1085.


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B. Likelihood of Success on the Merits*5 On the record before the court, Arch has shown a

likelihood of prevailing on the merits of its claim for breachof contract against Sierra and Indemnitors. Arch has providedfacts showing that defendants did not meet their obligationsunder the GIA. As defendants have not provided any factscontradicting Arch's claims, this prong of the preliminaryinjunction test is met. See McDonald's Corp. v. Robertson,147 F.3d 1301, 1313 (11th Cir.1998) (upholding districtcourt's grant of preliminary injunction where court hadaccepted plaintiff's version of the facts, as defendants hadfailed to dispute them); Williams v. San Francisco UnifiedSch. Dist., 340 F.Supp. 438, 442 (N.D.Cal.1972) (explainingthe court must accept the statements in unopposed affidavitssubmitted in support of preliminary injunction as true).

C. Irreparable HarmArch also has demonstrated a likelihood of irreparableharm in the absence of a preliminary injunction, as it hasshown it is probable “there [is] substantial danger that thedefendants would transfer or conceal [Arch's] funds, resultingin denying recovery to [Arch].” In re Estate of FerdinandMarcos, Human Rights Litigation, 25 F.3d 1467, 1480(9th Cir.1994). Arch has presented evidence supporting aninference that Sierra and DCR have concealed funds receivedfrom CalTrans and transferred those funds to Weir, Scarola,Lanza and Hust, rather than paying Arch as required by theterms of the GIA. Again, defendants have not disputed thatthe funds were not transferred as Arch alleges, nor explainedhow their use of the payments from CalTrans was legitimate.

D. Balance of Equities and the Public InterestThe court must weigh the anticipated hardships to theparties in considering whether to grant Arch's request for apreliminary injunction. Stormans, Inc. v. Selecky, 586 F.3d1109, 1138 (9th Cir.2009). Here, in the absence of anyevidence to the contrary, the danger that Arch would not beable to recover on its claims against defendants is greater thanthe harm to defendants from freezing their assets before trial.Finally, as the requested injunction will only affect the parties,“the public interest [is] ... a neutral factor in the analysisrather than one that favors granting or denying the preliminaryinjunction.” Id. at 1138–39.

IV. Temporary Restraining Order

Arch additionally requests that the court issue a temporaryrestraining order preventing Scarola individually, as well asKindell, Lanza and Hust (collectively, “new defendants”)from dissipating or concealing any assets they received fromSierra or Indemnitors. A temporary restraining order may beissued upon a showing “that immediate and irreparable injury,loss, or damage will result to the movant before the adverseparty can be heard in opposition.” FED. R. CIV. P. 65(b)(1)(A). The purpose of such an order is to preserve the status quoand to prevent irreparable harm “just so long as is necessaryto hold a hearing, and no longer.” Granny Goose Foods, Inc.v. Brotherhood of Teamsters, 415 U.S. 423, 439, 94 S.Ct.1113, 39 L.Ed.2d 435 (1974). In determining whether to issuea temporary restraining order, a court applies the factors thatguide the evaluation of a request for preliminary injunctiverelief: whether the moving party “is likely to succeed on themerits, ... likely to suffer irreparable harm in the absenceof preliminary relief, ... the balance of equities tips in [its]favor, and ... an injunction is in the public interest.” Winterv. Natural Res. Def. Council, Inc., 555 U.S. 7, 20, 129 S.Ct.365, 172 L.Ed.2d 249 (2008); see Stuhlbarg Int'l. Sales Co. v.John D. Brush & Co., 240 F.3d 832, 839 n. 7 (9th Cir.2001)(stating that the analysis for temporary restraining orders andpreliminary injunctions is “substantially identical”).

A. Authority to Issue Temporary Restraining Order*6 As explained above, Arch must state a cause in equity

against the new defendants for the court to have the authorityto issue injunctive relief. As Arch has stated a claim seekinginjunctive relief under the Uniform Fraudulent Transfer Act,the court may issue a temporary restraining order. See Cal.Civ.Code § 3949.07; Kremen v. Cohen, No. 5:11–CV–05411–LHK, 2011 WL 6113198, at *4 (N.D.Cal. Dec.7,2011) (granting a temporary restraining order based on claimsunder UFTA).

B. Likelihood of Success on the MeritsArch argues that its evidence showing the new defendantsreceived funds from Sierra and Indemnitors after the filing ofthe original complaint demonstrates a likelihood of successon its UFTA claims against these defendants. (Mot. forPreliminary Inj. & TRO at 7–8, ECF 58–1) However, Archhas not sufficiently explained how these facts establish anUFTA violation. Arch has not demonstrated a likelihood ofsuccess on the merits.

Accordingly, IT IS HEREBY ORDERED that:











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1. Arch's Motion for Leave to File a First AmendedComplaint and Alter Dates in Pretrial Scheduling Orderis GRANTED. Arch is directed to promptly file on thedocket the proposed complaint accompanying its motion.The court will issue a separate revised Pretrial SchedulingOrder.

2. Arch's Motion for Temporary Restraining Order isDENIED, without prejudice.

3. Arch's Motion for Preliminary Injunction is GRANTEDas follows:

Pending trial of this matter, defendants Sierra EquipmentRental, Inc. Melvin R. Weir, and Carolyn S. Scarola, as

Trustee of the Dry Creek Ranches Trust, are barred fromwithdrawing, transferring, assigning, conveying, pledging,hypothecating, dissipating, mortgaging, or disposing of inany manner the funds in their possession and any funds,assets, realty or personalty, tangible or intangible, choses inaction or other property. This order shall have no effect onproperty of natural person Weir that is otherwise exempt fromenforcement of a money judgment pursuant to CaliforniaCode of Civil Procedure section 703.010 et seq.

This order shall take effect immediately.

IT IS SO ORDERED.

Footnotes

1 The original complaint named Scarola as a defendant both as an individual and in her capacity as trustee of the DCR. (ECF 2.) On

July 13, 2012, the court dismissed Scarola as an individual without prejudice under Federal Rule of Civil Procedure 41(a)(1)(A)

(ii). (ECF 46.)

2 At the hearing, Sierra argued that further review of Sierra's Bank of Marin accounts would reveal that the funds were used legitimately.

As Sierra did not submit a written opposition to the Motion for Preliminary Injunction, or any evidence in support, the court disregards

this argument. Local Rule 230.



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EXHIBIT C


In re The Billing Resource, Not Reported in B.R. (2007)


2007 WL 3254835 Only the Westlaw citation is currently available.

United States Bankruptcy Court, N.D. California.

In re THE BILLING RESOURCE, dba Integretel, a California corporation, Debtor.

The Billing Resource, dba Integretel, a California corporation, Plaintiff,

v. Federal Trade Commission, et al., Defendants.

Bankruptcy No. 07–52890–ASW. | Adversary No. 07–5156. | Nov. 2, 2007.


Jeffrey K. Rehfeld, Michael H. Ahrens, Ori Katz, Steven B. Sacks, Sheppard, Mullin, Richter and Hampton, San Francisco, CA, for Plaintiff.

Steven J. Schwartz, Danning, Gill, Diamond and Kollitz, Los Angeles, CA, Julie A. Mack, Federal Trade Commission, Washington, DC, for Defendants.

Opinion

MEMORANDUM DECISION RE ORDER TO SHOW CAUSE REGARDING PRELIMINARY

INJUNCTION

ARTHUR S. WEISSBRODT, United States Bankruptcy Judge.

*1 Before the Court is an Order to Show Cause (“OSC”) why a preliminary injunction should not issue enjoining the Federal Trade Commission (“FTC”) and David R. Chase (“Receiver”), not individually, but solely in his capacity as receiver for Access One Communications, Inc. (“Access One”) and Network One Services, Inc. (“Network One”)1 from taking actions against The Billing Resource, dba Integretel (“Integretel” or “Debtor”)2 in the action captioned Federal Trade Commission v. Nationwide Connections, Inc., et al., Case No. 06–80180–Civ–Ryskamp (“Florida Action”) pending in the United States District Court for the Southern District of Florida (“Florida Court”). Debtor seeks to enjoin the FTC from prosecuting the enforcement aspect of the Florida Action (“Enforcement Action”) against Debtor (and not against the other defendants in that action) as

well as enjoining the Receiver from implementing or enforcing the Omnibus Order entered in the Florida Action on September 14, 2007 (“Omnibus Order”) (as it relates solely to Debtor, and not to any other defendants). Debtor also seeks to unblock $1,762,762.56 currently held by Debtor in a blocked account (“Blocked Account”). These funds were taken from Debtor’s general commingled funds and placed temporarily in the Blocked Account pursuant to a stipulation between Debtor and Receiver—at the suggestion of the Court—entered into at the September 26, 2007 hearing on Debtor’s interim motion for use of cash collateral. 1

In addition to these two entities, Receiver is also the receiver for several other entities in the litigation brought by FTC in which Receiver was appointed. The only two receivership entities that are relevant to these proceedings are Access One and Network One.

2

This Court will use Integretel to differentiate actions taken by or events related to Debtor that occurred pre-petition.

A hearing on the OSC was held on October 17, 2007 and the matter has been submitted for decision. Debtor is represented by Michael H. Ahrens, Esq. and Steven B. Sacks, Esq. of Sheppard, Mullin, Richter & Hampton, LLP. FTC is represented by Michael P. Mora, Esq. and Collot Guerard, Esq. Receiver is represented by Walter K. Oetzell, Esq. of Danning, Gill, Diamond & Kollitz, LLP and Jeffrey C. Schneider, Esq. of Tew Cardenas LLP. The Official Committee of Unsecured Creditors (“Committee”) is represented by John D. Fiero, Esq. of Pachulski Stang Ziehl & Jones LLP. Creditor POL, Inc. is represented by Kathryn S. Diemer, Esq. of Diemer, Whitman & Cardosi, LLP. Creditor PaymentOne Corporation (“PaymentOne”) is represented by Stephen H. Warren, Esq. of O’Melveny & Myers LLP. Creditor United Online, Inc. is represented by Jeffrey K. Garfinkle, Esq. of Buchalter Nemer. BSG Billing Solutions is represented by James A. Pardo, Jr., Esq. and Felton E. Parrish, Esq. of King & Spalding LLP. This Memorandum Decision constitutes the Court’s findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

I.




FACTS

A. Debtor’s Business3

3

While “Debtor” refers to the post-petition businessentity and “Integretel” refers to the pre-petition business entity, the Court uses Debtor in the followingsection rather than Integretel because the sectiondescribes Debtor’s business both pre- and post-petition.

Debtor provides billing-related and other services for smaller private telecommunications companies that compete with large local exchange carriers (“LECs”) in niche areas such as public pay phones, hotels and prisons (“Alternative Operator Services”). Private telecommunications companies that provide Alternative Operator Services have difficulty billing for “collect” and other types of calls, since most individuals do not pay invoices from these unknown companies and those companies cannot: bill the individuals through the individual’s normal telephone bill. Debtor was created in 1988 to address this void in the marketplace. Debtor has billing and collection agreements with an estimated 1,400 LECs—both major local exchange companies and numerous independents. Debtor’s infrastructure permits private telecommunications providers to incorporate such providers’ charges into the phone bills of more than 90% of business and residential consumers throughout the United States and Canada. *2 The typical service contract between Debtor and its service provider customers provides that the customer submits to Debtor the customer’s billing transaction in a data format acceptable to Debtor. In the typical service contract, the customers acknowledge that these billing transactions are structured as a purchase of accounts receivable. Debtor contends that its customers have no ownership interest in the proceeds of the billing transaction after the billing transactions are submitted to Debtor and its customers hold only an unsecured claim against the distributions payable by Debtor to the customer under the service contracts—usually in 90 or so days. The service contracts provide detailed formulas for computing the amounts Debtor owes to its customers. Debtor maintains certain reserves for disputes, fees and other adjustments as bookkeeping entries only. The service contracts provide that each week Debtor transfer by wire to its customers’ bank accounts the net proceeds identified in the prior week as defined by the service contracts. This amount is forwarded approximately 90 days after the submission of the billing transaction. Once Debtor receives a billing transaction, Debtor submits the billing information to the LECs; and

the LECs in turn bill the end user. At varying intervals, the LECs make payments into Debtor’s “wire in” account based on the billing transactions previously submitted to the LEC. Funds are transferred into this account every day throughout the day. Once a week—typically on a Thursday—Debtor settles its accounts with its customers. To settle accounts, Debtor disburses funds from the “wire in” account to the “wire out” account. The “wire out” account is a zero balance account meaning that all funds transferred into that account are generally transferred out to several other accounts on the same day. It is from these other accounts that Debtor: (1) pays its vendors, employees and other operating expenses; (2) collects taxes that Debtor is required to collect in connection with Debtor’s business; (3) makes payments to LEC end users that are entitled to a cash voucher for a refund;4 and (4) holds excess funds, if any, from weekly settlements to cover subsequent operating shortfalls including settlement obligations that exceed available funds in the “wire in” account. 4

Certain individual or business consumers are occasionally entitled to a refund or a credit. This results, inter alia, from an error in billing. Debtor asserts that 95% of these cases are corrected electronically through an automated credit transaction. In the 5% of errors handled through the issuance of a voucher to the consumer, the voucher—redeemable for cash—is drawn from the voucher account.

Debtor has approximately thirty-seven employees. In 2000, Debtor formed PaymentOne as a subsidiary to address the specialized billing and support requirements of the internet. Debtor owns 97% of PaymentOne. In 2002, Debtor formed another majority-owned subsidiary known as Inmate Calling Solutions, LLC to target the correctional industry and in 2004, Debtor formed yet another majority-owned subsidiary known as Information Services 900 LLC to target 900 call traffic.

B. Florida Action On February 27, 2006, the FTC commenced the Florida Action in the Florida Court against three Alternative Operator Services providers as well as their principals (not Integretel or its principals) for alleged deceptive and unfair practices for unauthorized billing of charges on phone bills in violation of the Federal Trade Commission Act. The FTC alleged that these defendants had defrauded consumers throughout the United States of more than $30 million by placing unauthorized collect call charges onto consumers’ telephone bills. At the request of the FTC, the




Florida Court entered an ex parte temporary restraining order (“TRO”) that shut down the defendants’ alleged unlawful operation, froze the defendants’ personal and corporate assets and appointed Receiver as temporary receiver for the corporate defendants. Two of the corporate defendants—Access One and Network One—were prior customers of Integretel (collectively, “Prior Customers”). On March 8, 2006, a preliminary injunction was entered (“Preliminary Injunction”) and Receiver was permanently appointed. *3 Both the TRO and the Preliminary Injunction provided, inter alia, that any business entity served with a copy of the TRO or Preliminary Injunction

that holds, controls, or maintains custody of any account or asset of any Defendant, or has held, controlled or maintained custody of any such account or asset at any time since the date of entry of this Order, shall:

A. Hold and retain within its control and prohibit the withdrawal, removal, assignment, transfer, pledge, encumbrance, disbursement, dissipation, conversion, sale, or other disposal of any such asset except by further order of the Court;

...

TRO at page 8; Preliminary Injunction at page 9. The FTC asserts that the FTC served Integretel with the TRO within days of the entry of the TRO. On March 6, 2006, Integretel’s president, Ken Dawson, submitted a letter to the FTC stating in relevant part that: (a) Integretel had service contracts with the Prior Customers; (b) pursuant to the service contract with the respective Prior Customer, each Prior Customer was entitled to certain proceeds from billing transactions; however (c) each Prior Customer was in default under the service contract and no amounts were currently due and owing. Mr. Dawson noted that Integretel had not processed any billing for Access One since May 2005 nor for Network One since June 2003. With respect to each Prior Customer, Mr. Dawson stated: “[t]o the extent proceeds become due to [Prior Customer] in the future, we will establish a separate bank account into which such funds will be deposited and notify your office accordingly.”5 Pre-petition Integretel did not establish any such separate bank account. 5

Letter dated March 6, 2006 from Ken Dawson toRoberto Menjivar, Attachment B to Declaration ofLaura Kim in Opposition to Plaintiff’s Motion for aTemporary Restraining Order and Preliminary

Injunction filed on October 1, 2007.

On September 21, 2006, the FTC filed an amended complaint asserting claims against Integretel for Integretel’s collection of alleged fraudulent charges. Specifically, the complaint asserts that Integretel deceptively billed consumers for collect calls that were never made, received or authorized. In its complaint, the FTC seeks a monetary judgment as well as multiple forms of non-monetary relief such as a permanent injunction against pertinent law violations, “fencing-in” injunctive relief, rescission of contracts and a claims procedure for consumer redress. Integretel filed an answer denying the FTC’s allegations. Integretel’s principals were not named in the amended complaint. On October 16, 2006, Receiver filed a motion in the Florida Court seeking to hold Integretel in contempt of court for Integretel’s alleged failure to turn over to the Receiver on behalf of the Prior Customers certain “reserves” under the service contracts with the Prior Customers in an alleged amount in excess of $1.4 million. Integretel opposed the motion on various grounds, including: (a) Integretel did not hold any such reserves in a separate account; (b) the service contracts in place with the Prior Customers permitted Integretel to withhold certain monies owed to the Prior Customers as “reserves”; and (c) Integretel was not obligated to turn over those funds under the respective service contracts. Integretel also filed its own motions to modify the Florida Court’s injunctive orders and to stay the contract claims pending arbitration. A hearing on these motions was held on April 12, 2007. *4 On September 14, 2007, the Florida Court entered the Omnibus Order. In the Omnibus Order, the Florida Court found that Integretel held reserves in the amount of $1,762,762.56 on behalf of the Prior Customers as of June 30, 2007 (“Commingled Funds”). The Florida Court stated that Integretel’s assertion that the “reserves” were not held as segregated funds but rather were kept in a pooled account and tracked via an internal accounting entry was “a distinction without a difference, since the TRO captures funds ‘held on behalf of, or for the benefit of, a Defendant.’ “ Omnibus Order at 3. The Florida Court noted that “[a]n entity need not be an agent, partner, joint venturer, trustee, fiduciary, or legal representative to possess funds that one is holding ‘on behalf of another person or entity ...” Id. The Florida Court also rejected Integretel’s arguments that Integretel could retain the “Commingled Funds” to fund Integretel’s assertion of an indemnity claim or liquidated damages for breach of contract against the Prior Customers. Id. at 4.




Regarding Integretel’s motions, the Florida Court denied Integretel’s request to stay the contract claims pending arbitration of those claims pursuant to the service contract arbitration clause, since the Florida Court concluded that Receiver was not bound by the those clauses. The Florida Court stated in particular:

The Receiver’s claim is not a claim at law governed by pre-receivership contracts, however, but one governed by this Court’s jurisdiction over receivership property based on the TRO and Amended Preliminary Injunction. The Receiver does not claim that the funds must be turned over according to, or by adopting, a contract signed between Integretel and Access One/Network One. The Receiver is seeking to recover the reserve funds pursuant to the Court’s in rem jurisdiction over receivership property, as memorialized in the TRO and the Amended Preliminary Injunction.

Omnibus Order at 4. In response to Integretel’s argument that the TRO and Preliminary Injunction would be invalid if those orders permitted the Florida Court to determine Integretel’s ownership interest—or lack thereof—in the Commingled Funds without a new, separate legal proceeding, the Florida Court stated: “[i]ssues concerning entitlement to disputed receivership property, in fact, are the types of issues typically determined via summary proceedings in the federal court equity receivership context.” Id. at 5. The Florida Court rejected Integretel’s arguments that Integretel was deprived of due process when the Florida Court issued the TRO and Preliminary Injunction and also rejected Integretel’s various arguments that those orders are invalid. The Florida Court also denied Integretel’s request to modify those orders. Finally the Florida Court:

ORDERED AND ADJUDGED that the Receiver’s Revised Motion for Order to Show Cause Why Integretel Should Not Be Held in Contempt of Court, filed October 16, 2006 [DE 246], is GRANTED. Integretel shall show cause in writing within 10 days of the date of this Order why it should not be held in contempt for failure to turn over the reserves. In addition, Integretel shall provide a sworn statement identifying the amount of reserves as of the issuance of the TRO. The Court further orders that these funds

shall be placed in a segregated Receivership account. It is further

*5 ORDERED AND ADJUDGED that Integretel’s Motion to Modify Prior Injunctive Orders, filed October 30, 2006 [DE 294], is DENIED. It is further

ORDERED AND ADJUDGED that Integretel’s Motion to Stay Contract Claims, filed December 29, 2006 [DE 363], is DENIED....

Omnibus Order at 10. On September 16, 2007, promptly after receiving the Omnibus Order, Integretel filed its bankruptcy petition. Debtor is one of seventeen defendants in the Florida Action. Other than two pending motions regarding depositions, discovery is complete in the Enforcement Action.6 Dispositive motions are scheduled to be filed very soon—by November 6, 2007, with opposition to those motions to be filed by December 4, 2007, and replies due by December 18, 2007. Debtor asserts that Debtor will not be filing any dispositive motions, but anticipates having to respond to dispositive motions filed by other parties. The FTC has stated that the FTC will seek summary judgment against Debtor. Debtor asserts that a two- to four-week trial is set to commence in the Florida Action on February 25, 2008. The FTC predicts that the FTC will prevail on the liability aspect in summary judgment and if not, the FTC estimates that the trial will be no more than nine days, and other defendants contend that the trial will take ten to fifteen days at most. The FTC does not contend that a preliminary injunction against Debtor interferes with the FTC from proceeding with the Enforcement Action against any of the other sixteen defendants. 6

Integretel filed a motion to continue one deposition and another billing aggregator defendant filed a motion requesting ten additional depositions. The FTC opposed both motions and the Florida Court had not ruled on those motions as of October 15, 2007.

Debtor anticipates having to spend $821,600 in litigation costs over the next six months related to depositions, discovery motions, dispositive motions, other motions, pre-trial submissions and trial.7 Debtor does not break out the estimated fees into the various subcategories. Debtor estimates that in addition to those fees there will be an estimated $10,000 in fees for local counsel and an estimated $50,000 to $75,000 in costs.8 In addition to these estimated fees and costs, Debtor estimates that Debtor will incur an additional $50,000 to $150,000 in fees related to Receiver’s request for turnover of the




Commingled Funds.9

7

Declaration of Neal Goldfarb in Support of EmergencyMotion for Temporary Restraining Order andPreliminary Injunction filed on September 24, 2007(“Goldfarb Dec.”) at ¶¶ 5–6.

8

Goldfarb Dec. at ¶ 7.

9

Goldfarb Dec. at ¶ 8.

C. Events since Debtor Filed Its Bankruptcy Petition As noted above, Debtor filed this chapter 11 bankruptcy case on September 16, 2007. On September 17, 2007, Debtor filed a Notice of Bankruptcy in the Florida Action. On September 18, 2007, this Court generated a Notice of Chapter 11 Bankruptcy Case, Meeting of Creditors, & Deadlines setting, inter alia, a meeting of creditors for October 17, 2007 and a deadline for filing a proof of claim for non-governmental units of January 15, 2008 and for governmental units of March 14, 2008. On September 20, 2007, the Florida Court issued an order stating that the Florida Action was stayed by the automatic stay. On September 21, 2007, the FTC filed an emergency motion for clarification that the automatic stay did not apply to the Enforcement Action and the contempt proceedings. On the same day, without granting Debtor an opportunity to respond to the FTC’s emergency motion either in writing or orally, the Florida Court issued its Order Granting Motion for Clarification as to Scope of Stay (“Clarification Order”). In the Clarification Order, the Florida Court stated that in the Omnibus Order the Florida Court had “ruled that the reserve funds are the property of the receivership estate and ordered Integretel to pay the current reserve funds, amounting to $1,762,762.56, immediately to the Receiver.” Clarification Order at 1. *6 Furthermore, the Florida Court held that Bankruptcy Code section 362(b)(4)10 did not stay the Enforcement Action. The Florida Court also stated with respect to the contempt proceedings brought by the Receiver: 10

Unless otherwise noted, all statutory references are toTitle 11, United States Code, as amended in 2005(“Bankruptcy Code”).

Nor is the contempt proceeding stayed. First, the automatic stay applies only to protect property of the bankruptcy estate or property of the debtor. See11 U.S.C. § 362(a)(2). The Court has already ruled that the reserve funds are neither the property of the “bankruptcy estate” nor Integretel. Second, the 11 U.S.C. § 362(b)(4) exception also applies to civil contempt proceedings brought by a governmental unit in the exercise of its police or regulatory powers. See SEC v. Bilzerian, 131 F.Supp.2d 10, 14 (D.D.C.2001)(civil contempt proceeding falls within the exception; incarceration of debtor subsequent to failure to provide financial information as required by purgation provision in prior disgorgement order). Finally, the bankruptcy filing does not deprive this Court of its inherent power to enforce the integrity of its orders. “[C]ontempt orders to uphold the dignity of the court are excepted from the automatic stay.” NRLB v. Sawulski, 158 B.R. 971, 975 (E.D.Mich.1993). Clarification Order at 4. Thus, even though the newly extant bankruptcy estate had no opportunity to respond to the FTC’s emergency motion, the Florida Court granted the FTC’s emergency motion. The Florida Court stated that the commencement of Debtor’s bankruptcy case did not stay the contempt proceedings against Debtor or FTC’s prosecution of the Enforcement Action and the Florida Court vacated the September 20, 2007 order staying proceedings against Debtor.

Also on September 21, 2007, this Court held a hearing on Debtor’s emergency motion for interim use of cash collateral and Debtor’s request for authority to maintain Debtor’s pre-petition bank accounts. In its motion for interim use of cash collateral, Debtor requested court authority to use cash collateral pursuant to a stipulation with its secured creditor PaymentOne. Debtor asserted that PaymentOne was a secured creditor based on more than $6.4 million PaymentOne had loaned to Debtor between October 18, 2006 and the petition date (the “new value” provided by PaymentOne, in bankruptcy parlance). The motion for authority to maintain Debtor’s pre-petition bank accounts was granted and the motion on the interim use of cash collateral was continued to September 26, 2007. Prior to the September 26, 2007 hearing, seven objections were filed in opposition to Debtor’s motion for interim use of cash collateral. Some of the oppositions raised questions regarding Debtor’s viability and ability to operate successfully as a going concern. Prior to and at the hearing, Debtor obtained the consent of all parties to




Debtor’s use of cash collateral. In particular, Debtor and Receiver agreed to set up the Blocked Account whereby Debtor agreed to deposit $1,762,762.56 of its commingled funds into a blocked account and Debtor and Receiver agreed that the establishment of the Blocked Account did not in any way affect the merits of either parties’ rights, claims or defenses with respect to the funds in the Blocked Account. Based in part on the consent of all parties, this Court granted Debtor interim use of cash collateral through October 15, 2007 and set a further hearing on the use of cash collateral for that day. *7 In papers relating to the September 26, 2007 hearing and at that hearing, Debtor informed this Court that negotiations were underway for a possible sale of PaymentOne to a third party. Debtor also requested the expedited appointment of the unsecured creditors’ committee so that Debtor would have an entity with which Debtor could talk on a confidential basis with, and obtain the opinions regarding, possible reorganization scenarios, including the possible sale of PaymentOne. On October 1, 2007, the United States Trustee filed a notice that a committee of seven unsecured creditors of Debtor had been appointed. Two days later the Committee selected the law firm of Pachulski Stang Ziehl & Jones LLP as its counsel, subject to approval of this Court. Within a week, Debtor and the Committee executed a confidentiality agreement; Debtor provided the Committee with various documents and information requested by the Committee; and the Committee began the process of analyzing that information. On October 10, 2007, the Committee and Debtor participated in a five hour face-to-face meeting. Discussions at that meeting included Debtor’s financial information—including projections, claims against Debtor, Debtor’s plan for post-petition pre-payment to Debtor’s pre-petition customers, Debtor’s relationship with the LECs, the status of the Florida Action, as well as plan of reorganization issues. At that meeting, the Committee agreed to consent to Debtor’s continued use of cash collateral through November 2. Debtor committed to negotiate with the Committee a term sheet for a plan of reorganization contemplating a continuation of Debtor’s business operations with the goal of allowing Debtor to exit bankruptcy as quickly as possible, while maximizing the value to unsecured creditors. The Committee stated its intention to use the time between October 10 and November 2 to conduct further due diligence on Debtor’s assets, liabilities and financial affairs in an effort to be in a better position to evaluate an exit strategy for Debtor from bankruptcy. On October 15, 2007, this Court held a second hearing on

Debtor’s interim use of cash collateral. In support of Debtor’s continued use of such cash collateral, Debtor submitted budgets showing Debtor’s actual and projected post-petition finances. Debtor submitted one budget assuming that Debtor could use the funds in the Blocked Account as well as the assumption that the Enforcement Action and related proceedings were stayed. Debtor also submitted another budget without those assumptions. Regarding the projected $1 million in litigation expenses related to the Florida Action, Debtor projected incurring $333,333 for the weeks ending November 2, 2007, December 7, 2007, and January 4, 2008. Debtor asserted at that hearing, and continues to assert, that Debtor needs the funds in the Blocked Account and that without the ability to use the funds in the Blocked Account, Debtor will not have sufficient cash flow as of mid-December 2007. *8 Debtor’s continued use of cash collateral again drew seven objections, but the primary concern of the objecting creditors was with respect to the alleged secured nature of their respective claims, and not on Debtor’s ability to stay in business. In addition, as noted above, Debtor’s continued use of cash collateral had the support of the Committee. On October 16, 2007, this Court granted Debtor’s continued interim use of cash collateral. A hearing for final authority for Debtor to use cash collateral is set for November 2, 2007. Meanwhile, on October 1, 2007, Debtor requested additional time—until November 15, 2007—to file its schedules of assets and liabilities (“Schedules”) and statement of financial affairs (“Statement”). In its application, Debtor noted the size and complexity of Debtor’s business operations, coupled with the limited number of employees, who, in addition to their regular duties, were capable of preparing the Statement and Schedules. On October 23, 2007, this Court granted Debtor’s request. Debtor’s Schedules and Statement are currently due on November 15, 2007. On October 2, 2007, Debtor sought a temporary restraining order from this Court enjoining the Enforcement Action and seeking an order to show cause for the issuance of a preliminary injunction. At that hearing, this Court denied Debtor’s request for a temporary restraining order of the Enforcement Action on the basis that for the period from October 2, 2007 through October 17, 2007, Debtor had not demonstrated that the threatened injury to Debtor outweighed the harms of a temporary restraining order against the FTC.11 However, the Court found that there was cause to issue the OSC and the OSC was issued as to why a preliminary injunction should not issue.




11

While Debtor originally sought a temporary restrainingorder against Receiver’s continued enforcement of theOmnibus Order, the stipulation at the September 26cash collateral hearing that resulted in the temporaryestablishment of the Blocked Account resolved thatneed to both parties’ satisfaction.

On October 11, 2007, Debtor filed in the Eleventh Circuit a motion for an immediate interim stay of the Clarification Order in as far as that order held that the Florida Action—other than the Enforcement Action—was not automatically stayed. On October 17, 2007, the Eleventh Circuit temporarily granted Debtor’s motion pending further order of the court (“Stay Order”).

II.

APPLICABLE LAW

In the non-bankruptcy context, [the Ninth Circuit has] consistently required trial courts deciding preliminary injunction motions to balance the moving party’s likelihood of success on the merits and the relative hardship of the parties. The moving party must show:

(1) a strong likelihood of success on the merits, (2) the possibility of irreparable injury to plaintiff if preliminary relief is not granted, (3) a balance of hardships favoring the plaintiff, and (4) advancement of the public interest (in certain cases). Alternatively, a court may grant the injunction if the plaintiff demonstrates either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor.

*9 As we have said many times regarding the two alternative formulations of the preliminary injunction test: These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases. They are not separate tests but rather outer reaches of a single continuum.

Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120 (9th Cir.2005) (citations and internal quotation

marks omitted).

Solidus Networks, Inc. v. Excel Innovations, Inc., (In re Excel Innovations, Inc.), ––– F.3d ––––, 2007 WL 2555941 at *5 (9th Cir. Sept. 7, 2007) (emphasis in original). The usual preliminary injunction standard applies to stays of proceedings under 11 U.S.C. § 105(a) (“Section 105”). Excel, 2007 WL 2555941 at *7. In Excel, a reorganization case, the Ninth Circuit stated that in granting or denying an injunction under Section 105, “a bankruptcy court must consider whether the debtor has a reasonable likelihood of a successful reorganization, the relative hardship of the parties, and any public interest concerns if relevant.”Excel, 2007 WL 2555941 at *7.

III.

ANALYSIS

A. Reasonable Likelihood of a Successful Reorganization In a reorganization context, a debtor seeking a stay against a non-debtor must show a reasonable likelihood of a successful reorganization. Excel, 2007 WL 2555941 at *7. This is not a high burden, id. at *8, and a strong showing on the likelihood of a successful reorganization lowers the burden to show irreparable harm. Id. at *11. The FTC argues that the Committee’s unwillingness to consent to a final cash collateral order speaks volumes about Debtor’s prospects—or lack thereof—of successfully reorganizing and that it remains to be seen whether this will be a “real” reorganization case. Citing general statistics, the FTC asserts it is more likely that Debtor’s case will fall into the 90% or more of chapter 11 cases that are converted to liquidations or dismissed. The FTC argues that overall the record at this point demonstrates that Debtor’s fate hangs precariously in the balance and a liquidation scenario is more, or at least as likely as, a successful reorganization and Debtor has not shown by a preponderance of the evidence a likelihood of success on the merits.12

12

A bankruptcy case may have an excellent result for creditors, even in a liquidation context. For example, a successful sale of a debtor’s business and subsequent liquidation of that debtor’s assets in a chapter 11 or a chapter 7 may result in a substantial distribution to creditors.




Receiver asserts that Debtor has not shown a likelihood of success on the merits on the basis that Debtor’s support by the Committee fails to address the numerous objections by creditors claiming a security interest in Debtor’s assets to Debtor’s continued use of cash collateral. In addition, Debtor’s strategy over the near-term presupposes Debtor will be able to use the Commingled Funds to fund Debtor’s business operations, so Debtor cannot show a likelihood of success on the merits. The Court disagrees with the FTC and Receiver. The Court finds that, at this juncture, Debtor has made a strong showing that Debtor has a reasonable likelihood of a successful reorganization. It is very early in Debtor’s bankruptcy case—Debtor’s bankruptcy case is only six weeks old. In that short period of time, Debtor has obtained the confidence of its creditors that Debtor is a viable business and has a reasonable likelihood of reorganizing successfully. This is demonstrated in several ways. First, following strenuous initial objections, Debtor’s creditors consented to Debtor’s first interim use of cash collateral as soon as Debtor demonstrated its viability to the objecting creditors. Second, the LECs have for the most part continued to forward funds to Debtor. Third, in an effort to retain customers, Debtor is negotiating with its customers to provide a 50% pre-payment of the transferred accounts receivables at the time of transfer rather than having the customers wait 90 days, as those customers did pre-petition. Debtor has obtained the Committee’s support of that plan. Fourth, the Committee is confident enough in Debtor’s prospects of reorganization that the Committee supported Debtor’s continued use of cash collateral for an additional three weeks to enable the Committee and Debtor to work together on the terms of a plan of reorganization. *10 In addition, Debtor and Debtor’s 97%-owned subsidiary PaymentOne are diligently exploring both a reorganization with Debtor and a sale of PaymentOne’s business to prospective purchasers. The proceeds of such a sale could help Debtor fund a plan of reorganization. Alternatively, Debtor is exploring the possibility of a pot plan providing a pro-rata distribution to unsecured creditors or a plan that would have Debtor continue its operations and issue new stock in exchange for Debtor’s unsecured debt. At this early stage of Debtor’s bankruptcy case, Debtor’s reasonable likelihood of a successful reorganization is evident from the support of Debtor’s creditors and the Committee, Debtor’s clear pursuit of several viable

avenues of possible reorganization, Debtor’s projections of positive cash flow for the next six months, Debtor’s retention of its customers and the continued success of Debtor’s business. Thus, Debtor has met its burden of showing a reasonable likelihood of a successful reorganization.13

13

Although the issue is not presented here, a court might appropriately enjoin an enforcement action, like the FTC’s, against a chapter 7 estate. The chapter 7 trustee might well convince the court not to allow theenforcement action to proceed until the trustee and the court knew what assets and liabilities there were in the estate. There would be no point, for example, in allowing an enforcement action seeking a monetary judgment to proceed if the estate did not have any money in it above the amount needed to pay administrative claims. There also might be no purpose in enjoining a chapter 7 debtor from engaging in certain business practices, if that debtor was out of business.

B. The FTC’s Enforcement Action The parties do not dispute for the purposes of the current dispute that, under Bankruptcy Code section 362(b)(4), the automatic stay does not stay the Enforcement Action.14 However, the FTC argues that this Court does not have authority to stay that litigation against Debtor under Section 105. This Court disagrees. Under In re First Alliance Mortg. Co., 264 B.R. 634 (C.D.Cal.2001) (“FAMCO ”) and the myriad of authorities cited therein, this Court has the legal authority to enjoin prosecution of governmental actions against a debtor that falls within the regulatory and police powers exception of Bankruptcy Code section 362(b)(4). FAMCO, 264 B.R. at 652 n. 18. 14

While the Clarification Order in which the District Court held that Bankruptcy Code section 362(b)(4) did not apply to the Florida Action is on appeal, in that appeal, Debtor has not challenged that Order insofar as the Clarification Order holds that the Enforcement Action is not automatically stayed.

This Court may enjoin the prosecution of the Enforcement Action under Section 105 if the Enforcement Action “threatens” the assets of the bankruptcy estate. FAMCO, 264 B.R. at 652. Under FAMCO, a Section 105 injunction could be appropriate against a regulatory action in two types of situations.

First, a governmental action that seeks actual physical control over the assets of the debtor’s estate threatens




the bankruptcy court’s exclusive jurisdiction over the res of the debtor’s estate and therefore can be enjoined....

Second, a § 105 injunction of a regulatory or police powers action could be appropriate in other circumstances that severely threaten the integrity of the bankruptcy process. A few courts have enjoined regulatory or police powers actions on the grounds that the costs of defending the actions at issue, both in terms of money spent on lawyers’ fees and time taken away from focusing on reorganization, were so high in comparison to the assets of the estate that allowing the actions to continue constituted a “threat” to the estate. E.g., NLRB v. Superior Forwarding, Inc., 762 F.2d 695, 698–99 (8th Cir.1985). Because the bankruptcy court has the obligation to protect and marshal the estate’s assets, a severe enough threat to the assets of the estate constitutes a threat to the bankruptcy process.

*11Id. at 655. In balancing the hardships between the parties, “[a] bankruptcy court must ‘identify the harms which a preliminary injunction might cause to defendants and ... weigh these against plaintiff’s threatened injury.’ Caribbean Marine Servs. Co. v. Baldridge, 844 F.2d 668, 676 (9th Cir.1988) (citation omitted).” Excel, 2007 WL 2555941 at *9.

1. Harms to FTC The FTC articulates that the FTC would be harmed by the granting of a preliminary injunction because the FTC only seeks what the FTC terms as “equitable” relief in the Enforcement Action and this Court cannot grant all of the relief requested by the FTC.15 But there is no doubt that the FTC seeks to collect monies from Debtor. Specifically, the FTC seeks monetary injunctive relief in the form of disgorgement of monies received from consumers and restitution to the consumers. In addition, the FTC seeks a permanent injunction halting Debtor’s allegedly unlawful practices, rescission of contracts and a claims procedure to provide restitution to the consumers who allegedly paid for unauthorized charges on their phone bills. 15

While this Court does not necessarily agree with theFTC that this Court could not grant all equitable reliefrequested by the FTC in the Enforcement Action, dueto the limited nature of the preliminary injunction beinggranted at this time, there is no reason for this Court toaddress the FTC’s assertion.

The FTC also asserts that being enjoined from proceeding

in its chosen forum—the Florida Court—would harm the FTC in other critical ways. The FTC quotes extensively from FAMCO which states in this regard:

[T]he hardship to the governmental units of not being allowed to proceed with their actions in their chosen forums includes harms different in character from the harms normally considered on motions for injunctions under § 105. Being able to have a claim determined by the bankruptcy court is qualitatively different from proceeding with a lawsuit in home forums. As Congress recognized when it created the regulatory and police powers exception, the goals of public policy, punishment, and deterrence may sometimes conflict with the goals of maximizing an individual estate’s assets and efficiently processing claims. It is the former goals, which are difficult if not impossible to measure in dollars and cents, that are impaired when a governmental unit loses the ability to enforce its laws in its own forum.

Considering deterrence in particular, the harm to the governmental units must be measured with a broader perspective in mind than these parties alone. The bankruptcy court and First Alliance are undoubtedly correct that there will be more money to distribute to borrowers in this case if the separate actions are not allowed to proceed. However, the governmental units are entitled to make the choice that, over time, similarly situated borrowers and consumers benefit more when companies do not violate the law in part because they know that bankruptcy will not provide a way out when their wrongs are discovered. In any given case, reasonable minds could disagree about the marginal costs and the marginal benefits of different approaches and which will maximize the wealth and happiness of the greatest number of people. The point is that it is the governmental units charged with enforcing consumer protection laws, governmental units that are responsive to the political will of the people, that should be the ones to make the choice, not the bankruptcy court.

*12FAMCO, 264 B.R. at 659. The FTC asserts that the FTC’s need for permanent injunctive relief is particularly acute here because the FTC needs permanent injunctive relief from the Florida Court barring Debtor’s allegedly unlawful business practices. The FTC asserts that the FTC’s pursuit of phone billing aggregators such as Debtor is a vital enforcement strategy that the FTC has pursued to curb the allegedly insidious and unlawful practice of placing unauthorized charges on consumers’ phone bills. During the past nine years, the FTC has filed numerous actions against telephone billing aggregators and has obtained




injunctive and monetary equitable relief. The FTC notes that this is not the first time that the FTC has sued Debtor (the previous suit was settled) and some of Debtor’s current customers were recently prosecuted by state attorneys general for placing unauthorized charges on consumers’ phone bills and other alleged deceptive trade practices.

2. Harms to Debtor Debtor has filed a chapter 11 bankruptcy petition. “The purpose of title 11 protection is to allow an entity to ‘restructure ... finances’ and enter a plan of reorganization so that it is able to ‘continue to operate, provide its employees with jobs, pay its creditors, and produce a fair return for its stockholders.’ “ CFTC v. NRG Energy, Inc., 457 F.3d 776, 779 (8th Cir.2006) (internal citation omitted). Said a different way, “[t]he purpose of Chapter 11 reorganization is to assist financially distressed business enterprises by providing them with breathing space in which to return to a viable state.” In re Little Creek Dev. Co., 779 F.2d 1068, 1073 (5th Cir.1986) (quoting In re Winshall Settlor’s Trust, 785 F.2d 1136, 1137 (6th Cir.1985)). Here “Debtor ‘is a real company with real debt, real creditors and a compelling need to reorganize in order to meet these obligations’ and is therefore, exactly the type of debtor for which chapter 11 was enacted.” In re Dow Corning Corp., 244 B.R. 673, 677 (Bankr.E.D.Mich.1999), aff’d,255 B.R. 445 (E.D.Mich.2000) (internal citation omitted). In determining irreparable injury to Debtor, this Court must consider the impact of permitting the Enforcement Action to proceed against Debtor at this point in Debtor’s bankruptcy case. Debtor raises two main harms that would cause irreparable injury should this Court not preliminarily enjoin the Enforcement Action. First, Debtor anticipates having to spend over $900,000 in fees and costs over the next six months in the Enforcement Action. Debtor estimates it will incur $821,600 in litigation fees related to depositions, discovery motions, dispositive motions, other motions, pre-trial submissions and trial. In addition, Debtor estimates that there will be an estimated $10,000 in fees for local counsel and an estimated $50,000 to $70,000 in costs. Debtor’s budgets show that Debtor will not be able to operate on an administratively solvent16 basis if Debtor is forced to incur these substantial fees over the next six months. 16

In a chapter 11 bankruptcy case, all post-petition obligations have administrative priority status. Thismeans that those claims are paid prior to most other

claims in a bankruptcy estate, namely other priority claims and pre-petition unsecured claims. In addition, those claims must be paid in full on the effective date of a confirmed plan of reorganization. The effective date is usually 30 days after an order confirming a plan of reorganization is entered, but can be in as few as eleven days. To stay administratively solvent, a debtor would insure that debtor retains sufficient cash reserves on hand to pay all administrative claims in full on the effective date of a plan.

*13 The FTC argues that Debtor overestimates its costs to defend against the Enforcement Action. The FTC asserts that the declaration of Neal Goldfarb submitted by Debtor in support of its request lacks sufficient detail to support Debtor’s proposed estimate. Moreover, the FTC argues that the estimate overstates the amount of estimated trial time and fails to consider that some of the issues in the Enforcement Action will be narrowed, if not eliminated, by summary judgment since the FTC’s position is that the uncontested facts establish Debtor’s liability. The FTC further contends that the relevant comparison under FAMCO is not between Debtor’s costs of defending itself against the FTC in the Florida Court or not defending itself at all, but rather between Debtor defending itself in the Florida Court and defending itself in this Court. According to the FTC, unless the Enforcement Action is concluded as to Debtor, the same facts will have to be litigated in this Court to establish a bankruptcy claim against Debtor.17 Moreover, under the recently enacted changes to the Bankruptcy Code, the FTC can pursue a non-dischargeability action against Debtor for the FTC’s monetary claim. Finally, the FTC alleges that it would pursue the non-monetary aspects of the Enforcement Action after confirmation of Debtor’s plan. NRG Energy, 457 F.3d at 780–81 (holding that a bankruptcy court has no authority to enjoin a government agency from bringing a post-confirmation enforcement action against a reorganized debtor for injunctive relief against future law violations).18

17

This argument is incorrect, or at least premature, because the Court is only enjoining the Enforcement Action for a few months and has not determined whether the Enforcement Action will be adjudicated in the Florida Court or in this Court, if it ultimately needs to be adjudicated at all. It might well settle in the bankruptcy context in connection with a plan of reorganization or otherwise. In this connection, the desire of the post-petition Debtor and the FTC to resolve their disputes may be significantly greater than the situation before Debtor filed for bankruptcy.

Furthermore, even if the matter were tried in the




bankruptcy court, this Court would determine when the trial should take place.

18

However, as noted, Debtor and the FTC may well settlethose disputes in the context of Debtor’s plan ofreorganization or otherwise.

The FTC does not address the second harm raised by Debtor: the impact of the continuation of the Enforcement Action on Debtor’s reorganization efforts. Debtor has relatively few employees and Debtor’s president, Mr. Dawson—one of the founders of Debtor—is and will continue to be very closely involved in Debtor’s defense in the Enforcement Action. Mr. Dawson is also the main contact for all of Debtor’s reorganization efforts in addition to his duties overseeing normal operational issues. The bankruptcy filing unsettled Debtor’s customers and Debtor is working on a proposed pre-payment plan whereby Debtor would pay 50% of the receivables represented by post-petition billing submissions. Because this is a new program, the program will be time-consuming to implement and monitor. In addition, Mr. Dawson needs to be available to work with Debtor’s reorganization counsel, the various secured and unsecured creditors, the Committee and the United States Trustee. Further, the Committee supports Debtor’s use of cash collateral through November 2, 2007. In exchange, Debtor has committed to negotiate with the Committee a term sheet for a plan of reorganization contemplating a continuation of Debtor’s business operations with the goal of allowing Debtor to exit bankruptcy as quickly as possible. Debtor is also monitoring the possible sale of PaymentOne to a third party. *14 Finally, upon Debtor filing its chapter 11 bankruptcy petition, Debtor became a “debtor-in-possession.” As a debtor-in-possession, Debtor acts as a fiduciary to the bankruptcy estate and owes a duty of care and loyalty to the bankruptcy estate’s creditors. In re McConville, 110 F.3d 47, 50 (9th Cir.1997). Thus, Debtor thus is a new entity with different and additional responsibilities, concerns and pressures than it had when Debtor operated solely as Integretel. Debtor, the Committee and Debtor’s other creditors need time to evaluate the merits and strengths of the FTC’s positions and decide whether the bankruptcy estate should try to settle the Enforcement Action with the FTC. Giving Debtor and Debtor’s creditors a few months to do that is critical at this juncture—particularly in the context of negotiating a plan of reorganization.

3. Balancing of the Harms and the Public Interest Based on the unique facts of this case and in consideration of the relative hardship of the parties and the public interest concerns, the Court finds that continued prosecution of the Enforcement Action severely threatens the integrity of the bankruptcy process and Debtor’s prospects for reorganization and a preliminary injunction of the Enforcement Action against Debtor through March 14, 2008 is warranted. On March 7, 2008 at 1:00 p.m., the Court will hold a further hearing on whether the preliminary injunction of the Enforcement Action should be continued beyond March 14, 2008. Either the FTC or Debtor may request that the preliminary injunction be lifted before March 7, 2008 for good cause based on facts that are not currently before this Court. The FTC is concerned that this Court’s granting of a preliminary injunction against the Enforcement Action will set a precedent that a defendant can escape prosecution for committing deceptive and unfair trade practices by simply filing for bankruptcy. The Court is keenly aware of the FTC’s concern and that is not what this Court intends. Rather, it is the unusual convergence—almost a perfect storm—of the trial schedule in the Enforcement Action and the critical first few months of a viable chapter 11 bankruptcy case that warrant a limited preliminary injunction at this time. First, the next several months are a critical time for Debtor in its effort to reorganize, and the immediate continuation of the Enforcement Action seriously threatens Debtor’s ability to reorganize. Debtor has only 37 employees to service its 58 pre-petition customers and manage Debtor’s relations with over 1400 LECs. Moreover, Debtor’s president, Mr. Dawson, is and will continue to be closely involved in Debtor’s defense in the Enforcement Action. If the Enforcement Action is not temporarily stayed, Mr. Dawson would be required to divert his time and attention from Debtor’s reorganization between November 6 and December 4, 2007 to assist Debtor’s counsel in the Enforcement Action in preparing an opposition to a motion for summary judgment that the FTC has stated it will file against Debtor. There may also be eleven or more additional depositions in which Debtor will need to participate if the Florida Court grants the pending motions requesting additional discovery. In addition, Mr. Dawson will be required to fly to Florida during February 2008 to prepare for and participate in the trial in the Enforcement Action scheduled to commence on February 25, 2008.19 The diversion of Debtor’s management—and Mr. Dawson in particular—in defending the Enforcement Action during the next few




months seriously threatens Debtor’s reorganization. 19

The trial situation could possibly change if FTC doesfile a summary judgment motion and it is granted inpart or in full. However, Debtor will still need toprepare for trial because Debtor cannot know inadvance what the result will be of any as yet to be filedFTC motions.

*15 Mr. Dawson is the main contact for all of Debtor’s reorganization efforts in addition to his duties overseeing normal operational issues. Debtor’s reorganization efforts—especially at this early stage of Debtor’s bankruptcy case—are time-consuming. First, under the Bankruptcy Code, Debtor is required to obtain court approval for the use of its cash collateral post-petition. This is a marked difference from how Debtor operated pre-petition. Pre-petition Debtor could use any cash that came into Debtor’s accounts subject only to claims of various creditors. Post-petition, however, Debtor must obtain the consent of all creditors who have an interest in that cash collateral or court approval for the use of that cash collateral. In this instance, the Court has approved Debtor’s use of cash collateral on an interim basis at three-week intervals. Debtor has scheduled a final hearing for use of cash collateral for November 2, which depending on the status of its negotiations with its creditors, Debtor may or may not change to another interim request for use of cash collateral. It is not unusual in a chapter 11 bankruptcy case for a debtor to seek multiple interim requests for use of cash collateral while a debtor negotiates with secured and unsecured creditors for final consent to a debtor’s use of cash collateral. In the early stages of a bankruptcy case, creditors are getting up to speed regarding a debtor’s business operations and the relative likelihood of recoveries for creditors pursuant to various reorganization proposals. During this time, creditors, debtors and the bankruptcy court strike a balance among the parties’ interests and grant limited permission for a debtor to use post-petition cash collateral until the parties are comfortable with a debtor’s plans to operate and can resolve a debtor’s use of cash collateral on a final basis. The early, limited permission to use; cash collateral is in part why a chapter 11 bankruptcy case is so time-intensive for a debtor, and indeed all parties in the early stages. Second, the bankruptcy filing unsettled Debtor’s customers and Debtor is actively working on a proposed pre-payment plan whereby Debtor would pay 50% of the receivables represented by post-petition billing

submissions. This is a marked change from Debtor’s pre-petition operations where Debtor paid its customers approximately 90 days after the billing transactions were submitted to Debtor. Because the pre-payment program is new, Mr. Dawson and Debtor’s other employees will have to spend a great deal of time implementing and monitoring the new program. Further, the Committee was appointed on October 1, 2007 and on October 10, 2007, the Committee had a five hour face-to-face meeting with Debtor. At that meeting the Committee supported Debtor’s use of cash collateral through November 2, 2007 and in exchange Debtor has committed to negotiate with the Committee a term sheet for a plan of reorganization contemplating a continuation of Debtor’s business operations with the goal of allowing Debtor to exit bankruptcy as quickly as possible. Debtor is also monitoring the possible sale of PaymentOne to a third party. Mr. Dawson is a, and probably the, critical participant in those discussions and negotiations. *16 Finally, Debtor has complex business operations and over 1,200 creditors on its creditor matrix. Due to the size and complexity of Debtor’s business operations, Debtor requires—and has been granted—additional time to complete its Schedules and Statement of Financial Affairs. Those documents are currently due on November 15, 2007. The Schedules consist of seven separate schedules that require Debtor to: (a) list in detail all real and personal property, the value of each piece or category of property, and the security interest held against that property; (b) provide separate lists of Debtor’s creditors—secured creditors, priority unsecured creditors and unsecured creditors that includes an address for each creditor, information regarding when the claim was incurred and consideration for the claim, whether the claim is contingent, unliquidated or disputed, and the amount of the claim; (c) provide a detailed list of all executory contracts and unexpired leases; and (d) provide a list of all entities that are co-debtors with Debtor. The Statement requires Debtor to answer twenty-five questions in detail regarding Debtor’s financial affairs. The questions require Debtor to detail, inter alia, all payments or transfers Debtor made in the 90 days immediately preceding the commencement of the case that aggregate more than $5,475 to any creditor, and all payments or transfers Debtor made within one year immediately preceding the commencement of the case to any creditor that is an insider (all of the majority-owned subsidiaries of Debtor are considered to be insiders). Based on these projected activities, Debtor’s management- and Mr. Dawson in particular—will spend the next few months dealing with Debtor’s customers and




creditors, completing Debtor’s Schedules and Statement, negotiating with the Committee over the terms for a plan of reorganization and, if successful, most of November and early December will be spent negotiating a draft plan of reorganization and overseeing the preparation of a proposed disclosure statement. Both of these documents will require substantial amounts of time on the part of Mr. Dawson and Debtor’s other personnel. The plan of reorganization is Debtor’s contract with its creditors as to how Debtor intends to restructure itself using the Bankruptcy Code. In addition, the proposed disclosure statement is similar to a prospectus and will require, inter alia, a description of Debtor’s background, the events that caused Debtor to file its bankruptcy case, what has changed such that Debtor will be able to complete its proposed plan of reorganization, a description of the proposed plan, and financial projections in support of the plan if Debtor proposes to present a plan that permits Debtor to operate as a going concern. Debtor must submit its proposed disclosure statement to this Court for approval. 11 U.S.C. § 1125(b). Such activities will consume a huge portion of the available time of Debtor’s management over the next few months. *17 However, should Debtor be required to proceed to trial in the Enforcement Action at the end of February 2008, Mr. Dawson and other of Debtor’s personnel will be required to travel to Florida and spend many days—if not weeks in the case of Mr. Dawson—preparing for and participating in the trial in the Enforcement Action. This activity will take place at a critical juncture of Debtor’s bankruptcy case where Debtor should instead be seeking confirmation of a plan of reorganization. Debtor is committed to proposing a plan of reorganization on an expeditious basis. Under the notice requirements of the Bankruptcy Code and Rules, it is highly likely that Debtor will seek approval of a disclosure statement during January 2008, and could set a confirmation hearing on a proposed plan of reorganization during February or March 2008. Confirmation of a chapter 11 plan requires an enormous amount of work for both a debtor and its counsel. In addition to resolving and addressing any objections by any parties to approval of a disclosure statement and confirmation of a plan, this Court has an independent duty to ensure that a disclosure statement contains adequate information, In re Main Street AC, Inc., 234 B.R. 771, 774 (Bankr.N.D.Cal.1999), and an affirmative duty to ensure that a plan satisfies all sixteen requirements of Bankruptcy Code section 1129 for confirmation. In re Ambanc La Mesa Ltd. P’ship., 115 F.3d 650, 653 (9th Cir.1997). Just one of the requirements is that this Court must determine that confirmation of Debtor’s plan will

not likely be followed by the liquidation or further financial reorganization. 11. U.S.C. § 1129(a)(11). Mr. Dawson will almost certainly be required to testify before this Court as to Debtor’s plan and the financial projections on which it is based, as well as other evidence this Court requires to confirm any proposed plan submitted for confirmation by Debtor. In addition to the impact of the Enforcement Action on Debtor’s president and other personnel, it would be highly injurious to Debtor and Debtor’s prospects for reorganization if Debtor had to spend the bulk of the estimated $1 million in legal fees and costs associated with the Enforcement Action during this same critical period. Such an outlay of funds at a critical time of confirmation would seriously impair, if not strike a death knell, to Debtor’s prospects for a reorganization., Debtor is required under the Bankruptcy Code to pay all administrative claims as of the effective date of a confirmed plan. 11 U.S.C. § 1129(a)(9)(A). Debtor may well not have sufficient funds to both pay the litigation costs of defending the Enforcement Action and pay administrative claims on the effective date of a confirmed plan. The FTC likely holds only a pre-petition unsecured claim against Debtor in the Enforcement Action. Any monetary claims FTC asserts against Debtor arise only from Debtor’s alleged pre-petition placing of unauthorized collect call charges onto consumers’ telephone bills. There is no showing that at this point there is any reason for Debtor to spend $1 million litigating an unsecured claim in the next five months. First, at this juncture it is unclear what unsecured creditors will receive in Debtor’s reorganization and it is unknown if spending $1 million to defend against the FTC’s claims makes sense, especially in this case where secured and other unsecured creditors desperately need for all resources to be devoted to Debtor’s reorganization efforts. Second, over the next five months Debtor may negotiate a resolution of the FTC’s claims without the need for litigation. This Court is not determining at this juncture where the FTC’s claims will be liquidated. Rather, this Court is merely delaying briefly the Enforcement Action against Debtor only.20 It is this Court’s experience that in chapter 11 cases such as Debtor’s, a debtor typically negotiates with the various creditors to reach a consensus as to the structure of a plan of reorganization. It is generally less expensive and easier if a debtor can negotiate a plan of reorganization than if a debtor has to confirm a plan of reorganization over the objections of numerous creditors. At the early stages of Debtor’s case and under the facts of this case, a preliminary injunction of limited duration is warranted.




20

This Court’s decision stays the Enforcement Actionagainst Debtor for a few months. This decision does notdetermine whether (1) the FTC may recommence theEnforcement Action in the Florida Court after thosefew months, or (2) whether the FTC should be requiredto pursue Debtor by filing a claim with, and litigatingthat claim in, the bankruptcy court.

*18 By limiting the duration of the preliminary injunction and requiring Debtor to provide further updated evidence in mid-February 2008 to support the continued injunction of the Enforcement Action, this Court eliminates or at least reduces substantially the alleged harms of the FTC. The FTC cites three harms from a possible injunction of the Enforcement Action: (1) the inability of the FTC to obtain the non-monetary equitable relief it seeks against Debtor; (2) the inability of the FTC to pursue the claims in the Enforcement Action against Debtor in the Florida Court; and (3) the public interest in permitting the FTC to pursue a vital enforcement strategy to curb the unlawful practice of placing unauthorized charges on consumers’ phone bills. However, this Court has not eliminated, and is not eliminating, the possibility that at a later date this Court would permit the FTC to prosecute the Enforcement Action in the Florida Court, including the ability of the FTC to obtain the non-monetary equitable relief it seeks against Debtor. The FTC itself notes that it will seek such relief against Debtor post-confirmation. This Court is merely delaying for a few months the FTC’s prosecution of the Enforcement Action against Debtor. No decision has yet been made as to where the FTC’s claims will be litigated if indeed those claims need to be litigated at all. Granting a preliminary injunction of limited duration also renders premature the FTC’s argument that this Court must consider Debtor’s costs of Debtor defending itself in the Florida Court and defending itself in this Court rather than Debtor’s costs of defending itself against the FTC in the Florida Court or not defending itself at all. First, Debtor will not likely be prosecuting an objection to the FTC’s claim in the next few months. Indeed, March 14, 2008 is the claims bar date for governmental units in Debtor’s bankruptcy case. Thus, for this limited duration preliminary injunction, Debtor almost certainly will not incur any costs defending itself in this Court against the FTC’s claims.21

21

See footnote 17, supra.

C. Contempt Proceedings and Turnover Action

1. Debtor’s Ability to Sue the Receiver Receiver argues that this Court lacks subject matter jurisdiction over this adversary proceeding as to Receiver because Debtor has not obtained permission from the Florida Court to bring this action—or any action—against Receiver. Receiver asserts that for over 100 years, legal authority holds that a litigant must obtain permission from the court appointing a receiver before bringing an action against that receiver. Carter v. Rodgers, 220 F.3d 1249, 1252 (11th Cir.2000) (holding that under Barton v. Barbour, 104 U.S. 126 (1881), a debtor must obtain leave from the bankruptcy court before the debtor can initiate an action in district court against a bankruptcy-court appointed trustee for breach of fiduciary duties); In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir.2005) (a bankruptcy-court appointed trustee of a liquidating trust cannot be sued in a foreign jurisdiction for violating a settlement agreement without the permission of the court appointing the trustee). *19 Debtor asserts that the Barton doctrine applies only if Debtor were suing Receiver for dereliction of duties, which Debtor is not doing in this adversary proceeding. Moreover, Debtor argues that Crown Vantage stands for the proposition that Debtor does not need leave from the Florida Court to sue Receiver in this instance because this Court has exclusive in rem jurisdiction to determine the property of Debtor’s bankruptcy estate and the injunctive relief requested by Debtor is a stay specifically designed to protect the assets of the bankruptcy estate, so the Barton doctrine is not invoked. This Court agrees with Debtor that once Debtor filed its bankruptcy petition on September 16, 2007, this Court obtained exclusive in rem jurisdiction over the property in Debtor’s bankruptcy estate, and particularly over any legal and equitable interest Debtor held in the Commingled Funds as of the commencement of the case. While none of the parties or this Court have found any cases directly on point, the Court finds Gilchrist v. General Elec. Capital Corp., 262 F.3d 295 (4th Cir.2001), particularly instructive. In Gilchrist, Spartan International, Incorporated and its subsidiaries (collectively, “Spartan”) closed their doors for business. Spartan’s major creditor (“GE”) commenced a state law debt-collection action invoking the diversity jurisdiction of the district court of South Carolina (“South Carolina Court”). To facilitate the foreclosure of the creditor’s lien, the South Carolina Court appointed a federal receiver for all of Spartan’s assets (“Receiver Order”). The Receiver Order enjoined all persons from commencing or prosecuting any action, suit or proceeding




that affected the receivership estate or Spartan. Gilchrist, 262 F.3d at 297–98. One week later and with actual notice of the Receiver Order, 50 creditors (“Georgia Creditors”) filed an involuntary bankruptcy petition in the bankruptcy court in the Southern District of Georgia (“Georgia Court”) and a request for the appointment of an interim bankruptcy trustee. GE objected to the appointment of an interim bankruptcy trustee and filed a motion to dismiss the involuntary bankruptcy petition or transfer venue to the district of South Carolina. The receiver filed a similar motion. Following a hearing, the Georgia Court overruled the objections, denied the motions and appointed an interim bankruptcy trustee. Gilchrist, 262 F.3d at 298. While that hearing was in progress, the receiver obtained a temporary restraining order from the South Carolina Court enjoining 38 of the Georgia Creditors from undertaking any action in furtherance of the involuntary bankruptcy petition. Four days later the South Carolina Court found the Georgia Creditors in contempt of the Receiver Order and allowed the Georgia Creditors to purge their contempt by withdrawing the bankruptcy petition. The interim bankruptcy trustee argued that the automatic stay precluded the South Carolina Court’s actions, but the South Carolina Court refused to recognize the automatic stay of its proceedings. The South Carolina Court asserted that it had jurisdiction to determine the scope of the automatic stay, and it had the authority to issue an injunction to prevent the collateral attack of that court’s Receiver Order appointing the receiver. In an effort to purge their contempt, the Georgia Creditors subsequently filed a petition in the Georgia Court to withdraw the involuntary petition, which the Georgia Court denied. The Georgia Court stayed further proceedings pending a review of the South Carolina Court’s orders by the Fourth Circuit. Gilchrist, 262 F.3d at 298–99. *20 In reviewing the South Carolina Court’s orders, the Fourth Circuit noted that the South Carolina Court was within the scope of that court’s equitable powers in appointing the receiver and asserting in rem jurisdiction over Spartan’s assets, even those located in other districts. Gilchrist, 262 F.3d at 302. However, once the Georgia Creditors filed the involuntary bankruptcy petition,

[b]y virtue of the jurisdictional provisions of the United States Code, and the commencement of a bankruptcy case against Spartan, the bankruptcy court obtained “exclusive jurisdiction of all of the property, wherever located, of [Spartan] as of the commencement of such case, and of property of the estate.” 28 U.S.C. § 1334(e) (emphasis added). In addition, the filing of the

petition in bankruptcy “operates as a stay, applicable to all entities, of the ... continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was commenced before” the bankruptcy petition. 11 U.S.C. § 362(a)(1). To give effect to its jurisdiction, the bankruptcy court is given broad equitable powers, see11 U.S.C. § 105, with nationwide service of process, see Bankr.R. 7004(d).

Gilchrist, 262 F.3d at 303. The Fourth Circuit then found that the South Carolina Court had properly determined that the South Carolina Court had jurisdiction to determine its own jurisdiction and the scope of the automatic stay. However, the Fourth Circuit stated that:

The [South Carolina] court provided no explanation of why, as a matter of equity, the bankruptcy process was not superior to a receivership in the liquidation of a large business, with assets in several jurisdictions and with thousands of creditors, some of whom were claiming liens superior to the lien relied upon by GE when it initiated the receivership proceeding. More importantly, it provided no explanation of why the terms of § 362(a) were not applicable.

Similarly, in their briefs and arguments presented to us, counsel for GE and the receiver advanced no exception to § 362(a) that would be applicable. Instead they argued for a “first-filed” principle, urging that the court which first takes custody of assets for liquidation should be given priority.

We cannot agree. Our examination of the Bankruptcy Code reveals that Congress intended that the bankruptcy process be favored in circumstances such as these. Section 1334(e) of title 28 is unequivocal in its grant of exclusive jurisdiction to the bankruptcy court, and § 362(a) imposes an automatic stay on all proceedings merely upon the filing of a bankruptcy petition. If we were to frustrate these express provisions to further a first-filed policy, we would have to deny bankruptcy jurisdiction to every bankruptcy court in which foreclosure proceedings had already commenced against the debtor’s property, on the grounds that the in rem nature of the foreclosure proceeding precludes the bankruptcy court from taking custody of the res. Such a jurisdictional limitation on bankruptcy proceedings would severely limit the efficacy of bankruptcy. In the absence of express language suggesting that Congress intended for bankruptcy jurisdiction to be so limited, we believe it would frustrate Congressional intent to imply such a limitation based solely on consideration of a first-filed




policy.

*21 Even if general equitable principles could modify the application of statutory jurisdictional grants, we do not believe that the equities favor the common-law receivership process over the highly developed and specific bankruptcy process. The procedural requirements for liquidating a large corporation with thousands of creditors, many of whom might challenge the priority of liens and the adequacy of asset sales, present a task that would push the receivership process to its limits. See [In re Baldwin–United Corp. Litigation], 765 F.2d [343, 348 (2nd Cir.1985) ] (“[T]o whatever extent a conflict may arise between the authority of the Bankruptcy Court to administer this complex reorganization and the authority of the District Court to administer consolidated pretrial proceedings, the equities favor maintenance of the unfettered authority of the Bankruptcy Court”). In this case it can be seen, even from the initial transactions in the receivership, that the customized receivership mechanisms are wanting in comparison with established bankruptcy process. For example, when the receiver in this case sold a mill in Georgia for $4.2 million, the creditors had no advance notice of the transaction, and some have challenged the adequacy of compensation, proffering evidence that the mill was worth over $2 0 million. More important to the Georgia creditors in this case, the district court did not have in place a mechanism to adjudicate the relative priority of liens. GE claims a first lien by reason of its perfected security interest in most of the assets of Spartan and proffered an order by which the proceeds of liquidation would be paid to it as the superior lien holder. But Spartan’s employees claim a prior statutory lien in assets produced by them at the manufacturing plants at which they worked, as created by state law. While they surely could file claims in the receivership, the process for making and adjudicating such claims was not spelled out.

Gilchrist, 262 F.3d at 303–04. While the facts in this case differ from those in Gilchrist—the action in the Florida Court is an enforcement action rather than an action to foreclose on collateral, and Debtor is not the receivership entity as in Gilchrist, there are two primary principles that apply here. First, as noted in Gilchrist, once a bankruptcy petition is filed, section 1334(e) of title 28 is unequivocal in its grant of exclusive jurisdiction to the bankruptcy court over all property, wherever located, of Debtor as of the commencement of such case. 28 U.S.C. § 1334(e). Property of the bankruptcy estate includes all legal or equitable interests of a debtor in property as of the

commencement of the case. 11 U.S.C. § 541(a)(1). Bankruptcy Code section 542 also provides that entities—other than custodians—in possession, custody or control of property that a debtor-in-possession may use, sell, or lease under Bankruptcy Code section 363 shall deliver and account for such property to that debtor, unless the property is of inconsequential value or benefit to the estate. 11 U.S.C. § 542(a). Bankruptcy Code section 543 provides that a custodian shall turn over property of the debtor unless excused by the bankruptcy court. 11 U.S.C. §§ 543(b), (d). *22 Here Receiver asserts that because the Florida Court found in the Omnibus Order that Integretel held “reserves” in the amount of $1,762,762.56 on behalf of the Prior Customers as of June 30, 2007, Integretel was required to turn over the Commingled Funds to Receiver. However, the Commingled Funds were nothing more than Integretel’s commingled funds and were not any particular or identifiable res, and the Florida Court did not find that a res existed. In fact the Omnibus Order does not require Integretel to pay any specific amount of funds to Receiver. Rather, in order to comply with the Omnibus Order, Debtor would have to pay Receiver out of Debtor’s general account the “reserves” the Florida Court determined Integretel held on behalf of the Prior Customers (the Florida Court described such “reserves” but did not quantify them). Integretel did not turn over any commingled funds to Receiver pre-petition and Debtor did not segregate any such funds in any fashion pre-petition. As of the petition date, Debtor retained an interest in all of its commingled funds and Receiver asserted an interest in some as yet unquantified portion of those funds. On the petition date, this Court obtained exclusive jurisdiction over all of the commingled funds under section 1334(e) of title 23. Accord In re Simon, 153 F.3d 991, 996 (9th Cir.1998).22

22

Because there is no pre-petition res, it is difficult to understand how the Commingled Funds could not be property of the bankruptcy estate. This Court is notreviewing the Florida Court’s decision in the Omnibus Order; that decision is on appeal to the Eleventh Circuit. However, this Court is of the opinion that the bankruptcy court has exclusive jurisdiction over what constitutes property of the estate. See Section III.C.2 of this decision, infra. In any event, the Court must consider Debtor’s likelihood of success on the merits on this issue in considering the stay issues currently before the Court.

It is this exclusive grant of in rem jurisdiction that precludes the application of the Barton doctrine in this particular set of circumstances. Crown Vantage points out




that

[p]art of the rationale underlying Barton is that the court appointing the receiver has in rem subject matter jurisdiction over the receivership property. As the Supreme Court explained, allowing the unauthorized suit to proceed “would have been a usurpation of the powers and duties which belonged exclusively to another court.” (Citations and footnote omitted).

Crown Vantage, 421 F.3d at 971. It is the unique situation here—where the exclusive in rem jurisdiction over the Commingled Funds passed from the Florida Court to this Court upon Debtor filing its bankruptcy petition—that eliminates Debtor’s need to request leave from the Florida Court before suing Receiver in this adversary proceeding. The parties dispute the precise implication of the Omnibus Order. Receiver and the FTC assert that the Omnibus Order determined in a final appealable order that the Commingled Funds were property of the receivership estate and Debtor had no interest in the Commingled Funds at the time Debtor commenced this bankruptcy case. Receiver bases this argument on the premise that the Florida Court ordered the turnover of Commingled Funds. Outside of bankruptcy, Receiver could perhaps compel adherence to the Omnibus Order regardless of whether any actual, segregated funds existed from which to make the payment ordered by the Florida Court. However, once Debtor filed for bankruptcy protection, the Omnibus Order command could only be enforced at the expense of all other creditors of Debtor—secured and unsecured—other than Receiver. This distinction is usually discussed in the context of a constructive trust remedy, where courts have often expressed that the “privileging of one unsecured claim over another clearly thwarts the principle of ratable distribution underlying the Bankruptcy Code.” In re Flanagan, –––F.3d ––––, 2007 WL 2915812, *8 (2d Cir. Oct. 9, 2007). *23 The Ninth Circuit has recognized this distinction for more than 40 years. In Elliot v. Bumb, 356 F.2d 749, 754–55 (9th Cir.1966), the Ninth Circuit refused to allow state law to control whether a creditor would be entitled to claim that a trust existed over a debtor’s commingled funds because the state law yielded to bankruptcy law and bankruptcy law requires tracing. The Ninth Circuit has followed that case in Matter of Esgro, Inc., 645 F.2d 794, 798 (9th Cir.1981); In re North American Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir.1985); and In re Advent Management Corp., 178 B.R. 480, 488 (9th Cir. BAP1995), aff’d,104 F.3d 293 (9th Cir.1997). As noted in Flanagan, the “equities in bankruptcy are not the

equities of the common law.” Flanagan, 2007 WL 2915812 at *8 (quoting XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1452 (9th Cir.1994)). Thus, the Omnibus Order is likely, at most, nothing more than a money judgment determining Debtor’s purported liability to the receiver.23 While it is based on the concept that Receiver had a property interest in Debtor’s bank accounts as of the issuance of the TRO, the Omnibus Order does not and could not call for the turnover of any specific, identifiable property in Debtor’s bank accounts as of the TRO. Rather the Omnibus Order merely directs Debtor to pay over the amount of Debtor’s “reserve” liability from any funds Debtor has available to it. Receiver never claimed that Receiver can trace the funds received by Debtor from the Prior Customers to an identifiable fund that still exists. Rather, Receiver correctly interprets the payment order as being a judgment commanding the payment of an as yet unquantified amount of money. 23

It is not 100 percent clear that the Florida Court has determined that Receiver has a fully liquidated final appealable judgment for money against Debtor.

Debtor filed its bankruptcy petition while the Commingled Funds remained in Debtor’s bank account. Debtor has demonstrated a very strong likelihood of success on the merits—that whether measured at the outset of the Florida Action or as of the date of the petition, Debtor holds no specific identifiable funds that can be traced from the Prior Customers to Debtor’s existing bank accounts. The determination that Receiver held an interest in the Commingled Funds did not eliminate any interest Debtor’s bankruptcy estate had in the same funds.

To reclaim money or property from a bankruptcy estate on the basis that the property belongs to the reclaiming party and not to the debtor, the reclaiming party must be able to definitively trace its property. Even when property is commingled, that property must be positively identified, or else the reclaiming party is relegated to the status of a general unsecured creditor, regardless of the equities. The manner in which the debtor or the estate came into possession of the property is irrelevant. (Citations




omitted.)

In re Graphics Technology, Inc., 306 B.R. 630, 635 (8th Cir. BAP), aff’d,113 Fed. Appx. 734 (8th Cir.2004). Thus, notwithstanding any post-petition pronouncement by the Florida Court to the contrary, the Commingled Funds are property of Debtor’s bankruptcy estate subject to whatever interest the Omnibus Order granted Receiver in those funds—along with the interests Debtor’s other secured and unsecured creditors assert in those funds. Debtor can sue Receiver without obtaining the permission of the Florida Court here because any action by Receiver in furtherance of obtaining possession of the Commingled Funds interferes with this Court’s exclusive in rem jurisdiction over those funds. *24 The second primary principle found in Gilchrist is that a district court is limited in its ability to address competing claims over the same assets. As noted in Gilchrist, even where the receiver held property of Spartan pursuant to the foreclosure action initiated by GE, the South Carolina Court did not have in place a mechanism to adjudicate the relative priority of liens against that property. In this case, the Florida Court had jurisdiction only over part of Debtor’s property pre-petition—i.e., some portion of the commingled funds in Integretel’s bank account. At the time that the Florida Court entered the Omnibus Order, the only parties before that court with respect to the Commingled Funds were Receiver, Integretel and possibly the FTC. The Florida Court could not and did not adjudicate the competing claims to the Commingled Funds asserted by Debtor’s secured and unsecured creditors.

2. Bankruptcy Court Jurisdiction Over Property of the Estate Receiver and the FTC assert that the Florida Court determined that the Commingled Funds were not property of Debtor in the post-petition Clarification Order.24 In particular, the Florida Court stated with respect to its determination that there was no automatic stay in place as to the contempt proceedings that: 24

The Clarification Order was issued post-petition. If thisCourt is correct, that the Florida Court had nojurisdiction to determine post-petition what propertyconstitutes property of the estate, then the Florida Courtlacked jurisdiction to issue that aspect of theClarification Order. The Court considers this matter inthe context of the stay issues before it, and not inreview of the Florida Court.

First, the automatic stay applies only to protect property of the bankruptcy estate or property of the debtor. See11 U.S.C. § 362(a)(2). The Court has already ruled that the reserve funds are neither the property of the “bankruptcy estate” nor Integretel. Clarification Order at 4. The issue of the Florida Court’s jurisdiction to determine the scope of the automatic stay is not before this Court. However, as discussed above, once Debtor filed its bankruptcy petition, the bankruptcy court has exclusive jurisdiction to determine what is property of the estate. Gilchrist, 262 F.3d at 303 (once a bankruptcy petition is filed, section 1334(e) of title 28 is unequivocal in its grant of exclusive jurisdiction to the bankruptcy court over all property, wherever located, of a debtor as of the commencement of such case). Moreover, the pre-petition determination that Receiver held an interest in the Commingled Funds did not eliminate any interest Debtor’s bankruptcy estate had in the same funds, especially since those funds were not part of a specific pre-petition res.25See Graphics Technology, 306 B.R. at 635. Thus, the post-petition assertion by the Florida Court in the Clarification Order that the Commingled Funds are not property of Debtor’s bankruptcy estate exceeded the Florida Court’s post-petition jurisdiction over property of Debtor’s estate.26

25

The creation of the Blocked Account post-petition also does not create a pre-petition res since Debtor and Receiver agreed that the temporary establishment of the Blocked Account did not in any way affect the merits of either parties’ rights, claims or defenses with respect to the funds in the Blocked Account.

26

The Clarification Order is currently on appeal to the Eleventh Circuit, but that does not change this Court’s legal analysis of the jurisdiction of the bankruptcy court. See footnote 24, supra.

3. Harms to Receiver Receiver asserts that several harms would occur should this Court enjoin Receiver from implementing or enforcing the Omnibus Order and/or unblock the funds held in the Blocked Account. Primarily, Receiver argues that Debtor is attempting to interfere with the administration of the receivership in seeking to enjoin the enforcement of the Omnibus Order. The purpose of the receivership is to marshal and preserve the assets of the receivership entities in order to return those assets to the victims of the fraud. Eller Industries, Inc. v. Indian Motorcycle Manufacturing, Inc., 929 F.Supp. 369




(D.Colo.1995); Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93 (2d Cir.1987).27 In some federal governmental enforcement actions, a federal district court may appoint a receiver and issue a temporary restraining order and/or preliminary injunction to preserve the assets that result from the actions of the receivership entities—whether held by parties or non-parties—to provide redress for the legitimately defrauded investor. FTC v. Productive Marketing, Inc., 136 F.Supp.2d 1096, 1104–06 (C.D.Cal.2001) (where the district court found that the non-party’s failure to turn over receivership funds disrupted the district court’s power to enforce its injunction and the receiver’s right to obtain such funds). The Florida Action is an enforcement action in which the FTC seeks injunctive relief against Debtor—among others—for consumer redress for deceptive and unfair practices for unauthorized billing of charges on phone bills in violation of the Federal Trade Commission Act. The Florida Court appointed Receiver, issued the Preliminary Injunction and ordered Receiver, as the Florida Court’s agent, to locate, marshal and preserve receivership property. Receiver argues that if this Court enjoins Receiver from performing Receiver’s duties, this Court will also be enjoining the Florida Court. Receiver asserts that such a ruling would create an unworkable, unthinkable, and grave conflict between this Court’s injunction order and the previously-issued orders of the Florida Court. However, that is not correct. Bankruptcy courts enjoin parties from proceeding outside of the bankruptcy court; they do not normally enjoin any other courts from taking any action. This Court is not enjoining the Florida Court. 27

Receiver asserts that Eller Industries (a Colorado district court decision which is distinguishable and notbinding on this Court in any event) involves a strikinglysimilar set of facts. According to Receiver, theColorado district court concluded that theMassachusetts bankruptcy court’s injunction could notbe effective against a receiver appointed by theColorado district court because the bankruptcy court’sinjunction interfered with the Colorado district court’smandated obligations of the receiver—who was afiduciary of the Colorado district court and wasresponsible for locating and protecting the assets of thereceivership estate. The Colorado district court foundthat the purposes of the receivership can only beachieved by a stay of foreign equitable actions,including the Massachusetts adversary proceeding.

This Court disagrees. The facts of Eller Industriesare distinguishable and the legal proposition forwhich Eller Industries stands is not applicable to theinstant case. In Eller Industries. a chapter 7 trusteeobtained a temporary restraining order against IndianMotorcycle Manufacturing, Inc. (“IMMI”)precluding IMMI from soliciting funds by using a

script “Indian” trademark. The temporary restraining order enjoined IMMI from transferring, assigning, conveying, hypothecating or encumbering—except in the ordinary course of business—any and all of IMMI’s assets. Shortly thereafter, a federal receivership was established putting a receiver in as the only officer and director of IMMI. After the federal receiver was appointed, the Massachusetts bankruptcy court converted the temporary restraining order into a preliminary injunction and the bankruptcy trustee asserted that the preliminary injunction applied to the receiver. The Colorado district court held that the Colorado district court had exclusive jurisdiction over the assets and administration of the receivership imposed on IMMI, only the Colorado district court could authorize equitable actions against the receivership estate, and the bankruptcy court’s preliminary injunction was not effective against the Colorado district court or the IMMI federal receivership. In Eller Industries a bankruptcy trustee was enjoining a third party entity that itself was under federal receivership. Such a pursuit was precluded by the federal receivership district court. Here, this Court is enjoining Receiver from dissipating property of Debtor’s bankruptcy estate. Debtor is not in receivership. As discussed in detail supra, once Debtor filed its bankruptcy petition, this Court obtained exclusive in rem jurisdiction over the Commingled Funds. No such transfer from the bankruptcy estate to the IMMI federal receiver occurred in Eller Industries, and that case is distinguishable.

*25 Receiver also argues that Debtor is merely seeking to re-litigate the parties’ disputes over the Commingled Funds as set forth in the Omnibus and Clarification Orders. Such re-litigation is barred by res judicata. According to Receiver, a review of the Omnibus Order and the Clarification Order reveals that those orders were not merely an interim measure to preserve the Commingled Funds. Rather those orders adjudicated ownership of the Commingled Funds. Moreover, the ownership issue is not predicated on whether the FTC ultimately prevails in the Enforcement Action, and the turnover provisions of the Omnibus Order and Clarification Order are final, appealable orders. The FTC contends that any issue that Debtor has with those orders should be brought before the Eleventh Circuit. However, the bankruptcy court has exclusive in rem jurisdiction post-petition over property of the estate, as well as jurisdiction to determine what constitutes property of the estate, so Debtor necessarily should be permitted to assert that position in this Court. Additionally, Receiver is concerned about the dissipation




of the Commingled Funds should the Blocked Account be unblocked. If Debtor were to spend the funds in the Blocked Account, the purpose of the Omnibus Order will be thwarted. Also, if this Court were to enjoin Receiver and permit Debtor to use the Commingled Funds in the operation of its business, this Court would be exercising control over property under which the Florida Court has exclusive in rem jurisdiction and this Court would effectively be determining the interests in the Commingled Funds without a final order in an adversary proceeding in contravention of Federal Rule of Bankruptcy Procedure 7001(2). Debtor contends that Receiver is adequately protected, even assuming Receiver has a specific interest in the Commingled Funds. Because this Court is not unblocking the Blocked Account at this time, there is no need to address Debtor’s argument that Receiver is adequately protected by Debtor’s total assets even if at a later time Receiver were to demonstrate an interest in the Commingled Funds and the Court were to consider whether to unblock all or some of the funds in the Blocked Account.

4. Harms to Debtor Debtor asserts that it will face irreparable injury if enforcement of the Omnibus Order is not enjoined28 and if the Blocked Account is not unblocked. First, Debtor’s business will suffer very substantially and irreparably if Debtor is required to turn over $1,762,762.56 to Receiver under the Omnibus Order, particularly at this critical point in Debtor’s reorganization efforts. Debtor’s estate will lose the over $1.7 million that appears to be property of the estate. Those funds will not be available to Debtor or its creditors if they are turned over to Receiver. 28

Debtor asserted this argument prior to obtaining theStay Order.

Second, Debtor asserts that it needs those funds to maintain adequate cash reserves relating to its post-petition operations. This in part is due to a shift in Debtor’s actions with respect to “unremitted” funds. Specifically, under Debtor’s pre-petition settlement process, when Debtor received payments from the LECs, Debtor would settle Debtor’s obligations with its customers. Debtor had the right to retain some portion of those proceeds under the service contracts and pay the unremitted portion to the customer at a later time. When Debtor withheld funds during the pre-petition settlement process, Debtor used those funds for its general operating

expenses. Post-petition, Debtor believes it is prudent for Debtor to retain sufficient cash to cover Debtor’s possible administrative obligations to its customers to remit withheld funds to those customers, should Debtor have to remit those funds in the future. Under its new post-petition policy to retain sufficient cash to cover the unremitted funds, Debtor requires additional excess cash to ensure the unremitted funds are available to customers for billing transactions submitted post-petition. *26 Receiver and the FTC both argue that based on Debtor’s own budgets, Debtor does not currently need the use of the funds in the Blocked Account, at this time, so there is no basis for this Court to release those funds. Receiver and the FTC argue that Debtor has made no attempt to supply any foundation for the financial figures. Also, the budgets indicate that Debtor is never left without cash. The total cash balance even during the monthly shortfalls never falls below $3 million. The question then arises as to whether the claimed monthly shortfall in mid-December results from the unsubstantiated legal costs related to the Enforcement Action, the unexplained one-time drop in revenue in December, and/or the unusual and questionable post-petition pre-payment arrangement. In addition, as Debtor points out, such a turnover by Debtor to Receiver of the funds in the Blocked Account would be a preference of one unsecured creditor—Receiver—over all similarly situated unsecured creditors. The portion of the Omnibus Order that requires Debtor to pay over the Commingled Funds likely represents, at most, an ordinary judgment against Debtor which is an unsecured claim in this bankruptcy estate. From the issuance of the TRO and Preliminary Injunction in the Florida Court to the filing of Debtor’s bankruptcy case, no money was set aside for Receiver’s claim. The Omnibus Order requiring Debtor to pay over to Receiver an amount denominated on Debtor’s books as “reserves” cannot create a property interest where none exists. Debtor has “reserve” amounts for each of Debtor’s past and current customers, and none of those customers are being afforded the right to invade Debtor’s bank account to retrieve funds that those customers might wish to claim as their own. Receiver’s claim is not superior to that of any other creditor, except that Receiver has obtained the Omnibus Order from the Florida Court, which is currently on appeal to the Eleventh Circuit. In an effort to counter this alleged harm of Debtor, the FTC argues that the Florida Court ruled in the Omnibus Order that the Commingled Funds are property of the receivership estate and not property of Integretel. Moreover, Debtor’s purported inability to turn over the




funds is a complete defense to contempt under FTC v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir.1999), if that defense can be established. FTC argues that if Debtor prevails on the inability to pay defense, Debtor will not have to turn over the Commingled Funds and Debtor will not have the irreparable harm Debtor alleges. Alternatively, if Receiver ultimately prevails, then there is also no cognizable irreparable harm because the property of the receivership estate will have been rightly restored to the receivership at no cost to Debtor’s estate. The FTC further argues that Debtor’s claim for irreparable harm rings especially hollow given that Debtor only has itself to blame for any predicament in which Debtor now finds itself. Debtor was served with the TRO in March 2006 and had 18 months to organize its financial affairs in order to comply with the TRO. Debtor had ample opportunity to seek clarification of the Florida Court TRO and Preliminary Injunction, secure a letter of credit, borrow from one of Debtor’s affiliated companies, cut costs, or put money into savings. Instead, Debtor allegedly chose to ignore the TRO and Preliminary Injunction, and Debtor should not now be heard to complain about a harm that is in essence, self-inflicted. *27 Finally, Debtor will be harmed by incurring legal fees and costs if enforcement of the Omnibus Order is not enjoined, as well as the diversion of Debtor’s management from the reorganization process. Debtor estimates that Debtor will incur an additional $50,000 to $150,000 in fees related to Receiver’s request for the turnover of the Commingled Funds. Receiver argues that the contempt proceedings are largely complete and the orders are self-executing. However, the Omnibus Order is now on appeal. If the enforcement of the Omnibus Order is not enjoined, Debtor will have to comply with the order to turn over the funds or show cause why Debtor should not be held in contempt.

5. Balancing of the Harms and the Public Interest Even if the contempt proceeding is properly subject to the exemption from the automatic stay under Bankruptcy Code section 362(b)(4), this Court may enjoin the prosecution of the contempt proceeding under Section 105 if the contempt proceeding “threatens” the assets of the bankruptcy estate. FAMCO, 264 B.R. at 653. A proceeding “that seeks actual physical control over the assets of the debtor’s estate threatens the bankruptcy court’s exclusive jurisdiction over the res of the debtor’s estate and therefore can be enjoined.” FAMCO, 264 B.R. at 655.29

29

This Court is not reviewing the Florida Court’s decision in the Clarification Order that the contempt proceeding is exempt from the automatic stay under Bankruptcy Code section 362(b)(4); that is on appeal to the Eleventh Circuit. The Florida Court determined that the contempt proceeding was an exercise of the government’s police or regulatory power, and therefore exempt from the automatic stay pursuant to Bankruptcy Code section 362(b)(4). However, as this Court understands the situation, neither the FTC nor any other government agency is a party to Receiver’s contempt proceeding.

a. Enjoining Enforcement of the Omnibus Order Once Debtor filed its bankruptcy petition a bankruptcy estate came into being. Debtor is a debtor-in-possession and is a fiduciary to all of Debtor’s creditors—inter alia, secured creditors, unsecured creditors, customers, the FTC and Receiver. Receiver certainly does not represent all creditors of Debtor’s estate. At most Receiver represents the receivership estates of the Prior Customers and the FTC. Receiver does not seek to have the Commingled Funds turned over to him to protect those funds for all creditors of Debtor’s bankruptcy estate. Rather, Receiver seeks possession of those funds for the benefit of the receivership estates of the Prior Customers, to the exclusion of Debtor’s other secured and unsecured creditors. Although the Florida Court issued the Omnibus Order, Receiver—in the shoes of the Prior Customers—is no different from nearly all of Debtor’s customers. The typical service contract provides for Debtor to maintain certain reserves for disputes, fees and other adjustments. These “reserves” on behalf of the Prior Customers were the “reserves” that were the subject of the Omnibus Order. It is undisputed that the “reserves” were held as bookkeeping entries and not as segregated funds. Permitting Receiver to implement the Omnibus Order would irreparably harm Debtor’s bankruptcy estate by preferring one creditor—Receiver—over other similarly situated creditors of Debtor, since most if not all service contracts provide for the same “reserves.” Moreover, Debtor asserts that it needs the Commingled Funds to operate post-petition. This Court should not destroy Debtor’s business to “protect” a creditor that is likely an unsecured creditor, and in the same position as Debtor’s other customer creditors. *28 As far as this Court knows, enforcement of the Omnibus Order is presently stayed under the Stay Order.




This is so because on September 20, 2007, the Florida Court issued an order staying proceedings against Debtor. The Clarification Order vacated the September 20, 2007 order. The Stay Order stays the Clarification Order, so the end result is that the Stay Order reinstated the September 20, 2007 order that stays, inter alia, enforcement of the Omnibus Order. At this point, this Court is not inclined to issue a stay that is duplicative of the stay of the Eleventh Circuit. Should there currently be no such stay or should the status of a stay of the enforcement of the Omnibus Order change, any party may request further relief from this Court for good cause based on facts that are not currently before this Court.

b. Unblocking the Blocked Account Based on the record before the Court, Debtor’s request for authority to unblock the Blocked Account is denied through December 14, 2007. On December 7, 2007 at 10:00 a.m., the Court will hold a further hearing on whether to unblock the Blocked Account as of December 14, 2007. Any party may request that the Blocked Account be unblocked prior to that time for good cause based on facts that are not currently before this Court. Debtor concedes that pursuant to Debtor’s projected budgets, Debtor does not need to use the funds in the Blocked Account until December 14, 2007. In reviewing Debtor’s budget, Debtor projects incurring litigation expenses related to the Florida Action, in the amount of $333,333 for each week ending November 2, 2007, December 7, 2007, and January 4, 2008. This Court has stayed the Enforcement Action against FTC through March 14, 2008, and the Eleventh Circuit has stayed the Clarification Order. The Eleventh Circuit Stay Order effectively reinstates the Florida Court’s September 20, 2007 order stating that the automatic stay applies to all aspects of the Florida Action, and so the Stay Order stays all other proceedings against Debtor in the Florida Action. Thus, unless this Court’s order is overturned, the $666,666 that Debtor projects to spend in legal fees for the Florida Action between November 2, 2007 and December 7, 2007 is moot. Adding those funds back into Debtor’s budget means that Debtor should have sufficient cash flow until the week ending December 21, 2007. However, that is not the end of the analysis. It is this Court’s understanding that part of the reason that Debtor’s budget indicates that Debtor will have insufficient cash flow as of the week ending December 21, 2007 is based on Debtor’s new post-petition practice of holding funds equivalent to post-petition collected and unremitted funds owed to customers. Adding the projected legal fees back into Debtor’s pre-petition settlement cash balance and

retaining all other assumptions, Debtor will have a deficit of $167,962 in funds held related to Debtor’s obligations to customers for collected and unremitted funds for the week ending December 21, 2007 and a deficit of $185,556 in such funds for the week ending December 28, 2007. After that time, Debtor’s projections indicate that Debtor will have sufficient funds to cover Debtor’s new post-petition practice of holding such funds. If this Court’s understanding is incorrect or Debtor needs to use those funds, Debtor can always request further relief from this Court for good cause based on facts that are not currently before this Court or if Debtor believes the Court misunderstands the facts before it. *29 The Court acknowledges Debtor’s new commitment to addressing an issue that resulted in Debtor’s bankruptcy filing, namely Debtor’s pre-petition use of funds withheld during the settlement process for Debtor’s general operating expenses. Thus, on the balance sheet it appears that Debtor would have a deficit. However, it appears possible that Debtor would for two weeks have a deficit of less than $200,000 in an account that holds funds to be paid to customers at a later time. If that were true, would there be a sufficient basis for this Court to unblock the over $1.7 million in funds held in the Blocked Account to provide a reserve of less than $200,000 in case Debtor were required to remit unremitted funds to customers? By December 7, 2007, the Court and all parties will have several more weeks of actual post-petition financial information from Debtor, so a more accurate assessment of Debtor’s actual need for the funds in the Blocked Account can be made. In any event, as noted above, should Debtor need the partial or full use of the funds in the Blocked Account for a period of time, the Court will consider such a request at the December 7, 2007 hearing. Moreover, should Debtor need use of the funds in the Blocked Account prior to the December 7, 2007 hearing, Debtor may request such relief before that hearing.

CONCLUSION

For the foregoing reasons, the Enforcement Action against Debtor is enjoined through March 14, 2008. On March 7, 2008 at 1:00 p.m., the Court will hold a further hearing on whether the preliminary injunction of the Enforcement Action should be continued beyond March 14, 2008. Any supplemental papers in support of continuing the preliminary injunction of the Enforcement Action after March 14, 2008 shall be filed and served by February 22, 2008. Any opposition shall be filed by February 29, 2008. Either FTC or Debtor may request that




the preliminary injunction be lifted before March 7, 2008 for good cause based on facts that are not currently before this Court. Based on the Stay Order, this Court will deny without prejudice Debtor’s request for a preliminary injunction of the enforcement of the Omnibus Order. Should there currently be no such stay or should the status of a stay of the enforcement of the Omnibus Order change, any party may request further relief from this Court for good cause based on facts that are not currently before this Court. Debtor’s request for authority to unblock the Blocked Account is denied through December 14, 2007. On December 7, 2007 at 10:00 a.m., the Court will hold a

further hearing on whether to unblock the Blocked Account as of December 14, 2007. Any supplemental papers in support of unblocking the 3locked Account at that time shall be filed and served by November 27, 2007. Any opposition shall be filed by December 3, 2007. Any party may request that the Blocked Account be unblocked prior to that time for good cause based on facts that are not currently before this Court. *30 Counsel for Debtor shall submit a form of order consistent with this decision after review by FTC and Receiver as to form.

End of Document

© 2013 Thomson Reuters. No claim to original U.S. Government Works.


EXHIBIT D


In re Bryco Funding, Inc., Not Reported in B.R. (2009)

52 Bankr.Ct.Dec. 74



United States Bankruptcy Court,N.D. California.

In re BRYCO FUNDING, INC., Debtor.E. Lynn Schoenmann, Trustee, Plaintiff,

v.State of California, Franchise Tax Board, Defendant.

Bankruptcy No. 08–30173 TEC. |Adversary No. 09–3087 TC. | Oct. 9, 2009.


Dennis D. Davis, Katherine D. Ray, Goldberg, Stinnett, Davisand Linchey, San Francisco, CA, for Plaintiff.

Kristian D. Whitten, Office of the Attorney General, SanFrancisco, CA, for Defendant.

Opinion

MEMORANDUM DECISIONRE MOTION TO DISMISS

THOMAS E. CARLSON, U.S. Bankruptcy Judge.

*1 For the reasons stated below, the court denies theFranchise Tax Board's motion to dismiss the first amendedcomplaint.

FACTSOn October 16, 2006 and December 29, 2006, Bryco Funding,Inc. (Bryco) allegedly paid $210,963 (the Transfers) to theFranchise Tax Board (FTB) to satisfy the personal income taxobligations of Debtor's former officers and directors, BryceAngell and John Aitken. Am. Compl. ¶¶ 6–8, 12.

On February 4, 2008, Bryco filed a chapter 7 bankruptcypetition. E. Lynn Schoenmann was appointed Trustee ofBryco's bankruptcy estate.

On January 12, 2009, Trustee filed an action against theFTB in San Francisco County Superior Court to avoid theTransfers. The parties stipulated to dismissal of that actionwithout prejudice.

On February 2, 2009, the FTB filed a proof of claim againstBryco, seeking recovery of unsecured and priority taxestotaling $36,846 for income taxes incurred by Bryco in 2006and 2007.

On May 15, 2009, Trustee filed an action in this courtagainst the FTB seeking to recover the Transfers. On July28, 2009, Trustee filed an amended complaint in that action,seeking to recover the Transfers from the FTB as fraudulentconveyances pursuant to Bankruptcy Code sections 548(a)(1)(A) and 548(a)(1)(B).

MOTION TO DISMISSOn August 5, 2009, the FTB filed a motion to dismissthe first amended complaint. The FTB argues that Trustee'sfederal fraudulent-transfer claims are time-barred, becauseTrustee did not comply with the California Tort ClaimsAct. California Government Code section 911.2 establishesa one-year time limitation for suing the State to recover afraudulent transfer. The FTB argues that this claim-filingrequirement is a substantive element of the federal claimsbrought against the State, citing Willis v. Reddin, 418 F.2d702 (9th Cir.1969) and United States v. State of California,655 F.2d 914 (9th Cir.1980). The FTB also argues that thefederal fraudulent-transfer claims are subject to GovernmentCode section 911.2, because the federal statute does notexpressly exclude application of California's GovernmentCode requirements, which are “part of a statutory complexdesigned to limit California's waiver of sovereign immunity.”The FTB contends that, when an essential state interest is atissue, “[t]o displace traditional state regulation ... the federalstatutory purpose must be ‘clear and manifest.’ “ (citing BFPv. Resolution Trust Corp., 114 S.Ct. 1757, 1765 (1994).

The FTB also seeks to dismiss the complaint on the groundthat Aitken and Angell are necessary and indispensableparties. The FTB argues that if Aitken and Angell are notjoined as parties, the FTB could be compelled to return theTransfers to Trustee, but be foreclosed from recovering thetaxes owed from Angell and Aitken, because each of themhas filed a chapter 7 bankruptcy petition and has received adischarge.

OPPOSITION TO THE MOTION TO DISMISSTrustee contends that the exhaustion requirements of theCalifornia Tort Claims Act do not apply, because there isan independent basis for the bankruptcy court's jurisdiction.Trustee also argues that, because section 548 defines all the


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52 Bankr.Ct.Dec. 74


elements of the federal fraudulent transfer claim, and becausesection 546 fixes a federal statute of limitations for suchclaims, application of the one-year limitation period in theCalifornia Government Code is barred by the SupremacyClause. Trustee notes that compliance with the claims-filingrequirement would be necessary if the State's sovereignimmunity would otherwise prevent the State from being sued,but contends that the State has no defense of sovereignimmunity under Cent. Virginia Cmty. Coll. v. Katz, 546 U.S.356, 370–79 (2006).

*2 Trustee argues finally that Aitken and Angell are notnecessary and indispensable parties, because section 550(a)(1) authorizes Trustee to recover the Transfers from eitherthe initial transferee or the entity for whose benefit theTransfers were made. Trustee further argues that failure tojoin the two officers will not subject the FTB to a substantialrisk of incurring double, multiple, or otherwise inconsistentobligations, because there is no risk that the FTB will beobligated to return the Transfers more than once.

DISCUSSION

1. Statute of LimitationsAs acknowledged by the FTB, the California Tort Claims Actis “part of a statutory complex designed to limit California'swaiver of sovereign immunity.” State of California, 655F.2d at 918. The Supreme Court recently held that sovereignimmunity is not an available defense to fraudulent-transferactions brought under the Bankruptcy Code, because theStates surrendered their sovereign immunity with respect toproceedings involving bankruptcy courts' in rem jurisdictionand remedies ancillary to that in rem jurisdiction. Katz, 546U.S. at 370–79. Because Trustee has sued the FTB only toavoid and recover fraudulent transfers, the State may notinvoke sovereign immunity to defend against these claims.The provisions of the California Tort Claims Act can beinvoked to limit enforcement of a federal claim only to theextent that a waiver of the State's sovereign immunity isnecessary.

The Trustee's failure to exhaust state-law administrativeremedies does not divest this court of jurisdiction toadjudicate the fraudulent transfer claims against the FTB,because the bankruptcy court has an independent basis forjurisdiction over the claims. See Sullivan v. Town & CountryHome Nursing Svcs., Inc. (In re Town & Country HomeNursing Svcs., Inc.), 963 F.2d 1146 (9th Cir.1992) (failureto exhaust administrative remedy under Medicare Act and

Federal Tort Claims Act did not divest bankruptcy court ofjurisdiction over state-law claims).

Furthermore, the state statute of limitations contained inGovernment Code section 911.2 does not apply, because thefederal fraudulent-transfer statute contains its own statute oflimitations. 11 U.S.C. § 546(a); Reddin, 418 F.2d at 704 (statestatute of limitation applies only in the absence of a federalstatute of limitations); accord State of California, 655 F.2dat 917 (applying state claim-filing statute because no federal

limitations period applied). 1 The court has not found, nor hasthe FTB cited, any case in which a court applied the statuteof limitations established by the California Tort Claims to afederal claim that contained its own statute of limitations.

2. Necessary and Indispensable PartiesI determine that Aitken and Angell are not necessaryand indispensable parties for the following reasons. First,the court may accord complete relief among the existing

parties, 2 because Trustee may recover an avoided transfereither from the initial transferee of such transfer or fromthe individual for whose benefit the transfer was made. 11U.S.C. § 550(a)(1). The FTB has not cited, nor has the courtfound, a case limiting or barring a trustee from recovering afraudulent transfer from an initial transferee on the basis thatthe beneficiary's liability for the transfer has been discharged.Rather, courts have interpreted section 550(a)(1) to give atrustee the option to sue either the initial transferee or thebeneficiary, because both are independently and strictly liableto repay the fraudulent transfer. Tese–Milner v. Brune (In reRed Dot Scenic, Inc.), 293 B.R. 116, 121 (S.D.N.Y.2003);Marlow v. United States (In re Julien Co.), 136 B.R. 760,764–65 (Bankr.W.D.Tenn.1991); see Shapiro v. Art Leather,Inc. (In re Connolly North Am., LLC), 340 B.R. 829, 842–43(Bankr.E.D.Mich.2006) (that claim against initial transfereewas barred by statute of limitations did not preclude trusteefrom recovering transfers from alleged beneficiary).

*3 Second, it is not necessary to join Aitken and Angell toprotect the FTB from multiple or inconsistent obligations. It istrue that if the FTB is forced to repay the taxes paid on behalfof Aitken and Angell, the FTB may not be able to recoverthose tax payments from Aitken and Angell themselves. Thisis so, however, not because Trustee has failed to join Aitkenand Angell in the present action, but because the tax liabilitiesof Aitken and Angell may have been discharged in theirchapter 7 cases. It is also possible that the tax liabilities ofAitken and Angell are excepted from discharge under section












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52 Bankr.Ct.Dec. 74


523(a), in which case the FTB can join with the presentaction a complaint against Aitken and Angell to determine the

dischargeability of their tax liabilities. 3 Trustee cannot assertsuch a claim, because Trustee does not have standing to doso. To the extent that the tax obligations of Aitken and Angellwere discharged, it is the discharge, rather than Trustee's

failure to join Aitken and Angell in the present action, thatcauses the FTB harm.

Parallel Citations

52 Bankr.Ct.Dec. 74

Footnotes

1 The broad statement in Willis that California statutes conditioning “the right to sue the sovereign upon timely filing of claims ...

are more than procedural requirements [, t]hey are elements of the plaintiff's cause of action” does not support the FTB's argument.

The Ninth Circuit in Willis expressly stated that California statutes may not impair federally created rights or impose conditions on

them. Id. at 704–05.

2 Fed. R. Bankr.Proc. 7019; Fed. R. Civ. Proc. 19(a)(1)(A).

3 In bringing a complaint to determine dischargeability of debt, the FTB could avail itself of the nationwide service of process provided

by Fed. R. Bankr.P. 7004, and venue in this district would appear to be proper under 11 U.S.C. § 1409(a).



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EXHIBIT E


In re Coast Grain Co., Not Reported in B.R. (2006)



NOT FOR PUBLICATIONUnited States Bankruptcy Appellate Panel

of the Ninth Circuit.

In re COAST GRAIN COMPANY, Debtor.Bouma Dairy, Appellant and Cross–Appellee,

v.Greg Braun, Plan Agent,

Appellee and Cross–Appellant.

Nos. EC–05–1187–PaNMa, EC–05–1213–PaNMa. | Bankruptcy No. 01–19647. |

Adversary No. 03–01466. | Argued andSubmitted Jan. 19, 2006. | Filed Jan. 31, 2006.

Appeal from the United States Bankruptcy Court for theEastern District of California, Honorable W. Richard Lee,Bankruptcy Judge, Presiding.

Before PAPPAS, NAUGLE 2 and MARLAR, BankruptcyJudges.

Opinion

MEMORANDUM 1

*1 Bouma Dairy (“Bouma”) and Greg Braun (“Braun”)both appeal from the judgment entered by the bankruptcycourt implementing its order granting, in part, Braun's motionfor partial summary judgment and other relief, and denyingBouma's motion for summary judgment. We AFFIRM in partand REVERSE AND REMAND in part.

FACTS

1. The Coast Grain prepayment program.Bouma operates a dairy business and purchased grain andfeed products from Coast Grain Company (“Coast Grain”).Most of Coast Grain's customers were large dairy farms suchas Bouma located in the Chino or Central Valley areas ofCalifornia and Arizona.

Coast Grain sold its feed products under both fixed priceagreements using written sales contracts and on a variable“spot market” basis. Under a sales contract, Coast Grain

would sell to a customer a certain quantity of a product atan agreed price to be delivered at a particular time, or overa range of times, in the future. Bouma usually purchasedproducts from Coast Grain under one or more contracts aswell as making frequent spot market purchases.

Coast Grain accepted cash deposits or advance paymentsfrom its dairy customers. The parties refer to this arrangementas Coast Grain's “prepayment program.” Apparently, thisprogram was attractive to Coast Grain customers becauseit allowed them flexibility in obtaining or scheduling feed

deliveries during the year. 3 In addition, Coast Grain wouldpay customers with prepayment accounts what it referred toas “quality adjustments,” or, in effect, interest, on the balance

in the prepayment accounts. 4

Coast Grain deposited customer prepayments in its generaloperating bank account and recorded a corresponding currentliability on its books identified as “deferred feed sales.” If acustomer had established a prepayment account, the costs ofany purchases from Coast Grain made by that customer undera sales contract or on the spot market would ordinarily be paidby debiting that customer's prepayment account.

Coast Grain offered another service to customers with aprepayment account. Without restriction, Coast Grain would,upon instruction from the customer, make payments from theprepayment account to third parties on the customer's behalf.Payments would be paid from the prepayment account until itwas exhausted. Remarkably, Coast Grain did not require, as acondition of accepting a prepayment deposit from a customer,that the customer agree to purchase any products from CoastGrain. Although most customers made purchases during theyear from Coast Grain, under this arrangement, customerswere free to direct Coast Grain to pay third parties any sumup to the entire amount of the prepayment deposit, plus allaccumulated interest. There were no restrictions on the typesof persons or entities to whom a customer could direct a thirdparty payment, nor did Coast Grain have any procedure inplace to determine the nature of the customer's obligation tothe third party to whom the check was being issued or, indeed,

whether there was any such obligation. 5

2. Bouma's Dealings with Coast Grain.*2 For approximately the fifteen years before Coast Grant

filed for bankruptcy, Bouma participated in the Coast Grainprepayment program by paying certain amounts to CoastGrain each year for feed purchases and other expenditures to


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be made the following year. On November 6, 2000, Boumaexhausted the balance remaining in its Coast Grain accountfrom the $650,000 prepayment deposit Bouma had made in

December 1999. 6 Thereafter, Bouma continued to order andreceive products from Coast Grain on an open account basis.As of December 29, 2000, Bouma had unpaid Coast Graininvoices on its current account totaling $65,872.71.

On December 29, 2000, Bouma issued Coast Grain a checkfor $1,630,000 which Coast Grain credited to Bouma'sprepayment account. On December 31, 2000, that entireamount was transferred from Bouma's prepayment accountto its current account, paying off the accumulated unpaidinvoices and creating a credit balance. Bouma made no furtherprepayment deposits to Coast Grain after December 29, 2000.

When Bouma made its December 29, 2000, deposit withCoast Grain, there was only one existing written sales contract

between them, for rolled corn (the “Rolled Corn Contract”). 7

Delivery under the Rolled Corn Contract began in October2000; the remaining obligation on December 29, 2000, was$321,510.56. The Rolled Corn Contract did not require thatBouma prepay for any deliveries. The parties entered intono other written contracts for delivery of products beforeOctober 2001.

Bouma made 765 separate purchases from Coast Grain offourteen different feed and grain products between January 1and August 25, 2001. Except for the Rolled Corn Contract,Bouma did not have any written sales contracts with CoastGrain for any of these products.

Coast Grain generated an invoice for each shipment to Boumaand entered it into the Coast Grain accounting system. FromJanuary 1 to August 25, 2001, upon entry, each invoicewas paid by deduction (a debit) in the same amount againstthe credit balance in Bouma's current account. During thistime, at Bouma's request, Coast Grain issued seventeenchecks totaling $900,371 to third parties, each of which werededucted from the credit balance in Bouma's current account.Four of the third party checks, totaling $381,480.55, wereissued and cleared Coast Grain's bank account during the 90–day period prior to Coast Grain's bankruptcy filing. Duringthe same time period, invoices representing product deliveriesfrom Coast Grain to Bouma in the amount of $101,844.92were paid by deduction against the credit balance in Bouma'scurrent account.

In August 2001, Coast Grain terminated the prepaymentprogram. On August 25, 2001, Coast Grain announced itwould no longer permit product invoices to be paid bydebits against prepayment balances. Coast Grain transferredBouma's remaining prepayment deposit and accumulatedinterest from its current account back to its prepayment

account. As a result of one final charge, 8 Bouma'sprepayment account balance was reduced to $65,581.56.

*3 Over the next few months, Bouma continued to makepurchases from Coast Grain, presumably on open account.As of November 1, 2001, Bouma's purchases exceeded theamount remaining on its prepayment account by $3,711.28.On December 6, 2001, Bouma paid this amount to CoastGrain and there were no further transactions between theparties.

3. The Coast Grain bankruptcy and this litigation.

On October 17, 2001, an involuntary chapter 11 9 bankruptcypetition was filed against Coast Grain. On November 28,2001, an order for relief was entered. On March 13, 2002,the bankruptcy court appointed Braun chapter 11 trustee. Thebankruptcy court confirmed the “Third Amended Chapter11 Plan for Coast Grain Company” on October 28, 2003and appointed Braun as the Plan Agent with authority toimplement the Third Amended Chapter 11 Plan.

As authorized by the confirmed plan, Braun filed a largenumber of adversary proceedings against former customersof Coast Grain who held prepayment accounts. Braun'samended complaint in this adversary proceeding includesfifteen separate claims for relief, seeking to recover theamount of all shipments of grain and third party paymentsmade by Coast Grain on Bouma's account during the 90days preceding the chapter 11 filing, as well as paymentfor feed delivered from Coast Grain to Bouma after thepetition was filed. Braun asserted claims against Boumafor recovery of alleged preferences, fraudulent conveyances,accounts receivable, as well as for avoidance of prohibitedsetoffs.

The parties filed cross-motions for summary judgment.In a published decision containing findings of fact andconclusions of law, the bankruptcy court concluded that thetransactions between Coast Grain and Bouma could not beavoided as preferences, but should instead be analyzed assetoffs under § 553:




It is the court's conclusion that[Braun] cannot collect Coast Grain'saccounts receivable from Bouma aspreferential transfers. A pre-petitiontransfer of property of the debtormay not be avoided under § 547 ifthe transfer was made in exchangefor an asset or property right ofequal value, or if the transfer wasmade in satisfaction of an obligationsecured by the right of setoff. Bothof these situations existed here.Coast Grain's sales of dairy feed toBouma, and the third-party paymentsmade for Bouma's benefit, generatedcontract rights against Bouma ofequal value. Bouma's liability forthose contracts and Coast Grain'sliability on the prepaid account weremutual obligations subject to potentialsetoff. The actual “transfer of propertyof the debtor” occurred each timeCoast Grain gave up the right tocollect its accounts receivable, whenCoast Grain debited its claim againstBouma's prepaid account. At thattime, Bouma was potentially securedby its right of setoff pursuant to §506(a). If Bouma improved its positionthrough these debits, then the PlanAgent's right to recover from Boumais through avoidance of the setoff,the debit transaction, under § 553(b).The Plan Agent did not move forsummary judgment under § 553(b) andresolution of that issue will require

further proceedings.

*4 In re Coast Grain Co., 317 B.R. 796, 805(Bankr.E.D.Cal.2004) (emphasis added) (hereafter “the First

Bouma Decision” and cited as Coast Grain). 10

Although Braun had not moved for summary judgment toavoid the debits made to Bouma's accounts during the 90–dayperiod before Coast Grain's bankruptcy filing under § 553(b),in the First Bouma Decision the bankruptcy court was ableto address several aspects of Bouma's setoff and recoupment

defenses. 11

First, the bankruptcy court held that Bouma could notproperly claim an offset under § 553(a) for any purchasesmade after Coast Grain terminated the prepay program andbefore its bankruptcy filing. Coast Grain, 317 B.R. at 806.The court found that an affidavit from Bouma's managershowed that Bouma continued to make purchases from CoastGrain after August 25, 2001, solely for the purpose ofcreating offsets against amounts on deposit in its prepaymentaccount. Id. at 801, n. 4; 806. Therefore, the bankruptcycourt concluded, setoff of these purchases was barred under§ 553(a)(3) (disallowing a claim for offset based upon debtincurred within 90 days pre-bankruptcy “for the purpose ofobtaining a right of setoff from the debtor”). Id. at 806.

The bankruptcy court also concluded that Bouma could notassert a recoupment defense. For recoupment to apply, thecourt reasoned, the competing claims of the parties mustarise out of the same transaction or occurrence. Id. at 806,citing Newbery Corp. v. Fireman's Fund Ins. Co. (In reNewbery Corporation), 95 F.3d 1392, 1399 (9th Cir.1996).To determine whether claims arise from the same transaction,the bankruptcy court determined that it must apply the“logical relationship test,” as adopted in Sims v. UnitedStates Department of Health and Human Services (In reTLC Hospitals, Inc.), 224 F.3d 1008, 1011 (9th Cir.2000);see also Aetna U.S. Healthcare, Inc. v. Madigan (In ReMadigan), 270 B.R. 749, 754 (9th Cir.BAP2001). Althoughin applying that test, the Ninth Circuit notes that the term“transaction” is a flexible one, Newbery, 95 F.3d at 1402(citing Moore v. New York Cotton Exchange, 270 U.S.593 (1926)), the bankruptcy court was “not persuaded thatBouma's prepayment in December 2000, and the subsequentpurchases and third party payments which benefited Boumamonths later, had such a ‘logical relationship’ that theyshould be deemed to constitute the same transaction.” CoastGrain, 317 B .R. at 809. As a result, the bankruptcy courtconcluded that the competing claims of Bouma and CoastGrain arising from the prepayment account and the post-termination purchases did not arise out of a single transactionand, therefore, Bouma could not assert a recoupment defense.

Following the First Bouma Decision, Braun filed a motionfor a partial summary judgment on the twelfth, thirteenthand fourteenth claims for relief of his complaint. Afteranother hearing, in an extended oral ruling, the bankruptcycourt concluded that Braun was entitled to a judgment onthe twelfth claim, which sought to recover the amount ofthe purchases made during the 90 days pre-bankruptcy as





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prohibited offsets under § 553, the claim that was not beforethe court in the First Bouma Decision. Transcript of hearing(March 24, 2005), pp. 74–86. As it had suggested it would,the bankruptcy court found that the prepayment agreementbetween Coast Grain and Bouma was in the nature of a globalsetoff agreement.

*5 The Court can only characterize the prepaymentagreement on December 29th, 2000, as an agreementto create a debit account on Coast Grain's records forBouma's benefit, against which future goods and servicesdelivered and provided for Bouma's benefit would be paidor compensated by a debit transaction against the account.

In other words, in my view, the prepayment agreement thatwe've been talking about was nothing more than a ... globalsetoff agreement.... Bouma here offers that there were noactual setoffs taken during the preference period and thatthere's no evidence that it exercised the right of setoff. Thecourt disagrees.

One, Mr. Schoenveld's declaration clearly establishes thatthe prepayment was made to create future debit rights, andthere's no showing that Bouma ever made any effort tootherwise pay for the goods and services that it received.And it's clear that Bouma knew and understood at all timesthat the goods and services ... would be debited against theprepayment account.

In this context, the court's directly equating the term “debit”with the concept of ... a setoff.

Accordingly, the court finds that if setoff were takenagainst the prepayment accounts [in the 90–day pre-petition period], that those setoffs did improve Bouma'sposition by the amounts that were debited and that thesetoffs are voidable pursuant to § 553(b). So judgment willbe entered for [Braun].

Transcript of hearing (March 24, 2005), pp. 79–80. We referto this ruling as the “Second Bouma Decision.”

The bankruptcy court made one alteration to its earlierFirst Bouma Decision. In the Second Bouma Decision,the court decided that because the Rolled Corn Contractbetween Bouma and Coast Grant was in existence, and thatapproximately $321,000 of that contract still remained tobe performed on the day Bouma's prepayment deposit wasmade, and that $35,403 of that Rolled Corn Contract wasperformed during the 90 days prior to the commencement

of the bankruptcy case, Bouma was entitled to recoup that$35,403.

Since the court had decided that neither the recoupmentdoctrine nor § 553(a) offered Bouma a defense to Braun'sclaims, except for the Rolled Corn Contract, the bankruptcycourt granted Braun a summary judgment for the avoidablesetoffs (§ 553(b)—twelfth claim), for the accounts receivable(§ 542—thirteenth claim) and for the post-bankruptcypurchases (§ 549—fourteenth claim). On April 29, 2005,the bankruptcy court entered an Order Granting Plaintiff'sMotion for Partial Summary Judgment, Bifurcating Claims,Dismissing Claims, and Directing Entry of Final Judgment,

and then issued the Final Judgment. 12

The bankruptcy court certified the Final Judgment under Fed.R. Civ P. 54(b), as incorporated by Fed. R. Bankr.P. 7054.Bouma timely appealed, arguing that recoupment was anabsolute defense to all Braun's claims. Braun then timelycross-appealed, arguing that the $35,403 recoupment shouldnot have been allowed.

JURISDICTION

*6 The bankruptcy court had jurisdiction pursuant to 28U.S.C. § 1334 and § 157(b). This Panel has jurisdiction overthe appeal pursuant to 28 U.S.C. § 158(a)(1) and (b).

STANDARD OF REVIEW

Both Bouma's appeal and Braun's cross-appeal arise from thebankruptcy court's entry of Final Judgment, which in turn isbased upon the bankruptcy court's Order Granting [Braun's]Motion for Partial Summary Judgment, Bifurcating Claims,Dismissing Claims, and Directing Entry of Final Judgment.A bankruptcy court's decision to grant summary judgment isreviewed de novo. See Thrifty Oil Co. v. Bank of America Nat.Trust and Sav. Ass'n, 322 F.3d 1039, 1046 (9th Cir.2003); Inre Stanton, 303 F.3d 939, 941 (9th Cir.2002); In re Betacomof Phoenix, Inc., 240 F.3d 823, 828 (9th Cir.2001; In re HomeAmerica T.V.-Appliance Audio, Inc., 232 F.3d 1046, 1050(9th Cir.2000); In re Bakersfield Westar Ambulance, Inc .,123 F.3d 1243, 1245 (9th Cir.1997); In re Madigan, 270 B.R.at 753. A bankruptcy court's decision to grant partial summaryjudgment is reviewed de novo. Guerin v. Winston Industries,Inc., 316 F.3d 879, 882 (9th Cir.2002).


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ISSUES ON APPEAL

1. Did the bankruptcy court err in concluding that therewas a “global setoff agreement” covering all transactionsbetween Bouma and Coast Grain, and that any setoffseffected in the 90–day period before the filing of CoastGrain's bankruptcy petition were avoidable by Braununder § 553(b)?

2. Did the bankruptcy court err in finding that thecompeting claims of Bouma and Coast Grain,arising from the prepayment account and the post-termination purchases, did not arise out of “thesame transaction” and therefore Bouma could notassert a recoupment defense?

3. Did the bankruptcy court err in allowing Bouma apartial recoupment for the Rolled Corn Contract?

BOUMA'S REQUEST FOR JUDICIAL NOTICE

On August 30, 2005, Bouma filed a Request for JudicialNotice in which it asked the Panel to take judicial noticeof the decisions of the bankruptcy court in two otheradversary proceedings in the Coast Grain bankruptcy case:(i) Memorandum Decision regarding Plaintiff's Motion forPartial Summary Judgment in Braun v. Schakel Dairy,Adv. No. 03–1432; and (ii) Amended Findings of Fact andConclusions of Law re Motion for Summary Judgment inBraun v. Walter H. Jensen Cattle Co., Inc., Adv. No. 03–1419–B (together, the “Requested Decisions”). Bouma statedno reasons or justification for its request, other than quotingcase law holding that a federal court “may take notice ofproceedings in other courts, both within and without thefederal judicial system, if those proceedings have a directrelation to matters at issue.” United States Ex Rel. Robinson

Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248(9th Cir.1992). Bouma's Request for Judicial Notice at p. 1.However, Braun has not objected to Bouma's request.

The Panel will grant Bouma's Request for Judicial Notice.The Panel will consider the bankruptcy court's decisions inthe two adversary proceedings for at least two reasons.

*7 First, the parties acknowledge that Braun is pursuing alarge number of adversary proceedings against various CoastGrain customers involving similar (but not identical) factsand legal theories, all presided over by the same bankruptcy

judge. Bouma asks that we consider the court's decisionsin two of those adversary proceedings. In those decisions,the bankruptcy court applied a legal analysis similar tothat employed in the decisions on appeal. Indeed, the courtreferences the First Bouma Decision to serve as a foundationof the legal analysis of setoff and recoupment in the twoother decisions. For example, in Jensen, the bankruptcy courtdistinguished the facts from those in Bouma and explains whyrecoupment is available under the Jensen circumstances butnot (or only to a very limited extent) in our case. Arguably,a review of these decisions may be helpful to the Panel tounderstand the bankruptcy court's application of the same lawto three fact patterns that are both similar and dissimilar. Ineffect, the Panel has considered these decisions in the samefashion at it would any non-binding decision of a bankruptcycourt to support, or to oppose, a particular interpretation orapplication of the Bankruptcy Code.

Second, Braun does not oppose Bouma's request.Presumably, Braun agrees it is appropriate for the Panelto consider the bankruptcy court's decisions in the otheradversary proceedings, or, in the alternative, concedes that hewill suffer no prejudice if the Panel does so.

DISCUSSION

1. The bankruptcy court did not err in finding that therewas a “global setoff agreement ” and that the setoffseffected during the 90–day period before the filing of thebankruptcy petition were avoidable by Braun.Under certain circumstances, a creditor's right of “setoff” isrecognized in the Bankruptcy Code. Section 553(a) specifiesthat “Except as otherwise provided ... this title does not affectany right of a creditor to offset a mutual debt owing by suchcreditor to the debtor that arose before the commencement ofthe case.” The Ninth Circuit has described the right of setoffallowed in bankruptcy cases in these terms:

The defining characteristic of setoff is that “the mutualdebt and claim ... are generally those arising from differenttransactions.” 4 Collier on Bankruptcy ¶ 553.03, at 553–14(15th ed.1995)....

Under section 553(a), each debt or claim sought to beoffset must have arisen prior to filing of the bankruptcypetition. In addition, “a claim may ... be set off withoutregard to whether it is contingent or unliquidated, as longas the claim qualifies as ‘mutual’ under applicable non-bankruptcy law....” 5 Collier ¶ 553.01[4] at 553–6 (citation









omitted [in original] ). In order for countervailing debts tobe “mutual,” they must be “in the same right and betweenthe same parties, standing in the same capacity.” 5 Collier ¶553.04[2], at 553–22 (citing England v. Industrial Comm.Of Utah (In re Visiting Home Services, Inc.), 643 F.2d1356, 1360 (9th Cir.1981).

*8 Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392,1398–99 (9th Cir.1996).

Under § 553 and the relevant Ninth Circuit case law, acreditor's right to offset is recognized and preserved underthree conditions: (1) The creditor holds a claim against thedebtor that arose before the commencement of the case; (2)The debtor owes a debt to the creditor that also arose beforethe commencement of the case; (3) The claim and debt are

mutual, as determined by applicable non-bankruptcy law. 13

See In re Luz Int'l, Ltd., 219 B.R. 837, 843 (9th Cir.BAP1998).

As discussed earlier, the bankruptcy court in the First BoumaDecision determined that the three conditions required forsetoff were present in the transactions between Bouma andCoast Grain: “Coast Grain's sales of dairy feed to Bouma, andthe third-party payments made for Bouma's benefit, generatedcontract rights against Bouma of equal value. Bouma'sliability for those contracts and Coast Grain's liability on theprepaid account were mutual obligations subject to potentialsetoff.” Coast Grain, 317 B.R. at 805. Later, in the SecondBouma Decision, the bankruptcy court determined that therewere actual setoffs. Based on the deposition testimonyof Bouma's managing director, Mr. Schoenveld, the courtconcluded that the prepayment agreement created a debitaccount on Coast Grain's records for Bouma's benefit, againstwhich Coast Grain offset the cost of the goods and servicesprovided to Bouma, and third party payments made forBouma, via a debit against the account. The court observedthat Bouma made no other payments to Coast Grain forthese goods or third party payments other than by debit toits account. Therefore, the bankruptcy court concluded thatthe parties' prepayment agreement constituted a global setoffagreement.

Having determined that the transactions were subject tosetoff, the bankruptcy court then found that the setoffseffected during the 90–day period preceding the filing ofCoast Grain's bankruptcy petition improved Bouma's positionby the amounts that were debited from its prepayment

account. 14 Consequently, the bankruptcy court concludedthat the setoffs were avoidable pursuant to § 553(b)(1). The

bankruptcy court also concluded that any of these setoffsthat occurred after termination of the prepayment program byCoast Grain should be disallowed and were recoverable byBraun because the purchases made by Bouma were, accordingto the testimony of its officer, “for the purpose of obtaining aright of setoff from the debtor.” § 553(a)(3)(C). Finally, thebankruptcy court decided that any post-petition setoffs werenot debts “arising before the commencement of the case,” notprotected by § 553(a), and therefore recoverable by Braun.

Bouma objects to the bankruptcy court's decision on twogrounds: (1) that no mutual debts existed between Bouma andCoast Grain; and (2) the facts do not satisfy the requirements

for a setoff. 15 We disagree.

*9 First, Bouma insists there were no mutual debts owingby the parties to one another under these facts. In Bouma'sview, at the time Bouma received products from Coast Grain,or whenever Coast Grain made third party payments onBouma's behalf, it was simply taking delivery of a product, oraccepting a service, for which it had already paid Coast Grain.Under this approach, given its positive prepayment accountbalance, Bouma argues no debt to Coast Grain arose fromsuch transactions.

The parties illustrate their positions concerning Bouma's“mutual debts” argument in their respective reply briefs byoffering conflicting interpretations of the same analogy. In itsbrief, Bouma argues the facts of this case resemble a situationwhere an individual overpays a credit card account by $1,000,thereby creating a credit balance on the account. When thecardholder then incurs a $500 additional charge on the card,Bouma suggests no new independent debt arises in favor ofthe credit card issuer. Instead, the existing credit balance issimply reduced by the amount of the new charges. So long asthere is a credit balance on the account, in Bouma's view, thecardholder is never indebted to the issuer for new charges thatdo not exceed the credit balance.

Braun acknowledges that the cardholder's overpayment/prepayment of $1,000 properly reflects Bouma's status whenit made its $1.6 million deposit with Coast Grain in December2000. Braun also agrees that, under the analogy, such anoverpayment created an obligation on the part of the creditcard issuer in favor of the cardholder. However, it is Braun'sposition that this debt must be balanced by the cardholder'sobligation to pay the credit card company for any chargesmade on the account. In other words, to Braun, whenever thecardholder uses the card to make a purchase, a new debt arises














that the issuer then sets off against the cardholder's creditbalance. To Braun, the analogy applied to the Bouma–CoastGrain relationship evidences a classic setoff arrangement.

In our opinion, Braun's interpretation of the analogy moreaccurately reflects legal reality. When Bouma gave CoastGrain its funds in December, 2000, Coast Grain becameindebted to Bouma for the amount deposited. However,each time Bouma purchased feed from Coast Grain, or oneach occasion when Bouma directed Coast Grain to makea payment to a third party on its behalf, a separate, distinctdebt was created which Bouma owed to Coast Grain forthe cost of the product or the amount of the third-partypayment. This characterization of the parties' relationship isevidenced by the fact that for purchases, Coast Grain createdan invoice and then “paid” that invoice by making an entry inits books debiting the amount of the invoice against Bouma'sprepayment account. For third party payments, Coast Grainissued its check and then debited Bouma's account for theamount of that check. When Coast Grain made these entriesin its books, Bouma's debt to Coast Grain was effectivelysatisfied and a setoff for purposes of § 553(a) occurred. Tothe extent these setoffs occurred within 90 days before CoastGrain's bankruptcy, and thereby improved Bouma's position,they were avoidable by Braun under § 553(b).

*10 Bouma's second objection to the bankruptcy court'ssetoff conclusion is that the facts here do not satisfy therequirements for a setoff according to the U.S. SupremeCourt. Bouma points out that, as set forth in Citizens Bank ofMaryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d258 (1995):

... [A] setoff has not occurred untilthree steps have been taken: (i) adecision to effectuate a setoff; (ii)some action accomplishing the setoff;and (iii)a recording of the setoff.

Strumpf, 116 S.Ct. at 289. Bouma argues that there was noshowing here that Coast Grain intended to effectuate a setoffin these transactions, or that Bouma ever effected a setoff.

As an initial matter, it is unclear whether, under Californialaw, to constitute an offset, there must be a conscious decisionto offset by the one of the parties, or, indeed, the specific useof some “magic words.” Strumpf considered the applicationof the automatic stay under § 362(a)(3) and (7) to a bank'sright to set off amounts in a debtor's account against debtsowed by the debtor to the bank after bankruptcy. The full

text of the first line of the quotation from the Court's decisionactually reads as follows:

A requirement of such an intent[the intent to permanently reducean account by the amount of theclaim asserted against the account]is implicit in the rule followed bya majority of jurisdictions addressingthe question, that a setoff has notoccurred until three steps have beentaken....

Id. In Strumpf, the Supreme Court acknowledged that thereis no federal right of setoff created by the Bankruptcy Codebut that any such right must be based upon state law—in

that case, Maryland law. Id. 16 The Strumpf Court derivedthe requirement that a creditor intend to permanently settleaccounts as a condition for setoffs under § 362(a) from what itperceived to be the majority rule of law in the states. Strumpfdid not cite any California cases to support its conclusion.

California recognizes setoffs as an equitable right at commonlaw. Meherin v. Saunders, 131 Cal. 681, 684, 63 P. 1084,1087 (Cal.1901), Salaman v. Bolt, 141 Cal.Rptr. 841, 847(Cal.Ct.App.1977)(cited with approval in Keith G. v. SuzanneH., 52 Cal.App.4th 853, 859, 72 Cal.Rptr.2d 525, 530(Cal.Ct.App.1998)). There is also a statutory right to offsetmutual debts pursuant to California Code of Civil Procedure(“CCP”) § 431.70. The principal concern of the Californiacases and statute seems to be that setoff be allowed only wherethe debts being offset against one another are mutual, fullymatured obligations. Eistrat v. Humiston, 160 Cal.App.2d 89,90, 324 P.2d 957, 958–959 (Cal.Ct.App .1958). There is noCalifornia statutory provision, and we have found no caselaw, that supports Bouma's alleged three-part requirement fora setoff.

Moreover, it is apparent to us from the record that, by debitingBouma's prepayment account for the cost of each purchase ofproduct or third-party payment, Coast Grain intended to effect

an offset. Both in establishing the prepayment account 17

relationship and in documenting each transaction, CoastGrain obviously intended that Bouma's charges be settled bydebit against its account. If an intent by a creditor to effectan offset is indeed required, the debit process employed heresufficiently evidences this intent.















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*11 But Bouma argues that it never set off any debts; CoastGrain did. As a result, it argues that Braun can not recover.This argument also ignores the realities of its arrangementwith Coast Grain. Bouma indeed effected setoffs by makingpurchases of product from Coast Grain, and by having CoastGrain send checks to others, just as surely as it would havebenefited from taking money out of an account it held forCoast Grain. Under its arrangement with Coast Grain, Boumahad the ability to control and, as it turned out, to improve itsposition vis-à-vis its debt to Coast Grain, by simply buyingmore product from Coast Grain, or instructing Coast Grainto make payments to others on its behalf. In this sense, weagree with the bankruptcy court that both Bouma and CoastGrain were “creditors” and that both were involved in settingoff the obligations of each other. That Coast Grain acted asthe “bank”, and Bouma as the customer, is of no significancein this case.

For these reasons, we conclude that the bankruptcy courtcorrectly determined that a global setoff agreement existedbetween Bouma and Coast Grain and that the purchases andthird-party payments and corresponding debits to Bouma'saccount, made in the 90–day period before the filing of thebankruptcy petition, were avoidable by Braun pursuant to §553(b).

2. The bankruptcy court did not err in finding that Boumacould not assert a recoupment defense.The Panel has previously examined in depth the applicationof the equitable doctrine of recoupment in bankruptcy cases.Madigan, 270 B.R. at 753–56. However, a summary ofthe lessons of Madigan and other decisions regarding thatdoctrine, its relationship to setoff, and the application of thelogical relationship test, is again appropriate here.

First, recoupment is an equitable, common law doctrine thatis not expressly recognized in the Bankruptcy Code butis preserved through judicial decisions. The U.S. SupremeCourt has allowed the use of recoupment in bankruptcy cases.Reiter v. Cooper, 507 U.S. 258, 265, 113 S.Ct. 1213, 122L.Ed.2d 604 (1993).

Recoupment is “the setting up of a demand arising from thesame transaction as the plaintiff's claim or cause of action,strictly for the purpose of abatement or reduction of suchclaim.” Newbery, 95 F.3d at 1399. It involves “netting outof debt,” Oregon v. Harmon (In re Harmon), 188 B.R. 421,425 (9th Cir.BAP1995) and is allowed “because it would

be inequitable not to allow the defendant to recoup thosepayments against the debtor's subsequent claim.” Newbery,95 F.3d at 1401.

The justification for the defensive use of recoupment inbankruptcy is that there is no independent basis for a “debt,”and therefore there is no “claim” against estate property.Harmon, 188 B.R. at 425.

The respective claims involved in a recoupment may ariseeither before or after the commencement of the bankruptcycase, but they must arise out of the same transaction.Newbery, 95 F.3d at 1399. It is this “same transaction”requirement that essentially distinguishes recoupment fromsetoff.

*12 In order to determine if two claims arose from thesame transaction, in the Ninth Circuit, we apply the logicalrelationship test. TLC Hosps., 224 F.3d at 1012; Newbery, 95F.3d at 1403. In other words, the two dealings that support arecoupment must be logically related to one another for thedoctrine to be available.

It is this “same transaction” requirement that lies at theheart of Bouma's appeal. The bankruptcy court decided that,under these facts, it could not find a logical relationshipbetween Bouma's prepayment arrangement with Coast Grainand the subsequent discretionary purchases from, and thirdparty payments made on its behalf by, Coast Grain to supportapplication of the doctrine of recoupment.

The court cannot connect Bouma'spre-payment to the subsequentpurchases and third party paymentsto find a “logical relationship”sufficient to support the doctrine ofrecoupment. The opposing obligationsbetween Bouma and Coast Grainwere effectuated as separate anddistinct contracts in the continuouscommercial relationship between theparties. At the time of the prepayment,Bouma was not legally obligated topurchase $1.5 million of product toBouma. Those contracts came intoexistence months later, when Boumapurchased dairy feed on the “spotmarket.” Coast Grain clearly wasunder no legal obligation to makethird party payments to Bouma's



















vendors-the court can describe thatactivity as nothing more than agratuitous accommodation to CoastGrain's customers, a marketing ployto promote participation in theprepayment program.

Coast Grain, 317 B.R. at 808.

The bankruptcy court supported its conclusion that therewas no logical relationship between Bouma's claims and theprepayment arrangement by applying the analysis requiredunder two Ninth Circuit decisions, Newbery and TLC Hosps.In Newbery, the Court of Appeals applied a “proximatecause” test to connect the parties' competing claims.Fireman's Fund had issued performance and payment bondsto an electrical subcontractor, Newbery Electric Inc., to insureits involvement in several construction projects. Newberyabandoned the projects and Fireman's Fund was required totake them over. Newbery and Fireman's Fund executed acontract providing that Fireman's Fund could use Newbery'sequipment to complete the jobs and, in return, would payrent to Newbery's secured lender, Citibank. Citibank thenassigned the right to collect such rent back to Newbery. WhenFireman's Fund failed to make the rent payments, Newberysued. The court noted that, but for Newbery's breach ofthe construction contracts, Fireman's Fund would not haveneeded to rent the equipment. As Newbery was contractuallyobligated to indemnify Fireman's Fund for its losses, theparties' opposing claims, according to the Ninth Circuit, arosefrom and were intertwined in the same contracts and acts ofthe parties. As a result, the court allowed Fireman's Fund torecoup its claims against Newbery from the rent it owed.

*13 In TLC Hosps., the Ninth Circuit allowed arecoupment when it found evidence of Congressional intentin enacting the Medicare statutory scheme to connectthe estimated payments and reimbursements based onthe ongoing Medicare contract. Based upon the intricatesystem established in the legislation, the court allowed theGovernment to withhold the amount of overpayments madeto a hospital from future payments due to the hospital.

In both Newbery and TLC Hosps., the Court of Appealslooked to the legal relationships among the parties todetermine the “logical relationship” between the competingclaims. Comparing the Bouma–Coast Grain relationship withthose examined in Newbery and TLC Hosps., the bankruptcycourt concluded that the opposing claims of Bouma andCoast Grain lacked any causal connection or that they

were entwined by anything “but an unwritten, noncommittal,amorphous ‘understanding’ based on their prior course ofbusiness.” Coast Grain, 317 B.R. at 808–09. The bankruptcycourt opined that for recoupment to be available, Boumaneeded to establish, at a minimum, that the prepaymentarrangement had a legally cognizable relationship to thesubsequent sale of goods and third party payments madeby Coast Grain. The court found that, given the “loose knitstructure” of the parties' understandings, as well as the lackof a “definite agreement” to memorialize the terms of theprepayment agreement, Bouma had failed to establish therequisite logical relationship.

Bouma argues that the logical relationship between theprepayment and the subsequent shipments and third partytransfers can be established by deposition testimony and theconduct of the parties, and cites authorities for its contentionthat the prepayment agreement and subsequent sales andtransfer formed a unitary contract. Bouma reminds us thatin Newbery, the court stated that “transaction is a wordof flexible meaning. It may comprehend a series of manyoccurrences, depending not so much upon the immediatenessof their connection as upon their logical relationship .”Newbery, 96 F.3d at 1402(quoting Moore v. New York CottonExchange, 270 U.S. 593 (1926)). Bouma also relies uponAshland Petroleum Company v. Appel (In re B & L OilCo.), 782 F.2d 155 (10th Cir.1986) which, in turn, had beenfavorably cited by the Supreme Court in Reiter v. Cooper,supra.

In B & L Oil, the debtor granted Ashland Oil the right, butwith no obligation, to purchase unspecific amounts of crudeoil from B & L. Ashland purchased oil and, prior to B & L'sfiling for bankruptcy, overpaid for the oil. After bankruptcy,Ashland withheld payments for subsequent deliveries from B& L to recover the amount of overpayment. In the litigationthat followed, B & L argued that the original contract betweenB & L and Ashland never required Ashland to purchase anyoil and, therefore, that Ashland's payment obligation aroseindependently for each delivery. Ashland argued that therewas a contract and that all purchases under it should be treatedas arising from the same transaction. The Tenth Circuit settledthe dispute by finding that there was a single contract, despitethe fact that orders were entered at different times and forvarying amounts.

*14 Although we find B & L informative, we are morepersuaded by Braun's arguments, which liken the facts of thisappeal with those presented in our decision in Cal. Canners











and Growers v. Military Distributors of Va., Inc. (In re Cal.Canners and Growers), 62 B.R. 18 (9th Cir.BAP1986)(citedwith approval in Madigan, 270 B.R. at 758). Cal. Cannersfiled for bankruptcy in 1983. Before bankruptcy, Cal. Cannerssold and delivered goods to Military Distributors, whichthereafter, on the order of Cal. Canners, shipped the goods tovarious military installations. Cal. Canners received paymentfrom the U.S. government for these shipments but did notpay Military Distributors for several separate orders andshipments before the bankruptcy filing. Military Distributorsadmitted that it owed Cal. Canners for post-bankruptcypurchases but asserted that the defense of recoupment appliedto the payment of the pre-petition debt. This Panel held thateach delivery under a single distributor's agreement was aseparate transaction for recoupment purposes. It also foundsignificant that “the purchaser's claim involved the purchaseand sale of different goods. Id. at 20–21.

Cal. Canners is indeed on point in this case. Bouma madea prepayment deposit, not to guarantee that it would havea secure supply of feed products or to nail down favorablecontract terms, but presumably to take advantage of taxsavings or other financial advantages it could hopefullyrealize. This prepayment relationship was not evidenced byany formal contract and, as the bankruptcy court found, wasat best a nebulous “oral arrangement.” Under this vagueunderstanding, Bouma was not required to purchase goodsfrom Coast Grain and Coast Grain was not required tosell goods to Bouma on any specified terms. Bouma's actof making a prepayment deposit with Coast Grain simplycannot reasonably be connected in any logical fashion tothe 765 separately invoiced purchases of fourteen differentproducts it thereafter made from Coast Grain. Moreover,these purchases amounted to considerably less than 50percent of the prepayment deposit and we are at a lossto connect the prepayment deposit to the over $900,000distributed by Coast Grain on seventeen different occasionsto various third parties, who were not even identified at thetime of the original oral prepayment agreement. It seemsundisputed that, had it instructed Coast Grain to do so, all ofthe prepayment deposit could have been distributed to thirdparties, with any product purchases carried by Coast Grainon open account, something that actually occurred after theprepayment deposit was exhausted in years past and again in2001.

As the Ninth Circuit noted in TLC Hosps., “the logicalrelationship concept is not to be applied so looselythat multiple occurrences in any continuous commercial

relationship would constitute one transaction.” TLC Hosps.,244 F.3d at 1012. Although there was a continuingcommercial relationship between Bouma and Coast Grainthrough the period at issue in this appeal, that relationshipis best characterized as an on-going series of separatetransactions. We therefore agree with the bankruptcy courtthat “the opposing obligations between Bouma and CoastGrain were effectuated as separate and distinct contracts inthe continuous commercial relationship between the parties.”Coast Grain, 317 B.R. at 808.

*15 The bankruptcy court correctly determined thatthere was no logical relationship between the prepaymentagreement and the subsequent purchases and third partypayments. There was no single transaction or contract whichis a fundamental requirement for exercise of recoupmentrights. Consequently, the bankruptcy court did not err in itsdecision that recoupment could not be applied in the instantcase, a conclusion that was consistent with the case law of this

Circuit and well-reasoned. 18

3. The bankruptcy court erred in allowing Bouma a partialrecoupment for the Rolled Corn Contract.After rejecting Bouma's recoupment defense in the FirstBouma Decision, the bankruptcy court partly reversedpositions in the Second Bouma Decision by allowing Boumaa partial recoupment for purchases and payments madeby Coast Grain on the Rolled Grain Contract during the90–day pre-petition period. This ruling is the subject ofBraun's cross-appeal. To us, the allowance of a partialrecoupment to Bouma under these facts is inconsistent withthe bankruptcy court's persuasive and cogent analysis ofthe “same transaction” requirement. Because the bankruptcycourt did not identify specific facts sufficient to justify whya “logical relationship” existed between the Rolled CornContract and the prepayment deposit, the bankruptcy court'sallowance of partial recoupment to Bouma for the RolledCorn Contract must be reversed.

We find no indication in the record that, at the time Boumamade its prepayment deposit, the parties intended to treatBouma's obligations under the Rolled Corn Contract in anyspecial manner, as compared with its other purchases, vis-à-vis Bouma's prepayment account. Significantly, the RolledCorn Contract was entered into by the parties in October,2000 and deliveries to Bouma from Coast Grain commencedthe same month. In fact, some $70,000 in purchases hadalready been made by Bouma prior to the date it made the








December prepayment deposit. Although the Rolled CornContract obligates Bouma to make purchases from CoastGrain, in describing his intentions at the time he tendered the$1.63 million prepayment to Coast Grain, Mr. Schoenveldmakes no special mention of the Rolled Corn Contract. Onthe contrary, he stated that, after paying off the accumulatedaccount balance, any remaining prepayment credits werefor “feed” to be delivered in the future. The Coast Grainaccounting records show that deliveries of rolled corn toBouma were treated in the same manner as any other productpurchased by Bouma during 2001: an invoice was createdon or near the delivery date and was paid by debiting theprepayment balance. As noted above, there is no evidencethat, had Bouma asked Coast Grain to do so, all amounts in theprepayment account could be debited to pay non-Rolled CornContract invoices or to make third party payments, withoutregard to the status of the Rolled Corn Contract.

Although the existence of a written contract between theparties is one factor the bankruptcy court could considerin deciding whether transactions are logically related forpurposes of application of the recoupment doctrine, we thinkthe bankruptcy court assigned far too much weight to theexistence of the Rolled Corn Contract. Contrary to Bouma'sargument, the facts in Jensen, as compared with those here,are very different. The business relationship between CoastGrain and Jensen was almost completely based on the terms ofwritten contracts. The remaining value of the Jensen contractswas almost exactly equal to the full amount of the prepaymentdeposit Jensen provided to Coast Grain less amounts due.Jensen did not ask Coast Grain to make third party paymentsfrom its account.

*16 In this case, the Rolled Corn Contract comprised arelatively small portion of the amount of purchases executedon Bouma's account. Bouma had made substantial purchases

from Coast Grain under the Rolled Corn Contract beforethe December, 2000, prepayment deposit was made. Therewas nothing in the Contract tying Bouma's performance tothe existence of the prepayment deposit. Bouma also madesignificant purchases of goods from Coast Grain on openaccount. In addition, Bouma directed that the bulk of theprepayment account be disbursed to third parties.

We find little support in the record to show that Bouma'sobligations to Coast Grain under the Rolled Corn Contractwere in any way “logically related” to the existence andoperation of the 2001 prepayment account. Absent factorsother than the mere existence of the written contract,application of the recoupment doctrine is inappropriate. Thebankruptcy court's decision to apply a partial recoupmentin Bouma's favor must be reversed and this action must beremanded to the bankruptcy court for recalculation of theaward to Braun under the Twelfth Claim of the AmendedComplaint.

CONCLUSION

The decision of the bankruptcy court granting Braun'srequest to disallow and recover setoffs made from Bouma'sprepayment account during the 90 days before Coast Grain'sbankruptcy filing, and thereafter, and denying Bouma'srecoupment defense, are AFFIRMED. The bankruptcy court'sallowance of a partial recoupment to Bouma for the RolledCorn Contract is REVERSED and the adversary proceedingis REMANDED to the bankruptcy court for recalculation ofthe award to Braun and entry of a judgment consistent withthis decision.

Footnotes

1 This disposition is not appropriate for publication and may not be cited except when relevant under the doctrines of law of the case,

res judicata, or collateral estoppel. See 9th Cir. BAP Rule 8013–1.

2 Hon. David N. Naugle, United States Bankruptcy Judge for the Central District of California, sitting by designation.

3 There are suggestions in the record that customers also enjoyed tax advantages by participation in this prepayment program. We have

no reason to doubt this, but do not find it necessary to consider any tax implications in disposing of the issues.

4 Coast Grain would credit its customers' prepayment accounts additional amounts each month based on the account balances at the

end of the previous month. In the several years preceding Coast Grain's bankruptcy, the rate of “interest” earned by customers was

either 6.5 percent per annum for a prepayment deposit of less than $1 million or 7.5 percent per annum for a prepayment deposit

greater than $1 million. Coast Grain did not report these quality adjustment credits to any taxing authorities.

5 Again, presumably, as a tax planning tool for customers, most of the prepayment deposits Coast Grain received came in the last few

days of December each year. Although Coast Grain had accepted prepayment deposits for many years, in the last few years before its


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bankruptcy filing, the amount of prepayment deposits increased dramatically. In December 1998, Coast Grain received $18,015,945

in deposits, while in December 2000, it received $92,104,832. From January through August 2001, at the request of customers, Coast

Grain sent out $27,489,643 in third party payments.

6 Of this deposit, Coast Grain sent out, at Bouma's direction, $296,628 as third party payments from January through June, 2000.

7 This was sales contract S–800789, originally entered into by Bouma and Coast Grain on August 1, 2000, for $392,000. The delivery

period was October 1, 2000 through September 30, 2001.

8 This deduction was for products shipped to Bouma before August 25, 2001 even though the invoice for the shipment was apparently

not entered in Coast Grain's system until after the termination date.

9 Unless otherwise indicated, all references to chapter or section are to the Bankruptcy Code, 11 U.S.C. §§ 101–1330 and references

to Rules are to the Federal Rules of Bankruptcy Procedure.

10 Although the First Bouma Decision is the bankruptcy court's most complete analysis of the parties' setoff and recoupment arguments,

further proceedings were necessary to finally resolve Braun's claims. Coast Grain, 317 B.R. at 805. The bankruptcy court made

several subsequent rulings, including the Second Bouma Decision, based upon which the Final Judgment was entered giving rise

to this appeal.

11 Bouma moved for summary judgment on its asserted recoupment defense. Braun, in turn, moved for summary judgment striking this

defense and also Bouma's setoff defense.

12 The Final Judgment effectively incorporates by reference the First Bouma Decision, as well as the court's oral findings of fact and

conclusions of law stated on the record at the March 24 hearing.

13 The applicable non-bankruptcy law in the instant appeal is that of California. Neither of the parties have examined the mutuality

of the parties' obligations to one another under California law. The bankruptcy court correctly noted that the Coast Grain account

receivable created when it sold products to Bouma would be independently enforceable under California law. Coast Grain, 317 B.R.

at 802. Regarding the mutuality of the Coast Grain obligation, the court noted that “[i]t is undisputed that Bouma's prepaid account

represented a liability for Coast Grain and a claim for Bouma.” Id.

14 The “improvement of position” standard is a shorthand reference to § 553(b)'s requirement that, to be avoidable, a creditor's offset

reduce any “insufficiency” in accounts existing between the debtor and creditor during the 90 days before the bankruptcy petition

is filed. § 553(b)(1). An “insufficiency” is in turn defined by the Code as “that amount, if any, by which a claim against the debtor

exceeds a mutual debt owing to the debtor by the holder of such claim.” § 553(b)(2). Given this complicated statutory formulation,

it can be understood how the reference to “improvement of position” developed. At oral argument, this “improvement of position”

test was conceded by Bouma.

15 As near as we can tell from its briefs, while Bouma argues the transactions in question do not qualify as setoffs for purposes of §

553, if indeed we conclude setoffs did occur, Bouma does not challenge the bankruptcy court's decision that they are recoverable

by Braun under § 553.

16 Indeed, as Bouma notes, the Supreme Court's decision is described by one source as establishing the “general rules” for setoffs. See

4 Colliers on Bankruptcy ¶ 553.05[1]. Transcript of hearing (March 24, 2005), pp. 62–63.

17 Indeed, there is no evidence in the record that Bouma ever objected to the custom and practice of the parties.

18 Before leaving this issue, we note the following from the bankruptcy court's opinion: “Recoupment is an equitable doctrine which

may be denied based on the parties' conduct or other ‘equitable factors' which the court does not need to address here.” Coast

Grain, 317 B.R. at 809, n. 7. We also do not rest our decision on “the equities”. However, given Bouma's sophistication and purely

financial motives for engaging in this inherently risky quasi-banking arrangement with its feed supplier, it is doubtful that we could

be persuaded that Bouma should be spared its loss in preference to Coast Grain's other creditors.
















EXHIBIT F


In re Conrad, Not Reported in B.R. (2007)



United States Bankruptcy Court, W.D. Washington,at Tacoma.

In re Jeffrey CONRAD, Debtor.Jeffrey Conrad, Plaintiff,

v.NMTC Inc., dba Matco Tools, Defendant.

Bankruptcy No. 05–51412. | AdversaryNo. 07–4095. | Nov. 2, 2007.


Darren C. Walker, Vancouver, WA, for Plaintiff.

Lawrence R. Ream, Richard G. Birinyi, Bullivant HouserBailey PC, Seattle, WA, for Defendant.

Opinion

MEMORANDUM DECISION

PAUL B. SNYDER, U.S. Bankruptcy Judge.

*1 This matter came before the Court on October 2, 2007, ona Motion to Dismiss filed by NMTC, Inc., dba Matco Tools(Matco). Pursuant to Fed.R.Civ.P. 12(b)(6), made applicableby Fed. R. Bankr.P. 7012(b), Matco seeks to dismiss theComplaint for Violation of the Automatic Stay and forForgery (Complaint) filed by Jeffrey Conrad (Debtor). Basedon the evidence, pleadings and arguments presented, theCourt's findings of fact and conclusions of law are as follows:

FINDINGS OF FACT

On October 12, 2005, the Debtor filed a petition for reliefunder Chapter 7 of Title 11. The Debtor listed Matco as acreditor on his Creditor Matrix. Docket entries in the Debtor'sbankruptcy case, No. 05–51412, indicate that although Matcowas listed in the Creditor Matrix, no address was provided,and Matco was not given notice of the Debtor's Chapter 7bankruptcy filing. The Debtor subsequently included Matco'saddress in his Schedule F included in his balance of schedulesfiled November 22, 2005, but there is no indication that Matcowas sent notice of the bankruptcy upon the filing of theseschedules.

The Complaint alleges that Matco received actual notice ofthe Debtor's bankruptcy as evidenced from the adversarycomplaint Matco filed against the Debtor. The ClaimsRegister indicates that on January 25, 2006, Matco filed aProof of Claim, dated January 20, 2006. Matco's AmendedProof of Claim, filed October 10, 2006, indicates Matco hasan unsecured claim of $11,453.31. On January 31, 2006,Matco commenced Adversary Proceeding No. 06–4032,seeking a determination that its debt was nondischargeable.The Debtor's answer to Matco's complaint sets forth, by wayof counterclaim, an action against Matco for violating theautomatic stay. On August 17, 2006, the Debtor convertedhis bankruptcy to a Chapter 13. As a result of the conversion,Adversary Proceeding No. 06–4032 was dismissed by Matcowithout prejudice on September 6, 2006.

According to the Complaint in the current adversaryproceeding, on November 25, 2005, Matco caused astatement to be delivered to the Debtor entitled “MonthlyStatement of Account” (Statement). This Statement,contained in Exhibit A to the Complaint, sets forth the accountbalance as of November 25, 2005, the minimum due thatmonth, the amount past due, and the total due by December16, 2005. It contains the following language, set forth in a boxcreated by asterisks:

Please return the bottom portionof this statement, along with yourcheck, money order, or credit cardinformation. Please make paymentspayable to MATCO TOOLS. Be sureto include your account number onyour check or money order. We can bereached at 1–800–472–0012 from 8:00a.m.–9:00 p.m. EST.

The Statement also sets forth in all capital letters,“MATCO IS NOW REPORTING THE STATUS OF ALLACCOUNTS TO NATIONAL CREDIT BUREAUS.”

On January 12, 2006, one of Matco's employees telephonedthe Debtor and demanded payment of the debt that had beenlisted in the Debtor's bankruptcy case. The Complaint allegesthat the employee threatened to send a representative fromMatco to the Debtor's home and his work to collect the debtor take back the tools.

*2 On January 27, 2006, Matco caused another statement(Second Statement) to be delivered to the Debtor. The Second


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Statement, contained in Exhibit B to the Complaint, isidentical in language to the Statement, except for the amountsdue.

The Debtor further alleges in the Complaint that on multipleoccasions after the bankruptcy case was filed, Jim Odoms, anagent of Matco, demanded payment from the Debtor for hisMatco obligation.

The Debtor filed the current adversary proceeding on July 19,2007, alleging violation of the automatic stay under 11 U.S.C.

§ 362(h) 1 . The Debtor seeks damages in an unspecifiedamount, including attorney fees and punitive damages ifappropriate. On September 10, 2007, Matco filed its Motionto Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (Rule 12(b)(6)).After a hearing, the parties filed additional pleadings on theissues raised.

CONCLUSIONS OF LAW AND DISCUSSION

In order for a court to grant a motion to dismiss under Rule12(b)(6), it must be established that the plaintiff has failed“to state a claim upon which relief can be granted.” Whilea complaint does not need detailed factual allegations, itrequires “more than labels and conclusions, and a formulaicrecitation of the elements of a cause of action will not do.”Bell Atlantic Corp. v. Twombly, ––– U.S. ––––, –––– – ––––,127 S.Ct. 1955, 1964–65, 167 L.Ed.2d 929 (2007). “[A]llwell-pleaded allegations of material fact are taken as true andconstrued in a light most favorable to the non-moving party.”Wyler Summit P'ship v. Turner Broad. Sys., Inc. 135 F.3d 658,661 (9th Cir.1998). While factual allegations in the complaintare assumed to be true, they “must be enough to raise a rightto relief above the speculative level.” Twombly, 127 S.Ct. at1965.

In ruling on a motion to dismiss, a court usually “ ‘may notconsider any material beyond the pleadings.’ “ Cooper v.Pickett, 137 F.3d 616, 622 (9th Cir.1998) (quoting Branch v.Tunnell, 14 F.3d 449, 453 (9th Cir.1994), overruled on othergrounds by Galbraith v. County of Santa Clara, 307 F.3d1119 (9th Cir.2002)). If a court considers evidence outsidethe pleadings, it normally must convert the Rule 12(b)(6)motion into a Fed.R.Civ.P. 56 motion for summary judgmentand allow the nonmoving party an opportunity to respond.United States v. Ritchie, 342 F.3d 903, 907 (9th Cir.2003);Fed.R.Civ.P. 12(b). “A court may, however, consider certainmaterials—documents attached to the complaint, documents

incorporated by reference in the complaint, or matters ofjudicial notice—without converting the motion to dismissinto a motion for summary judgment.” Ritchie, 342 F.3d at908.

“Even if a document is not attached to a complaint, itmay be incorporated by reference into a complaint if theplaintiff refers extensively to the document or the documentforms the basis of the plaintiff's claim.” Ritchie, 342 F.3d at908. Affidavits and declarations are not allowed as pleadingexhibits unless they form the basis of a party's complaint.Ritchie, 342 F.3d at 908. In order for a court to take judicialnotice of adjudicative facts, the facts must be indisputable,which occurs only if they are either “generally known” underFed.R.Evid. 201(b)(1) or “capable of accurate and readydetermination by resort to sources whose accuracy cannot bereasonably questioned” under Fed.R.Evid. 201(b)(2). Ritchie,342 F.3d at 908–09.

*3 Matco has requested this Court consider material outsidethe Complaint, including the following: docket report forDebtor's bankruptcy case No. 05–51412; Debtor's petitionfor relief and bankruptcy schedules; Creditor Matrix; Noticeof Chapter 7 Bankruptcy Case and corresponding Certificateof Service; Time, Expense, and Compensation Listing Sheetattached as Exhibit A to the Application for Compensationfiled by Debtor's attorney in the bankruptcy case; the OrderConfirming Chapter 13 Plan; Matco's Amended Proof ofClaim and attachments; the docket report for AdversaryProceeding No. 06–4032; and the complaint and answerfiled in Adversary Proceeding No. 06–4032. The Debtor hasnot opposed the Court's consideration of any of the abovedocuments. The Debtor also included in his response to theMotion to Dismiss additional material outside the Complaint,

including Matco's original Proof of Claim and attachments. 2

For purposes of Matco's Rule 12(b)(6) motion, the Court willconsider all of the material outside the Complaint filed byboth parties. This undisputed material primarily consists ofpleadings contained in either the Debtor's bankruptcy case orMatco's adversary proceeding, of which this Court can takejudicial notice.

Matco presents several arguments in support of its motion todismiss.

1. Standing


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Matco first argues that the Debtor has no standing to pursuethe adversary proceeding because the Order ConfirmingChapter 13 Plan Dated 9/01/06 entered March 21, 2007,provides that all of the Debtor's claims are retained by theestate and are to be pursued by the Chapter 13 Trustee. Thisargument is not persuasive. Not only has Matco misread theConfirmation Order, but upon confirmation, all property ofthe estate vests with the Debtor, pursuant to 11 U.S.C. §1327(b).

Matco also argues that the Debtor has no standing becausein Matco's nondischargeability adversary proceeding, theCourt's Order Dismissing Adversary Proceeding WithoutPrejudice permitted Matco to raise its debt as a matter ofrecoupment to the Debtor's Complaint. Matco asserts that“it is likely” that no unsecured creditor will receive anydistribution from the Debtor's Chapter 13 case, and thatthe Debtor's damages will be less than Matco's claim of$11,453.31. According to Matco, because the only effectof the continued pursuit of the Debtor's claims would beto reduce the amount of Matco's claim, the Debtor has nostanding. Matco assumes it will receive no distribution in theDebtor's bankruptcy, but the confirmed plan provides for a3% distribution to general unsecured creditors. Furthermore,applying the Rule 12(b)(6) standard, there are no allegationsin the Complaint or facts in the judicially noticed documentsthat suggest the Debtor's alleged damages will be less thanMatco's claims. Even assuming the facts as alleged by Matcoare correct, Matco has not established as a matter of law in itsRule 12(b)(6) motion that the recoupment defense eliminatesthe Debtor's standing to make a claim under 11 U.S.C. §362(h). Recoupment outside of the standing issue will beaddressed further below.

2. Willful Stay Violation*4 Former 11 U.S.C. § 362(h) provides that “[a]n individual

injured by any willful violation of a stay provided bythis section shall recover actual damages, including costsand attorneys' fees, and, in appropriate circumstances, mayrecover punitive damages.” A willful violation occurs if (1)a party knew of the stay, and (2) its actions in violation ofthe stay were intentional. Eskanos & Adler, P.C. v. Leetien,309 F.3d 1210, 1215 (9th Cir.2002). Matco does not appearto dispute that for at least those actions occurring after it filedits Proof of Claim, its actions were willful and done withknowledge of the stay. Rather, Matco appears to contend thatfor purposes of Rule 12(b)(6), its actions did not violate thestay.

Matco relies on Morgan Guar. Trust Co. of New York v. Am.Savs. and Loan Ass'n, 804 F.2d 1487, 1491 (9th Cir.1986),for its assertion that the Debtor must present evidence ofcoercion or harassment to establish a violation of the stay. It isquestionable whether Morgan applies in this case. First, thatcase is factually distinguishable, as it dealt specifically withpresentment of a negotiable instrument, and the presentmentin that case was to an entity other than the debtor. Notably,in 1985, Congress amended 11 U.S.C. § 362 to provide thatpresentment of a negotiable instrument is not a violation of the§ 362(a), as now codified in 11 U.S.C. § 362(b)(11). Second,Morgan was decided based on law that existed prior to theenactment of 11 U.S.C. § 362(h), the statute under which theDebtor currently seeks relief.

Even if Morgan were on point and applicable, however,the Rule 12(b)(6) standard requires the Court to look at thealleged facts in a light most favorable to the Debtor. Inthe Complaint, the Debtor alleged that after Matco filed itsadversary petition in January, 2006, Matco sent a SecondStatement to the Debtor, and an agent of Matco demandedpayment from the Debtor on multiple occasions. One of thecases cited by the Ninth Circuit Court of Appeals in Morganas an example of threats and harassment was Gibson, wherethe bankruptcy court held that the automatic stay was violatedby “a creditor who made repeated visits and telephone callsto the debtor.” Morgan, 804 F.2d at 1491 n. 4 (citing Inre Gibson, 16 B.R. 682, 683–84 (Bankr.S.D.Ohio 1981)).Assuming the Debtor's alleged facts to be true, the agent'sdemand for payment on multiple occasions may meet thestandard articulated in Morgan. Furthermore, Matco's SecondStatement, which provides that Matco is reporting the statusof all accounts to national credit bureaus, can be construed asbeing more then a mere “request for payment.” Accordingly,the Debtor has alleged sufficient facts upon which to state aclaim under 11 U.S.C. § 362(h).

3. RecoupmentRecoupment, an equitable defense, “ ‘is the setting up of ademand arising from the same transaction as the plaintiff'sclaim or cause of action, strictly for the purpose of abatementor reduction of such claim.’ “ Newbery Corp. v. Fireman'sFund Ins. Co., 95 F.3d 1392, 1399 (9th Cir.1996) (quoting 4Collier on Bankruptcy ¶ 553.03, at 553–15 (15th ed.1995))(emphasis in original). Recoupment is “based on the premisethat ‘the defendant should be entitled to show that becauseof matters arising out of the transaction sued on, he or sheis not liable in full for the plaintiff's claim.’ “ NewberyCorp., 95 F.3d at 1401 (quoting Collier ¶ 553.03, at 553–


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17). “Recoupment is only a challenge to the validity andextent of the plaintiff's claim, and no affirmative recoveryis permitted.” In re Al–Jiboury, 344 B.R. 218, 227–28(Bankr.D.Mass.2006) (quoting In re Jones, 289 B.R. 188, 192(Bankr.M.D.Fla.2002)). The respective claims of the plaintiffand defendant may arise either before or after commencementof the bankruptcy case, but both must arise out of thesame transaction. In re Madigan, 270 B.R. 749, 754 (9thCir.BAP2001).

*5 In order to determine if the two claims arose fromthe same transaction, the Court must apply the “logicalrelationship” test. Madigan, 270 B.R. at 754. A claim forrecoupment is analogous to a compulsory counterclaim; bothrequire a determination of whether the claim “arises out ofthe transaction or occurrence that is the subject matter of theopposing party's claim.” Madigan, 270 B.R. at 755 (quotingFed.R.Civ.P. 13(a)). In the Ninth Circuit,

[a] logical relationship exists whenthe counterclaim arises from the sameaggregate set of operative facts asthe initial claim, in that the sameoperative facts serve as the basisof both claims or the aggregatecore of facts upon which the claimrests activates additional legal rightsotherwise dormant in the defendant.

Madigan, 270 B.R. at 755 (quoting Pinkstaff v. United States(In re Pinkstaff), 974 F.2d 113, 115 (9th Cir.1992)). Courtsapplying this test have required, “ ‘only that the obligationsbe sufficiently interconnected so that it would be unjust toinsist that one party fulfill its obligation without requiring thesame of the other party.’ “ Madigan, 270 B.R. at 755 (quoting5 Collier on Bankruptcy ¶ 553.10[1] (15th ed. rev.2001)).The word “transaction” is given both a liberal and flexibleconstruction. Madigan, 270 B.R. at 755.

The issue before the Court is whether the Debtor's 11 U.S.C.§ 362(h) complaint arises out of the same transaction asMatco's underlying claim of $11,453.31 for tools sold to theDebtor. Included in this issue is the question of whether therecoupment defense can be applied to a § 362(h) action.Matco relies on Cox v. Billy Pounds Motors, Inc. (In re Cox),214 B.R. 635 (Bankr.N.D.Ala.1997), in which an Alabamabankruptcy court allowed a creditor to assert recoupmentagainst the debtor's claim for damages under § 362(h). In sodoing, the bankruptcy court held that the debtor's debt forpurchase of a vehicle from the creditor, and the creditor's

post-petition repossession of the vehicle in violation of theautomatic stay, arose out of the same transaction. Cox, 214B.R. at 647–48.

Assuming Matco is permitted to assert its recoupmentdefense against Debtor's claim for damages under 11U.S.C. § 362(h)—a legal issue which the Court need notdetermine at this time—the only scenario under which theCreditor's defense would eviscerate the Debtor's claim is ifthe Debtor's damages did not exceed Matco's $11,453.31claim. The Complaint does not specify an amount ofdamages, but requests damages, including attorney's fees andpunitive damages as warranted. The Court previously viewedallegations of a stay violation in the light most favorable tothe Debtor, and concluded that there are sufficient factualallegations upon which to adequately state a claim. The Courtmust now view the allegations of damages in the light mostfavorable to the Debtor. In so doing, the Court notes thatwhile the Debtor has not specified a particular amount ofdamages, this is not an uncommon practice in notice pleading.Furthermore, there are no allegations in the Complaint orfacts in the judicially noticed documents, which construedappropriately, support Matco's assertion that damages willin fact be less than $11,453.31. There is no factual basisto conclude that a recoupment defense would eviscerate theDebtor's § 362(h) claim so as to warrant relief under Rule12(b)(6).

4. Damages*6 Matco does not appear to dispute that attorney fees can be

damages for purposes of an action under 11 U.S.C. § 362(h).Rather, Matco argues that the attorney fees incurred by theDebtor as a result of the alleged stay violations were coveredby the flat fee paid to Debtor's counsel, and thus no additionalfees were incurred by Debtor. Matco, however, concedes thatfees would have been incurred by the Debtor in pursuit ofthe stay violation action in the course of Matco's adversaryproceeding. The Debtor confirmed that his attorney fees inMatco's adversary proceeding included time for prosecutingthe stay violation action. Assuming the facts presented inthe Complaint are true, the Debtor has presented sufficientevidence of damages upon which to state a stay violationclaim.

5. Matco AgentIn its post-hearing brief, Matco argued that Jim Odoms wasan independent contractor, and any intentional acts he mayhave performed were not in furtherance of Matco's business.
































Matco points to the documents attached to its Proof of Claimin support of its position that Odoms was owed a separateobligation by the Debtor, and thus was not an agent ofMatco's. The Complaint, however, alleges that Jim Odomsis an agent of Matco and that he demanded payment fromthe Debtor for his Matco obligation. This Court is required toassume the facts alleged in the Complaint are true. Moreover,

the documents attached to the Proof of Claim can be construedto support the Debtor's allegation.

Accordingly, Matco's motion to dismiss filed pursuant to Rule12(b)(6) is denied.

Footnotes

1 Former section 362(h) was amended and redesignated as section 362(k), by the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, effective in cases commenced on or after October 17, 2005. Because the Debtor's bankruptcy case was filed

October 12, 2005, former section 362(h) applies.

2 In his response, the Debtor also included a declaration of his bankruptcy attorney. This declaration refers to facts in the Debtor's

response that are supported by a deposition taken of the Debtor on July 14, 2006. To the extent these facts are not included in the

Complaint, the Court will not consider them on Matco's Rule 12(b)(6) motion.






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EXHIBIT G


In re Death Row Records, Inc., Not Reported in B.R. (2012)



United States Bankruptcy Appellate Panel,of the Ninth Circuit.

In re DEATH ROW RECORDS, INC., Debtor.John Chiang, Controller for theState of California, Appellant,

v.R. Todd Neilson, Chapter 7 Trustee, Appellee.

No. CC–11–1186–HPePa. | BankruptcyNo. 06–11205. | Adversary No. 10–02574. | Argued and Submitted Nov.

16, 2011. | Filed March 21, 2012.

Appeal from the United States Bankruptcy Court for theCentral District of California, Honorable Vincent P. Zurzolo,Bankruptcy Judge, Presiding.


Hiren M. Patel, Deputy Attorney General, argued for theAppellant.

Uzzi O. Raanan of Danning, Gill, Diamond & Kollitz, LLP,argued for the Appellee.

Before: HOLLOWELL, PAPPAS and PERRIS 1 ,Bankruptcy Judges.

Opinion

MEMORANDUM 2

I. INTRODUCTION

*1 In this interlocutory appeal, the California StateController (“Controller”) seeks the reversal of an order

certifying a nationwide class of chapter 7 3 trustees whodid, could have, or might in the future make a claim fortheir respective debtor's funds that escheated to the Stateof California prepetition. For the reasons given below, weREVERSE the bankruptcy court's certification of the classaction and REMAND the matter to the bankruptcy court toissue a certification order solely under Civil Rules 23(a) and23(b)(2), and which narrows the scope of the certified class

action by eliminating claims for interest damages and claimsfor willful violation of the automatic stay.

II. FACTS

A. The Bankruptcy CaseIn April 2006, Death Row Records, Inc. (“DRR”) and Marion“Suge” Knight, Jr. (“Knight”) each filed voluntary petitionsfor relief under chapter 11. In July 2006, appellee R. ToddNeilson (“Neilson”) was appointed the chapter 11 trusteefor the DRR estate. In January 2009, the Knight estate wasconsolidated with the DRR estate (the consolidated estatescomprise the “Debtor”), with Neilson acting as the chapter 11trustee. In November 2009, the Debtor's case was convertedto chapter 7. Neilson was appointed the chapter 7 trustee(“Trustee”).

B. Trustee's Escheat ClaimIn March 2009, the Trustee filed a claim with the Controlleron behalf of the Debtor seeking a return of the Debtor's moneythat had escheated to the State of California (“California”)under California's Unclaimed Property Law (the “UPL”),Cal.Civ.Proc.Code (“CCP”) § 1500, et. seq. On May 26,2010, the Controller's office issued a letter to the Trustee(“Letter”), which granted in part and denied in part theTrustee's claim. The Letter explained that the Controllerdenied thirteen of the sixteen claims asserted by the Trusteeon the basis that it was “the long-standing position ofthis office that once unclaimed property has escheated toCalifornia, it is not subject to claims by bankruptcy trusteesclaiming on behalf of a bankruptcy estate or debtor.”

The Letter explained that because thirteen of the accounts hadescheated before the bankruptcy petitions were filed, legaland equitable title to the accounts vested in California. TheLetter acknowledged that the former owner of the accountscould divest California of title by filing a verified claim underthe procedures set forth in the UPL, but until such a claimwas filed, verified and approved, “such property would notbe belonging or owed to such property or entity (debtor).”The Letter stated that because that procedure had not occurredprepetition, “the property is not part of bankruptcy estate asdefined in 11 U.S.C. § 541.”

The Letter continued:

In addition, a trustee acts on behalf ofthe bankruptcy estate, not the debtor.



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For purposes of claiming escheatedproperty, “owner” means the personwho had legal right to property priorto its escheat (California Code of CivilProcedures Section 1540; subdivision(d)). Once the property vests in theState of California, only the formerowner can claim the property. As aresult, it does not appear that thebankruptcy estate, or its trustee, hada legal right to the property before itescheated to the State of California.Consequently, because title to theproperty sought vested in the Stateof California, and is not, therefore,property of the debtor, these fundsheld by the state under the UnclaimedProperty Law are not subject to a claimby a bankruptcy trustee.

*2 The total amount of the claims denied was $10,166.44.

C. The Class ActionOn August 25, 2010, the Trustee filed a complaintcommencing a class action against the Controller:

(1) for turnover of the class members' and the Debtor'sproperty and for an accounting pursuant to § 543;

(2) for turnover of property under § 542;

(3) for wrongful denial of claims under CCP § 1540;

(4) to avoid and recover unjust enrichment;

(5) for willful violation of the automatic stay;

(6) for declaratory relief seeking a determination that debtors'property that escheats to California prepetition is property ofthe class members' respective bankruptcy estates subject tothe exclusive control of the debtors' respective bankruptcyestates' trustees; and,

(7) for injunctive relief enjoining the Controller fromcontinuing to deny claims made by bankruptcy trustees onbehalf of their estates.

The complaint sought turnover under § 542 and/or § 543of the amount of escheated funds plus interest and actual

damages on the stay violation claim, including costs andattorneys' fees incurred in bringing the class action. TheTrustee filed and served a First Amended Complaint (the“Class Action”) on September 8, 2010, asserting the identicalclaims for relief.

D. Controller's Motion To DismissOn October 29, 2010, the Controller filed a Motion toDismiss under Rules 7012 and 7019 (“MTD”), assertingthat the Eleventh Amendment barred the Class Action, thebankruptcy court lacked jurisdiction under 28 U.S.C. §§1334 and 157, and the Trustee lacked authority under theBankruptcy Code to file the Class Action.

On January 3, 2011, the bankruptcy court issued an order(“Dismissal Order”) that dismissed the Trustee's CCP § 1540and unjust enrichment claims. In its Dismissal Order, thebankruptcy court denied the balance of the MTD becausethe bankruptcy court determined it had jurisdiction over theclaims alleging violations of the Bankruptcy Code.

The Controller did not seek leave to appeal the DismissalOrder. On February 24, 2011, the Controller filed ananswer denying all the Trustee's allegations. The Controllerasserted lack of subject matter jurisdiction as an affirmativedefense on the grounds of: sovereign immunity, lack ofjurisdiction under 28 U.S.C. §§ 1334 and 157, mootness,and that the Class Action was not a core proceeding. TheController also asserted as an affirmative defense that theTrustee could not satisfy Civil Rule 23 requirements forclass certification (made applicable in bankruptcy adversaryproceedings by Rule 7023) and lacked standing to act as theclass representative.

E. Class CertificationIn December 2010, the Trustee filed a motion for: (1)class certification; (2) appointment of the Trustee as theclass representative; (3) permanent appointment of classcounsel; and (4) approval of the form of class notice (the“Certification Motion”). The Controller filed an opposition(“Opposition”). The Opposition challenged class certificationunder Civil Rule 23, the definition of the class (“Class”), andthe definition of the Class claims (“Claims”). The Controllerdid not, however, raise sovereign immunity or other subjectmatter jurisdiction challenges previously raised in the MTD.

*3 At a March 10, 2011 hearing on the Certification Motion,the bankruptcy court granted the motion and made oral











findings concerning the elements of Civil Rule 23(a) and (b)finding that:

(1) numerosity was satisfied because the number of chapter7 trustees in California and nationwide would be difficult tomanage absent a class action;

(2) commonality was satisfied because the Claims bear thesame or sufficient number of characteristics in common, so“that it makes sense” to have them litigated in a Class Action;

(3) typicality of injury was satisfied by the Letter, whichreferred to the long standing position of the Controllerthat trustees could not make claims for debtors' escheatedproperty; and,

(4) adequacy of representation was met because there is noconflict of interest between the Debtor's interest and the Class'interest in having the Trustee pursue the Class Action.

The bankruptcy court also found that the issues were clearlydefined as required by Civil Rule 23(b) because it wasa narrow class where common questions of law and factpredominate.

On April 8, 2011, the bankruptcy court issued an order(“Class Certification Order”) certifying the Class Actionand appointing the Trustee as Class representative. TheClass Certification Order also appointed Class counsel andapproved the form of the Class Action notice, which includedan “opt out” provision that would permit members to elect tobe excluded from the Class.

The Class Certification Order defined the Class as:

all bankruptcy trustees who previouslyfiled, could have filed, or will file inthe future, claims with the State ofCalifornia on behalf of the bankruptcyestates of debtors whose propertyescheated to the State of Californiaprior to the filing of the bankruptcypetitions commencing their respectivebankruptcy cases, and which claimswere rejected by the Controller on thegrounds that such [escheated] propertyis not property of the bankruptcyestates ... and/or that the trustees lack

authority to file bankruptcy claimsunder CCP Section 1540.

F. Controller's Motion For Leave To AppealOn April 21, 2011, the Controller filed a Motion For Leaveto Appeal the Class Certification Order and a Notice ofAppeal. On April 26, 2011, a BAP panel (“Panel”) issueda briefing order. In its brief, the Controller argued thatappeal should be permitted so that the Class CertificationOrder, as well as the sovereign immunity and 28 U.S.C. §1334 jurisdictional arguments raised in the MTD, could bereviewed. The Trustee's opposition argued that the Controllerhad waived his sovereign immunity argument by not seekingto appeal the MTD. On June 15, 2011, the Panel issued anorder granting leave to appeal. That order is silent on thescope of the appeal. On September 1, 2011, the Panel issuedan order granting a Stay Pending Appeal.

III. JURISDICTION

The Controller challenges the bankruptcy court's subjectmatter jurisdiction. To the extent that the challenge is notsustained, the bankruptcy court had jurisdiction under 28U.S.C. §§ 1334(a) and 157(a), (b)(1) and (B)(2)(A), (B), (G)and (O). We have jurisdiction under 28 U.S.C. § 158(a)(3)and the Panel's June 15, 2011 order granting leave to appeal.

IV. ISSUES

*4 1. Did the bankruptcy court have subject matter

jurisdiction over the Class Action? 4

2. Did the bankruptcy court err in certifying the Class?

V. STANDARD OF REVIEW

We review findings of fact for clear error and issues of lawde novo. Litton Loan Serv'g, LP v. Garvida (In re Garvida),347 B.R. 697, 703 (9th Cir.BAP2006). A bankruptcy court'sdetermination of its subject matter jurisdiction is reviewedde novo. Sea Hawk Seafoods, Inc. v. Alaska (In re ValdezFisheries Dev. Ass'n, Inc.), 439 F.3d 545, 547 (9th Cir.2006).The existence of sovereign immunity is a question of lawreviewed de novo. Del Campo v. Kennedy, 517 F.3d 1070,1075 (9th Cir.2008); Emp't Dev. Dep't. of Cal. v. Joseph(In re HPA Assocs.), 191 B.R. 167, 171 (9th Cir.BAP1995).





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We review issues of standing de novo. La Asociacion deTrabajadores de Lake Forest v. City of Lake Forest, 624 F.3d1083, 1087 (9th Cir.2010).

We review an order on class certification under Civil Rule23 for an abuse of discretion. Vinole v. Countrywide HomeLoans, Inc., 571 F.3d 935, 939 (9th Cir.2009). As the NinthCircuit noted, appellate review is limited:

to whether the [court] correctlyselected and applied [Civil] Rule23's criteria. An abuse of discretionoccurs when the [court], in makinga discretionary ruling, relies upon animproper factor, omits considerationof a factor entitled to substantialweight, or mulls the correct mix offactors but makes a clear error ofjudgment in assaying them.

Id. (citing Parra v. Bashas', Inc., 536 F.3d 975, 977–78 (9thCir.2008). To the extent that a ruling on a Civil Rule 23requirement is supported by a finding of fact, that findingis reviewed for clear error. Wolin v. Jaguar Land Rover N.Am., LLC, 617 F.3d 1168, 1171–72 (9th Cir.2010). A factualfinding is clearly erroneous if it is illogical, implausible, orwithout support in inferences that can be drawn from the factsin the record. United States v. Hinkson, 585 F.3d 1247, 1262–63 (9th Cir.2009) (en banc).

VI. DISCUSSION

I. Subject Matter Jurisdiction

A. Sovereign ImmunityUnder the Eleventh Amendment, “[t]he Judicial Power ofthe United States shall not be construed to extend to anysuit in law or equity, commenced or prosecuted againstone of the United States by citizens of another state or bycitizens or subjects of any foreign state.” U.S. Const. amend.XI. Generally speaking, the doctrine of sovereign immunityprecludes a federal court from hearing a private person's suitagainst a State, state agencies and state officials, acting intheir official capacities. Va. Office for Prot. and Advocacyv. Stewart, ––– U.S. ––––, 131 S.Ct. 1632, 1637–38 (2011);Peirick v. Ind. Univ.-Purdue Univ. Indianapolis AthleticsDep't., 510 F.3d 681, 695 (7th Cir.2007).

The Controller contends that the Eleventh Amendmentdeprives the bankruptcy court of jurisdiction over the ClassAction because it implicates the State's “core” sovereigninterest in establishing and administering the process fordealing with escheated property. In order to evaluate thatassertion, we begin with a brief overview of exceptions tosovereign immunity in bankruptcy proceedings.

1. Exceptions To Sovereign Immunity In BankruptcyProceedings*5 There are three generally recognized exceptions to a

State's sovereign immunity in a bankruptcy case. The first,and best settled theory, is that by filing a claim, a State waivesits sovereign immunity with respect to its claim. Gardner v.New Jersey, 329 U.S. 565, 573–74 (1947). Second, Congressmay abrogate a State's immunity if it: (1) unequivocallyexpresses its intent to do so; and (2) acts pursuant to a validexercise of its powers. Seminole Tribe of Fla. v. Florida, 517U.S. 44, 55 (1996). Third, in ratifying the U.S. Constitution,which included authorizing Congress to enact uniform lawson the subject of bankruptcies, the States acquiesced to alimited subordination of their sovereign immunity to thefederal courts in the bankruptcy arena. Cent. Va. Cmty. Coll.v. Katz, 546 U.S. 356, 362–63 (2006).

Here, the second and third exceptions are at issue. We brieflyreview each in turn.

a) Congressional Abrogation Under § 106(a)In 1994, Congress passed § 106(a) in an effort to abrogatethe sovereign immunity of all governmental units with respectto specifically enumerated sections of the Bankruptcy Code,including sections regarding turnover of assets (§§ 542, 543)and the automatic stay (§ 362). However, the validity of §106(a) was called into serious doubt by the Supreme Court'sdecision in Seminole Tribe. 517 U.S. at 59. In SeminoleTribe, the Supreme Court overturned Pennsylvania v. UnionGas Co., 491 U.S. 1 (1989), and rejected the contentionthat Congress could abrogate a States' sovereign immunityunder its Article I powers, specifically, the Indian CommerceClause. Id. at 66.

The Bankruptcy Clause (U.S. Const. art. I, § 8, cl.4) of theU.S. Constitution is also an Article I power. After SeminoleTribe, a number of courts of appeal, including the NinthCircuit, relied on Seminole Tribe to hold that § 106(a) wasnot a valid abrogation of the States' Eleventh Amendment













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immunity. See, e.g., Mitchell v. Franchise Tax Bd. (In reMitchell), 209 F.3d 1111 (9th Cir.2000).

The Sixth Circuit, however, came to a different result inHood v. Tenn. Student Assistance Corp., 319 F.3d 755 (6thCir.2003) aff'd, Tennessee Student Assistance Corp. v. Hood,541 U.S. 440 (2004). The Sixth Circuit's decision in Hoodwas based on two rationales. The first was that the Stateswaived their sovereign immunity when they collectivelyagreed in the plan of the Constitutional Convention to allowuniform federal power in the area of bankruptcy. Id. at 752.The second part of the Sixth Circuit's analysis was that theadversary proceeding at issue, a student loan undue hardshipdischarge complaint, was not a traditional lawsuit in whichthe state was forced to defend itself against an accusationof wrongdoing. Instead, the adversary proceeding simplyallowed the “adjudication of interests claimed in a res.” Id.at 768. The State could determine if it wanted to assert aninterest in the res or it could decline to do so. Under thisanalysis, the bankruptcy court's jurisdiction extended only tothe res and not directly against the State. Id.

*6 The Supreme Court granted certiorari in Hood, but didnot decide if Congress had authority under the BankruptcyClause to abrogate States' sovereign immunity in § 106(a).Rather, the Supreme Court held that an adversary proceedingintended to determine if a student loan could be dischargedwas an in rem proceeding that did not require the bankruptcycourt to assert in personam jurisdiction over the State, andconsequently, did not impact the State's sovereign immunity.Id. at 453.

b) Waiver By RatificationIn 2006, the Supreme Court again examined the issue ofStates' sovereign immunity in bankruptcy proceedings. InKatz, the bankruptcy trustee of a bookstore business broughtan avoidance and preference action against four state colleges.546 U.S. 356. Instead of deciding if § 106(a) was a validabrogation of the States' sovereign immunity, the Courtphrased the issue as follows:

The relevant question is not whether Congress has“abrogated” States' immunity in proceedings to recoverpreferential transfers. See 11 U.S.C. § 106(a). The question,rather, is whether Congress' determination that Statesshould be amenable to such proceedings is within thescope of its powers to enact “Laws on the subject ofBankruptcies.”

Id. at 379.

Katz held that “[i]n ratifying the Bankruptcy Clause, theStates acquiesced in a subordination of whatever sovereignimmunity they might otherwise have asserted in proceedingsnecessary to effectuate the in rem jurisdiction of thebankruptcy courts.” Id. at 378. While bankruptcy jurisdictionis understood as principally being in rem, the jurisdictionof the court's adjudicating rights in a bankruptcy estateincludes “the power to issue compulsory orders to facilitatethe administration and distribution of the res.” Id. at 362.Therefore, a federal court exercising bankruptcy in remjurisdiction could also issue ancillary orders in furtheranceof that jurisdiction. Id. at 371. Katz recognized that an ordermandating a turnover of property “although ancillary to andin furtherance of the court's in rem jurisdiction, might itselfinvolve in personam process.” Id. at 372. Therefore, to theextent that the exercise of bankruptcy ancillary jurisdictionimplicated the States' sovereign immunity, the States agreedin the plan of convention not to assert that immunity. Id. at373, 378.

Katz did not define the range of proceedings that wouldqualify as an ancillary proceeding and fall within the States'waiver of sovereign immunity. However, it provided someguidance by setting out three critical in rem functions ofbankruptcy courts: (1) the exercise of exclusive jurisdictionover all of the debtor's property; (2) the equitable distributionof that property among the debtor's creditors; and (3) theultimate discharge that gives the debtor a “fresh start.” Id. at363–64.

2. Sovereign Immunity Does Not Apply To The ClassAction's Turnover Claims Even If It Interferes With TheState's Procedures For Administering Escheated Property*7 We now turn to the Controller's sovereign immunity

challenges to the Class Action. We begin with a review ofthe California statutory scheme for dealing with unclaimedproperty in order to decide if California's sovereign interest isimplicated by the Class Action.

Escheat is a procedure for dealing with unclaimed propertywith roots in feudal law. In common law, if a tenant of realproperty died without heirs, the land escheated to the lord ofthe fee, but as feudal titles do not exist in the United States,it is the State, by virtue of its sovereignty, which steps intothe place of the feudal lord, to take title to escheated property.See Taylor v. Westly, 402 F.3d 924, 926 (9th Cir.2005).








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California's escheat procedures are governed by the UPL.The law has two purposes: (1) “to protect unknown ownersby locating them and restoring their property to them”;and (2) “to give the [S]tate, rather than the holders ofunclaimed property the benefit of the use of it, most ofwhich experience shows will never be claimed.” Harris v.Westley, 116 Cal.App. 4th 214, 219 (Cal.Ct.App.2004); Fongv. Westly, 117 Cal.App. 4th 841, 844 (Cal.Ct.App.2004).

The UPL distinguishes between “escheat” and “permanentescheat .” CCP § 1300(c) and (d). Where property has notpermanently escheated, title vests in California; but, the titleis defeasible and meant to be temporary until a claim bythe owner is made pursuant to the UPL. Morris v. Chiang,

163 Cal.App. 4th 753, 757 (Cal.Ct.App.2008). Owners 5

of property that the Controller holds, but that have notpermanently escheated to California, may claim and receivetheir property back, but interest is not payable on a claimfor escheated funds. Id. at 756; CCP § 1540(c). The UPLprovides that if a claimant is dissatisfied with the Controller'sdetermination not to return escheated property, the claimantmay seek judicial review of the denial in California statecourt. CCP § 1352(c).

To the extent funds held by the Controller have notpermanently escheated to the State, the Eleventh Amendmentdoes not bar the Class Action because it seeks a return ofthe Class members'—not California's—property. Suever v.Connell, 439 F.3d 1142, 1146–47 (9th Cir.2006); see alsoTaylor, 402 F.3d at 933.

The Controller does not, however, argue that the Class Actionis improper because it seeks California's funds. Instead,he argues that the Class Action improperly interferes withCalifornia's core interest in administering the UPL. Unlikethe plaintiffs in Suever and Taylor, where claims were notinitially filed with the Controller, here, the Trustee did filea claim with the Controller. Therefore, according to theController, California's “core” interest in having appealsof denied claims heard in California state court bars theClass Action. Furthermore, because the Class definitionincludes trustees whose claims were rejected because ofa determination that they “lacked authority” to file claimsunder CCP § 1540, the Controller asserts that the ClassAction improperly seeks to interfere with his administrationof California law.

*8 However, the Controller ignores a critical fact. Thereason why the Class members do not have authorityto file claims under CCP § 1540 is because of theController's determination that debtors' escheated funds arenot bankruptcy estate property. The Class Action, therefore,challenges the Controller's application of federal law, not theUPL.

Nevertheless, the Controller asserts that any challenge to theController's alleged policy, even if the policy is based on aninterpretation of federal bankruptcy law, must be brought in

California state court pursuant to § 106(a)(4). 6 Whatever thescope of Congressional abrogation may be under § 106(a)after Hood and Katz, the provisions of § 106(a), whichexempt States from federal bankruptcy law remain viable. 2COLLIER ON BANKRUPTCY ¶ 106.03 (Alan N. Resnick &Henry J. Sommer eds., 16th ed.2011). Thus, according to theController, § 106(a)(4) requires that denials of trustees' claimsto escheated property be heard exclusively in a Californiastate court.

Section 106(a)(4)'s scope, however, is limited to theenforcement of orders against a State. It does not requirethat state procedures be followed to obtain that order. Ifjurisdiction is proper, an order may be obtained against aState in federal court. Once the order is obtained, § 106(a)(4)requires that it be enforced, consistent with applicable statelaw.

The Controller contends that because the Trustee made aclaim under the UPL, he acknowledged that he was boundto comply with the UPL's requirements regarding that claim.As a result, the Controller contends that the Trustee's onlyrecourse, if he was unhappy with the Controller's decision,was to file an action in California state court. If theController's rejection of the Debtor's claims was based onstate law, the Controller's argument might be persuasive.However, once a dispute arises about whether property isproperty of a bankruptcy estate, exclusive jurisdiction toresolve that question lies with the federal courts. 28 U.S.C.§ 1334(e); In re Wash. Mut., Inc., 461 B.R. 200, 217(Bankr.D.Del.2011); Brown v. Fox Broad. Co., (In re Cox),433 B .R. 911, 919 (Bankr.N.D.Ga.2010); In re RomanCatholic Archbishop of Portland in Or., 335 B.R. 842, 850–51 (Bankr.D.Or.2005). Because the Class Action is limited tomembers whose claims are denied because of the purporteddetermination that such funds are not bankruptcy estateproperty, jurisdiction is proper in the bankruptcy court.






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In his reply brief, the Controller asserts that if bankruptcycourts have exclusive jurisdiction over estate property, thereis no need for the Class Action because the Class memberscan file turnover actions in their individual bankruptcy cases.This argument is meritless. Just because individual trusteesmay file turnover actions in their cases, does not mean that aclass action is not appropriate. Here, each claim of individualtrustees is quite small—making it difficult for the trustees toobtain adequate legal representation. A class action permitsthe trustees to spread litigation costs and, therefore, it may bethe most efficient way for trustees to adjudicate their claims.

*9 The Controller also argues that Suever and Taylor arenot applicable because the holdings in those cases requirea showing that in refusing to return escheated property, theController has committed ultra vires or unconstitutional acts.See Suever, 439 F.3d at 1147. According to the Controller, thedetermination that debtors' escheated funds are not propertyof their bankruptcy estates is, at most, a legal error, not an“ultra vires” act. However, wrongfully exercising power overestate property is not just a legal error, it's a violation offederal law and, therefore, beyond the powers granted to theController under the UPL. Accordingly, if the Class Actionallegations are true, the Controller's action would constitute

an ultra vires act. 7

To the extent turnover claims of the Class Action do notseek anything more than turnover of debtors' escheatedproperty, the Eleventh Amendment does not bar the Claims.Id. Moreover, to the extent that California has a sovereigninterest in having the UPL's procedures followed, that interestwas waived regarding determinations of what constitutesbankruptcy estate property when California ratified theConstitution. Katz 546 U.S. at 373, 378.

3. The Class Action's Assertion Of In PersonamJurisdiction Over The Controller Is Not Proper

a) Turnover ClaimsThe Controller asserts that bankruptcy in rem jurisdiction, asexplained in Katz and Hood, is limited to adjudicating claimsof specific property of individual bankruptcy estates and thatbecause the Class Action seeks an injunction to overturn analleged policy of the Controller, it improperly invokes the inpersonam jurisdiction of federal courts over a state officer.

In Katz, however, the Supreme Court held that bankruptcyjurisdiction could properly be asserted over ancillary

proceedings, including in personam proceedings to the extentnecessary to effectuate jurisdiction over the res. Id. at1004. Accordingly, the exercise of ancillary in personamjurisdiction over a state officer, if necessary to effectuatea turnover of estate assets, is permitted because the Statesagreed in the plan of convention not to assert that immunity.Id. at 373. The result is not any different because the inpersonam jurisdiction is being asserted in a class action.The compensatory purpose of class actions, which permitlitigation and compensation of small claims that wouldotherwise not be pursued, is as important inside bankruptcyas outside. In re Am. Reserve Corp., 840 F.2d 487, 492 (7thCir.1988); Aiello v. Providian Fin. Corp., Inc. (In re Aiello),231 B.R. 693, 712 (Bankr.N.D.Ill.1999).

b) Stay Violation ClaimsThe automatic stay is the mechanism which protects the corebankruptcy functions of exercising jurisdiction over estateproperty, equitably distributing estate property and protectinga debtor's discharge. The stay “facilitates the orderlyadministration and distribution of the estate by ‘protect[ing]the bankruptcy estate from being eaten away by creditors'lawsuits and seizures of property before the trustee has hada chance to marshal the estate's assets and distribute themequally among the creditors.’ “ Fla. Dep't of Revenue v. Diaz(In re Diaz), 647 F.3d 1073, 1085 (11th Cir.2011) quotingMartin–Trigona v. Champion Fed. Sav. & Loan Ass'n, 892F.2d 575, 577 (7th Cir.1989). If a proceeding's purpose isto facilitate the in rem function of bankruptcy jurisdictionby assuring that the automatic stay is honored, then it fallswithin the “consent by ratification” exception to sovereignimmunity. Id. at 1085–86 (determining that there willgenerally be bankruptcy jurisdiction over contempt motionsagainst States for stay violations); see also In re Griffin, 415B.R. 64, 71 (Bankr.N.D.N.Y.2009) (bankruptcy jurisdictionover emotional distress damages for stay violation).

*10 The Controller cites In re Diaz as authority for theproposition that there is no waiver of sovereign immunityfor stay violation claims after a debtor's discharge is issued.In In re Diaz, a chapter 13 debtor sued the Departments ofRevenue and Social Services for damages as a result of analleged stay violation when they attempted to collect a childsupport obligation. The debtor brought suit after the chapter13 plan had been completed and the estate assets had beenfully distributed. As a result, the court found that there was nolonger any in rem function of the bankruptcy court becausethe estate had been fully distributed. 647 F.3d at 1086.

















In re Diaz does not, however, stand for the broad propositionthat there cannot be an exercise of ancillary jurisdiction forstay violations after a debtor receives a discharge. Such aresult would be inconsistent with § 362(a)' s protection ofestates'—as well as debtors'—property. 11 U.S.C. § 362(a)(2), (3) and (4); Little Pat, Inc. v. Conter (In re Soll), 181 B.R.433, 444 (Bankr.D.Ariz.1995) (“The automatic stay protectsnot only debtors, but also property of the estate.”). It is alsoinconsistent with § 362(c)(1), which maintains the stay untilsuch property is “no longer estate property.” Estate propertyremains protected by the automatic stay until it is divestedfrom the estate by exemption, abandonment, sale and, ifproperly scheduled, by the closing of the case under § 554(c).

c) Damages 8

The Class Action seeks interest on the Class members'escheated property from the time a claim is denied by theController until paid. The UPL, however, does not allowa recovery of interest on returned escheated funds. CCP §1540(c). The Class Action cannot provide more relief to theClass than is otherwise available to other claimants underthe UPL. Therefore, § 106(a)(4) applies and requires thatany turnover order be consistent with the UPL, which limitsrecovery solely to the amount of the escheated funds.

The Controller argues that § 106(a)(4) should also applyto any damages arising out of the stay violation claimsbecause the UPL does not provide for damages for violationsof § 362(a). However, the UPL is not the law at issuein considering stay violations. Stay violations are governedby the Bankruptcy Code. The Controller's position wouldallow governmental units to violate the stay with impunitybecause there would likely never be a state law that authorizesdamages for such violations. As a result, bankruptcy courtswould be unable to enforce their jurisdiction over estateproperty and debtors' discharges. See, e.g., Fla. Dep't. ofRevenue v. Omine (In re Omine), 485 F.3d 1305, 1314 (11thCir.2007), opinion withdrawn due to settlement, 2007 WL6813797 (June 26, 2007)(“The bankruptcy court's ancillaryorder to enforce an automatic stay, which is one of thefundamental debtor protections provided by the bankruptcylaws, operates free and clear of the Florida DOR's claim ofsovereign immunity.”).

*11 In summary, the Claims for interest on escheatedproperty are barred by sovereign immunity, but the damageclaims for stay violation are not.

B. Jurisdiction Under 28 U.S.C. §§ 1334(a) And 157In addition to seeking dismissal under Civil Rule 12 forlack of subject matter jurisdiction because of sovereignimmunity, the Controller also sought dismissal under 28U.S.C. §§ 1334 and 157. On appeal, the Controller's onlymention of this argument appears in a footnote asserting thatthe Class Action “is not really an action that arises under§§ 543[sic], 543 or 362, so the bankruptcy court lackedauthority to assert jurisdiction under 28 U.S.C. §§ 1334 and157.” The Controller does not further explain that statement;nevertheless, we will do our best to address it.

The Claims are based on § 105 (contempt), § 362 (violationsof the stay); and § 542 (turnover of estate property). Suchclaims arise under the Bankruptcy Code and, therefore, thedistrict court has jurisdiction over the Claims pursuant to

28 U.S.C. § 1334(b). 9 As explained below, the Claims arealso “core” proceedings under 28 U.S.C. § 157(b)(2) and,accordingly, bankruptcy courts may enter final judgment insuch proceedings subject to any constitutional limitations onthe powers of Article I courts under Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594 (2011).

The Class Action seeks turnover of estate property. Beforeturnover can be required, there must be a determinationthat the property is estate property. The Ninth Circuit hasdistinguished actions seeking to obtain property owed to adebtor from actions seeking to obtain property of a debtor.See, e.g., John Hancock Mut. Life Ins. Co. v. Watson (In reKincaid), 917 F.2d 1162, 1165 (9th Cir.1990). With respectto the latter, “an action to obtain property of the estate wouldnecessarily involve a determination regarding ‘the nature andextent of property of the estate,’ the action would also bea matter ‘concerning the administration of the estate’ and,therefore, a core proceeding.” Id. (citing 28 U.S.C. § 157(b)(2)(A)).

A determination of whether there has been a stay violation isalso a core proceeding. Johnson v. Smith (In re Johnson), 575F .3d 1079, 1083 (10th Cir.2009). Exercise of civil contemptpowers under § 105(a), if based on a core matter such asenforcement of the automatic stay, is also a core matter.Mountain Am. Credit Union v.. Skinner (In re Skinner), 917F.2d 444, 448 (10th Cir.1990).

Accordingly, the bankruptcy court did not err in determiningthat it had subject matter jurisdiction over the Class Actionunder 28 U.S.C. §§ 1334 and 157.


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C. Nationwide Scope Of The Class ActionThe Controller argues that even if the bankruptcy courthas jurisdiction over the Debtor's escheat claims, thatjurisdiction cannot be extended to assert jurisdiction overother bankruptcy estates. According to the Controller, abankruptcy court's jurisdiction is strictly limited to the casesfiled in its court and may not be extended to cases in otherdistricts.

*12 Questions regarding the territorial scope of abankruptcy court's jurisdiction must begin with an analysisof district court jurisdiction from which it is derived. Under28 U.S.C. §§ 1334(a) and (b), district courts have jurisdictionover all bankruptcy cases, and over all civil proceedings“arising under title 11, or arising in or related to cases undertitle 11.” Pursuant to 28 U.S .C. §§ 1334, 157, and 151, districtcourts may assign their bankruptcy jurisdiction to bankruptcy

courts. 10 Accordingly, with the exception of personal injurytort claims (28 U.S.C. § 157(b)(5)), bankruptcy courts haveauthority to adjudicate all matters that fall within the districtcourt's bankruptcy jurisdiction.

The Controller asserts, however, that the reference in 28

U.S.C. § 1334(e) 11 to “a case” limits bankruptcy jurisdictionto the district court where the case is filed—the so-called“home court.” But, federal bankruptcy jurisdiction is notthat narrow. See Noletto v. NationsBanc Mortg. Corp. (Inre Noletto), 244 B .R. 845, 851–852 (Bankr.S.D.Ala.2000)holding that “home court” interpretation of 28 U.S.C. §1334(e) rendered the venue provisions of 28 U.S.C. § 1409meaningless. The Noletto court concluded that only in remclaims against estate property were limited to the “homecourt.” Id. at 856; see also Cano v. GMAC Mortg. Corp.(In re Cano), 410 B.R. 506, 550–51 (Bankr.S.D.Tex.2009)(“Nothing within [28 U.S.C] §§ 1334 or 157 ties bankruptcyjurisdiction over debtor adversary proceedings to the locationof the debtor's bankruptcy case.”).

Here, the Class Action seeks a determination that theescheated funds are property of the Class members'bankruptcy estates subject to turnover and an injunctionagainst continued denial of claims based on the Controller'sallegedly improper policy. A request for a determinationthat the Class members have a right to a turnover ofproperty—debtors' escheated funds—is not the same asthe determination that the Class members have a right to

a specific amount of escheated funds. 12 Therefore, the

turnover, declaratory and injunctive relief claims are notsolely in rem claims, and the nationwide scope of the ClassAction as to those claims is proper.

However, the nationwide jurisdiction over the Class Actionstay violation claims is not appropriate because § 362(k)provides relief only to individuals. Damages suffered asa result of stay violations are not suffered by trustees asindividuals, but as the representatives of the bankruptcyestate. Havelock v. Taxel (In re Pace), 67 F.3d 187, 193 (9thCir.1995). The only way a trustee can recover damages forstay violations is by bringing an action under § 105(a) for civilcontempt. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178,1189–90 (9th Cir.2003).

Civil contempt proceedings must be brought by a motion inthe court where the bankruptcy case is pending. Barrientos v.Wells Fargo Bank, N.A., 633 F.3d 1186, 1190 (9th Cir.2011)(“[C]ontempt proceedings brought by the trustee ... arecontested matters that must be brought by motion in the

bankruptcy case under Rule 9014.”) (emphasis added). 13

Accordingly, the bankruptcy court lacks subject matterjurisdiction over the stay violation claims in cases pending inother bankruptcy courts.

*13 In summary, the Class Action may not seek intereston the Class member's claims for escheated property and thebankruptcy court lacks jurisdiction over stay violation claimsin cases not filed in its own court. We reject the balance ofthe Controller's jurisdictional challenges to the Class Action.

II. Class Certification

A. Article III StandingWe turn, now, to the Controller's challenge to the ClassCertification Order. We begin with the Controller's argumentsthat the Trustee and Class members lack standing underArticle III of the U.S. Constitution.

Article III standing requires that the party invoking the court'sauthority demonstrate that he personally suffered actual orthreatened injury in fact, that the injury be a result ofdefendant's action, and that the injury be redressable byjudicial decision. Valley Forge Christian Coll. v. Am. Unitedfor Separation of Church and State, Inc., 454 U.S. 464, 471–72 (1982).

1. Trustee's Standing









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The Controller asserts that the Trustee lacks standing becausethe Class Action is allegedly being pursued solely for the

benefit of bankruptcy trustees in other bankruptcy cases. 14

In support of his argument, the Controller cites cases thatstand for the proposition that a bankruptcy trustee may notprosecute class actions solely for the benefit of third-partycreditors where the only recovery for the bankruptcy estate isan administrative claim for the trustee's expenses. Williams v.Cal. 1st Bank, 859 F.2d 664, 667 (9th Cir.1988); In re Wash.Group, Inc., 476 F.Supp. 246, 252 (M.D.N.C.1979).

The Trustee counters that the Class Action will benefit theDebtor because the Trustee has negotiated a fee agreementthat caps attorneys' fees at $5,000, thereby assuring aminimum recovery of approximately $5,000 for the Debtor'screditors. The Trustee argues that should he separately pursuethe Debtor's claims, the cost of the litigation would far exceedthe amount of the claims. Therefore, the Trustee argues thatpursuing the Class Action is consistent with his fiduciary dutyto the Debtor's creditors and that it is being pursued for thebenefit of those creditors as well as the Class.

The cases cited by the Controller are distinguishable becausehere, the Class Action is being prosecuted for the benefit ofthe Debtor's estate as well as the Class. The Trustee, therefore,meets the Article III requirement of demonstrating that he hasan injury, which can be redressed by a favorable decision inthe Class Action.

2. Class Members' StandingThe Controller challenges the inclusion of future claimants inthe Class because future claimants have not yet filed claimswith the Controller and, therefore, by definition, cannot havebeen injured by the Controller's alleged policy. However,when a class action challenges a policy of the defendant,inclusion of future claimants is appropriate. Apilado v. N. Am.Gay Amateur Athletic Alliance, 792 F.Supp.2d 1151, 1164(W.D.Wash.2011) (citing Armstrong v. Davis, 275 F.3d 849,865 (9th Cir.2001) cert. denied, 537 U.S. 812 (2002)); Davisv. Astrue, 250 F.R.D. 476, 485 (N.D.Cal.2008);.

*14 The Controller also asserts that future members ofthe Class will not be affected by the Controller's actionsbecause if bankruptcy courts have exclusive jurisdiction overestate property, claims for escheated property can be filedin the bankruptcy court where the Class members' cases arepending. This assertion lacks merit. Bankruptcy courts haveexclusive and final jurisdiction to determine if property is

property of a bankruptcy estate. Once that determination ismade, it does not follow that the federal court is the propertribunal in which to adjudicate state law issues related toestate property.

Finally, the Controller challenges the inclusion in the Classof trustees who could have but did not file claims with theController. We agree with the Controller that the Class maynot include trustees in pending and prior cases who did notactually file a claim with the Controller. See, e.g., Serenav. Mock, 547 F.3d 1051, 1054 (9th Cir.2008); Madsen v.Boise State Univ., 976 F.2d 1219, 1220 (9th Cir.1992) (“[A]plaintiff lacks standing to challenge a rule or policy to whichhe has not submitted himself by actually applying for thedesired benefit.”). Accordingly, the Class may not properlyinclude trustees who could have but did not file claims with

the Controller. 15

B. Statute Of LimitationsThe Controller contends that the Class certification isimproper because the Class could potentially include claimsthat might be barred by the statute of limitations. However,the Controller failed to raise the statute of limitationsargument before the bankruptcy court, in the MTD, in theanswer to the Class Action, or in the Opposition. Becausea statute of limitations defense is an affirmative defense, itcannot be considered for the first time on appeal. Roberts v.Coll. of the Desert, 870 F.2d 1411, 1414 (9th Cir.1988).

C. Class Certification Under Civil Rule 23 16

Historically, class actions were used in English chancerycourts for resolving disputes where joinder of all partieswas not possible. Civil Rule 23 is based on that practice. Itauthorizes class actions in the interest of judicial economy andefficiency. One of the primary purposes of Civil Rule 23 isto spread litigation costs and afford individual claimants withsmall claims access to judicial relief that would otherwise beeconomically unavailable to them. In re Aiello, 231 B.R. at709.

While the trial court has broad discretion to certify a class, itsdiscretion must be exercised within the framework of CivilRule 23. Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180,1192–93 (9th Cir.2001). Class certification involves a two-part analysis. First, the movant must demonstrate that theproposed class satisfies the requirements of Civil Rule 23(a)that:


























(1) the members of the proposed class be so numerous thatjoinder of all claims would be impracticable;

(2) there be questions of law or fact common to the class;

*15 (3) the claims or defenses of the representative partiesmust be typical of the claims or defenses of absent classmembers; and

(4) the representative parties must fairly and adequatelyprotect the interest of the class.

If a movant meets the requirements of Civil Rule 23(a), thenat least one of the three subsections of Civil Rule 23(b) mustalso be met before a class action may proceed.

1. Civil Rule 23(a)

a) NumerosityThe bankruptcy court found that the Class Action satisfiesthe numerosity requirement because the number of potentialClass members—trustees throughout the United States—islarge. The Controller does not challenge that finding onappeal.

b) CommonalityCommonality focuses on the relationship of common factsand legal issues among class members, but:

All questions of fact and law neednot be common to satisfy [Civil Rule23(a)(2) ]. The existence of sharedlegal issues with divergent factualpredicates is sufficient, as is a commoncore of salient facts coupled withdisparate legal remedies within theclass.

Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9thCir.1998). The Trustee contends that the commonalityrequirement has been met because Class membershipincludes numerous common factual elements, including thatall Class members are trustees with an existing or potentialclaim to escheated funds that would be rejected by theController. The common legal issues include whether debtors'interest in escheated funds is property of their bankruptcyestates, and, whether trustees in such cases have standing tofile claims for the escheated funds.

The Controller counters that the Class Action would requirethe bankruptcy court to determine the amount due to eachindividual trustee, and therefore, when such individualizeddeterminations are required, the commonality standard of

Civil Rule 23(a)(2) cannot be met. 17 However, the Trusteeasserts that the Class Certification Order does not requireindividual determination of specific amounts due to eachClass member. Rather, it defines the Class in terms of whetherits members are “entitled” to turnover and an accounting ofdebtors' escheated funds under § 542 and § 543. “Entitle”means “to furnish with proper grounds for seeking orclaiming something.” BLACK'S LAW DICTIONARY 532(6th ed.1990). To the extent that the Class Action requests adetermination that Class members have a right to escheatedfunds that have been withheld solely on the grounds thatthe funds are not estate property (but not a determination ofthe amount due to each Class member), then certification isproper.

c) TypicalityCivil Rule 23(a)(3) requires that the claims of the classrepresentative be typical of the class claims. In examiningtypicality, courts consider “ ‘whether other members have thesame or similar injury, whether the action is based on conductwhich is not unique to the named plaintiffs, and whetherother class members have been injured by the same courseof conduct.’ “ Kanawi v. Bechtel Corp., 254 F.R.D. 102, 110(N.D.Cal.2008) citing Hanon v.. DataProducts Corp., 976F.2d 497, 508 (9th Cir.1992). The bankruptcy court found thatthe Letter describing the Controller's “long standing position”of rejecting trustee claims met the typicality requirement.

*16 The Controller contends that the typicality requirementhas not been met because the Class includes members whohave not yet filed claims with the Controller. However, wherethe challenged conduct is a policy or practice that affects allclass members, the injuries of the class representative and thatof the class members need not be identical. Typicality is met ifthe class representative and members suffer identical injuriesas a result of the alleged wrongful policy. See Armstrongv. Davis, 275 F.3d at 868–69. Here, the Trustee and theClass members all suffer the same injury: the denial orpotential denial of their claim by the Controller based on theController's stated position that the funds are not property ofthe bankruptcy estate.

d) Adequacy Of Representation














Finally, Civil Rule 23(a)(4) requires a determination that theclass representative will adequately protect the interests ofthe class. In determining whether the interests of a class willbe adequately represented, the court must determine that theclass representative does not have an interest antagonisticto the class; and, that the class counsel must be qualified,experienced and able to conduct the litigation. James W.Moore et al., 5 MOORE'S FEDERAL PRACTICE § 23.25( [3][a] ) (3d ed.2007).

The Controller argues that the Trustee cannot satisfy CivilRule 23(a)(4) because there is an inherent conflict of interestbetween the Trustee's fiduciary duty to the bankruptcyestate and his role as Class representative. A potential forconflict between a bankruptcy trustee's fiduciary obligationsto efficiently and quickly administer a bankruptcy estate andto act as a class representative has long been recognized.See Dechert v. Cadle Co., 333 F.3d 801, 802–03 (7thCir.2003); Centrue Bank v. Samson (In re Thompson), 2010WL 4065421 *2–3 (S.D.Ill. Oct. 15, 2010). However, thereis no per se rule barring a bankruptcy trustee from servingas a class representative. Dechert recognized that there couldbe situations where only a fiduciary could act as a classrepresentative. 333 F.3d at 803.

Here, as the bankruptcy court noted: “Who else but abankruptcy trustee can assert that the Controller is improperlydenying payment of claims to bankruptcy trustees?” Thus,because the Debtor is affected by the same alleged improperconduct as the Class, the bankruptcy court found that noconflict would be suffered by the Debtor by having theTrustee pursue the Class Action. We see nothing illogicalabout the bankruptcy court's determination and, accordingly,find no abuse of discretion with respect to its determinationthat the Trustee could act as Class representative.

2. Civil Rule 23(b)Once the requirements of Civil Rule 23(a) are met, at least oneof the requirements of Civil Rule 23(b) must also be satisfiedbefore a class can be certified. Civil Rule 23(b) classificationsare written in the alternative. In this case, the bankruptcy courtcertified the Class under Civil Rule 23(b)(1)(A), (b)(2) and(b)(3).

*17 Civil Rule 23(b)(1)(A) is appropriate if prosecutingseparate actions would create a risk of inconsistent resultsthat would establish incompatible standards of conduct forthe party opposing the class or absent class members. Eventhough the Certification Order certified the Class under

Civil Rule 23(b)(1), the bankruptcy court did not make aspecific finding that separate actions would create a risk ofinconsistent results or incompatible standards of conduct forthe Controller. It is unlikely that such a finding could be made.

The Ninth Circuit has adopted a conservative view of CivilRule 23(b)(1), which requires that either: (1) “rulings inseparate actions would subject [a] defendant to incompatiblejudgments requiring inconsistent conduct to comply withthe judgment; or (2) a ruling in the first of a series ofseparate actions will ‘inescapably alter the substance of therights of others having similar claims.’ “ Mateo v. M/S Kiso,805 F.Supp. 761, 772 (N.D.Cal.1991) quoting McDonnellDouglas Corp. v. U.S. Dist. Ct. of Cal., 523 F.2d 1083,1086 (9th Cir.1975). Neither of these two conditions is metby the Class Action. If the Class is not certified, it is notclear that the Controller will be subject to multiple individualactions or incompatible judgments. In fact, if the Trustee wereto prevail on the Debtor's claims, California's law of issuepreclusion would likely prevent the Controller from denying

other trustees' claims for debtors' escheated property. 18

If, however, the Trustee pursues an action solely in Debtor'scase against the Controller and fails, that result would notbind other bankruptcy estates because those estates are notin privity with the Debtor. Accordingly, a ruling againstthe Trustee will not “inescapably” alter the rights of othertrustees having similar claims. Id. at 773. Consequently, thebankruptcy court abused its discretion in certifying the Classunder Civil Rule 23(b)(1).

Civil Rule 23(b)(2) provides for Class certification when “theparty opposing the class has acted or refused to act on groundsgenerally applicable to the class, thereby making appropriatefinal injunctive relief or corresponding declaratory relief withrespect to the class as a whole.” Zinser, 253 F.3d at 1195.Here, while the bankruptcy court made no specific findings,it did find that the Letter demonstrated a commonalityof claims, which is consistent with the findings requiredunder Civil Rule 23(b)(2). Under the Controller's policy,all bankruptcy trustees are denied the right to make aclaim for debtors' escheated funds for the same reason—the Controller's determination that such funds are not estateproperty.

Certification of a class under Civil Rule 23(b)(2) isappropriate only where the primary relief sought isdeclaratory or injunctive relief, not monetary. Id. TheController asserts that the bankruptcy court's certification















under Civil Rule 23(b)(2) was error because the ClassAction seeks monetary relief for the amount of each estate'sescheated funds. However, at oral argument and in his brief,the Trustee asserted that the only damages being sought arefor attorneys' fees incurred in bringing the Class Action.Assuming that is the case, then the damages being soughtare merely incidental to the primary claims for injunctiveand declaratory relief. Daly v. Harris, 209 F.R.D. 180, 192

(D.Haw.2002). 19 As a result, the bankruptcy court did noterr in certifying the Class under Civil Rule § 23(b)(2).

*18 Finally, certification under Civil Rule 23(b)(3) isappropriate when individualized damage claims are beingsought. However, the Trustee admits that the only damagesbeing sought are not individualized, but are limited to thecosts and fees incurred in prosecuting the Class Action.Accordingly, Civil Rule 23(b)(3) is inapplicable to the ClassAction.

In summary, we find that the bankruptcy court did not abuseits discretion in certifying the Class under Civil Rule 23(a)and Civil Rule 23(b)(2). However, the bankruptcy court diderr in certifying the Class under Civil Rule 23(b)(1)(A) and(b)(3).

VII. CONCLUSION

Based on the foregoing reasons, we determine that theclaims for interest on escheated funds are barred bysovereign immunity. Under the holding of Katz, Californiahas waived its sovereign immunity claims to the balance ofthe Claims. The bankruptcy court, however, lacks subjectmatter jurisdiction over the stay violation claims, which mayonly be pursued by civil contempt motions filed in each Classmember's cases.

Additionally, we determine that the certification of the Classunder Civil Rule 23(b)(1) was error. The Trustee has admittedthat the Class Action does not seek individualized damagesclaims and, accordingly, certification of the Class under CivilRule 23(b)(3) was also error. Although the bankruptcy courtdid not err in certifying the Class under Civil Rule 23(b)(2),as noted above, unless there is some federal or state law whichauthorizes recovery of attorneys' fees for the Claims, suchfees are not recoverable under Civil Rule 23(h). Therefore,we REVERSE the Certification Order entry and remandthe matter to the bankruptcy court to issue a certificationorder solely under Civil Rules 23(a) and (b)(2), and whichnarrows the scope of the Class Action by eliminating claimsfor interest damages and claims for willful violation of theautomatic stay.

Footnotes

1 Hon. Elizabeth L. Perris, United States Bankruptcy Judge for the District of Oregon, sitting by designation.

2 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed.

R.App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013–1.

3 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532. All Rule references

are to the Federal Rules of Bankruptcy Procedure, Rules 1001–9037. Federal Rules of Civil Procedure are referred to as “Civil Rules.”

4 Only the Class Certification Order is at issue in this interlocutory appeal. The Controller did not raise the sovereign immunity and

28 U.S.C. §§ 1334 and 157 subject matter jurisdiction arguments in the Opposition to the Certification Motion. Because we have

the discretion to address purely legal issues prerequisite to the Class Certification Order, we address the bankruptcy court's subject

matter jurisdiction in this Memorandum. See, e.g., Pac. Exp. v. United Airlines, Inc., 959 F.2d 814, 819 (9th Cir.1992).

5 An owner is defined as “the person who had legal right to the property prior to its escheat, his or her heirs, his or her legal

representative, or a public administrator acting pursuant to authority granted in Sections 7660 and 7661 of the Probate Code.” CCP

§ 1540(d).

6 Section 106(a)(4) provides: “The enforcement of any such order, process, or judgment against any governmental unit shall be

consistent with appropriate nonbankruptcy law applicable to such governmental unit and, in the case of a money judgment against

the United States, shall be paid as if it is a judgment rendered by a district court of the United States.”

7 We do not need to decide whether the Class Actions' allegations are true, only that it alleges actions which would be ultra vires.

See Taylor, 402 F.3d at 934.




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8 The Class Action seeks actual damages in the form of interest on the turnover claims and actual damages and sanctions on the stay

violation claims. However, in his Answering Brief and at oral argument, the Trustee asserted that he is seeking damages solely for

the costs and attorneys' fees incurred in prosecuting the Class Action.

9 Section 1334(b) provides in relevant part:

(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on

a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil

proceedings arising under title 11, or arising in or related to cases under title 11.

10 This is subject to any constitutional limits on the authority of Article I judges. See generally Stern v. Marshall, 131 S.Ct. 2594 (2011).

11 28 U.S.C. § 1334(e) provides, in relevant part, “The district court in which a case under Title 11 is commenced or is pending shall

have exclusive jurisdiction: (1) of all the property, wherever located, of the debtor as of the commencement of such case, and (2)

of property of the estate.”

12 To the extent that the Trustee seeks turnover of a specific amount, his claim is limited to the approximately $10,000 allegedly due

in the Debtor's case.

13 Barrientos involved an alleged violation of a discharge injunction, but the holding of the case, which is based on Rule 9020, applies

to any motion for contempt.

14 Even though the Controller did not raise this argument before the bankruptcy court, because Article III standing is a jurisdictional

requirement that cannot be waived, it may be considered as part of this appeal. See United States v. Hayes, 515 U.S. 737, 742 (1995).

15 Trustees who failed to file claims in the past may, however, still be members of the Class as future claimants.

16 Because we have determined that the bankruptcy court cannot assert jurisdiction over the stay violation claims of the Class Action

under 28 U.S.C. § 1334(e), we do not address the stay violation claims in our Civil Rule 23 analysis. We note, however, that a

number of courts have refused to certify class actions for stay and/or discharge violations because the element of damages would

require a detailed examination of the facts surrounding each class member's claim, thereby making it impossible for the class to

meet the commonality requirements of Civil Rule 23(a)(2). See In re Aiello, 231 B.R. at 712 (too many variations in claims for

actual damages under § 362(h) to meet commonality requirements); Walls v. Wells Fargo Bank, N.A. (In re Walls), 262 B.R. 519,

529 (Bankr.E.D.Cal.2001) (extent of damages will depend not just on the class-wide behavior of the defendant but on the extent of

damages to each individual debtor).

17 The Trustee argues that, because the Controller did not make this argument before the bankruptcy court, we should not consider it

for the first time on appeal. In conducting the Civil Rule 23 analysis, the bankruptcy court necessarily made findings of fact which

normally should not be reviewed for the first time on appeal. El Paso v. Am. W. Airlines, Inc. (In re Am W. Airlines, Inc.), 217 F.3d

1161, 1165 (9th Cir.2000) (Absent exceptional circumstances, we generally will not consider arguments raised for the first time on

appeal, although we have discretion to do so.). However, when the issue is one of law and either does not depend on the factual

record, or the record has been fully developed, we may address the argument. Marx v. Loral Corp., 87 F.3d 1049, 1055 (9th Cir.1996).

Here, the record is fully developed regarding the facts relevant to the commonality determination and, therefore, we exercise our

discretion to review it.

18 Under California law, the party asserting issue preclusion has the burden of establishing the following “threshold” requirements:

(1) the issue sought to be precluded must be identical to that decided in a former proceeding;

(2) the issue must have been actually litigated in the former proceeding;

(3) it must have been necessarily decided in the former proceeding;

(4) the decision in the former proceeding must be final and on the merits; and,

(5) the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.

Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.2001); Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez),

367 B.R. 99, 104 (9th Cir. BAP2007).

19 However, absent some type of damages claim, the Trustee may be unable to recover attorneys' fees for prosecuting the Class Action

because Civil Rule 23(h) limits an award of attorneys' fees to circumstances where such a recovery is authorized by law. Here, we

have determined that the Class Action may not seek damages in the form of interest on the escheated funds and that the bankruptcy

court lacks jurisdiction over Class members' stay violation claims.












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EXHIBIT H


In re IndyMac Bancorp, Inc., Slip Copy (2012)


KeyCite Yellow Flag - Negative Treatment

Distinguished by In re Vineyard Nat. Bancorp, Bankr.C.D.Cal., May 3,

2013

2012 WL 1037481Only the Westlaw citation is currently available.United States Bankruptcy Court, C.D. California,

Los Angeles Division.

In re INDYMAC BANCORP, INC., Debtor.Alfred H. Siegel, solely as Chapter 7 Trustee ofthe estate of IndyMac Bancorp, Inc., Plaintiff,

v.Federal Deposit Insurance Corporation,

in its capacity as Receiver of IndyMacBank, F.S.B. and as Conservator of

IndyMac Federal Bank, F.S.B., Defendant.

Bankruptcy No. 2:08–bk–21752–BB. | Adversary No. 2:09–ap–01698–BB. | March 29, 2012.


David M. Stern, Lee R. Bogdanoff, Matthew Heyn, WhitmanL. Holt, Robert J. Pfister, Klee, Tuchin, Bogdanoff & SternLLP, Los Angeles, CA, for Plaintiff.

Allan H. Ickowitz, John W. Kim, Nossaman LLP, LosAngeles, CA, for Defendant.

Opinion

REPORT AND RECOMMENDATION OF THEHONORABLE SHERI BLUEBOND, UNITED

STATES BANKRUPTCY JUDGE, TO THEUNITED STATES DISTRICT COURT FOR

THE CENTRAL DISTRICT OF CALIFORNIACONTAINING PROPOSED FINDINGS OF FACT,

CONCLUSIONS OF LAW, AND FINAL JUDGMENTREGARDING COMPETING MOTIONS FOR

SUMMARY JUDGMENT WITH RESPECT TOTHE OWNERSHIP OF CERTAIN TAX REFUNDS

SHERI BLUEBOND, United States Bankruptcy Judge.

*1 This Report and Recommendation is respectfullysubmitted by the undersigned Judge of the United States

Bankruptcy Court for the Central District of California (the“Court”) to the United States District Court for the CentralDistrict of California (the “District Court”) pursuant to 28U.S.C. § 157(c)(1) and Federal Rule of Bankruptcy Procedure9033 based upon the District Court's prior determinationthat the matters addressed herein constitute a “non-coreproceeding.” See Siegel v. FDIC (In re IndyMac BancorpInc.), No. 11–03969–RGK, 2011 WL 2883012, at *5–7(C.D.Cal. July 15, 2011).

As detailed more fully below, the Court hereby recommends(1) that the District Court adopt all of this Court's proposedfindings of fact and conclusions of law; (2) that the DistrictCourt sever, from the balance of the litigation, the claimswhich are the subject of this Report and Recommendation;and (3) that the District Court enter a final judgment infavor of Alfred H. Siegel, Chapter 7 Trustee of the estate ofIndyMac Bancorp, Inc. and plaintiff in this proceeding (the“Trustee”), on those severed claims pursuant to Federal Ruleof Civil Procedure 54(b).

I. PROCEDURAL BACKGROUND

1. On July 31, 2008 (the “Petition Date”), IndyMac Bancorp,Inc. (“Bancorp”) filed a voluntary petition under chapter 7 oftitle 11 of the United States Code (the “Bankruptcy Code”),thereby commencing the bankruptcy case pending before thisCourt as In re IndyMac Bancorp, Inc., Case No. 2:08–bk–21752–BB (Bankr.C.D.Cal.) (the “Bankruptcy Case”). Thefiling of the Bankruptcy Case created a bankruptcy estateunder Bankruptcy Code section 541(a).

2. On August 4, 2008, the Office of the United States Trusteeduly appointed Alfred H. Siegel as the interim Chapter 7Trustee in the Bankruptcy Case. On December 4, 2008, theCourt entered an order duly appointing Mr. Siegel as thepermanent Chapter 7 Trustee in the Bankruptcy Case.

3. On or about November 26, 2008, the Federal DepositInsurance Corporation as Receiver of IndyMac Bank, F.S.B.and as Conservator for IndyMac Federal Bank, F.S.B. (the“FDIC”) filed a proof of claim in the Bankruptcy Case, whichthe Court's clerk assigned claim number 62 (the “FDIC Proofof Claim”). The FDIC Proof of Claim asserts various claimsagainst the Bancorp bankruptcy estate in the FDIC's capacityas Receiver of IndyMac Bank, F.S.B. (the “Bank”) and asConservator for IndyMac Federal Bank, F.S.B. (“FederalBank” and together with the Bank, the “IndyMac Banks”),


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including claims related to the FDIC's purported ownershipof various tax refunds. The parties have stipulated that,subsequent to the filing of the FDIC Proof of Claim, the FDICas Conservator for Federal Bank was replaced by the FDICas Receiver of Federal Bank, and the FDIC in its capacityas Receiver of Federal Bank was substituted for the FDICas Conservator of Federal Bank in this litigation [see DocketNos. 53 & 54]. Accordingly, reference to the “FDIC” in thisReport and Recommendation is to the FDIC both as Receiverof the Bank and as Receiver of Federal Bank.

*2 4. On June 11, 2009, the Trustee filed his Complaint(1) Objecting to FDIC Claim; (2) For Subordination ofFDIC Claim; (3) Counterclaim for Declaratory Relief (the

“Initial Complaint” [Docket No. 1] 1 ) against the FDIC inits capacity as Receiver of the Bank and as Conservator ofFederal Bank, thereby commencing the adversary proceedingpending before this Court as Siegel v. FDIC (In re IndyMac

Bancorp, Inc.), Adversary Proc. No. 2:09–ap–01698–BB(Bankr.C.D.Cal.) (the “Adversary Proceeding”).

5. The Trustee and the FDIC thereafter entered into a series ofconsensual stipulations extending the FDIC's time to respondto the Initial Complaint, which stipulations were approved bythe Court [see Docket Nos. 6, 7, 9, 10, 19, 20, 22, 23, 25 &26].

6. On April 19, 2011, the Trustee filed his FirstAmended Complaint (1) Objecting to FDIC Claim; (2)For Subordination of FDIC Claim; (3) Counterclaim forDeclaratory Relief, which is the operative complaint in theAdversary Proceeding (the “Complaint” [Docket No. 28] ).The Complaint contains five claims for relief, four of whichseek the disallowance or subordination of the FDIC Proofof Claim under provisions of the Bankruptcy Code. Thefifth claim for relief seeks a declaration that the Trustee, asrepresentative of Bancorp's estate, is entitled to receive all taxrefunds resulting from consolidated or combined tax returnsfiled for the years 2000 through 2008 as property of Bancorp'sestate under Bankruptcy Code section 541(a).

7. On April 19, 2011, the Trustee also filed his Motion forSummary Judgment on Plaintiff's Fifth Claim for Relief, or, inthe Alternative, for an Order that Certain Material Facts AreNot Genuinely in Dispute (the “Trustee MSJ” [Docket No.31] ). In support of the Trustee MSJ, the Trustee submitteddeclarations from Benjamin P. Saul and Susan P. Tomlinsonwith certain exhibits thereto [Docket No. 32], as well as astatement of uncontroverted facts [Docket No. 33].

8. Before answering the Complaint or responding to theTrustee MSJ, the FDIC filed a Motion to Bifurcate or Severand Withdraw Reference of Only “Part” of the AdversaryProceeding Related to Tax Refund Claims and Offsets inthe District Court (the “FDIC Withdrawal Motion” [DocketNo. 1 in Civil Case No. 11–03969–RGK] ). The Trusteeopposed the FDIC Withdrawal Motion, and the District Courtultimately denied the motion by order dated July 15, 2011.Siegel v. FDIC, 2011 WL 2883012. In that order, the DistrictCourt (1) rejected the FDIC's arguments for mandatorywithdrawal of the bankruptcy reference, id. at *4–5; (2)concluded that the parties' tax refund “ownership dispute isnon-core,” id. at *6; but (3) declined to permissively withdrawthe reference based upon the efficiencies associated withleaving the tax refund litigation before this Court, including“the knowledge that bankruptcy courts routinely resolve thesetypes of disputes,” id. at *7.

*3 9. On June 2, 2011, the FDIC filed its answer tothe Trustee's Complaint (the “FDIC Answer” [Docket No.38] ) and asserted a counterclaim for declaratory reliefregarding the ownership of certain tax refunds (the “FDICCounterclaim”).

10. On June 3, 2011, the FDIC filed an opposition to theTrustee MSJ [Docket No. 39] and a competing Cross–Motion for Partial Summary Judgment on (A) Count Oneof Counterclaim, (B) Plaintif's Fifth Claim for Relief, and(C) Offset Rights for Tax Refunds and Liabilities Asserted inParagraphs 64, 65 and 66 of Plaintiff's First Claim, or foran Order that Certain Materials Facts Are Not in Dispute(the “FDIC MSJ” [Docket No. 41 ] ). In support of these twopleadings, the FDIC submitted certain additional materials,including a declaration from Brent H. Frost (the “FrostDeclaration” [Docket No. 43] ), a declaration from JamesA. Thormahlen (the “Thormahlen Declaration” [Docket No.44] ), a declaration from John W. Kim [Docket No. 45],a statement of uncontroverted facts in support of the FDICMSJ [Docket No. 46], and a separate statement of supposedlygenuine issues and uncontroverted facts in support of itsopposition to the Trustee's statement of uncontroverted factsand the Trustee MSJ [Docket No. 40].

11. From and after June 3, 2011, the Court was effectivelyfaced with two “dueling” motions for summary judgmentregarding the tax refunds, which the Court viewed asadvocating opposite sides of the same coin. Other bankruptcycourts have considered and resolved very similar litigation






arising in a very similar procedural posture. See, e.g.,BankUnited Fin. Corp. v. FDIC (In re BankUnited Fin.Corp.) (“BankUnited”), 462 B.R. 885 (Bankr.S.D.Fla.2011)(opinion resolving cross-motions for summary judgmentregarding whether certain tax refunds were property of adebtor-parent's bankruptcy estate or property of the FDIC asreceiver); Zucker v. FDIC (In re NetBank, Inc.) (“NetBank”),459 B.R. 801 (Bankr.M.D.Fla.2010) (same).

12. to a stipulated briefing schedule, both parties thereafterfiled further briefs and declarations in support of andin opposition to their respective cross-motions. Morespecifically,

• On November 15, 2011, the Trustee filed, inter alia,(1) an opposition to the FDIC MSJ [Docket No. 59],(2) a supplemental declaration of Susan P. Tomlinsonwith certain exhibits thereto (the “First SupplementalTomlinson Declaration” [Docket No. 62] ), and (3)evidentiary objections to the Frost Declaration [DocketNo. 63].

• On December 6, 2011, the parties filed a Joint NoticePursuant to LBR 7030–1(b)(4), attaching certain marked

deposition transcripts [Docket No. 67]. 2

• On December 6, 2011, the Trustee filed, inter alia, a replybrief in further support of the Trustee MSJ [Docket No.68].

• On December 6, 2011, the FDIC filed, interalia, (1) a reply brief in further support of theFDIC MSJ [Docket No. 72], (2) a declarationof William Lesse Castleberry (the “CastleberryDeclaration” [Docket No. 73] ), (3) a declarationof Stephan H. Wasserman (the “WassermanDeclaration” [Docket No. 74] ), (4) a responseto the Trustee's evidentiary objections to theFrost Declaration [Docket No. 75], (5) evidentiaryobjections to the First Supplemental TomlinsonDeclaration [Docket No. 76], (6) a reply to theTrustee's response to the FDIC MSJ under LocalBankruptcy Rule 7056–1(c)(2) [Docket No. 77],and (7) a supplemental declaration of John W. Kim[Docket No. 79].

*4 • On December 8, 2011, the Trusteefiled evidentiary objections to the Castleberry

Declaration and to the Wasserman Declaration[Docket No. 81].

• On December 9, 2011, the Trustee fileda second supplemental declaration of SusanP. Tomlinson, which made one correction toparagraph 6 of the First Supplemental TomlinsonDeclaration (the “Second Supplemental TomlinsonDeclaration” [Docket No. 82] ).

• On December 12, 2011, the FDIC filed a responseto the Trustee's evidentiary objections to theCastleberry Declaration and to the WassermanDeclaration, which included another declaration ofJohn W. Kim [Docket No. 83].

13. On December 13, 2011, the Court heard oral argumentfrom the parties regarding their cross-motions for summaryjudgment and evidentiary objections, making certain oralrulings [see Docket No. 84 (transcript of December 13hearing) ]. After this hearing, the Court continued thehearing to January 24, 2012 and ordered the parties to filesimultaneous supplemental briefs regarding the legal effect,if any, of the deemed rejection of an executory contract on theparties' tax refund ownership dispute.

14. The Trustee and the FDIC filed their respectivesupplemental briefs on January 13, 2012 [Docket Nos. 85& 88]. Thereafter, the Trustee moved for leave to file ashort written response to what the Trustee interpreted as anew argument in the FDIC's supplemental brief [Docket No.89]. The Court granted this motion via an order entered onJanuary 18, 2012 [Docket No. 91], and afforded each side theopportunity to file one additional supplemental reply brief.The Trustee and the FDIC each filed an additional brief[Docket Nos. 92 & 93].

15. The Court held a further hearing regarding the cross-motions on January 24, 2012 [see Docket No. 97 (transcriptof January 24 hearing) ]. After the hearing, the Court ruledfrom the bench that the Court would recommend grantingthe Trustee MSJ and denying the FDIC MSJ. The Courtthen set a further hearing for February 29, 2012, in orderto allow the parties to address certain procedural issuesregarding transmission of this Report and Recommendationto the District Court, along with any objection and responsepursuant to Federal Rule of Bankruptcy Procedure 9033.Pursuant to a stipulation between the parties and the Court'sorder approving the stipulation [Docket Nos. 98 & 99],this hearing was continued to March 13, 2012, the partiesjointly agreed that it was appropriate to include the proposed









entry of a final order under Rule 54(b) in this Report andRecommendation, and a briefing schedule was set for theFDIC's objection and the Trustee's response under FederalRule of Bankruptcy Procedure 9033(b).

16. Prior to the continued hearing and on the schedule set forthin their stipulation, the parties submitted briefing regardingthe form of a report and recommendation, which includedcompeting proposed forms submitted by the FDIC and theTrustee [Docket Nos. 102–103 & 105]. At the March 13,2012 hearing, the Court allowed the parties to present oralargument regarding the competing forms. Based upon thatargument, the Court indicated that certain changes should bemade. The Court had explicit instructions with respect to aportion of the form of a report and recommendation throughparagraph 53. The Court further indicated that it wouldreview and make revisions to the balance of the proposedreport sua sponte as it deemed appropriate. Thereafter, theCourt requested the Trustee to submit a revised report andrecommendation consistent with the Court's determinationsat the hearing through paragraph 53 of the proposed report,which the Trustee did. The Court further reviewed the revisedreport and recommendation and made additional changes inthe process of preparing the final form of the Court's Reportand Recommendation. Except to the extent incorporatedherein, all objections concerning the form of this Report andRecommendation have been overruled.

*5 17. The Court has devoted substantial resources to fullyevaluating the respective positions of the Trustee and theFDIC. The Court permitted two extra rounds of briefing, sothat each side was ultimately allowed to file five separatemerits briefs. Similarly, the Court scheduled and held twolengthy hearings to allow counsel for each side a full and fairopportunity to advance all relevant arguments. As such, theCourt believes that it has a robust foundation upon which topropose findings and conclusions to the District Court.

18. Pursuant to 28 U.S.C. § 157(c)(1) and FederalRule of Bankruptcy Procedure 9033, this Report andRecommendation is intended to provide proposed findingsof fact and conclusions of law for the District Court, alongwith this Court's ultimate recommendation regarding howthe District Court should dispose of the tax refund-relatedportions of this Adversary Proceeding.

II. JURISDICTION AND VENUE

19. Pursuant to 28 U.S.C. § 1334(b), Congress vestedjurisdiction over this Adversary Proceeding in the DistrictCourt. Under 28 U.S.C. § 157(a), Local Bankruptcy Rule5011–1(a), and District Court General Order No. 266, thisCourt may exercise jurisdiction over all aspects of thisAdversary Proceeding. Because the District Court determinedthat the tax refund-related aspects of this AdversaryProceeding are “non-core,” this Court cannot enter a finaljudgment on those aspects of the case. See Stern v. Marshall,564 U.S. ––––, 131 S.Ct. 2594, 2596, 180 L.Ed.2d 475(2011); Siegel v. FDIC, 2011 WL 2883012, at *5. Instead,absent consent of all parties to the proceeding under 28 U.S.C.§ 157(c)(2), this Court's must prepare proposed findings offact and conclusions of law for the District Court's reviewunder the framework established by 28 U.S.C. § 157(c)(1) andFederal Rule of Bankruptcy Procedure 9033. The FDIC willnot consent to this Court's entry of a final judgment regardingthe tax refunds. See Dec. 13, 2011 Hr'g Tr. at 14:9–14. ThisReport and Recommendation must therefore be submitted tothe District Court, and the District Court must enter an orderconsistent with the District Court's rejection, acceptance,or modification of the Report and Recommendation underFederal Rule of Bankruptcy Procedure 9033(d).

20. Because the Bankruptcy Case is pending in the CentralDistrict of California, venue of the Adversary Proceeding inthis Court and in the District Court is proper pursuant to 28U.S.C. § 1409(a).

III. PROPOSED FINDINGS OF FACT

21. Despite the volume of material before the Court, the Courtdoes not believe it necessary to make a large number offactual findings in order to dispose of the Trustee MSJ andthe FDIC MSJ. Rather, upon the Court's extensive review andconsideration of the legal briefing, declarations, documents,and other materials before it, the Court has determined thatthere is no genuine dispute as to the following propositions offact that are actually material to the resolution of the matters

addressed herein as a matter of law . 3

*6 22. At all times material to this Adversary Proceeding,Bancorp was the ultimate holding company for the Bank.Specifically, Bancorp held the stock of IndyMac IntermediateHoldings, Inc., which in turn held the Bank's stock. [SeeDocket No. 40 at p. 1 ¶ 1.]








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23. Effective as of February 6, 2003, Bancorp and theBank entered into the Amended and Restated Tax SharingAgreement (the “TSA” [Docket No. 32 Ex. 4] ). [See DocketNo. 40 at p. 1 ¶ 2.] The TSA is a critical document forpurposes of assessing the respective rights and obligations ofBancorp and the Bank with respect to any tax refunds.

24. Bancorp was the “common parent” of an “affiliatedgroup” of corporations that the Internal Revenue Code allowsto file a single consolidated income tax return. 26 U.S.C.§§ 1501 & 1504(a). The Department of the Treasury haspromulgated certain regulations to address the filing of suchconsolidated returns, which, generally allow payment ofrefunds to the parent on behalf of the consolidated group. Taxregulations concerning the payment of refunds to a holdingcompany (or any other entity) are not determinative of theultimate ownership of such refunds. See, e.g., 26 C.F.R. §301.6402–7(j).

25. The TSA operates against the backdrop of tax rules thatcontemplate that Bancorp will file consolidated tax returnsand directly receive payment of all tax refunds. It is a contractthat sets forth rights and obligations to which all members ofthe consolidated group, including the Bank, are bound. SeeTSA § 6.

26. Consistent with its position as common parent, and priorto the Petition Date, Bancorp filed federal, state, and localconsolidated or combined tax returns on behalf of itself andits subsidiaries, including the Bank, for the 2000, 2001, 2002,2003, 2004, 2005, and 2006 tax years. [See Docket No. 40 atp. 1 ¶ 3 & Docket No. 32 Exs. 9–13 & 24–27.]

27. The Bank was a financial institution regulated by theformer Office of Thrift Supervision (the “OTS”). On July 11,2008, the OTS closed the Bank and appointed the FDIC to bethe receiver for the Bank. [See Docket No. 40 at p. 1 ¶ 2.]

28. On July 11, 2008, Federal Bank, was formed as a newlychartered banking institution, and the OTS appointed theFDIC conservator of Federal Bank. On March 19, 2009, theOTS closed Federal Bank and appointed the FDIC receiverof Federal Bank.

29. As receiver and/or conservator of the IndyMac Banks, theFDIC succeeded to “all rights, titles, powers, and privilegesof the insured depository institution, ... and the assets of theinstitution.” 12 U.S.C. § 1821(d)(2)(A)(i).

30. As receiver and/or conservator of the IndyMac Banks, theFDIC is charged with preserving and conserving the assetsand property of the failed institution. Id. § 1821(d)(2)(B)(iv).

31. As discussed above, the Petition Date occurred on July31, 2008, and the Trustee was subsequently appointed theChapter 7 Trustee for Bancorp's bankruptcy estate.

*7 32. The Trustee filed, on behalf of Bancorp and itssubsidiaries, including the Bank, a 2007 consolidated federaltax return on September 15, 2008. The Trustee also filed anapplication for a tentative refund for the 2005 tax year asa result of carrying the consolidated net operating loss (or“NOL” and “NOLs” in plural form) reported on the 2007consolidated federal tax return back to the 2005 tax year. [SeeDocket No. 32 Exs. 9 & 16–18.]

33. The Trustee filed, on behalf of Bancorp andits subsidiaries, including the IndyMac Banks, a 2008consolidated federal tax return on or around September 15,2009, and an amended 2008 return on or around September13, 2010. Then, on or around January 27, 2011, the Trusteefiled, on behalf of Bancorp and its subsidiaries, including theBank, amended consolidated federal tax returns for tax years2003, 2004, and 2005 carrying the NOL reported on the 2008consolidated federal tax return back to offset tax liabilitiesin the 2003, 2004, and 2005 tax years. [See Docket No. 32Exs. 19–23.] The carryback of the 2008 NOL to prior yearsallowed the Trustee to apply for and obtain refunds on accountof taxes paid in those prior years.

34. The Trustee and the FDIC entered into two stipulations,both of which were approved by the Court, that establisheda joint, interest-bearing account at Citibank, N.A. (the “JointAccount”) into which all tax refunds could be deposited—without prejudice to either party's position regarding theownership of such refunds—pending litigation or settlementof the parties' ownership dispute. [See Docket Nos. 363, 364,444 & 447 in the Bankruptcy Case.]

35. The parties are in agreement that, as of November 15,2011, the following funds generated from the followingsources, paid by the relevant taxing authorities after the filingof Bancorp's bankruptcy petition, and based upon tax returns,amendments, and refund claims submitted by the Trusteeafter the filing of Bancorp's bankruptcy petition, were ondeposit in the Joint Account:

Source of Funds Amount of Funds





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Carryback of consolidated NOLs for the 2007tax year as adjusted by IRS audits (2004–2005),including interest thereon (federal)

$11,475,520.16

Carryback of consolidated NOLs for the 2008 taxyear, including interest thereon (federal)

$40,695,712.07

Interest, penalty, payroll, audit, and otheradjustments to prior tax years, 2003–2008 (federal)

$2,821,826.71

Misc. refunds received from state taxing authorities

$74,312.51

Interest accrued on funds deposited in the JointAccount through October 31, 2011

$38,282.82

TOTAL

$55,105,654.27

[See First Supplemental Tomlinson Declaration ¶ 9; DocketNo. 88 Ex. B.]36. The total refund amount set forth above will continueto increase as (1) interest continues to accrue monthly onthe Joint Account, and (2) additional, smaller, miscellaneoustax refunds may be received. These funds represent the taxrefunds that are the subject of the ownership dispute at theheart of the parties' cross-motions and this Court's Report andRecommendation.

IV. EVIDENTIARY RULINGS

*8 37. Before setting forth the Court's legal analysisregarding the ownership dispute, the Court first addressescertain evidentiary objections filed by the Trustee or by theFDIC.

A. The Frost Declaration [Docket No. 43]38. Mr. Frost is the former tax director of Bancorp and theBank. The FDIC proffered the Frost Declaration in an effortto (a) elaborate on the purported unwritten intent of the partiesin executing the TSA, (b) describe how the refunds related toNOLs were generated, and (c) provide Mr. Frost's opinionsabout how such refunds would have been allocated under theTSA. The Trustee objected to admission of this declarationon two grounds: (1) the Frost Declaration is parol evidencethat is not relevant to the interpretation of the TSA, and thusis inadmissible under Federal Rules of Evidence 401 and

402 4 ; and (2) testimony adduced at Mr. Frost's depositiondemonstrates that Mr. Frost lacks personal knowledge of

certain matters in the Frost Declaration, which makes suchtestimony inadmissible under Federal Rule of Civil Procedure56(c)(4) and Federal Rule of Evidence 602.

39. The Court agrees with the Trustee's first argument andhas determined not to admit the Frost Declaration becauseit is irrelevant parol evidence in light of the unambiguouswritten TSA. Given the unambiguous nature of the TSA,extrinsic or parol evidence is not relevant to its interpretationunder California law (which governs the TSA per its Section7(b)). See generally Winet v. Price, 4 Cal.App.4th 1159, 6Cal.Rptr.2d 554, 557 n. 3 (Ct.App.1992).

40. The Court's initial review of the Frost Declarationand other pertinent extrinsic evidence did not expose anyambiguity in the TSA that warranted clarification via theadmission or use of parol evidence. See generally Pac. Gas& Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69Cal.2d 33, 37, 69 Cal.Rptr. 561, 442 P.2d 641, 644 (1968).Thus, after considering all the materials before it, the Courthas concluded that the TSA is not ambiguous, either on itsface (i.e., “patent” ambiguity) or following a preliminaryreference to the pertinent extrinsic evidence (i.e., “latent”ambiguity). There is no reason to look to what the partiesintended beyond the four-corners of their written contract.As a consequence, the Frost Declaration is inadmissible. See,e.g., ASP Props. Grp., L.P. v. Fard, Inc., 133 Cal.App.4th1257, 35 Cal.Rptr.3d 343, 349 (Ct .App.2005); Chaknova v.Wilbur–Ellis Co., 69 Cal.App.4th 962, 81 Cal.Rptr.2d 871,875 (Ct.App.1999).

41. The Frost Declaration is comparable to the declarationof Dennis Brown described in a recent California Court of


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Appeals decision. Like Mr. Frost, Mr. Brown's declarationpurported to testify about what the parties' “intent” reallywas. See Lonely Maiden Prods., LLC v. GoldenTree AssetMgmt., LP (“Lonely Maiden”), 201 Cal.App.4th 368, 135Cal.Rptr.3d 69, 83 (Ct.App.2011). The California courtsrefused to consider this sort of declaration for a numberof reasons, and the appellate court noted that, even if thecourt did consider Mr. Brown's statements, “it would bepointless because Brown failed to offer evidence of anexternal manifestation of intention.” Id. The Frost Declarationis inadmissible for the same reasons. The Court will interpretthe TSA based upon the plain text that the parties chose touse at the time the document was executed, not based uponextrinsic testimony offered many years after the fact.

*9 42. It is particularly appropriate to exclude the FrostDeclaration in light of the FDIC's repeated urging to theCourt that the TSA is unambiguous. Both the Trustee andthe FDIC took the position in multiple briefs that the TSA'sterms are plain and that this dispute can be resolved based

upon the text within the four-corners of this contract. 5 Inattempting to address the inconsistency between its positionthat the TSA is unambiguous and its submission of the FrostDeclaration, the FDIC argued that some ambiguity mustexist because the Trustee and the FDIC interpret the TSA inopposing fashions. The case law is clear, however, that mereinconsistent interpretations of a contract by two litigants doesnot mean a contract is ambiguous, but rather likely meansthat one of the parties is advancing a flawed interpretation.See, e.g ., FDIC v. W.R. Grace & Co., 877 F.2d 614, 621(7th Cir.1989); PG & E v. FERC, 746 F.2d 1383, 1387 (9thCir.1984). Accord Bank of Am. Nat'l Trust & Sav. Ass'nv. 203 N. LaSalle St. P'ship, 526 U.S. 434, 461, 119 S.Ct.1411, 143 L.Ed.2d 607 (1999). In the common fact-patternwhere even though “both parties contend that the agreementis unambiguous, each contends for an interpretation favorableto its own position,” it falls to the Court to determine whois right based upon the words used in the contract. See,e.g., Seymour v. Coughlin Co., 609 F.2d 346, 349–50 (9thCir.1979). Because the Court concludes the TSA is in factunambiguous and subject to interpretation based upon itsplain text, the Court has not relied upon any of the extrinsicor parol evidence offered by either side to this litigation inperforming its interpretive task.

B. The Castleberry Declaration [Docket No. 73]43. Mr. Castleberry is a tax partner at the law firm ofCooley LLP. As with the Frost Declaration, the FDIC

proffered the Castleberry Declaration to assist the Court ininterpreting the TSA, even though Mr. Castleberry is a non-percipient witness with no personal experience related toIndyMac prior to this litigation. The Trustee objected toadmission of this declaration on several grounds: (1) it isimproper new evidence submitted via reply briefing; (2) itis legal opinion that is irrelevant and inadmissible underFederal Rules of Evidence 401, 402, and 702; (3) it isputative “expert” testimony that failed to apply a reliablemethodology as required by Federal Rule of Evidence 702and the Supreme Court's decisions in Daubert v. Merrell DowPharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125L.Ed.2d 469 (1993), and Kumho Tire Co. v. Carmichael,526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999);and (4) it is parol evidence that is not relevant to theinterpretation of the TSA, and thus is inadmissible underFederal Rules of Evidence 401 and 402. The FDIC arguedthat Mr. Castleberry has personal knowledge of other taxsharing agreements between parent companies and their bankor thrift subsidiaries. The FDIC further suggested that Mr.Castleberry was an “expert” on the drafting and interpretationof agreements such as the TSA and that he was opining on“factual” matters—namely, how the TSA should be appliedand what the parties intended based upon his purportedexperience and the language in the agreement. According tothe FDIC, the Castleberry Declaration is admissible underFederal Rule of Evidence 704(a), which provides that “[a]nopinion is not objectionable just because it embraces anultimate issue.”

*10 44. The Court sustained the Trustee's objection anddeclined to admit the Castleberry Declaration into evidence.As explained above, the TSA is not ambiguous, and thus parolevidence such as the Castleberry Declaration is not relevantto its interpretation. Moreover, opinion or “expert” testimonyabout legal issues is not admissible evidence. Crow Tribe ofIndians v. Racicot, 87 F.3d 1039, 1045 (9th Cir.1996). Accord

United States v. McIver, 470 F.3d 550, 561–62 (4th Cir.2006);Dow Corning Corp. v. Safety Nat'l Cas. Corp., 335 F.3d742, 751–52 (8th Cir.2003); Owen v. Kerr–McGee Corp., 698F.2d 236, 240 (5th Cir.1983). Because the interpretation of acontract such as the TSA is a legal issue for the Court, Mr.Castleberry's testimony would be inadmissible as evidenceeven if the Court believed the TSA is ambiguous (which theCourt does not). See, e.g., CMI–Trading, Inc. v. Quantum Air,Inc. ., 98 F.3d 887, 890 (6th Cir.1996); Marx & Co. v. Diners'Club, Inc., 550 F.2d 505, 508–10 (2d Cir.1977).

C. The Wasserman Declaration [Docket No. 74]







































45. Mr. Wasserman is a non-percipient accountant who wasretained by the FDIC to summarize certain prior tax filings,opine about which entity supposedly generated some or allof the NOLs that were carried back to obtain the tax refunds,and otherwise try to explain certain information for theCourt. The Trustee objected to admission of this declaration,arguing that (1) it was improper new evidence submitted viareply briefing; and (2) nothing in the Wasserman Declarationultimately has any bearing on the resolution of this dispute,thus the Wasserman Declaration is irrelevant. The FDICargued that the Wasserman Declaration is admissible basedupon certain documents and tax records and was proper asa reply to the First Supplemental Tomlinson Declarationsubmitted by the Trustee.

46. The Court sustained the Trustee's objection and declinedto admit the Wasserman Declaration into evidence becausethe Court concluded it is not relevant.

D. The First Supplemental Tomlinson Declaration[Docket No. 62]47. Ms. Tomlinson is a partner at the accounting firm thathas been retained to assist the Trustee in his administration ofthe Bancorp estate. Ms. Tomlinson submitted three differentdeclarations in this litigation. The FDIC did not object to thefirst or third Tomlinson declarations, but did object to partsof the First Supplemental Tomlinson Declaration.

48. Specifically, the FDIC argued that paragraph 6 ofthe First Supplemental Tomlinson Declaration was flawedbecause it improperly described the nature of the 2008consolidated NOL. Although the Court does not believe thatthe quantification or specific attribution of the consolidatedNOL is material to the resolution of this dispute, Ms.Tomlinson's admitted error was subsequently corrected by theSecond Supplemental Tomlinson Declaration, to which theFDIC filed no objection. As such, the Court believes this issuehas been resolved.

*11 49. The FDIC also argued that the First SupplementalTomlinson Declaration improperly described and failed toauthenticate documents that were attached to the declarationas Exhibits “N”, “O” and “P”. These documents all relate tohow Bancorp and the Bank handled a tax refund that was paidto Bancorp in late 2007, before the failure of the Bank andBancorp's bankruptcy petition, which supported argumentsthat the Trustee made in opposition to the FDIC MSJ. Inlight of the Court's conclusion that the TSA is unambiguous,the Court ultimately did not rely upon evidence or argument

about how this prebankruptcy 2007 tax refund was addressed.Nevertheless, the Court overruled the FDIC's authenticationobjection. In many bankruptcy cases, particularly chapter 7cases in which a trustee is appointed, it is difficult if notimpossible to locate the individuals who were involved withparticular documents or transactions prior to the filing of thebankruptcy case. In such circumstances, the Court considersit appropriate to analyze the authenticity of documents basedupon the best resources actually available to the trustee. Here,the Court does not have reason to doubt—and the FDIC neveroffered any—that the documents attached to Ms. Tomlinson'sdeclaration are what they purport to be, which is certainbanking statements and records that were maintained in theordinary course of Bancorp's business and now are in theTrustee's possession. Therefore, the Court concludes that theTrustee may appropriately rely upon the documents attachedto the First Supplemental Tomlinson Declaration.

V. PROPOSED CONCLUSIONSOF LAW AND ANALYSIS

50. Both the Trustee and the FDIC seek summary judgment,which is appropriate if there is no genuine dispute as to anymaterial fact and the moving party “is entitled to judgmentas a matter of law.” Fed.R.Civ.P. 56(a) (made applicablehere by Fed. R. Bankr.P. 7056). A dispute is “genuine” only“if the evidence is such that a reasonable [finder of fact]could return a verdict for the nonmoving party.” Andersonv. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,91 L.Ed.2d 202 (1986). The only facts that are “material”for these purposes are those that “might affect the outcomeof the suit under the governing law.... Factual disputes thatare irrelevant or unnecessary will not [preclude summaryjudgment].” Id.

51. The Court concludes that there is no genuine disputeof material fact and that the Trustee is entitled to judgmentas a matter of law regarding the status of the tax refunds

as property of the Bancorp estate. 6 As detailed below, thisconclusion flows from the terms of the TSA, the applicationof principles of California law in light of those terms, and theinterface of the result under California law with black letterconcepts of federal bankruptcy law.

A. A Bankruptcy Filing Creates An Estate ThatEncompasses A Very Broad And Expansive Set Of









Property Interests, Including Contingent And FutureInterests*12 52. When Bancorp filed a chapter 7 petition on July

31, 2008, a bankruptcy estate was created to hold “all legalor equitable interests of [Bancorp] in property as of thecommencement of the case.” 11 U.S.C. § 541(a)(1) (emphasisadded). The emphasized temporal phrase sets a “date ofcleavage” and establishes the moment at which the parties'respective rights in property must be determined. See, e.g., Inre Peterson, 106 B.R. 229, 230 (Bankr.D.Mont.1989); In rePalmer, 57 B.R. 332, 333–34 (Bankr.W.D.Va.1986). This isa longstanding and fundamental rule of bankruptcy law. SeeEverett v. Judson, 228 U.S. 474, 479, 33 S.Ct. 568, 57 L.Ed.927 (1913).

53. The scope of an estate's property interests is broad. E.g.,United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103S.Ct. 2309, 76 L.Ed.2d 515 (1983); In re Central Ark. Broad.Co., 68 F.3d 213, 214 (8th Cir.1995). Estate property includesall of a debtor's rights and expectancies and is a concept that“has been construed most generously and an interest is notoutside its reach because it is novel or contingent or becauseenjoyment must be postponed.” Segal v. Rochelle, 382 U.S.375, 379, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966); see also, e.g.,11 U.S.C. § 541(c)(1)(A) (providing that assets become estateproperty notwithstanding any provision of nonbankruptcylaw that would prevent their being liquidated or transferredby the debtor); H.R. REP. No. 95–595, at 175–76 (1977),reprinted in 1978 U.S.C.C.A.N. 5963, 6136 (making clearthat “property of the estate” includes all “contingent interestsand future interests, whether or not transferable by thedebtor”).

54. Case law further confirms that “[a] debtor's contingentinterest in future income has consistently been found tobe property of the bankruptcy estate,” because “everyconceivable interest of the debtor, future, nonpossessory,contingent, speculative, and derivative, is within the reachof § 541.” In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993).Indeed, there is a series of decisions by the Ninth CircuitCourt of Appeals finding that future rights or expectancies,including those related to future tax refunds and tax attributes,based on prepetition activities are within the expansive scopeof bankruptcy estate property. See United States v. Sims (Inre Feiler) (“Feiler”), 218 F.3d 948, 955–56 (9th Cir.2000);Neuton v. Danning (In re Neuton), 922 F.2d 1379, 1382–83 (9th Cir.1990); Rau v. Ryerson (In re Ryerson), 739 F.2d1423, 1424–26 (9th Cir.1984).

55. In addition to broadly defining property of the estate inthe first instance, the Bankruptcy Code also provides that, asa matter of federal law, a debtor's bankruptcy estate includesall “[p]roceeds, product, offspring, rents, or profits of or fromproperty of the estate.” 11 U.S.C. § 541(a)(6).

56. The central question on which the Trustee and the FDICdisagree is whether the tax refunds at issue are amongthe property interests that passed into Bancorp's bankruptcyestate on July 31, 2008. The first step to answering thatquestion lies in the provisions of the TSA that Bancorp and theBank executed many years before the filing of any bankruptcycase.

B. Under A Well Established Body Of Case Law, TheRelationship Between Bancorp And The Bank Was OneOf Debtor And Creditor Under California Law, WhichMeans All The Refunds Are Now Property Of Bancorp'sEstate*13 57. In analyzing the nature of the prebankruptcy rights,

obligations, and relationships arising under the TSA, theCourt has found guidance in two categories of authority.First, the Court has looked to a set of cases involving thevery issue presented here: a dispute about the ownership oftax refunds in bankruptcy when a prebankruptcy tax sharing

agreement existed. 7 Second, the Court has looked to aseparate set of cases involving the interpretation of parties'legal relationships—both inside and outside of bankruptcy—

under California law. 8 These central authorities, along withother cases involving analogous disputes, coalesce around aset of consistent and well developed legal principles. Whenthe TSA is examined against this core set of principles, itbecomes clear that the TSA established a debtor-creditorrelationship between Bancorp and the Bank regarding futuretax refunds, meaning that Bancorp owned the refunds inquestion and was obligated to make payments to the Bankpursuant to the terms of the TSA. The Bank held a right topayment against Bancorp for amounts that might or mightnot correspond with the amount of any refund received byBancorp. The reasoning supporting the Court's conclusion,the rationales for distinguishing the FDIC's two citedauthorities, and the consequences of the Court's conclusionvis-à-vis the respective rights of the Trustee and the FDIC inthe Bankruptcy Case are developed below.


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1. Analysis Of The TSA's Terms Reveals A Debtor–Creditor Relationship And Forecloses The Existence OfAny Other Relationship58. The Court's analysis of the applicable case law indicatesthat three key factors are examined when considering whethera particular document or transaction establishes a debtor-creditor relationship, on the one hand, or a different sortof relationship (such as a trust, mere agency, or bailmentrelationship), on the other hand. Individually, each of thesefactors weighs in favor of the conclusion that the TSAestablishes a debtor-creditor relationship; collectively, the

factors provide strong support for that conclusion. 9 Asexplained above, the Court finds that the intention of theparties can be determined from the TSA itself and that thereis no ambiguity which requires parol or extrinsic evidence todiscern the parties' intentions.

a. The TSA Creates Fungible Payment ObligationsUnrelated To Any Refunds59. Other courts have repeatedly found that the use of suchterms as “reimbursement” or “payment” in a tax sharingagreement evidences a debtor-creditor relationship. E.g.,BankUnited, 462 B.R. at 900; NetBank, 459 B.R. at 814–15; Team Financial, 2010 WL 1730681, at *10–11; FirstCentral, 269 B.R. at 497–98; Franklin Savings, 159 B.R. at29. The reason is that such terms create “ordinary contractualobligations” or “an account, a debtor-creditor relationship,which is the quintessential business of bankruptcy.” MCorp,170 B.R. at 902; First Central, 269 B.R. at 498. This preceptfully accords with the Ninth Circuit's application of Californialaw in the bankruptcy context to “conclude that as a matterof law a debtor-creditor relationship” exists when the parties'prepetition agreements create fungible payment obligations.

Coupon Clearing, 113 F.3d at 1101–02. 10

*14 60. Here, Sections 2, 3, and 4 of the TSA create a systemof intercompany “payments” and “reimbursements” that maydiffer materially from the amount of any tax refunds actuallyreceived by Bancorp.

61. Bancorp is responsible under the TSA to pay all of theconsolidated group's tax liability. TSA § 2. Each subsidiaryof Bancorp, including the Bank, is required to pay to Bancorpthe amount of its hypothetical separate tax liability, calculatedas if it had filed a separate federal or state income taxreturn. Id. The TSA expressly authorizes Bancorp, in its “solediscretion,” to determine whether any tax refunds to which

the consolidated group is entitled will be paid or creditedagainst future tax liabilities of the consolidated group. TSA §5. Any payment of refunds is made directly to Bancorp andin Bancorp's name. See 26 C.F.R. § 1.1 502–77(a)(2)(v).

62. The TSA also provides for “payment” or“reimbursement” from Bancorp to the Bank under certainconditions if the Bank suffers losses that would have entitledit to a refund had it filed separate tax returns. In the case ofthe Bank having current losses, the TSA states that Bancorp“shall reimburse” the Bank for the Bank's current losses, butonly in “an amount equal to the amount the Bank Groupwould have received had it carried back the current lossesagainst the Bank Group's separate taxable income in prioryears.” TSA § 3. In the case of subsequent adjustments toincome, gains, losses, deductions, or credits, the TSA requires“payment” by Bancorp to the Bank if the adjustment wouldhave resulted in a smaller hypothetical separate tax liabilityfor the Bank. TSA § 4(a). In both cases, “reimbursement” or“payment” is to be made no later than within 15 business days(i.e., three weeks or more) after Bancorp actually receives atax refund from the taxing authority. TSA §§ 3 & 4(a).

63. The terms “reimbursement” and “payment” are indicativeof a debtor-creditor relationship and, in comparison, arecompletely inconsistent with the existence of a trust or agencyrelationship. See, e.g., Team Financial, 2010 WL 1730681, at*10–11; First Central, 269 B.R. at 495–98; Franklin Savings,182 B.R. at 863. Nothing in the TSA ever suggests thatthe Bank has a direct interest in any refunds, as opposedto the right to receive a generalized payment of moneyfrom Bancorp. Indeed, the prefatory paragraph regardingthe “intent” of the TSA provides that the Bank should“make and receive payments as if it were filing income taxreturns separate from and excluding [Bancorp]” (emphasisadded). This right to receive fungible “payments” using aformula calculated as if the Bank were a separate tax filer ismeaningfully different from the right to receive any specificrefunds upon receipt.

64. Contrary to an argument made by the FDIC, the useof the terms “reimbursement” and “payment” in the TSA isnot limited to an isolated occurrence. “Reimbursement” isused three times in Section 3 alone, and the terms “payment”or “shall pay” appear numerous times throughout the entireTSA, including in the initial paragraph about the parties'intent. The Court believes that this consistent, repeated useof these key terms and the overall system of intercompany“payments” or “reimbursements” established by the TSA





















strongly evidence the parties' creation of a debtor-creditor

relationship. 11 Such terms are substantively meaningfulindicia of the legal relationship created by agreement amongthe parties. The Court agrees with the Trustee that a series ofdecisions extending from 1993 through the present that citethe terms “reimbursement” and “payment” as indicative of adebtor-creditor relationship are correctly decided.

*15 65. The Court finds it particularly telling that theamount due from Bancorp to the Bank under the TSA maybe significantly different from the amount of any refundsreceived and may even be due when no refunds are paid toBancorp. This is similar to the requirements of the agreementsin the NetBank and First Central cases, which also providedthat the subsidiary will be paid amounts equal to what thesubsidiary would have received if it hypothetically were astandalone tax filer. See NetBank, 459 B.R. at 814–15; FirstCentral, 269 B.R. at 496. Logically, this construct defeatsthe FDIC's suggestion that the Bank ever had direct propertyrights in tax refunds. Instead, what the Bank held was acontractual claim against Bancorp that may or may not beowing at the same time that Bancorp receives refunds andlikely will be owing in an amount different from any refundsreceived. This relationship sits at the heart of the TSA and fitswithin the debtor-creditor paradigm.

b. The TSA Contains No Escrow, SegregationRequirement, Or Use Restrictions On Refunds ThatBancorp Receives66. Other courts have repeatedly found that the lack ofprovisions requiring the parent to segregate or escrow anytax refunds and the lack of restrictions on the parent's use ofthe funds while in the parent's possession further evidencesa debtor-creditor relationship. See, e.g., NetBank, 459 B.R.at 812–14; Team Financial, 2010 WL 1730681, at *11; FirstCentral, 269 B.R. at 496; Franklin Savings, 182 B.R. at 863.Once again, controlling Ninth Circuit authority involvingother types of contracts is in accord. See Coupon Clearing,113 F.3d at 1101–02; In re B.I. Fin. Servs. Grp., 854 F.2dat 354–55. So too are decisions by California's state courts.See Lonely Maiden, 135 Cal.Rptr.3d at 78–82; Del Costellov. State of California, 185 Cal.Rptr. at 585–87; Tyler v.State of California, 185 Cal.Rptr. at 51–52; Petherbridge,145 Cal.Rptr. at 92 & 97–98. In fact, the notion that adebtor-creditor relationship exists when, prior to bankruptcy,commingling or unrestrained use of funds by the debtor waspossible is one that has been applied for decades and inthe context of many different sorts of business relationships.

See, e.g., Pan Am. World Airways, Inc. v. Shulman Transp.Enters., Inc. (In re Shulman Trans. Enters., Inc .), 744 F.2d293, 295–96 (2d Cir.1984); Carlson, Inc. v. Commercial Disc.Corp., 382 F.2d 903, 905–06 (10th Cir.1967); In re Lord's,Inc., 356 F.2d 456, 458–59 (7th Cir.1965); In re Martin's, 11F.Supp. 99, 101 (E.D.N.Y.1935); In re M.W. Sewall & Co.,431 B.R. 526, 529–32 (Bankr.D.Me.2010).

67. The key principle emerging from these cases wassummarized in In re Black & Geddes, Inc.: “It is a firmlyestablished principle that if a recipient of funds is notprohibited from using them as his own and comminglingthem with his own monies, a debtor-creditor, not a trust,relationship exists.” 35 B.R. 830, 836 (Bankr.S.D.N.Y.1984).These precise words have been quoted and applied by theNinth Circuit Court of Appeals and by California's stateappellate courts. See Coupon Clearing, 113 F.3d at 1101;Lonely Maiden, 135 Cal.Rptr.3d at 79. In contrast to the firstfactor discussed in the preceding section, this factor does notturn on the precise words of the agreement, but instead looksto the broader range of actions that are permitted or forbiddenby the agreement.

*16 68. The TSA contains no escrow provision, segregationrequirements, or restrictions on Bancorp's use of tax refundsthat the government pays to Bancorp. Nothing containedin the TSA imposes any duty upon Bancorp to hold thesefunds in trust or to treat them as trust funds for the benefitof any of the other parties. Instead, before a paymentbecomes due to the Bank, the TSA provides that Bancorphas complete dominion and control over all monies receivedfrom the taxing authorities for three weeks or more, and theBank's rights are limited to the expectancy of payment of acontractually calculated sum at a future date. These are factsthe FDIC did not and cannot contest. Rather, the FDIC arguedthat decisions imposing requirements of segregation or userestrictions do not explain the basis for such requirements.This is not correct; the other courts do provide a basis fortheir conclusions. As those courts cogently explain, a debtor-creditor relationship is created because lack of segregationprovisions or use restrictions undermines the direction andcontrol necessary to establish an agent or trustee relationship.See, e.g., Coupon Clearing, 113 F.3d at 1099–1102; NetBank,459 B.R. at 812–14; First Central, 269 B.R. at 496–97;

Lonely Maiden, 135 Cal.Rptr.3d at 79–81 & 84. 12 As appliedhere, these principles make clear that when Bancorp holdstax refunds, Bancorp stands as a future debtor of the Bank(after the passage of three weeks), not as a trustee or an agent.











































The Court concludes that this factor is strongly indicative ofa debtor-creditor relationship.

c. The TSA Delegates Complete And UnrestrainedDecision–Making To Bancorp Regarding All TaxMatters69. Other courts have repeatedly found that contractualprovisions giving a parent sole discretion to prepare and fileconsolidated tax returns and to elect whether or not to receivea refund also evidence a typical debtor-creditor relationship.E.g., NetBank, 459 B.R. at 815–16; First Central, 269 B.R.at 497. Yet again, controlling Ninth Circuit case law supportsand accords with the reasoning of these courts. See CouponClearing, 113 F.3d at 1099–1100.

70. Section 5 of the TSA gives Bancorp “sole discretion” overmyriad tax-related matters, including the manner in which taxreturns are prepared and filed, whether any refunds should bepaid or credited against future tax liability and how to resolvedisputes with the Internal Revenue Service (the “IRS”). Thisis the exact opposite of the Bank having day-to-day controlover the means of Bancorp's implementation of the TSA.In NetBank, the parties had a contractual provision nearlyidentical to Section 5 of the TSA. See 459 B.R. at 804–05. That court held that this provision “does not subject the[Parent] to the direction or control of any member of theConsolidated Group and does not establish a principal-agentrelationship.” Id. at 816.

71. The FDIC asserted that the lone use of the word “agent” inSection 5 of the TSA somehow made Bancorp a mere agentas to any tax refunds it received. The Court declines to adoptthe FDIC's interpretation of the contract. First, Section 5 doesnot address receipt or payment of refund-referenced amountsfollowing receipt—those matters are governed by other partsof the TSA—or ever say that refunds payable to Bancorpare held merely as an agent. Second, Section 5 of the TSAsimilarly does not subject Bancorp to the Bank's directionor control in any fashion—the Bank expressly granted suchcontrol to Bancorp and relinquished any say in how Bancorpexercises its discretion as “agent” for the consolidated group.On this score, the Court believes that the word “agent” isa particularly loose and slippery term with many possible

meanings. 13 As such, consistent with the approach taken byother courts, the Court finds it appropriate to analyze thepractical substance of the parties' relationship, rather than toascribe “talismanic” importance to an indefinite word suchas “agent.” See, e.g., In re Morales Travel Agency, 667 F.2d

1069, 1071–72 (1st Cir.1981); NetBank, 459 B.R. at 815–17. As a matter of substance, Section 5 of the TSA and thedocument as a whole place Bancorp firmly in the driver'sseat regarding tax filings and refunds. This division of powerfurther supports a finding that a debtor-creditor relationshipexisted between Bancorp and the Bank.

*17 72. In sum, the Court concludes that there is asubstantial body of case law demonstrating why the Trustee'sproposed interpretation of the TSA is correct. The Courtelects to follow the holdings of MCorp, 170 B.R. 899,BankUnited, 462 B.R. 885, NetBank, 459 B.R. 801, TeamFinancial, 2010 WL 1730681, First Central, 269 B.R. 481& 377 F.3d 209, and Franklin Savings, 159 B.R. 9 & 182B.R. 859, which are directly on point. This approach findsfurther support in the Ninth Circuit's controlling applicationof California law in Coupon Clearing, 113 F.3d at 1099–1102, and in several decisions by California's state courts.The Court views this line of authority as providing a well-reasoned and appropriate application of bankruptcy law tovery similar agreements and facts. The Court's analysis of thefactors developed in these cases required the Court to closelyexamine the TSA from all angles. The Court has not onlycarefully studied the text of the contract, but also consideredthe overall structure and substantive relationship it createdbetween Bancorp and the Bank. Regardless of the path taken,the destination remains the same: as a matter of law, theTSA operates as part of a debtor-creditor relationship betweenBancorp and the Bank with respect to the tax refunds.

2. The FDIC's Two Tax Refund Cases AreDistinguishable73. In arguing against the effects of the authorities discussedin the preceding section of this Report and Recommendation,the FDIC relied upon two unpublished decisions in whichother courts concluded that tax refunds were not property ofthe parent company's bankruptcy estate despite the existenceof a prebankruptcy tax sharing agreement: BSD Bancorp, Inc.v. FDIC (In re BSD Bancorp, Inc.) (“BSD Bancorp”), No.93–12207–A11 (S.D.Cal. Feb. 28, 1995), and Lubin v. FDIC(“Lubin”), No. 10–00874, 2011 WL 825751 (N.D.Ga. Mar.2, 2011). The Court believes that both of these cases aredistinguishable and concludes that neither of these decisionsprovides authority for the outcome urged by the FDIC in thiscase.

74. The key distinction between this case and both of theFDIC's cases is that courts found that the agreements in thosecases affirmatively provided what the TSA does not. The BSD









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Bancorp tax sharing agreement allowed the parent to borrowtax refunds from the subsidiary in “remote” and “unusual”circumstances. See slip op. at 5 & 11. Therefore, by negativeinference, the court found that the agreement did not create adebtor-creditor relationship because, looking at its “economicreality,” “except in the ‘unusual’ circumstances in whichthe agreement allowed [parent] to borrow the refund, theagreement required [parent] to give the [subsidiary] its shareof the refund in cash and immediately.” Id. at 10–11 (emphasisadded). The TSA contains no special and “unusual” loanoption and does not include any requirement of an immediatedownstream from Bancorp to the Bank. Rather, Bancorpobtains full control over the refunds upon receipt and thenhas three weeks before it is required to make any payment tothe Bank, which might or might not equal the amount of thetax refunds previously received. The TSA cannot be premisedon anything other than Bancorp's ownership interests in thetax refunds given Bancorp's unfettered dominion and controlover the refunds and Bancorp's contractual obligation to payamounts to the Bank that may vary significantly from theamount of any refunds paid to Bancorp. This is a differenteconomic reality, creating different legal results. See alsoBankUnited, 462 B.R. at 900 (distinguishing BSD Bancorpwhere “nothing in the [tax agreement] suggests that thereare particularized instances when the obligations betweenthe Holding Company and the Bank would create a debtor/creditor relationship, such that in all other instances the natureof the obligation is something else”); NetBank, 459 B.R. at816–17 (similarly distinguishing BSD Bancorp based uponkey differences between the operative agreements).

*18 75. Likewise, in Lubin, the court relied on the followinglanguage to find that the tax agreement in that case establishedan agency relationship:

If the Holding Company receives atax refund from a taxing authority,these funds are obtained as agentof the consolidated group on behalfof the individual group members.This allocation agreement as wellas other corporate policies shouldnot be intended to consider refundsattributable to the subsidiary banks,which are received by the HoldingCompany from the taxing authority, asthe property of the Holding Company.

2011 WL 825751, at *5 (emphasis added). Thus, theLubin court concluded that this agreement included specific

contractual language affirmatively establishing a substantiveagency relationship with respect to tax refunds anddisclaiming any parent interest in those tax refunds. The TSAincludes nothing of the sort. See also BankUnited, 462 B.R.at 900 (distinguishing Lubin on similar grounds).

76. The decisions in BSD Bancorp and Lubin, even ifcorrectly decided, actually strengthen the Court's conclusionthat the TSA establishes a debtor-creditor relationship. Eachdecision provides an example of language other courtsdeemed contrary to a debtor-creditor relationship that couldhave been included in the TSA if the parties had so desired,but was not. As a result, the Court does not believe that eitherof these decisions supports the FDIC's position.

77. The fact that Bancorp and the Bank could have structureda different prebankruptcy relationship resolves the FDIC'srepeated emphasis on the fact that many of the lossesindirectly resulting in the tax refunds were generated by theBank, that the prior year taxes were paid on account ofactivities at the Bank, and that the Bank paid taxes directlyto the taxing authorities. All of this may be true (althoughthe Court made no specific findings since these disputes arenot material), but Bancorp and the Bank reduced to writingtheir agreement and understanding about what would happenin these circumstances. Under Section 5 of the TSA, Bancorphad full discretion as to whether and how to file tax returns,including whether to carry consolidated NOLs back to obtainrefunds or to carry them forward to offset future income. IfBancorp had elected to carry consolidated NOLs back and, ifsome portion of those NOLs arose on account of the Bank'soperations, the parties agreed that Bancorp would have aneventual obligation to pay a mathematically determined sumto the Bank, which amount could differ greatly from theamount of any refunds or be due even if no refunds werereceived. The Court agrees with the Trustee that the TSAcannot be read to create anything other than a debtor-creditorrelationship.

3. The Consequence Of A Debtor–Creditor RelationshipUnder Bankruptcy Law78. Because the TSA sets forth a debtor-creditor relationshipbetween Bancorp and the Bank with respect to the taxrefunds, it is necessary to consider the consequences ofthis relationship in the context of the Bankruptcy Case. Forthe reasons expressed below, the Court concludes that theconsequences are that (1) all of the refunds passed intoBancorp's bankruptcy estate on July 31, 2008; and (2) the










FDIC acquired a prepetition “claim” under the BankruptcyCode.

a. Bancorp Has An Interest In All The Tax Refunds as ofthe Petition Date*19 79. As explained in Part V.A above, case law and

legislative history make clear that the property of a debtor'sestate includes all manner of rights in which the debtor has aninterest on the date it filed for bankruptcy, even if that interestwas contingent, non-possessory, speculative, unliquidated orinchoate. The specific question presented here is whether thescope of property of the estate includes tax refunds resultingfrom the carryback of 2007 and 2008 consolidated NOLs toprior years, even if tax returns were not actually filed and therefunds were not actually paid until after the July 31, 2008Petition Date.

80. The seminal case bearing on whether the tax refunds arepetition date property is Segal v. Rochelle, 382 U.S. 375,86 S.Ct. 511, 15 L.Ed.2d 428 (1966). In Segal, the debtors'bankruptcy petition was filed on September 27, 1961. Id. at376. After the end of 1961, losses from that year were carriedback against taxes the debtors paid on account of income in1960 and 1959, which generated tax refunds. Id. Like theFDIC here, the Segal debtors argued that these tax refundswere not property of their estates because “under the statutoryscheme no refund could be claimed from the Governmentuntil the end of the year.” Id. at 380. The Supreme Courtrejected this argument, and held instead that the tax refundswere “sufficiently rooted in the prebankruptcy past” to beproperty of the estate. Id. Although the tax year had notended prior to the bankruptcy petition, “taxes had been paidon net income within the past three years, and the yearof bankruptcy at that point exhibited a net operating loss,”which rendered the debtors' future refunds—of taxes paidprepetition as the result of losses incurred prepetition—estateproperty notwithstanding the contingencies and uncertaintiesassociated with actually obtaining those refunds. See id. at380–81. In a line that remains equally applicable today, theSupreme Court emphasized that in bankruptcy “the term‘property’ has been construed most generously and an interestis not outside its reach because it is novel or contingent orbecause enjoyment must be postponed.” Id. at 379.

81. Segal's “sufficiently rooted in the prebankruptcy past”standard remains the law under the Bankruptcy Code. See,e.g., Feiler, 218 F.3d at 955–56; Ryerson, 739 F.2d at 1416.Indeed, in legislative history to the 1978 Bankruptcy Code,Congress wrote that “[t]he result of Segal v. Rochelle is

followed, and the right to a refund is property of the estate.”H.R. REP. No. 95–595, at 367 (1977), reprinted in 1978U.S.C.C.A.N. 5963, 6323 (citation and footnote omitted).

82. Many courts have followed Segal and held that a debtor'sestate includes tax refunds actually paid postpetition as aresult of the carryback of losses incurred or income earnedduring the year of the petition, even when the petition is filedin the middle of the year. See, e.g., Araj v. Kohut (In reAraj), 371 B.R. 240, 242–44 (E.D.Mich.2007); United Statesv. Carey (In re Wade Cook Fin. Corp.) (“Wade Cook”),375 B.R. 580, 594–97 (B.A.P. 9th Cir.2007); In re FlyingJ, Inc. (“Flying J”), No. 08–13384, 2009 WL 5215000,at *4 (Bankr.D.Del. Dec.28, 2009); In re Matthews, 380B.R. 602, 607 (Bankr.M.D.Fla.2007); Wilson v. IRS (In reWilson), 29 B.R. 54, 57–58 (Bankr.W.D.Ark.1982). Againstthe weight of these cases, the FDIC argued that the right tofuture tax refunds payable on account of the tax returns andrefund claims filed by Trustee on behalf of the consolidatedgroup of which the Bank and Bancorp were members didnot constitute property of Bancorp's estate as of the PetitionDate. The FDIC asserted that none of these cases apply herebecause none of them supposedly involved a bankruptcyestate asserting ownership of tax refunds based upon NOLsclaimed by members of a consolidated group when the debtorin bankruptcy is the parent member of the group and thereforeis responsible for filing all consolidated tax returns.

*20 83. The Court finds the Trustee's line of authoritypersuasive and consistent with the reasoning of the SupremeCourt in Segal. The central proposition of these cases isthat, when there is an expectancy that future tax refundsmay be paid based upon prebankruptcy events, those refundsare property of the debtor's bankruptcy estate, even if thereare many steps that must be performed after bankruptcyin order to actually liquidate and obtain payment of therefunds (such as the ending of a taxable year, filing oftax returns, and payment of refunds by the government)and even if the amount of those refunds is unknown orunknowable on the Petition Date. See Wade Cook, 375 B.R.at 595–96. As applied here, the effects of Segal and itsprogeny make the future tax refunds that would be payableto Bancorp property of Bancorp's bankruptcy estate. As inall of these cases, the predicates of the tax refunds (paymentof prior year taxes and incurrence of losses) occurred priorto bankruptcy, which renders the refunds sufficiently rootedin the prebankruptcy past to be estate property despite thefact that the Petition Date occurred in the middle of 2008.Although Bancorp's right to receive physical payment of the



















refunds depended on certain postpetition events, Bancorp'sexpectancy in those refunds was no more inchoate than thedebtors' petition date expectancy in Segal or in the manycases that have followed Segal. The Court does not believethat the supposed distinction the FDIC tries to draw againstthese cases (that they do not involve disputes among membersof a consolidated group) alters the analysis or the result.The FDIC cited no authorities to suggest this is a relevantdistinction, and all of the key authorities involving ownershipdisputes among members of consolidated groups—includingBankUnited, 462 B.R. 885, NetBank, 459 B.R. 801, TeamFinancial, 2010 WL 1730681, First Central, 269 B.R. 481& 377 F.3d 209, and Franklin Savings, 159 B.R. 9 & 182B.R. 859—demonstrate that the standard analysis about whatis property of a bankruptcy estate applies with equal force inthe consolidated group context.

84. The FDIC advanced several arguments designed to alterthe status of at least some of the refunds resulting from thecarryback of the 2008 NOL. After considering the FDIC'sarguments and the Trustee's responses to these arguments, theCourt concludes that none of the arguments provides a reasonfor the Court to depart from a straightforward application ofSegal for the proposition that all of the tax refunds in questionare property of Bancorp's bankruptcy estate.

(1) The FDIC's End–Of–Year Cases Are DistinguishableAnd Inapposite85. In its briefing and at oral argument, the FDIC cited twolines of case law to support the assertion that Bancorp wouldhave no right to refunds unless the tax year in which theconsolidated NOLs were incurred actually closed before thePetition Date. The Court concludes that these cases addressissues different from those presented here, a conclusionshared by the court in the Flying J case. See 2009 WL5215000, at *2–4

*21 86. First, the FDIC cited two cases addressing whethersecured creditors could obtain liens against a debtor'stax refunds, each of which concluded that, for UniformCommercial Code (“UCC”) purposes, a debtor acquires

“rights” to refunds only after the end of the taxable year. 14

But whether Bancorp had “rights” in the tax refunds forpurposes of creating a security interest is critically differentfrom whether those refunds fall within the broad scope of“property of the estate” under Bankruptcy Code section541(a). For example, the Brandt case used a general rule ofCalifornia law “that some interests are simply too remote

or uncertain for a creditor's lien to attach” and the notionthat, under the UCC, “a debtor cannot acquire rights in anitem that may or may not come into existence based uponcertain contingencies occurring in the future.” See 279 B.R.at 559–60. That court explicitly distinguished its analysisfrom cases addressing whether tax refunds are property of theestate, including Segal v. Rochelle, as cases involving “issuesparticular to federal bankruptcy law.” Id. at 559. But this caseinvolves those very “issues particular to federal bankruptcylaw,” and Ninth Circuit authority demonstrates that assetsmay be property of a bankruptcy estate even though a debtordid not have sufficient rights in the collateral prepetition fora security interest to have attached to those rights under theUCC. See In re Contractors Equip. Supply Co., 861 F.2d241, 245 & 245 n. 7 (9th Cir.1988). Simply put, the FDIC'stwo cases apply a specific and different test for “rights” incollateral that is far narrower than the test utilized in the NinthCircuit and elsewhere for “property of the estate.” To theextent these cases purport to apply bankruptcy law concepts,the Court believes that their posited end of year rule cannot bereconciled with Segal and the Court elects to follow bindingauthority from the Supreme Court rather than non-bindingauthority from bankruptcy judges sitting in other districts. Cf.

Flying J, 2009 WL 5215000, at *2–4. 15

87. Second, the FDIC cited a series of cases involvingdisputes between individual debtors and the trusteeconcerning refunds of income taxes that were withheld from

the individuals' wages throughout the year. 16 Each of thesecases contains virtually no discussion of the Segal decision.The reason why was explained by the Flying J court whenit distinguished this series of cases: All of the FDIC's cases“dealt with the straightforward issue of the date the debtorbecame entitled to a tax refund for a tax year in which heoverpaid,” a scenario in which a “bright-line test is easilyapplied” because “the refund relates to activities in that taxyear.” 2009 WL 5215000, at *3. The reasoning of these casesis thus inapplicable in cases (such as Flying J and this case)“where the debtor seeks to apply losses incurred in one taxyear to other tax years (either prospectively or retroactively).”Id. In the latter group of cases—where income ultimatelyproducing refunds was earned in years that ended prior tothe petition date—the resulting NOL carryback refunds aresufficiently rooted in the prebankruptcy past under Segal. Seeid. at *4.




















(2) Parsing Of NOLs Among Entities Is Not Required,Although The Court Specifically Rejects The NotionThat The “Consolidated Group” Owns Anything*22 88. Both sides to this litigation devoted attention

to arguing about which specific NOLs were utilized togenerate the tax refunds at issue. The Trustee introducedevidence that, of the $782,473,561 in consolidated 2008NOL, $210,444,677 of that NOL is attributable to Bancorpactivities. See Second Supplemental Tomlinson Declaration¶ 2. The Trustee also cited case authority suggesting that all

of the consolidated NOLs are property of Bancorp's estate. 17

For its part, the FDIC initially argued that the Bank hadsufficient NOLs to generate all the refunds itself, and latertook the position that each of the NOLs belonged to the“consolidated group” as a whole.

89. Ultimately, the Court believes that these debates are asideshow and not material to resolution of this dispute—as the Ninth Circuit noted in Feiler, “[w]hether the NOLsthemselves are considered property is something of a redherring,” because the real issue is who owns the refunds. See218 F.3d at 956. In answering that question, there are onlytwo parties involved, Bancorp and the Bank. Additionally,although there is a tax law backdrop to this dispute, the centralquestion—whether the tax refunds are property of Bancorp'sbankruptcy estate—ultimately is an issue of bankruptcy law.

90. The debtor-creditor relationship established under theTSA means that Bancorp has an ownership interest in any taxrefunds payable to it, regardless of the source of the losses(or the owner of any NOLs). The Bank—and all membersof the entire consolidated group under Section 6 of the TSA—agreed to this structure in advance. The only issue towhich the relative attribution of specific NOLs is germane isthe mathematical calculation of any unsecured claim arisingunder the TSA. The fact that the TSA uses the adjectival term“the Group's” to modify “losses” and “refunds” has no impacton the nature of the relationship or rights created under thatcontract.

91. The Court specifically rejects the notion that the“consolidated group” could own anything in its own right.The “consolidated group” is a legal fiction created fortax purposes and for the convenience of the IRS. The“consolidated group” is not a legal entity or person withthe capacity to own anything at all. See, e.g., Karls v.Mellon Capital Mgmt. Corp., 2010 WL 5115272, at *4–5(Cal.Ct.App. Dec.15, 2010); I.R.S. Field Serv. Adv. Mem.

200027026, 2000 WL 33116161, at p. 4 (Apr. 10, 2000). Aconsolidated group cannot file its own bankruptcy case anddid not file this Bankruptcy Case. Once again, the crux of thisdispute is a fight between the Bancorp bankruptcy estate andthe FDIC as receiver regarding the application of bankruptcylaw concepts to these facts; the “consolidated group” is notand could not be a party to this litigation, and it does not haveany property or other interests separate and apart from themembers of the group.

(3) No Proration Is Required*23 92. First, regardless of the specific point at which

NOLs accrued, the Court concludes that the entirety of thetax refunds are adequately grounded in the prebankruptcypast because all of the income that was subject to offset wasundisputedly earned prepetition (in 2003, 2004, 2005, and2006) and all of the prior year taxes that have now beenrefunded were paid prepetition in or for those prior years.As was true in the Flying J case, this reality leads the Courtto conclude that the loss-carryback refund claim in this caseis sufficiently rooted in the prebankruptcy past to be estateproperty under Segal regardless of when specific losses wereoccurred in 2008. See 2009 WL 5215000, at *4. Thus, noproration would be warranted even if some portion of thelosses that generated the NOLs accrued post-petition.

93. Second, even if a proration analysis were undertaken,the record is such that the analysis would do nothing toimprove the FDIC's position. The only legal foundation forproration would be dicta in Segal about the possibility ofproration when “losses by the bankrupt after filing but beforethe year's end might increase the refund.” 382 U.S. at 380 n. 5(emphasis added). Put differently, if sufficient losses existedprior to July 31, 2008 to generate the roughly $40 millionin refunds resulting from the carryback of 2008 NOLs, thensubsequent losses would be superfluous and provide nothingto which a proration analysis could even theoretically beapplied.

94. An accountant declaration that the FDIC submitted insupport of the FDIC MSJ leaves no doubt that there weresufficient, if not excessive, losses incurred prior to July31, 2008 to generate the entire amount of the refunds nowat issue. Specifically, the FDIC submitted the ThormahlenDeclaration, a carefully written document which drawsprecise distinctions between the “Bank,” the “Federal Bank,”and the “Bank Group.” This declaration provides whatappears to be the only evidence in the record about the specificaccrual of NOLs throughout 2008, and it is unequivocal












in its statement that the Bank had, prior to its failure (onJuly 11, 2008, several weeks before the Petition Date),incurred sufficient NOLs to generate the refunds at issuehere. Based upon these statements, the Court concludes thatthere necessarily would have been more than sufficient lossesavailable to capture the same tax refunds if Bancorp's taxableyear had ended on July 31, 2008.

95. Additionally, paragraph 4 of the Thormahlen Declarationexplains further that massive losses were incurred in both2007 and 2008, the amounts of which losses are far in excessof what would be needed to generate the $40 million incarryback tax refunds. Based upon this evidence, it defieslogic for the FDIC to suggest that ample losses would not

have existed prior to July 31, 2008 (at which point 7 /12ths of

the year would have elapsed). Indeed, common sense clearlyindicts that a majority, if not the vast bulk, of the 2008 losseswould have occurred in the first part of 2008, which is whenthe Bank was bleeding money and careening towards failureand seizure by the OTS. The FDIC's speculation, contradictedby the Thormahlen Declaration, that sufficient losses wouldnot have been incurred to generate the exact same refundsis unsupported by the evidence. Thus, the Court finds thatnothing in the record submitted to the Court gives rise to anygenuine dispute about this issue in light of Mr. Thormahlen'sunequivocal and uncontradicted testimony about the timing

and magnitude of the losses. 18

*24 96. In summary, the Court does not believe that any“proration” analysis is appropriate here or that such ananalysis, if undertaken, would alter the outcome. The simplefact of the matter is that the tax refunds at issue are allsolidly grounded in the prebankruptcy period; the prospectthat whatever taxes had been paid in prior years would berefunded was hardly one that was unduly remote. Under Segaland its progeny, that fact compels the conclusion that therefunds are property of Bancorp's estate.

97. Put very simply, the conclusion that follows from thedebtor-creditor relationship under the TSA and decades ofbankruptcy jurisprudence is that the tax refunds at issue areproperty of the Bancorp estate. Segal is directly applicableand dispositive here. There is no doubt that all of the incomeagainst which the consolidated NOLs were applied wasearned prepetition or that there were sufficient prepetition2007 and 2008 consolidated NOLs for Bancorp to carrybackto prior years and obtain payment of all the tax refunds. As inSegal, Wade Cook, Flying J and other cases, both the incomeand the losses were rooted in the prebankruptcy past and gave

Bancorp a vested prepetition interest in the tax refunds. Thefact that monetization of Bancorp's Petition Date interests wascontingent on the subsequent filing of tax returns, payment bythe government, and the like does not diminish the existenceof the refunds or their status as property of the estate on thePetition Date. “Filing a return is merely a procedural stepthat must be fulfilled in order to receive the refund.” Araj v.Kohut, 371 B.R. at 244. The next question is what rights theFDIC possesses vis-à-vis those refunds, to which the Courtnow turns.

b. The FDIC Had A Petition Date “Claim” Relating ToThe Tax Refunds96. In addition to defining the scope of Bancorp's estateunder Bankruptcy Code section 541(a), the Petition Datealso sets the marker for defining rights of creditors and thirdparties vis-à-vis the estate. See, e.g., In re Fleishman, 372B.R. 64, 71 (Bankr.D.Or.2007); In re Statmore, 22 B.R. 37,38 (Bankr.D.Neb.1982). This flows from the longstandingrule that a bankruptcy petition “fixes the moment when theaffairs of the bankrupt are supposed to be wound up, asif the whole matter could be settled in a day.” Addison v.Langston (In re Brints Cotton Mktg.), 737 F.2d 1338, 1342(5th Cir.1984) (quoting Sexton v. Dreyfus, 219 U.S. 339, 344,31 S.Ct. 256, 55 L.Ed. 244 (1911); internal quotation marksomitted). This rule is now codified in the provisions of theBankruptcy Code bearing on the FDIC's claims and rightsin the Bankruptcy Case. See 11 U.S.C. §§ 502(b) (claimsare determined “as of the date of the filing of the petition”)& 541(d) (competing claimants' interests in property areexamined “as of the commencement of the case”).

99. Upon the filing of Bancorp's case, the relative rights ofBancorp and the FDIC concerning any future tax refundswere governed by the TSA, which, as the Court hasalready concluded, established a debtor-creditor relationship.Although tax refunds resulting from the carryback of 2007and 2008 consolidated NOLs were not yet received, the FDICstill had a prepetition “claim” against Bancorp with respectto those refunds.

*25 100. The Bankruptcy Code defines a “claim” toencompass any “right to payment” or any “equitable remedyfor breach of performance if such breach gives rise to aright to payment,” whether or not such right or remedy“is reduced to judgment, liquidated, unliquidated, fixed,contingent, matured, unmatured, disputed, undisputed, legal,equitable, secured, or unsecured.” 11 U.S.C. § 101(5).














http://www.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000546&cite=11USCAS101&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Folder*cid.dff96b22f48648ca9e3b85bde7d8d582*oc.Search)#co_pp_362c000048fd7



101. Ninth Circuit case law clearly demonstrates that acreditor may have a prepetition general unsecured “claim”under a prebankruptcy contract even if the circumstancesnecessary to trigger that claim do not occur until after thebankruptcy filing. For example, in Christian Life Ctr. Litig.Def. Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370,1374 (9th Cir.1987), the court held that an officer's claim forindemnification was a prepetition, general unsecured claimthat arose from a prepetition contract, noting in the processthat it “makes no difference” that this contingent claim did notactually “accrue until after the petition was filed.” Similarly,in SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571F.3d 826, 843–44 (9th Cir.2009), the court concluded that acreditor had a contingent, unliquidated unsecured claim forattorneys' fees based upon a fee provision in a prepetitioncontract, even though those fees were not actually incurreduntil after the bankruptcy case was filed. The lesson of thesecases is that parties may have unsecured “claims” under acontract that exists on the petition date, even if the eventsrendering those claims matured and liquidated claims happenthereafter. See also, e.g., United States v. Gerth, 991 F.2d1428, 1433–34 (8th Cir.1993).

102. As applied here, it is apparent that the FDIC wouldhave had a “claim” under the TSA on July 31, 2008, eventhough no tax refunds had actually been paid to Bancorp. Thisis particularly the case with respect to tax refunds that arerooted in the prebankruptcy past. Whatever rights the FDICheld as to future tax refunds all relate back to a contractthat was executed and in effect at the commencement of theBankruptcy Case. As with the future indemnity and attorneys'fee claims, the FDIC's claims are general unsecured claims.

103. As the Trustee's counsel correctly noted at the January24, 2012 hearing, the FDIC's position that there is no “claim”under the TSA until Bancorp actually receives possessionof tax refunds is akin to the flawed analysis adopted by theThird Circuit Court of Appeals in Avellino & Bienes v. M.Frenville Co. (In re M. Frenville Co.), 744 F.2d 332, 336–38(3d Cir.1984). The Frenville decision was widely criticizedby courts and commentators alike—to the point of becomingsomething of a running joke among bankruptcy practitioners—and has been repeatedly rejected by the Ninth Circuit Courtof Appeals. See, e.g., Am. Law Ctr. PC, v. Stanley (In reJastrem), 253 F.3d 438, 442 (9th Cir.2001). In fact, an en bancpanel of the Third Circuit Court of Appeals recently overruledFrenville, noting how the decision was “universally rejected”by other circuit courts and criticized by numerous districtcourts, bankruptcy courts, and commentators. See JELD–

WEN, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d114, 120–21 (3d Cir.2010). Because the FDIC's argumenthere relies on a narrow definition of a “claim” that has nowbeen rejected in every circuit, it is no more persuasive thanthe Third Circuit's discredited reasoning in Frenville.

*26 104. By its plain terms, the TSA gave the Banka “right to payment” with respect to tax refunds paid orpayable to Bancorp. Under Bankruptcy Code section 101(5)and numerous decisions, that contractual right to paymentaffords the FDIC an unsecured “claim” in the BankruptcyCase (subject to the bases for disallowance or subordinationasserted in the Complaint). The fact that this claim was“contingent” on future events (including the closing of the2008 tax year, the filing of tax returns, and the paymentof refunds to Bancorp), “unmatured” (until refunds wereactually paid to Bancorp and the 15 business day periodin the TSA passed), and “unliquidated” (until the specificamount of the claim was determinable) does not change thefundamental character of the claim. The Court believes thatthe only appropriate conclusion under the circumstances isthat the FDIC has a general unsecured claim under the TSAfor the amounts that would have been due to it under thatagreement based upon the refunds that Bancorp received.

105. For the foregoing reasons, the Court concludes that theplain terms of the TSA suffice to define and resolve therelative rights of the parties; the tax refunds at issue areproperty of Bancorp's bankruptcy estate, and the FDIC has theability to assert an unsecured claim under the TSA, subject toresolution in the claims allowance process. This conclusiondoes not end the analysis, however, because, throughout thislitigation, the FDIC has offered a variety of theories as towhy the TSA purportedly should not be applied in accordancewith its plain terms. The Court considers these theories akin toaffirmative defenses against the legal rights and relationshipsresulting from the TSA. The FDIC's arguments fall into fourprimary categories: (1) arguments based upon a 1973 opinionthat both parties consistently refer to as “Bob Richards

” 19 ; (2) arguments based upon the Bankruptcy Code; (3)arguments based upon title 12 of the United States Code ora 1998 agency policy statement; and (4) arguments basedupon California law. The Court has carefully considered allof the FDIC's affirmative defenses and concludes that noneof them succeeds in defeating the basic legal construct thatresults under the TSA. In the interests of completeness, thisReport and Recommendation now discusses the specifics ofthe FDIC's arguments in some detail.



















C. The Bob Richards Decision Is Not Applicable Here InLight Of The TSA106. The FDIC devoted substantial effort in all five ofits briefs and at both hearings attempting to fit this caseinto the rule articulated by Bob Richards. If Bob Richards

still remains good law, 20 the Court believes it must beapplied as actually stated: as a gap-filling rule limited tocircumstances when no tax sharing agreement—express orimplied—exists between the parties. See 473 F.2d at 264 (ruleinapplicable “where an agreement can fairly be implied”); id.at 265 (applying rule because “there is no express or impliedagreement” regarding rights to tax refunds). Here, there is anexpress agreement—the TSA.

*27 107. The FDIC argued that only “clear and explicitlanguage” takes a prebankruptcy contract out of BobRichards. The FDIC did not cite any cases adopting thisposition, which is belied by Bob Richards itself and atodds with the FDIC's own authorities about how even“implicit” agreements render Bob Richards inapplicable. See,e.g., Capital Bancshares v. FDIC, 957 F.2d 203, 207 (5thCir.1992); Brandt, 279 B.R. at 556. Even BSD Bancorp, theprincipal case upon which the FDIC relies for this argument,recognizes that the Bob Richards “gap-filling rule” can be“expressly or impliedly ” overridden in an agreement. Slip op.at 10 (emphasis added).

108. At bottom, the Court does not believe the tax sharingagreements in other cases were any more “explicit” or draftedmore favorably for the debtor-parent than the TSA in thiscase. The courts deciding these other cases express a uniformview that tax sharing agreements very similar to the one hererender Bob Richards inapplicable. See BankUnited, 462 B.R.at 897–901; NetBank, 459 B.R. at 810; Team Financial, 2010WL 1730681, at *8; First Central, 269 B.R. at 489–90 & 500;Franklin Savings, 159 B.R. at 29. Thus, even assuming theBob Richards rule remains good law, it is inapplicable hereby its own terms due to the presence of a contrary “expressor implied agreement.”

109. The Court's view in this regard is fully consistent withhow the District Court has already read Bob Richards in thisvery case, when it denied the FDIC's motion to withdrawthe reference in part because—unlike here—the partiesin Bob Richards “were functioning without a tax sharingagreement.” See Siegel v. FDIC, 2011 WL 2883012, at *5.The FDIC's counsel took the position at oral argument that“the District Court erred in [its] reading of Bob Richards.”

See Dec. 13, 2011 Hr'g Tr. at 28:9–11. The Court doesnot agree with the FDIC and reads Bob Richards in thesame fashion as the District Court. There is a key distinctionbetween a fact-pattern involving no tax agreement amongthe parties (Bob Richards) and one involving such anagreement (this case). This key distinction-the debtor-creditorrelationship arising under the TSA-removes this case from theparameters of the Bob Richards decision. Because the TSAexists and serves to define the parties' rights, there is no “gap”that could ever be filled with the default rule stated in BobRichards.

110. In addition, unlike the non-debtor parent corporationin Bob Richards, Bancorp is itself subject to a bankruptcyproceeding. Any proceeds received by the Trustee would beused to pay allowed valid claims against the estate, not to linethe pockets of any of the parties involved. As explained in theFirst Central case (which involved an analogous tax refunddispute between a bankruptcy trustee and the liquidator ofthe debtor's failed insurance subsidiary), the unfortunatereality of Bancorp's insolvency is that the expectations of allunsecured creditors will be frustrated—myriad promises topay will not be fulfilled. See 377 F.3d at 217. Hence, althoughthe FDIC “may understandably chafe at being required toaccept less than it was otherwise entitled to receive underthe [Tax Sharing] Agreement, the short—and conclusive—answer is that this is not injustice, it is bankruptcy.” Id.; seealso id. at 218; Ades & Berg Grp. Investors v. Breeden (In reAdes & Berg Grp. Investors), 550 F.3d 240, 243 (2d Cir.2008)(per curiam); MCorp, 170 B.R. at 902. As the Court noted atthe December 13 hearing, a case where the parent corporationis in bankruptcy presents exactly the opposite situation fromthat presented in Bob Richards. See Dec. 13, 2011 Hr'g Tr.at 31:3–21.

*28 111. In assessing “unjust enrichment” and similar“equitable” arguments advanced by the FDIC, the Court isalso mindful of how the Ninth Circuit Court of Appealshas repeatedly held that proper application of “equitable”doctrines will differ in the bankruptcy context. See, e.g.,Elliott v. Frontier Props. (In re Lewis W. Shurtlef, Inc.),778 F.2d 1416, 1419–20 (9th Cir.1985); In re N. Am. Coin& Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir.1985).Accord XL/Datacomp v. Wilson (In re Omegas Grp.), 16F.3d 1443, 1452 (6th Cir.1994). As in North American Coin,the Court does not perceive any equitable rule requiringthe Court to protect the FDIC fully at the great expenseof Bancorp's other creditors; “the equities, as well as theprinciples underlying the bankruptcy laws, point in the other




























direction.” 767 F.2d at 1578; see also Mahon v. Stowers,416 U.S. at 105 (“This Court has previously held that anordinary debtor-creditor relationship requires more than thepost-bankruptcy disappointment of the creditor to convert itinto a trust relationship.”). Thus, because there will be nounjust enrichment if the Trustee retains the tax refunds forthe benefit of Bancorp's estate, there is no factual basis forimposing the quasi-contractual remedy of Bob Richards. Cf.First Central, 377 F.3d at 218.

112. Finally, the Court observes that the existence of theTSA renders unnecessary reference to equitable doctrines thatare used only when there is no contract, such as the rule inBob Richards. This is true as a matter of bankruptcy law.See, e.g ., TPG of Scottsdale, LLC v. Scott Desert Shadows,LLC (In re Scott Desert Shadows, LLC), No. 06–0003, 2006WL 1775828, at *3–4 (Bankr.D.Ariz. Apr.14, 2006). Thisis equally true as a matter of California law, which makesclear that when two parties have entered into a contractregarding a subject matter, the right of each party concerningthat subject is to sue the counterparty for breach or, incertain specific circumstances, to compel performance, not toalter the parties' contractual relationship through the use ofequitable doctrines. See, e.g., Paracor Fin., Inc. v. GE CapitalCorp., 96 F.3d 1151, 1167 (9th Cir.1996) (citing Wal–NoonCorp. v. Hill, 45 Cal.App.3d 605, 119 Cal.Rptr. 646, 650–51 (Ct.App.1975)); Wilkison v. Wiederkehr, 101 Cal.App.4th822, 124 Cal.Rptr.2d 631, 636–41 (Ct.App.2002); HedgingConcepts v. First Alliance Mortg. Co., 41 Cal.App.4th 1410,49 Cal.Rptr.2d 191, 197–99 (Ct.App.1996).

D. The FDIC's Affirmative Defenses Under TheBankruptcy Code Do Not Overcome The TSA113. The FDIC argued that the TSA was invalid based upona number of bankruptcy concepts. The FDIC did not providethe Court with any applicable authorities in which any othercourt utilized these provisions of the Bankruptcy Code inthe tax sharing context and as the FDIC suggests. Upon theCourt's own analysis of these arguments, the Court finds eachof the FDIC's attempts unavailing.

1. Nothing In The Record Suggests Any RelationshipThat Could Implicate Bankruptcy Code Section 541(d)*29 114. The FDIC argued that Bankruptcy Code section

541(d) removes the tax refunds from Bancorp's estate. Section541(d) is a provision that is applicable when a third partycan demonstrate that a debtor held absolutely no equitableinterest in an asset as a result of a trust or similar relationship.

As with the provisions of the Bankruptcy Code discussedabove, section 541(d) once again requires the Court toexamine the state of affairs “as of the commencement of thecase.” 11 U.S.C. § 541(d). As the party seeking to excludeproperty from the estate for its own benefit, it is the FDIC'saffirmative burden to demonstrate that, as of July 31, 2008,the relationship between Bancorp and the Bank was such thatany tax refunds received at that moment would have fallenoutside the broad scope of section 541(a)(1). 5 COLLIER ONBANKRUPTCY ¶ 541.28 (16th ed. rev.2011); SouthmarkCorp. v. Grosz (In re Southmark Corp.), 49 F.3d 1111, 1117–18 (5th Cir.1995).

115. In recognition of their disfavor in bankruptcy, the FDICat one point suggested that it had abandoned any “constructivetrust” theory, and instead sought to establish some othersort of “trust” relationship that could implicate BankruptcyCode section 541(d). See Docket No. 41 at 14:6–13. Thereis nothing in the record to support any voluntary or resultingtrust construct.

116. Under California law, “[a] voluntary trust is created byacts or words of the trustor which indicate (1) an intentionto create a trust and (2) the subject, purpose, and beneficiaryof the trust.” Weststeyn Dairy 2, 280 F.Supp.2d at 1075.Of particular importance, “[w]here there is no agreementby the parties to segregate prepayments or to forbid thecommingling of such prepayments with a party's generalfunds, such prepayments are not held in trust.” Id. at 1080;see also B.I. Fin. Servs. Grp., 854 F.2d at 354–55; LonelyMaiden, 135 Cal.Rptr.3d at 78–82. Here, as discussed above,nothing in the TSA imposes any segregation requirementsor commingling restrictions. Thus, as a matter of law, thedocument does not establish a formal trust relationship.

117. Under California law, a resulting trust is an “intention-enforcing” device historically limited to real propertytransactions. See Johnson v. Johnson, 192 Cal.App.3d 551,237 Cal.Rptr. 644, 647 & n. 1 (Ct.App.1987). “Clear andconvincing proof is required to support a declaration thata resulting trust exists.” Id. at 647. Such proof must beparticularly clear and compelling “when an attempt is madeto establish a resulting trust after the lapse of many years orwhere parol evidence alone is relied upon.” G.R. HolcombEstate Co. v. Burke, 4 Cal.2d 289, 299, 48 P.2d 669, 674(1935). In addition, a resulting trust is an equitable remedysubject to the same strict limitations imposed on constructive

trusts in bankruptcy. 21




















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118. Here, the FDIC provides no evidence to support itsresulting trust theory. If such an intention existed, thenevidence of such intent should be readily available, butthe FDIC provided the Court with no contemporaneousdocuments or any other material showing any intent byanyone to create any sort of “trust” or similar relationship.Rather, as in the recent Lonely Maiden decision, the actualevidence defeats this theory because the TSA betweenBancorp and the Bank resulted in Bancorp obtainingbeneficial interests in refunds it received, and there is nodocument or other admissible evidence remotely suggestingotherwise. See 135 Cal.Rptr.3d at 83–84.

*30 119. In the Court's experience, most reasonablycompetent attorneys know how to draft language that creates atrust relationship if that is what their clients desire. Creating atrust relationship requires only a few words and the utilizationof relative simply concepts, such as a segregated account.The TSA contains nothing along these lines, which leads theCourt to conclude that no trust relationship was intended.This conclusion might be rebuttable if there were compellingevidence to the contrary in the record, but the FDIC has notprovided the Court with any evidence upon which the Courtcould conclude a trust relationship was intended in 2003.

120. A complete lack of any evidentiary support is a far cryfrom the “clear and convincing proof” required by Californialaw. Because the FDIC has no evidence supporting theexistence any sort of trust relationship under California law,the FDIC cannot extricate the tax refunds from Bancorp'sestate via Bankruptcy Code section 541(d).

2. Deemed Rejection Of The TSA Does Not Strip TheEstate Of Petition Date Property Or Otherwise AlterThe Outcome121. The Court believes, and the parties appear to agree, thatthe TSA is an “executory contract” under the BankruptcyCode. An “executory contract” is generally understood to beone under which future material performance remains due onboth sides of the contract. See In re Frontier Props., Inc., 979F.2d 1358, 1364 (9th Cir.1992).

122. Section 365 of the Bankruptcy Code contains provisionsthat provide a bankruptcy trustee or debtor in possessionwith the ability to “assume” an executory contract—therebyallowing the bankruptcy estate to continue to obtain futureperformance from the counterparty, provided that the trusteeor debtor in possession also perform under the contract—orto “reject” an executory contract—thereby freeing the estate

of the burdens under the contract. See 11 U.S.C. § 365(a).Because this is a chapter 7 case and the Trustee did notaffirmatively assume the TSA on or before September 29,2008, the contract was “deemed rejected” under BankruptcyCode section 365(d)(1).

123. The parties disagree about the legal consequences of the“deemed rejection.” The FDIC argued that rejection returnedthe parties to a world in which relative rights vis-à-vis the taxrefunds are governed by Bob Richards. The Trustee took theposition that rejection does not have any effect on the estate'srights to the refunds, in part because those rights passed tothe estate on the Petition Date. The Court permitted each sideto file a supplemental brief specifically addressing this issue.After reviewing those supplemental briefs and allowing theparties additional oral argument about this issue, the Courthas concluded that the Trustee's position is correct.

124. Under the Bankruptcy Code, the primary effect ofrejection of an executory contract is to create a breachimmediately prior to the bankruptcy filing, thereby leavingthe counterparty with an unsecured damages claim. See11 U.S.C. §§ 365(g)(1) & 502(g)(1). Beyond creating abreach and yielding a claim against the estate, rejection doesnot substantively affect the contract—it is not terminated,vaporized, or otherwise cancelled. See, e.g., In re Cont'lAirlines, 981 F.2d 1450, 1459 (5th Cir.1993); Top Rank, Inc.v. Ortiz (In re Ortiz), 400 B.R. 755, 761–64 (C.D.Cal.2009);Cohen v. Drexel Burnham Lambert Grp., Inc. (In reDrexel Burnham Lambert Grp., Inc.), 138 B.R. 687, 708(Bankr.S.D.N.Y.1992).

*31 125. The rejected executory contract continues to definethe nature of the parties' relationship and provides the sourceto determine the extent of any unsecured claim against theestate. See, e.g., First Ave. W. Bldg., LLC v. James (In reOneCast Media, Inc.), 439 F.3d 558, 563 (9th Cir.2006);Sir Speedy Inc. v. Morse, 256 B.R. 657, 659 (D.Mass.2000).The estate is relieved from rendering further performanceunder the contract, and the contract counterparty is givenan unsecured claim for breach that can be processed inbankruptcy with other creditors' claims. See, e.g., In re RegaProps., Ltd., 894 F.2d 1136, 1140 (9th Cir.1990). Thus, asexplained in the Collier treatise:

Rejection and section 365(g)'s deemedbreach do not affect the parties'substantive rights under the contract orlease, such as the amount owing or ameasure of damages for breach, or the










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enforceability of an arbitration clause,and does not waive any defensesto the contract. However, rejectiondeprives the nondebtor party of aspecific performance remedy that itmight otherwise have under applicablenonbankruptcy law for breach of thecontract or lease.

3 COLLIER ON BANKRUPTCY ¶ 365.10[1] (16th ed.rev.2011) (footnotes omitted).

126. Likewise, rejection does not operate to retroactivelyremove property from the estate. See, e.g., Thompkins v.Lil' Joe Records, Inc., 476 F.3d 1294, 1306–08 (11thCir.2007); Simmons Capital Advisors, Ltd. v. Bachinski(In re Bachinski), 393 B.R. 522, 543–45 (Bankr.S.D.Ohio2008); Thompson–Mendez v. St. Charles at Olde CourtP'ship, LLC (In re Thompson–Mendez), 321 B.R. 814, 819(Bankr.D.Md.2005). This concept has been applied by othercourts in the specific context of a rejected tax sharingagreement. See NetBank, 459 B.R. at 821. Simply put, ifan asset would have been property of the bankruptcy estateas of the petition date, subsequent rejection of an executorycontract does not change that result.

127. As detailed in Part V.B.3.a above, Bancorp had aninterest in all the tax refunds at issue as of the PetitionDate. Thus, based upon the foregoing lines of authority,the TSA did not divest Bancorp of that interest. Rather,rejection served to trigger a material breach of the rejectedTSA, thereby creating a prepetition unsecured damages claimfor the FDIC. See, e.g., In re Aslan, 909 F.2d 367, 371–72 (9th Cir.1990). Included within the FDIC's prepetitionclaim is whatever allowable damages result from the estate'sfuture non-performance under the contract, all measured asof the Petition Date. See, e.g., Taunton Mun. Lighting Plant

v. Enron Corp. (In re Enron Corp.), 354 B.R. 652, 655–59(S.D.N.Y.2006). Put differently, rejection created a vehiclethrough which the FDIC's contingent and unliquidated claimsunder the TSA could be channeled against the estate forpurposes of resolution in the Bankruptcy Case under theBankruptcy Code.

128. The FDIC disagreed with the foregoing case law andtook the position that the Trustee is inappropriately seekingto obtain further “benefits” under the TSA after its deemedrejection. The Court rejects the FDIC's analysis for severalreasons. First, Bancorp's rights to future tax refunds—theonly “benefit” to which the FDIC could conceivably point—

became property of the estate on the Petition Date, not afterthe TSA's deemed rejection. Second, the Trustee has neversought to obtain any postpetition performance from the FDIC(including with respect to the Bank's theoretically unexecutedobligations in Sections 2(b), 2(c)(i), and 4(b) of the TSA) thatwould somehow benefit the bankruptcy estate. Nor has theTrustee sought to avail himself of any affirmative rights underthe TSA. Rather, the only post-rejection actions the Trusteetook were to file consolidated tax returns and receive paymentof the tax refunds that vested in the Bancorp estate on thePetition Date.

*32 129. The Trustee's position does not ask the FDIC orthe Bank to do anything post-rejection; the only parties whomust act are the IRS and other taxing agencies (by payingrefunds to Bancorp as parent for a consolidated group), noneof which are even parties to the TSA. This is a markedlydifferent situation from cases in which a debtor has tried tocompel ongoing or additional performance from a contractualcounterparty post-rejection. Because the Trustee never soughtany post-rejection performance under the TSA, the FDIC'sposition must reduce to the notion that the mere existence ofthe TSA confers some “benefit” on the Trustee. But rejectioncannot change the fact that the TSA defined the relationshipbetween Bancorp and the Bank on the Petition Date. Nor doesrejection change that relationship; rather, even after rejection,the TSA continues to perform its descriptive function ofsetting forth a debtor-creditor relationship between Bancorpand the Bank. This is not a “benefit” of the TSA—it is the veryessence of the TSA. Accordingly, the Court concludes thatthe Trustee will not inappropriately “benefit” from the TSA,and nothing about rejection operates to create any ownershiprights for the FDIC or changes the nature of Bancorp'sownership interests in the tax refunds.

130. As the Trustee detailed at length in his supplementalbriefing, the Trustee did not need to rely upon the TSAto file the tax returns that triggered payment of the taxrefunds at issue. Rather, the applicable Treasury Regulationsprovided the Trustee with the sole authority to file the relevantreturns and be paid the refunds separate and apart from

anything in the TSA. 22 See 26 C.F.R. §§ 1.1502–77(a)(1)(i),1.1502–77(a)(2)(v), 1.1502–77(d)(4)(ii) & 1.1502–78(b)(1).In fact, the Trustee was affirmatively obligated to file thoseconsolidated tax returns as a matter of federal law. See, e.g.,11 U.S.C. §§ 346(b), 521(j)(1) & 704(a); 26 U.S.C. § 6012(b)(3)-(4); 28 U.S.C. §§ 959(b) & 960(a). Hence, the Trusteedid not need to rely upon or enforce any part of the TSAas a source of authority for these actions, which means that
















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the Trustee does not inappropriately seek to enforce the TSApost-rejection.

131. As a variation on its general argument about thepurported effects of deemed rejection, the FDIC also arguedthat Bancorp lacked a petition date interest in incrementaltax refunds resulting from the passage of the Worker,Homeownership, and Business Assistance Act of 2009, Pub.L.No. 111–92, 123 Stat. 2984 (Nov. 6, 2009), which amendedthe Internal Revenue Code to allow taxpayers with a NOLfor 2008 or 2009 to elect to carry NOL from one of thoseyears back to the third, fourth, or fifth preceding taxable yearinstead of the second taxable year. See id. § 13. Accordingto the FDIC, the estate lacks an interest in the additionalrefunds that became available under this legislation becausethe legislation was passed after the Petition Date and afterthe deemed rejection of the TSA. (The FDIC argued that thisis particularly true because it asserts that the 2008 NOL didnot even exist before Bancorp's bankruptcy petition was filed,which is an assertion that is legally and factually incorrect forthe reasons discussed above.) The Court disagrees with thistheory.

*33 132. As an initial matter, the case law makes clear that,when the estate owns an asset such as stock or a building thatappreciates in value postpetition, the added value inures tothe benefit of the estate. See, e.g., Gebhart v. Gaughan (Inre Gebhart), 621 F.3d 1206, 1211 (9th Cir.2010); Koksal v.Postel (In re Koksal), 451 B.R. 144, 153 (Bankr.D.Kan.2011).The 2009 tax legislation had the effect of making a propertyinterest that vested in the estate on the Petition Date (theability to carryback 2008 NOLs to obtain a refund of taxespaid several years prior to bankruptcy) more valuable, but itdid not create any new property interests. In that sense, the taxlegislation is akin to a zoning regulation that makes a buildingowned by the estate more valuable, or, as in two 19th centurySupreme Court cases, acts of Congress that provide additionalcompensation for actions taken prior to a bankruptcy filing.Williams v. Heard, 140 U.S. 529, 535–41, 11 S.Ct. 885, 35L.Ed. 550 (1891); Milnor v. Metz, 41 U.S. 221, 224–27, 16Pet. 221, 10 L.Ed. 943 (1842). Those cases address the effectsof postpetition legislation vis-à-vis property of an estate andhold that the fruits of such legislation remain property of theestate.

133. The parties pointed the Court to only one decisionaddressing a debtor's right to larger tax refunds after thepassage of the 2009 tax legislation, which squarely rejectsthe FDIC's theory. In re Hooper, No. 09–26224, 2010 WL

5155828 (Bankr.D.Ariz. Dec.14, 2010). Relying heavily onSegal v. Rochelle, the court in Hooper rejected the notionthat additional refunds resulting from the 2009 tax legislationwere not property of the estate. As in Segal, all those refundswere sufficiently rooted to the prebankruptcy past to be estateproperty since “the Debtors have already paid taxes on the netincome that will generate the refund, and as of the time of thefiling of their bankruptcy petition, the Debtors have generateda loss from their business operations for the 2009 tax year.”Id. at *3 n. 7. Application of Segal thus led to the conclusion

that the postpetition refund generatedby the enactment of postpetitionlegislation is property of thebankruptcy estate to the extent thatthe refund is predicated on prepetitiontaxes having been previously paid bythe Debtors to the Internal RevenueService. The nature, not the timing,of the refund determines whether therefund is property of the bankruptcyestate. The Debtors' 2008 and 2009NOL's and the refund in questiongenerated by those NOL's are propertyof the estate subject to the Trustee'sturnover power under 11 U.S.C. § 542.

Id. at *4 (emphasis added).

134. In light of Williams v. Heard, Milnor v. Metz, andIn re Gebhart, the Court found the analysis in Hooper tobe compelling, and has determined that its conclusion isequally applicable here; the refunds at issue are predicatedon taxes paid to taxing agencies in 2003–2006, and sufficientlosses to obtain all those refunds existed on the day Bancorpfiled its chapter 7 petition. The 2009 tax legislation wasentirely retrospective in effect, providing a mechanism forprepetition losses to be used by Bancorp to obtain a refundof taxes that had been paid prepetition. See id. at *3–4.Hooper appropriately applies the rule of Segal in the contextwhere postpetition legislation makes prebankruptcy assetsor expectations more valuable. The FDIC pointed to noauthority contrary to Hooper and provided no substantivebasis for distinguishing the decision here, although the FDICdid assert that Hooper was like some other cases cited bythe Trustee insofar as it did not involve the parent companyof a consolidated group as the taxpayer. The Court doesnot believe this supposed distinction is one that makes anylegal difference, however, and the FDIC cited no authoritysuggesting otherwise. Thus, the Court concludes that the


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fact that November 2009 tax legislation allowed the 2008NOL to be carried back for a longer period of time thanmight otherwise have been the case does not mean that anyincremental refunds fall outside the broad scope of propertyof the Bancorp estate. Once again, rejection of an executorycontract simply does not strip property out of a bankruptcyestate.

3. Bankruptcy Code Section 365(c)(2) Does Not ApplyHere*34 135. The FDIC argued that the operation of the TSA is

undermined by Bankruptcy Code section 365(c)(2). Section365(c)(2) establishes a general limitation on a bankruptcytrustee's ability to assume a certain type of executory contractand/or to assign that contract to a third party. Specifically, thetrustee may not assume or assign “a contract to make a loan,or extend other debt financing or financial accommodations,to or for the benefit of the debtor, or to issue a security of thedebtor.” 11 U.S.C. § 365(c)(2).

136. Section 365(c)(2) is irrelevant by its plain terms; theTrustee never sought to “assume or assign” the TSA. Asdiscussed above, the TSA was deemed rejected by operationof law, which means it can no longer be assumed or assigned.Therefore, a debate about whether the TSA is a contractwhereby the Bank would make “financial accommodations”to Bancorp is purely academic. Even if it were somehowrelevant, however, the Court concludes that the TSA doesnot involve the making of any “financial accommodations” toBancorp, for at least two reasons.

137. First, as the Collier treatise explains, this term is “strictlyconstrued and do[es] not extend to an ordinary contractto provide goods or services that has incidental financialaccommodations or extensions of credit.” 3 COLLIER ONBANKRUPTCY ¶ 365.07[2] (16th ed. rev.2011). Thus, onlyif a contract's “primary purpose” is “to extend financingto or guarantee the financial obligations of the debtor”does a “financial accommodation” exist; if an agreement“establishes a contractual business relationship and anyfinancing that is a part of this relationship is only incidentalto the relationship, then the [a]greement does not fall withinthe ambit of §§ 365(c)(2) and 365(e)(2)(B).” Citizens & S.Nat'l Bank v. Thomas B. Hamilton Co. (In re Thomas B.Hamilton Co.), 969 F.2d 1013, 1019–20 (11th Cir.1990);see also, e.g., In re United Airlines, Inc., 368 F.3d 720,724 (7th Cir.2004). Here, the TSA's overarching purposeis to create a business relationship that governs the filingof consolidated tax returns and allocates tax liabilities

and responsibilities among the IndyMac group's members.Although a debtor-creditor relationship may be created incertain scenarios in which a refund is received, the provisionof that indirect “financing” certainly is not the TSA's “primarypurpose,” but rather is an attribute incidental to the broaderarrangement. Cf. In re Travel Shoppe, Inc., 88 B.R. 466, 470(Bankr.N.D.Ga.1988) (rejecting interpretation that “wouldturn every contract where the debtor owed money into acontract for financial accommodations and would allow theexception to swallow the rule” (internal quotation marksomitted)). Because the TSA is not a contract for “financialaccommodations,” Bankruptcy Code section 365(c)(2) is noteven theoretically relevant.

138. Second, and perhaps even more fundamentally, a“financial accommodation” can only be provided by a partywho owns funds or assets in the first instance. See, e.g., In reFarrell, 79 B.R. 300, 304 (Bankr.S.D.Ohio 1987). Here, nomoney or property belonging to the Bank is ever “loaned” or“advanced” to Bancorp, which means the Bank is necessarily“under no obligation to provide advances of cash or newproperty” after Bancorp's bankruptcy filing. See id. Rather,Bancorp incurs a contingent future contractual liability tothe Bank under certain scenarios, which payment would bemade from Bancorp's own, fungible cash. All refunds thatBancorp receives are paid directly to it by the taxing agencies,not by the Bank—the taxing agencies are the only partiesever providing new property to Bancorp, but it is to fulfilltheir own, independent legal obligations, not as any loan oraccommodation to Bancorp. This structure does not createa financial accommodation for Bancorp, and it does notinvolve any use of the Bank's property. The only asset ownedby the Bank (or the FDIC as receiver) is a contractuallycalculated claim against Bancorp. Therefore, the Court rejectsthe FDIC's argument under Bankruptcy Code section 365(c)(2).

E. The FDIC's Affirmative Defenses Under BankingLaw Do Not Overcome The TSA*35 139. In addition to its bankruptcy theories, the FDIC

contended that provisions of title 12 of the United StatesCode or a 1998 banking agency policy statement provideaffirmative defenses to the operation of the TSA. Upon dueconsideration of the FDIC's arguments, the Court concludedthat each of them is incorrect or inapposite under thecircumstances presented here. In many cases, although theFDIC's defenses are presented under other federal statutes, itis once again the operation of established bankruptcy law thatprevents most of these defenses from being successful.









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1. The FDIC's Attempted “Repudiation” Of The TSAViolated The Automatic Stay And Is Void140. On August 15, 2008, the FDIC sent a letter to Bancorpin which it purported to “repudiate” the TSA under 12 U.S.C.§ 1821(e). [Docket No. 32 Ex. 2.] The FDIC argues thatthis repudiation could have the effect of undoing the TSA orotherwise returning the parties to a world governed by thequasi-contractual rule of Bob Richards. The Court concludesthat there are two reasons why the FDIC's argument does notwork.

141. First, the FDIC's conduct violated the automatic stay thatarose as a matter of law when Bancorp filed for bankruptcyon July 31, 2008. Under the Bankruptcy Code, a broad staycomes into effect upon the bankruptcy filing, and this stayprohibits, inter alia, any act to exercise possession or controlover property of the estate, any act to enforce a prebankruptcyclaim against a debtor or its estate, and an array of otherconduct that might be appropriate outside of bankruptcy. See11 U.S.C. § 362(a). Other courts have consistently held thatthe FDIC as receiver is subject to the automatic stay to thesame extent as any other party. See, e.g., Sunshine Dev., Inc.v. FDIC, 33 F.3d 106, 111–14 (1st Cir.1994); In re ColonialRealty Co., 980 F.2d 125, 137 (2d Cir.1992).

142. The Court concludes that the FDIC's purported“repudiation” of the TSA is among the actions that areprohibited by the automatic stay imposed by 11 U.S.C. §362(a). Other courts to consider this issue have come to thesame conclusion. See, e.g ., NetBank, 459 B.R. at 819–20.Because the automatic stay applied, the onus was on theFDIC to move for relief from stay under Bankruptcy Codesection 362(d) before purporting to “repudiate” the TSA. TheFDIC never brought such a motion, and the Court certainlydid not modify the stay to allow the FDIC to act in thisfashion. Any actions taken in violation of the stay are voidab initio under Ninth Circuit law. See, e.g., Griffin v. Harvey(In re Wardrobe), 559 F.3d 932, 934–35 (9th Cir.2009);Contractors' License Bd. v. Dunbar (In re Dunbar), 245 F.3d1058, 1063 (9th Cir.2001). Therefore, the FDIC's purportedrepudiation could not, as a matter of law, have had any effecton the property rights of the Bancorp estate.

143. In addition, repudiation, just like rejection of anexecutory contract, merely constitutes a breach of theagreement that creates a contractual claim. See 12 U.S.C.§ 1821(e)(3). The case law makes clear that repudiationunder title 12 does not vaporize or nullify a contract. See

WRH Mortg., Inc. v. S.A.S. Assocs., 214 F.3d 528, 532–34 (4th Cir.2000); ALLTEL Info. Servs., Inc. v. FDIC, 194F.3d 1036, 1039 (9th Cir.1999); Howell v. FDIC, 986 F.2d

569, 571 (1st Cir.1993). 23 For all the reasons set forthabove concerning the non-effects of the TSA's deemedrejection under the Bankruptcy Code, the FDIC's attemptedrepudiation would not have divested the estate of any PetitionDate property interests even if the repudiation had beensuccessfully executed.

2. 12 U.S.C. § 371c Does Not Invalidate The TSA*36 144. The FDIC argued at some length that the interplay

between the TSA and bankruptcy law somehow implicatesand violates 12 U.S.C. § 371c, a banking statute that placescertain general restrictions on the terms of loans betweena regulated bank and its affiliates. According to the FDIC,section 371c alters the otherwise widely accepted rule thattax refunds belong to a parent corporation's bankruptcy estatewhen the parties entered into a tax sharing agreement of thesort present here. Based upon this notion, the FDIC arguedthat the Court should not adopt an interpretation of the TSAthat would violate the FDIC's construction of federal law.

145. The FDIC's pleadings did not cite any case lawsupporting this concept, and the FDIC's counsel was unableto provide the Court with any authority supporting the FDIC'sposition about this statute when the Court pressed counselat oral argument. See Dec. 13, 2011 Hr'g Tr. at 44:25–45:5. The Court found the FDIC's arguments on this frontto be unconvincing, which is a conclusion the District Courtappears to have separately reached. See Siegel v. FDIC, 2011WL 2883012, at *4–5. The Court especially agrees with theDistrict Court's assessment that the FDIC “fails to explainhow a violation of federal statute § 371c(c) falls under TSASection 7(a), which discusses penalties for violating the rulesof the OTS or the FDIC, nor how a violation of § 371c(c)would void the TSA.” Id. at *4. Nevertheless, for the sakeof completeness, the Court considered the FDIC's argumentsmore fully and did not agree with them.

146. First, it is doubtful that section 371c has any relevanceat all. The FDIC cited no case law for the proposition that taxsharing agreements give rise to a “loan” or similar “extension

of credit.” 24 This contention simply assumes that the Bankowned all the tax refunds (i.e., the putative loaned or extendedproperty) in the first instance. If this initial premise is wrong,then the FDIC's argument falls apart.


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147. The premise behind the FDIC's argument is wrong. Untilfunds are paid over to the Bank by Bancorp, the Bank hasno property interest or other rights with respect to any taxrefunds. Instead, the Bank merely has a right to receive apayment under the TSA after the TSA's 15–business–dayperiod actually runs. The import of this is manifest: Anyloan or extension of credit could not occur until the Bankfirst obtained a vested right to payment, which it then mightgrant to Bancorp for some future period. Having ownershiprights in the first instance is an inherent part of any loan.See, e.g., BLACK'S LAW DICTIONARY 985 (9th ed.2009)(defining “lend” as allowing another the temporary use ofone's property or money “on condition that the thing or itsequivalent be returned” or that the money be repaid). Here,Bancorp, not the Bank, has ownership rights to the tax refundsunder the TSA, which means those refunds cannot form thebasis for any “loan” because there never is any borrowingevent.

*37 148. Nor does the Court believe there is any “extensionof credit” for purposes of section 371c. This concept hasbeen interpreted, based upon the words' plain meaning, toencompass a continuation of an obligation past the point at

which it would otherwise be due. 25 Until the 15–business–day period in the TSA passes, however, the Bank has norights against Bancorp, and thus could not be described ashaving extended any credit under the statute. The Court doesnot agree with the FDIC's suggestion that the mere fact thatBancorp would eventually be obligated to pay some money tothe Bank—i.e., the debtor-creditor relationship that is centralto this case—also means that there must be a prohibitedextension of credit. This sweeps far too broadly. Manyrelationships are of a debtor-creditor nature without involvingany extension of credit. For example, tort victims, judgmentcreditors, and employees all have “claims” that establisha debtor-creditor relationship for bankruptcy purposes. 11

U.S.C. § 101(5) & (10). 26 It is untenable to suggest theseparties extended credit to the debtor, however. The FDICcited nothing to suggest that an extension of credit sweepsin an all-encompassing fashion, and the Court will use the“general definition” of a commonly understood term unlessdoing so would produce “absurd results.” Rowland v. Cal.Men's Colony, 506 U.S. 194, 200, 113 S.Ct. 716, 121 L.Ed.2d656 (1993). Because the TSA's operation does not involve a“loan” or other “extension of credit,” as generally understood,and applying the general definition produces a sensible result,section 371c is inapplicable.

149. Ultimately, the Court does not find section 371c ofrelevance here. The TSA is not structured as a “loan” or an“extension of credit.” There is no borrowing event. There isno money or other property of the Bank ever borrowed byBancorp. Instead of a claim for money borrowed, the TSAcreates a general contractual obligation that may be triggeredby external events. This is not the sort of transaction describedby section 371c.

150. Even assuming section 371c has some relevance to thepresent dispute, the Court also finds that it does not apply inthe fashion suggested by the FDIC. Contrary to the FDIC'sassertions, the TSA contains no provision stating that theparties would not comply with whatever collateral posting orequity ratios may be associated with section 371c, if, as, andwhen those provisions became applicable. Rather, such ratioswould be part of the document since “statutes in existence atthe time a contract is executed are considered a part of thecontract, as though they were expressly incorporated therein.”2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp.,924 F.2d 1247, 1254 (2d Cir.1991). This puts to rest theFDIC's circular suggestion that Bancorp and the Bank musthave intended some sort of non-debtor-creditor relationshipbecause otherwise the TSA violates the law—section 371citself contemplates debtor-creditor relationships and merelyimposes certain conditions on certain subsets of them (asdiscussed above, the Court does not find the TSA to be withinthose subsets), and the TSA never states or even suggests thatthe parties would not comply with those conditions. Thus,section 371c's requirements are not at odds with the parties'contract, and, prior to Bancorp's chapter 7 petition, nothingrestricted Bancorp's compliance with such requirements.

*38 151. Nevertheless, as a matter of bankruptcy law, suchrequirements would not be enforceable postpetition. Afterall, although section 371c may require a security interest insome contexts, the statute itself does not create a securityinterest. Nor does the statute perfect any lien. See 67 Fed.Reg.76560, at 76574 (Dec. 12, 2002) (preamble to “RegulationW” promulgated in connection with section 371c notinghow “a member bank's security interest in any collateralrequired by section [371c] must be perfected in accordancewith applicable law”). There is no indication that the Banktook steps to create or perfect any lien to which it may havebeen entitled prebankruptcy under section 371c or the TSA,and the FDIC never asserts the existence of any prepetitionlien. There is no reason to believe such a lien was granted,let alone that it was properly perfected in accordance withapplicable nonbankruptcy law. Whatever might have been





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required prior to or outside of bankruptcy, the Bank neitherobtained nor perfected a lien against Bancorp prepetition. Theautomatic stay bars any tampering with the state of affairs onBancorp's Petition Date. 11 U .S.C. § 362(a)(3), (4) & (6). Asa result, the FDIC cannot use arguments under section 371c toimprove its unsecured creditor position. Nor does the fact thatsection 371c could have theoretically required a lien in somesituations provide any basis for elevating the FDIC's claim inthe Bankruptcy Case above the level of an unsecured creditor.See, e.g., TWA Inc. Post Confirmation Estate v. U.S. Dep't ofAgric. (In re TWA Inc. Post Confirmation Estate), 312 B.R.759, 761–65 (Bankr.D.Del.2004).

152. Finally, again assuming that section 371c applies andfurther assuming the TSA somehow violated it, the statutestill does not work as the FDIC suggests. Nothing in section371c says that a loan or extension of credit made in violationof the statute is void ab initio or fails to create an enforceabledebtor-creditor relationship. To the contrary, the statutecontemplates civil penalties (see 12 U.S.C. §§ 504 & 1818(i)(2)) or regulatory action, such as “cease and desist” orders(see 12 U.S.C. §§ 1468(c) & 1818), as the sole remedies forviolations of section 371c. This stands in sharp contrast toother banking laws in which Congress made clear its intent torender certain transactions void or invalid. See, e.g., 12 U.S.C.§§ 91, 1441a(y)(3) & 1467a(f).

153. Other courts have considered analogous arguments andrejected the notion that loans or extensions of credit madein purported violation of title 12's restrictions are voidable.See Armstrong v. First Nat'l Bank (In re Clothes, Inc.), 40B.R. 997, 1000 (D.N.D.1984); In re Bates, 58 B.R. 915,916–17 (Bankr.W.D.Tenn.1986). And, as the District Courtpreviously ruled in this very litigation, no regulatory actionhas been taken (or could be taken postpetition due to theautomatic stay) and no provision of the TSA would operateto give any “voidable” power to section 371c. See Siegel

v. FDIC, 2011 WL 2883012, at *4–5. Thus, nothing aboutsection 371c or other banking law alters the prepetitiondebtor-creditor relationship that existed between Bancorp and

the Bank. 27

*39 154. At best, section 371c might have had sometheoretical prebankruptcy applicability. Nothing about theTSA, however, necessarily violates the dictates of section371c, and whatever the statute actually required would havebeen part of the parties' agreement. Once Bancorp filed forbankruptcy, however, the world changed dramatically and theBankruptcy Code now forbids the FDIC from improving its

prepetition rights. Nevertheless, the TSA remains the contractthat defines the parties' relationship vis-à-vis tax refunds,and it continues to do so for purposes of ascertaining whatis property of Bancorp's estate and what claims the FDICmay hold. See 11 U.S.C. §§ 502(b), 541(a)(1) & 541(d)(each making the Petition Date the operative cleavage point).Because the Trustee does not need to “enforce” the TSA toprevail in this dispute, any debate about whether enforcementwould be consistent with section 371c is purely hypothetical.

3. The Interagency Policy Statement Is Legally AndFactually Irrelevant155. The FDIC argues that the 1998 Interagency PolicyStatement on Tax Allocation in a Holding Company Structure(the “Policy Statement”) is relevant to the interpretation ofthe TSA, because it supposedly is a “rule” that could result inprovisions of the TSA being rendered “null and void” underSection 7(a) of the TSA. The Court finds the Policy Statementto be irrelevant here for several reasons.

156. First, as discussed in Part IV.A. above, the Courthas determined the TSA is unambiguous and should beinterpreted based upon its text, not based upon parol evidencesuch as the Policy Statement. Thus, the Court does not acceptthe FDIC's invitation to review the extrinsic evidence that theCourt has declined to admit on the premise that it will supportthe FDIC's argument that the parties drafted the TSA with theintent that it be consistent with the Policy Statement.

157. Second, the District Court has already made clear inthis litigation that the Policy Statement is “non-binding” and“not material to adjudicate the ownership issue.” Siegel v.FDIC, 2011 WL 2883012, at *4; see also, e.g., BankUnited,462 B.R. at 896 n. 29; NetBank, 459 B.R. at 817–18; TeamFinancial, 2010 WL 1730681, at *8–9. In the process, theDistrict Court noted that this “Court may choose to consider”the Policy Statement in its legal analysis. See 2011 WL2883012, at *4 (emphasis added). Because the Court agreeswith the District Court that the Policy Statement is non-binding and not material to adjudicate the parties' dispute,the Court chooses not to dwell on how the Policy Statementshould be interpreted.

158. Third, the TSA does not incorporate the PolicyStatement. As a matter of law, the lack of a clear, specific,and unequivocal reference to the Policy Statement means theTSA does not incorporate it by reference under Californialaw. See, e.g., Cariaga v. Local No. 1184 Laborers Int'lUnion of N. Am., 154 F.3d 1072, 1074–75 (9th Cir.1998);


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Chan v. Drexel Burnham Lambert, Inc., 178 Cal.App.3d 632,223 Cal.Rptr. 838, 843–46 (Ct.App.1986). In addition, theTSA only incorporates “rules promulgated by” the OTS andthe FDIC, but the Policy Statement is obviously a merestatement of policy, not a formal “rule” and not anything“promulgated” by any federal regulator. See, e.g., Pelisserov. Thompson, 170 F.3d 442, 447 (4th Cir.1999); NetBank,459 B.R. at 817. At best, the language of Section 7(a) is an“amorphous” description, one that fails to guide the readerto a Policy Statement that falls outside the scope of whatSection 7(a) describes in extremely general terms. Cf. Chan,223 Cal.Rptr. at 845. Once again, the Court will not look tothe FDIC's extrinsic evidence to alter the TSA's clear text or toprovide additional concepts and incorporations by referencethat plainly appear nowhere in the document itself.

*40 159. Finally, even if this Policy Statement were relevantor incorporated into the TSA the Court cannot agree thatthe TSA violates it. As the Trustee's briefing demonstrated,the Policy Statement contains several provisions that areconsistent with there being a debtor-creditor relationshipbetween the parent and its subsidiary concerning taxrefunds, including characterizing the parent's obligation as a“reimbursement” and a “receivable,” recommending that theparent make payments to the subsidiary from its general fundseven when no tax refund is due or received, and suggestingthat the subsidiary should receive payments calculated as ifthe subsidiary were a separate entity. The TSA comports with

all of this. 28

4. The FDIC's Belated Argument Under 12 U.S.C. §1823(e) Is Not Viable160. In its December 6, 2011 reply brief, the FDIC arguedfor the first time that the TSA was invalid under 12U.S.C. § 1823(e), which imposes certain conditions on theenforcement of an “agreement which tends to diminish ordefeat the interest of the [FDIC] in any asset acquired by”it as receiver. The FDIC never previously referenced thisargument in any of the lengthy prior briefing regarding theTrustee MSJ or the FDIC MSJ.

161. The Trustee objected to consideration of this argumenton the grounds that it was inappropriately raised for the firsttime in the FDIC's reply. The Court agrees. The Court's localrules require replies to be limited to responding directly toopposition papers, LBR 9013–1(g)(1), and thus follows theample authority precluding parties from raising new issues forthe first time in a reply brief. See, e.g., Coleman v. Quaker

Oats Co., 232 F.3d 1271, 1289 n. 4 (9th Cir.2000); NovosteelSA v. United States, 284 F.3d 1261, 1274 (Fed.Cir.2002);Docusign, Inc. v. Sertifi, Inc., 468 F.Supp.2d 1305, 1307(W.D.Wash.2006). The FDIC waived its section 1823(e)argument by raising it in a dilatory and inappropriate fashion.The record demonstrates that the FDIC was aware of thispotential argument before the start of briefing, as the FDICincluded this claim among the affirmative defenses raised inthe FDIC Answer. See FDIC Answer at pp. 15–16 (“SixthDefense”).

162. Even if the FDIC had not waived this argument, theCourt does not find it persuasive. Section 1823(e) imposesfour conditions on agreements encompassed within its scope.The FDIC does not contest that the TSA satisfies three ofthose conditions (it is a written document, executed by theBank, which has continuously been among the Bank's officialrecords). Rather, the FDIC maintains that the TSA was notapproved by the board of directors of the Bank.

163. The Trustee offered documents showing that the TSAwas approved by the board of directors of the Bank.Specifically, the Trustee provided documents (to which theFDIC lodged no objection) clearly evidencing that the TSAwas part of a set of “Transactions with Affiliates” policies,which policies were specifically considered and approvedin official corporate minutes and resolutions of the boardof directors of the Bank. [See Docket No. 81 Ex. “Y”.]By approving and adopting the transactions policies andexpressly ratifying, confirming, adopting, and approving allactions taken to implement those policies—including havingthe TSA govern the Bank's tax rights—these documentsunambiguously defeat the FDIC's unsubstantiated suggestionthat the requirements of section 1823(e) were not met.The fact that documents attached to formal Bank boardminutes specifically reference and acknowledge the TSA byname makes this case readily distinguishable from FDIC

v. Gardner, 606 F.Supp. 1484 (S.D.Miss.1985), where thechallenged contract was never referenced or acknowledgedin board minutes or the attachments thereto, let aloneaffirmatively incorporated by name into a formal approval.Moreover, the FDIC simply ignores other documents thatthe FDIC sought to include in the record, which againdemonstrate that the Bank's board approved the policies ofwhich the TSA is a part and state that board approval ofthe TSA “shall be evidenced by the execution thereof.” [SeeDocket No. 81 Ex. “X”.] Based upon these clear documentsand without any evidence on the other side, the Court is



























unable to conclude that there is any genuine dispute of fact

on this front. 29

*41 164. More generally, the Court is doubtful that section1823(e) even applies in this context. The statute by its termsis limited to an “agreement which tends to diminish or defeatthe interest of the [FDIC] in any asset” it acquired as receiverof the Bank. The FDIC's argument that the TSA defeats thesupposed interest of the FDIC in tax refunds simply assumesthat those refunds were an “asset” of the Bank to beginwith. The Court again rejects this mischaracterization of thearrangements between Bancorp and the Bank. In addition,multiple courts have held that section 1823(e) only appliesto “conventional loan” transactions. See, e.g., John v. RTC,39 F.3d 773, 776 (7th Cir.1994); E.I. du Pont de Nemours& Co. v. FDIC, 32 F.3d 592, 597 (D.C.Cir.1994). As theCourt has explained, the TSA is not an agreement for a“loan,” and it certainly is not the sort of “regular bankingtransaction” to which section 1823(e) is intended to apply.Given that the TSA was repeatedly submitted to and approvedby IndyMac's federal regulators, the Court does not acceptthe FDIC's suggestion that the TSA is one of the “secretagreements” at which the statute is aimed. See, e.g., BrooksideAssocs. v. Rifkin, 49 F.3d 490, 495–97 (9th Cir.1995).

165. Because it was waived by the FDIC and is factually andlegally inapplicable in any event, the Court rejects the FDIC'sargument that it can defeat the TSA through section 1823(e).In particular, the Court finds that the FDIC's evidence andargument does not raise a genuine dispute of material fact andtherefore rejects the FDIC's argument that the TSA did notfully comply with the provisions of 12 U.S.C. § 1823(e).

F. The FDIC's Affirmative Defenses Under CaliforniaState Law Do Not Overcome The TSA166. Beyond its technical bankruptcy and banking defenses,the FDIC also attempted to undo the TSA by relying onCalifornia law to support its arguments. Upon considerationof the legal principles behind these concepts, the Court doesnot find any of these arguments applicable to this case.

1. The TSA Is Supported By Adequate Consideration167. The FDIC argued that the TSA was not supportedby sufficient consideration to the Bank and therefore wasnot an enforceable contract. The Court disagrees with thisargument. Under California law, “[a] written instrumentis presumptive evidence of a consideration.” CAL. CIV.CODE § 1614. Here, that written contract provides material

benefits to all members of the consolidated IndyMac group bystreamlining tax administration (which, among other things,eliminated the need for the Bank to incur the costs ofpreparing its own tax return). See, e.g., Marvel, 273 B.R.at 64–66. Indeed, federal regulators encourage parties toenter into these sort of contracts, see, e.g., Team Financial,2010 WL 1730681, at *8–9, and the IndyMac TSA wassubject to review and approval by outside regulators at theOTS. In addition to the resulting administrative efficienciesfor the Bank, the Bank also received a significant potentialunsecured contractual claim against Bancorp. The Court hasno doubt that these benefits to the Bank easily surpass themere “peppercorn” of consideration that is necessary for theTSA to be an enforceable contract under California law. SeeWalters v. Calderon, 25 Cal.App.3d 863, 102 Cal.Rptr. 89,97 (Ct.App.1972).

2. The TSA Does Not Involve Any ProblematicAssignment*42 168. The FDIC also argued that the TSA was ineffective

to assign the Bank's refunds to Bancorp under Californialaw. As with the FDIC's section 371c argument, this theoryis misplaced because it simply presupposes that the Bankowned the tax refunds in the first instance. An “assignment,”after all, requires that “the owner of the right” transfer theright to another. See, e.g., Cockerell v. Title Ins. & TrustCo., 42 Cal.2d 284, 291, 267 P.2d 16, 20 (1954). Here, asthe Court has explained, the Bank was never an owner ofanything until funds were actually paid over to it by Bancorp.Plus, even if the Bank did have a preexisting interest inrefunds that it could assign, this right was properly assignedvia the TSA. Although an assignment requires the assignorto manifest its intent to transfer a right, this intent can beshown in many ways and need not be explicitly stated in theagreement. As the California Supreme Court has explained,“[a]n assignment requires very little by way of formalitiesand is essentially free from substantive restrictions ... ‘[i]tis sufficient if the assignor has, in some fashion, manifestedan intention to make a present transfer of his rights to theassignee.’ “ Amalgamated Transit Union v. Superior Court,46 Cal.4th 993, 1002, 95 Cal.Rptr.3d 605, 209 P.3d 937,943 (2009) (citations omitted). As detailed above, the TSAmanifests the parties' creation of a debtor-creditor relationshipin myriad respects. Thus, there is no “assignment” associatedwith applying the TSA according to its terms.

3. There Is No Unjust Enrichment If The TrusteeRetains The Refunds














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169. Finally, the FDIC argued that the doctrine of unjustenrichment should prevent the Trustee from retaining thetax refunds under the TSA. As discussed at some lengthearlier in this Report and Recommendation, the Court doesnot believe that any unjust enrichment is happening here. Inthat regard, the Court again notes that the discussion of unjustenrichment by the Second Circuit Court of Appeals in the veryanalogous First Central case is extremely compelling. As inFirst Central, the Trustee here wants only to marshal “theassets of the estate under judicial supervision, for distributionaccording to federal law, under circumstances in whichunsecured creditors receive fair but not full returns,” whichmeans that even if Bancorp's estate may be “enriched” if theTrustee retains the refunds, it will not be unjustly enriched.See 377 F.3d at 218.

170. Furthermore, the presence of the written TSA betweenthe parties makes resort to unjust enrichment, unfairness, orsimilar equitable concepts and remedies inappropriate underCalifornia law in any event. See, e.g., Total Coverage, Inc.v. Cendant Settlement Servs. Grp., Inc., 252 F. App'x 123,125–26 (9th Cir.2007); Hedging Concepts, 49 Cal.Rptr.2dat 197–98. The FDIC's position again runs aground on thefundamental rule that “courts cannot make better agreementsfor parties than they themselves have been satisfied to enterinto or rewrite contracts because they operate harshly orinequitably.” Walnut Creek Pipe Distribs., Inc. v. GatesRubber Co. Sales Div., 228 Cal.App.2d 810, 39 Cal.Rptr. 767,771 (Ct.App.1964). At the end of the day, there is nothinginequitable, unjust, overreaching, or otherwise unfair aboutthe FDIC receiving proportional distributions on account ofwhatever unsecured claim the Bank would have enjoyedunder the TSA. It is the opposite result advocated by the FDIC—under which the FDIC would receive an enhanced recoveryat the expense of similarly situated unsecured creditors—thatwould be offensive to the principles of equality of distributionlying at the heart of the bankruptcy process.

VI. PROPOSED CERTIFICATION UNDER RULE 54(b)

*43 171. The operative Complaint in this AdversaryProceeding involves five separate claims for relief. ThisReport and Recommendation addresses only one of thoseclaims: the Fifth Claim for Relief, the only one thatany party has suggested is a “non-core” matter on whichthis Court cannot enter final judgment, and the mirrorimage of that claim, the FDIC Counterclaim (together,the “Tax Refund Claims”). Although the adoption of the

Court's recommendations by the District Court would fullyresolve the tax refund-related issues, there remain additional,potentially complex causes of action to be litigated in thiscase.

172. In their February 8, 2012 stipulation, the parties jointlysuggested that it would be appropriate to sever the “non-core”Tax Refund Claims from the remainder of the AdversaryProceeding, and for the District Court to certify any judgmententered after the District Court's review of this Report andRecommendation as a final judgment under Federal Rule

of Civil Procedure 54(b). 30 After considering the parties'suggestion and the posture of this litigation, the Court agreesthat entry of a final judgment would be appropriate, andhereby proposes that the District Court direct entry of a finaljudgment as to the Tax Refund Claims under Rule 54(b).

173. Rule 54(b) provides in relevant part that:

When an action presents more than oneclaim for relief ... or when multipleparties are involved, the court maydirect entry of a final judgment as toone or more, but fewer than all, claimsor parties only if the court expresslydetermines that there is no just reasonfor delay.

Fed.R.Civ.P. 54(b); see Fed. R. Bank. P. 7054(a) (makingrule applicable to adversary proceedings). Thus, a decisionwhich would otherwise not be “final” for appellate purposes—such as an order granting partial summary judgment—maybe “certified” as a final decision under Rule 54(b) if a courtentering the judgment finds that “(1) there has been a finaljudgment on the merits, i.e., an ultimate disposition on acognizable claim for relief; and (2) there is ‘no just reasonfor delay.’ “ Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d195, 202 (3d Cir.2006). Application of Rule 54(b) calls for anexercise of judicial discretion. See Curtiss–Wright Corp. v.Gen. Elec. Co., 446 U.S. 1, 7–8, 100 S.Ct. 1460, 64 L.Ed.2d1 (1980).

174. A determination under Rule 54(b) is appropriate herebecause the parties' dispute regarding the Tax Refund Claimsis conceptually and legally distinct from the other claimsfor relief. Moreover, the Tax Refund Claims are separateclaims that are capable of an ultimate resolution at thisjuncture. Therefore, a judgment on the Tax Refund Claimswould be an appropriately final disposition of separate claimsfor relief. See, e.g., Curtiss–Wright, 446 U.S. at 7; United






























States v. Ettrick Wood Prods., Inc., 916 F.2d 1211, 1217 (7thCir.1990).

175. Nor is there any “just reason for delay.” Thissecond prong of the Rule 54(b) analysis is necessarily acontext-specific one, which “must take into account judicialadministrative interests as well as the equities involved” ina particular case. See Curtiss–Wright, 446 U.S. at 8. Thisprong allows the District Court to act as a “dispatcher” for thiscase, applying its “sound judicial discretion ... to determinethe ‘appropriate time’ when each final decision in a multipleclaims action is ready for appeal.” See id.

*44 176. This Adversary Proceeding has been pending forseveral years, and the Bankruptcy Case has been pending evenlonger. Virtually all tax refunds that will ever be paid havebeen paid and are now held in the Joint Account where theyare accruing very low rates of interest. Absent settlement,only a final judicial resolution will provide a mechanismwhereby those funds are released for distribution. Both theTrustee and the FDIC have an understandable interest inseeing that the funds are distributed in a timely fashion. See,e.g., Century Glove, Inc. v. First Am. Bank, 860 F.2d 94,98 (3d Cir.1988) (emphasizing how “issues central to theprogress of the bankruptcy petition, those likely to affectthe distribution of the debtor's assets, or the relationshipamong the creditors, should be resolved quickly” (citationand internal quotation marks omitted)). As both parties agree,accomplishing this important result is a reason to avoid delaythrough the entry of a final judgment on the Tax RefundClaims.

177. In addition, there are procedural benefits to entry ofa final judgment under Rule 54(b). Although the DistrictCourt determined that the Tax Refund Claims are “non-core,” the Court hereby finds that the claim allowance andsubordination issues presented by the Trustee's remainingcounts are “core” bankruptcy matters with little relationshipto the underlying ownership dispute. 28 U.S.C. §§ 157(b)(2)(B), 157(b)(2)(O) & 157(b)(3); Stern v. Marshall, 131 S.Ct.at 2618. Under the Judicial Code, a federal district courtanalyzes a bankruptcy court's rulings on “core” matters ina fundamentally different fashion from its rulings on “non-core” matters. See 28 U.S.C. §§ 157(c)(1) & 158(a). It wouldlikely be procedurally complex and inefficient for the DistrictCourt to perform both manners of review at the very endof the Adversary Proceeding. Since the “non-core” portionof this Adversary Proceeding is now ready for the DistrictCourt's review, the Court believes it would be just to allow

that review to proceed with finality. This is particularly truegiven the Court's impression that, in light of intensity of theparties' litigation thus far, it is reasonably likely that the losingparty before the District Court will seek to appeal to the NinthCircuit Court of Appeals. In order to allow for that appeal toproceed now—rather than at the very end of the case whenthe District Court has reviewed all of the Court's ruling on allaspects of the Adversary Proceeding, including the remaining“core” matters—the District Court may need to enter a finalorder. See generally 28 U.S.C. § 1291. The District Court canaccomplish this result by exercising its discretion under Rule54(b).

178. In summary, the result recommended by this Reportand Recommendation would include the final disposition ofclaims for relief that are distinct and separate from the otherclaims in the Trustee's Complaint or in the FDIC Answer.The Court does not perceive any just reason to delay the entryof a final judgment as to the Tax Refund Claims, and thusrecommends that the District Court direct the entry of such ajudgment under Rule 54(b).

VII. CONCLUSION AND RECOMMENDATION

*45 179. The Court recognizes that this Report andRecommendation is lengthy and addresses many issues thatmay seem complex or esoteric. Much of the complexity isa function of the sheer number of different arguments andtheories that the FDIC has advanced throughout the courseof this litigation. After carefully working through all thesearguments, the Court does not believe this to be as harda case as it may appear. There is an established body ofcase law extending from 1993 through 2011 resolving verysimilar disputes about tax refunds in bankruptcy, and thereis an established body of case law applying California lawto determine the nature of a relationship, including in thebankruptcy context. These cases provide the first principlesupon which this Report and Recommendation is based. As toeach of the additional issues layered on top of this foundation,the Court believes that a clear answer can be found in therelevant statutes, existing case law, or logic itself.

180. After reviewing all of the evidence and arguments madeby both parties in numerous rounds of briefing and hearings,the Court finds that there is no genuine dispute as to anymaterial fact that would limit the Trustee's entitlement tojudgment as a matter of law. As such, the Court's dulyconsidered recommendation to the District Court would be









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that the District Court grant the relief requested by the TrusteeMSJ and deny the FDIC MSJ.

181. More specifically, the Court respectfully recommendsthat the District Court enter an order (1) adopting thisReport and Recommendation in its entirety; (2) providingthat the Trustee, as successor to Bancorp, is entitled toimmediate payment, possession, and ownership of all refundsto be received on or after July 30, 2008 in connection withconsolidated or combined federal and state tax returns filedor submitted for the years 2000 through 2008 and any interestassociated therewith, including all funds now on deposit in

the Joint Account; (3) holding that any legal rights of theFDIC, the Bank, or any subsidiary or affiliate of the Bankwith respect to these tax refunds are properly asserted, if atall, solely in the form of a general unsecured claim againstthe Bancorp estate, subject to the bar date in effect in theBankruptcy Case, as well as the objections, defenses, andcauses of actions set forth in the Trustee's Complaint; and (4)expressly determining that there is no just reason for delayand directing that the judgment in favor of the Trustee andagainst the FDIC be entered as a final judgment under FederalRule of Civil Procedure 54(b).

Footnotes

1 Unless otherwise described, all bracketed references to docket numbers in this Report and Recommendation refer to the CM/ECF

docket maintained for the Adversary Proceeding.

2 As explained below, the Court ultimately did not rely on any of this deposition testimony in reaching the proposed findings and

conclusions set forth in this Report and Recommendation.

3 The Court believes that all of the matters described in this Part III of the Report and Recommendation are purely factual, but to the

extent they involve any legal conclusions, they should be treated as such. Likewise, the proposed legal conclusions and analysis in

Part V below contain discussion of additional factual issues that, although relevant for purposes of considering certain arguments

made by the parties, ultimately are not material for purposes of ruling on the Trustee MSJ or the FDIC MSJ. To the extent the District

Court disagrees with any of the Court's materiality analysis, the factual propositions at issue in Part V should be treated as though

they were set forth in this Part III.

4 The Federal Rules of Evidence are generally made applicable in bankruptcy cases by Federal Rule of Bankruptcy Procedure 9017.

5 To quote the Trustee, “[t]he TSA is unambiguous.” Docket No. 59 at 13:19. To quote the FDIC, it took positions that applied only

“[t]o the extent an ambiguity exists within the TSA, which it does not,.... ” Docket No. 41 at 34:1–2 (emphasis added).

6 The factual findings that the Court believes necessary to resolve this litigation are set forth in Part III above. As noted in footnote 3,

this Part V of the Report and Recommendation contains discussion of additional factual issues that, although relevant for purposes of

considering certain arguments made by the parties, ultimately are not ones that the Court considers material for purposes of ruling on

the Trustee MSJ or the FDIC MSJ. To the extent the District Court disagrees with any of the Court's materiality analysis, the factual

propositions discussed below should be treated as though they were set forth in Part III.

7 The primary authorities in this category are: United States v. MCorp Fin., Inc. (In re MCorp Fin., Inc.) (“MCorp”), 170 B.R.

899 (S.D.Tex.1994); BankUnited, 462 B.R. 885; NetBank, 459 B.R. 801; Team Fin. Inc. v. FDIC (In re Team Fin., Inc.) (“Team

Financial”), Adv. Proc. No. 09–5084, 2010 WL 1730681 (Bankr.D.Kan. Apr.27, 2010); Superintendent of Ins. v. First Cent. Fin.

Corp. (In re First Cent. Fin. Corp.) (“First Central”), 269 B.R. 481 (Bankr.E.D.N.Y.2001), aff'd, 377 F.3d 209 (2d Cir.2004); and

Franklin Sav. Corp. v. Franklin Sav. Ass'n (In re Franklin Sav. Corp.) (“Franklin Savings”), 159 B.R. 9 (Bankr.D.Kan.1993), aff'd,

182 B.R. 859 (D.Kan.1995).

8 The primary authorities in this category are: Foothill Capital Corp. v. Clare's Food Mkt., Inc. (In re Coupon Clearing Serv ., Inc.)

(“Coupon Clearing”), 113 F.3d 1091 (9th Cir.1997); Altura P'ship v. Breninc, Inc. (In re B.I. Fin. Servs. Grp., Inc.), 854 F.2d 351

(9th Cir.1988); Weststeyn Dairy 2 v. Eades Commodities Co., 280 F.Supp.2d 1044 (E.D.Cal.2003); Lonely Maiden, 201 Cal.App.4th

368, 135 Cal.Rptr.3d 69; Del Costello v. State of California, 135 Cal.App.3d 887, 185 Cal.Rptr. 582 (Ct.App.1982); Tyler v. State of

California, 134 Cal.App.3d 973, 185 Cal.Rptr. 49 (Ct.App.1982); and Petherbridge v. Prudential Sav. & Loan Ass'n, 79 Cal.App.3d

509, 145 Cal.Rptr. 87 (Ct.App.1978).

9 In connection with the Trustee's opposition to the FDIC MSJ, the Trustee pointed to documents and deposition testimony concerning

the actual course of conduct with respect to a tax refund paid to Bancorp in October 2007. The FDIC, on the other hand, pointed

to a course of conduct with respect to a 2005 tax year refund that was described in the Wasserman Declaration. Because the Court

concludes that the TSA is unambiguous in its creation of a debtor-creditor relationship, the Court did not find it necessary to consider

extrinsic evidence beyond the four-corners of the contract. If, however, the District Court disagrees with this Court's reading of the

TSA, it could be appropriate to consider the evidence and arguments that the parties made with respect to the course of dealing and

the ramifications of that course of dealing.






























10 In Coupon Clearing, a group of grocers argued that, under California's laws of agency, trust, and bailment, coupon proceeds in the

process of being remitted by manufacturers were not property of the chapter 7 estate created when an intermediary (their coupon

processor) filed for bankruptcy. As here, the retailers' relationship with the debtor was defined by the parties' prepetition contracts,

which the retailers attempted to construe in a fashion similar to the FDIC's arguments about the TSA. The Ninth Circuit rejected the

retailers' position, articulating principles that are equally instructive here.

11 The FDIC cited In re Florida Park Banks, Inc., 110 B.R. 986 (Bankr.M.D.Fla.1990), for the proposition that the term “reimbursement”

is insignificant. In that case, the court determined there was no agreement between the holding company and the subsidiary. Id. at 988–

89. Rather, the term “reimbursement” appeared in a “policy statement” regarding tax refunds in the minutes of a board meeting. In

dicta, the court concluded that, even if the “policy statement” were a binding agreement, it did not create a debtor-creditor relationship

not because it believed “reimbursement” was an insignificant term, but for other reasons. See id. at 988. This case is inapposite and

distinguishable.

12 To similar effect is BankUnited; as in that case, Bancorp was obligated eventually to remit a payment to the Bank under the TSA,

but prior to that time:

the [tax agreement] does not require the Holding Company to deliver those funds to the Bank, nor does anything in the [tax

agreement] suggest that the Holding Company accepts those funds from the IRS in any kind of trust or agency capacity or holds

the funds under any specialized status that would cause those funds to be considered something other than the property of the

Holding Company when in its possession.

462 B.R. at 900.

13 The pliability of the word “agent” is underscored by the District Court's prior discussion of 26 C.F.R. § 1.1502–77, which makes

Bancorp an “agent” to act on behalf of members of its consolidated group vis-à-vis the IRS. As the District Court noted, case law

makes clear that this “agent” status is procedural only and without effect on the parties' ownership rights. Siegel v. FDIC, 2011 WL

2883012, at *5; see also, e.g., BankUnited, 462 B.R. at 896; NetBank, 459 B.R. at 809–10; Team Financial, 2010 WL 1730681, at

*5–7; First Central, 269 B.R. at 489.

14 Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am., Inc. (In re TOUSA, Inc.) (“TOUSA”), 406 B.R. 421, 431–

32 (Bankr.S.D.Fla.2009); Brandt v. Fleet Capital Corp. (In re TMCI Elecs.) (“Brandt”), 279 B.R. 552, 558–61 (Bankr.N.D.Cal.2000).

15 The Court also specifically rejects the FDIC's attempted use of dicta in a footnote contained in the NetBank opinion. That footnote—

citing TOUSA—states that tax refunds vest in a debtor “no later than ... the first day of the Debtor's tax year immediately succeeding

the tax year in which the losses giving rise to the Tax Refund were incurred.” 459 B.R. at 821 n. 12 (emphasis added). In the context

of the NetBank opinion, this conclusion was all that was needed to resolve that litigation since—unlike here—the relevant tax years

had actually ended prebankruptcy. That court's “no later than” language makes clear that the court was not opining on the separate

issue presented here—which explains why NetBank does not ever cite or reference the Segal decision. Put simply, the FDIC's reading

of this footnote is erroneous because it is divorced from the factual context of the NetBank decision.

16 United States v. White, 365 B.R. 457, 460 (M.D.Pa.2007); In re Glenn, 207 B.R. 418, 421 (E.D.Pa.1997); In re Beaucage, 334

B.R. 353, 357–58 (Bankr.D.Mass.2005); In re Stienes, 285 B.R. 360, 362 (Bankr.D.N.J.2002); In re Conti, 50 B.R. 142, 148

(Bankr.E.D.Va.1985).

17 See, e.g., Marvel Entm't Grp., Inc. v. Mafco Holdings, Inc. (In re Marvel Entm't Grp., Inc.) (“Marvel”), 273 B.R. 58, 83–85

(D.Del.2002); Parker v. Saunders (In re Bakersfield Westar, Inc.) (“Bakersfield Westar”), 226 B.R. 227, 232–34 (B.A.P. 9th

Cir.1998); In re Se. Banking Corp., No. 91–14561, 1994 WL 1893513, at *2 (Bankr.S.D.Fla. July 21, 1994); In re PharMor, Inc.,

152 B.R. 924, 926–27 (Bankr.N.D.Ohio 1993).

18 The Court does believe that there is a factual disagreement about the full extent or attribution of NOLs beyond the amount sufficient

to obtain the refund. As noted above, the Trustee has submitted evidence that $210,444,677 of the final 2008 consolidated NOL was

attributable to Bancorp, which the FDIC disputed based upon statements in the Wasserman Declaration. Because the Court does not

believe that it is necessary to resolve these issues to dispose of the Trustee MSJ or the FDIC MSJ, the Court ends its analysis at the

point where the record makes clear that sufficient 2008 losses had been incurred prior to the Petition Date.

19 W. Dealer Mgmt., Inc. v. England (In re Bob Richards Chrysler–Plymouth Corp.), 473 F.2d 262 (9th Cir.1973).

20 Throughout the course of this litigation, the Trustee advanced three separate arguments about why Bob Richards no longer is good

law. First, the Trustee argued that the decision posits a rule of “federal common law,” which is something the Supreme Court has

subsequently constrained courts from doing. See Atherton v. FDIC, 519 U.S. 213, 217–26, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997);

O'Melveny & Myers v. FDIC, 512 U.S. 79, 85–89, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994); Ledo Fin. Corp. v. Summers, 122 F.3d 825,

828–29 (9th Cir.1997). Second, the Trustee argued that Bob Richards presupposes that there be “separate NOLs” in which a subsidiary

has some property interests or other rights, which is a proposition since rejected by the Supreme Court. See United Dominion Indus.

v. United States, 532 U.S. 822, 829–30, 121 S.Ct. 1934, 150 L.Ed.2d 45 (2001); Marvel, 273 B.R. at 83–85. Third, the Trustee argued

that subsequent articulations of California law—in such cases as Coupon Clearing and Lonely Maiden—demonstrate that if Bob







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Richards in fact purported to apply state law, it incorrectly stated and applied such law. Based upon these arguments, the Trustee takes

the position that Bob Richards no longer remains a valid Ninth Circuit panel decision. See Miller v. Gammie, 335 F.3d 889, 900 (9th

Cir.2003) (en banc ); Wolfson v. Watts (In re Watts), 298 F.3d 1077, 1081–83 (9th Cir.2002). Because the Court has concluded that

this dispute falls outside the reach of Bob Richards in any event, the Court has not resolved whether Bob Richards retains viability

in light of the three lines of authorities presented by the Trustee. To the extent that a future court differs with this Court's reading of

the TSA and Bob Richards, it would be appropriate for that court to address these issues.

21 See, e.g., In re Foam Sys. Co., 92 B.R. 406, 409 (B.A.P. 9th Cir.1988), aff'd, 893 F.2d 1338 (9th Cir.1990) (unpublished table

disposition); In re Moore, No. 11–41988, 2011 WL 1877879, at *2 (Bankr.N.D.Cal. May 16, 2011).

22 The parties devoted some of their briefing to the FDIC's potential ability to file a “competing” consolidated tax return under 26

C.F.R. § 301.6402–7. Because nothing in this regulation deprives or imposes any conditions on the Trustee's right to file the returns

that he filed here (and the record shows that the FDIC never purported to file a tax return on behalf of the consolidated group), the

Court does not believe this regulation bears on the outcome of this case. Nevertheless, for the sake of completeness, the Court notes

that any effort by the FDIC to file any tax documents that could in any way affect Bancorp's estate postpetition would violate the

automatic stay and would therefore be void under Ninth Circuit law. See NetBank, 459 B.R. at 819–20. This conclusion would obtain

notwithstanding any argument under Internal Revenue Code section 6402(k) because Ninth Circuit case law makes clear that tax law

must yield to bankruptcy law when the two conflict. See, e.g., Feiler, 218 F.3d at 950; Bakersfield Westar, 226 B.R. at 236.

23 The FDIC's power to “repudiate” contracts was modeled after and intended to operate like a trustee's power to “reject” executory

contracts under the Bankruptcy Code. See, e.g., Fresca v. FDIC, 818 F.Supp. 664, 668 n. 2 (S.D.N.Y.1993). It is notable that the

FDIC's own statutory power, which the FDIC improperly attempted to exercise here, merely breaches a contract, and does not destroy

it for purposes of determining the parties' rights. As the Court has explained, rejection in bankruptcy operates similarly.

24 The decision in BSD Bancorp suggests in dicta that section 371c may have been implicated in that particular case. See BSD Bancorp,

slip op. at 11–12. This observation was made in the context of a different contract, which required an immediate downstream of any

tax refunds and expressly created a “loan to parent” in the “remote” and “unusual” circumstances when that downstream did not

occur. See id. at 5 (quoting the agreement). The TSA says nothing of the sort, and the Court believes this fact alone provides ample

reason to distinguish the unpublished BSD Bancorp decision.

25 See, e.g., Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 132 (4th Cir.1999); Field v. Mans, 157 F.3d 35, 43 (1st Cir.1998);

Fid. & Deposit Co. v. Arnez, 61 F.2d 607, 610 (9th Cir.1932), rev'd on other grounds, 290 U.S. 66, 54 S.Ct. 16, 78 L.Ed. 176 (1933).

26 The overarching nature of a “claim” in bankruptcy is further underscored by juxtaposing it with the many different legal forms that a

party's right to receive payment of money may take outside of bankruptcy. In the commercial law context, for example, the Uniform

Commercial Code draws broad distinctions between “notes” and other negotiable instruments (the subject of Article 3), bank deposits

(the subject of Article 4), “letters of credit” (the subject of Article 5), and “securities” (the subject of Article 8). Within Article 9,

there are further distinctions drawn between payment obligations taking the form of “accounts,” “chattel paper,” “promissory notes”

and other “instruments,” “commercial tort claims,” and “payment intangibles.” See, e.g., CAL. COM.CODE § 9102. Every one of

these items involves a debtor-creditor relationship and could be the source of a “claim” under Bankruptcy Code section 101(5). The

FDIC's argument reduces to a logical fallacy: every “loan” or “extension of credit” may give rise to a “claim” in bankruptcy, but not

every “claim” in bankruptcy originates in a “loan” or an “extension of credit.”

27 In addition to disagreeing with the FDIC about the applicability of section 371c in the first instance and the legal consequences if

it does apply, the Court rejects the FDIC's implicit binary structure. Even assuming that section 371c somehow violated the TSA,

nothing about that fact would affirmatively create a trust or give the FDIC property rights in any tax refunds. In order to prevail in

the ownership dispute, the FDIC must meet its burden of affirmatively establishing ownership rights in the refunds that suffice to

extract that property from the broad reach of Bankruptcy Code section 541(a). Nothing in section 371c does this work for the FDIC.

28 The Policy Statement does suggest that a “tax allocation agreement or other corporate policies should not purport to characterize

refunds attributable to a subsidiary depository institution that the parent receives from a taxing authority as the property of the

parent.” This single, precatory sentence must be interpreted in the context of the Policy Statement as a whole and its general purpose.

So interpreted, the only logical meaning of this provision is that the agencies might consider it an unsafe or unsound practice for

a parent to keep all of a group's refunds free and clear without a corresponding reimbursement obligation to the subsidiary. Any

other interpretation ignores and nullifies those provisions in the Policy Statement, among others, describing the parent's obligation to

“reimburse” the subsidiary and to do so even if the parent never receives refunds. Nothing in the Policy Statement purports to describe

the effects of a tax sharing agreement in bankruptcy or to reject case law in existence when it was drafted. This is telling because

the banking agencies could have taken a clear position in the Policy Statement that the debtor-creditor relationships firmly upheld by

several bankruptcy and district courts in the Franklin Savings and MCorp matters, all published before the Policy Statement, were

impermissible. The agencies chose not to, and the Court finds this silence in the face of established law to be as instructive as any

words used in the Policy Statement.






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29 The only purported evidence that the FDIC put forward in support of this affirmative defense was a single paragraph in an attorney

declaration, asserting that the attorney supervised a review of board minutes and supposedly was “unable to locate any minutes

reflecting approval of the TSA.” [Docket No. 79 ¶ 3.] In addition to being untimely submitted, this attorney declaration is directly

contradicted by the aforementioned documents, and thus does not create a genuine issue of material fact. See, e.g., Estremera v.

United States, 442 F.3d 580, 584–85 (7th Cir.2006).

30 As the parties' stipulation recognizes, such certification would be appropriate only if the District Court enters summary judgment in

favor of one of the parties, and thus would not be possible to the extent that the District Court decides that neither party is entitled

to summary judgment.





EXHIBIT I


In re Jefferson County, Ala., --- B.R. ---- (2013)


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SynopsisBackground: Insurance company sought determination thatstay did not apply to its cause of action against third party or,in alternative, moved for relief from stay on “cause” theory.

Holdings: The Bankruptcy Court, Thomas B. Bennett, J.,held that:

[1] automatic stay's prohibition against commencementor continuation of proceedings against debtor preventedinsurance company that had provided insurance coveragefor bankrupt county's municipal debt from pursuing causeof action against non-debtor which had allegedly aided andabetted debtor's fraud in convincing insurance company toprovide such coverage;

[2] lawsuit was also stayed as act to obtain possession of, orto exercise control over, debtor's property; and

[3] “cause” did not exist to modify automatic stay in order toallow insurance company to proceed with lawsuit.

Motion denied.

West Headnotes (20)

[1] BankruptcyCo-Debtors and Third Persons

Generally, stay's prohibition againstcommencement or continuation of proceedingsagainst debtor applies only to certain actionstaken or not taken with respect to debtor, and not

with respect to such action or inaction affectingother parties. 11 U.S.C.A. § 362(a)(1).


Under unusual circumstances, stay's prohibitionagainst commencement or continuation ofproceedings against debtor also applies toproceedings against non-debtor defendant, whensuch an application furthers purposes behindautomatic stay. 11 U.S.C.A. § 362(a)(1).


“Unusual circumstances” may exist, of kindwarranting extension of stay's prohibition againstcommencement or continuation of proceedingsagainst debtor in order to protect non-debtor defendant, (1) where indemnificationor contribution relationship creates identity ofinterest between debtor and non-debtor; (2)where proceeding against non-debtor imposes asubstantial burden of discovery on debtor; or(3) where proceeding would have a potentialpreclusive effect that forces debtor to participatein proceeding as if it were a party. 11 U.S.C.A.§ 362(a)(1).

[4] BankruptcyAutomatic Stay

BankruptcyAdjustment of Debts of a Municipality

“Breathing spell” afforded by automatic stay isparticularly important in context of Chapter 9case, in which, if stay is to be lifted routinelyto allow claimants to assert their claims instate court, municipality will not have time,opportunity, or ability to confirm a plan. 11U.S.C.A. § 362(a).


Bankruptcy




Adjustment of Debts of a Municipality

Automatic stay's prohibition againstcommencement or continuation of proceedingsagainst debtor prevented insurance companythat had provided insurance coverage forbankrupt county's municipal debt from pursuingcause of action against non-debtor which hadallegedly aided and abetted debtor's fraud inconvincing insurance company to provide suchcoverage; company's claims against purportedaider and abettor were inextricably intertwinedwith its unstated fraud claims against debtor,and company would have to establish debtor'sfraud in order to recover from this non-debtoron aiding and abetting theory, non-debtor hadalso asserted third-party indemnification claimsagainst debtor, such that there was identity ofinterests between parties, and debtor might feelneed to participate in third-party litigation, andthus be diverted from task of reorganizing, basedon substantial amounts at stake and potentialpreclusive effect of judgment in third-partyaction. 11 U.S.C.A. § 362(a)(1).


Proceedings against non-debtor defendantshould be stayed, where there is such aclose identity between the non-debtor defendantand debtor that judgment against non-debtordefendant would, in effect, be judgment againstdebtor. 11 U.S.C.A. § 362(a)(1).


Stay is appropriate where claims against debtorand non-debtor defendant are “inextricablyinterwoven,” such as when there isindemnification agreement. 11 U.S.C.A. §362(a)(1).


Absolute, or automatic, right of indemnityis not required for “unusual circumstances”

exception to apply, and to justify applicationof stay's prohibition against commencement orcontinuation of proceedings against debtor inorder to protect non-debtor; rather, possibilityof right of indemnification is sufficient. 11U.S.C.A. § 362(a)(1).


Courts apply the stay's prohibition againstcommencement or continuation of proceedingsagainst debtor to proceedings against non-debtor defendants, where discovery in thoseproceedings would impose a burden ondebtor that would substantially hinder debtor'sreorganization. 11 U.S.C.A. § 362(a)(1).

[10] Federal CourtsJudgment

When dealing with questions of issue preclusion,federal courts look to law of state in whichjudgment has been or would be rendered. 28U.S.C.A. § 1738.

[11] JudgmentScope and Extent of Estoppel in General

JudgmentIdentity of Issues, in General

JudgmentEssentials of Adjudication

Under New York law, doctrine of collateralestoppel, or issue preclusion, has tworequirements: (1) identical issue necessarilymust have been decided in prior action and bedecisive of present action, and (2) party to beprecluded from relitigating issue must have hadfull and fair opportunity to contest the priordetermination.

[12] JudgmentMutuality of Estoppel in General




Collateral estoppel can be used offensively underNew York law, and doctrine of mutuality is adead letter.

[13] JudgmentPrivity in General

Under New York law, collateral estoppel barsnot only the parties to previous action fromlitigating an issue decided therein, but those inprivity with them as well.


Unlike the stay's prohibition againstcommencement or continuation of proceedingsagainst debtor, separate prohibition against actsto obtain possession of, or to exercise controlover, estate property applies to non-debtoractions that have adverse impact on property ofthe estate. 11 U.S.C.A. § 362(a)(1, 3).

[15] BankruptcyInterest of Debtor in General

BankruptcyParticular Items and Interests

BankruptcyFuture Interests

BankruptcyAfter-Acquired Property; Proceeds; Wages

and Earnings

“Property of the estate” includes everyconceivable interest of debtor, including thosethat are future, nonpossessory, contingent,speculative, and derivative. 11 U.S.C.A. §541(a).



Stay's prohibition against acts to obtainpossession of, or to exercise control over,property of the estate prevented insurance

company that had provided insurance coveragefor bankrupt county's municipal debt frompursuing cause of action against non-debtorwhich had allegedly aided and abetteddebtor's fraud in convincing insurance companyto provide such coverage; while insurancecompany, by not naming bankrupt county asdefendant even though it was county's fraudwhich the named defendant had allegedlyaided and abetted, was not pursuing recoverydirectly from debtor's property, alleged aiderand abettor's third-party indemnification andcontribution claims against county createdimmediate adverse economic consequence forChapter 9 estate, and insurance company's actionwas attempt to indirectly obtain property ofdebtor. 11 U.S.C.A. § 362(a)(3).

[17] BankruptcyCause; Grounds and Objections

Whether “cause” exists for relief from automaticstay must be determined on case-by-case basis.11 U.S.C.A. § 362(d)(1).

[18] BankruptcyCause; Grounds and Objections

BankruptcyBalancing Hardships

To determine whether “cause” exists to liftautomatic stay and permit suit to proceed in non-bankruptcy forum, bankruptcy court considersthe following: (1) whether any great prejudiceto either the bankruptcy estate or debtor willresult from continuation of civil suit; (2) whetherhardship to non-debtor party from maintenanceof stay considerably outweighs hardship todebtor; and (3) whether non-debtor party hasprobability of prevailing on merits of its lawsuit.11 U.S.C.A. § 362(d)(1).

[19] BankruptcyParticular Cases





“Cause” did not exist to modify automatic stayin order to allow insurance company to proceedwith lawsuit against third party which hadallegedly aided and abetted Chapter 9 debtor'spurported fraud, and which had contractual andcommon law indemnification and contributionclaims against debtor, where, given amounts atstake and potential preclusive effects of suchlitigation on debtor, grant of stay relief wouldforce debtor to participate in third-party lawsuitand to deplete estate resources on litigationpending in another forum, whereas, if stay reliefwas denied, insurance company would suffervery little prejudice, as it could pursue its claimsin bankruptcy forum. 11 U.S.C.A. § 362(d)(1).

[20] BankruptcyClaims or Proceedings Against Estate or

Debtor; Relief from Stay

BankruptcyBankruptcy Judges

Bankruptcy court, even as non-Article-III court,has authority to enter final orders regardingmodification of automatic stay. 11 U.S.C.A. §362(d).


James Blake Bailey, Patrick Darby, Christopher L. Hawkins,Jennifer Harris Henderson, Bradley Arant Boult CummingsLLP, Jay R. Bender, Birmingham, AL, Whitman L. Holt,Samuel M. Kidder, Kenneth N. Klee, Robert J. Pfister,Klee, Tuchin, Bogdanoff & Stern LLP, David M. Stern, LosAngeles, CA, for Debtor.

Opinion

MEMORANDUM OPINION ON THEAUTOMATIC STAY AND THE ASSURED ACTION

THOMAS B. BENNETT, Bankruptcy Judge.

I. Introduction

*1 Creative lawyering has its merits. Sometimes, it allowsone to solve what previously had been an intractable legalissue. Other times, it is a bane masking problems inherentin what creativity's means is attempting to accomplish. Thisis a case of the second sort demonstrating the downside ofcreativity. What is involved is an attempt to avoid the shieldafforded debtors by the automatic stay of the BankruptcyCode, 11 U.S.C. § 362(a), based on Jefferson County,Alabama (“the County”) not having been sued by the plaintiff,Assured Guaranty Municipal Corp., f/k/a Financial SecurityAssurance, Inc. (“Assured”) in one of two lawsuits pendingin the same New York state court, before the same judge,with the same counsel and coordinated discovery, involvingvirtually identical claims that arose from the same, criticalfactual background.

The question presented to this Court is whether the degreeof sameness between these two lawsuits is sufficient for theautomatic stay to apply when the only meaningful differenceis that the County is a defendant in one suit and a third-partydefendant in the other. Viewed from another perspective, theissue is whether Assured's creative pleading is enough toavoid application of 11 U.S.C. § 362(a)'s shield. The Courtholds that it is not. The automatic stay applies to Assured'saction against JPMorgan in New York state court (“AssuredAction”), and there is no cause to modify the stay to allow theAssured Action to proceed.

II. The Assured and Syncora Actions—The Sameness

The United States District Court for the Northern Districtof Alabama entered a consent decree in 1996 that requiredJefferson County, Alabama to remediate its Sewer System(“Sewer System”). The County proceeded to raise billions ofdollars for the development of its sewer system by issuingwarrants secured exclusively by revenue generated by itsSewer System, which were underwritten by JPMorgan ChaseBank, N.A. and its affiliate, J.P. Morgan Securities LLC(collectively, “JPMorgan”). The County also entered intoseveral interest rate swap transactions with JPMorgan inrelation to these warrants. Between 2002 and 2005, theCounty and JPMorgan made several agreements with Assuredand Syncora Guarantee Inc. (“Syncora”) in which Assuredand Syncora issued policies that insured against the County'sfailure to pay principal and interest on the warrants. Assuredalso reinsured over $360 million in policies originally issuedby Syncora and Financial Guaranty Insurance Company




(“FGIC”). See Assured's Statement of Legal Issues, at 4, Nov.15, 2011 (Doc. 146).

To obtain these policies, the County and JPMorgan allegedlymade statements and representations to Assured and Syncorathat purposefully misrepresented and concealed informationabout bribes that JPMorgan had paid to County officials.Additionally, the County and JPMorgan allegedly failed todisclose the 2003 Krebs Report, an analysis of the SewerSystem's ability to generate revenues and needed sewer ratemodifications, to Assured and Syncora.

*2 Syncora's credit rating was downgraded in 2008partially as a result of its overexposure to subprimeresidential mortgages. This downgrade triggered a modifiedand accelerated principal repayment schedule in the SewerSystem warrant indebtedness. In addition, starting in April2008, the Sewer System failed to generate sufficient revenuesto meet the payment obligations on its warrants. Thisconfluence of events caused the County to default onits obligations to warrantholders. The SEC subsequentlycensured JPMorgan for its involvement in the financing of theSewer System, and several Jefferson County Commissionerswere convicted of crimes relating to its rehabilitation andimprovements.

On April 29, 2010, Syncora filed a complaint againstJPMorgan and the County in the Supreme Court of the Stateof New York, County of New York (“New York court”) thatalleged fraud and aiding and abetting fraud in connectionwith the financing of the Sewer System (“Syncora Action”).Syncora opened its Complaint with the following paragraph:

This action arises out of one of thebiggest cases of municipal corruptionin United States history and a massivefraud perpetrated by DefendantsJefferson County and JPMorgan inconnection with billions of dollarsof municipal debt that the County,with the aid of JPMorgan, issued tofinance a sewer system remediationproject. As part of an unprecedentedscheme of corruption and abuse, whichhas resulted in over 20 criminalconvictions (including several CountyCommissioners), and multiple SECenforcement actions (including onesagainst JPMorgan and two of itsformer senior bankers), Jefferson

County and JPMorgan fraudulentlyinduced Syncora, a New York-basedinsurer, to provide over $1 billion ininsurance coverage for certain of theCounty's municipal debt.

Syncora Guarantee Inc. v. Jefferson Cnty., Ala., No.601100/10, Compl. ¶ 1 (N.Y.Sup.Ct. Apr. 29, 2010)(“Syncora Complaint”). The Syncora Complaint containsfour causes of action: “Fraud Related to Bribes (2002 Policy,2003 Policy, and Surety Bond) (Against Jefferson Countyand JPMorgan)”; “Aiding and Abetting Fraud Related toBribes (2002 Policy, 2003 Policy, and Surety Bond) (AgainstJefferson County and JPMorgan)”; “Fraud Related to KrebsFindings (2003 Policy and Surety Bond) (Against JeffersonCounty and JPMorgan)”; and “Aiding and Abetting FraudRelated to Krebs Findings (2003 Policy and Surety Bond)(Against Jefferson County and JPMorgan).” Syncora Compl.¶¶ 108–53. The Syncora Complaint asks the New York courtto find “Defendants jointly and severally liable to Syncora forcompensatory and punitive damages,” among other requests.Syncora Compl. at p. 43.

On June 16, 2010, Assured (using the same law firm asSyncora) filed a Complaint against JPMorgan—but not theCounty—in the New York court, alleging fraud and aidingand abetting fraud in connection with the financing ofthe Sewer System (“Assured Action”). Assured opened itsComplaint with the following paragraph:

*3 This action arises out of oneof the biggest cases of municipalcorruption in United States historyand a massive fraud perpetratedby JPMorgan and Jefferson County,Alabama (“Jefferson County” or the“County”) in connection with billionsof dollars of municipal debt issuedby the County and underwritten byJPMorgan to finance a sewer systemremediation project. As part of anunprecedented scheme of corruptionand abuse, which has resulted in over20 criminal convictions (includingseveral County Commissioners), andmultiple SEC enforcement actions(including ones against JPMorgan andtwo of its former senior bankers),JPMorgan and the County fraudulentlyinduced Assured, a New York-based




insurer, to provide over $378 millionin insurance coverage for JeffersonCounty municipal debt.

Assured Guar. Mun. Corp. v. JPMorgan Chase Bank,N.A., No. 650642/2010, Compl. ¶ 1, (N.Y. Sup.Ct. June16, 2010) (“Assured Complaint”). The remainder of theAssured Complaint repeats many of the same allegations—often verbatim—from the Syncora Complaint. The AssuredComplaint contains two causes of action, which mirror thefirst two causes of action in the Syncora Complaint: “Fraud”and “Aiding and Abetting Fraud.” Assured Compl. ¶¶ 28–31.The main difference between the two Complaints, apart fromAssured's decision not to name the County as a party, is theabsence of discussion about the Krebs Report in the AssuredComplaint. The facts section in the Assured Complaint doesnot discuss the Krebs Report, and the third and fourth causesof action in the Syncora Complaint, which are premised onthe Krebs Report, are not present in the Assured Complaint.The remaining variations between the two Complaints mostlyreflect the differing procedural postures of the cases. Finally,much like the Syncora Complaint, the Assured Complaintasks the court to find “JPMorgan liable to Assured forcompensatory and punitive damages,” among other requests.Assured Compl. at p. 32.

Both the Assured and Syncora Actions are assigned to thesame judge in the New York court. On July 28, 2010,JPMorgan filed a motion to dismiss the Assured Complaint,but the New York court denied this motion. JPMorganthen filed a third-party complaint in the Assured Action onFebruary 10, 2011, in which it denied that Assured is entitledto any relief, but if any liability were to be imposed uponit, JPMorgan asserted two cross-claims against the Countyfor indemnification (both contractual and common law) andcontribution. Jefferson County filed a motion to dismissJPMorgan's third-party complaint on April 1, 2011, but theNew York court denied that motion.

JPMorgan's arguments for contractual indemnification arebased on provisions in various warrant purchase agreementsbetween JPMorgan and the County. In one such agreement,the County agreed to indemnify J.P. Morgan Securities LLC,along with its members, officers, and employees, amongothers, against:

any and all losses, claims, damagesor liabilities caused by ... any untruestatement or alleged untrue statementof a material fact contained in the

Official Statement or caused by anyomission or alleged omission from theOfficial Statement of any material factnecessary to make the statements madetherein, in light of the circumstancesunder which they were made, notmisleading.

*4 Objection of JPMorgan Chase Bank, N.A. and J.P.Morgan Securities LLC to the Motion of Assured GuarantyMunicipal Corp. for a Determination that the AutomaticStay Does Not Apply or For Relief From the AutomaticStay (“JPMorgan Br.”), Ex. 9 § 11(a) (Doc. 871–11).Other standby warrant purchase agreements contain asimilar provision, in which the County agreed to indemnifyJPMorgan Chase Bank, N.A. along with its officers andemployees “from and against any and all claims, damages,losses, liabilities, reasonable costs or expenses whatsoeverthat [JPMorgan Chase Bank, N.A.] may incur ... that arises[sic] out of the transactions contemplated by this Agreementor the Related Documents....” JPMorgan Br., Ex. 10 § 9.03(b).

Assured, Syncora, JPMorgan, and the County agreed tocoordinate discovery for efficiency purposes in the Assuredand Syncora Actions, but the discovery in these cases was andremains nonetheless substantial. During the pre-bankruptcyperiod, the County agreed to cooperate with Assured'sdocument requests and produced more than 370,000 pages ofdocuments. On October 6, 2011, the parties informed the NewYork court that they had agreed to a framework for settlementnegotiations, and had therefore reached an informal standstillon the Assured and Syncora Actions. At the time of thisstandstill, document discovery was unfinished, third-partydocument discovery had been minimal, depositions andexpert discovery had yet to commence, and the parties stillhad unresolved discovery disputes. Further, at the time ofthe standstill, the County had already spent over $2.5 millionfrom its limited General Fund to defend itself in the Assuredand Syncora Actions.

On November 9, 2011, the County filed its Chapter 9 petitionand scheduled approximately $4.23 billion dollars of debt,with approximately $3.14 billion of that debt attributable tothe Sewer System. The bankruptcy filing triggered impositionof the automatic stays of 11 U.S.C. § 362(a) and 11 U.S.C.§ 922(a), and Assured, Syncora, JPMorgan, and the Countyinformed the New York court that their informal standstillwould continue until they reached a resolution of whether thestay affects the Assured and Syncora Actions. Accordingly,Assured filed a motion in the County's bankruptcy case for




this Court to determine that the automatic stay does not applyto the Assured Action, or alternatively, to modify the stay andallow the Assured Action to continue (“the Assured Motion”)(Doc. 748). Both the County and JPMorgan objected to theAssured Motion.

III. The Assured Action is Subject to theAutomatic Stay of 11 U.S.C. § 362(a)(1)

[1] [2] [3] Section 362(a)(1) automatically stays “thecommencement or continuation, including the issuance oremployment of process, of a judicial, administrative, or otheraction or proceeding against the debtor that was or could havebeen commenced before the commencement of the case underthis title, or to recover a claim against the debtor that arosebefore the commencement of the case under this title.” 11U.S.C. § 362(a)(1). Generally, the automatic stay of § 362(a)(1) applies only to certain actions taken or not taken withrespect to a debtor, and not with respect to such action orinaction affecting other parties. See A.H. Robins Co., Inc.v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986). However,courts have recognized that certain “unusual circumstances”warrant applying the § 362(a)(1) stay to proceedings against anon-debtor defendant where such an application furthers thepurposes behind the stay. See id.; Queenie, Ltd. v. NygardInt'l, 321 F.3d 282, 287 (2d Cir.2003) (“The automaticstay can apply to non-debtors, but normally does so onlywhen a claim against the non-debtor will have an immediateadverse economic consequence for the debtor's estate.”).Such unusual circumstances have been found (1) whenan indemnification or contribution relationship creates anidentity of interests between the debtor and the non-debtordefendant; (2) when the proceeding imposes a substantialburden of discovery on the debtor; or (3) when the proceedingwould have a potential preclusive effect that forces the debtorto participate in the proceeding as if the debtor were a party.See, e.g., A.H. Robins, 788 F.2d at 999; Queenie, Ltd., 321F.3d at 287; Johns–Manville Corp. v. Asbestos Litig. Grp. (Inre Johns–Manville Corp.) (Johns–Manville I), 40 B.R. 219,223–26 (S.D.N.Y.1984); Lesser v. A–Z Assocs. (In re Lion

Capital Grp.), 44 B.R. 690, 702–04 (Bankr.S.D.N.Y.1984). 1

A. The Assured Action is at odds with the purposesbehind the automatic stay and Chapter 9*5 In the context of determining whether specific “unusual

circumstances” warrant extension of the automatic stay, itis important to consider the bigger picture at issue—the

purposes behind the 11 U.S.C. § 362 automatic stay andChapter 9 generally. As the House Report on the bill enactingthe § 362 automatic stay succinctly explains,

[t]he automatic stay is one of the fundamental debtorprotections provided by the bankruptcy laws. It gives thedebtor a breathing spell from his [or her] creditors. It stopsall collection efforts, all harassment, and all foreclosureactions. It permits the debtor to attempt a repaymentor reorganization plan, or simply to be relieved of thefinancial pressures that drove him into bankruptcy.

The automatic stay also provides creditor protection.Without it, certain creditors would be able to pursuetheir own remedies against the debtor's property. Thosewho acted first would obtain payment of the claims inpreference to and to the detriment of other creditors.Bankruptcy is designed to provide an orderly liquidationprocedure under which all creditors are treated equally.A race of diligence by creditors for the debtor's assetsprevents that.

... The scope of [§ 362(a)(1) ] is broad. All proceedingsare stayed, including arbitration, license revocation,administrative, and judicial proceedings. Proceeding inthis sense encompasses civil actions as well, and allproceedings even if they are not before governmentaltribunals.

H.R.Rep. No. 95–595, at 340 (1977), reprinted in 1978U.S.C.C.A.N. 5963, 6296–97. See also S.Rep. No. 95–989,at 49, 54–55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,5835, 5840–41.

[4] This “breathing spell” afforded by the stay is particularlyimportant in the context of a Chapter 9 case:

The two main benefits of a Chapter9 filing are (1) the breathing spellprovided by the automatic stay, and(2) the ability to adjust debts ofclaimants through the plan process.If the automatic stay is to belifted routinely to allow claimants toassert their claims in state court, amunicipality will not have the time,opportunity or ability to confirm aplan. This certainly was not the policyor intent of Congress in providingdebt relief for municipalities throughChapter 9. It likewise was not the




intent of California in authorizing itsmunicipalities to use Chapter 9.

Alliance Capital Mgmt. L.P. v. Cnty. of Orange (In reCnty. of Orange ), 179 B.R. 185, 191 (Bankr.C.D.Cal.1995),rev'd in part on other grounds & remanded, 189 B.R. 499(C.D.Cal.1995).

Courts routinely cite the purpose behind the automatic staywhen applying it to non-debtors. See, e.g., Maaco Enters., Inc.v. Corrao, No. 91–3325, 1991 WL 255132, at *2 (E.D.Pa.Nov. 25, 1991) (citing legislative history describing the broadapplication of the stay and holding that the stay “appliesto suits against non-debtor defendants who are related tothe debtor and to suits the resolution of which may havea significant impact on the debtor.”); Lomas Fin. Corp. v.Northern Trust Co. (In re Lomas Fin. Corp.), 117 B.R.64, 67–68 (S.D.N.Y.1990) (allowing debtor's participationin lawsuit “would contravene the congressional intent of anautomatic stay”); Sudbury, Inc. v. Escott (In re Sudbury, Inc.),140 B.R. 461, 464 (Bankr.N.D.Ohio 1992) (citing the purposeof the stay and noting that “Plaintiffs' actions would violatethe spirit” of § 362).

*6 In effectuating the purpose behind the stay, courts havedeclined to elevate form over substance. In a case similarto this one, a district court upheld a bankruptcy court'simposition of the stay in a suit against officers of the debtorwhere the allegations in the complaint were actually againstthe debtor. Lomas Fin. Corp., 117 B.R. at 65–68. The courtheld that § 362(a)(1) applied to the action against the non-debtor defendants based on the indemnification agreementbetween the debtor and non-debtor defendants, the harm tothe debtor's reorganization, and the potential for collateralestoppel. Id. at 66–68. The district court agreed with thebankruptcy court's conclusion that naming the non-debtorsin the suit was merely a “transparent attempt ... to end runthe automatic stay.” Id. at 68 (internal quotations and citationomitted).

Similarly, in Kaiser Grp. Int'l, Inc. v. Kaiser Aluminum &Chemical Corp. (In re Kaiser Aluminum Corp., Inc.), 315B.R. 655 (D.Del.2004), an adversary proceeding plaintiffargued that because only the insurance company, and notthe debtor, was named as a defendant in the adversaryproceeding, the automatic stay did not apply. 315 B.R. at 657.Both the bankruptcy and district courts disagreed, noting thatwho was named in the suit was not controlling. Id. at 658–59.The district court held

KGI contends that its adversary actiononly names Travelers as a defendant,and therefore it is not a lawsuit againsta debtor. The Court disagrees withKGI's position. The protection of theautomatic stay extends to any actionor proceeding against an interest of thedebtor. The scope of this protection isnot determined solely by whom a partychose to name in the proceeding, butrather, by who is the party with a realinterest in the litigation.

Id. at 658; see also Maaco Enters., Inc., 1991 WL 255132,at *2–3 (staying action against individuals who owned debtorfranchise because it would “effectively be a judgment againstthe debtor”).

[5] In the context of the County's Chapter 9 case, Assured'sposition on the inapplicability of the automatic stay and in thealternative, for its modification, elevates form over substance.The Assured Action against JPMorgan and the SyncoraAction against JPMorgan and the County are virtuallyidentical. Even though Syncora directly named the Countyas a defendant and JPMorgan brought the County into theAssured Action as a third-party defendant, it is obvious thatthe County is a party in interest in both cases. Both theAssured and Syncora Complaints contain numerous materialallegations implicating conduct by the County. Indeed, oneof the two claims Assured asserts against JPMorgan is that itaided and abetted the County's fraud. In order to succeed onthat claim, it will have to prove that the County committed theunderlying fraud and that JPMorgan had actual knowledge ofit and provided substantial assistance to advance the fraud'scommission. See, e.g., Lerner v. Fleet Bank, N.A., 459 F.3d273, 292 (2d Cir.2006) (“To establish liability for aiding andabetting fraud, the plaintiffs must show (1) the existence ofa fraud; (2) the defendant's knowledge of the fraud; and (3)that the defendant provided substantial assistance to advancethe fraud's commission.”) (internal quotations and citationsomitted).

*7 Just as in the Kaiser and Lomas cases, the factthat the Assured Complaint does not actually name theCounty as a defendant is simply not controlling. As morefully detailed below, the claims against the County andJPMorgan are inextricably interwoven, and the County has anindemnification agreement with JPMorgan that could make itresponsible for any recovery Assured wins against JPMorgan.




See infra Section III.B. This relationship is augmented byAssured's reinsurance of some of Syncora's liability exposureto warrantholders, which, if the Assured Action continued,would effectively be litigation of the Syncora Action via theAssured Action.

Allowing the Assured Action to proceed would circumventthe purpose of the automatic stay. It would significantlyinfringe on the County's “breathing spell” by requiringit to expend significant time and resources defending itsinterests in the action. See infra at Section III.C. Moreover,Assured's fraud allegations may affect the claims allowance,subordination, and adjustment of debt processes in thisCourt. In fact, Assured might try to rely on a finding offraud to advance its interests ahead of other creditors byturning its non-recourse contract claim into one against theCounty's General Fund, fundamentally altering the balanceof the County's Chapter 9 case. The Assured Action alsorepresents an attempt to fix the amount of Assured's claimagainst the County via outside litigation even though thebankruptcy court is the more efficient forum for makingsuch a determination. See McKesson Corp. v. El PasoPharm., Inc. (In re El Paso Pharm., Inc.), 130 B.R. 492,496 (Bankr.W.D.Tex.1991) (bankruptcy courts generally donot modify the automatic stay to allow parties to pursueclaims adjudication in state court because it is not “as fast, asinexpensive, or as fair to the estate” as the claims allowanceprocess and because of concerns about uniformity of decisionwithin bankruptcy case).

In short, the automatic stay's application to the AssuredAction furthers the purpose behind the stay by giving theCounty a true breathing spell and allowing the Chapter9 adjustment process to move forward in a fair andorderly fashion. The “unusual circumstances” that support itsapplication or extension to the Assured Action—the identityof interests between the County and JPMorgan, the discoveryburden on the County, and the potential preclusive effect ofthe Assured Action—are further discussed in detail below.

B. Identity of interests between the County andJPMorgan[6] [7] Courts have held that proceedings against a non-

debtor defendant should be stayed where there is such a closeidentity between the non-debtor defendant and the debtor thata judgment against the non-debtor defendant would in effectbe a judgment against the debtor. See, e.g., A.H. Robins, 788F.2d at 999; Gulfmark Offshore, Inc. v. Bender Shipbuilding& Repair Co., Inc., No. 09–0249–WS–N, 2009 WL 2413664,

at *1 (S.D.Ala. Aug. 3, 2009); Sudbury, Inc., 140 B.R. at 464.A stay is appropriate where the claims against the debtor andnon-debtor defendant are “inextricably interwoven,” such asin the case of an indemnification agreement. See E. Air Lines,Inc. v. Rolleston (In re Ionosphere Clubs, Inc.), 111 B.R. 423,434 (Bankr.S.D.N.Y.1990) (internal quotations and citationomitted); see also Queenie, Ltd., 321 F.3d at 287–88; A.H.Robins, 788 F.2d at 999; Gulfmark Offshore, Inc., 2009 WL2413664, at *1.

*8 A.H. Robins is a seminal case that established the“unusual circumstances” exception allowing courts to staya proceeding against a non-debtor defendant when thatdefendant is indemnified by the debtor. See 788 F.2d at999. A.H. Robins Company manufactured and marketed theDalkon Shield medical device in the early 1970s. Id. at996. Many of A.H. Robins' customers filed product liabilitylawsuits against A.H. Robins alleging that they had beeninjured by the Dalkon Shield. Id. A.H. Robins filed a Chapter11 petition while trying to defend itself against these suits,and upon filing, the automatic stay prevented the suits againstthe debtor from proceeding. Id. However, several plaintiffswanted to sever their claims against A.H. Robins and continuetheir suits against the debtor's insurance company and severalindividuals involved in the production of the Dalkon Shield.See id. at 996–97, 1007–08. Although the automatic staygenerally does not protect non-debtors, the Fourth Circuitexplained that this rule is not without exception:

[Section 362](a)(1) is generally saidto be available only to the debtor,not third party defendants or co-defendants.... However, ... there arecases [under 362(a)(1) ] where abankruptcy court may properly staythe proceedings against non-bankruptco-defendants but ... in order for relieffor such non-bankrupt defendants to beavailable under (a)(1), there must beunusual circumstances and certainlysomething more than the mere fact thatone of the parties to the lawsuit hasfiled a Chapter 11 bankruptcy mustbe shown in order that proceedings bestayed against non-bankrupt parties.This unusual situation, it would seem,arises when there is such identitybetween the debtor and the third-partydefendant that the debtor may be saidto be the real party defendant and




that a judgment against the third-partydefendant will in effect be a judgmentor finding against the debtor. Anillustration of such a situation wouldbe a suit against a third-party who isentitled to absolute indemnity by thedebtor on account of any judgment thatmight result against them in the case.To refuse application of the statutorystay in that case would defeat the verypurpose and intent of the statute.

Id. at 999 (internal quotations and citations omitted) BecauseA.H. Robins had liability coverage from its insurancecompany and because the individual co-defendants involvedin the production of the Dalkon Shield were indemnified bycorporate by-laws, state statutes, and the debtor's insuranceagreement, the Fourth Circuit upheld the extension of theautomatic stay because this case fell within the “unusualcircumstances” exception. Id. at 997, 1007–09. The FourthCircuit also explained one possible consequence of notapplying the automatic stay in the context of such anindemnity relationship:

Of course, if the indemnitee, whohas suffered a judgment for whichhe is entitled to be absolutelyindemnified by the debtor, cannot fileand have allowed as an adjudicatedclaim the actual amount of thejudgment he has secured but mustsubmit his claim for allowance inthe bankruptcy proceeding with theprospect that his claim may notbe allowed in the full amount ofthe judgment awarded in favor ofhim, the indemnitee will be unfairlymulcted by inconsistent judgments andhis contract of indemnity in effectnullified.

*9 Id. at 1000.

[8] Since A.H. Robins—and contrary to the argument

set forth by Assured, 2 courts have clarified that absoluteindemnity is not required for the unusual circumstancesexception to apply. Rather, the “possibility” of a right ofindemnification is sufficient. See Robert Plan Corp. v. LibertyMut. Ins. Co., No. 09–CV–1930JS, 2010 WL 1193151, at*4 (E.D.N.Y. Mar. 23, 2010) (“given the possibility that

the Officers had such an absolute right [of indemnification],the Bankruptcy Court properly protected the estate bystaying the contempt case”); see also In re Fiddler's Creek,LLC, No. 9:10–bk–03846–ALP, 2010 WL 6618876, at *5(Bankr.M.D.Fla. Sept. 15, 2010) (existence of “potential”indemnity and contribution claims was sufficient to applyunusual circumstances exception).

One particularly relevant case, American Film Technologies.,Inc. v. Taritero (In re American Film Technologies, Inc.),175 B.R. 847, 851–55 (Bankr.D.Del.1994), demonstratesthat a court need not formally determine that a non-debtordefendant is indemnified by the debtor to apply the “unusualcircumstances” exception. See Am. Film, 175 B.R. at 851–55. The plaintiff in American Film was a former officerand director of American Film Technologies, Inc., who suedthe company and its officers and directors for fraud andbreach of his employment contract. Id. at 848. The companysubsequently filed a petition for Chapter 11 bankruptcyand sought a stay of the lawsuit against its officers anddirectors, who were to be indemnified for any such damagesunder the company's charter and by-laws. Id. at 848–49.The plaintiff argued that if the officers and directors hadcommitted fraud, the applicable state laws prevented themfrom being indemnified by the debtor. Id. at 851, 854–55.The court rejected that argument, holding that the plaintiff'slawsuit “squarely implicate[d] [the debtor's] indemnificationobligations” and that the “unusual circumstances” exception

applied. Id. at 855. 3 See also Sudbury, 140 B.R. at464 (applying the “unusual circumstances” exception eventhough there were “questions as to the enforceability ofthe indemnities” because of fraud on the part of individual

officers and directors). 4

JPMorgan and the County entered into severalwarrant purchase agreements that included indemnificationprovisions. In addition to these contract-based groundsfor indemnification, JPMorgan has claimed that it shouldreceive damages from the County based on its contributionand common law indemnification claims. The actionsof the County and JPMorgan were closely intertwinedwhile coordinating the financing of the Sewer System,and the alleged misconduct falls within the County'spotential obligations for indemnification and contribution toJPMorgan.

Because of the bases on which these indemnification andcontribution claims are premised, JPMorgan's interests are“inextricably interwoven” with the County's. In order to




prove that JPMorgan aided and abetted the County's fraud,Assured will have to prove that the County committedfraud, and if the New York court enters a judgment againstJPMorgan on Assured's fraud claims, that judgment could,via preclusion, result in a judgment against the Countywhen JPMorgan pursues its indemnification and contributionclaims. See A.H. Robins Co., 788 F.2d at 999; Vazquez v.Aetna Cas. & Sur. Co., 112 Misc.2d 125, 446 N.Y.S.2d176, 178–79 (Civ.Ct.1982) (offensive collateral estoppel ispermissible where the non-party can show privity with theparty against whom the judgment was rendered). AlthoughAssured's fraud allegations have yet to be addressed by theNew York court, and even if state law eventually preventsJPMorgan from being indemnified by the County for the fraudclaims, these allegations “squarely implicate” the potentialapplicability of the County's indemnification and contributionobligations. See Am. Film, 175 B.R. at 855. Accordingly,these “unusual circumstances” warrant application of the §362(a)(1) automatic stay.

C. Discovery would significantly burden the County'sadjustment of debts*10 [9] Courts apply the § 362(a)(1) stay to proceedings

against non-debtor defendants when discovery in thoseproceedings would impose a burden on the debtor that would

substantially hinder the debtor's reorganization. 5 See, e.g.,Lomas Fin. Corp., 117 B.R. at 67; Johns–Manville I, 40 B.R.at 223–26; Sudbury, Inc., 140 B.R. at 465; E. Air Lines, Inc.,

111 B.R. at 435. 6

One of the seminal cases on this issue is Johns–ManvilleI. In that case, Johns–Manville, a large manufacturer ofasbestos, filed a Chapter 11 bankruptcy petition after beingfaced with a vast number of product liability lawsuits totalingmore than two billion dollars. Johns–Manville I, 40 B.R. at221. Johns–Manville was severed out of the product liabilitylawsuits because of the automatic stay, but many plaintiffswanted to continue to pursue their litigation against other non-debtor defendants. Id. The district court explained why theburden of discovery would have a serious, adverse impact onthe debtor's reorganization:

In considering the effect of extensive and expensive pre-trial discovery taken from a debtor in reorganization, orfrom its present or past officers and employees, the Courtmust be mindful of the realities of modern litigation.Pretrial discovery under modern federal practice hasbecome a monster on the loose. It is no longer a simple

question of inspecting documents or producing a witnessunder oath who may simply be directed by Debtor's counselto tell the truth and then testify. Pre-trial proceedings havebecome more costly and important than trials themselves.It is customary today for the lawyers for a witness or partysubject to deposition testimony, to meet with the witnessprior to depositions and interview the witness in depth.This is done in order to refresh the witness' recollection,prepare the witness to listen carefully to questions andassure that the witness will not engage in surmise orspeculation and give unfounded answers which later passas an admission against interest. Witness preparation alsoextends to making sure that attorney-client privilegedmatter, or trade secrets are not inadvertently loosed to theworld.

...

Furthermore, once a witness has testified to a fact, or whatsounds like a fact, that witness may be confronted with hisprior testimony under oath in a future proceeding directlyinvolving Manville, whether or not Manville was a party tothe record on which the initial testimony was taken.

...

Manville cannot be reorganized while its managementis chasing around the country preparing for pre-trialdiscovery and protecting its legitimate interests in the scopeand conduct of deposition testimony. To suggest otherwise,as noted above, would be to ignore the realities of modernlitigation.

Id. at 224–25. 7 See also E. Air Lines, Inc., 111 B.R. at435 (“Because the suit would ultimately divert the debtor'sresources and attention from the bankruptcy process, andpossibly deprive this Court of control over issues centralto its administration of the case, it is necessary to enjoin[the lawsuit against the non-debtor defendants].”); Sudbury,Inc., 140 B.R. at 465 (ruling that two lawsuits, eachrequesting $60 million in damages, were stayed because thelawsuits “would require the examination and production ofvoluminous records of the Debtor, analysis of its activitiesand financial reporting over a number of years and would betime-consuming and costly”); Lomas Fin. Corp., 117 B.R.at 67 (staying a lawsuit because “key personnel would bedistracted from participating in the reorganization process”)(internal quotations and citation omitted). Moreover, the caselaw indicates that the concerns expressed by the Johns–Manville I court apply equally to discovery taken against




former officers of the debtor. See, e.g., Johns–Manville I, 40B.R. at 224 (noting that its analysis applies to “present orpast officers and employees”); Sudbury, Inc., 140 B.R. at 467(“prosecution of these suits would seriously impair Debtor's‘breathing spell’ and its reorganization” even if no currentofficers are named).

*11 Allowing the Assured Action to proceed would imposea burden on the County that would substantially hinder itsadjustment of debts by diverting its attention and resourcesaway from the bankruptcy process. The stakes in the AssuredAction are high, and discovery is in the early stages. Assuredalleges that fraud occurred during the financing of theSewer System, which is responsible for approximately $3.14billion of the County's $4.23 billion in scheduled debt,and makes allegations that involve hundreds of millions ofdollars in potential compensatory and punitive damages. TheCounty has already produced more than 370,000 pages ofdocuments to Assured and spent over $2.5 million fromits General Fund defending itself, and the parties still haveyet to finish what remains as extensive and expensive pre-trial discovery. Document discovery—including third-partydocument discovery—is not yet complete, depositions andexpert discovery have not begun, and numerous discoverydisputes have yet to be briefed and resolved.

Participating in this discovery would distract key personnelof the County—including Commissioners, employees, andcounsel—from the process of developing and executing aplan of adjustment because they will be required to respondto document discovery and be deposed or, at the very least,be involved in the deposition process. Even if Assured seeksdiscovery only from former, and not current, officials andemployees of the County as it currently asserts it will do,JPMorgan, which also has a right to engage in discoveryagainst the County, anticipates undertaking much broaderdiscovery, including discovery from both current and former

County officials. JPMorgan Br. at 3. 8

Further, despite Assured's assurances that “all the eventsrelevant to Assured's fraudulent inducement claims againstJPMorgan occurred prior to the issuance of Assured's finalpolicy in April 2005 (and largely between 2002 and 2004),”Assured Reply Br. at 15 (Doc. 901), discovery will notnecessarily be so limited. The Assured Complaint reliesheavily upon events that occurred after 2005, including theCounty's April 2008 failure to generate sufficient revenues tomeet its payment obligations, the 2009 criminal convictionof former Birmingham mayor Larry Langford, the 2009

censures and fines that the SEC imposed on JPMorgan,the 2009 civil charges that the SEC brought against formerJPMorgan bankers, and the 2009 revelation at Langford'scriminal trial of the bribes involved in the sewer financing.Assured Compl. ¶¶ 77–83. In any case, even discoveryagainst former officials would require the participation ofthe County's counsel and its current leadership as well as anexpenditure of funds, all of which are resources that not onlyshould be, but out of financial necessity must be, devoted tothe County's adjustment of debts. See Johns–Manville I, 40B.R. at 224; Sudbury, Inc., 140 B.R. at 467.

In short, discovery in the Assured Action promises to be thesame sort of “extensive and expensive” process described bythe Johns–Manville court. See Johns–Manville I, 40 B.R. at224. Application of the stay is therefore appropriate.

D. Potential preclusive effect of the Assured Action*12 This Court also considers whether the Assured

Action should be stayed because of its potential preclusive

effect. 9 Courts have stayed proceedings against non-debtordefendants when the proceedings would have a potentialpreclusive effect that would force the debtors to participate inthe proceedings as if they were a party. See Lomas Fin. Corp.,117 B.R. at 67; Lesser, 44 B.R. at 702–04.

[10] [11] [12] [13] When dealing with preclusion,courts look to the laws of the state in which judgment wouldbe or has been rendered. See, e.g., Marrese v. Am. Acad. ofOrthopaedic Surgeons, 470 U.S. 373, 381, 105 S.Ct. 1327,84 L.Ed.2d 274 (1985). As such, this Court looks to the lawsof New York. The doctrine of collateral estoppel in NewYork contains two requirements: “First, the identical issuenecessarily must have been decided in the prior action andbe decisive of the present action, and second, the party tobe precluded from relitigating the issue must have had afull and fair opportunity to contest the prior determination.”Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 492N.Y.S.2d 584, 482 N.E.2d 63 (N.Y.1985). Collateral estoppelcan be used offensively under New York law, and the doctrineof mutuality is “a dead letter.” B.R. DeWitt, Inc. v. Hall,19 N.Y.2d 141, 147, 278 N.Y.S.2d 596, 225 N.E.2d 195(N.Y.1967). Based on this formulation, “collateral estoppelbars not only parties from a previous action from litigatingan issue decided therein, but those in privity with them aswell.” Gramatan Home Investors Corp. v. Lopez, 46 N.Y.2d481, 486, 414 N.Y.S.2d 308, 386 N.E.2d 1328 (N.Y.1979).Privity often exists in the relationship between an indemnitor




and indemnitee, A to Z Assocs. v. Cooper, 161 Misc.2d 283,613 N.Y.S.2d 512, 517 (N.Y.Sup.Ct.1993) (quoting Israel v.Wood Dolson Co., 1 N.Y.2d 116, 119, 151 N.Y.S.2d 1, 134N.E.2d 97 (N.Y.1956)), and some courts have applied thestay on the basis of similar relationships. See, e.g., LomasFin. Corp., 117 B.R. at 67 (in case involving allegationsagainst officers of the debtor, the court noted that “it is notpossible for the debtor to be a bystander to a suit which mayhave a $20 million issue preclusion effect against it in favorof a pre-petition creditor”) (internal citation and quotationsomitted); Lesser, 44 B.R. at 702–04 (applying stay wherepotential effect of collateral estoppel would force the debtorsto monitor, and possibly participate in the district court cases).But see Queenie, Ltd., 321 F.3d at 288 (declining to applystay “because of an apprehended later use against the debtorof offensive collateral estoppel or the precedential effect ofan adverse decision”).

The potential preclusive effect of allowing the AssuredAction to proceed against JPMorgan presents a concernfor the County because of the Syncora Action involvingclaims against it in the hundreds of millions of dollars, ifnot greater, and the County's indemnification agreementswith JPMorgan. The Assured and Syncora Complaints allegesubstantially similar fraud claims, have been assigned to thesame judge, and the parties had been coordinating discovery

for both cases. 10 The County would be forced to participatein the Assured Action as if it were a party to the casebecause of the potential prejudicial effect the outcome of theAssured Action will have on both the Syncora Action and

JPMorgan's indemnity claims against the County. 11 Even if,as the County contends, an actual collateral estoppel claimmight not succeed, the County's legal position could still beadversely impacted by testimony given in the Assured Actionto the detriment of its positions as a third-party defendant inthe Assured Action and a defendant in the Syncora Action.See Johns–Manville I, 40 B.R. at 224–26.

*13 As a practical matter, the County cannot be abystander to a suit which may have a preclusive effecton claims for of hundreds of millions of dollars againstit by a pre-petition creditor. The County's doing nothingis even more problematic because Assured has reinsuredcertain of Syncora's potential obligations to warrantholders.When one recognizes that the underlying liability basis towarrantholders is identical for the reinsured policies, it isobvious that the County cannot avoid participating in theAssured Action. More simply, it would be forced to asignificant degree to participate in the Assured Action unless

it wants to gamble that no adverse facts or rulings will beconclusively established. Therefore, the potential prejudice tothe County's positions in the Syncora Action and indemnityactions by JPMorgan further supports application of theautomatic stay.

IV. Assured's Action is Subject to theAutomatic Stay of 11 U.S.C. § 362(a)(3)

[14] [15] Unlike § 362(a)(1), § 362(a)(3) is not limited toactions against the debtor but instead stays “any act to obtainpossession of property of the estate or of property from theestate or to exercise control over property of the estate,” 11U.S.C. § 362(a)(3), and courts have applied the (a)(3) stay tonon-debtor actions that “have an adverse impact on property

of the estate.” 12 See Kagan v. Saint Vincents Catholic Med.Ctrs. of New York (In re Saint Vincents Catholic Med. Ctrs.of New York ), 449 B.R. 209, 217–18 (S.D.N.Y.2011) (“theautomatic stay provision is not limited solely to actionsagainst the debtor, but rather bars actions against even againstthird-parties that would have an adverse impact on theproperty of the estate”); Queenie, Ltd., 321 F.3d at 287 (“Theautomatic stay can apply to non-debtors, but normally doesso only when a claim against the non-debtor will have animmediate adverse economic consequence for the debtor'sestate.”); 48th Street Steakhouse, Inc. v. Rockefeller Grp.(In re 48th Street Steakhouse, Inc.), 835 F.2d 427, 430–31(2d Cir.1987) (applying (a)(3) stay to non-debtor); Kaiser,315 B.R. at 659 (same). “Property of the estate” within themeaning of § 362(a)(3) is governed by 11 U.S.C. § 541(a)and includes “ ‘[e]very conceivable interest of the debtor,’including those that are ‘future, nonpossessory, contingent,speculative, and derivative.’ ” Saint Vincents Catholic Med.Ctrs. of New York, 449 B.R. at 217 (quoting Chartschlaa v.Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir.2008)).

[16] An indemnification claim against the debtor—even ifit is ultimately unsuccessful—may fall within § 362(a)(3)because it has an “immediate adverse economic consequencefor the debtor's estate:”

[B]ecause the Debtors have alreadypledged to indemnify the Officers,a claim against the Officers will,when entered, constitute a claim(and hence, an “immediate adverseeconomic consequence”) against theestate. The fact that Appellants could




sue to nullify this negative economicconsequence does not eliminate thefact that it would still continue to existfor at least the duration of Appellants'suit—thereby potentially complicatingthe pending bankruptcy proceedings.

*14 Robert Plan Corp., 2010 WL 1193151, at *3 (citingQueenie, Ltd., 321 F.3d at 287). But see In re All SeasonsResorts, Inc., 79 B.R. 901, 904 (Bankr.C.D.Cal.1987)(officer's right to be indemnified by debtor does not implicate

§ 362(a)(3)). 13

The Assured Action is an attempt to indirectly obtain propertyof the debtor under § 362(a)(3). Just as in Robert PlanCorp., JPMorgan's indemnification and contribution claimsagainst the County create an immediate adverse economicconsequence for the debtor regardless of whether they areultimately successful. Additionally, and as already discussed,the reinsurance agreement between Assured and Syncoraeffectively brings the underlying reinsured liabilities in theSyncora Action into the Assured Action as well. Theseidentical underlying claims should not be allowed to goforward in the Assured Action while they are stayed inthe Syncora Action simply because of Assured's pleadingdifferences. The Assured Action is stayed pursuant to 11

U.S.C. § 362(a)(3). 14

V. There is No Cause to Modify the Automatic Stay

Having determined that the automatic stays of 11 U.S.C.§ 362(a)(1) and (a)(3) apply to the Assured Action, theCourt must next examine whether Assured has made aprima facie showing that it is entitled to relief fromthe stay. In re Jefferson Cnty., Ala., 484 B.R. 427, 465(Bankr.N.D.Ala.2012) (Although “[t]he party opposing thestay bears the burden of persuasion on all issues except equity,the moving party must first make a prima facie showingthat it is entitled to the relief requested.”) (internal citationsomitted).

[17] [18] Section 362(d) allows the Bankruptcy Court togrant relief from the automatic stay for “cause.” “Cause”is not defined in the Bankruptcy Code. “Because there isno clear definition of what constitutes ‘cause,’ discretionaryrelief from the stay must be determined on a case by casebasis.” In re Mac Donald, 755 F.2d 715, 717 (9th Cir.1985);see also In re S. Oakes Furniture, Inc., 167 B.R. 307,

308 (Bankr.M.D.Ga.1994). To determine whether “cause”exists to lift the stay and allow a suit to proceed in a non-bankruptcy forum, this Court has analyzed whether (1) anygreat prejudice to either the bankrupt estate or the debtor willresult from continuation of a civil suit, (2) the hardship to thenon-bankrupt party by maintenance of the stay considerablyoutweighs the hardship to the debtor, and (3) the creditor has

a probability of prevailing on the merits of its lawsuit. 15 Inre Jefferson Cnty., Ala., 484 B.R. at 465–66 (citing Chizzaliv. Gindi (In re Gindi), 642 F.3d 865, 872 (10th Cir.2011),overruled on other grounds by TW Telecom Holdings Inc. v.Carolina Internet Ltd., 661 F.3d 495 (10th Cir.2011)).

[19] As detailed in the preceding sections of this opinion,the County would be greatly prejudiced by allowing theAssured Action to continue. It would be forced to participatein an extensive and expensive discovery process anda trial in another state, further depleting the County'srapidly diminishing General Fund. Moreover, the County'sindemnification agreements with JPMorgan could meanthat the County will essentially be required to participatein litigation involving the issues in the Assured Actiontwice. Further, if the Assured Action proceeds, the evidencepresented may have a preclusive effect in the Syncora Actionor the indemnification claims. It may also alter the type andclassification of the claim Assured would otherwise have inthe County's Chapter 9 case while other claimholders wouldnot have a similar opportunity.

*15 In contrast, Assured will suffer very little hardship if thestay is applied to the Assured Action. If the Assured Actionis stayed, Assured can still pursue its claims against theCounty in this Court and will not forfeit its right to pursue itsclaims against JPMorgan at a later date. Even more pointedly,Assured is being treated identically to Syncora with respectto what for all intents and purposes are identical claims andcauses of action.

[20] This Court's resolution of issues involving theallowance of claims, subordination, and the County's plan ofadjustment of debts will implicate—and may even moot—theAssured Action, and allowing Assured to litigate these issuesoutside the context of the County's Chapter 9 case would

defeat the very purpose of the County's Chapter 9 petition. 16

In short, there is no question that prejudice to the County faroutweighs any hardship to Assured.

Unlike the stay relief motion this Court recently ruledon in In re Jefferson County, Ala., 484 B.R. 427




(Bankr.N.D.Ala.2012), Assured's likelihood of success onthe merits is unclear from the record before this Court. SeeIn re Tovar, No. BR 12–00357, 2012 WL 4845593, at *6(Bankr.N.D.Iowa Oct. 10, 2012) (because movant's chancesof success on the merits were unclear on the record provided,the factor was neutral); In re Marvin Johnson's Auto Serv.,Inc., 192 B.R. 1008, 1017 (Bankr.N.D.Ala.1996) (“Withoutknowing the testimony the state court will hear, it is notpossible for this Court to predict to what extent, if any,Mr. Franks will be successful.”). In any event, it appearsit may be too early in the Assured Action for the Court toassess Assured's likelihood of success. See In re Pro FootballWeekly, Inc., 60 B.R. 824, 826 (N.D.Ill.1986). This factor istherefore neutral, and the balance of these three factors weighsheavily against modifying the automatic stay of 11 U.S.C. §362 with respect to the Assured Action, and it will not bemodified.

VI. Conclusion

Based on the foregoing findings of fact and conclusionsof law, Assured's Motion is denied. The Court holds thatbased on the unusual circumstances presented in this case—specifically, the identity of interests between JPMorganand the County, the effect on the County's reorganizationefforts, and the potential preclusive effect of a judgment inthe Assured Action—that the automatic stay of 11 U.S.C.

§ 362 applies to the Assured Action. 17 Further, becausethe prejudice to the County far outweighs any hardship toAssured, the Court will not modify the automatic stay inorder for the Assured Action to proceed. This outcome is theelevation of substance over form preventing the downsideof creativity that might otherwise cause misapplication oravoidance of the automatic stay of 11 U.S.C. § 362(a). Morebasically, the degree of sameness between the Assured Actionand the Syncora Action requires equality of treatment that thecreative pleading attempts to avoid.

*16 A separate order incorporating the Court's decisionwill be entered contemporaneously with this MemorandumOpinion.

Footnotes1 This Court notes that other courts have stayed actions involving non-debtor parties in a variety of procedural ways. Some courts have

simply determined the 11 U.S.C. § 362(a) stay applies to non-debtors based on the considerations outlined above, see, e.g., In re QA3Fin. Corp., No. BK1 1–80297–TJM, 2011 WL 2678591 (Bankr.D.Neb. July 7, 2011); Maaco Enters., Inc. v. Corrao, No. 91–3325,1991 WL 255132 (E.D.Pa. Nov. 25, 1991), while other courts have extended the § 362 stay using 11 U.S.C. § 105, which allows abankruptcy court “to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code].”See, e.g., Sudbury, Inc. v. Escott (In re Sudbury, Inc.), 140 B.R. 461, 464 (Bankr.N.D.Ohio 1992); Johns–Manville I, 40 B.R. at 226.Still other courts have held that a movant seeking relief pursuant to § 105 must do so through an adversary proceeding. See, e.g., Inre Cincom iOutsource, Inc., 398 B.R. 223, 227 (Bankr.S.D.Ohio 2008).

As set forth in detail below, this Court holds that the automatic stay of 11 U.S.C. § 362(a)(1) and (a)(3) apply to the AssuredAction. Alternatively, for those actions or proceedings requiring its extension, this Court is imposing the automatic stay. Whetherthe imposition may be accomplished without the use of 11 U.S.C. § 105, must be done in conjunction with § 105, or requiresan adversary proceeding is not and need not be resolved. This Court reaches the same conclusion based on the circumstancespresented regardless of whether it utilizes § 105, and, to the extent an adversary proceeding might be required, this Court wouldissue such relief consistent with this opinion if an adversary proceeding were to be filed.

2 In its brief, Assured selectively quotes from A.H. Robins to create an overly narrow rule: “For there to be an identity of interest, atminimum, JPMorgan must establish an ‘absolute’ or ‘automatic’ right of indemnity. See A.H. Robins, 788 F.2d at 999 (stay maybe applied to action against non-debtor where non-debtor ‘is entitled to absolute indemnity by the debtor’) (emphasis added)....”Assured Motion at 15 (Doc. 748). A.H. Robins, however, did not state that absolute indemnity is a minimum requirement for “unusualcircumstances” to exist, but mentioned it only as an “illustration.” A.H. Robins, 788 F.2d at 999. And, as the Court notes, other courtsinterpreting A.H. Robins have not imposed such a requirement.

3 In its Reply, Assured claims that the American Film “court only imposed the automatic stay because the non-debtor defendantsindisputably had a right to indemnification for plaintiff's breach of contract claim.” Assured Reply Br. at 6 n. 4 (emphasis added).This summary of the case is not accurate. First, the court noted that the officers and directors were “presumably” indemnified underthe contract claim; it did not “indisputably” settle this issue. See Am. Film, 175 B.R. at 851. As with the fraud claim, the contractclaim remained a potential source of indemnification that had not yet been determined by a judge or jury. Second, the court found




that the “California case” implicated the debtor's indemnification obligations, and that “California case” included both the fraud andcontract claims. See id. at 855.

4 Assured's contention that the stay cannot be applied in the case of joint tortfeasors is inapposite in this case because here the “debtorand a nondebtor are so bound by statute or contract that the liability of the nondebtor is imputed to the debtor by operation of law.”Plessey Precision Metals, Inc. v. Metal Ctr., Inc. (In re Metal Ctr., Inc.), 31 B.R. 458, 462 (Bankr.D.Conn.1983); see also Am. Film,175 B.R. at 853. In addition, JPMorgan's contribution claim survives regardless of the parties' fault. See Corva v. United Servs. Auto.Ass'n, 108 A.D.2d 631, 485 N.Y.S.2d 264, 265 (1985) (“It is of course well established that New York law permits an apportionmentof damages among culpable parties regardless of the degree or nature of the concurring fault and that contribution is permitted evenin favor of an intentional wrongdoer if the parties are subject to liability to plaintiff for damages for the same injury.”) (internalquotations and citation omitted).

5 Because a Chapter 9 debtor does not “reorganize” as this terminology is used in a Chapter 11 case, the Court will reference the samesort of restructuring used in Chapter 9 cases by referring to it as the County's adjustment of debts.

6 Conversely, courts have not applied the stay where the discovery would cause little to no harm to the debtor's reorganization efforts.See, e.g., CAE Indus. Ltd. v. Aerospace Holdings Co., 116 B.R. 31, 33–34 (S.D.N.Y.1990) (declining to apply the stay to “onlyone action against a single former corporate insider” because there was no evidence that continued litigation against the defendantwould have a “substantive effect” on the debtor's reorganization); Ochs v. Lipson (In re First Cent. Fin. Corp), 238 B.R. 9, 18–21(Bankr.E.D.N.Y.1999) (“Here, mass litigation is non-existent, there is no reorganization effort which would require the participationof the Officers and Directors, and no discernible harm can be ascribed to the Debtor if the Officers and Directors ultimately fileclaims for indemnification in this Chapter 7 case.”); All Seasons Resorts, Inc. v. Milner (In re All Seasons Resorts, Inc.), 79 B.R.901, 904 (Bankr.C.D.Cal.1987) (refusing to apply the stay to invalidate a default judgment against debtors' officers where there wasno threat to debtor's reorganization). Unlike these cases, the Assured Action involves more than little or no harm to the County'sadjustment of debts.

7 A subsequent case demonstrated that § 362(a)(1)'s protection against such discovery from the debtor is not absolute. In OccidentalChemical Corp. v. Johns–Manville Corp. (In re Johns–Manville Corp.) (Johns–Manville II ), 41 B.R. 926 (S.D.N.Y.1984), anotherdistrict court declined to apply the stay to a non-debtor defendant, a former supplier of Manville's asbestos fibers, where the discoverysought was very limited and involved information that was in the exclusive custody and control of Manville, the plaintiffs' employer.The court balanced the parties' competing interests and determined that the small effect on the debtor's reorganization was outweighedby the asbestosis plaintiffs' right to pursue their claims in a timely fashion and by the non-debtor defendant's need to mount areasonable defense. Id. at 931–32 (“I am not persuaded that permitting limited discovery in this or comparable cases would bringabout so disruptive an effect upon Manville's reorganization efforts as to condone the imposition of an injustice upon others.”). Inthis case, the balance tips the other way. See infra Section V.

8 JPMorgan's brief states thatAssured's argument that Assured does not currently expect to depose any current County employees is of no moment. JPMorganwill be required to do so to defend itself against Assured's claims. Specifically, among JPMorgan's defenses are (1) that thepayments made by JPMS at the direction of duly authorized County Commissioners were not secret and were in fact well knownto the participants in the transactions at issue, including County Commissioners and employees, as well as the County's legaland financial advisors; and (2) that the payments were immaterial to the sewer-related problems that subsequently confrontedthe County. Thus, JPMorgan intends to depose and potentially call at trial numerous current and former County representativesand outside advisors.

JPMorgan Br. at 3. Assured counters JPMorgan's contentions by arguing that JPMorgan will not need to engage in such discovery“because none of the current County Commissioners were in office at the time of JPMorgan's fraud and its bribery scheme in theearly half of the last decade (and none is believed to have been involved in the JPMorgan bribery scandal).” Assured Reply Br. at 16.Assured contends that JPMorgan misstates the reasons for these depositions and ignores the possibility that the County may decideto cooperate with JPMorgan's discovery requests (as the County did with Assured's document requests in the pre-bankruptcy periodof 2011). However, the County's resistance to Assured's motion demonstrates that cooperation is not likely to occur. Furthermore,the costs that would be incurred even if the County cooperated would be substantial, and the other factors supporting applicationof the automatic stay that are discussed in the text of this opinion remain. Finally, even if Assured were correct that JPMorganwould not need to depose such officials and employees, reaching that determination could itself be a significant discovery disputethat would contribute to the County's burden.

9 The case law remains ambiguous regarding whether the preclusive effect of a proceeding against a non-debtor defendant is anindependent ground for imposing a stay on that proceeding, or whether it is merged with the analysis about a debtor's discoveryburden. Although these issues often overlap, the preclusive effect of a proceeding and a debtor's discovery burden are two distinctconcepts. See Lesser, 44 B.R. at 702–04 (examining collateral estoppel issues independently of a proceeding's discovery burden).




For example, a debtor could be overwhelmed by the discovery costs of a proceeding in which the debtor has no stake in the outcome.Similarly, a debtor could be concerned about the developments in a case that might affect the debtor's own future litigation withoutbeing forced to engage in discovery in that case.

10 Quinn Emanuel Urquhart & Sullivan, LLP currently represents both Assured and Syncora before the New York court, but offeredduring this Court's April 16, 2012, hearing to terminate its joint representation if such an option would allow the Assured Action tocontinue. Hr'g Tr. at 62–63 (Doc. 921). Concerns about the preclusive effect of the Assured Action remain regardless of the identityof Assured's legal representation, and Quinn Emanuel's offer—although being the right thing to do for its client—has no effect onthis Court's determination of this issue. See Johns–Manville I, 40 B.R. at 224–25 (disregarding a party's offer to waive any right ithad to use discovery against the debtor in future proceedings).

11 Although the parties in the Assured and Syncora Actions have not stated any intention of invoking collateral estoppel, given the near-identical nature of the two suits, it is highly unlikely that such arguments will not be made.

12 Title 11 U.S.C. § 902(1) makes the references in 11 U.S.C. § 362(a)(3) to “property of the estate” mean “property of the debtor.” SeeIn re Jefferson Cnty., Ala., 484 B.R. 427, 447 (Bankr.N.D.Ala.2012).

13 In All Seasons, the court held that “special circumstances” did not exist to apply the stay to the non-debtors in that case because thecircumstances there—the non-debtor officers' attempts to reverse the default judgment against them by applying the stay—did notimplicate the debtor's reorganization:

[T]he magnitude of the harm to debtor if no stay is in force does not approach the scope of the potential injuries besettingthe debtors in Robins and Johns–Manville. I believe the court in those cases was particularly sensitive to the magnitude of theproblems and the need to maintain the status quo and control over all the litigations which had the potential to destroy anyreorganization plans. Such a threat is not evident here. Debtor seeks to unravel a default judgment against two of its officers.The balancing of harm in this proceeding is between the officers and Milner, not debtor. With his default judgment againstMcNamee and Mooney, Milner will likely be paid the full amount of his claim. They, in turn can seek indemnification fromdebtor, but their claim will be treated like any pre-petition, unsecured claim. In all likelihood, they will not get paid in full.

All Seasons Resorts, Inc., 79 B.R. at 904. As detailed in Sections III.C and V, the County's adjustment of debts would besignificantly impacted if the Assured Action were to proceed.

14 For all of the reasons above, the Court holds that the automatic stays of 11 U.S.C. § 362(a)(1) and (a)(3) apply to—or are imposedon—the Assured Action. However, the Court notes that even if the stays did not apply to the entire Assured Action, all portionsof the Assured Action directly implicating the debtor itself—including anything related to the allegations that JPMorgan aided andabetted the County's fraud and all of the discovery impacting the debtor—would be stayed pursuant to § 362(a). See Mar. Elec. Co.,Inc. v. United Jersey Bank, 959 F.2d 1194, 1204–05 (3d Cir.1991) (claims and parties should be disaggregated when determiningapplication of the stay). As a practical matter, a stay affecting only the portions of the Assured Action impacting the County wouldeffectively prohibit the Assured Action from moving forward in any meaningful way. This disaggregation for automatic stay purposesis another, alternative basis on which this Court premises its ruling.

The Court also notes that the automatic stay of 11 U.S.C. § 922(a) does not apply to the Assured Action because that stayapplies only to actions or proceedings “against an officer or inhabitant of the debtor.” No such officer or inhabitant is namedin the Assured Action; only the County itself is a third-party defendant. Cf. In re Jefferson Cnty., Ala., 484 B.R. 427, 447(Bankr.N.D.Ala.2012) (§ 922(a) stay has potential application only to County Commissioners); In re City of Stockton, Cal., 484B.R. 372 (Bankr.E.D.Cal.2012) (staying action against city officers).

15 The parties cite a ten-factor test from In re Marvin Johnson's Auto Serv., Inc., 192 B.R. 1008, 1014 (Bankr.N.D.Ala.1996), in analyzingwhether cause exists to lift the stay. See Assured Br. at 20; County Br. at 15. As this Court has often noted during hearings, multi-factor tests—particularly those used to determine “cause” for stay relief—essentially come down to a totality of the circumstancesanalysis. As set forth in this section of this opinion, the totality of the circumstances indicates that relief from the automatic stayis not appropriate.

16 Assured argues that Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), calls into question whether this Courthas the authority to issue a final order on Assured's state law fraud claims against JPMorgan. Assured Br. at 23. As this Court recentlynoted in another decision, though, Stern does not limit a bankruptcy court's ability to enter final orders regarding modification ofthe automatic stay. In re Jefferson Cnty., Ala., 484 B.R. 427, 439 (Bankr.N.D.Ala.2012). And in any case, Assured's claims directlyimplicate matters that are squarely within the jurisdiction of this Court. See supra Section III.B.

17 See infra note 1.



EXHIBIT J


Kaisha v. Dodson, Not Reported in F.Supp.2d (2008)



United States District Court,N.D. California.

Yugen KAISHA, Y.K.F., Plaintiff,v.

Stephanie DODSON, Defendant.

No. C-08-0225 SC. | Aug. 11, 2008.


James S. Monroe, Nixon Peabody LLP, Mark David Byrne,Law Offices of Martin F. Triano, San Francisco, CA, forPlaintiff.

Joel K. Belway, Law Office of Joel K. Belway, San Francisco,CA, for Defendant.

Opinion

ORDER DENYING DEFENDANT'S MOTIONFOR ABSTENTION OR STAY AND GRANTING

TRIANO'S MOTION TO INTERVENE

SAMUEL CONTI, District Judge.

I. INTRODUCTION*1 Plaintiff Yugen Kaisha, Y.K.F. (“Plaintiff” or “YKF”)

filed this action to set aside an allegedly fraudulentconveyance under 11 U.S.C. §§ 544(b) and 548. DefendantStephanie Dodson (“Defendant” or “Dodson”) moves theCourt to abstain from hearing this action pursuant to 28U.S.C. § 1334(c)(1), or in the alternative to stay the matter.See Docket No. 12 (“Abst.Mot.”). Should the Court allowthe matter to proceed, Dodson also requests that YKF berequired to post a $25,000 security for costs. See id. YKFfiled an Opposition and Dodson filed a Reply. Docket Nos.15 (“Abst.Opp'n”), 18 (“Abst.Reply”).

Also before the Court is a motion by Martin Triano, doingbusiness as the Law Office of Martin F. Triano (“Triano”),to intervene in this dispute. See Docket No. 10 (“Int.Mot.”).YKF filed an Opposition to Triano's motion and Trianoreplied. Docket Nos. 14 (“Int.Opp'n”), 17 (“Int.Reply”).Dodson did not participate in the briefing on Triano's motion.

Having thoroughly considered all of the parties' submissions,the Court hereby DENIES Dodson's motion and GRANTSTriano's motion.

II. BACKGROUND

A. YKF's ClaimOn September 5, 2005, Alexander Popov (“Popov” or“Debtor”) filed a petition for relief under Chapter 7 of theBankruptcy Code in the Bankruptcy Court for the NorthernDistrict of California. See In re: Popov, No. 05-32929(Bankr.N.D.Cal.2005).

In August of 2004, Popov transferred to Dodson 3,774,000shares of common stock in Smart Alec's Intelligent Food,

Inc, for a price of $12,500. 1 YKF alleges that, at the timeof this sale, the shares had been pledged to YKF as securityfor indebtedness of hundreds of thousands of dollars. Compl.,Adv. Docket No. 1, Ex. 3; Monroe Decl., Docket No. 16, ¶

5, Ex. 2. 2 YKF purchased from the Chapter 7 Trustee therights, claims, causes of action, and remedies of the Trusteeand of the Debtor's Estate to avoid and recover the transfer ofstock from Debtor to Dodson under 11 U.S.C. §§ 544(b), 548,and 550, and California Civil Code §§ 3439-3439.12. Compl.¶¶ 10-11, Ex. A. The sale of the Trustee's right to pursue thisaction was approved by the Bankruptcy Court. Monroe Decl.¶ 5, Ex. 2.

After purchasing the right to do so, YKF brought this actionagainst Dodson, alleging that Debtor transferred the stockto Dodson with the intent to hinder, delay, or defraud theDebtor's creditors. See Yugen Kaisha, Y.K.F. v. Dodson,Adversary Proceeding No. 07-3104 (Bankr.N.D.Cal.). Bytransferring the stock to Dodson, YKF alleges, Debtor tookthe stock out of the bankruptcy estate so that he and Dodsoncould retain control of Smart Alec's.

Dodson filed a counterclaim against YKF, alleging breach ofcontract, on which she demanded a jury trial. Adv. DocketNo. 6. Dodson did not consent to have the jury trial beforethe Bankruptcy Court. Pursuant to Bankruptcy Local Rule9015-2(b), the Bankruptcy Court therefore certified thatthe reference should be withdrawn and the case should betransferred to this Court. Adv. Docket No. 24.

B. Triano's Claim*2 Triano moves to intervene in this action on the basis

that he has a secured interest against the same 3,774,000


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shares of stock in Smart Alec's that form the basis of YKF'sclaim against Dodson. In April 2002, prior to transferring thestock to Dodson, Debtor executed a promissory note in theamount of $45,648 plus “such additional sums which mayaccrue from the legal services being provided by” Triano.

See Byrne Decl., Docket No. 10-4, Ex. N. 3 This note alsoprovides for collection of attorney's fees and costs incurredin enforcement of its terms. See id. Debtor also pledged hisshares of Smart Alec's as collateral to secure payment of thepromissory note. Id. Under the terms of the promissory note,the entire balance, including principal, costs, and interest wasdue on April 30, 2003. Id. Triano claims he perfected hisinterest in the stock by filing a statement with the CaliforniaSecretary of State in 2002, which he amended in April 2007to reflect the continued interest after Debtor's discharge frombankruptcy. Id. Ex. O.

Triano sued Dodson in California state court, alleging thatDefendant purchased and encumbered the stock in questionwithout notice to Triano, in violation of the promissory note.Id. Ex. Q. Triano sought a judicial determination that thepromissory note gives him a valid and enforceable securityinterest in the stock, and damages for intentional interferencewith contractual relations. Id.

In the bankruptcy proceeding, Triano timely presented hisProof of Claim secured by the stock disputed in this matter,which was not objected to by any of the estate's creditors.See id. Ex. F. The Trustee objected in part, however. Thebankruptcy court upheld the Proof of Claim over the Trustee'sobjection, and the district court affirmed that ruling on appeal.See id. Exs. G, H.

Triano asserts that when YKF purchased the right to bringthis suit from the Trustee, it did so subject to Triano's interestas a secured creditor, and that both YKF and the Trusteeacknowledged that interest. See id. Exs. J-M. In the newcomplaint Triano wishes to file here, if the Court allowshim to intervene, Triano seeks declaratory relief from theCourt affirming that he holds a valid Proof of Claim in theDebtor's estate, that he holds a valid security interest in thedisputed shares of Smart Alec's and the proceeds therefrom,and attorney's fees and costs recoverable under the terms ofhis promissory note from Debtor. See id. Ex. R.

III. ABSTENTION MOTION

A. Legal Standard

Dodson moves the Court to abstain from hearing this matter.The Bankruptcy Code vests the Court with the discretion toabstain under certain circumstances:

Except with respect to a case underchapter 15 of title 11, nothing in thissection prevents a district court in theinterest of justice, or in the interestof comity with State courts or respectfor State law, from abstaining fromhearing a particular proceeding arisingunder title 11 or arising in or related toa case under title 11.

*3 28 U.S.C. § 1134(c)(1). The Ninth Circuit has identifieda number of factors that the Court may consider in decidingwhether or not to abstain:

(1) the effect or lack thereof on theefficient administration of the estateif a Court recommends abstention, (2)the extent to which state law issuespredominate over bankruptcy issues,(3) the difficulty or unsettled natureof the applicable law, (4) the presenceof a related proceeding commencedin state court or other nonbankruptcycourt, (5) the jurisdictional basis,if any, other than 28 U.S.C. §1334, (6) the degree of relatednessor remoteness of the proceeding tothe main bankruptcy case, (7) thesubstance rather than form of anasserted “core” proceeding, (8) thefeasibility of severing state law claimsfrom core bankruptcy matters to allowjudgments to be entered in statecourt with enforcement left to thebankruptcy court, (9) the burden of[the bankruptcy court's] docket, (10)the likelihood that the commencementof the proceeding in bankruptcy courtinvolves forum shopping by one of theparties, (11) the existence of a right toa jury trial, and (12) the presence in theproceeding of nondebtor parties.

Christensen v. Tuscon Estates, Inc. (In re Tuscon Estates,Inc.), 912 F.2d 1162, 1167 (9th Cir.1990) (quoting RepublicReader's Serv., Inc. v. Magazine Serv. Bureau, Inc. (In










re Republic Reader's Serv., Inc.), 81 B.R. 422, 429(Bankr.S.D.Tex.1986)) (modification in original).

B. Discussion

1. Abstention Is InappropriateNone of Defendant's arguments in favor of abstention iscompelling. First, Defendant argues that neither of theparties here was a debtor or trustee in the underlyingbankruptcy. Abst. Mot. at 5. This is misleading. YKFlawfully purchased, with the Bankruptcy Court's approvaland without objection from any party, the Trustee's rightsin this action. YKF therefore stands in the place of theTrustee in this suit. See Duckor Spradling & Metzger v.Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 782-83(9th Cir.1999) (chapter 7 trustee may authorize a creditorto exercise the power to bring avoidance claims); see alsoSimantob v. Claims Prosecutor, L .L.C. (In re Lahijani), 325B.R. 282, 288 (B.A.P. 9th Cir.2005); Religious Tech. Ctr.v. Lucas (In re Henson), No. 03-5131, 2006 Bankr.LEXIS3722, at *26-27 (Bankr.N.D.Cal. Apr. 21, 2006) (collectingauthority). Defendant concedes this point in her Reply brief,claiming it has no bearing on the abstention issue, despite thefact that she repeated the argument that neither she nor YKFis a trustee only one paragraph earlier. See Abst. Reply at 3;see also Abst. Mot. at 5.

Defendant next argues that the Court should abstain becauseYKF included both Bankruptcy Code and California Code ofCivil Procedure provisions in the Complaint. Abst. Mot. at5. While the Court may be called upon to answer questionsof California law, it is clear that the bankruptcy issues aredominant. The First and Third Causes of Action arise solelyunder 11 U.S.C. § 548. Section 548(a)(1) (A) allows thetrustee to avoid a transfer of the debtor's interest in anyproperty or obligation that occurred up to two years prior tofiling the bankruptcy petition, where it can be shown thatthe debtor “made such transfer or incurred such obligationwith actual intent to hinder, delay, or defraud any” creditor.The remedy provided, avoidance of the transfer, is explicitlycreated by the federal statute, without any reference to statelaw. The same is true with regard to section 548(a)(1)(B)(i), which allows the trustee to avoid a transfer made in thesame two year period for which the debtor “received less thana reasonably equivalent value.” These are solely questionsof bankruptcy law. See Lahijani, 325 B.R. at 288 (“Whilethere is some disagreement among courts about the exerciseby others of the trustee's bankruptcy-specific avoiding powercauses of action, the Ninth Circuit permits such actions to

be sold or transferred.” (emphasis added)). While YKF'sclaims under 11 U.S.C. § 544(b)(1) may require reference toCalifornia law for resolution, the rights asserted are createdby federal law and also require resolution of other bankruptcyissues for their enforcement.

*4 Defendant's final argument for abstention is that YKF isforum shopping, because it could have brought this action inthe Alameda County Superior Court. See Abst. Mot. at 5-6.Bringing claims which arise under the Bankruptcy Code inthe Bankruptcy Court, as YKF did, can hardly be consideredforum shopping. The mere existence of an alternative forumis not a basis for abstention, particularly where the disputeraises questions of bankruptcy law and falls under this Court'soriginal jurisdiction. See 11 U.S.C. §§ 544, 548; 28 U.S.C. §1334.

Even if it were not clear that YKF is asserting bankruptcyclaims and invoking this Court's jurisdiction under thebankruptcy law, the Court would still have jurisdiction. YKFis a Japanese corporation with its primary place of businessin Japan. Defendant is a California resident. The amount incontroversy exceeds $75,000. As such, the matter properlyfalls within the Court's diversity jurisdiction. See 28 U.S.C.§ 1332(a)(2). Though unnecessary, the existence of a secondbasis for the Court's jurisdiction further supports the Court'sconclusion.

For each of the reasons identified above, the Court concludesthat abstention in this matter is inappropriate. Defendant didnot address the majority of the judicially-recognized reasonsfor abstaining, and failed to persuade the Court that thereasons she did address were actually applicable here. TheCourt therefore DENIES Defendant's motion to abstain.

2. No Basis Exists For Staying This ActionDefendant moves in the alternative for a stay of this action.According to Defendant, YKF is not qualified to do businessin California, and therefore, it may not maintain an actionin the California courts. See Abst. Mot. at 6; Cal Corp.Code§ 2203(c). This argument is without merit. Because YKF'sclaim arises under the federal bankruptcy laws and the Courthas jurisdiction under those laws, as discussed above, the statelicensing requirements cannot prevent YKF from suing infederal court. See Harms, Inc. v. Tops Music Enters., Inc.,160 F.Supp. 77, 80-81 (S.D.Cal.1958); see also Lone StarSteakhouse & Saloon v. Alpha of Va., Inc., 43 F.3d 922, 929n. 9 (4th Cir.1995).









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Even if the sole basis for jurisdiction were diversity, however,Defendant's argument would still fail. Defendant's claim thatYKF could not sue in California state court significantlycontradicts the assertions in her abstention argument that ifthe Court were to abstain, YKF would simply bring suit inCalifornia court. What's more, Defendant acknowledges thatYKF previously sued her in state court. Abst. Mot. at 5-6.In fact, Defendant's counterclaim alleges that YKF breachedthe settlement agreement arising from the prior suit YKFbrought against her in the state court. See id. at 3-4. Nothingin Defendant's brief or supporting papers gives the Court anyfactual basis for concluding that YKF's eligibility to sue herin state court has changed.

*5 Finally, Defendant has not established that YKF isconducting “intrastate business” as that term is definedin the California Corporations Code. See Cal. Corp.Code§§ 2105, 2203(c). The burden of proving that YKF wastransacting intrastate business and that this action arises outof that business is on Defendant. See United Med. Mgmt.v. Gatto, 49 Cal.App.4th 1732, 1740, 57 Cal.Rptr.2d 600(Ct.App.1996). Under section 191(a) of the CorporationsCode, “ ‘transact intrastate business' means entering intorepeated and successive transactions of its business in thisstate, other than interstate or foreign commerce.” Thereis no evidence that YKF has entered into repeated andsuccessive transactions in California. Defendant points toYKF's original investment in Smart Alec's (which gave rise toYKF's lien against the disputed stock), and the series of legaldisputes following that investment. However, merely beinga shareholder of a domestic corporation does not qualify astransacting intrastate business. Cal. Corp.Code § 191(b)(1).Nor does bringing a lawsuit or settling a lawsuit or dispute.Id. § 191(c)(1). As Defendant has not carried her burden, theCourt DENIES the motion to stay.

3. Defendant's Request For Security Is Not JustifiedDefendant also moves the Court to require YKF to furnisha $25,000 security for costs. Abst. Mot. at 8. Federal courtshave the inherent power to require a plaintiff to post sucha security, and often look to the law of the forum statein determining whether to do so. See Simulnet E. Assocs.v. Ramada Hotel Operating Co., 37 F.3d 573, 574 (9thCir.1994). The California Civil Procedure Code allows adefendant to move for an undertaking of costs:

The motion shall be made on thegrounds that the plaintiff resides out ofthe state or is a foreign corporation and

that there is a reasonable possibilitythat the moving defendant will obtainjudgment in the action or specialproceeding. The motion shall beaccompanied by an affidavit in supportof the grounds for the motion andby a memorandum of points andauthorities. The affidavit shall set forththe nature and amount of the costsand attorney's fees the defendant hasincurred and expects to incur by theconclusion of the action or specialproceeding.

Cal.Civ.Proc.Code § 1030(b). While there is no dispute thatYKF is a foreign corporation, Defendant has not satisfiedthe other statutory requirements. Defendant does not addressthe merits of the case at all, let alone prove that “there is areasonable possibility” that she will obtain judgment. Id. TheCourt therefore DENIES Defendant's motion for a securityfor costs. See A. Farber & Partners, Inc. v. Garber, 417F.Supp.2d 1143, 1167-47 (C.D.Cal.2006).

IV. INTERVENTION MOTION

A. Legal StandardRule 24 of the Federal Rules of Civil Procedure governsboth intervention as a right and permissive intervention. SeeFed.R.Civ.P. 24(a), (b). Rule 24 is broadly construed in favorof applicants for intervention. United States v. Stringfellow,873 F.2d 821, 826 (9th Cir.1986), vacated on other groundssub nom., Stringfellow v. Concerned Neighbors In Action,480 U.S. 370, 107 S.Ct. 1177, 94 L.Ed.2d 389 (1987).Intervention as a right, under Rule 24(a)(2), is governed bya four-part test:

*6 (1) the applicant's motion must betimely; (2) the applicant must assertan interest relating to the property ortransaction which is the subject ofthe action; (3) the applicant must beso situated that without interventionthe disposition of the action may, asa practical matter, impair or impedehis ability to protect that interest; and(4) the applicant's interest must beinadequately represented by the otherparties.















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Sagebrush Rebellion, Inc. v. Watt, 713 F.2d 535, 527 (9thCir.1983). Application of this test is guided by practicalconcerns. Stringfellow, 873 F.2d at 826. Where the partyseeking to intervene cannot satisfy the requirements of Rule24(a), he may still be entitled to permissive intervention underRule 24(b)(1) (B) if he can satisfy three conditions: “(1) themovant must show an independent ground for jurisdiction;(2) the motion must be timely; and (3) the movant's claim ordefense and the main action must have a question of law andfact in common.” Venegas v. Skaggs, 867 F.2d 527, 529 (9thCir.1989).

B. DiscussionTriano asserts that he may intervene as a matter of right underRule 24(a)(2). In the alternative, if the Court finds no right,Triano argues that the Court should grant him permissionto intervene under Rule 24(b)(1)(B). The Court agrees withTriano in the first instance, and does not reach the questionof permissive intervention.

Of the four factors Triano must establish to prove he hasthe right to intervene, two are not in dispute. First, Trianofiled his motion to intervene in a timely manner. Beforethe Bankruptcy Court, Triano filed his motion shortly afterDodson filed her Answer. See Adv. Docket Nos. 6, 12. Trianothen re-filed his motion promptly in this Court after thereference was withdrawn. See Int. Mot.; Sierra Club v. U.S.Envtl. Prot. Agency, 995 F.2d 1478, 1481 (9th Cir.1993)(motion to intervene timely if filed at the outset of thelitigation). The fourth factor is also undisputed, as it is clearthat Triano's interests are adverse to both Dodson and YKF.

However, YKF does contest the second and third factors. 4

See Int. Opp'n at 3-4.

The second factor in the test for intervention is whether theprospective intervenor “assert[s] an interest relating to theproperty or transaction which is the subject of the action.”Sagebrush Rebellion, 713 F.2d at 527. This interest mustalso be protectable. See Sierra Club, 995 F.2d at 1484 (“Itis generally enough that the interest is protectable undersome law, and that there is a relationship between the legallyprotected interest and the claims at issue.”). Triano assertsthat Debtor unlawfully transferred 3,744,000 shares of SmartAlec's stock to Dodson, that he has a secured lien againstthose shares, and that his lien should be superior to any claimYKF has against the same shares. Triano's interests stem bothfrom his previously-upheld Proof of Claim in the underlyingBankruptcy case, as well as his direct claim of a secured

interest in the stock. These interests are both protectable bylaw and related to the property or transaction which is thesubject of YKF's action against Dodson. Triano has thereforesatisfied the second Sagebrush Rebellion requirement.

*7 YKF also argues that Triano hasn't satisfied the thirdrequirement. Int. Opp'n at 4. The Court disagrees. Triano'sability to protect the interests described above may beseverely impaired by outcomes possible in the present action.YKF suggests that, as long as Triano can bring a claim againstwhoever owns the stock at the end of this suit, his ability toprotect his interest is not affected. The issue is not so simple.For example, a ruling in this action that the transfer of stock toDodson was not fraudulent would likely be persuasive to thestate court considering the nearly-identical issue in Triano'saction against Dodson. Even though the ruling here would notbe binding on the state court, the potential effect still warrantsintervention here:

Furthermore, even if we assume thatthe district court's ruling has nobinding effect on the Arizona courts,we cannot wholly overlook the factthat jurisprudential concerns mightcause those courts to find the reasoningof the district court more persuasivethan they might otherwise find asimilar argument to be, and that theymight choose to accept the districtcourt's reasoning to avoid confusion,lack of finality, and disrespect for law.

Yniguez v. Arizona, 939 F.2d 727, 737 (9th Cir.1991), vacatedon other grounds sub nom., Arizonans for Official Englishv. Arizona, 520 U.S. 43, 117 S.Ct. 1055, 137 L.Ed.2d 170(1997); see also Stringfellow, 873 F.2d at 826.

As a practical matter, the outcome of this litigation willdetermine the “remedial scheme” for the disposition of thedisputed Smart Alec's shares. See Stringfellow, 873 F.2d at827. Excluding Triano from that remedial scheme is alsosufficient basis for allowing him to intervene here:

Where, as here, a prospectiveintervenor has demonstrated a clearinterest in the remedial scheme, andwhere the prospective intervenor seeksto obtain remedies that differ fromthose sought by the original plaintiffs,it is reasonable to conclude that


















disposition of the litigation may impairthe prospective intervenor's ability toprotect its interests. That the remedyestablished in the present litigationmay be challenged in a subsequentaction does not detract from ourconclusion.

Id. Given the liberal scope of Rule 24 favoring intervention,the Court finds that Triano has established all four ofthe Sagebrush Rebellion factors, and therefore GRANTSTriano's motion.

V. CONCLUSIONFor the reasons set forth above, the Court DENIES Dodson'smotion in its entirety and GRANTS Triano's motion.Triano shall be allowed to file his proposed Complaint forIntervention, attached as Exhibit R to the Byrne Declaration.

IT IS SO ORDERED.

Footnotes

1 YKF alleges that Debtor actually transferred the shares to Defendant in August of 2005 and that Debtor and Defendant backdated

the share purchase agreement to further their fraudulent conveyance. Resolution of this issue is not necessary for the instant motion.

2 Citations to documents from the underlying adversary proceeding, No. 07-3104 (Bankr.N.D.Cal), will appear in the form “Adv.

Docket No. XX.”

3 The Declaration of Mark D. Byrne, counsel for Triano, purports to include 18 exhibits, labeled A-R. However, the document identified

in the text of Byrne's declaration as Exhibit B, a copy of the Bankruptcy Court's certification to withdraw the reference, was not

actually attached to the declaration. The result of this is that in the version of the declaration filed with the Court, the Exhibits labeled

B-P correspond with those identified in Byrne's declaration as C-R. As the Court has access to the certification, Adv. Docket No.

24, the Court will refer to the remaining exhibits as though they had been correctly labeled to correspond with the text of Byrne's

declaration.

4 Before the Bankruptcy Court withdrew the reference, Triano moved to intervene in that proceeding, and Dodson did not oppose

intervention. See Adv. Docket Nos. 12, 16.




EXHIBIT K


In re Linda Vista Cinemas, L.L.C., Not Reported in B.R. (2010)



United States Bankruptcy Court,D. Arizona.

In re LINDA VISTA CINEMAS,L.L.C.,, an Arizona limited liability

company, dba Tower Theatres, Debtor.

No. 4–10–bk–14551–JMM. | May 25, 2010.

West KeySummary

1 BankruptcyPreliminary injunctions and restraining

orders

Foreclosure upon the Chapter 11 debtor'sguarantors' assets would have hindered theguarantors' ability to utilize those assets inassisting in the debtor's reorganization, and thus,a preliminary injunction under the BankruptcyCode was warranted to prevent the bank fromforeclosing on the non-debtor-guarantors' assets.The bank argued that the collateral assets woulddepreciate before a plan was vetted, but ithad no appraisal or other evidence to supportthat conclusion. On the other hand, foreclosureupon the guarantors' assets would hinder theirability to keep themselves viable, which wouldbetter enable them to positively contribute to thedebtor's eventual reorganization. 11 U.S.C.A. §105(a).


Michael W. McGrath, Mesch Clark & Rothschild, Tucson,AZ, for Plaintiff.

Gerald L. Shelley, Fennemore Craig, P.C., Phoenix, AZ, forDefendant.

Opinion

MEMORANDUM DECISION

JAMES M. MARLAR, United States Chief BankruptcyJudge.

INTRODUCTION

*1 A hearing was held on May 24, 2010, concerning theDebtor's request for a 11 U.S.C. § 105(a) injunction againstBank of Arizona (“Bank”) to enjoin it from foreclosureagainst the collateral of certain non-debtor guarantors ofthe Debtor's obligation to the Bank. Those foreclosures arescheduled to occur tomorrow, May 26, 2010.

DISCUSSION

In response to various and related collection actions by Bank,the Debtor filed Chapter 11 on May 12, 2010. Yesterday,the court took evidence on the Debtor's request to enter apreliminary injunction against the Bank, and prevent it fromproceeding against non-debtor guarantors pending furtherorders. Such injunction, if granted, could not extend beyond aplan confirmation. In re American Hardwoods, 885 F.2d 621(9th Cir.1989).

This court has jurisdiction, and the equitable power to grantsuch relief, if the Debtor can prove that without the injunction,the Bank's collection actions might negatively affect theDebtor's reorganization. Hardwoods, supra. However, inorder to obtain such injunction, the usual standards fora preliminary injunction must be proven. In re ExcelInnovations, Inc., 502 F.3d 1086 (9th Cir.2007).

Factually, the Debtor borrowed $5,293,000 from the Bank inOctober, 2006. As of May 12, 2010, it had paid the loan downto approximately $3,131,977. However, due to a generaleconomic downturn, unforeseen when the “startup” loan wasmade, the Debtor's cash flows failed to meet projections, andit has been in default in payment terms since approximatelyOctober, 2009. When negotiations failed, the Bank beganpursuit of the Debtor and its collateral, as well as proceedingagainst the guarantors and their pledged collateral. The loan iscross-collateralized against all entities, and the Bank and theaffected parties believe the values of the Bank's collateral are:

Cutler residence $1,200,000



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Cutler Fire-land

388,000

Edwards residence

–0–

Grand Cinemas personalty

50,000

Debtor's personalty

549,837

(Ex. 1)

$2,187,837

If accurate, the Bank is, therefore, a secured creditor for$2,187,837, and an unsecured creditor for $944,140. Incomparison to the other creditors, in each class, the Bankholds the lion's share of the indebtedness owed by the Debtor.If a preliminary injunction is not granted, the testimonywas that the four guarantor groups would file Chapter 11before the May 26, 2010 foreclosure date. If they do so,they will be prevented, by virtue of their respective fiduciaryresponsibilities to their own creditors, from contributing cashor assets to this Debtor's reorganization. Or, should theybe allowed to do so, in their separate Chapter 11 cases,the efforts would be severely complicated by the rules andstatutes governing each bankruptcy case. In Mr. Cutler's case,for example, he is prepared, in 2010, to inject $250,000into the Debtor's operations. Doing so in the context ofhis own Chapter 11 would be very difficult, if it could beaccomplished at all.

*2 Instead of having one Chapter 11 case to deal with, theBank and the parties would then be embroiled in managingfive cases, at five times the expense and an exponentialincrease in uncertainty. The Debtor would lose the ability toleverage the assets of the non-debtors, as well as their credit,in aiding its reorganization.

The court can fashion relief that satisfies its equitable duties.Clearly, the Debtor must present a confirmable, feasible planif it is to survive. While the law allows the Debtor a chance todo so, it may not have an inordinate time period to accomplishthis end. This is because the Debtor is losing money, andis being supported only by significant capital contributionsfrom its guarantors. And, because the Bank is not being paidmuch for having to wait (only a $10,000 monthly adequateprotection payment), the Bank is currently bearing a largerisk.

But allowing the Bank to go forward now, to forecloseon guarantors' assets, would surely doom any chance ofreorganization for the Debtor, and perhaps for four other

future debtors as well. A sufficient factual record was made toshow that allowing the Bank's current foreclosures to proceedwould negatively impact the Debtor's reorganization ability.Chapter 11 is intended to provide second opportunities todebtors, provided that, within a reasonable time, the Debtorcan present a feasible reorganization plan.

APPLICATION OF FACTS TO THE LAW

In order to grant non-debtor guarantors a § 105(a) injunction,the court must find, from the proof, that certain elementshave been dealt with in a persuasive manner. Since thetype of injunction sought is labeled “preliminary,” thecourt notes that nonetheless, the decisional outcome of thismatter is a final order for purposes of review. In re ExcelInnovations, Inc., 502 F.3d 1086, 1092 (9th Cir.2007). Thisis because these types of proceedings cannot extend beyondconfirmation of a plan of reorganization. Hardwoods at 625.

In Excel, the Ninth Circuit instructed bankruptcy courts to“consider whether the debtor has a reasonable likelihood of asuccessful reorganization, the relative hardship of the parties,and any public interest concerns if relevant.” Id. at 1096.

A. Reasonable Likelihood of ReorganizationFrom the evidence, the court finds, at this very early stage ofthe proceedings, that the Debtor has a reasonable likelihoodthat it can successfully reorganize. This “is not a high burden”for the Debtor. Excel at 1097.

As the instant issue requires an equitable decision, the courtnotes that the case has only been on file for 14 days. Thestatute contemplates that a debtor-in-possession may have120 days within which to exclusively file a plan. 11 U.S.C.

§ 1121(b). 1 As in all equitable events, the court must strikea reasonable balance between the rights of debtors and therights of their creditors. The process is a continuum, with theequities favoring the debtor at the beginnings of a case, but









moving toward the creditors as a case moves along, unlesstangible progress is made in the reorganization process.

*3 Here, the facts demonstrated that there is a reasonablelikelihood that this Debtor may successfully reorganize. Suchfacts include: (1) the guarantors, Cutler Fire and GrandCinema, are profitable operating businesses, which may—given time—utilize and leverage their good credit andassets toward either new capital contributions or gaining newcredit for the Debtor; (2) the principals' expertise in runningprofitable movie houses in the Tucson area; (3) the abilityof the guarantors to maximize the use of their pledged assetstowards this debtor's reorganization, which would otherwisebe lost if foreclosures were to occur; (4) the proven successof the guarantors in other, or similar, businesses in Tucson,yields opportunities to perhaps garner other equity investors,or to refinance the Debtor's obligations on more favorablepayment and/or credit terms, such as longer periods or lowerinterest rates; (5) the statement that a reorganization planmight be filed within the next 30–60 days, as a full paymentplan. This statement indicates that this case will not dragout in such a manner as to harm creditors; (6) the Debtorhas already obtained approximately $257,000 in deferred rentfrom another primary creditor, its landlord, who appears to befavorably included towards the Debtor, and keeping it at itsestablished location (Ex. 1, Schedule F).

B. HardshipThe Ninth Circuit has also required bankruptcy courts tobalance the relative hardships of the parties.

At this stage of the case, the court finds and concludes that theharm to the Debtor far outweighs the harm to the Bank, if theinjunction is not granted. This is partially because the Bankpresented no credible evidence that its real estate collateralwould diminish in value from its current estimates. Althoughthe Bank's witness, Mr. Cohen, testified that the collateralassets will depreciate between now and the time a plan isvetted, he had no appraisal or other evidence to support thatconclusion. Consequently, as the Ninth Circuit explained inExcel, “Speculative injury cannot be the basis for a finding ofirreparable harm.” Id. at 1098. Bank's counsel, in argument,stated that the guarantors' other creditors might proceedagainst them while the Bank was stayed, but acknowledgesthat he knew of no such actual fact.

On the other hand, foreclosure upon the guarantors' assetswill clearly hinder their ability to utilize those assets inassisting the Debtor, and keeping them viable will better

enable them to contribute positively to the Debtor's eventualreorganization. If they are forced into Chapter 11 proceedingsof their own, then a domino effect will add considerable riskand uncertainty to this Debtor's ability to survive, and itsability to present a feasible plan of reorganization will bedestroyed. Four new Chapter 11 cases will also crush theexisting credit abilities of each of those guarantors, whichthen only accelerates the Debtor's demise.

*4 Clearly, the hardship balancing test favors the Debtor.

C. Public PolicyPublic policy, to the extent that it is applicable, also favorsthe Debtor. Chapter 11 is a last resort for any debtor. If theinjunction is not granted, two sets of individual debtors, andtwo businesses, would be forced to fill their own bankruptcycases, so that their assets are not lost to foreclosure. In thatevent, many employees would be affected, as would the futureof those businesses. The credit of the individuals would beimpaired for at least a decade.

CONCLUSION

The court does not take the issues in this case lightly. Inrecognition that a Chapter 11 filing only allows a pause inlegal proceedings, and is not an end in itself, the court hasthe power to “expeditiously and economically” manage theChapter 11. 11 U.S.C. § 105(d)(2). To that end, an order willbe entered which requires the filing of a plan and disclosurestatement by a date certain, and which moves the matterforward to confirmation.

Although the guarantors are hereby granted a brief reprievefrom honoring their contractual obligations, the parole will bebrief.

The parties are urged to attempt to resolve their differencesconsensually, in the hopes that further expense anduncertainly is minimized.

Therefore, a preliminary injunction will be granted,and the pending foreclosures stayed, with the followingqualifications:

1. The Debtor shall files its plan and disclosure statementby August 24, 2010;


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2. A hearing on the disclosure statement shall be held onSeptember 23, 2010 at 1:30 p.m.; and

3. A confirmation hearing on the Debtor's plan shall be heldon October 27, 2010 at 1:30 p.m.

The court reserves the power to alter these dates, dependingon circumstances. Counsel for the Debtor shall present aseparate order.

Footnotes

1 The statute even sets an outside date of 18 months. 11 U.S.C. § 1121(d)(2)(A).



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EXHIBIT L


Weiss v. U.S., Not Reported in F.Supp.2d (2000)

86 A.F.T.R.2d 2000-5736, 2000-2 USTC P 50,685


2000 WL 1052983United States District Court, E.D. Pennsylvania.

Charles WEISS,v.

UNITED STATES of America.

No. CIV. A. 00–1672. | July 31, 2000.

Opinion

MEMORANDUM AND ORDER

SHAPIRO

*1 The Government appeals denial by the United StatesBankruptcy Court for the Eastern District of Pennsylvaniaof its motion to lift a Chapter 13 automatic stay. TheGovernment seeks to appeal a decision in a prior Chapter7 adversary proceeding that certain tax liabilities weredischargeable. The stay will be lifted and the Government'sappeal and debtor's cross-appeal will be heard.

BACKGROUND

Debtor Charles Weiss (“Weiss”) filed for bankruptcy underChapter 7. On August 17, 1999, the Bankruptcy Court orderedthat Weiss's federal tax liabilities for 1986 and 1987 weredischargeable, but his federal tax liabilities for 1988 through1991 were not dischargeable. The Government appealed andWeiss cross-appealed (together, “cross-appeals” or “Chapter

7 cross-appeals”). 1 On October 8, 1999, Weiss filed apetition under Chapter 13 of the Bankruptcy Code; thisautomatically stayed the pending cross-appeals in his Chapter7 proceeding. On January 31, 2000, the Government movedin Bankruptcy Court for relief from the automatic stay topursue its appeal of the Bankruptcy Court's August 17, 1999Order; Weiss opposed lifting of the stay. On February 25,2000, the Bankruptcy Court denied the Government's motionin the interest of prompt confirmation of Weiss's proposed

Chapter 13 repayment plan. 2 The Government has appealedthe Bankruptcy Court's February 25, 2000 Order.

DISCUSSION

The Bankruptcy Code automatically stays certain acts againsta debtor upon filing a petition in bankruptcy. See 11U.S.C. § 362. A party in interest can request relief fromthe stay if, after notice and hearing, “cause” is shown forterminating, annulling, modifying, or conditioning the stay.See 11 U.S.C. § 362(d)(1). An order denying relief from a stayis immediately appealable. See 28 U.S.C. § 158; United Statesv. Pelullo, 178 F.3d 196, 200 (3d Cir.1999). A BankruptcyCourt's decision denying to lift the automatic stay is reviewedfor abuse of discretion. See In re Wilson, 116 F.3d 87, 89 (3dCir.1997).

The Bankruptcy Court found no cause to lift the stay; itreasoned that lifting the stay would “unleash” the appealsprocess on its August 17, 1999 order in the Chapter 7proceeding and delay confirmation of a repayment plan in theChapter 13 proceeding. See Bankr.Ct.Mem. & Ord., Feb. 25,2000, at 3. The Bankruptcy Court stated that “it serves theinterests of all parties concerned to have a confirmed Chapter13 plan in place while any appeals are pending.” Id. TheBankruptcy Court wanted the debtor to begin repayment assoon as possible.

Section 362(d)(1) does not define “cause” for lifting astay; a court must determine its existence based on thetotality of circumstances. See In re Wilson, 116 F.3d 87,90 (3d Cir.1991). Cause is broadly construed; specificconsiderations may include: 1) the balance of harm to theparties if the stay is denied; and 2) the best interest ofefficient administration. See, e.g., In re Tucson Estates, 912F.2d 1162 (9th Cir.1990); In re Moralez, 238 B.R. 526(Bankr.E.D.Mi.1991).

*2 If the cross-appeals are not decided before theBankruptcy Court confirms a plan, the Government mayappeal the confirmed plan; this will delay final resolution ofboth the Chapter 13 and Chapter 7 proceedings. If the cross-appeals are decided now, the Bankruptcy Court can considera plan based on the outcome of the appellate proceedings.The Government is Weiss's largest creditor; determiningthe amount Weiss still owes the Government is the largestobstacle to a final repayment plan.

If the Government succeeds on its appeal and Weiss isunsuccessful on his cross-appeal, he will have debts inexcess of the unsecured debt limit under Chapter 13 andwill be ineligible for Chapter 13 protection. See 11 U.S.C. §109(e). Prompt decision of the Chapter 7 cross-appeals mayexpeditiously bring the Chapter 13 bankruptcy to completion.


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Weiss v. U.S., Not Reported in F.Supp.2d (2000)

86 A.F.T.R.2d 2000-5736, 2000-2 USTC P 50,685


Confirming a Chapter 13 plan and then deciding appealsdirectly affecting the debtor's ability to abide by the confirmedplan would not be in the interest of the administrationof justice. Immediate decision of the cross-appeals wouldsave both parties delay and expense; efficiency mandatesexpeditious consideration of the pending appeals.

The Government has a due process right to appeal theBankruptcy Court's dischargeability determination beforeconfirmation of a repayment plan rendering its appeal moot.The Government's right to appeal a confirmed plan is not anadequate substitute, despite the Bankruptcy Court's desire tohave the debtor begin payments promptly. The Government'sright to due process requires consideration of its Chapter 7appeal, before the debtor's Chapter 13 plan is confirmed.

CONCLUSION

The Bankruptcy Court's refusal to lift the automatic stay wasan abuse of discretion. The stay is lifted to permit decision ofthe cross-appeals.

ORDER

AND NOW this 31st day of July, 2000, upon considerationof the Bankruptcy Court's February 25, 2000 Order, theappellate brief for appellant, brief for appellee, and reply tobrief for appellee, it is ORDERED that:

1. The Order of February 25, 2000 in Bankruptcy No. 9932874DAS is REVERSED. The Chapter 13 automatic stay islifted to allow the Chapter 7 appeals in 99–5297.

2. Civil Action 99–5297 shall be REMOVED FROMADMINISTRATIVE SUSPENSE FORTHWITH.

3. Cross-appellants in 99–5297 (as consolidated) shall filebriefs by August 21, 2000. Cross-appellees each shall respondby August 31, 2000. No replies are contemplated.

Parallel Citations

86 A.F.T.R.2d 2000-5736, 2000-2 USTC P 50,685

Footnotes

1 In 99–4707, the Government appeals the August 17, 1999 Bankruptcy Court order. In 99–5291, Charles Weiss cross-appeals the

same order. On December 22, 1999, 99–4707 and 99–5291 were consolidated under 99–5297 and placed in administrative suspense.

2 Weiss has proposed a plan which would pay 100% of the tax liability for tax years 1988–1991, totaling $193,466.17. Weiss did

not propose to make payments for tax years 1986–1987; the Government claims Weiss owes $108,240.45 for those two years. See

Brief for Appellee, at 4.



This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

June 2012 F 9013-3.1.PROOF.SERVICE LA/1448136.1

PROOF OF SERVICE OF DOCUMENT I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: Arent Fox LLP, Gas Company Tower, 555 West Fifth Street, 48th Floor, Los Angeles, CA 90013. A true and correct copy of the foregoing document entitled (specify): COMPENDIUM OF CASE DECISIONS NOT IN OFFICIAL REPORTERS CITED IN BRIEF AMICI CURIAE OF THE POB CREDITORS IN SUPPORT OF THE CITY’S MOTION TO ENFORCE AUTOMATIC STAY AND IN OPPOSITION TO THE STATE DEFENDANTS’ MOTION TO DISMISS will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below:

1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On (date) June 13, 2013, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below: Service information continued on attached page 2. SERVED BY UNITED STATES MAIL: On (date) June 13, 2013, I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on (date) June 13, 2013, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. June 13, 2013 MANDI SANDSTROM /s/ Mandi Sandstrom Date Printed Name Signature




1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Julie A Belezzuoli on behalf of Defendant California Department of Finance [email protected] Julie A Belezzuoli on behalf of Defendant Office of State Controller, State of California [email protected] Julie A Belezzuoli on behalf of Defendant Ana J Matosantos [email protected] Julie A Belezzuoli on behalf of Defendant John Chiang [email protected] Brett Bissett on behalf of Interested Party Courtesy NEF [email protected], [email protected];[email protected] Alicia Clough on behalf of Defendant California Department of Finance [email protected], [email protected] Alicia Clough on behalf of Defendant Office of State Controller, State of California [email protected], [email protected] Alicia Clough on behalf of Defendant State of California [email protected], [email protected] Alicia Clough on behalf of Defendant Ana J Matosantos [email protected], [email protected] Alicia Clough on behalf of Defendant John Chiang [email protected], [email protected] Marc S Cohen on behalf of Defendant California Department of Finance [email protected], [email protected] Marc S Cohen on behalf of Defendant Office of State Controller, State of California [email protected], [email protected] Marc S Cohen on behalf of Defendant State of California [email protected], [email protected] Marc S Cohen on behalf of Defendant Ana J Matosantos [email protected], [email protected] Marc S Cohen on behalf of Defendant John Chiang [email protected], [email protected] Victoria C Geary on behalf of Defendant California State Board Of Equalization [email protected] Victoria C Geary on behalf of Defendant Cynthia Bridges [email protected] Paul R. Glassman on behalf of Attorney Paul R. Glassman [email protected]




Jeffery D Hermann on behalf of Defendant County of San Bernardino [email protected] Bonnie M Holcomb on behalf of Interested Party Courtesy NEF [email protected], [email protected] Gregory A Martin on behalf of Interested Party Courtesy NEF [email protected] United States Trustee (RS) [email protected] 2. SERVED BY UNITED STATES MAIL: Donn A Dimichele Office of the City Attorney 300 N D St 6th Fl San Bernardino, CA 92418 Jolena E Grider on behalf of Plaintiff City Of San Bernardino, California Office of the City Attorney 300 N D St 6th Fl San Bernardino, CA 92418 James F Penman on behalf of Plaintiff City Of San Bernardino, California Office of the City Attorney 300 N D St 6th Fl San Bernardino, CA 92418 Larry Walker 222 W Hospitality Lane 4th Floor San Bernardino, CA 92415 State of California c/o State Capitol Suite 1173 Sacramento, CA 95814 3. SERVED BY PERSONAL DELIVERY: Judge Honorable Meredith A. Jury United States Bankruptcy Court 3420 Twelfth Street, Suite 325 / Courtroom 301 Riverside, CA 92501-3819.
