Northern California Judges Rule in Bankruptcy Cases

Two Northern District of California judges have recently released memorandum decisions in bankruptcy proceedings among them:

In re Multiple Allied Services involves the debtor's landlord (Kayland of Sacramento) who seeks to have its legal fees declared as rent and given administrative priority in a Chapter Seven bankruptcy proceeding.  Under 11 U.S.C § 365(d)(4) within 120 days of declaring bankruptcy, the debtor must either assume its lease or deem it surrendered.  Here, the debtor failed to act by December 17, 2009 (abandoning the lease) and did not vacate the premises until ordered to do so on January 22, 2010.  The trustee and Kayland entered a stipulation that the legal fees incurred in getting the debtor off the property were administrative rent.  Now, the trustee has a change of heart and wants the legal fees to go into the unsecured creditor's pile.  Judge Thomas E. Carlson found no good reason for setting aside the stipulation.  In re Cukierman, (9th Cir. 2001) dealt with a similar issue and construed § 365(d) to cover debts prior to surrender, thus the attorneys fees incurred prior to surrender received administrative priority.

In re Avon Townhomes Venture is also a Chapter Seven bankruptcy proceeding.  Here, James McClenahan is the president, CEO and 100% shareholder of Eagle Home Loans.  The debtor's attorney contacted him to sell a piece of property pursuant to a court order allowing the properties sale.  He sold the property and received a commission of $18,300.  Judge Roger L. Eferemsky was not pleased with the debtor employing people without his approval.

McClenahan's Response does not dispute that neither he nor Eagle Home Loans obtained the Court's authorization to be employed as broker for the Debtor. The Response also does not dispute the Court's finding that McClenahan and/or Eagle Home Loans acted as the broker on behalf of the Debtor. Instead, McClenahan appears to argue, without any supporting legal authorities, that disgorgement would be improper because the Commission was earned and the estate received the benefit of the sale. However, "[a]s a general rule the equitable remedy of quantum meruit cannot be available where the fees are barred by law under the bankruptcy rules." Halperin v. Occidental Financial Group. Inc., (9th Cir. 1994). Otherwise, any unapproved professional could assert an equitable claim to compensation.

Judge Eferemsky ordered Mr. McClenahan to repay the commission.

Northern California Judges rule in Bankruptcy actions

Several judges have recently released opinions in bankruptcy cases.

Brown v. Lim is an adversarial proceeding where the plaintiff pro se wants does not want a loan he made to the debtor discharged as a result of the proceeding because Mr. Lim claims that Ms. Brown defrauded him in an Arizona real estate transaction.  Judge Thomas E. Carlson acknowledged that fraudulent transfers are exceptions to discharge under 11 U.S.C. § 523(a)(2)(A).  However, Mr. Lim failed to establish that a fraudulent transfer occurred.  The judge noted that Mr. Lim's complaint appears to be with Ms. Brown's husband (who allegedly made the misrepresentations) who is not a party to the action and that his remedy is in state court.  Judge Carlson dismissed the claim with prejudice.

In re Lighthouse Lodge involves competing comprehensive Chapter 11 plans.  Lighthouse Lodge, LLC declared bankruptcy on April 9, 2009.  RIX Capital Markets, LLC is the primary and supersecured creditor for Lighthouse Lodge which owns Lighthouse Lodge & Suites and has a loan with a maturity date of October 1, 2009.  The debtor wants to restructure ORIX's secured debt by extending the maturity date until October 12, 2012 and fixing the interest rate to 9% (instead of the loan default rate) at an amount of $8,644,489.  ORIX would like to liquidate Lighthouse Lodge and obtain interest at the default rate which it claims it is owed $9,398,030.  The interesting issue is whether Lighthouse Lodge can cure the default by repaying the loan in full over the proposed three year extension of the loan by paying the note rate.  Judge Roger L. Eferemsky explained under In re Entz-White Lumber and Supply, Inc. (9th Cir. 1988) a loan that matures pre-petition can be extended and cured.  The debtors would like to apply this rule to a loan that naturally matures post petition.  Judge Eferemsky explained that there is no legal authority for that proposition, rather a cure must return the parties to their pre-default positions, in the case of a loan that matured post petition that would mean paying the loan in full.  Allowing a loan to be renegotiated and considered cured would be an "absurd result."  He granted ORIX's request and denied the objections.

In re Scraff is ruling on the debtor's objection to proof of a claim.  Mr. Scraff was one of four directors and shareholders of Questor General Partners, L.P. (QGP).  QGP was the general partner of Questor Partners Fund, L.P. which invested in struggling companies. each principal signed an agreement which contained a "clawback provision" where the pricipals would pay a portion of their distributions if there was a subsequent shortfall.  Mr. Scraff then executed an "exiting agreement" where he sold his shares, became a limited partner of QPF and entered into a consulting role.  This departure, Mr. Scraff argued meant he was no longer a fiduciary to the company.  However, QGP would later argue that the debtor was still in a position of trust and confidence to QGP.  The shortfall occurred and Mr. Scraff did not pay his portion, $2,913,748.  Judge Arthur S. Weissbrodt agreed with QGP and found that Mr. Scraff's intimate counseling role along with his continued acceptance of partnership distributions put him in a position of trust and confidence and made him a fiduciary to the general partners.

Van Upp v. Bradlow is a claim against the estate filed in U.S. District Court.  Judge Susan Illston noted that leave of the bankruptcy court needed to be obtained before pursuing an action in federal district court.  Since that had not occurred she dismissed the case for lack of subject matter jurisdiction,