Shulman Hodges & Bastian LLP
949-340-3400|949-427-1654

Ninth Circuit Holds Courts May Entertain Hypothetical Preference Actions Within Section 547(b)(5)'s Hypothetical Liquidation Analysis

In Schoenmann v. Bank of the West (In re Tenderloin Health), No. 14-17090, D.C. No. 4:13-cv-03992-JSW, the Ninth Circuit Court of Appeals reversed the district court's order affirming the bankruptcy court's summary judgment in favor of Bank of the West ("BOTW") in an adversary proceeding for avoidance of a preferential transfer brought by a Chapter 7 trustee ("Trustee"). Specifically, the Ninth Circuit held "that courts may entertain hypothetical preference actions within section 547(b)(5)'s hypothetical liquidation when such an inquiry is factually warranted, supported by appropriate evidence, and so long as the hypothetical preference action would not result in a direct conflict with another section of the Bankruptcy Code."

In 2009 and 2011, Tenderloin Health ("Debtor") obtained a $300,000 loan from BOTW, secured in part by the Debtor's deposit accounts with BOTW. In late 2011 or early 2012, the Debtor wound up its affairs and sold its only real property. From the sale proceeds, the Debtor paid BOTW $190,595.50 ("Transfer") to fully satisfy its outstanding loan obligation and the Debtor deposited the remaining sale proceeds of $526,402.05 in its BOTW deposit account. On July 20, 2012, the Debtor filed for Chapter 7 bankruptcy ("Petition Date"). As of the Petition Date, the Debtor's BOTW deposit account contained $564,115.92.

Workarounds to Meeting Shareholder Quorum Requirements in California Corporations

In a lot of cases, a California corporation will need shareholders' consent to take action, and in order for shareholders to take action, a quorum must be established. California Corporations Code Section 602(a) states that a quorum is established if a majority of the shares that are entitled to vote are represented in person or by proxy at a shareholders meeting, unless the articles of incorporation provides otherwise. But what happens if the corporation can't take action because its shareholders can never establish a quorum?

The California Supreme Court Prohibits On-Call and On-Duty Rest Periods

On December 22, 2016, the California Supreme Court addressed , in Augustus v. ABM Security Services, Inc., 2016 WL 7407328 (Cal. Dec. 22, 2016), whether California law requires employers to provide employees off-duty rest periods, and whether such requirement permits employers to require that employees remain on-call during rest periods. Specifically, the Augustus Court considered whether defendant employer's requirement that its security guard employees carry radios during rest breaks violated California Law.

Top 5 Things You Should Consider in Your Founders Agreement By Andrew Lee of Shulman Hodges & Bastian LLP on January 10, 2017

A Founders Agreement is an agreement between the cofounders that outlines important terms. Having a Founders Agreement from the outset will provide the founders with a clear understanding of what to expect when the company truly begins to operate.

Below are five key points to consider in your Founders Agreement.

Roles and Responsibilities

When a startup company begins to operate, founders tend to do many different things for the company. However, as the company matures and becomes more complex, founders may find themselves debating amongst each other as to who does what if their roles and responsibilities were not clearly defined from the beginning. It would be prudent for the founders to determine their positions and responsibilities to help avoid potential confusion or contention amongst the founders.

Equity Ownership

There are two trains of thought for granting equity to founders: (a) all founders receive an equal amount, or (b) each founder receives varying amounts depending on certain factors. Whichever option you decide, it would be wise to consider implementing a vesting schedule for the founder's equity because upon resignation or removal, all unvested equity interest would terminate.

Be Careful Representing Debtors in the Gap Period of an Involuntary Bankruptcy Filing

Attorneys representing debtors faced with an involuntary petition may have a difficult time getting paid for their fees incurred in the "gap" period from the bankruptcy estate. Further, even if counsel is paid by the debtor and need not seek payment from the bankruptcy estate, the court will examine the fees paid under Section 329 of the Bankruptcy Code for reasonableness.

If the attorney must seek payment from the bankruptcy estate as an administrative expense, Section 507(a)(2) gives a second priority status to administrative expenses allowed under Section 503(b). Section 503(b) allows an administrative expense for, "other than claims allowed under section 502(f) ... the actual, necessary costs and expenses of preserving the estate." As such, Section 503(b) "expressly excludes from administrative expenses 'gap' claims 'allowed under section 502(f)" which would include attorneys' fees incurred by the debtor during the gap period. In re Baab Steel, Inc., 495 B.R. 530, 533 (Bankr. D. Co. 2013).

Section 507(a)(3) gives a third priority status to claims allowed under Section 502(f). Section 502(f) allows claims in an involuntary case arising "in the ordinary course of the debtor's business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief."

PAGA CLAIMS, WHETHER INDIVIDUAL OR REPRESENTATIVE, ARE NONWAIVEABLE VIA A PREDISPUTE ARBITRATION AGREEMENT

On November 16, 2016, the First Circuit Court of Appeal certified for publication its opinion in the Tanguilig v. Bloomingdales, Inc. case (San Francisco City and County Super. Ct. No. CGC-14-541208), which addressed the enforceability of PAGA waivers pursuant to Iskania v. CLS Transportation Los Angeles, LLC. Specifically, Bloomingdales moved to compel arbitration of Tanguilig's "individual PAGA claim." The trial court denied the motion and the Appellate Court affirmed, holding that "Iskanian v. CLS Transportation Los Angeles, LLC...and consistent with the Federal Arbitration Act (FAA)(9 U.S.C. et seq.), a PAGA representative claim is nonwaivable by a plaintiff-employee via a predispute arbitration agreement with an employer, and a PAGA claim (whether individual or representative) cannot be ordered to arbitration without the state's consent." The Appellate Court reasoned that, whether a PAGA claim is brought in an individual or representative capacity, the real party in interest is the state. Since a claim cannot be ordered to arbitration without the consent of the real party in interest, the individual v. representative nature of the PAGA claim was not relevant to the analysis. Rather, the analysis turned on the absence of the state's consent to arbitration.

Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.

In Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc., (Nov. 14, 2016, S218497) ___Cal. 5th [2016 Cal. LEXIS 9282] (hereinafter "Centinela") the California Supreme Court was asked to determine whether a HMO health plan ("HMO") which contractually delegated the responsibility for payment of emergency services for its plan beneficiaries to an individual practice association ("IPA") which ultimately went out of business could be sued by emergency department physicians who were left unpaid. The California Supreme Court held that the HMO's could be sued under two theories, (1) the negligent delegation of financial responsibility for emergency services by an HMO to an IPA which the HMO "knew or should have known was financially unsound" and (2) the negligent failure by the HMO to reassume the delegated responsibility to make payment when it knew there was "no reasonable expectation" that the IPA could make payments to the physicians.

In Centinela, plaintiffs were physician partnerships which provided emergency services at hospitals. The emergency room physicians are required by state and federal law to provide emergency services regardless of a patient's ability to pay. Cal. Health & Saf. Code, § 1317, subds. (a), (b); 42 U.S.C. § 1395dd (b), (h). After providing such emergency services, physicians typically seek reimbursement from third party payers such as HMO's who are statutorily obligated to pay for such services for their plan beneficiaries. Conversely, HMO's are also permitted by statute to contract with other parties, like an IPA, to assume the responsibility to make such payments. Critically, in this case the emergency department physicians are simply third parties to the contract between the IPA and the HMO. Normally, parties to a contract have no duty to manage their financial affairs to prevent economic loss to third parties. Indeed, Plaintiff's complaint was dismissed in the superior court after a demurrer was filed on the basis that the HMO's had no duty to the emergency physicians when they contracted with the IPA.

Beware in Mediation as to Whether California or Federal Law Governs Potential Claims of Privilege.

The Ninth Circuit recently held that Federal Rule of Evidence (FRE) 501, rather than California's mediation confidentiality statute (Evidence Code § 1123(b)), governs the admissibility of mediation exchanges when a settlement relates to federal claims and is sought to be enforced in federal court. In re TFT-LCD (Flat-Panel) Antitrust Litigation, 835 F.3d 1155 (9th Cir. 2016).

In Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.

In Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc., (Nov. 14, 2016, S218497) ___Cal. 5th [2016 Cal. LEXIS 9282] (hereinafter "Centinela") the California Supreme Court was asked to determine whether a HMO health plan ("HMO") which contractually delegated the responsibility for payment of emergency services for its plan beneficiaries to an individual practice association ("IPA") which ultimately went out of business could be sued by emergency department physicians who were left unpaid. The California Supreme Court held that the HMO's could be sued under two theories, (1) the negligent delegation of financial responsibility for emergency services by an HMO to an IPA which the HMO "knew or should have known was financially unsound" and (2) the negligent failure by the HMO to reassume the delegated responsibility to make payment when it knew there was "no reasonable expectation" that the IPA could make payments to the physicians.

In Centinela, plaintiffs were physician partnerships which provided emergency services at hospitals. The emergency room physicians are required by state and federal law to provide emergency services regardless of a patient's ability to pay. Cal. Health & Saf. Code, § 1317, subds. (a), (b); 42 U.S.C. § 1395dd (b), (h). After providing such emergency services, physicians typically seek reimbursement from third party payers such as HMO's who are statutorily obligated to pay for such services for their plan beneficiaries. Conversely, HMO's are also permitted by statute to contract with other parties, like an IPA, to assume the responsibility to make such payments. Critically, in this case the emergency department physicians are simply third parties to the contract between the IPA and the HMO. Normally, parties to a contract have no duty to manage their financial affairs to prevent economic loss to third parties. Indeed, Plaintiff's complaint was dismissed in the superior court after a demurrer was filed on the basis that the HMO's had no duty to the emergency physicians when they contracted with the IPA.

Irvine
Shulman Hodges & Bastian LLP
• 100 Spectrum Center Drive, Suite 600 • Irvine, CA 92618
• Local: 949-340-3400 • Fax: 949-340-3000 • Map & Directions
or contact us at 949-427-1654

Riverside
Shulman Hodges & Bastian LLP
• 3550 Vine Street, Suite 210 • Riverside, CA 92507 
• Local: 951-275-9300 • Fax: 951-275-9303 • Map & Directions
or contact us at 949-427-1654

Map