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Irvine Business & Commercial Law Blog

A Release of Potential Claims Can Constitute a Fraudulent Conveyance

In Potter v. Alliance United Ins. Co., 2019 Cal. App. LEXIS 666, the California Court of Appeal considered whether a "Release and Settlement Agreement" releasing an insurance company from any claims for negligence, delay, bad faith, etc. and an agreement to forego any assignment of such claims constituted a fraudulent conveyance.

Supreme Court Adopts Objective Standard for Contempt for Discharge Violations, Overturning Ninth Circuit Precedent

In Taggart v. Lorenzen, 587 U.S. ___ (2019), the Supreme Court has clarified the standard under which a creditor may be held in civil contempt for violating a bankruptcy discharge order. Taggart was a former co-owner of a company with two other owners. The company and other owners sued Taggart for breach of their operating agreement. Before trial, Taggart filed for Chapter 7 bankruptcy and ultimately received a discharge of his pre-petition debts. Notwithstanding their knowledge of the discharge, the attorney for the company and other co-owners sought and obtained an award from the state court of post-petition attorney fees against Taggart. Pursuant to In re Ybarra, 424 F.3d 1018 (9th Cir. 2005), a creditor is not entitled to post-petition attorney fees stemming from prepetition litigation unless the bankruptcy debtor returns to the fray. In this case, it was ultimately decided that Taggart had not returned to the fray, leaving the remaining question of whether the company and co-owners should be held in civil contempt for violating the discharge order.

Stricter Interpretation Required: The Strategic Lawsuits Against Public Participation Statute Requires Analysis of Both Content and Context

On May 6, 2019, the Supreme Court of California published an opinion drastically altering the way strategic lawsuits against public participation ("SLAPP") statutes are interpreted. The anti-SLAPP statute allows for a "special motion to strike meritless claims early in litigation - but only if the claims arise from acts in furtherance of a person's right of petition or free connection with a public issue." (pg. 1) The case setting this in motion, Inc. v. Doubleverify Inc., deals with two for-profit companies who are disputing how one company was portrayed in a confidential report. The trial and appellate courts both held Doubleverify, Inc's reports were protected under the anti-SLAPP statute. They further held context was irrelevant in analyzing whether an anti-SLAPP statute was applicable. However, the Supreme Court of California reversed this decision, holding "the context of a defendant's statement is relevant, though not dispositive, in analyzing whether the statement was made 'in furtherance of' free speech 'in connection with' a public issue." (pg. 2)

Trademark Licensee's Rights Not Rescinded Upon Debtor/Licensor's Rejection of the License

The Supreme Court of the United States (SCOTUS) resolved a circuit split when it recently held in Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (May 20, 2019) that the debtor's rejection of Mission's license agreement did not terminate Mission's rights to use the debtor's trademarks because outside of bankruptcy, a licensor's breach cannot revoke the licensee's continuing rights. The SCOTUS focused on the language in Section 365(a) of the Bankruptcy Code that rejection constitutes a breach. Since breach is not defined in the Bankruptcy Code, the SCOTUS looked to the result of a licensor's breach outside of bankruptcy, which is that "a licensor's breach cannot revoke continuing rights given to a counterparty under a contract." In other words, "rejection breaches a contract but does not rescind it" when breach is deemed to have occurred pre-petition. 

Actual Intent to Cause Injury is Not Required Under Bankruptcy Code Section 523(a)(6)

In In re Hamilton, BAP Nos. SC-17-1126 and SC-17-1123, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") considered the intent requirement for non-dischargeability of a debt under Section 523(a)(6). The debtor argued that the Supreme Court case of Kawaauhau v. Geiger, 523 U.S. 57 (1998) required actual intent or specific intent to cause injury to meet the "willful" injury requirement of Section 523(a)(6). The BAP clarified that while Geiger held that an intent to cause harm was required, it did not elaborate as to "the precise state of mind required," as stated by the Ninth Circuit in Petralia v. Jerchich (In re Jercich), 238 F.3d 1202 (9th Cir. 2001). The BAP commented that the holding in Jercich that the debtor must intentionally commit the act with a substantial certainty that injury will occur is controlling and not at odds with Geiger. As such, the BAP confirmed that a specific intent to cause injury is not required to meet the "willful" standard under Section 523(a)(6) but rather, only a substantial certainty that injury will occur as found in Jercich.

To Be Enforceable, Default Interest Must Be Supported by Contemporaneous Evidence of a Relationship Between It and Foreseeable Actual Costs

In In re Altadena Lincoln Crossing LLC, Case No. 2:17-bk-14276-BB, the Bankruptcy Court for the Central District of California disallowed default interest on a large commercial loan after conducting an exhaustive review of California law concerning the enforceability of default interest.

Bankruptcy Code section 506(b) provides that a secured creditor is entitled to include within its claim "interest . . . and any reasonable fees, costs or charges provided for under the agreement." 11 U.S.C. § 506(b). The Ninth Circuit has held that default interest is to be enforced unless the default interest provision is not enforceable under applicable nonbankruptcy law. General Electric Capital Corp. v. Future Media Productions, Inc., 547 F. 3d. 956, 961 (9th Cir. 2008). The applicable law is California Civil Code section 1671(b), which provides that "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." Cal. Civ. Code § 1671(b). California courts have held, for example, that a liquidated damages clause will generally be considered unreasonable and unenforceable under Cal. Civ. Code § 1671(b) if it "bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach" at the time the contract was made. See, e.g., Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal 4th 970, 977 (1998); Morris v. Redwood Empire Bancorp, 128 Cal. App. 4th 1305, 1314 (2005). 

A Note on the Types of Trusts Recognized in California

I have recently encountered many issues stemming from whether assets are held by one person in trust for another. Below is a discussion of the various trusts recognized in California.

First, there are two basic categories of trusts: express trusts and implied trusts. An express trust exists when there is "an explicit declaration of trust followed by an actual conveyance or transfer of property to the trustee." Bainbridge v. Stoner, 16 Cal. 2d 423, 428 (1940) (citations omitted). 

SCOTUS Finds Section 523(a)(2)(B) Financial Condition Can Relate to a Single Asset

In a June 4, 2018 decision, the Supreme Court of the United States ("SCOTUS") held that a "statement in writing . . . respecting the debtor's or an insider's financial condition" in Bankruptcy Code Section 523(a)(2)(B), which requires the statement to be in writing, can relate to a single asset and does not have to be a financial statements regarding all of the debtor's assets and liabilities. 


The California Supreme Court recently issued a ruling that should cause every California employer utilizing the services of independent contractors to consider whether those workers should be reclassified as employees subject to California's wage and hour regulations.

In Dynamex Operations W. v. Superior Court, 4 Cal.5th 903 (2018), the Court made it significantly more difficult for employers to classify their workers as independent contractors and thereby avoid complying with many federal and state wage, hour and working condition regulations. The Court held that when an employer is deciding whether to classify a worker as an independent contractor as opposed to a common law employee subject to wage and hour rules and regulations, the employer should begin by presuming that the worker is a common law employee. To overcome this presumption and classify a worker as an independent contractor, the employer must then be able to establish all of the following elements: 

Ninth Circuit Removes Requirement to Attend Hearing and Object to Confer Standing to Appeal Bankruptcy Court Orders

In In re Point Center Financial, Inc., No. 16-56321, slip op. (9th Cir. May 29, 2018) the Ninth Circuit Court of Appeals decided whether attendance at a hearing and an objection to a bankruptcy court ruling are prerequisites to having standing to appeal the same. Generally, only a person aggrieved by a bankruptcy court order may appeal entry of the same. A person aggrieved is someone who is directly and adversely affected pecuniarily by a bankruptcy court order, such as when an order diminishes one's property, increases one's burdens, or detrimentally affects one's rights. Duckor Spradling & Metzger v. Baum Tr. (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999); Fondiller v. Roberson (In re Fondiller), 707 F.3d 441, 443 (9th Cir. 1983).

The debtor in the case is an originator and servicer of residential and commercial loans. Its business model was to make loans through funding by private investors and to grant those investors shares of the repayment proceeds and deeds of trust securing the same. If properties subject to the debtor's loan went into default, the debtor would then acquire the properties through foreclosure and set up a limited liability company to take title to those properties. Investors would then exchange their loan interests for membership interests in the companies, and the debtor served as manager of each property-holding LLC.

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