Shulman Hodges & Bastian LLP

September 2014 Archives

Out-of-court workout a viable option for many struggling businesses

In one of our recent posts, we discussed a drug maker's decision to file for Chapter 11 bankruptcy protection, which provides the company with an automatic stay against creditor actions. While Chapter 11 certainly has its benefits, such as letting the filer continue operations while restructuring, business owners should be absolutely certain that bankruptcy is right for their particular situation.

Section 523(a)(1)(C) Claims for Tax Fraud Require Specific Intent

On September 15, 2014, the Ninth Circuit Court of Appeals ("Court") issued the opinion Hawkins v. the Franchise Tax Board of California, et. al., Case No. 11-6276, pursuant to which the Court held that claims for non-dischargeability under Bankruptcy Code Section 523(a)(1)(C) based on a willful attempt to evade or defeat taxes requires a specific bad intent and not just mere knowledge of the consequences of the act. The Court determined the meaning of "willful" and decided there must be a specific bad intent to evade taxes. The Court's opinion is contrary to previous decisions in the Tenth Circuit where all that is required is mere knowledge of a duty to pay taxes and the voluntary and intentional violation of such duty.

You've sold your successful startup: What next?

Let's say you've worked hard for years to build a profitable business. You may have even spent significant time away from your family to raise finances and manage operations. As an entrepreneur, you probably realize, too, that once your company reaches a certain level of profitability, selling the business may be the best move for its growth and your future.


In Cruz v. Strauss (In re Cruz), 2014 Bankr. LEXIS 3687(B.A.P. 9th Cir. Aug. 29, 2014), the Bankruptcy Appellate Panel for the Ninth Circuit recently affirmed retroactive annulment of the automatic stay to validate a foreclosure sale. In Cruz, a five-percent interest in residential real property was transferred to the debtor post-petition. The deed transferring the five-percent interest to the debtor was recorded at 12:52 p.m. on July 15, 2013, and on the same day, at approximately 2:18 p.m., the property was sold at a trustee's sale. At the time of the sale, the trustee was unaware of the debtor's bankruptcy; however, after becoming aware of the debtor's bankruptcy filing, the trustee moved the bankruptcy court to annul the automatic stay to validate the sale or, in the alternative, to confirm that no stay was in effect at the time of the sale. The Court held that a stay violation could be cured by retroactive annulment where cause exists to annul the stay pursuant to 11 U.S.C. § 362(d). The Court reasoned that although the property interest was transferred post-petition, the automatic stay was in effect at the time of the trustee's sale pursuant to 11 U.S.C. § 362(a)(5); however, the Court further reasoned that an action taken in violation of the automatic stay that would otherwise be void may be declared valid if cause exists for retroactive annulment of the stay pursuant to 11 U.S.C. § 362(d). The Court concluded that a bankruptcy court could find that cause existed where a debtor, who had filed a skeletal chapter 7 case in bad faith, took a fractionalized interest in residential property on the day it was sold in foreclosure, the buyer had no knowledge of the stay at the time of sale, and the buyer acted promptly to obtain relief from stay once it learned of the debtor's bankruptcy.

Drug maker files for Chapter 11 to preserve right to appeal ruling

The need for Chapter 11 bankruptcy protection can arise under a wide variety of circumstances. For antiviral drug maker Siga Technologies Inc., a costly judgment in a licensing dispute not only jeopardizes the company's viability; enforcement of the judgment could prevent Siga from producing and delivering an important smallpox drug to the national stockpile.

Adobe prevails in patent dispute with non-practicing entity

A non-practicing entity or patent assertion entity -- pejoratively referred to as a patent troll -- is an individual or company that brings a patent infringement claim in an effort to collect licensing fees in connection with a product or service not actually manufactured or provided by the non-practicing entity. A non-practicing entity (NPE) could also be a research laboratory, inventor or development company that provides patents to licensees prior to a product being manufactured.

Contract dispute between California hospital and insurer goes public

When it comes to contract negotiations between hospitals and insurers, deadlock is not uncommon. Both sides must account for a multitude of factors in an ever-changing health care industry, and sometimes extended negotiation is necessary to reach an agreement that is favorable for all parties involved. However, the details of such disputes are rarely widely publicized.

$100 million settlement ends 2 intellectual property suits in CA

Protecting intellectual property is crucial to giving businesses the competitive edge they need to thrive. Whether you intend to enforce or defend against a claim of patent or trademark infringement, it is important have on your side a legal team with experience in intellectual property law.

The Ninth Circuit Bankruptcy Appellate Panel Holds Des Brisay Continues to Apply to Ninth Circuit Cases - Choice of Law Issues in Bankruptcy Cases are Governed by Federal Choice of Law Rules

The Ninth Circuit Bankruptcy Appellate Panel ("BAP") recently issued the opinion, Sterba v. PNC Bank (In re Sterba), BAP No. NC-13-1590-KuDJu (9th Cir. BAP Aug. 27, 2014), which held that the bankruptcy court improperly relied on California's choice of law rules instead of Ninth Circuit precedent in determining the timeliness of a creditor's claim against the bankruptcy estate. In this case, the Chapter 7 debtors ("Debtors") appealed from an order overruling their objection to the proof of claim filed by PNC Bank. The Debtors argued that PNC's claim was barred by a four-year statute of limitations under California law. The bankruptcy court found that Ohio law applied - and thus a six-year statute of limitations applied - based on the choice of law provision set forth in the promissory note on which PNC's claim was based.

The Ninth Circuit Holds That the Bankruptcy Court Has Authority to Enter Judgment on Stern Claims Based on the Parties' Consent

The Ninth Circuit recently issued the opinion, Mastro v. Rigby, No. 13-35209 (9th Cir. Aug. 22, 2014), which held that the bankruptcy court has authority to enter judgment on Stern claims based on the parties' consent. In this case, Linda Mastro ("Ms. Mastro"), the non-filing spouse of the debtor and a claimant to the bankruptcy estate, appealed the district court's dismissal of her appeal of the bankruptcy court's judgment finding her liable for fraudulently transferring more than $1 million in bankruptcy estate assets. The Ninth Circuit concluded that the district court abused its discretion in dismissing Ms. Mastro's appeal under the fugitive disentitlement doctrine because no necessity justified invoking the rule of disentitlement under the circumstances.

More doctors adopting concierge business models

The health care industry is rapidly changing, and so are doctors' business models. According to a survey by the Physicians Foundation, more than 50 percent of 13,500 doctors surveyed in 2000 had independent practices. In 2013, however, only one-third of the doctors practiced independently.

Post-Petition Attorneys' Fees Can Withstand Discharge if Debtor Affirmative Resumes Participation in Litigation Even Where Debtor is a Defendant

In an opinion filed August 28, 2014 by the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in In re Gillespie, BAP No. NC-13-1455-KuDJu, the Court reversed the bankruptcy court because the bankruptcy court misconstrued In re Ybarra, 424 F.3d 1018 (9th Cir. 2005) in discharging post-petition attorneys' fees awarded against the debtor.

Amazon steps into Internet gaming with acquisition of Twitch

The videogame industry is big business, and Amazon recently stepped into this arena in a major way. Market watchers in California likely saw news of Amazon's recent agreement to pay $970 million in cash for Twitch Interactive Inc., the popular Internet gaming channel. Twitch may not be a familiar name to many Americans, though the channel draws an immense amount of Internet traffic, fourth behind Netflix Inc., Google Inc. and Apple Inc. Twitch is not only a hub for gamers to play each other; viewers also tune in to watch gaming competitions.

Administrative Pledge of Funds Placed Post-Bankruptcy is Not a Willful Violation of the Stay Because Debtors Had No Rights to Possession or Control of Such Funds

In Mwangi v. Wells Fargo Bank, N.A., Case No. 12-16087, published on August 26, 2014 by the Ninth Circuit Court of Appeals ("Court"), the Court upheld the dismissal of the debtors' adversary proceedings against Wells Fargo Bank ("WFB") for placing a "temporary administrative pledge" on the debtors' accounts post-bankruptcy. The Court held that there was no willful violation of the automatic stay because (1) the account funds were property of the estate and thus, (2) the debtors had no right to possession or control of the funds and (3) that after the funds revested in the debtors, the funds were no longer estate property. Thus, the funds were "no longer subject to the protections of §362(a)(3)'s automatic stay provision." 

Federal court: FedEx misclassified drivers

In disputes over employee misclassification and business models involving independent contractors, often the primary question is whether or not the company controls the contractors' work. If the company does control the work, then workers who have been classified as independent contractors may in effect be employees of the company. When that is the case, the employer may be responsible for back-pay and benefits for misclassified workers.

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