Bankruptcy and Restructuring Blog

The California Court of Appeal recently rejected the argument that directors and officers owe fiduciary duties to the company's creditors when the company is in the so-called "zone of insolvency," or is even clearly insolvent. In Berg & Berg Enterprises, LLC v. John Boyle, et al., 100 Cal. Rptr. 3d 875 (Cal. Ct. App. 6th Dist. Oct. 29, 2009), the California court expounded that "there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation's creditors solely because of a state of insolvency."  Id. at 893-94.  The court was even much less inclined to find that directors owed such duties when the corporation is not clearly insolvent but on the brink of insolvency, and held that "there is no fiduciary duty prescribed under California law that is owed to creditors by directors of a corporation solely by virtue of its operating in the 'zone' or 'vicinity' of insolvency." Id. at 893.

In a majority opinion dated December 15, 2009, the Ninth Circuit Bankruptcy Appellate Panel held that a chapter 11 debtor may not equitably subordinate a creditor's claim and transfer the lien securing that claim, when such creditor is, itself, in bankruptcy, before first obtaining relief from the automatic stay under section 362 of the U.S. Bankruptcy Code in such creditor's bankruptcy case. Lehman Commercial Paper v. Palmdale Hills Prop. (In re Palmdale Hills Prop., LLC), 2009 Bankr. LEXIS 4294 (B.A.P. 9th Cir. Dec. 15, 2009).  

In Burkhart v. Coleman, (In re Tippett) --- F.3d ---, 2008 WL 4070690 (9th Cir. Sept. 4, 2008), the Ninth Circuit held that an unauthorized post-petition sale of real property may be upheld where: 1) the bankruptcy trustee failed to record the bankruptcy petition with the county recorder; and 2) a bona fide purchaser thereafter bought and recorded title in the property.  As welcome as this news is to bona fide purchasers in California, the opinion raises interesting issues pertaining to acts arguably taken in violation of the automatic stay under section 362 of the Bankruptcy Code by holding that the automatic stay may not apply to sales or transfers of property initiated by the debtor under certain circumstances.

In 2005, in a blow to assignments for the benefit of creditors ("ABC") in California, the Ninth Circuit in Sherwood Partners Inc. v. Lycos ("Sherwood I"), 394 F.3d 1198 (9th Cir. 2005), held that an assignee in an ABC cannot bring preference actions under California law because the Bankruptcy Code preempts state preference law. Since Sherwood I, two California state courts of appeal have reached the opposite conclusion and held that assignees can bring preference actions under California law because the Bankruptcy Code does not preempt state preference law. Credit Managers Ass'n of California v. Countrywide Home Loans, Inc., 144 Cal. App. 4th 590 (2006), review denied; Haberbush v. Cummins Family Ltd. Partnership, 138 Cal. App. 4th 1630 (2006). While Sherwood I leaves uncertain an assignee's ability to bring preference actions under state law, California state courts have resoundingly shown approval for ABCs in California in rejecting Sherwood I.

In the case of Sherman v. Harbin (In re Harbin), the Ninth Circuit decided that in determining feasibility of a plan under Bankruptcy Code Section 1129(a)(11), a court must evaluate the possible impact of pending litigation whether at the trial level or on appeal.