2009 Chapter 11 Recent Developments (Part I)

Reasoning: the indemnification clause at issue is a common one in the type of relationship that existed between Oakwood and US Fire. But the dispute at issue "has nothing to do with a payment or incurrence of other expenses in connection with U.S. Fire's role as surety." The indemnity language here covers two very specific actions: "one where indemnitors do not comply with a deposit demand, and the other where the indemnitors do not comply with a payment obligation triggered by a demand on a bond." The indemnification thus does not cover the litigation that has occurred in this adversary proceeding.

b. Avoidance / Preference Actions

Johnson, et. al. v. Slatkin (In re Slatkin), 525 F.3d 805 (9th Cir. 2008)

Facts: In May 2001, Slatkin filed for chapter 11 bankruptcy. Shortly after which he was criminally charged for operating a Ponzi scheme. He pled guilty in a plea agreement - in which he admitted to operating a Ponzi scheme from 1986 to May 2001 - and is serving a fourteen-year prison sentence. In August 2002, the chapter 11 trustee filed hundreds of adversary proceedings against Slatkin's investors to avoid and recover as actual fraudulent transfers 'profit' payments they received for investing in Slatkin's scheme. In this adversary proceeding, the bankruptcy court held that Slatkin's guilty plea and plea agreement conclusively established that Slatkin operated a Ponzi scheme with the actual intent to defraud creditors and thus granted the trustee's motion for summary judgment finding that the trustee was allowed to avoid and recover the profits received by the defendants and was also able to recover prejudgment interest. The district court affirmed and the plaintiffs appealed.

Issues: Whether the bankruptcy court erred in its findings.

Rules:

(1)

"[T]he plea agreement is admissible under Federal Rule of Evidence 807..." the bankruptcy court did not err in considering it for its summary judgment ruling.

(2)

"[A] debtor's admission, through guilty pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor's fraudulent intent under 11 U.S.C. § 548(a)(1)(A) and California Civil Code § 3439.04(a)(1), and precludes relitigation of that issue."

(3)

"[O]nce the existence of a Ponzi scheme is established, payments received by investors as purported profits- i.e., funds transferred to the investor that exceed that investor's initial 'investment'- are deemed to be fraudulent transfers as a matter of law."

Holding: Affirmed.

Reasoning:

(1)

The Ninth Circuit steps through the three requirements of FRE 807 and finds that it is admissible.

(2)

The Ninth Circuit stepped through the facts of the case and found that the bankruptcy court did not err in its decisions. And the plaintiffs were unable to offer evidence raising a material issue of fact as to whether Slatkin operated a Ponzi scheme and thus earned illegal profits.

(3)

The Ninth Circuit upheld the bankruptcy court's ruling that Slatkin was not a stockbroker as defined under 11 U.S.C. § 741 because, although Slatkin had customers, he did engage in business of effecting transactions in securities since he purchased investments by contacting another stockbroker and he never held himself out as being a licensed full-service brokerage firm or being licensed to buy or sell securities on behalf of others.