2009 Chapter 11 Recent Developments (Part I)

Wolkowitz v. FDIC (In re Imperial Credit Indus., Inc.), 527 F.3d 959 (9th Cir. 2008)

Facts: In February 2002, the FDIC issues a Prompt Corrective Action notice informing Southern Pacific Bank (SPB) and its holding company, Imperial Credit Industries (Imperial) to provide capital to meet its holding requirements by March 2002. As required by federal law, SPB provided the FDIC with a capital restoration plan and Imperial, also pursuant to federal law, executed a corresponding guaranty agreement under the plan. Ultimately, SPB failed to implement its capital restoration plan and was declared insolvent; the FDIC was appointed as receiver in February 2003. In July 2003, Imperial filed for voluntary chapter 11 to liquidate its assets. In September 2003, the FDIC notified Imperial of its obligation to perform under the guaranty under § 365(o) in the amount of approximately $18 million. In November 2003, Imperial sued the FDIC in its bankruptcy seeking to avoid its guaranty requirements as a fraudulent transfer. After a number of procedural fights, the district court upheld Imperial's requirement to pay the guaranty, upheld the FDIC's estimation of the obligation, denied the chapter 7 trustee's request to avoid the guaranty as a fraudulent conveyance, and, after Imperial converted to chapter 7 to avoid its FDIC obligation, held that the FDIC's claim was entitled to administrative expense.

Issues:

(1) Whether the district court erred in its findings.

Rules:

(1) Under 12 U.S.C. § 1828(u)(1), a fraudulent conveyance claim is barred against federal banking agencies that have received money for the return of assets that were transferred to a federally insured bank or for monetary damages or other legal or equitable relief in connection with such transfer if the transfer was made when the secured bank was undercapitalized. But "'the issuance of a guaranty is not included in [§ 1828(u)(1)] although payments pursuant to the guaranty are, of course, included.'"

(2) The plain language of § 365(o) and § 507(a)(9) suggests, and the court holds, that FDIC's claim under the performance guaranty is entitled to ninth priority in the debtor's converted chapter 7 case.

Holding: Affirmed in part and remanded in part: affirmed to the extent the district court found that the guaranty was valid and that Imperial was liable to the FDIC for the payment under the guaranty; and affirmed the district court's finding that the FDIC's calculation of Imperial's liability is approximately $18 million. Remanded to the extent the district court found that the guaranty was not avoidable as a fraudulent conveyance under § 548 of the Bankruptcy Code as being barred by 12 U.S.C. § 1828(u)(1). Remanded to the extent the district court found that the FDIC claim was entitled to administrative expense payment.

Reasoning:

(1) The trustee was not barred from using § 548 as a defense against the FDIC's attempt to force the debtor to pay its liabilities under § 362(o) because the debtor converted to chapter 7. (2) >Although § 1828(u)(1) does preclude a claim for a fraudulent conveyance for the payment of an insolvent bank to a federal banking agency, it does not bar a claim to avoid a guaranty as a fraudulent conveyance.

(3) The court recognized that, if a trustee assumes an executory contract the payments for such services are entitled to administrative status, the obligation of trustee to assume Imperial's contract with the FDIC is automatic and, therefore, § 365(o) is an exception to the trustee's assume or reject powers and is not an administrative expense as it is not an 'actual, necessary' cost of preserving the Imperial's chapter 7 estate. Just because a debtor was in chapter 11 before it converted to chapter 7,