Sherwood Partners, Inc. v. Lycos, Inc.

Decision Date12 January 2005
Docket NumberNo. 03-55247.,03-55247.
Citation394 F.3d 1198
PartiesSHERWOOD PARTNERS, INC., Assignee for the Benefit of Creditors of International Thinklink Corporation, Plaintiff-counter-defendant-Appellee, v. LYCOS, INC., a Delaware Corporation aka Delaware Lycos, Inc., Defendant-counter-claimant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

James S. Monroe and Walter T. Johnson, Nixon Peabody LLP, San Francisco, CA, for the defendant-appellant.

Irving Sulmeyer and Janis G. Abrams, SulmeyerKupetz, Los Angeles, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Central District of California; Gary A. Feess, District Judge, Presiding. D.C. No. CV-01-05403-GAF.

Before D.W. NELSON, Senior Circuit Judge, KOZINSKI and GRABER, Circuit Judges.

Opinion by Judge Kozinski; Dissent by Judge D.W. Nelson

KOZINSKI, Circuit Judge.

We consider whether the Bankruptcy Code preempts a state statute that gives an assignee selected by the debtor the power to void preferential transfers that could not be voided by an unsecured creditor.

Facts

Thinklink Corp., a unified messaging service provider, entered into an agreement with Lycos, which operates a network of web sites. Lycos agreed to promote Thinklink's messaging service on Lycos web sites exclusively for two years. Thinklink eventually defaulted on one of its payments; Lycos nevertheless continued to display links to Thinklink's messaging service. Lycos and Thinklink renegotiated their agreement, shortening the exclusivity period to 90 days and reducing Thinklink's remaining payments from over $17 million to $1 million plus stock. Thinklink delivered the $1 million but not the stock, and about two months later made a voluntary general assignment for the benefit of creditors to Sherwood Partners. Sherwood shut down Thinklink's business and sued Lycos in state court under Cal.Civ.Proc.Code § 1800 to recover the $1 million payment as a preferential transfer.1

Lycos removed to federal court on diversity grounds and moved to dismiss, arguing that section 1800 was preempted by the Bankruptcy Code. The district court denied Lycos's motion and eventually granted summary judgment to Sherwood. Lycos appeals.

Discussion

Congress has broad authority to preempt state laws, but whether Congress has done so in a particular instance is a matter of congressional intent. This intent is most easily detected where the statute expressly preempts other laws, but preemption may also be inferred where it is clear from the statute and surrounding circumstances that Congress intended to occupy the field, leaving no room for state regulation. The Supreme Court, in Pacific Gas & Electric Co. v. State Energy Resources Conservation & Development Commission, 461 U.S. 190, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983), summarized the contours of the field preemption doctrine:

Absent explicit pre-emptive language, Congress' intent to supersede state law altogether may be found from a "`scheme of federal regulation ... so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,' because `the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,' or because `the object sought to be obtained by the federal law and the character of obligations imposed by it may reveal the same purpose.'"

Id. at 203-04, 103 S.Ct. 1713 (quoting Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947))). "Even

where Congress has not entirely displaced state regulation in a specific area," the Court continued, "state law is pre-empted ... where [it] `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" Id. at 204, 103 S.Ct. 1713 (quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941)).

There can be no doubt that federal bankruptcy law is "pervasive" and involves a federal interest "so dominant" as to "preclude enforcement of state laws on the same subject" — much like many other areas of congressional power listed in Article I, Section 8, of the Constitution, such as patents, copyrights, currency, national defense and immigration. The Bankruptcy Clause, which grants Congress the power to make bankruptcy laws, U.S. Const. art. I, § 8, cl. 4, stresses that such rules must be "uniform." Bankruptcy law occupies a full title of the United States Code. It provides a comprehensive system of rights, obligations and procedures, as well as a complex administrative machinery that includes a special system of federal courts and United States Trustees.

At the same time, federal law coexists peaceably with, and often expressly incorporates, state laws regulating the rights and obligations of debtors (or their assignees) and creditors. See, e.g., 11 U.S.C. § 522(b)(2) (incorporating state personal exemptions to the bankruptcy estate); id. § 544(b) (making state law on voidable transfers available to the bankruptcy trustee); id. § 543(d)(2) (excusing some assignees for the benefit of creditors from compliance with property turnover requirements). In determining whether Cal.Civ.Proc.Code § 1800 is preempted, we must consider whether it is merely another creditor rights provision of the kind that is tolerated by the Bankruptcy Code, or whether it gives the state assignee powers that are within the heartland of bankruptcy administration.

Sherwood argues that the preference avoidance provisions of section 1800 are not only tolerated but specifically incorporated by the Bankruptcy Code through section 544(b), which allows a bankruptcy trustee to avoid any transfers voidable by unsecured creditors under "applicable law" (including state law).2 Section 544(b), says Sherwood, "manifest[s] congressional intent not to preempt state statutes invalidating preferences.... Empowering bankruptcy trustees to so act a fortiori manifests a congressional intent that state statutes are valid and available to be used by a bankruptcy trustee." Reply Br. of Appellee at 30. The Supreme Court in Stellwagen v. Clum, 245 U.S. 605, 38 S.Ct. 215, 62 L.Ed. 507 (1918), in fact cited section 70e of the Bankruptcy Act of 1898, the precursor to section 544(b), in upholding a statute allowing assignees to void certain preferential transfers. See id. at 614, 618, 38 S.Ct. 215.

But the trustee's powers under section 544(b) are limited to those of unsecured creditors — such as the right of an individual unsecured creditor to set aside fraudulent conveyances under state law. See, e.g., Decker v. Advantage Fund Ltd., 362 F.3d 593, 596 (9th Cir.2004) (involving a claim, under section 544(b), to avoid a transfer using California's Uniform Fraudulent Transfer Act, Cal. Civ.Code § 3439.04). Similarly, the Ohio statute upheld in Stellwagen, unlike the California statute at issue here, gave court-appointed trustees only those avoidance powers already held by "[a]ny creditor or creditors." 245 U.S. at 611 n. 1, 38 S.Ct. 215 (quoting the statute).3 By contrast, the power to set aside preferential transfers under California's section 1800 can be exercised only by general assignees, not by individual unsecured creditors. In other words, the assignee appointed pursuant to section 1800 is given new avoidance powers by virtue of his position.

To make Stellwagen and section 544(b) cover this case would require us to read the term "creditor" in section 544(b) as encompassing representatives of creditors such as Sherwood. We doubt that Congress had Sherwood in mind when describing unsecured creditors in section 544(b). The Bankruptcy Code defines "creditor," in relevant part, as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(10)(A). "Custodian" is a different concept, which includes receivers, trustees and "assignee[s] under a general assignment for the benefit of the debtor's creditors." Id. § 101(11). In fact, Congress defined custodian using the word "creditor" in two places. See id. § 101(11)(B), (C). Custodians, instead of being by their nature creditors, stand in a certain fiduciary relation to creditors. But Congress did not mention custodians alongside creditors in section 544(b). We are therefore unable to read "creditor" in section 544(b) to include custodians. See Dubis v. B.W. Supply (In re Delta Group), 300 B.R. 918, 923-24 (Bankr.E.D.Wis.2003); 5 Collier on Bankruptcy ¶ 544.09[4], at 544-21 & n. 26 (Lawrence P. King et al. eds., 15th ed. rev.2004) ("creditor" in section 544(b) includes assignees or successors of the original creditor, but "[a]n assignee for the benefit of creditors ... is not such a creditor"); see also In re Komfo Prods. Corp., 247 F.Supp. 229, 237 (E.D.Pa.1965); Vern Countryman, The Use of State Law in Bankruptcy Cases (Part II), 47 N.Y.U. L.Rev. 631, 663 (1972) (if Congress intended "any creditor" in section 70e, the precursor to section 544(b), to mean "any representative of any creditor," "it would be desirable to amend [the statute] to say so"). Zimmerman v. Frem Corp. (In re Kenval Mktg. Corp.), 69 B.R. 922, 929-31 (Bankr.E.D.Pa.1987).4 Thus, section 544(b) of the Bankruptcy Code, and its partial incorporation of state transfer avoidance law, does not save the California statute from preemption.

The question remains whether the section 1800 assignee's special avoidance powers, though not expressly incorporated into the Bankruptcy Code by section 544(b), nevertheless can peaceably coexist with the federal bankruptcy scheme. To answer this question we must consider the essential goals and purposes of federal bankruptcy law, and then determine whether section 1800 is consistent with them.

It is...

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