In The Matter Of Jts Corp. v. Tramiel

• Decision Date: 10 August 2010
• Docket Number: No. 07-15970,07-16004.,07-15970
• Parties: In the Matter of JTS CORPORATION, Debtor,Suzanne L. Decker, Plaintiff-Appellee,v.Jack Tramiel, Defendant-Appellant,andRoger W. Johnson; Jean D. Deleage; Amber Arbitrage LDC, a private investment fund incorporated in the Cayman Islands, Defendants,Office of the U.S. Trustee, Trustee,v.Lip-Bu Tan, Third-party-defendant.In the Matter of JTS Corporation, Debtor,Suzanne L. Decker, Plaintiff-Appellant,v.Jack Tramiel, Defendant-Appellee,andRoger W. Johnson; Jean D. Deleage; Amber Arbitrage LDC, a private investment fund incorporated in the Cayman Islands, Defendants,Office of the U.S. Trustee, Trustee,v.Lip-Bu Tan, Third-party-defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

617 F.3d 1102

In the Matter of JTS CORPORATION, Debtor,

Suzanne L. Decker, Plaintiff-Appellee,

v.Jack Tramiel, Defendant-Appellant,andRoger W. Johnson; Jean D. Deleage; Amber Arbitrage LDC, a private investment fund incorporated in the Cayman Islands, Defendants,Office of the U.S. Trustee, Trustee,

v.Lip-Bu Tan, Third-party-defendant.

In the Matter of JTS Corporation, Debtor,

Suzanne L. Decker, Plaintiff-Appellant,

v.Jack Tramiel, Defendant-Appellee,andRoger W. Johnson; Jean D. Deleage; Amber Arbitrage LDC, a private investment fund incorporated in the Cayman Islands, Defendants,Office of the U.S. Trustee, Trustee,

v.Lip-Bu Tan, Third-party-defendant.

Nos. 07-15970, 07-16004.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 6, 2009.

Filed Aug. 10, 2010.

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Christian B. Nielsen, San Jose, CA, and G. Larry Engel, Morrison & Foerster LLP, San Francisco, CA, for the appellant.

Jeffrey C. Wurms, Wendel, Rosen, Black & Dean, LLP, Oakland, CA, for the appellee.

Appeal from the United States District Court for the Northern District of California, Jeremy D. Fogel, District Judge, Presiding. D.C. No. CV-05-04709-JF.

Before: PROCTER HUG, JR., PAMELA ANN RYMER, and M. MARGARET McKEOWN, Circuit Judges.

OPINION

HUG, Circuit Judge:

This case involves a bankruptcy appeal. Appellant Jack Tramiel, a member of the JTS Corporation board of directors, attempted to assist the debtor, JTS Corporation (“JTS”), and purchased real property from JTS. It was held that this purchase was a constructive fraudulent conveyance and that Tramiel was liable for the value of the property. The major issues in this case are what the fair market value of the real property is, whether Tramiel is entitled to an offset for the value he paid for the property as a good faith transferee, and whether Tramiel is entitled to a credit for the amount that his codefendants paid in a settlement agreement. We have jurisdiction under 28 U.S.C. § 158(d)(1), and we affirm.

I. Factual Background

In 1994, JTS Corporation (“JTS”) was formed to design, manufacture, and market hard disks for personal computers. By 1996, after a contract with JTS was terminated, JTS needed additional working capital to continue. At that time, JTS determined that it was not able to go public to acquire the additional funds that it needed and agreed to merge with Atari Corporation (“Atari”) to obtain the funds. Through the merger, JTS received $15 million in cash, $55 million in intellectual property, eight separate real properties located in California and Texas, and a $25 million loan which JTS hoped would carry it through September 1996. In addition, Tramiel, the defendant, who was the chairman of Atari's board of directors, was brought onto the JTS board of directors.

Since the funds acquired through the merger were only intended to carry JTS through September, Virginia Walker, JTS's chief financial officer, began to search for additional capital. After Walker failed to secure funds from several banks, she approached Tramiel and suggested that he buy the eight separate real properties (“real property”) that JTS would acquire as a result of the Atari merger. In response, Tramiel suggested that he buy the real property for $10 million and permit JTS to retain an option to repurchase the real property for the same $10 million for one year. If JTS exercised the option, Tramiel would keep the greater of $1 million or the rental income generated by the property for a one-year period.

In June 1996, JTS's board of directors approved the sale of the real property to Tramiel and authorized Walker to work with an attorney to implement the sale. Evidence showed that the JTS board believed that the real property sale to Tramiel was the quickest way of raising the necessary funds to keep the company running and that the repurchase option would allow a year to regain the real property if it decided to do so. One director recalled a discussion that although JTS might receive a greater price for the real property under other circumstances, in light of the immediate need for funds, Tramiel's offer was fair. Tramiel removed himself from the boardroom and abstained from all voting during the sale discussions.

By July 1996, JTS's debt exceeded its assets by $23 million. In September 1996, the real property sale closed. Still struggling, JTS liquidated other property acquired from the merger. Despite these and other efforts, JTS was unable to recover and in November 1998, was forced into bankruptcy through an involuntary petition. Later, JTS filed a Chapter 11 petition, scheduling assets of $4.2 million and liabilities of $136 million. In 1999, the case converted to Chapter 7.

II. Procedural Background

In 2003, the trustee, Suzanne L. Decker filed a complaint against JTS's directors (including Tramiel), its attorneys, and a shareholder, alleging fraudulent conveyance and other claims. In 2004, Tramiel's co-defendants i.e., the attorney defendants and two members of the JTS board of directors, reached a settlement with Decker in which they agreed to pay the JTS bankruptcy estate $4.5 million. The bankruptcy court issued an order approving the settlement and trial proceeded against only Tramiel.

In 2005, the bankruptcy court held inter alia that the sale of the real property to Tramiel was avoided as a constructive fraudulent conveyance under 11 U.S.C. § 544(b) of the Bankruptcy Code and California Civil Code § 3439.04. The bankruptcy court stated that under § 544(b) a trustee may avoid transfers of a debtor's property that would be avoidable under state law. Under California Civil Code § 3439.04, a transfer is avoidable if the debtor completed the property transfer without receiving a reasonably equivalent value in exchange for the property and the debtor intended to incur or believed or reasonably should have believed that it would incur debts beyond its ability to pay. In determining reasonably equivalent value, the bankruptcy court found that the fair market value of the eight separate real properties which Tramiel bought from JTS was $15,760,000 if the properties had been individually exposed to the market for one year and sold separately. Because the property was sold as a bundled portfolio and it was a quick sale, the court held that a 5% reduction should apply for a quick sale and a 20% reduction should apply for a bundled sale. Thus, the bankruptcy court held that the reasonably equivalent value of the real property was $11,820,000.

The bankruptcy court determined that the value of the option to repurchase the real property was $432,815. The bankruptcy court stated that the value of the repurchase option is determined by subtracting the strike price of the repurchase option from the fair market value of the real property. The bankruptcy court held that the stated strike price, $10 million, should be added to the loss of rental income for the real property for one year, which was $1,387,185, to equal a total $11,387,185 strike price. The bankruptcy court subtracted the strike price of $11,387,185 from the reasonably equivalent value of the real property i.e., $11,820,000, and held that the value of the repurchase option was $432,815. The bankruptcy court held that Tramiel paid a total consideration of $10,432,815 for the real property by adding the value of the repurchase option to the $10 million purchase price.

In addition, the bankruptcy court held Tramiel was a good faith transferee under California Civil Code § 3439.08(d)(3). The bankruptcy court determined that under California Civil Code § 3439.07(a)(1) the ability of a trustee to avoid a transfer is subject to the limitations under California Civil Code § 3439.08. Under § 3439.08(d)(3), a good faith transferee is entitled to a reduction in liability to the extent of the value given to the debtor. The bankruptcy court held that Tramiel was a good faith transferee entitled to a reduction of the $10 million consideration paid for the real property plus the value of the repurchase option i.e., $432,815. The bankruptcy court held that subtracting the good faith transferee reduction of $10,432,815 from the $11,820,000 reasonably equivalent value left Tramiel with a liability of $1,387,185. After determining that Tramiel was not entitled to a settlement credit, the bankruptcy court held that Tramiel's liability was $1,387,185 plus interest.

Tramiel filed a motion in bankruptcy court to amend the judgment in order to grant him a settlement credit under California Civil Procedure Code § 877. The bankruptcy court amended its judgment and held that Tramiel was entitled to a settlement credit against his liability in the amount paid by the settling defendants to the bankrupt estate i.e., $4.5 million. Because this settlement credit exceeded Tramiel's liability, the bankruptcy court held that Decker could not recover any amount from Tramiel.

On appeal, the district court affirmed in part and reversed in part the bankruptcy court's judgment. The district court affirmed the bankruptcy court's determination that Tramiel was liable for constructive fraudulent conveyance under § 544(b) and § 3439.04(a). The district court held, however, that the fair market value of the real property was $15,760,000 and the rents were $1,387,185, creating a total fair market value of $17,147,185 for the real property. Unlike the bankruptcy court, the district court concluded that the appropriate measure of liability is the fair market value.

The district court affirmed the bankruptcy court's determination that Tramiel was a good faith transferee under California Civil Code § 3439.08(d)(3) and thus reduced his liability by $10,432,815 i.e., the $10 million purchase price and value of the repurchase option, $432,815. The district court subtracted $10,432,815 from the fair market value of the real property i.e., $17,147,185, and held that Tramiel's liability was $6,714,370.

The...