Official Comm. of Unsecured Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings Int'l, Inc.)

Decision Date30 April 2013
Docket NumberNo. 11–56677.,11–56677.
Citation714 F.3d 1141
PartiesIn the Matter of FITNESS HOLDINGS INTERNATIONAL, INC., Debtor. Official Committee of Unsecured Creditors, of the Estate of Fitness Holdings International, Inc., Appellant, v. Hancock Park Capital II, L.P., a Delaware Limited Partnership; Pacific Western Bank; Kenton Van Harten; Michael Fourticq, Sr.; Hancock Park Associates, III; Hancock Park Associates, Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

OPINION TEXT STARTS HERE

Richard D. Burstein and Robyn B. Sokol, Ezra Brutzkus Gubner, LLP, Woodland Hills, CA; Larry W. Gabriel (argued), Jenkins Mulligan & Gabriel, LLP, Woodland Hills, CA; David J. Richardson, Richardson Buchanan, PC, Los Angeles, CA, for Appellants.

David K. Eldan (argued), Parker, Milliken, Clark, O'Hara & Samuelian, Los Angeles, CA, for Appellee Pacific Western Bank.

Ralph F. Hirschmann (argued) and Shane W. Tseng, Hirschmann Law Group, Los Angeles, CA, for Appellee Kenton Van Harten.

Lawrence C. Barth and M. Lance Jasper (argued), Munger, Tolles & Olson, LLP, Los Angeles, CA, for Appellees Hancock Park Capital II, L.P., Michael Fourtieq, Sr., Hancock Park Associates, III and Hancock Park Associates.

Appeal from the United States District Court for the Central District of California, Andrew J. Guilford, District Judge, Presiding. D.C. No. 2:10–cv–00647–AG.

Before: CONSUELO M. CALLAHAN, SANDRA S. IKUTA, and ANDREW D. HURWITZ, Circuit Judges.

OPINION

IKUTA, Circuit Judge:

This case presents the question whether a debtor's pre-bankruptcy transfer of funds to its sole shareholder, in repayment of a purported loan, may be a constructively fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). In order to answer this question, we must determine whether a bankruptcy court has the power to recharacterize the purported loan as an equity investment. We hold that a court has the authority to determine whether a transaction creates a debt or an equity interest for purposes of § 548, and that a transaction creates a debt if it creates a “right to payment” under state law. See11 U.S.C. § 101(5), (12); Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (noting that Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law”). Because the district court concluded that it lacked authority to make this determination, we vacate the decision below and remand for further proceedings.1

I

Fitness Holdings International, Inc., the debtor in this bankruptcy case, was a home fitness corporation. Before declaring bankruptcy, the company received significant funding from two entities: Hancock Park, its sole shareholder, and Pacific Western Bank. Defendants Kenton Van Harten and Michael Fourticq both served on Fitness Holdings' board of directors. Fourticq was also a manager of Hancock Park.

Between 2003 and 2006, Fitness Holdings executed eleven separate subordinated promissory notes to Hancock Park for a total of $24,276,065. Each note required Fitness Holdings to pay a specified principal amount to Hancock Park, plus interest of ten percent per year, on or before the note's maturity date. 2

In July 2004, Pacific Western Bank made a $7 million revolving loan and a $5 million installment loan to Fitness Holdings, both of which were secured by all of Fitness Holdings' assets. Hancock Park guaranteed these loans. Fitness Holdings and Pacific Western Bank amended the loan agreement multiple times. The amendments eased Fitness Holdings' obligations in various ways, for example, by extending the maturity dates on the revolving loan and waiving past breaches.

Finally, in June 2007, Fitness Holdings and Pacific Western Bank agreed to refinance Fitness Holdings' debt. Under the terms of the agreement, Pacific Western Bank made two loans to Fitness Holdings: a $17 million term loan, and an $8 million revolving line of credit. These loans were also secured by all of Fitness Holdings' assets. The loan agreement provided that upon closing, $8,886,204 would be disbursed to pay off Pacific Western Bank's original secured loan, and $11,995,500 would be disbursed to Hancock Park to pay off its unsecured promissory notes. The payoff of Pacific Western Bank's prior secured loan had the effect of releasing Hancock Park from its guarantee.

These attempts to save Fitness Holdings proved unsuccessful, and the company filed for Chapter 11 bankruptcy on October 20, 2008. A committee of unsecured creditors, acting on behalf of Fitness Holdings and its estate, filed a complaint against Hancock Park, Pacific Western Bank, Van Harten, and Fourticq to recover the payments made to Hancock Park as a result of the refinancing transaction with Pacific Western Bank. The complaint also requested declaratory relief, asking the court to characterize the financing Hancock Park provided to Fitness Holdings in connection with the promissory notes as equity investments in Fitness Holdings, rather than extensions of credit. As a result, the complaint alleged, the transfer of $11,995,500 to Hancock Park was constructively fraudulent.

On January 15, 2010, the bankruptcy court dismissed all claims against Hancock Park with prejudice. The case was subsequently converted to a Chapter 7 filing on April 6, 2010, In re Fitness Holdings Int'l, Inc., No. 2:08–bk–27527–BR, Dkt. # 291 (Bankr.C.D.Cal. April 6, 2010). The following month, the bankruptcy court appointed a trustee for Fitness Holdings, who replaced the committee of unsecured creditors in the litigation.

The trustee appealed the bankruptcy court's dismissal of the complaint to the district court, which affirmed the bankruptcy court and dismissed the case for failure to state a claim. In re Fitness Holdings Int'l, Inc. (Fitness I), No. CV 10–0647 AG, 2011 WL 7763674, *1 (C.D.Cal. Aug. 31, 2011). The district court held that, under longstanding precedent of the Ninth Circuit Bankruptcy Appellate Panel, Hancock Park's advances to Fitness Holdings were loans and, as a matter of law, it was barred from recharacterizing such loans as equity investments. Id. at *5 (citing In re Pacific Express, 69 B.R. 112, 115 (B.A.P. 9th Cir.1986)).3

The trustee timely appealed, claiming that the district court should have: (1) recharacterized Hancock Park's payment of $11,995,500 to Fitness Holdings as a payment in satisfaction of an equity interest rather than a debt, and then (2) avoided Fitness Holdings' $11,995,500 transfer to Hancock Park as a constructively fraudulent transfer under § 548(a)(1)(B) of the Bankruptcy Code.

II

We have jurisdiction under 28 U.S.C. §§ 158(d)(1) and 1291. Because the district court dismissed the trustee's complaint for failure to state a claim, we review de novo. Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir.2010). In order to survive a motion to dismiss, a party must allege ‘sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.’ Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. In reviewing a dismissal for failure to state a claim, [a]ll well-pleaded allegations of material fact in the complaint are accepted as true and are construed in the light most favorable to the non-moving party.” Faulkner v. ADT Sec. Servs., Inc., 706 F.3d 1017, 1019 (9th Cir.2013).

A

We begin by setting forth the legal framework for fraudulent transfers under § 548(a)(1)(B) of the Bankruptcy Code.4

Filing a petition in bankruptcy creates an estate made up of the debtor's assets. Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 2657, 177 L.Ed.2d 234 (2010). In a Chapter 7 bankruptcy, a trustee is appointed or elected to administer the estate. 11 U.S.C. §§ 701–04. In order to protect the interests of the estate, a bankruptcy trustee may bring an action to avoid a transfer made before the bankruptcy that is allegedly either intentionally fraudulent, 11 U.S.C. § 548(a)(1)(A), or constructively fraudulent, § 548(a)(1)(B); BFP v. Resolution Trust Corp., 511 U.S. 531, 535, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). A transfer is constructively fraudulent, and thus can be avoided by the trustee, 11 U.S.C. § 550, if the debtor made the transfer on or within two years before the date of filing the bankruptcy petition, the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation,” § 548(a)(1)(B)(i), and one of four circumstances obtains.5

In construing the statutory requirement that the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation,” § 548(a)(1)(B)(i), we must turn to a series of interlocking statutory definitions. The key phrase in § 548(a)(1)(B)(i), “reasonably equivalent value,” is not defined in the Code. BFP, 511 U.S. at 535, 114 S.Ct. 1757. “Value” is defined, however, and includes the “satisfaction or securing of a present or antecedent debt of the debtor.” § 548(d)(2)(A). Under this definition, [p]ayment of a preexisting debt is value, and if the payment is dollar-for-dollar, full value is given.” 5 Collier on Bankruptcy ¶ 548.03[5] (16th ed. 2012). Therefore, to the extent a transfer constitutes repayment of the debtor's antecedent or present debt, the transfer is not constructively fraudulent. See Freeland v. Enodis Corp., 540 F.3d 721, 735 (7th Cir.2008) (holding that there is “reasonably equivalent value” where “payment of the accrued interest constituted ‘dollar-for-dollar forgiveness of a contractual debt.’) (quoting In re Carrozzella & Richardson, 286 B.R. 480, 491 (D.Conn.2002)).

We next address the definition of the term “debt.” The Bankruptcy Code defines “debt” to mean “liability on a claim.” 11 U.S.C. § 101(12); see also ...

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