Cap Call, LLC v. Foster (In re Shoot the Moon, LLC)

• Decision Date: 06 November 2020
• Docket Number: Adv. Proc. No. 2:17-ap-00028-WLH,Case No. 2:15-bk-60979-WLH
• Parties: In re: SHOOT THE MOON, LLC, Debtor. CAP CALL, LLC, Plaintiff and Counterclaim-defendant, v. JEREMIAH J. FOSTER, Defendant and Counterclaim-plaintiff.
• Court: U.S. Bankruptcy Court — District of Montana

In re: SHOOT THE MOON, LLC, Debtor.CAP CALL, LLC, Plaintiff and Counterclaim-defendant, v. JEREMIAH J. FOSTER, Defendant and Counterclaim-plaintiff.

Case No. 2:15-bk-60979-WLH

Adv. Proc. No. 2:17-ap-00028-WLH

UNITED STATES BANKRUPTCY COURT DISTRICT OF MONTANA

November 6, 2020

NOT FOR PUBLICATION

MEMORANDUM DISPOSITION RESOLVING COMPETING MOTIONS FOR PARTIAL SUMMARY JUDGMENT

A lot of legal work involves categorizing. The classification of a given event can yield different results under a range of legal regimes - including, for example, tax, bankruptcy, commercial, and securities law - or determine whether those regimes apply at all. The specifics of any given taxonomic exercise will differ based on the factual and legal contexts, but a common (although by no means universal) maxim is that the task must be guided by the substance of the event rather than by labels or other formalism.

Among other issues raised here, Jeremiah J. Foster (the "Trustee")¹ and CapCall, LLC dispute whether certain financial transactions should be classified as loans or as true sales of receivables. Both sides appear confident in their positions and have accordingly cross-moved for partial summary judgment regarding this issue. For the reasons discussed below, the court concludes that neither party is entitled to summary judgment. As such, the court denies both motions.

BACKGROUND & PROCEDURAL POSTURE

Various entities that were predecessors of the debtor² in the main bankruptcy case operated restaurants in Idaho, Montana, and Washington.³ When these Shoot the Moon entities needed further financing, several engaged in transactions with merchant cash advance companies, including CapCall.⁴ At least twelve transactions were consummated between Shoot the Moon entities and CapCall, the terms of which are set forth in written Merchant Agreements and associated documents (including confessions of judgment, personal guaranties by Shoot the Moon's principal, and UCC-1 financing statements).⁵

The economic core of these transactions was that CapCall provided the Shoot the Moon entities with immediate cash (and hence liquidity to operate their business) upon closing of each transaction. In exchange, CapCall received an agreed portion of future receivables generated through the Shoot the Moon entities' operation of the restaurants. The amounts promised to CapCall exceeded the amount of cash CapCall paid the Shoot the Moon entities, which created possible profit for CapCall and represented the cost to the Shoot the Moon entities of obtaining financing in this fashion. Before the Shoot the Moon bankruptcy filing, CapCall received payments as a result of these transactions but claims it did not receive all monies promised.⁶

Some funds that the Shoot the Moon entities received before the petition date but did not pay to CapCall are currently deposited in a restricted account.⁷ Some of the amounts that the debtor received after the petition were apparently utilized during the bankruptcy case.⁸

CapCall's operative complaint seeks declaratory relief that CapCall owns the balance of the restricted account, judgment against the Trustee for converting thepostpetition receipts,⁹ and other miscellaneous fees, costs, and interest components.

The Trustee's answer includes various counterclaims against CapCall, including seeking declaratory relief regarding the applicable state law governing the transactions at issue and that these transactions amounted to disguised loans, avoidance and recovery of allegedly voidable transfers, and remedies stemming from CapCall allegedly charging usurious interest rates.

The present dispute began with CapCall's motion requesting partial summary judgment regarding (i) choice-of-law issues, (ii) the classification of CapCall's transactions with the Shoot the Moon entities as sales or loans, and (iii) the Trustee's avoidance action counterclaims. The Trustee opposed CapCall's motion and cross-moved for partial summary judgment regarding the first two issues. After the completion of briefing, the court heard oral argument by counsel for each party. The matter is now ready for decision.

DISCUSSION

Jurisdiction & Power

The court has subject matter jurisdiction regarding this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) & 157(a) and Standing Order No. DLC-43 (D. Mont. Jan. 16, 2019). This court is a proper venue for this litigation as a result of the pendency of the underlying Shoot the Moon bankruptcy case in this district.¹⁰ Previous orders entered in this adversary proceeding reflect the parties' agreement that this is a "core" proceeding and each side's express consent to a final adjudication by this bankruptcy court.¹¹ Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.

Standard for Partial Summary Judgment

Federal Rule of Civil Procedure 56, which applies here through Bankruptcy Rule 7056, allows a party to move for complete or partial summary judgment. This relief should be granted only "if the movant shows that there is no genuinedispute as to any material fact and the movant is entitled to judgment as a matter of law."

"The determination of whether a given factual dispute requires submission to a jury must be guided by the substantive evidentiary standards that apply to the case. To defeat summary judgment, the nonmoving party must produce evidence of a genuine dispute of material fact that could satisfy its burden at trial."¹²

A summary judgment analysis requires the court to consider the evidence offered by the parties at that stage of the case "in the light most favorable to the nonmoving party."¹³ When, as here, the parties have filed cross-motions for summary judgment, courts will "evaluate each motion separately, giving the nonmoving party in each instance the benefit of all reasonable inferences."¹⁴

Finally, summary judgment is generally disfavored in the context of disputes that are intensely factual.¹⁵

Applicable Substantive Law

Absent a contrary rule in the Bankruptcy Code, the contours of claims and property rights in bankruptcy cases are sculpted by applicable nonbankruptcy law.¹⁶ Neither the Bankruptcy Code nor any other federal statute prescribes how todifferentiate true sales from loans, which means that bankruptcy courts should use the applicable state law.¹⁷

Differentiating True Sales from Loans

An entity needing liquidity can monetize its present or future accounts receivable in two primary ways: it can sell the receivables at a discount to a buyer¹⁸ or it can use the receivables as collateral for a loan. These two methods differ in key respects (including because the seller transfers title to the receivables in a sale transaction whereas the borrower retains title in a loan transaction), but they are not dissimilar. Indeed, Article 9 of the Uniform Commercial Code treats both secured loans and "a sale of accounts, chattel paper, payment intangibles, or promissory notes" as secured transactions subject to that statute's detailed rules regarding perfection and priority,¹⁹ which its commentary explains reflects how "[i]n many commercial financing transactions the distinction is blurred."²⁰ The UCC, however, never "delineates how a particular transaction is to be classified" and its commentary instead notes that this "issue is left to the courts."²¹

The courts have responded by formulating a holistic, multipart framework to examine the substance of a given transaction. A notable law review article cataloged factors that are often considered:

(1) whether the buyer has a right of recourse against the seller;(2) whether the seller continues to service the accounts and commingles receipts with its operating funds;

(3) whether there was an independent investigation by the buyer of the account debtor;

(4) whether the seller has a right to excess collections;

(5) whether the seller retains an option to repurchase accounts;

(6) whether the buyer can unilaterally alter the pricing terms;

(7) whether the seller has the absolute power to alter or compromise the terms of the underlying asset; and

(8) the language of the agreement and the conduct of the parties.²²

As with many multi-factor legal tests, no individual factor or combination of factors is determinative in a given case.²³ This legal inquiry is not a quantitative exercise subject to replication by a computer program, but instead is a comprehensive and contextual endeavor in which "[a]nalysis of the various factors and their impact on the nature of the parties' agreement is fact-intensive, and a determination must be made based on the totality of the circumstances."²⁴ One consideration that transcends and unites the specific factors, however, is the nature of how the parties allocated risk - in sales, the risk of loss from the purchased assets typically passes to the buyer whereas in disguised loans, various methods may be used to allocate risk such that the putative seller remains exposed to theunderlying receivables or has otherwise provided the putative buyer recourse to sources of recovery beyond the receivables.²⁵

CONCLUSIONS ON SUMMARY JUDGMENT²⁶

After reviewing the materials filed by CapCall and the Trustee in the light most favorable to the respective nonmoving party, the court ultimately concludes that (i) it is inappropriate and unnecessary at this stage to determine any choice-of-law issue and (ii) there are genuine disputes of material of fact precluding summary judgment regarding the substantive issues presently before the court.

Choice of Law

The parties disagree about which state's law governs; CapCall maintains that New York law should apply while the Trustee urges application of Montana law. This disagreement tees up a potential choice-of-law issue on which both sides have sought declaratory relief and cross-moved for summary judgment. The court is constrained, however, by the principle that "[a] choice-of-law determination is necessary only when a difference in the law will result in a different...