In re Hamada, 00-56865.
| Decision Date | 29 May 2002 |
| Docket Number | No. 00-56865.,00-56865. |
| Parties | In re James S. HAMADA, Debtor. James S. Hamada, Appellant, v. Far East National Bank, a California Corporation, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
David A. Tilem & C. Casey White, Tilem & White, LLP, Glendale, CA, for appellant James S. Hamada.
Adam A. Lewis, Morrison & Foerster, San Francisco, CA, for appellee Far East National Bank.
Appeal from the United States District Court for the Central District of California; J. Spencer Letts, District Judge, Presiding. D.C. No. CV-00-04276-JSL.
Before: THOMAS and RAWLINSON, Circuit Judges, and ARMSTRONG, District Judge.1
In this appeal, we consider, inter alia, the rights of statutory and equitable subrogation held by the issuer of a standby letter of credit. Under the circumstances presented by this case, we conclude that no right of subrogation existed. Therefore, we reverse the judgment of the district court.
James S. Hamada was the defendant in a breach of fiduciary duty and fraud action filed by his former partner in medicine. The judgment provided for damages of $500,000, punitive damages of $1.25 million, and prejudgment interest. Hamada appealed, and sought a supersedeas bond to stay execution of the judgment while his appeal was pending. He applied for a bond with Fidelity and Deposit Company of Maryland ("Fidelity"), and Fidelity agreed to provide the supersedeas bond if Hamada paid certain fees, indemnified Fidelity if the bond were to be called, and posted a standby letter of credit for the full amount. Hamada secured the letters of credit from Imperial and Far East banks, which agreed to provide the letters in exchange for Hamada's indemnification and provision of real and personal property as collateral. The letters were issued, and Fidelity issued the supersedeas bond.
The California Court of Appeal modified, vacated and affirmed parts of the 1990 judgment and remanded the case to the trial court for further proceedings. Hamada filed for bankruptcy in October 1995. In January 1996, Michelson filed an adversary proceeding in the bankruptcy court seeking a determination that his claims under the court judgment were non-dischargeable. After an order from the bankruptcy court granting Hamada's motion for relief from the automatic stay, the California trial court entered another judgment in the fraud action in May 1996. Nearly a year later, in July 1997, Michelson obtained a final judgment from the bankruptcy court holding that the damages, punitive damages and prejudgment interest awarded in the state case were non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and 523(a)(6).
In November 1997, the California Court of Appeal again reversed the trial court's judgment, and offered Michelson a remittitur reducing the punitive damages award to $500,000, which Michelson accepted. Michelson then made a demand on Fidelity's supersedeas bond for payment of the judgment. Fidelity sought payment from Hamada, who told the surety that he could not pay the judgment or satisfy his obligation to indemnify Fidelity. Fidelity then presented the letters of credit to Imperial and Far East, and each bank honored its letter and paid Fidelity in excess of $1.2 million. Fidelity then executed assignment agreements in favor of Far East and Imperial, assigning any rights it had to subrogation based upon its partial satisfaction of the Michelson judgment.
Far East and Imperial filed an adversary action against Hamada one year later seeking non-dischargeability of the debts owed to them. The parties stipulated to the material facts, and filed cross-motions for summary judgment. The Bankruptcy Court conducted a hearing on the matter in March 1999, and in March 2000 issued an order granting Hamada's motion and denying the motion filed by Imperial and Far East. The court held that the banks' claims were purely contractual and that they were not entitled to subrogation to the non-dischargeability of the Michelson judgment. The court found that the banks' direct claims arising from the letters of credit were dischargeable and that their failure to file timely non-dischargeability complaints precluded them from seeking non-dischargeability "at this late date."
The court also rejected the banks' claim that they were entitled to equitable subrogation, and rejected their contention that the assignment agreements had assigned any subrogation rights held by Fidelity to Far East and Imperial. The Bankruptcy Court determined that the agreements were unenforceable for lack of consideration and noted that the agreements "appear to be merely a litigation ploy by the Banks in an attempt to bootstrap themselves into a more favorable position than they bargained for in their agreements" with Hamada and Fidelity.
Far East appealed to the District Court, which reversed the bankruptcy court's ruling, essentially because the Michelson judgment was based on Hamada's fraudulent conduct. The District Court issued a judgment reversing the Bankruptcy Court and finding Far East entitled to subrogation of the non-dischargeable Michelson claims. Hamada timely appeals.
We review a district court's decision on appeal from a bankruptcy court de novo. Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1084 n. 9 (9th Cir.2000) (en banc). "We independently review the bankruptcy court's decision and do not give deference to the district court's determinations." Preblich v. Battley, 181 F.3d 1048, 1051 (9th Cir. 1999) (citation omitted). We review the bankruptcy court's findings of fact for clear error; we review conclusions of law and mixed questions of law and fact de novo. Beaupied v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir.1998). The question of whether a claim is non-dischargeable presents mixed issues of law and fact, which we review de novo. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir.1997) (en banc).
Far East failed to file an adversary proceeding objecting to discharge of its debt within the statute of limitations. See Fed. R. Bankr.P. 4007; State Bank & Trust, N.A. v. Dunlap (In re Dunlap), 217 F.3d 311, 315 (5th Cir.2000) ().
Thus, unless Far East is legally subrogated to the Michelson non-dischargeability judgment by virtue of its payment to Fidelity, Far East's claims were subject to discharge in the Hamada bankruptcy.
In general terms, subrogation is the substitution of one party in place of another with reference to a lawful claim, demand or right. It is a derivative right, acquired by satisfaction of the loss or claim that a third party has against another. Subrogation places the party paying the loss or claim (the "subrogee") in the shoes of the person who suffered the loss ("the subrogor"). Thus, when the doctrine of subrogation applies, the subrogee succeeds to the legal rights and claims of the subrogor with respect to the loss or claim. See, e.g., Amer. Surety Co. of New York v. Bethlehem Nat. Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 86 L.Ed. 241 (1941) (); Han v. United States, 944 F.2d 526, 529 (9th Cir.1991) ().
There are various types of subrogation, most commonly categorized as "conventional" or "contractual" subrogation, "legal" or "equitable" subrogation, and statutory subrogation. "Conventional" or "contractual" subrogation rights arise from an express or implied agreement between the subrogor and subrogee. Mutual Serv. Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 626 (7th Cir. 2001). "Equitable subrogation is a legal fiction, which permits a party who satisfies another's obligation to recover from the party `primarily liable' for the extinguished obligation." In re Air Crash Disaster, 86 F.3d 498, 549 (6th Cir.1996). The right of "legal" or "equitable" subrogation arose as a "creature of equity" and "is enforced solely for the purpose of accomplishing the ends of substantial justice." Memphis & L.R.R. Co. v. Dow, 120 U.S. 287, 302, 7 S.Ct. 482, 30 L.Ed. 595 (1887). Statutory subrogation, as one might expect, occurs by virtue of a right created by statute. See, e.g., Carter v. Derwinski, 987 F.2d 611, 614 (9th Cir.1993) (en banc). Far East alleges that it is subrogated to the Michelson non-dischargeability judgment by virtue of a right of statutory subrogation under the Bankruptcy Code and a right of equitable subrogation.
Far East claims a right of statutory subrogation under the Bankruptcy Code pursuant to 11 U.S.C. § 509(a), which provides:
Except as provided in subsection (b) or (c) of this section, an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment.
The legislative history to § 509 indicates that it was designed to describe rights available to a limited class of creditors, namely, true co-debtors who have actually paid a debtor's obligation to the third party in question:
This section is based on the notion that the only rights available to a surety, guarantor, or comaker are contribution, reimbursement, and subrogation. The right that applies in a particular situation will depend on the agreement between the debtor and the codebtor, and on whether and how the payment was made by the codebtor to the creditor.
H.R.Rep. No. 95-595, 95th Congr., 1st Sess. (1977) p. 358, U.S. Code Cong. & Admin. News at 5963, 6314.
For our purposes, the critical question under § 509(a) is whether Far East was "liable with the debtor on, or has secured, a claim of a creditor against a debtor." Fidelity, as a surety or...
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