In re: Brennon Ty Bishop and Michelle Bishop
CC-16-1341-TaKuL CC-16-1342-TaKuL
| 9th Cir. BAP | Aug 23, 2017Background
- Brennon and Michelle Bishop (debtors) filed Chapter 7 in 2002; Debtor held membership interests in two LLCs: FedChex and FedChex Recovery.
- Debtor’s bankruptcy filing triggered dissolution provisions in the LLC operating agreements; remaining members (including Arnold and Davis) later purchased Debtor’s interests in late 2002 for $64,000 via a promissory note that was never paid.
- Trustee sued and ultimately sold most estate assets to Electronic Funds Solutions, LLC (EFS), which succeeded as plaintiff in an adversary proceeding asserting avoidance/recovery claims under 11 U.S.C. §§ 549 and 550 for unauthorized postpetition transfers.
- After a lengthy trial, the bankruptcy court found § 549 liability for the unauthorized postpetition transfers of Debtor’s 9.12% FedChex and 2.64% FedChex Recovery interests and ordered recovery under § 550: return of the LLC economic interests (not a monetary award).
- Appellants (FedChex entities, Arnold, Davis) appealed, challenging (1) exclusion of rebuttal expert Michael Issa’s testimony, (2) the remedy (property vs. value), and (3) failure to enter judgment in favor of Arnold and Davis on all theories.
Issues
| Issue | Plaintiff's Argument (EFS) | Defendant's Argument (Appellants) | Held |
|---|---|---|---|
| Admissibility of rebuttal expert (Issa) | Court properly excluded late-filed declarations; plaintiff need not value property to recover under §549/§550. | Issa’s late declarations rebutted valuation and other trial testimony; exclusion prejudiced defendants. | Exclusion affirmed: Issa declarations untimely, not true rebuttal, and defendants failed to show prejudice or supply a sufficient record. |
| Remedy under §550: recover property vs. monetary value | EFS sought return of the transferred LLC economic interests; property return appropriate when value is not readily determinable. | Appellants argued estate/LLC law limited recovery to Debtor’s contractual capital-account payout (~$50k) and that state law controlled. | Affirmed: §550 governs; court did not abuse discretion in awarding the property where market value at transfer date was unclear. |
| Effect of LLC operating agreements on remedy | EFS: bankruptcy Code controls recovery remedies for avoidable transfers; recovery does not expand substantive LLC rights. | Appellants: state law/operating agreements limited Debtor’s remedy on withdrawal to capital-account balance, so plaintiff may only recover that value. | Rejected: bankruptcy remedy under §550 is proper; appellants failed to show the award expanded rights beyond Debtor’s interests or that court erred. |
| Judgment as to Arnold and Davis individually | EFS: judgment and memorandum make clear transfers are avoidable and recoverable from Arnold and Davis as transferees. | Appellants: bankruptcy court did not enter judgment favoring them or make separate findings; ask remand or amendment. | Rejected: record and memorandum show liability of Arnold and Davis for the avoided transfers; no remand or amendment required. |
Key Cases Cited
- Allstate Ins. Co. v. Herron, 634 F.3d 1101 (9th Cir.) (evidentiary rulings reviewed for abuse of discretion; prejudice required to reverse)
- Valdivia v. Schwarzenegger, 599 F.3d 984 (9th Cir.) (standard for reviewing evidentiary decisions)
- In re JTS Corp., 617 F.3d 1102 (9th Cir.) (§550 remedy aims to restore estate; return of property appropriate when value not readily determinable)
- In re Acequia, Inc., 34 F.3d 800 (9th Cir.) (purpose of §550 to restore estate to financial condition absent transfer)
- Aalfs v. Wirum (In re Straightline Invs., Inc.), 525 F.3d 870 (9th Cir.) (discussing restoration principle under §550)
- USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880 (9th Cir.) (review of bankruptcy court’s remedy selection under §550; guidance on awarding value vs property)
- In re Trout, 609 F.3d 1106 (10th Cir.) (return of property is default §550 remedy; monetary recovery is discretionary)