In re: Castle Trading, Inc.
CC-16-1322-FTaKu CC-16-1323-FTaKu CC-16-1324-FTaKu CC-16-1352-FTaKu CC-16-1353-FTaKu CC-16-1354-FTaKu
9th Cir. BAPMay 31, 2017Background
- Castle Trading (owned by Yuri and Natalia Plyam) retained law firm Mesisca Riley & Kreitenberg LLP (MRK) in Sept. 2011 to represent the company in three state-court matters and signed a fee agreement obligating Castle Trading to pay $635,000 by promissory note, secured by deeds of trust on five properties.
- MRK agreed to delay collection and took recorded deeds of trust as security; MRK represented Castle Trading in the three matters and obtained favorable outcomes in two before the bankruptcy filing.
- Castle Trading filed Chapter 7 in Feb. 2013; schedules listed large liabilities including a $3.8M shareholder loan and MRK filed a proof of claim ~ $728k. Trustee sold several properties and sued to avoid MRK’s liens and note as fraudulent transfers.
- The bankruptcy court held a consolidated trial and found (among other things) that the Fee Agreement was a flat/semi-flat fee arrangement, MRK provided roughly $212k in recorded hourly work (plus unbilled work), and MRK’s promise constituted reasonably equivalent value for the $635,000 obligation.
- Trustee appealed arguing (1) an executory promise of future legal services is not “value” or is too uncertain, and (2) the provided value was not reasonably equivalent and should be limited to recorded billings; MRK cross‑appealed on solvency issues which the panel did not reach.
- The BAP affirmed: MRK’s promise qualified as value and the bankruptcy court did not clearly err in finding the promise was reasonably equivalent to the $635,000 note and deeds of trust.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a promise to perform future legal services can be “value” under §548 | Trustee: an unperformed promise is not value (or here too uncertain to be value) | MRK: an enforceable executory promise for defined services is value; statute only excludes promises to furnish support | Court: promise of future legal services (not support) may constitute value; bankruptcy court implicitly found value and that was correct |
| Whether MRK’s promise was "reasonably equivalent value" to $635,000 | Trustee: value should be limited to MRK’s recorded billings (~$217,819) or assessed at time of signing; services were uncertain | MRK: fee agreement was flat/semi-flat for specific matters; unbilled work and nonquantifiable benefits (familiarity, willingness to represent insolvent client) add value | Court: affirmed factual finding that MRK provided roughly equivalent value; not clearly erroneous to consider totality and unbilled work |
| Whether the bankruptcy court erred by not deciding pretrial factual labels (e.g., earned-on-receipt retainer) | Trustee: court should have resolved those specific Pretrial Order questions | MRK: labels unnecessary to fraudulent-transfer analysis; material question is reasonably equivalent value | Court: no error—court need not classify the agreement if it correctly found reasonable equivalence |
Key Cases Cited
- Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102 (9th Cir.) (standard: factual findings on value reviewed for clear error)
- Pension Transfer Corp. v. Beneficiaries (In re Fruehauf Trailer Corp.), 444 F.3d 203 (3d Cir.) (courts may find value when reasonable to expect benefit at time of transfer)
- HBE Leasing Corp. v. Frank, 61 F.3d 1054 (2d Cir.) (services retainer held not fair consideration where agreement was undefined/uncertain)
- Mellon Bank v. Official Comm. of Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139 (3d Cir.) (an executory promise can be value if there is chance of positive return)
- Brobeck, Phleger & Harrison LLP (In re Brobeck), 408 B.R. 318 (Bankr. N.D. Cal.) (framework: determine existence of value and then reasonable equivalence)