Thursday, July 8, 2010
Court Rejects ‘End Run Around’ Bankruptcy Process
By a MetNews Staff Writer
A bankruptcy court’s order setting aside a company’s assignment of accounts receivable to a bank barred the bank from suing an account-holder who continued to make payments to the company instead, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The decision affirmed a ruling by a district judge in San Francisco, who found that Ta Chong Bank Ltd.’s suit against Hitachi High Technologies America Inc. for $1.2 million in payments was an attempt at an “end run around” the bankruptcy process.
The three-judge panel rejected the bank’s arguments that the judgment in a preference action did not preclude state law claims against Hitachi. The bank contended that the estate of Chapter 7 debtor CyberHome Entertainment Inc. had no property interest in the claims.
But Senior U.S. District Court Judge Richard Mills of the Central District of Illinois, sitting by designation, wrote that the panel was “unable to conclude that the Bank possesses any claim separate and distinct from those which were adjudicated in the bankruptcy proceedings.”
CyberHome began entering into factoring agreements with Ta Chong in 2004 under which the bank purchased CyberHome’s accounts receivable. In 2005 the companies agreed that future invoices to Hitachi—which purchased DVD players from CyberHome—would include a notice that payments were to go to Ta Chong.
Despite the assignment, Hitachi continued to pay CyberHome. It ultimately paid CyberHome the full $1.2 million balance on its account in 2006, but CyberHome filed for Chapter 7 bankruptcy in the Northern District of California eight months later.
Later that year, the Chapter 7 trustee filed an adversary proceeding against the bank, seeking to avoid its security interest in CyberHome’s accounts receivable as a preference because the bank failed to file a financing statement perfecting its interest until within 90 days before the bankruptcy filing.
The bank filed a secured proof of claim with the bankruptcy court for $83 million for amounts due under several credit accounts extended to CyberHome, and filed a counterclaim for fraud, negligence and breach of contract. However, it did not oppose the trustee’s motion for summary adjudication, and the bankruptcy court granted the motion, advising account debtors to disregard any request from the bank.
Ta Chong did not appeal, but several months later it sued Hitachi in state court for the $1.2 million in payments. Hitachi removed the action to federal court, and U.S. District Court Judge Phyllis J. Hamilton of the Northern District of California granted the company’s move to dismiss, finding that the case was “an improper appeal.”
The bank appealed Hamilton’s decision. Pointing to a California Commercial Code provision which states that an account debtor, after receiving notification of an assignment, cannot discharge its obligation to the assignee by paying the assignor, it argued that the bankruptcy court’s order did not bar its action against a third party because the estate had no property interest in the bank’s claim against Hitachi.
Hitachi countered that the bank availed itself of the bankruptcy court’s exclusive jurisdiction as to any claim for the $1.2 million in payments by filing a proof of claim, and the Ninth Circuit agreed.
“Although the Bank purports to bring claims under California state law, those claims derive from Hitachi’s obligation to pay the accounts receivable, which was determined to be part of CyberHome’s bankruptcy estate,” Mills wrote. “Accordingly, we are not persuaded by the Bank’s contention that Hitachi’s payment of $1.2 million to CyberHome means that CyberHome no longer has an interest in the matter and that Hitachi has incurred liability to the Bank unrelated to the accounts receivable.”
Senior Judge Alfred T. Goodwin and Judge William A. Fletcher joined Mills in his opinion.
The case is Ta Chong Bank Ltd. v. Hitachi High Technologies America, Inc., No. 08-17007.
Copyright 2010, Metropolitan News Company