In a case of first impression at the Circuit Level, the Ninth Circuit has held that an insider who waives his right to indemnification from a debtor is not a “creditor” for purposes of preferential transfers under § 547(b)(4). The facts before the court in Alberta Stahl, Chapter 7 Trustee v. Simon (In re Adamson Apparel), 2015 WL 2081575 (9th Cir. 2015) were straightforward. Arnold Simon was an insider of Adamson Apparel and personally guaranteed its debt to CIT Group. The guaranty provided that Simon to irrevocably waived his right of indemnification by Adamson Apparel in connection with the loan. There was no indication that the waiver was a sham. More than 90 days before Adamson Apparel filed bankruptcy, it paid almost $5,000,000 to CIT in partial satisfaction of its debt. Following Adamson Apparel’s bankruptcy filing, Simon paid with his personal funds the remaining $3,500,000 owed to CIT by the debtor. Simon did not file a proof of claim against the bankruptcy estate for the funds he personally paid to CIT on account of his guaranty. The Trustee filed an adversary proceeding against Simon seeking recovery from him of the $5,000,000 paid by the debtor to CIT as a preference.
The issue before the court was whether the trustee could recover the debtor’s payment to CIT from Simon as a preference because the payment benefitted him, or whether the trustee’s recovery was precluded by the fact that Simon was not a creditor of the debtor as a result of his waiver of his right of indemnification by the debtor. In addressing this issue, the Ninth Circuit noted that there was a split among the bankruptcy courts on this issue but no opinions at the district or circuit level answering the question.
The court noted first the plain language of § 547(b)(4), which provides that a preference includes a transfer made between 90 days and one year before the bankruptcy filing if the creditor involved is an insider of the debtor. There was no dispute that Simon was an insider, and the focus of the court’s analysis was whether he should be considered a creditor despite his waiver of indemnification. The trustee relied on numerous bankruptcy court decisions which hold that insider waivers of indemnification are invalid because the insider could conceivably purchase the debt rather than just paying under the guaranty. Bankruptcy courts adopting this line of reasoning do so on the opinion that such waivers are sham provisions unenforceable as a matter of public policy. Other bankruptcy courts have concluded that such waivers are not ipso facto against public policy and have held that an insider who waives his indemnification right in good faith is not a creditor and, therefore, not subject to preference liability under the plain language of the statute.
The Ninth Circuit agreed with those courts who hold that a good faith waiver of indemnification insulates an insider from preference liability. The court stated that the potential that a waiver may be a sham does not mean it actually is, rejecting an analysis based on what could happen and holding a court instead should focus on what has happened in the case before it. In the present case, Simon irrevocably waived his right of indemnification in the guaranty, and nothing in the guaranty or other loan documents gave him a contractual right to purchase the debt from CIT. As a result, the court concluded that, had Simon approached CIT with a proposal to purchase the debt, there was no certainty that CIT would have agreed to sell it to Simon. The court considered the absence of this contractual right a key factor, stating that had Simon had a contractual right to purchase the debt but did not do so, the court would be more concerned with the waiver being a sham. With these facts before it, and the plain language of § 547 requiring the insider to be a creditor, the court concluded that the trustee could not recover the debtor’s payment to CIT from Simon.