Creditors Comm Adamson Apparel v. Arnold Simon

This case presents an unresolved issue of bankruptcy law. The question is whether a corporate insider who personally guaranteed his corporation’s loan is absolved of any preference liability to which he might otherwise have been subjected, where he had previously waived his indemnification rights against the corporation, he had a bona fide basis for doing so, and he took no subsequent actions to negate the economic impact of that waiver. Bankruptcy courts have split on this issue, and neither party has been able to cite to any district- or appellate-court decision addressing the question.

Both the bankruptcy court and the district court below ruled in favor of the corporate insider. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. The loan, pledges, and guaranties

Adamson Apparel, Inc. (Adamson) manufactures and sells clothing. and accessories. On April 18, 2002, Adamson took out a multimillion-dollar loan from CIT Group Commercial Services, Inc. (CIT). To secure the loan, Adamson granted CIT a lien on its inventory and accounts receivable. *1014 Arnold H. Simon, Adamson’s president and CEO, subsequently entered into two…

dissenting:

I respectfully dissent. The majority’s conclusion that Arnold Simon is not a “creditor” for purposes of the Bankruptcy Code is wrong for two independent reasons. First, I would follow every bankruptcy court to have decided the issue and hold that insider-guarantors such as Simon are “creditors.” The majority errs by looking to extraneous facts to decide whether the waiver is valid. Second, even if we were to look to additional facts, the majority’s analysis depends heavily on a “fact” that the bankruptcy court expressly declined to find.

A. Insiders and the Right to Indemnity

As its president and CEO, Simon is an insider of Adamson Apparel, Inc. Adamson took out a loan from CIT Group Commercial Services, Inc. Simon personally guaranteed the loan. Adamson made a partial payment of about $5 million on the loan in December 2003. In September 2004, Adamson filed for bankruptcy.

Title 11 U.S.C. § 547 (b) authorizes the bankruptcy trustee to avoid certain pre-filing transfers: all transfers made in the 90-day period before filing and all transfers made for the benefit of a “creditor” in the one-year period before filing. Because the December 2003 partial payment occurred…

I. BACKGROUND

A. The loan, pledges, and guaranties

Adamson Apparel, Inc. (Adamson) manufactures and sells clothing and accessories. On April 18, 2002, Adamson took out a multimillion-dollar loan from CIT Group Commercial Services, Inc. (CIT). To secure the loan, Adamson granted CIT a lien on its inventory and accounts receivable. Arnold H. Simon, Adamson’s president and CEO, subsequently entered into two separate agreements with CIT to guarantee the loan: a Cash Collateral Pledge Agreement (the Pledge) and a Limited Guaranty (the Guaranty). In these agreements, Simon took responsibility for Adamson’s debt in the event that Adamson was unable to fully repay the loan. Simon would ordinarily have been entitled to have Adamson reimburse him for any amount that he was obligated to pay on the corporation’s behalf to settle the loan with CIT, but the agreements waived that right to indemnification. (As used throughout this opinion, Simon’s right to “indemnification” encompasses his rights to subrogation, reimbursement, or any other form of repayment.)

Over the next 18 months, the Pledge and the Guaranty were revised several times. Both agreements were initially signed on November 12,…