Sherwood Partners, Inc. v. Lycos, Inc.

Opinion by Judge KOZINSKI; Dissent by Judge D.W. NELSON.

We consider whether the Bankruptcy Code preempts a state statute that gives an assignee selected by the debtor the power to void, preferential transfers that could not be voided by an unsecured creditor.

Facts

Thinklink Corp., a unified messaging service provider, entered into an agreement with Lycos, which operates a network of web sites. Lycos agreed to promote Thinklink’s messaging service on Lycos web sites exclusively for two years. Thinklink eventually defaulted on one of its payments; Lycos nevertheless continued to display links to Thinklink’s messaging service. Lycos and Thinklink renegotiated their agreement, shortening the exclusivity period to 90 days and reducing Thinklink’s remaining payments from over $17 million to $1 million plus stock. Thinklink delivered the $1 million but not the stock, and about two months later made a voluntary general assignment for the benefit of creditors to Sherwood Partners. Sherwood shut down Thinklink’s business and sued Lycos in state court under Cal.Civ.Proc.Code § 1800 to recover the $1 million payment as a preferential transfer.

Lycos removed to federal court on…

dissenting.

I respectfully dissent because I disagree with the majority’s preemption analysis. The majority states that California Civil Procedure Code § 1800 is preempted by federal bankruptcy law. However, the reasoning by which the majority reaches this result would preempt any number of state laws governing voluntary assignments for the benefit of creditors because those laws have the effect of altering the incentives of various affected parties to initiate bankruptcy proceedings. Under the majority’s reasoning, any state statutory scheme, including those governing voluntary assignments for the benefit of creditors, that “give[s] state assignees or trustees avoidance powers beyond those that may be exercised by individual creditors trench[es] too close upon the exercise of the federal bankruptcy power.” Majority Op. at page 1205. State voluntary assignments, by definition, give the assignee more power than may be exercised by an individual creditor. 1 Because I believe that voluntary assignments for the benefit of creditors and related state statutes are not preempted by federal bankruptcy law, I cannot join the majority opinion.

Voluntary assignments for the benefit of…

Facts

Thinklink Corp., a unified messaging service provider, entered into an agreement with Lycos, which operates a net- work of web sites. Lycos agreed to promote Thinklink’s mes- saging service on Lycos web sites exclusively for two years. Thinklink eventually defaulted on one of its payments; Lycos nevertheless continued to display links to Thinklink’s messag- ing service. Lycos and Thinklink renegotiated their agree- ment, shortening the exclusivity period to 90 days and reducing Thinklink’s remaining payments from over $17 mil- lion to $1 million plus stock. Thinklink delivered the $1 mil- lion but not the stock, and about two months later made a voluntary general assignment for the benefit of creditors to Sherwood Partners. Sherwood shut down Thinklink’s busi- ness and sued Lycos in state court under Cal. Civ. Proc. Code § 1800 to recover the $1 million payment as a preferential trans- fer.

Lycos removed to federal court on diversity grounds and moved to dismiss, arguing that section 1800 was preempted by the Bankruptcy Code. The district court denied Lycos’s motion and eventually granted summary judgment to Sher- wood. Lycos appeals. 1 The statute provides that: [T]he…