Article courtesy of David Simonds and Edward McNeilly (Hogan Lovells)
In re TBH19, LLC, 2022 WL 16782946 (B.A.P. 9th Cir. Nov. 8, 2022)
In In re TBH19, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) decided whether a claim should have been disallowed under section 502(e)(1)(B) of the Bankruptcy Code as a contingent claim for reimbursement or contribution and if the settlement of that claim should have been approved by the bankruptcy court under Bankruptcy Rule of Procedure 9019. The BAP held that the claim was not subject to disallowance and approval by the bankruptcy court under Bankruptcy Rule 9019 was proper.
The debtor TBH19, LLC (the “Debtor”) owned a large piece of real property in Beverly Hills, California. In 2015, the Debtor borrowed $40 million from DBD Credit Funding (“DBD”), secured by a senior lien on the property. The Debtor also obtained secured financing from HAR-BD, LLC (“HAR-BD”), the appellant in this case.
Another of the Debtor’s creditors, Glorya Kaufman, guarantied repayment of the DBD loan. The Debtor and Ms. Kaufman executed a Reimbursement and Indemnity Agreement (the “RIA”) and a Subordination and Indemnity Agreement. The RIA required the Debtor to pay Ms. Kaufman an annual guaranty fee of 3% of the outstanding amount of the DBD loan and to indemnify her for amounts paid to DBD, as well as for any expenses incurred in connection with the DBD guaranty.
The Debtor eventually defaulted on the DBD loan, which led to state court litigation among DBD, Ms. Kaufman, the Debtor, its owner and HAR-BD. After the commencement of that litigation, the Debtor filed a chapter 11 bankruptcy petition.
In the bankruptcy case, Ms. Kaufman filed a proof of claim for $72.9 million, comprising of (1) guaranty fees of $4.8 million, (2) estimated indemnification of $66.1 million, and (3) attorneys’ fees and costs reimbursement of $2 million (the “Kaufman Claim”). The Debtor objected to the Kaufman Claim, in part on the basis that it should be disallowed under Bankruptcy Code section 502(e)(1)(B), which disallows claims for reimbursement or contribution that are contingent at the time of allowance of disallowance of such a claim. The bankruptcy court held its decision on the issue in abeyance pending resolution of the state court litigation.
The chapter 11 case was converted to chapter 7 shortly thereafter, and the chapter 7 trustee and Ms. Kaufman reached a settlement (the “Kaufman Settlement”), which, among other things, provided for mutual dismissals and releases in the state court litigation, and allowed the Kaufman Claim as a general unsecured claim for $17.8 million, which included almost $11 million in estimated indemnification. The chapter 7 trustee filed a motion seeking bankruptcy court approval of the Kaufman Settlement under Bankruptcy Rule 9019. The bankruptcy court approved the Kaufman Settlement over HAR-BD’s objection.
On appeal, the BAP considered whether (1) section 502(e) precluded the bankruptcy court’s approval of the Kaufman Settlement; (2) the bankruptcy court sufficiently analyzed the factors required for settlement approval; and (3) the bankruptcy court erred in approving the Kaufman Settlement despite HAR-BD’s offer to litigate the objection to the Kaufman Claim.
The BAP first held that section 502(e)(1)(B) did not apply because co-liability did not exist at the time of the Kaufman Settlement. First, the claim for guaranty fees and attorneys’ fees asserted by Ms. Kaufman never involved a co-liable party, as those fees were owed to Ms. Kaufman directly. Second, once the bankruptcy estate settled with DBD, Ms. Kaufman, the guarantor, was no longer liable with the Debtor on this claim, and DBD’s claim against the bankruptcy estate was eliminated. Third, even though the bankruptcy estate would remain obligated to indemnify Ms. Kaufman for amounts she eventually paid to DBD, her indemnification claims were contingent claims capable of estimation and allowance and could be allowed absent co-liability.
Next, the BAP found that the trustee’s judgment in settling Ms. Kauffman’s claim was within the “range of reasonableness,” and the bankruptcy estate and its creditors benefited from the compromise in several ways. The consideration provided by Ms. Kaufman as a result of the Kaufman Settlement included a release of Ms. Kaufman’s state court claims, a significant reduction in attorneys’ fees and an elimination of future claims for attorney’s fees. This all amounted to a significant reduction in administrative fees and a discount of indemnification claims for the Debtor’s estate. Accordingly, considered as a whole, the Kaufman Settlement was reasonable.