Arent Fox Secures Ninth Circuit Bankruptcy Appellate Panel Win, Chapter 11 Plan of Reorganization Confirmed

This win on appeal is the culmination of more than two years of contentious litigation and allows IFS to close the bankruptcy case and complete its successful corporate and capital structure reorganization. Arent Fox Bankruptcy & Financial Restructuring partner Aram Ordubegian and associate M. Douglas Flahaut represented the full service turn-key fulfillment house in the chapter 11 case and in its appeal before the Ninth Circuit.

“This is a great result for our client. The win on appeal allows IFS to complete its payments to creditors as called for by the confirmed plan of reorganization and close the bankruptcy case,” said Mr. Ordubegian. “In addition, this ruling is particularly notable for its discussion of whether a judgment on appeal is a contingent liability for determining a company’s solvency.”

Prior to the filing of its bankruptcy petition in March 2012, a judgment involving a business dispute with DC Media, Inc. was entered against IFS by a California state court, forcing IFS to file for chapter 11 protection. Before the filing of the bankruptcy case, DC Media perfected a judgment lien on all of IFS’s assets and began to exercise its rights as a secured creditor by levying on IFS’s operating bank account. After filing the chapter 11 proceedings, Arent Fox immediately commenced an adversary proceeding in the Bankruptcy Court to avoid that judgment lien so DC Media could be deemed an unsecured creditor.

In March 2013, the US Bankruptcy Court for the Central District of California ruled in Imagine Fulfillment Services, LLC vs. DC Media Capital, LLC, 489 B.R. 136 (Bankr. C.D. Cal. 2013) that the $4 million judgment lien in favor of DC Media constituted a preferential transfer and could therefore be avoided. The ruling by Judge Julia W. Brand set the stage for IFS to move forward with its corporate reorganization plan, which was subsequently confirmed in July 2013.

Besides being a major win for IFS, the Bankruptcy Court’s published opinion as affirmed by the Ninth Circuit is notable for its discussion of whether a judgment on appeal is a contingent liability or not for purposes of determining a company’s solvency in the preferential transfer context. While the Ninth Circuit has never provided guidance to bankruptcy courts in this context, Judge Brand adopted the so-called “triggering event” test from In re All Media Properties, Inc. and held that because the events giving rise to DC Media’s $4 million judgment occurred pre-bankruptcy, the liability was not contingent as a matter of law and therefore should be considered as a liability in the full amount of the judgment for purposes of a solvency analysis.

“A claim is contingent as to liability if the debtor’s legal duty to pay does not come into existence until triggered by the occurrence of a future event and such future occurrence was within the actual or presumed contemplation of the parties at the time the original relationship of the parties was created,” wrote Judge Brand. “On the other hand, if a legal obligation to pay arose at the time of the original relationship, but that obligation is subject to being avoided by some future event or occurrence, the claim is not contingent as to liability, although it may be disputed as to liability for various reasons.”

Applying the “triggering event” test, the Bankruptcy Court held that DC Media’s state court judgment was a non-contingent liability in its full face amount, even though the judgment was subject to an appeal, and therefore not final under California law, and not listed as a liability on the IFS’s books. With the full weight of the judgment on the client’s balance sheet, the Bankruptcy Court found that IFS satisfied the required preference recovery element of insolvency and avoided DC Media’s senior secured judgment lien position off of the company’s capital structure.

Arent Fox’s nationally recognized Bankruptcy & Financial Restructuring practice is rated an industry leader by Chambers USA, Legal 500, US News & World Report, and The Deal’s Bankruptcy Insider. The firm handles financial and corporate restructurings and recapitalizations, bankruptcy litigation, and distressed asset and corporate acquisitions for companies in a variety of industries throughout the country.