Stahl v. Simon (In re Adamson Apparel, Inc.)

Clothing manufacturer Adamson Apparel, Inc. borrowed money from CIT Group Commercial Services, Inc. Adamson’s president and CEO, Arnold Simon (defendant), entered a cash-collateral pledge agreement and limited-guaranty agreement with CIT. Those agreements provided that Simon was responsible for Adamson’s debt to CIT if Adamson could not fully repay the loan. Although Simon typically would have been entitled to reimbursement from Adamson if he personally paid off the loan on Adamson’s behalf, Simon waived his right of indemnification. In late 2003, BP Clothing LLC purchased nearly $5 million in merchandise from Adamson. Adamson told BP to transfer the purchase price to CIT in partial satisfaction of Adamson’s debt. In March 2004, Simon paid the remaining loan balance of over $3.5 million with his own money. Adamson filed for bankruptcy in September 2004. A committee appointed to represent Adamson’s unsecured creditors (plaintiff) brought an adversary action against Simon in the bankruptcy proceeding, seeking to recover the money paid to CIT by BP. The committee’s action was based on a preference-liability theory, which allows a bankruptcy trustee to set aside a transaction to or for the benefit of a corporate-insider creditor that occurred in the one-year period leading up to the filing of a bankruptcy petition. The committee alleged that Simon was a corporate insider who benefited from BP’s payment to CIT because the payment reduced the amount of the debt that Simon had guaranteed. Simon moved for summary judgment, arguing that he was not Adamson’s creditor because he had waived his indemnification rights. Simon asserted that because he was not a creditor, the preference-liability theory was inapplicable. The bankruptcy court ruled in Simon’s favor, and the federal district court affirmed. The committee appealed to the United States Court of Appeals for the Ninth Circuit.