In re Adamson Apparel, Inc.

A corporate insider who personally guarantees the corporation’s loan is exempt from preference liability when (1) the insider had a bona-fide basis to waive the insider’s indemnification rights against the corporation, and (2) the insider took no subsequent actions that would repudiate the economic impact of that waiver.

Adamson Apparel, Inc. (“Adamson”) had a multimillion dollar loan from CIT Group Commercial Services, Inc. (“CIT”), which was guaranteed personally by Arnold H. Simon, president and CEO of Adamson. Within the guarantee agreement, Simon waived his indemnification rights to have Adamson reimburse him in the event he paid the loan on behalf of the corporation. In December of 2003, BP Clothing L.L.C. (“BP Clothing”) purchased approximately $5 million worth of merchandise from Adamson, which payment was transferred to CIT as partial satisfaction of the debt owned by Adamson, the same debt guaranteed by Simon. In March 2004, Simon paid $3.4 million, the balance of Adamson’s loan to CIT. Months later, Adamson filed for Chapter 11 bankruptcy. The Committee of Unsecured Creditors (the “Committee”) was appointed to represent Adamson’s unsecured creditors, and filed a preference liability suit against Simon. The Committee wanted to recover the amount paid by BP Clothing to CIT in 2003. At trial, the bankruptcy court concluded that Simon was exempt to preference liability because he was not a creditor of Adamson, as defined in 11 U.S.C. §§ 101(10) and 547(b), which the Committee appealed. On appeal, the Ninth Circuit found that the bankruptcy court did not commit clear error in concluding that Simon’s indemnification waiver was valid, and thus negating Simon as a creditor as defined under the Bankruptcy Code. The panel reasoned that because Simon had a bona-fide basis to waive his indemnification right against Adamson, and took no subsequent actions that would repudiate the economic impact of that waiver, such as by paying the balance to CIT without seeking reimbursement, never filing a proof of claim in the bankruptcy case, or having a unilateral right to purchase the note from CIT, the waiver was valid. AFFIRMED.