Ninth Circuit Rules that Deprizio Waivers Are Still Relevant, at Least to a Guarantor

On May 6, 2015, in Stahl v. Simon (In re Adamson Apparel, Inc.), 2015 US App. LEXIS 7508, the Ninth Circuit Court of Appeals became the first circuit level court to hold that an insider guarantor’s waiver of its indemnity, exoneration, contribution, and indemnity rights absolves the insider guarantor from potential preference liability for payments made to a guaranteed lender during the extended one-year preference period applicable to insiders.  Such waivers (commonly referred to as “Deprizio waivers”) became a common requirement in lending transactions involving insider guaranties following the Seventh Circuit’s opinion in Levit v. Ingersoll Rand Fin. Corp. (In re Deprizio), 874 F.2d 1186 (7th Cir. 1989).  That decision held that lenders holding an insider guaranty were susceptible to the extended one-year reach back period because payments made to the lender benefitted the insider guarantor creditor and were thus avoidable under 11 USC §547(b)(4)(B). Congress amended the Bankruptcy Code in 1994 to make such payments recoverable only from the insider guarantor and not the lender, making Deprizio waivers no longer necessary to protect the lender.  11 USC §§ 547(I) and 550(c).  The guarantor, however, remained liable under §§ 547(b) and 550(a)(1) for those payments because it benefitted from having its guaranty liability reduced. Following the Deprizio decision, but prior to the Bankruptcy Code amendments, a number of bankruptcy courts, including the District of Oregon in Hostmann v. First Interstate Bank of Or., N.A. (In re XTI Xonix Techs, Inc.) 156 B.R. 821 (Bankr. D. Or. 1993), held that Deprizio waivers could be used to effectively shield both the lender and the guarantor from liability for the payments made to the lender within the extended one-year reach back period because the guarantor was no longer a creditor as a result of the waiver.  Following the amendments, however, a number of courts began to question the validity of such waivers on public policy grounds, finding that such waivers were a sham by giving the guarantor the ability to purchase the remaining debt from the lender after the preferential payments had been made, rather than performing under the guaranty, and thereby obtaining the lender’s rights to pursue the debtor for the remaining balance owed.  See In re USA Detergents, Inc., 418 B.R. 533 (Bankr. D. Del. 2009; In re Pro Page Partners, LLC, 292 B.R. 622 (Bankr. E.D. Tenn. 2003); In re Telesphere Commc’ns, Inc., 229 B.R. 173 (Bankr. N.D. Ill. 1999). Noting the validity of such concerns in Adamson, the Ninth Circuit nevertheless held that such concerns were insufficient to establish “a bright-line rule based on a fear of what could happen.”  Instead, it held that courts should consider the totality of the facts for evidence of a “sham” transaction rather than just invalidate the waivers.  In holding the waivers valid in Adamson, the Ninth Circuit found the following factors relevant: (1) the lender’s claim was secured and would have been satisfied to the extent of its collateral even without the guaranty, (2) the guarantor never filed a proof of claim even though it paid off the $3.5 million that remained owing to the lender, (3) the guarantor did not have a unilateral right to purchase the lender’s debt if the borrower defaulted, and (4) the trustee presented no evidence that the lender’s debt was the only debt of the company that the insider had guaranteed, reasoning that satisfying the lender’s debt first would have provided the guarantor with no benefit because it would still have been liable for the other guaranteed debts for which it had not waived its right to recover from the debtor. Although a Deprizio waiver may not be prudent in all situations, it should still be considered when insider guaranties are part of a loan transaction.

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