On October 4, 2006, the California Court of Appeals for the Fourth District held in Credit Managers Association of California v. Countrywide Home Loans, Inc., 2006 WL 2820882 (Cal.App.4 Dist.) ("CMAC") that Bankruptcy Code §§ 544 and 547, the provisions governing the avoidance of preferential transfers, do not preempt California Code of Civil Procedure § 1800 (" CCP § 1800"), which allows the assignee in a general assignment for the benefit of creditors to avoid certain preferential transfers under California law.  The CMAC panel reached the same conclusion as the California Court of Appeals for the Second District in Haberbush v. Charles & Dorothy Cummins Family Limited Partnership, (2006) 139 Cal.App.4th 1630 ("Haberbush").  Both CMAC and Haberbush directly conflict with the prior conclusion of the Ninth Circuit Court of Appeals in Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) ("Sherwood").  There, the Ninth Circuit held that the Bankruptcy Code does preempt CCP § 1800, which means, according to the federal court, that general assignees cannot avoid preferential payments to certain creditors under CCP § 1800.

In CMAC, the debtor, Instafi, transferred approximately $270,000 to a creditor, Countrywide Home Loans, while Instafi was insolvent.  Within 90 days thereafter, Instafi made a general assignment to CMAC for the benefit of Instafi’s creditors.  CMAC then filed a complaint against Countrywide in California Superior Court, seeking to recover, pursuant to CCP § 1800, the preferential transfer Instafi had made.  Countrywide demurred to the complaint on the grounds that §§ 544 and 547 of the Bankruptcy Code preempted CCP § 1800.  The trial court sustained Countrywide’s demurrer under Sherwood, and CMAC appealed.

On appeal, the court analyzed both Sherwood and Haberbush, found Haberbush more persuasive, and reversed the trial court.  Sherwood is factually similar to CMAC.  In Sherwood, Thinklink Corp., the assignor, made a preferential transfer to Lycos, Inc. while Thinklink Corp. was insolvent, and then made a voluntary general assignment for the benefit of creditors to Sherwood.  Sherwood sought to recover the alleged preferential transfer in California state court under CCP § 1800.  Lycos removed the case to federal court on diversity jurisdiction grounds, and then moved to dismiss, arguing that CCP § 1800 was preempted by the Bankruptcy Code.  The district court denied Lycos’s motion, and Lycos appealed.  The Ninth Circuit Court of Appeals reversed, and held that CCP § 1800 and the Bankruptcy Code cannot peaceably co-exist because if a state assignee were to recover and distribute a preferential transfer under CCP § 1800, then a trustee in a federal bankruptcy proceeding would not be able to recover the same sum.  The Ninth Circuit also held that CCP § 1800 impermissibly alters the incentives of individual creditors to avail themselves of federal bankruptcy law.

The CMAC court then analyzed Haberbush, which is factually similar to both CMAC and Sherwood.  In Haberbush, the assignor made a voluntary assignment for the benefit of creditors, and the assignee sought to avoid certain alleged preferential transfers pursuant to CCP § 1800.  The trial court granted the relief the assignee sought.  On appeal, the creditor- preference defendant, relying on Sherwood, argued that the Bankruptcy Code preempted CCP § 1800.  The appellate court rejected the preemption argument.

The Haberbush court based its decision, in part, on the fact that Congress intended voluntary assignments for the benefit of creditors to co-exist peaceably with federal bankruptcy law.  That conclusion means that under preemption analysis, the Bankruptcy Code does not preempt CCP § 1800.  The court also found that regardless of whether CCP § 1800 altered the incentives of individual creditors, that alteration neither interfered with nor created an obstacle to the Bankruptcy Code’s objective of equitable distribution.  The court concluded that there was no persuasive reason Sherwood offered to alter a state scheme that had long co-existed with federal bankruptcy law.  For a more detailed discussion of Haberbush and Sherwood, see Mette Kurth’s June 2, 2006 blog posting entitled, "California Court of Appeal Disagrees With Sherwood Partners And Holds That California Preference Laws Are Not Preempted By The Bankruptcy Code."

The CMAC decision widens the split between California state appellate courts and the Ninth Circuit on the issue of whether an assignee, who accepts an assignment for the benefit of creditors, has the authority to recover preferential payments from creditors under California state law.  The United States Supreme Court may have to resolve the conflict.  In the meantime, whether an assignee for the benefit of creditors can pursue preference actions under California state law may well depend upon whether the preference action in question is before a state court or a federal court.

Authored by:

M. Reed Mercado

(213) 617-5410