Carolyn A Dye Liquidating Trus v. Communications Ventures Iii Lp et al

OCR transcription for search; preserved printed pages are authoritative

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FILED
EOR PUBLICATION | | ra-sav
CEaAL SILT OFC
Deputy Cieck
ENTERED
FEB -§ 2007
CLERK. U.S. BANKRUPTCY COURT
we DISTRICT OF On Ce
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re Case No. SA 00-19215 JR
FLASHCOM, INC., Adv. No. SA 02-01620 JR
Debtor. Chapter 11
CAROLYN A. DYE, Liquidating
Trustee,
Plaintiff, MEMORANDUM OPINION
Vs.
ANDRA SACHS; COMMUNICATIONS
VENTURES III, LP; COMMUNICATIONS
VENTURES III CEO & ENTREPRENBURS’
FUNDS LP; MAYFIELD IX; MAYFIELD
ASSOCTATES FUNDS IV; DAVID HELFICH;
TODD BROOKS; BRADFORD SACHS;
RICHARD RASMUS; and KEVIN FONG,
Date: December 11, 2006
Defendants. Time: 2:00 P.M.
Place: Courtroom SA

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AUTHENTICA
U.S. GOVERN

I. INTRODUCTION
On July 22, 2002, Carolyn Dye (“Movant”) filed an amended
complaint against the defendants (collectively, “Defendants”), in
part, to avoid and recover the debtor’s transfer of $9 million to

Andra Sachs (“Andra”) on February 23, 2000 (the “Transfer”) under

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11 U.S.C. §§ 547(b) and 550.! Thereafter, Movant and Andra
reached a settlement. In futherance of the settlement, Andra
consented to the entry of a judgment avoiding the Transfer under
§ 547(b) as a preferential transfer.

On August 25, 2006, Movant filed a motion (the “Motion”) for
partial summary judgment, citing § 550, to recover $9 million
from Communications Ventures III, LP, Communications Ventures III
CEO & Entrepreneurs’ Funds, LP, Mayfield Ix, and Mayfield
Associates Funds IV (collectively, “Respondents”) as entities for
whose benefit the Transfer was made. Respondents opposed.
Following a hearing on Decemeber 11, 2006, I took the matter
under submission to determine whether the entry of the stipulated
judgment precludes Respondents from defending the avoidability of
the Transfer.

II. JURISDICTION

I have jurisdiction over this matter under 28 U.S.C.

§ 157(b) (1). This is a core proceeding under 28 U.S.C. §§ 157
(b) (2) (A), (F), (OC).
III. STATEMENT OF FACTS

Andra and her husband, Brad Sachs (“Brad”), founded

Flashcom, Inc. (“Debtor”), a telecom startup, during the late

1990s. In June 1999, Respondents invested approximately

1 Unless otherwise indicated, all chapter, section, and rule
references are to the Bankruptcy Code (the “Code”), 11 U.S.C.
§§ 101-1330, prior to its amendment by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (the “Act”), Pub.
L. 109-8, 119 Stat. 23, because this case was filed before the
Act's effective date (October 17, 2005), and to the Federal Rules
of Bankruptcy Procedure (the “Rules”), Rules 1001-9036.

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$15 million for Debtor’s Series A preferred shares. As a result,
David Helfich, Todd Brooks, and Kevin Fong (collectively, the
“Directors”), alleged principals of Respondents, were appointed
to Debtor’s board of directors.

Concerned with Andra’s continued involvement in Debtor,
Respondents entered into discussions with Andra for her removal.
This resulted in a Loan and Pledge Agreement (the “Loan
Agreement”}, dated September 3, 1999, whereby Respondents loaned
Andra $1 million {the “Loan”) and agreed to loan Andra an
additional $9 million upon Debtor obtaining at least $30 million
in Series B financing. The Loan was evidenced by four non-
recourse promissory notes (the “Notes”), and secured by Andra’s
interest in 500,000 shares of Debtor’s common stock. Respondents
and Andra also executed a series of four “Purchase Option”
agreements and four “Put Option” agreements (collectively, the
“Options”). In effect, the Options provided for the transfer of
$1 million worth of Andra’s shares to Respondents in satisfaction
of the Loan upon Debtor obtaining the above financing.?

On February 8, 2000, Debtor, Respondents, and Andra
restructured the arrangement contemplated by the Loan Agreement
and the Options. Respondents and Andra executed an amendment to
the Loan Agreement (the “Amendment”), terminating the parties’

obligations under the Options. Also, Debtor, Respondents, and

* Specifically, pursuant to the Purchase Options,
Respondents had the right to purchase that number of shares equal
to the amount of the Notes at 85% of the per share price. The
Put Options, on the other hand, provided that Andra had the right
to sell or put her shares to Respondents. Under both the
Purchase Options and the Put Options, Respondents had the right
to obtain the shares by applying the amounts due on the Notes.

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Andra executed a Stock Purchase Agreement (the “Stock Purchase
Agreement”), reinstating Respondents obligation to purchase

$1 million worth of Andra’s shares of Debtor’s common stock, and
requiring Debtor to redeem $9 million worth of Andra’s shares at
85% of the per share price.

Eight days later, Debtor and the Series B investors executed
a Series B Preferred Stock Purchase Agreement (the “Series B
Agreement”), providing for the purchase of $84 million of
Debtor’s Series B preferred stock at $6.57 per share. In
addition, the Series B Agreement provided that $9 million of the
proceeds were to be used to redeem Andra’s stock. On February
23, 2000, Debtor paid Andra $9 million to redeem 1,611,604 shares
at a redemption price of $5.58 per share.

On December 8, 2000, Debtor filed a voluntary chapter 11
petition. Thereafter, Debtor filed a plan of reorganization that
was confirmed on December 11, 2001. Debtor’s plan designated
Movant as the liquidating trustee for Debtor’s estate.

On July 11, 2002, Movant commenced this adversary proceeding
(the “Stock Redemption Proceeding”) against Defendants. On July
22, 2002, Movant filed an amended complaint (the “Complaint”).

In the Complaint, Movant alleged that Defendants either
orchestrated or participated in certain unauthorized, improper,
or otherwise avoidable agreements and transfers with Debtor
between September 1999 and February 2000. Specifically, Movant
asserted that the Transfer was avoidable as a preferential
transfer to or for the benefit of Andra, and recoverable from
Andra, as the initial transferee, or Respondents and the

Directors, as entities for whose benefit the Transfer was made.

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On September 2, 2005, Movant, Andra, and others reached a
global settlement (the “Global Settlement Agreement”). The
Global Settlement Agreement was designed to resolve the Stock

Redemption Proceeding as to Andra.* By order entered November 1,
2005, I approved the Global Settlement Agreement. On August 8,
2006, a judgment (the “Stipulated Judgment”) was entered,
providing that: “(a) [t]he wire transfer by Flashcom, Inc. of $9
million made on February 23, 2000 to Memory Max, dba a Taste of
Napa, which was made for the benefit of Andra Sachs, is avoided
as a preferential transfer pursuant to 11 U.S.C. § 547(b).”

On August 25, 2006, Movant moved for partial summary
judgment that, pursuant to § 550, she may recover $9 million from
Respondents. Movant argued that entry of the Stipulated Judgment
avoided the Transfer to the extent cf $9 million, and therefore,
she is entitled to recover $9 million from Respendents as
entities for whose benefit the Transfer was made. Respondents
opposed the Motion, arguing that they have the right to litigate
the avoidability of the Transfer as a preference, and that they
were not the beneficiaries of the Transfer. Following a hearing

on December 11, 2006, I took the matter under submission to

3 In pertinent part, the Global Settlement Agreement
provided that Andra, without admitting liability and in
furtherance of the Global Settlement Agreement, shall agree to
the entry of a judgment in the amount of $9 million under
§ 547(b) in favor of Movant, and “Andra shall sign a second
stipulated judgment pursuant to § 550(a) for recovery against
Andra on the [Movant] Avoidance Judgment, which will be entered
if Andra defaults upon her obligation to pay Movant $50,000 or
$62,000 depending upon the amount recovered by Movant from
[Respondents and the Directors] in the Stock Redemption
Proceeding.”

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determine: {A) whether the entry of the Stipulated Judgment
precludes Respondents from defending the avoidability of the
Transfer under § 547(b); and (B) whether Respondents are entities
for whose benefit the Transfer was made.
Iv. DISCUSSION
A. Entry of the Stipulated Judgment cannot Deprive the
Respondents of Their Right to Defend the $§ 547 and 550
Claims Asserted against Them.

Section 547{b) of the Code permits a bankruptcy trustee to
avoid certain preferential pre-petition transfers of interests in
property of the debtor. Section 550 provides in relevant part
that:

[T]o the extent that a transfer is avoided
under section 544, 545, 547, 548, 549,
553(b), or 724{a) of this title, the trustee
may recover, for the benefit of the estate,
the property transferred, or, if the court so
orders, the value of such property, from

{1) the initial transferee of such transfer
or the entity for whose benefit such transfer
was made; or

(2) any immediate or mediate transferee of
such initial transferee.

11 U.S.C. § S50(a) (1)-(2). Put simply, § 547(b) specifies a type

of transfer that may be avoided by a bankruptcy trustee. See

Crafts Plus+, Inc. v. Foothill Capital Corp. (In re Crafts

Plus+), 220 B.R. 331, 334 (Bankr. W.D. Tex. 1998). Separately,
§ 550 identifies the parties against whom a trustee may recover
the avoided transfer for the benefit of the estate. Id.

Movant argues that the entry of the Stipulated Judgment
avoided the Transfer to the extent of $9 million. For that
reason, Movant argues that she is no longer required to establish

the avoidability of the Transfer but may proceed to recover the

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value of the Transfer from Respondents under § 550(a), provided
that she can show that they were entities for whose benefit the
Transfer was made. Respondents reply that they are not bound by
the Stipulated Judgment, and more importantly, that they have the
right to litigate the avoidability of the Transfer.

This appears to be a matter of first impression in the Ninth
Circuit. Movant has not provided any direct authority for her
position.’ However, Movant asserts that a plain reading of
§§ 547(b) and 550(a), and the separation between the concepts of
avoidance and recovery compel summary judgment in her favor.”

As with any statutory construction dispute, I must begin

‘Movant relies heavily on Danning v. Miller (In re Bullion
Reserve of North America), 922 F.2d 544 (9th Cir. 1991}, to

support her position. In Danning, the trustee entered into an
agreement with the initial transferee stipulating to the
avoidability of the initial transfer under § 548. Id. at 546.
The trustee then filed suit against the immediate transferee to
recover the fraudulent transfer. Id. at 546. Movant finds
Danning persuasive because the trustee established the avoidance
of a transfer by stipulation with the initial transferee and then
sought to recover from a different transferee under § 550(a).
However, in Danning, the immediate transferee, subject to the

§ 550fa) action, conceded that the transfer was avoidable under

§ 548. Id. at 547. Therefore, the Ninth Circuit was “faced with
the narrow issue of whether Miller was a ‘transferee’ of the $1.5
million within the meaning of section 550(a)(1) or section
550(a)(2}).” Id. The Ninth Circuit did not address whether the
immediate transferee was precluded from litigating the
avoidability of the transfer, and therefore Danning is of iittle
help to the present dispute.

° Both the House and Senate Reports accompanying the
Bankruptcy Reform Act of 1978 state that § 550 “enunciates the
separation between the concepts of avoiding a transfer and
recovering from the transferee.” H.R. Rep. No. 95-595, at 375
(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6331; S. REP. No. 95-
989, at 90 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5876.

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with language of the statute. Barnhart v. Sigmon Coal Co., inc.,

534 U.S. 438, 450 (2002). “([The] first step in interpreting a
statute is to determine whether the language at issue has a plain
and unambiguous meaning with regard to the particular dispute in

the case.” Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117

S.Ct. 843, 846 (1997). “[I]f£ the statutory language is
unambiguous and the statutory scheme is coherent and
consistent(,]” then the court must cease its inquiry, and simply

enforce the statute as written. Id. (quoting United States v.

Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989)) (internal

quotation marks omitted); see also Perlman v. Catapult

Entertainment, Inc. (In re Catapult Entertainment, Inc.}, 165

F.3d 747, 754 (9th Cir. 1999). Only in rare cases may a court
inquire beyond the plain language of a statute. Ron Pair, 489

U.S. at 242; Estate of Cowart v. Nicklos Drilling Co., 505 U.S.

469, 475 (1992). “The plainness or ambiguity of statutory
language is determined by reference to the language itself, the
specific context in which that language is used, and the broader
context of the statute as a whole.” Robinson, 519 U.S. at 341.

The language used in § 550(a) is clear. Once a trustee
proves that the elements of an avoidance statute, such as § 547,
are satisfied “the unambiguous language of § 550(a) then
identifies the party responsible for repayment of the

preference.” Official Unsecured Creditors Comm, of Sufolla, Inc.

vy. U.S. Nat'l Bank of Oregon (In re Sufolla), 2 F.3d 977, 980

(9th Cir. 1993) (citing Levit v. Ingersoll Rand Fin. Coro. (In re

V.N. Deprizio Constr.), 874 F.2d 1186, 1194 (7th Cir. 1989)); see

also Kendall v. Sorani (In re Richmond Produce Co., Inc.), 195

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B.R. 455, 463 (N.D. Cal 1996). The trustee may recover from “the
initial transferee .. . or the entity for whose benefit the
transfer was made ...or.. . any immediate or mediate
transferee... .” 11 U.S.C. § 550(a).

This conclusion does not end my inquiry. Importantly,
neither the Code nor the Rules specify whether a § 550(a)
transferee has the right to litigate and/or raise defenses to the
avoidablity of a transfer as a preference. See General Motors

Acceptance Corp. v. Rodgers (In re Laguna Beach Motors, Inc.),

148 B.R. 317, 320 n.4 (9th Cir. BAP 1992) (stating that the Code
contains no language limiting who can raise the defenses provided
in § 547(c)). Rather, the Code and Rules are silent, and hence
ambiguous, leaving the applicable statutory language reasonably
susceptible to conflicting interpretations.

Where a statute is ambiguous, a court may look beyond the
statutory language to the legislative history, and the purpose of
the statutory scheme to determine the intent of Congress. United

States v. Buckland, 289 F.3d 558, 565 (9th Cir. 2002) (quoting

Adams Fruit Co. v. Barrett, 494 U.S. 638, 642 (1990)); United
States v. Davidson, 246 F.3d 1240, 1246 (9th Cir. 2001). Here,
these tools for determining congressional intent are of little

assistance because the congressional record and the legislative
history are silent with respect to the issue before the court.
However, another well-settled canon of statutory
construction is not only helpful, but controlling. “[I]f an
otherwise acceptable construction of a statute would raise
serious constitutional problems, and where an alternative

interpretation of the statute is ‘fairly possible,’ we are

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obligated to construe the statute to avoid such problems.”

I.N.S. v. St. Cyr, 533 U.S. 289, 299-300 (2001) (citation

omitted); Edward J. DeBartolo Corp. v. Fiorida Gulf Coast Bldc.

and Const. Trades Council, 485 U.S. 568, 575 (1988). Courts do

not have “the unfettered prerogative to rewrite a statute in
order to save it or to ‘ignore the legislative will’ behind it.”

Buckland, 289 F.3d at 564 (quoting Miller v. French, 530 U.S.

327, 341 (2000)}. The canon of constitutional doubt permits a
court to avoid constitutional concerns “only where the saving
construction is not plainly contrary to the intent of Congress.”

Miller, 530 U.S. 327, 341 (2000) (quoting Edward J. DeBartolo

Corp., 485 U.S. at 575 (1988)) (internal quotation marks
omitted). Where the intent of Congress is clear, a court must

give effect to that intent. Miller, 530 U.S. at 336.

The Due Process Clause of the Fifth Amendment prevides that
“no person shall .. . be deprived of life, liberty, or property,
without due process of law.” U.S. Const. amend. V. A person’s
right to due process of law is fundamental to our jurisprudence,

Grannis v. Ordean, 234 U.S. 385, 394 (1914), and for more than a

century, the central requisite of due process has been the right

to a meaningful opportunity to be heard. Fuentes v. Shevin, 407

U.S. 67, 80 (1972) {quoting Baldwin v. Hale, 68 U.S, 223, 233

(1863)). The purpose for providing such due process is clear: to
prevent the mistaken or unfair deprivation of one’s property.
Fuentes, 407 U.S. at 81. Thus, a person has the right to be
heard whenever his life, liberty, or property is at stake in a

judicial proceeding. See Ownbey v. Morgan, 256 U.S. 94, ill

(1921); see also Dusenbery v. U.S., 534 U.S. 161, 167 (2002)

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(quoting United States v. James Daniel Good Real Property, 510

U.S. 43, 48 (1993)).
To interpret §§ 547 and 550 Movant’s way would raise
substantial due process concerns, and would lead to anomalous

results. See Thompson v. Jonovich (In re Food & Fibre

Protection, Ltd.), 168 B.R. 408, 415-16 (Bankr. D. Ariz. 1994).

Movant sued Respondents to avoid and recover the Transfer.®° Asa
result, Movant has clearly put Respondents’ property at stake.

If Movant prevails, Respondents will be deprived of $9 million.
Moreover, Respondents’ ability to defend the § 550 claim is of
little consolation. The avoidability of the Transfer is a
prerequisite to Respondents’ potential liability. Once it is
determined that a preferential transfer was made, Movant need
only show that Respondents received some benefit to hold them

strictly liable. See General Elec. Capital Auto Lease, Ime. v.

Broach (In re Lucas Dallas, Inc.), 185 B.R. 801, 808 (9th Cir.

BAP 1995) (citing Danning, 922 F.2d at 547) (holding that initial
transferees are strictly liable for an avoided transfer).

Based on the foregoing, I conclude that Respondents have a
constitutional right to defend the § 547(b) claim asserted
against them before they can be deprived of the value of the
property transferred under § 550(a). I note that every court to

address this issue has, for one reason or another, held that a

6 Movant emphasizes that the § 547 claim was asserted
against Andra, only, and not Respondents. However, a review of
the Complaint does not support Movant's position. Nowhere in the
Complaint does it specify that certain claims are asserted
against Andra or Respondents, only. Rather, the Complaint and
each claim therein were filed against Defendants.

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stipulated or default judgment entered in an avoidance action
does not preclude the defendants in a recovery action from
disputing the avoidability of the transfer and raising
appropriate defenses. See Thompson, 168 B.R. at 415-16; see also

Morris v. Emprise Bank (In re Jones Storage and Moving, iInc.),

2005 Bankr. LEXIS 662, *14-16 (Bankr. D. Kan. 2005).
Accordingly, it would be inherently unfair and inappropriate for
this court to deny Respondents this fundamental right based on a
settlement reached by Sachs, a co-defendant, for less than 1% of
the requested recovery. Such an outcome would, for obvious
reasons, open the door to potential substantial abuse.’

This interpretation is not contrary to the relevant
legislative history, the overall statutory scheme, and Ninth
Circuit precedent.* Avoidance and recovery remain conceptually
bifurcated as Congress intended. H.R. Rep. No. 95-595; S. REP.
No. 95-989; see also Sufolla, 2 F.3d at 980. Sections 547 and
550 remain distinct claims, requiring the litigation of different

elements and defenses with different statutes of limitation.’

7 For example, a potential transferee might stipulate to the
avoidance of a transfer in exchange for a trustee’s promise to
seek recovery from third parties. See Morris, 2005 Bankr. LEXIS
662, *16.

®@ The Ninth Circuit’s decision in Sufolla, upon which Movant
relies, does not compel a contrary result. in that case, the
Ninth Circuit was not forced to decide the issue currently before
the court because, at trial, the defendant was afforded the
opportunity to litigate the avoidability of the transfer and
raise any defenses thereto. See Sufolla, 2 F.3d at 978-79.

9 Movant makes much of the fact that § 550(f){1) provides
that a proceeding to recover a transfer must be commenced not
later than the earlier of one year after the avoidance of the

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Furthermore, avoidability remains an attribute of the transfer.
See Sufolla, 2 F.3d at 982 (quoting De rizio, 874 F.2d at 1195).
Movant is not required to prove that the Transfer is avoidable as
to Respondents, but that each element of § 547{b) is satisfied.
As noted by numerous courts, § 347 addresses transfers, and

not creditors or transferees. See Crafts Plust, 220 B.R. at 334.

That is, § 547 does not specify the proper defendant for a
preference action. Id. Rather, § 550 identifies who the trustee
may proceed against. Moreover, avoidance and recovery, while
conceptually separate, do not occur in a vacuum. They are
intertwined, as both are typically required to make the estate
whole. As such, it is reasonable to believe that Congress
intended the trustee to avoid and recover a transfer against the
same entity, whether it be in one proceeding or two.’

Lastly, Respondents have not waived their fundamental right
to due process. Respondents were named defendants to each cause
of action in the Complaint. Similarly, Respondents answered
without limitation. True, the Global Settlement Agreement was
approved after notice and hearing at which Respondents were

present. However, neither the court nor Respondents were aware

transfer, or the time the case is closed or dismissed. However,
my interpretation does not render this subsection meaningless
because a trustee has a specified time to avoid a transfer and an
additional year after avoidance to recover the transfer under

§ 550.

19 This belief is further supported by § 547(g), which
provides that “the creditor or party in interest against whom
recovery or avoidance is sought has the burden of proving the
nonavoidability of a transfer... .” 11 U.S.C. § 547(q)
femohasis added).

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of Movant's intent to use the Stipulated Judgment to terminate
Respondents’ right to litigate the preference claim. In fact,
Movant indicated that approval of the Giobal Settlement Agreement
would not affect her claims against Respondents. As such, the
hearing on the Global Settlement Agreement did not provide
Respondents with a meaningful opportunity to be heard.

In sum, to recover the amount of the Transfer from
Respondents, Movant must prove the elements of avoidance under
§ 547(b) by a preponderance of the evidence. Movant has failed
to provide any evidence regarding the avoidability of the

Transfer. Accordingly, the Motion is denied.

B. Genuine Issues of Material Fact Exist Whether
Respondents are Entities for Whose Benefit the Transfer
was made.

As stated above, to the exent a transfer is avoided, the
trustee may recover the property transferred, or its value, from
“(1) the initial transferee of such transfer or the entity for
whose benefit such transfer was made; or (2) any immediate or
mediate transferee of such initial transferee.”

11 U.S.C. § 550(a)(1)-(2). Because Andra is the initial
transferee, recovery of the Transfer under § 550 from Respondents
is not appropriate unless they constitute an “entity for whose
benefit such transfer was made.” “Two frequently cited examples
of an entity for whose benefit the transfer was made are (l) a
guarantor of the debtor and (2) a debtor of the initial transferee.”

5 L. Kine, Conner On Bawxruetcy 7 550.02[4] (15th ed. rev. 2001)

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(citing Bonded Fin. Servs., Inc. Vv. Furopean Am. Bank, 838 F.2d

890, 895 (7th Cir. 1988) (“The paradigm ‘entity for whose benefit
such transfer was made’ is a guarantor or debtor — someone who
receives the benefit but not the money.”)). Importantly, the

“entity need not actually benefit, so long as the transfer was
made for his benefit.” Danning, 922 F.2d at 547.

Movant argues that Respondents are entities for whose
benefit the Transfer was made because Debtor made the Transfer to
extinguish Respondents’ obligations to Andra. Movant is correct
that after execution of the Loan Agreement, Andra had a
contingent right to payment from Respondents. Therefore, as
contended by Movant, Respondents were debtors of Andra, and
potential beneficiaries of the Transfer under § 550. See 11
U.S.C. § 101(5) (A), (12). However, Respondents argue that the
Amendment and the Stock Redemption Agreement, executed fifteen
days prior to the Transfer, terminated Respondents obligation to
pay Andra $9 million, and as a result, Debtor made the Transfer
to satisfy its contractual obligation to pay Andra $9 million, as
opposed to benefitting Respondents.

The Amendment, standing alone, did not terminate
Respondents’ obligation to loan Andra $9 million contingent on
Debtor obtaining the requisite financing. Rather, the Amendment
terminated only the Options, requiring Respondents to purchase

$1 million worth of Andra’s stock and requiring Andra to sell the

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same in satisfaction of the Loan. Arguably, Respondents’
contingent $9 million loan obligation remained unaffected. The
Amendment stated that, except as expressly modified, the terms of
the Loan Agreement remained in full force.

Debtor was also indebted to Andra. Concurrently with the
execution of the Amendment, Debtor, Andra, and Respondents
executed the Stock Redemption Agreement. Debtor agreed to redeem
$9 million worth of Andra’s shares. Respondents were neither
guarantors nor co-obligors of Debtor’s obligation to Andra.
Moreover, the Stock Redemption Agreement did not cross reference
the $9 million loan, and specificaily, did not provide for the
release and/or satisfaction cf Respondents’ loan obligation to
Andra upon the Transfer. Therefore, a dispute of fact exists
whether Debtor’s redemption of Andra’s shares was intended to
release Respondents’ obligation to lean Andra $9 million.

In sum, the parties dispute whether the execution of the
Amendment and the Stock Purchase Agreement was intended to
extinguish Respondents’ obligation to loan Andra $9 million, and
ultimately, purchase $9 million worth of Andra’s stock. Neither
agreement provides for the satisfaction of Respondents’ loan
obligation upon their execution or upon the Transfer. Lastly,
while the restructuring of the deal to buy-out Andra enabled
Respondents to purchase Series B Preferred shares, as opposed to

lAndra’s common stock, genuine issues of fact exist whether Debtor

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was solvent at the time of the Transfer, and therefore, whether
Respondents received any real benefit from obtaining preferred
shares. Accordingly, genuine issues of fact exist whether the
Tranfer was made to benefit Respondents, and specifically, to
satisfy Respondents’ contingent loan obligation to Andra.
V. CONCLUSION

The entry of the Stipulated Judgment did not avoid the
Transfer. Respondents have a constitutional right to defend the
claims asserted against them before they can be deprived of their
property. Therefore, to recover the Transfer from Respondents,
Movant must prove the elements of § 547. Moreover, genuine
issues of material fact remain as to whether Defendants are
entities for whose benefit the Transfer was made. Accordingly,
the Motion is denied.

This memorandum decision shall constitute my findings of

fact and conclusions of law.

Dated: February 5, 2007
LL Cy
Bie C £5 tn —
woman RYAN ki
Uveted States Bankruptcy Judge

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

Case No. SA 00-19215 JR
Adversary ,No. SA 02-01620 JR

In re

FLASHCOM, INC. ,
NOTICE OF ENTRY OF ORDER
Debtor. ’

To:

OFFICE OF THE UNITED STATES TRUSTEE
411 West Fourth Street
Santa Ana, CA 92701-8000

Oo © SN HR wv FF WH WN

10 |] DAVID R. WEINSTEIN

Weinstein, Weiss, & Ordubegian LLP
11/1925 Century Park East, Suite 1150
Los Angeles, California 90067

12
DANIEL SCOTT SCHECTER

13 || Latham & Watkins LLP

633 West Fifth Street, Suite 4000
14|| Los Angeles, CA 90071

15 || ROBERT A. FRANKLIN

Murray & Murray

16119400 Stevens Creek Boulevard, Suite 200
Cupertino, CA 95014

17

18|/a judgment or order entitled MEMORANDUM OPINION and ORDER DENYING
aoe EE ee ONT SUMMARY JUDGMENT was entered on

19

20 I hereby certify that I_mailed a copy of this notice to the
above-named persons on FER _ G 7007 .

21 eet

., | Dated: FEB - 6 2007 |

JON D. CERET

* sy A.W Luce

24

Deputy Clerk
25

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You are hereby notified, pursuant to Bankruptcy Rule 9022 that