In Re: Point 360 v. Medley Capital Corporation

• Court: Court of Appeals for the Ninth Circuit
• Decided: June 6, 2024
• Docket: 23-55585
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS JUN 6 2024 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

In re: POINT 360, No. 23-55585

Debtor. D.C. No. 2:21-cv-05815-JAK ______________________________

POINT 360, a California corporation, MEMORANDUM*

Appellant,

v.

MEDLEY CAPITAL CORPORATION, a Delaware corporation; MEDLEY OPPORTUNITY FUND II, LP, a Delaware limited partnership,

Appellees.

Appeal from the United States District Court for the Central District of California John A. Kronstadt, District Judge, Presiding

Submitted June 4, 2024** Pasadena, California

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The panel unanimously concludes this case is suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2). Before: M. SMITH and BADE, Circuit Judges, and FITZWATER,*** District Judge.

Point.360 appeals the district court’s order affirming the bankruptcy court’s

grant of summary judgment to Medley Capital Corporation and Medley Opportunity

Fund II (collectively referred to herein as Medley). We have jurisdiction pursuant

to 28 U.S.C. §§ 158(d) and 1291, and we affirm. Because the parties are familiar

with the facts, we do not recount them here except as necessary to provide context.

1. “The court may judicially notice a fact that is not subject to reasonable dispute

because it: (1) is generally known within the trial court’s territorial jurisdiction; or

(2) can be accurately and readily determined from sources whose accuracy cannot

reasonably be questioned.” Fed. R. Evid. 201(b). Accordingly, the bankruptcy court

did not abuse its discretion when it took judicial notice of the filings on its own

dockets.

2. After a party moves for summary judgment on the basis that the nonmoving

party cannot succeed at trial because of a “failure of proof concerning an essential

element of the nonmoving party’s case,” the nonmoving party must come forward

with such proof to survive summary judgment. Celotex Corp. v. Catrett, 477 U.S.

317, 322–23 (1986). Accordingly, the bankruptcy court did not err when it shifted

the burden of production to Point.360 after Medley argued in its summary judgment

*** The Honorable Sidney A. Fitzwater, United States District Judge for the Northern District of Texas, sitting by designation.

2 motion that Point.360 was unable to establish a key element of its mandatory

subordination claim pursuant to 11 U.S.C. § 510(b).

3. Claims against a debtor’s estate must be subordinated pursuant to § 510(b) if

“there exists some nexus or causal relationship between the claim and the purchase

of securities.” In re Am. Wagering, Inc., 493 F.3d 1067, 1072 (9th Cir. 2007)

(internal quotation marks and citations omitted). However, the subordination

required by § 510(b) “stops short of encompassing every transaction that touches on

or involves stock in a corporation.” In re Khan, 846 F.3d 1058, 1064 (9th Cir. 2017).

Where a party does not seek to be a shareholder in a debtor corporation, but, for

instance, uses the value of the stock as a basis to measure and calculate the

compensation owed to that party, that party is a creditor, as opposed to an equity

investor. Id. at 1064–65.

On summary judgment, Medley argued that Point.360 could not show that

Medley’s claims for repayment of the term loans it previously extended to Point.360

(the Term Loans) arose from the purchase or sale of equity securities. In response,

Point.360 pointed to a single piece of evidence in the record. Specifically, Point.360

cited the statement in the loan agreement that the warrants—which merely gave

Medley the right to purchase Point.360’s common stock at a specific price in the

future—were issued “[i]n consideration for the Term Loans.” The question for the

bankruptcy court, then, was whether that contractual language, by itself, was

3 sufficient to carry Point.360’s evidentiary burden to show a triable issue of fact over

whether Medley’s secured debt claims arising under the Term Loans were

sufficiently connected to the purchase or sale of securities such that they should be

subordinated pursuant to § 510(b).

Our decision in Kahn shows that such language was insufficient. If such

language were enough to render Medley’s issuance of the Term Loans an equity

investment, then every secured loan agreement that also provides for the issuance of

company stock upon the lender’s election would require subordination. Such a result

would contravene our statement in Kahn that subordination pursuant to § 510(b)

“stops short of encompassing every transaction that touches on or involves stock in

a corporation.” 846 F.3d at 1064.

Such a result would also improperly allocate the risks between creditors and

equity investors, see Wagering, 493 F.3d at 1071–72, especially if the lender never

chooses to exercise the warrants, as was the case here. By including the warrants as

additional consideration for the Term Loans, the loan agreement presented Medley

the opportunity to take a greater risk in exchange for potentially greater rewards by

exercising the warrants, but the fixed repayment plan for the Term Loans guaranteed

a lesser reward in exchange for less risk. To subordinate a claim for repayment of

secured term loans simply because the lender had the option to make an equity play

in the future would “unfairly shift to creditors risks associated with stock

4 ownership.” In re Tristar Esperanza Props., LLC, 782 F.3d 492, 496 (9th Cir. 2015);

see In re Betacom of Phx., Inc., 240 F.3d 823, 829 (9th Cir. 2001) (observing that §

510(b) subordinates claims “arising from” qualifying securities because

“[s]hareholders expect to take more risk than creditors in return for the right to

participate in firm profits”).

This would be a different case if Medley had filed proofs of claim seeking to

recover its interests arising under the now-cancelled warrants. But Medley never

did so. Rather, Medley filed proofs of claim showing only that it had extended the

Terms Loans to Point.360 with specific repayment obligations and that those

obligations were secured by collateral. The bankruptcy court approved a

reorganization plan, proposed by Point.360, in which these secured obligations were

reinstated. To subordinate and ultimately disallow such claims now would vitiate

that very plan.

Accordingly, the bankruptcy court correctly held as a matter of law that the

mere language cited by Point.360 was insufficient to create a triable issue of fact

over whether Medley’s secured debt claims arising under the Term Loan Agreement

were sufficiently connected to the purchase of securities such that they should be

subordinated pursuant to 11 U.S.C. § 510(b).

4. As Point.360 concedes, without triable issues of fact on its mandatory

subordination claim, Point.360’s other claims for disallowance pursuant to 11 U.S.C.

5 § 502(b)(1) and avoidance pursuant to 11 U.S.C. § 506(d) necessarily fail as well.

5. We need not reach the issue of judicial estoppel raised on appeal because

Point.360’s mandatory subordination, disallowance, and avoidance claims fail on

the merits, regardless of judicial estoppel. The bankruptcy court’s judicial estoppel

determination was merely an alternative basis for justifying the grant of summary

judgment to Medley.

AFFIRMED.