[00:00:03] Speaker 03:
Good morning, and may it please the Court. David Shimano on behalf of Harvey D. on our two morning bankruptcy appeals.

[00:00:11] Speaker 03:
The first one presents the following issue. DBD, the senior secured creditor, was owed $52 million on the petition date. During the bankruptcy, it received $60 million from the sale of the property and then received another $24 million from the guarantor for a total of almost $84 million. The question is, did that collection of $84 million fully satisfy its $52 million claim in the bankruptcy case?

[00:00:40] Speaker 03:
There are two issues for the court to decide.

[00:00:43] Speaker 03:
The first is how to account for the collection of post-bankruptcy interest from the non-debtor guarantor with respect to the claim against the bankruptcy estate.

[00:00:56] Speaker 03:
This issue was directly addressed by the Fourth Circuit in the natural gas and energy case, and it held that while the creditor can allocate post-petition interest against the guarantor however it wants with respect to its claim against the debtor, it must be applied to the claim against the debtor as a matter of bankruptcy law. That decision was followed in the ground improvement decisions by both the District Court of Nevada and a prior panel of this court. All we are asking is is that this court follow the logic and rationale of the Fourth Circuit in natural gas.

[00:01:32] Speaker 03:
The point I want to emphasize this morning on this is the following. Both parties cite the Ivanhoe case, a Supreme Court case from the 1930s. That case does not directly address this issue, so we can't look to it to control the decision, but it's a very... Explain why not, because I think maybe it does address this issue.

[00:01:51] Speaker 01:
Explain why you think it doesn't.

[00:01:53] Speaker 03:
It addresses...

[00:01:55] Speaker 03:
It addresses a partial payment, how it's counted for against the debtor until there is full payment. So Ivanhoe does not – it holds – once there's full payment from any source, it fully satisfies the claim. So it does – Ivanhoe doesn't answer when the claim is fully satisfied.

[00:02:18] Speaker 01:
If sources outside the bankruptcy don't count, why does it – I mean, I'm not sure why that matters.

[00:02:24] Speaker 03:
No, the claim – the collection from the non-debtor matters in calculating whether the claim is fully satisfied.

[00:02:34] Speaker 03:
It doesn't – as a matter of further distribution in the bankruptcy case, if it's a complete payment by the guarantor, the claim is fully satisfied. Ivanhoe is dealing with a partial payment. So if there's a partial payment, how is that accounted for for future distributions in the bankruptcy case? And Ivanhoe just sets a rule. For bankruptcy cases, a partial payment does not reduce the denominator of the creditor's claim for purposes of future distribution. But once from either source, fully paid, the claim is satisfied.

[00:03:08] Speaker 03:
So it doesn't really answer the question, when is it satisfied if you're collecting post-judgment interest? The importance of Ivanhoe, the importance of Ivanhoe is the following.

[00:03:19] Speaker 03:
Ivanhoe, in analyzing that issue, it was before them, made absolutely no reference to state law. It analyzed the issue as purely one of bankruptcy law and bankruptcy equitable principles and the text of the Bankruptcy Act at the time. It did not look to state law. And that's what the Fourth Circuit did as well in the natural gas and energy case and the grant improvement decisions. They looked at federal bankruptcy law to try and analyze this issue of how do we determine when a claim is fully satisfied.

[00:03:51] Speaker 03:
Counsel, what is that federal bankruptcy law?

[00:03:54] Speaker 04:
Is it a statute that you're referring to? Is it equitable principles? What is it? Fourth Circuit cited 502. 502 is very bare bones. It just says you can't collect unmatured interest on the claim. It doesn't speak to allocation of monies received from a guarantor.

[00:04:13] Speaker 03:
No dispute that the bankruptcy code itself, the text, does not answer the question.

[00:04:20] Speaker 03:
If it's not the text, what is it? Well, it's the doctrines and equitable principles that are embedded in the bankruptcy code system for 100 years plus, and that's what the Fourth Circuit said. If we look at 502B – which says no unmatured interest. Why is that rule there? Well, that's the codification of an older rule that tried to equalize treatment of creditors who have various rights. Some creditors have the right to post interest. Other creditors don't.

[00:04:51] Speaker 03:
We have to have an equitable rule that treats all creditors fairly, and that's going to inform our decision. And the Fourth Circuit basically came out with a rule. You have to have a rule. You've got to pick a rule. And they said this is the most equitable rule. And we explain why in our brief we think it is the most equitable rule.

[00:05:06] Speaker 02:
The Fourth Circuit's decision seems to be based on facts that there was inequitable conduct and not just inequitable conduct in the sense of a creditor having two sources of money and it's unfair to not sort of account for that fact, but inequitable conduct and sort of like bad behavior. And that's why they talked about equity stepping in to remedy that circumstance. We don't have those facts here. as far as I can tell. So why isn't that a distinguishing factor between our case and the Fourth Circuit case?

[00:05:38] Speaker 03:
First of all, I don't believe the Fourth Circuit decision was informed at all by any inequitable conduct by the creditor. The creditor enforced its rights. It was governed by its guarantee, and it came back to the bankruptcy court and asserted its claim, and the Fourth Circuit made a rule. And again, the ground improvement decision, again, there's no issue of inequitable conduct. The point i so the point i want to make is when the bankruptcy the bankruptcy court when it made its decision um disagreeing or not following natural gas it cited solely state law the the bankruptcy judge said well state law says the creditor can collect that can allocate the payment at whoever it wishes that ends the inquiry and i'm just pointing out that if you look at ivanhoe You look at natural gas, you look at ground improvement.

[00:06:27] Speaker 03:
That's not how they analyzed it. They said, yes, state law says what it says, but this has to be analyzed under bankruptcy law and bankruptcy equitable principles. We think what we're proposing is the best, fairest result, which is they can collect post-petition interest to the maximum amount from the guarantor. But to be fair to all the other creditors of the bankruptcy estate, it just has to be credited against the claim. And that's the fairest result. And we just ask the court follow that and not create a circuit split.

[00:06:59] Speaker 03:
And that's our proposal to you. If I may, I may go to the second argument because it's just as important. Because I only need you to agree with me on one of these two.

[00:07:09] Speaker 03:
So the second one is just as important. And that's the question of how do we allocate, how do we account for the receipt of a carve-out? Again, the issue is whether their claim was reduced by $60 million, inclusive of the carve-out or exclusive of the carve-out, by $56,250,000.

[00:07:27] Speaker 03:
As we predicted in our opening brief, they do not defend the lower court decisions. So we can actually say this morning that the lower court decisions are indefensible. Their argument is different. Their argument is, well, yes, maybe our claim was reduced by $60 million, but you see, we had the right to add the carve-out amount back against Ms. Kaufman under our guarantee loan documents. That's their argument. And as we point out, they did not brief that to the bankruptcy court.

[00:07:57] Speaker 03:
The district court made no reference to it. And despite ample opportunity, they have not cited a single provision of their loan agreements that give them the right to add the carve-out amount back to the claim against Kauffman. And what I would like to emphasize is the following. I'm going to refer the panel to the following pages in the excerpts of record, pages 431, 478, and 481.

[00:08:24] Speaker 03:
Those pages are from briefs that DBD submitted to the state court when they calculated their claim against Kaufman. And contrary to what they're saying now to you, there's nothing in those briefs that says, oh, we collected $60 million from the debtor, but we can add 3.75 back against our claim against Kaufman. That is not the argument that was included in their briefs.

[00:08:50] Speaker 01:
Even if we agree with you about the carve-out, And I think there's this additive or subtractive, even if we agree with you that it has to be, I think, additive.

[00:09:02] Speaker 01:
Why doesn't the post petition interest cause a problem for you?

[00:09:06] Speaker 01:
Because.

[00:09:06] Speaker 03:
The answer is because I don't think there's any dispute about this between the parties.

[00:09:15] Speaker 03:
That if you if they if you don't include the reduction of their claim by 60 and only 56 to In their calculation, it came against Kauffman, including the post-petition interest. And you allow them to collect post-petition interest and not credit it against the claim against the debtor. They were still overpaid by millions of dollars.

[00:09:37] Speaker 01:
But this gets – you said in your transition between the two points, I think you said you only have to agree with us on one. Right. But I think you're now saying you have to agree with us on both, right? We have to assume that the guarantor – the money from the guarantor matters here to get you out of the – You have some problem, I think, with the post-petition interest and why they don't get post-petition interest from the escrow.

[00:10:02] Speaker 03:
With respect to the – if you disagree with the Fourth Circuit and you create your circuit split, they're entitled to collect post-judgment interest, petition interest, and not apply it to the claim against the debtor. Let's assume that.

[00:10:17] Speaker 03:
So they collected $24 million from Kauffman.

[00:10:21] Speaker 03:
Their calculation of their total claim against Kauffman, including post-petition interest, was $25 million.

[00:10:29] Speaker 03:
So they got 24.

[00:10:31] Speaker 03:
If their claim was actually reduced $60 million and not 56 to 50, there's a $3.75 million spread. That means that they were overpaid by Kauffman, even assuming they were entitled to collect post-petition interest and not apply it to the claim against the debtor. They still were fully satisfied by Kauffman by several million dollars because they They had understated the reduction of the claim against the debtor. I don't think there's any dispute about that.

[00:11:00] Speaker 02:
That argument is based on the premise that by negotiating in bankruptcy to have their claim be $60 million, that that also negotiated away rights that they had against the guarantor under their guarantor contract. And I'm not sure I'm following that. What am I missing there? Because it seems like you do things in bankruptcy because bankruptcy world is different than just your contracting world. But that doesn't mean that the choices that you make in bankruptcy necessarily undermine things that are not in bankruptcy and the guarantor is not in bankruptcy.

[00:11:31] Speaker 03:
I 100 percent agree with you.

[00:11:34] Speaker 03:
But California law says and we cite the statute.

[00:11:39] Speaker 03:
Apply state law for a second. Any receipt of partial payment by the primary obligor correspondently reduces the claim against the guarantor in the exact same amount. That's California law. That's that's the law under state law. So if they want to add back the carve out. They want to say, oh, this is a collection expense. We are entitled to collect it against the guarantor. They have to have some contractual basis to do that. They cite no case law that they can do it. They don't cite any statute they can do it. It would have to be under their loan agreements. And they have never cited a single provision of any loan agreement with Kauffman that allows the claim against Kauffman to be reduced under state law by $60 million.

[00:12:19] Speaker 03:
That's what the California Civil Code says. and then added back as a contractual collection expense.

[00:12:25] Speaker 02:
I'm not sure. Maybe I'm not getting the math right, but I'm not sure that that matters here because what they were owed under their contract is more than $60 million plus the carve-out. It's more than that. And so that additional is what the guarantor is on the hook for.

[00:12:46] Speaker 03:
Their claim against the debtor indisputably was capped at the value of the collateral.

[00:12:51] Speaker 03:
$60.5 million. No dispute about that. They collected $60 million, if you agree with me, inclusive of the carve-out, that left a remaining claim of $500,000. They collected $24 million from Kauffman.

[00:13:08] Speaker 03:
That includes post-petition interest and attorney's fees. If, on point one, it has to be credited, we win. If it's inclusive of the 60 million, not 56.2, we still win because their claim – when they told the state court we were still owed $25 million, that was factually wrong. They were only owed $22 million.

[00:13:33] Speaker 03:
They overstated the amount owed by Kauffman because they didn't take into credit the reduction of the carve-out. They said our claim was reduced net of the carve-out. That's what they told the state court. So they said $25 million were owed. They got $24 million, but as a matter of fact, they were only owed less than $22 million.

[00:13:53] Speaker 02:
That's why we win. To the extent I'm tracking the argument, and I'm not sure I'm 100% tracking the argument, I guess I'm left with the question of even if Kauffman overpaid, I don't know what that does to your client. That doesn't necessarily mean your client would have gotten more money in the bankruptcy, and why would you care if they – the guarantor overpaid if it isn't going to impact your client?

[00:14:16] Speaker 03:
We're the junior secure creditor. The $500,000 sitting in the pot is our collateral. We get it if their claim is fully satisfied. That's the issue. Did the payment by Kauffman of $24 million satisfy that remaining $500,000 claim? It did if we're right about either one of these two facts. I'd like to reserve some time because I see that there's some confusion, and maybe we can clarify it in rebuttal.

[00:14:43] Speaker 01:
Let's hear from the other side. Thank you.

[00:14:53] Speaker 00:
Good morning, Your Honors, and may it please the Court. David Carpenter on behalf of DBD Credit Funding. I think the questions the Court are asking are the right questions. There are two simple propositions that control the outcome here. First is Ivanhoe, which states that Payments from a third-party source do not operate within the bankruptcy to reduce the amount of the bankruptcy claim, subject only to double recovery, which has not occurred here because DVD has not been fully satisfied on the full amount of the loan obligations.

[00:15:25] Speaker 00:
The second principle is then you do look to California law, which is very clear that a guarantee is a separate and independent obligation from the borrower's obligations. That means that we can pursue the guarantee without impairment based on what happens in bankruptcy world. And indeed, that is the very purpose of a guarantee. California law is further clear that we are entitled to allocate those guaranteed payments however we wish.

[00:15:54] Speaker 00:
Turning to the other side's arguments, just as a very brief overview, national energy, one, is factually distinguishable based on the peculiar circumstances of how those payments and the debtor-related payments were made in that case. It's also not legally controlling, both because it's not considering California law, but also to Judge Tong's point, there's no statutory text or textual basis in 502 for the decision. 502 simply speaks to the amount of the allowed claim.

[00:16:27] Speaker 00:
It does not speak to allocation. We then hear this idea of an appeal to equity.

[00:16:33] Speaker 00:
But the guarantee that DBD has does not exist for Harvey D's benefit or the benefit of any other creditors. If we did not have the guarantee, there is no dispute that DVD would be entitled to those escrow proceeds and Harvey D would be in no worse position than it is today with or without the existence of the guarantee. And that's part of the reason why, again, the guarantees exist to give these lenders the additional rights.

[00:17:04] Speaker 00:
I'll add in another aspect of the equity here, which is the whole reason this loan happened from DBD. A major purpose was actually to pay down a very significant portion of the debt that the borrower owed to Harvey D. It's about $19 million you see reflected in the loan documents. DBD would not in any world have made that loan in significant part to Harvey D's benefit if it didn't have that guarantee in hand, that ironclad guarantee in hand.

[00:17:41] Speaker 00:
And Harvey Dean knew this was the arrangement. It knew the guarantee was in place, and it actually accepted its position as the junior most subordinated creditor because of this waterfall series where it's DBD first, then Kaufman as the guarantor, and then Harvey D. So it knew full well what it was getting into when these loans were made, and the position and the risks that it was assuming.

[00:18:09] Speaker 04:
Counsel, does that fact distinguish our case from the Fourth Circuit's case?

[00:18:14] Speaker 00:
I think that is a significant fact if we're going to talk about sifting the circumstances, looking behind the transactions. That's what the Fourth Circuit's talking about, right? That's how it kind of gets to it when it says we need to look at what's really going on. I think a significant aspect of national energy was the fact that you have the debtor with these energy contracts that were guaranteed by the debtor parent and then a subsidiary. And the way they manufactured that payment was they had the debtor guarantor spin off the sub within the context of the bankruptcy.

[00:18:55] Speaker 00:
And then it took the money from that sub's sale And then with the bankruptcy's permission, the bankruptcy court's permission, use that as a payment. So all of that was happening. The transactions between the debtor parent guarantor, the spinoff, the sale, the allocation was all happening within the bankruptcy world, which I think is one of the reasons why National Energy felt it could kind of do what it did in looking behind those transactions. Here we have a true third-party guarantor operating entirely outside of the bankruptcy.

[00:19:30] Speaker 01:
So if we, I understand that argument, but if we disagree with that argument and we think that the Fourth Circuit was really dealing with a guarantor outside the bankruptcy, tell me why you think it's wrong anyway and we shouldn't follow it.

[00:19:42] Speaker 00:
I think you can turn to the dissent where it lays out very clearly that these are separate and independent obligations, how a claim works against the borrower in bankruptcy and your ability to pursue a guarantee outside of bankruptcy. I think Ivanhoe is very clear about that right and that you don't need to reduce the amount of the claim. I think it goes to the heart.

[00:20:06] Speaker 01:
Do you think this argument that it has to do with partial payment instead of full payment distinguishes Ivanhoe?

[00:20:12] Speaker 00:
No, because we don't have complete satisfaction of our debt under any circumstances. The full guaranteed obligations are much, much higher. We have never actually been made whole. Because in part, these are real litigation costs and real enforcement costs that we incurred because of a litigious borrower, very, very litigious borrower, and a very, very litigious guarantor. And that's really what drove up these costs. And again, that's why a guarantee exists, so that no matter what happens in the bankruptcy, no matter what discharge or reduction or impairment of rights you can get against the borrower, you can still go after the guarantor and that you have the indemnification of the guarantor for those expenses, for those enforcement costs.

[00:20:58] Speaker 00:
I think I've mentioned, I think just textually is another reason why national energy kind of goes off the rails, because 502B clearly does not speak to allocation at all. And for the equity reasons we stated here, that guarantees like this do not exist for the benefit of parties like Harvey Deen.

[00:21:18] Speaker 04:
Under your view, we don't really need to decide which law governs either federal or state because they yield the same results.

[00:21:26] Speaker 00:
Yes, I think that's correct. I don't think there is truly a federal law that speaks to the allocation requirement in this context. But generally speaking, bankruptcy courts will honor state law as it relates to the rights against third parties.

[00:21:44] Speaker 00:
And I'll note here that to adopt their view really does, it diminishes the power and the utility of guarantees. It takes away a lot of the purpose of that. Guarantees exist to facilitate the making of loans, notwithstanding the risks of a borrower being bankrupt. So you're actually tightening up capital if you accept this view. A similar point is made as to the carve-out. There is no authority to suggest that a carve-out, which is really sort of a structure within the bankruptcy world to reduce the claim against the borrower wouldn't ever operate to actually reduce the obligations of the guarantor.

[00:22:22] Speaker 00:
We know that Kaufman herself never made that argument, presumably because she never viewed the carve out as actually reducing her obligations. I'll note a further kind of funny wrinkle here is that although Harvey D is standing here, Harvey is actually standing in Kaufman's shoes.

[00:22:40] Speaker 00:
If you look at the district court's order on page 6, the 1ER6, note 8, it notes that Harvard is here because it got an assignment of Kaufman's right to the escrow proceeds. So the argument about the carve-out is actually that Kaufman misunderstood her own obligations and now theoretically would have a right to those escrow proceeds because she overpaid in the state court, and obviously she did not.

[00:23:08] Speaker 00:
We have cited – the range of guarantee provisions in the contract that all operate to the effect that the lender's rights are not in any way impaired by operation of bankruptcy law as against the guarantor. They're not reduced by any discharge of the borrower's obligations. That costs of enforcing your rights in bankruptcy fold into the guaranteed obligations and further that we are allowed to pursue Kaufman for all expenses incurred as a result of her breach.

[00:23:44] Speaker 00:
And that's clearly the case here. If Kaufman had stepped up in the first place and just paid the guarantee, DVD would be out. We wouldn't have had to go through the bankruptcy. We wouldn't have to go through and negotiate and carve out. We'd have just been paid. So everything that's flowed from here is truly part of DVD's attempt to enforce its rights, to make itself whole.

[00:24:06] Speaker 00:
And we didn't quite get there. And that's why we're entitled to escrow proceeds.

[00:24:09] Speaker 01:
So I may have done the math wrong, but I thought that I probably disagreed with you about whether the carve out should be subtractive versus additive. Like, so let's say it's additive.

[00:24:23] Speaker 01:
I was thinking that you were still going to win on the math in terms of the post petition interest. Like you were still going to get the money from the escrow because of that. Am I right or am I wrong? I mean, he says I'm wrong. So if you lose on that issue about how you, consider the carve out, can you still win on where the money goes?

[00:24:40] Speaker 00:
Honestly, Your Honor, I know there have been different numbers. There's like the $87 million number that's identified in the district court. I think based on that number, we still win either way. We have just been looking at it from the perspective of the differential between the state court judgment and the guarantee, which made it clear that we haven't been fully repaid.

[00:25:03] Speaker 00:
So I don't I don't have an answer for you immediately on that point.

[00:25:08] Speaker 00:
I could walk through more. I mean, if you want. I know my colleagues that we hadn't cited the specific provisions. If that would be helpful to you, I can give you the specific provisions of the guarantee that I think operate. But the basic point being that what we reduced in terms of confidence obligations was the actual amount that we were paid, like in the same way that the.

[00:25:31] Speaker 00:
broker's commissions and the other costs of sale from the sale of the collateral were taken off the top, we traded the carve-out as, no, we're going to credit for Kauffman what we actually recovered, not this kind of bankruptcy world fiction where the carve-out gets reduced from Kauffman's allowed claim. But however you want to characterize it for the carve-out, That's either you only reduce it based on the net proceeds or you treat the carve-out as, well, that's just part of the damage that Kauffman caused because of her breach.

[00:26:03] Speaker 00:
We all get to the same place with that treatment.

[00:26:12] Speaker 04:
What do you make of the argument made by your friend on the other side that you forfeited that argument?

[00:26:19] Speaker 00:
No, I mean, we did not. So I'll say it a few days later.

[00:26:24] Speaker 00:
Briefing evolved in the case below, and, in fact, we have raised sort of a contrary argument to them that they actually forfeited it by not developing the carve-out theory in the first place. Their original brief was this sort of cursory reference to a surcharge principle under 502C. And so we respond to that, and that's what the bankruptcy court originally rejected, and properly so. I think as it then evolved going into the district court, and I think it did come in oral argument, the rather intuitive and obvious point that the carve-out was part of the bankruptcy enforcement efforts, so no one expected or believed that it would reduce the guarantor obligation.

[00:27:11] Speaker 00:
As it evolved, we made the point more clearly for the district court in that appeal that no, the carve-out was...

[00:27:21] Speaker 00:
part of the bankruptcy enforcement process. It does not get credited to the guarantor.

[00:27:27] Speaker 00:
And then it's kind of further developed here. So we've made the point all along, I think the core issue being that just as a matter of logic, you would not have a bankruptcy carve-out work for the guarantor's benefit. I think that really defeats a whole purpose and structure and text of the guarantee, which is to make the lender whole no matter what odd stuff happens in bankruptcy world, I think it would also undermine the purpose of carve-outs in bankruptcy court. Carve-outs exist because they're trying to give the trustee and the senior creditor some flexibility.

[00:28:05] Speaker 01:
If I'm right, though, your client consented to the carve-out. The carve-out is giving money, if I'm right, to the trustee and other professionals rather than giving that money to another secured creditor. So treating the carve-out as not coming out of your money lets you take money from another secured creditor and jump ahead at people who aren't secured. Am I understanding that right?

[00:28:35] Speaker 01:
That's why I think you're not right about this carve-out. But tell me why I'm wrong about that.

[00:28:39] Speaker 00:
Well, I can understand why then that's the principle of reducing the allowed claim in bankruptcy court. And that's why the carve-out works there. But that's separate from whether we can go recover that carve out as against Kaufman, which is what we did. And she never disputed that we are allowed to do that.

[00:28:56] Speaker 02:
So so it's I mean, if that's correct, then from your perspective, do we even need to decide if the carve out is additive or subtractive?

[00:29:04] Speaker 00:
No, you don't.

[00:29:06] Speaker 02:
Because because the attitude was made clear in the brief.

[00:29:08] Speaker 01:
Yeah, I thought I thought that was true, but it was because of the post petition interest. But maybe maybe it's true. For some other reason, I mean, I sort of thought that which way the carve-out went wasn't going to matter very much because of the post-petition interest, but you seem to have some different theory about why. I'm not sure I'm understanding yet why it doesn't matter.

[00:29:26] Speaker 00:
So it doesn't matter whether it's additive or subtractive of the bankruptcy claim because it doesn't affect our ability to go after Kauffman.

[00:29:36] Speaker 02:
Because the delta between what you're going to recover in bankruptcy and what the guarantee is is bigger than the carve-out.

[00:29:45] Speaker 00:
Correct. Yes. So we agree. I think we can get there multiple ways, but we agree that ultimately the treatment of the carve out under the academic theories is immaterial.

[00:29:54] Speaker 04:
But I would also further counsel. So if we find in favor of your friend on the other side with respect to the carve out, you can still go and pursue that amount from Kauffman.

[00:30:05] Speaker 00:
Correct.

[00:30:06] Speaker 04:
Yes. Nothing what we do here on the carve out is going to affect your ability to. Correct. Pursue against Kaufman.

[00:30:12] Speaker 00:
That's correct. And that's that's that's what was in.

[00:30:14] Speaker 04:
You know, what are we doing with the second question? Maybe we don't need to decide it.

[00:30:18] Speaker 00:
Right. And that's what was what was reflected in the judgment and incorporated and accepted by Kaufman herself. And again, in her shoes that Harvey D stands.

[00:30:32] Speaker 01:
OK, we have you over your time. Let's put a minute on the clock for rebuttal, please.

[00:30:35] Speaker 00:
Thank you.

[00:30:41] Speaker 03:
Very brief on the first issue. Again, Ivanhoe – I was entirely begging the question. Ivanhoe rule applies until full satisfaction from any source. That's the question on appeal. Was their claim fully satisfied from any source? And again, Ivanhoe, no reference to state law. We look at bankruptcy principles. That's what the Fourth Circuit did. That's what was done in ground improvement. Let me go to the carve-out issue because I would really hate to lose this appeal because of a misunderstanding about what's going on.

[00:31:11] Speaker 03:
They had a $60 million.5 claim in the bankruptcy. That's not disputed. They told, based upon an argument to the state court, which admittedly Kauffman did not dispute, that their claim was reduced in the bankruptcy only $56.25, not $60 million. They got effectively a judgment that they were owed $25 million and Kauffman paid $24, leaving a gap. There's like a million-dollar differential there. That's the basis of them coming back to the bankruptcy court and saying, oh, we're still owed $1 million, therefore that $500,000 is ours.

[00:31:48] Speaker 03:
If, on the other hand, they overstated the claim so that, in fact, their claim was not $25 million. It was 25 minus 3.75. That was their claim, including post-petition interest, including every dollar of attorney's fees, the millions. That's okay.

[00:32:05] Speaker 03:
If their claim actually only was $21,250,000, and they got 24 million from Kauffman. They were overpaid several million dollars. And between them and Kauffman, that's between them and Kauffman. They signed a release and Kauffman can't go back and get it. That's too bad for Kauffman. But for my client, who's asserting a claim against the 500,000, I can point to that and say, they were fully satisfied from another source. There's no estoppel effect on my client. We're not a party to that other litigation. And if we're entitled to do the accounting, If your claim was actually $21,250,000, not $25 million, and you received $24 million against Kauffman, you were fully paid.

[00:32:47] Speaker 03:
That's the issue. And they don't really dispute that. Their argument, as developed, as they came up with a post hoc rationalization to try and justify their argument, oh, we can add the $3.75 back against Kauffman under our loan documents. And as I keep on repeating, I ask you just to go look at the record. There is nothing in the loan documents that allowed them to do that. Simply saying they can do it, simply saying that that's what guarantees do, that's not evidence.

[00:33:17] Speaker 03:
That is not true argument.

[00:33:20] Speaker 01:
Do you have a question? Yeah, go ahead.

[00:33:23] Speaker 04:
Why don't we treat the carve-out amount as a cost of going through the bankruptcy enforcement process?

[00:33:31] Speaker 03:
Two reasons.

[00:33:32] Speaker 03:
There's a contractual reason. It's explained in the briefs. If you look at the carve-out agreement itself, they identified the cost of sale as prior to the carve-out. That's how they characterized it in their own agreement. The cost of sale was the broker and the escropies. Then you get the net proceeds, and it's allocated between DBD and the trustee. So they didn't treat it as a cost of sale in their own carve-out agreement.

[00:33:57] Speaker 04:
What if it's a different kind of cost? I mean you can characterize it differently here. trying to understand the substance of the payment.

[00:34:03] Speaker 03:
Well, that was the ruling by the bankruptcy judge, right? The bankruptcy judge said your claim was only reduced 56 to five because a carve out is a cost of sale. And that's the question before you, that doesn't make any sense. A carve out where the junior secured creditor, we have a lien. It can only work if conceptually, conceptually DBD got the money. They got $60 million and in their own free will, They could give it to charity. They could give it to this court. They can give it to whoever they want.

[00:34:35] Speaker 03:
They decided to take some of their money and give it to the trustee so the trustee would go do what they wanted him to do. You can't treat that as a cost of sale. That is simply them. Carbouts work because that's their money. They can do whatever they want with it, and it can't affect other – it can't prejudice other creditors. That's the issue on appeal.

[00:34:55] Speaker 04:
Isn't it a cost to get the transaction approved? approved. You needed the trustee to do his or her work to get the sale affected. And the payment also needed to be made to the unsecured creditors because the carve out went part of the car went to the trustee. Another part went to the unsecured. Correct. It will blend into the next appeal. Yes, that's correct. That's why carve outs are acceptable in bankruptcy. But as to the effect – It's not a gift in the same way that giving it to charity is.

[00:35:27] Speaker 04:
This cost needed to be incurred.

[00:35:28] Speaker 03:
Well, the motivation is obviously different. You're an economic actor. But for purposes of the calculation of the claim, they received their collateral, and in their discretion they did whatever they want with it. It can't prejudice junior creditors. That's the point of Professor – well, not Professor – Richard Levin's article. You can't push – you're right. You can't push other creditors down the waterfall because you get a benefit if you induce the trustee to sell the property instead of you having to do a foreclosure.

[00:36:05] Speaker 03:
It can't reduce – it can't prejudice other creditors. That's the deal. You get to do it. You can do a carve-out, but you can't prejudice other creditors, and that's why – They it's indefensible what the bankruptcy judge did. They don't defend it. They don't defend it. They fall back on the argument that, oh, we have a contractual right to add it back under the loan documents.

[00:36:28] Speaker 03:
Please look at the record.

[00:36:30] Speaker 03:
It's not there. Thank you very much.

[00:36:32] Speaker 01:
Thank you both sides for the helpful arguments. This case is submitted.