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Ninth Circuit Hears Question Of First Impression Regarding Restitution of Judgment Creditors – Glass & Goldberg | Financing, Property & Bankruptcy Law
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Ninth Circuit Hears Question Of First Impression Regarding Restitution of Judgment Creditors

A recent Ninth Circuit Court of Appeals case decided in March 2018, considered a question of first impression. The case, PSM Holding Corp. v. National Farm Financial Corporation et al, (15-55026, March 7, 2018) (“PSM” and “National Farm”) considered whether a judgment creditor, who seizes a judgment debtor’s company pursuant to a judgment that is subsequently reversed on appeal, may recover in restitution for losses suffered while it was in possession of the seized company. The district court that heard the case answered affirmatively and awarded PSM Holding Corp. over $1.1 million in restitution. The parties then filed five appeals and cross-appeals.

The parties involved had attempted to complete a transaction whereby National Farm would sell an entity known as Business Alliance Insurance Company (“BAIC”) to PSM. BAIC provided insurance to small businesses and had approximately $30 million of assets. Ultimately, National Farm withdrew from the sale which resulted in PSM suing National Farm, Larry Chao (the president of National Farm), and BAIC alleging claims for breach of contract and fraud.

After a trial, a jury found for PSM and awarded it $43 million for both claims. Defendants were to post a $40 million bond as a condition to staying execution of the judgment pending appeal. When the Defendants failed to do so and National Farm entered bankruptcy, PSM executed on the judgment and took control of BAIC.

After taking possession of BAIC, PSM attempted to integrate it into its business. The Ninth Circuit then reversed the district court’s denial of Defendants motion for judgment as a matter of law. With this reversal, it was undisputed that PSM would owe Defendants restitution. At issue, was the appropriate amount of restitution. After the parties negotiated and haggled about who owed what to whom, the district court decided that the Defendants, who were judgment debtors, would pay restitution to PSM for losses it suffered while it possessed BAIC.

The Appeals Court affirmed in part, reversed in part, and dismissed in part. It held that a wrongful seizure could result in restitution, affirming the right to restitution, but finding error in allowing the recovery, rejecting challenges to an order denying the creditor’s request for rescission of its quota share reinsurance agreement. It decided the crux of the restitution issue by holding that any right to restitution runs only to the judgment debtor.

Thus, a judgment creditor who seizes a judgment debtor’s company pursuant to a judgment that is subsequently reversed on appeal cannot recover in restitution for losses suffered while it was in possession of the seized company.

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