Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
Aug. 23 — A secured creditor can't claim an interest in the post-bankruptcy earnings of a player in the National Hockey League (NHL), an Ohio bankruptcy court held Aug. 16 ( Johnson v. RFF Family P'ship, LP, 2016 BL 272693, Bankr. S.D. Ohio, No. 14-57104, 8/16/16 ).
Judge John E. Hoffman, Jr. of the U.S. Bankruptcy Court for the Southern District of Ohio concluded that both California law and Bankruptcy Code Section 552 prohibited lender RFF Family Partnership, LP from claiming an interest in the player's salary after he filed his Chapter 11 case.
Defenseman John Joseph Louis "Jack" Johnson, III signed a seven-year, $30.5 million contract in 2011 to play hockey for the Los Angeles Kings. A year later, Johnson's contract was assigned to the Columbus Blue Jackets.
According to a previous opinion in Johnson's bankruptcy case, the player — with the “aid” of his parents — took on large debts after signing his lucrative contract. In October 2014, he filed for Chapter 11 protection. Chapter 11 allows companies or individuals to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan that must be approved by the bankruptcy court.
Among these substantial debts were obligations owed to RFF. In January 2013, Johnson gave RFF a promissory note for more than $1.8 million along with a security and pledge agreement, an assignment of his hockey contracts, and a letter directing the Blue Jackets to deliver payments under his contract to RFF, the court said.
Since the filing of his case, RFF sought to enforce its rights under the note and related instruments, and the debtor (Johnson) contested its right to any money he earned under his contract after the filing. Ultimately, the debtor filed an adversary proceeding (lawsuit) against RFF for a “declaratory judgment that RFF does not hold a valid assignment of the Player Contract or the Debtor's wages and that, in any event, Section 552(a) ‘cuts off any alleged security interest claimed by RFF...,'” the court said.
The debtor filed a motion for summary judgment, which the court granted.
The parties agreed that California law governed any dispute over the agreements. The court found that Section 300 of the Calif. Labor Law's requirements for allowing an assignment of the debtor's wages were not satisfied. These requirements included the following:
After the court stated that the purported security agreement and/or assignment of the debtor's contract was void under the Calif. Labor Code, it also concluded that Section 552(a) applied. That section provides that a pre-petition (i.e., pre-bankruptcy) security interest generally doesn't attach to property acquired by the debtor post-petition, or during the bankruptcy. Accordingly, none of the debtor's post-petition earnings could become subject to any claim of security by RFF.
Debtor Jack Johnson was represented by Daniel A. DeMarco, Cleveland, Ohio; and Mark J. Kessler, Hahn Loeser & Parks LLP, Columbus, Ohio; Jeffrey M. Levinson, Cleveland, Ohio, represented RFF Family Partnership, LP.
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