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Supreme Court refuses to hear appeal from ruling that California preference lawsuit is preempted by U.S. Bankruptcy Code.(CREDIT COLUMN)
On October 3, 2005, the U.S. Supreme Court refused to hear an appeal from the Ninth Circuit Court of Appeal's decision in Sherwood Partners v. Lycos, Inc. The Ninth Circuit had ruled that California's preference statute--contained in California's assignment for the benefit of creditors (ABC) law--is preempted by the United States Bankruptcy Code. The Supreme Court's decision means an end to preference actions under California's ABC law and other similar state law preference statutes. An ABC is a type of state law liquidation proceeding that has some similarity to a liquidation case under Chapter 7 of the Bankruptcy Code. California has a modern and widely used ABC statute, including a preference provision that is similar to Section 547 of the Bankruptcy Code. The California ABE law enables an "Assignee" for the benefit of creditors, who is akin to a Chapter 7 bankruptcy trustee, to recover preferential transfers.
Thinklink Corporation had made an assignment for the benefit of creditors to Sherwood Partners in California. Sherwood sued Lycos to recover a $1 million payment as a preference under the California's preference statute. Lycos moved to dismiss, arguing that the Bankruptcy Code preempted the preference provisions of California's ABC law. The United States District Court denied Lycos' motion to dismiss and eventually granted summary judgment to Sherwood. Lycos appealed this decision to the Ninth Circuit Court of Appeals, which reversed the District Court in a January 2005 opinion.
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