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Practice Points

August 23, 2016

District Court of Delaware Decides on the Safe Harbor Provision’s Applicability to State Fraudulent Transfer Claims


A On June 20, 2016, Judge Kevin Gross issued a decision denying in part and granting in part a motion to dismiss a complaint alleging actual and constructive fraudulent transfers in connection with the pre-petition sale of the debtor. PAH Litigation Trust v. Water Street Healthcare Partners L.P., Adv. Pro. No. 15-51238 (Bankr. D. Del.).


The PAH Litigation Trust (the trustee) asserted fraudulent transfer claims against certain shareholders of Physiotherapy Holdings, Inc. (the debtor). The defendants allegedly directed the debtor to overstate its revenue in connection with the marketing and sale of the company. The sale was completed as a reverse triangular merger wherein the defendant shareholders were bought out, including through the issuance of secured notes by the merging subsidiary that were marketed using the overstated company revenue. The defendants sought dismissal of the complaint for failure to state a claim on four grounds: (1) the transaction was protected under the safe harbor provision of 546(e) of the Bankruptcy Code, (2) the purchasers released the claims through a post-transaction release of the shareholders, (3) the secured noteholders ratified the transaction, and (4) the complaint failed to meet the heightened pleading standard for claims of fraud.


The trustee argued that the safe harbor provision of 546(e) is inapplicable to its state law fraudulent transfer claims. The defendants responded that section 546 of the Bankruptcy Code preempts state fraudulent transfer law.


The court analyzed federal preemption principles and other cases that have addressed federal preemption of state fraudulent transfer claims.  Those other cases included: (1) PHP Liquidating LLC v. Robbins, in which the United States District Court for the District of Delaware determined that PHP LLC, a group of creditors established pursuant to a Chapter 11 plan to liquidate assets of PHP Corporation, was not prohibited from asserting avoidance actions under state law (291 B.R. 603 (D.Del. 2003)); (2) Whyte v. Barclays Bank PLC, in which the Southern District of New York reached the opposite conclusion (494 B.R. 196 (S.D.N.Y. 2013)); (3) In re Tribune Co. Fraudulent Conveyance Litig., in which the Second Circuit reversed the decision of the Southern District of New York and decided that section 546(e) preempts state law (2016 U.S. App. LEXIS 5787); and (4) Weisfeiner v. Fund 1 (In re: Lyondell Chem. Co.), in which the court concluding that section 546(e) does not apply to individual creditors asserting fraudulent transfer claims under state law because “the historic powers of the States were not superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” 503 B.R. 348, 360 (Bankr. S.D.N.Y. 2014).


Here, the court agreed with the reasoning of Lyondell instead of Tribune.  The court believed that the Lyondell opinion more accurately addressed the history and function of safe harbors and it agreed with the position that the states’ historic police powers were not to be superseded by federal law without clear congressional intent. After considering many factors, including the plain language of the statute, congressional intent, relevant case law, and the alleged bad faith of the defendant, the court ruled that the safe harbor provision does not bar the litigation trust from asserting these claims.


Ariana Dindiyal, New York Law School, New York City, NY


 

August 23, 2016

Delaware Bankruptcy Court Holds Administrative Expense Claim Can Set Off Preference Liability


The United States Bankruptcy Court for the District of Delaware recently issued an opinion on a matter of first impression for the court: whether an allowed post-petition administrative expense claim can be used to set off preference liability. Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Indep. Purchasing Coop., Inc. (In re Quantum Foods, LLC), No. 16-50045 (KJC) (Bankr. D. Del. Jul. 25, 2016). The court noted that to effect a setoff with a post-petition claim the corresponding liability also must arise post-petition. The court found that a preference claim and any liability therefor arise post-petition. Accordingly, the court held that an allowed post-petition administrative expense claim can be set off against preference liability. The court further held that section 502(d) of the Bankruptcy Code is not applicable to administrative expense claims.


Robert C. Maddox, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

June 10, 2016

Eastern District of New York Goes Its Own Way on Dischargeability of Bar Review Loan


A court’s recent ruling that a portion of a law school graduate’s loans could be discharged breaks new ground and could result in banks changing the way they lend money. The Honorable Carla Craig of the United States Bankruptcy Court for the Eastern District of New York ruled that a law graduate, Lesley Campbell, could discharge in bankruptcy a loan she received from Citibank while studying for the bar exam in 2009. Judge Craig’s very thorough opinion disagreed with other federal court decisions from around the country on the same issue and could result in a shift in when and how banks lend to students and graduates.


In the case before Judge Craig, Ms. Campbell sought to discharge a bar review loan she received from Citibank. This loan allowed Ms. Campbell to pay for her living expenses while she studied for the bar exam. Traditionally, lenders loan money to law and medical graduates, among others, after graduation to allow these individuals to study for their licensing exams or to relocate. Lenders view these loans as low-risk because the borrower has already graduated, received their degree, and is only waiting to pass their licensing requirements. In Ms. Campbell’s case, however, after failing the bar exam, she could not afford the payments on her nearly $300,000 of student loans. As a result, she filed for bankruptcy protection under chapter 7 of the bankruptcy code and sought to discharge the Citibank loan on the basis that it did not fall within the “educational benefit” exemption. Under the bankruptcy laws, loans used as an “educational benefit,” which is specifically defined in the bankruptcy code, cannot be discharged in bankruptcy.


Despite the opposing decisions on the issue, Judge Craig held that the discharge exemption for “educational benefits” applied only to federal and federally banked lenders. Judge Craig stated that merely because Citibank required Ms. Campbell to be a law student to qualify for the loan did not turn an “arm’s length consumer credit transaction into a ‘benefit’ that would make it eligible for the exemption.” In effect, Judge Craig ruled that the bar expenses loan had the same characteristics as an ordinary consumer loan, regardless of whether Ms. Campbell used it to facilitate studying for the bar exam. Judge Craig also ruled that the opposing decisions on the issues cited by Citibank were not persuasive because none of those cases interpreted how the term “educational benefit” was defined in the bankruptcy code. Judge Craig further stated that the legislative history and purpose of the relevant bankruptcy code section supported her decision because the impetus for including an exception to discharge for education loans made by the government was the concern that if students were allowed to discharge such loans, the solvency of government education loan programs would be undermined, which may discriminate against future students, because there will be no funds available for them to get an education. As a result of this reasoning, Judge Craig ruled that Ms. Campbell was allowed to discharge the Citibank loan as part of her bankruptcy plan.


It’s no secret that the cost of higher education is rising at an astounding rate. According to the White House, nearly 70 percent of bachelor’s degree recipients leave college with debt and reports calculate the current aggregate of student loan debt outstanding to approximate $1.2 trillion. Up until now, this amount has been completely protected from the discharge exemptions of the bankruptcy laws. Now that a court has allowed some of this money to be dischargeable in bankruptcy, lenders may shift how they deal with these types of loans. For example, they may require an applicant to obtain a co-signer or may only offer such loans to applicants with the highest credit scores. Alternatively, lenders may make less money available for these types of loans, may change the terms on which these loans are offered or may do away with such loans altogether. In light of this groundbreaking ruling, lenders should consider their options and students seeking loans should anticipate changes.


Catherine Pastrikos Kelly, Meyner and Landis LLP. Ms. Pastrikos Kelly was counsel to Ms. Campbell in the above discussed proceeding.


 

May 31, 2016

Eleventh Circuit Rules in Rosenberg v. DVI Receivables XIV, LLC


In Rosenberg v. DVI Receivables XIV, LLC, et al. (In re Rosenberg), Case No. 11-14620, 2016 WL 1392642 (11th Cir. Apr. 8, 2016), the Court of Appeals for the Eleventh Circuit vacated a district court’s order granting the defendants-appellees’ motion for judgment as a matter of law, which, pursuant to Federal Rule of Civil Procedure 50(b), was filed 28 days after judgment was entered.  On appeal, the plaintiff-appellant argued that the district court—which had withdrawn the reference—erred by applying 50(b)’s 28-day filing deadline and concluding the motion was timely. The Eleventh Circuit held that a district court must apply Federal Rule of Bankruptcy Procedure 9015(c)’s 14-day filing deadline because, among other things, Federal Rule of Bankruptcy Procedure 1001 makes the Bankruptcy Rules applicable to all cases and proceedings under the Bankruptcy Code whether before a district court or a bankruptcy court.


Brett M. Haywood, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 31, 2016

District Court Certifies Appeal Regarding Fee Claim to Third Circuit


In a memorandum opinion and order (Wilmington Trust Company v. Tribune Media Company, No 15-1116 (D. Del. Apr. 12, 2016)), Judge Gregory M. Sleet of the United States District Court for the District of Delaware granted Wilmington Trust Company’s motion seeking direct certification to the United States Court of Appeals for the Third Circuit of an appeal regarding whether a creditor with a prepetition, contractual entitlement to recover professional fees is entitled to an allowed, unsecured claim for those fees under section 502(b)(1) of title 11 of the United States Code where those fees are incurred post-petition. Pursuant to its claim, among other amounts, Wilmington Trust Company seeks $30,289,093.33 in fees and expenses. Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware issued a memorandum and order sustaining the objection of Tribune Media Company and its affiliated reorganized debtors to the Fee Claim, and subsequently, Wilmington Trust Company filed a notice of appeal. Section 158(d)(2) of title 28 of the United States Code governs motions for direct appeal to the court of appeals. Sections 158(d)(2)(A)(i) provides that a district court must certify a final order for immediate appeal if the court determines that, among other things, the order involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States. A “controlling decision” of the Third Circuit for purposes of Section 158(d)(2)(A)(i) is a decision that “admits of no ambiguity in resolving the issue.” The district court determined that the issue set forth in Wilmington Trust Company’s motion was a question of law and found no controlling third circuit or Supreme Court decision on such issue. Accordingly, the district court determined that Section 158(d)(2)(A)(i) required certification of the appeal to the Third Circuit.  


As of the date hereof, the Third Circuit has not ruled on the fee claim.


Rachel L. Biblo, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 24, 2016

Delaware Bankruptcy Court Dismisses Adversary Proceeding in Hormel Foods Case


In JLL Consultants, Inc. v. Hormel Foods Corporation (In re: AgFeed USA, LLC, et al.), Case No. 13-11761 (BLS), Adv. Proc. No. 14-50942 (BLS) (Bankr. D. Del. Dec. 15, 2015), the Bankruptcy Court for the District of Delaware dismissed an adversary proceeding upon determining that the debtors had released the asserted claims through an earlier settlement agreement.


Plaintiff JLL Consultants, Inc., the liquidating trustee in the bankruptcy cases of AgFeed Industries, Inc. and its affiliates (AFI), filed a complaint against Hormel Foods Corporation, alleging that Hormel made false representations in connection with the 2010 sale of a weanling-pig-raising company, M2P2, to AFI. The trustee alleged that Hormel fraudulently stated in a letter to AFI provided in connection with the sale that to its knowledge, M2P2 had not violated, breached, or defaulted on certain “Hog Procurement Agreements” and a “Sales Price Adjustment Addendum.”  The liquidating trustee also sought to avoid as fraudulent a $2.84 million pre-bankruptcy promissory note from AFI to Hormel.


Hormel moved to dismiss the amended complaint, arguing that AFI had released all of its claims in a 2013 settlement agreement which provided that AFI “release[d] and discharge[d] . . . Hormel . . . from all actions . . . whether known or unknown.”


Applying Minnesota law, which governed the settlement agreement, the Bankruptcy Court determined that AFI had released its claims against Hormel. It reasoned that the settlement agreement was intentionally broad and intended to achieve a global resolution of all ongoing disputes between the parties, including those relating to the letter, which predated the 2013 settlement agreement. Consequently, the Bankruptcy Court determined that the liquidating trustee’s claims had been released, and granted Hormel’s motion to dismiss.


Andrew M. Dean, Richards, Layton & Finger, P.A., Wilmington, Delaware.  Richards, Layton & Finger, P.A. serves as counsel to defendant Hormel Foods Corporation in the above captioned adversary proceeding. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 23, 2016

Bankruptcy Court for the District of Delaware Rules in Barry v. Santander Bank


In Barry v. Santander Bank, N.A. (In re Liberty State Benefits of Del., Inc.), Case No. 11-12404, Adv. Pro. No. 14-500520, 541 B.R. 219 (Bankr. D. Del. Oct. 26, 2015), the Bankruptcy Court for the District of Delaware held that the in pari delicto defense required dismissal of certain of the causes of action asserted against Santander Bank, N.A. for its alleged role in four allegedly fraudulent transactions involving the misappropriation of proceeds from debt instruments offered by the debtors.


The court noted that the trustee steps into the shoes of the debtor and therefore is subject to the same defenses that could be asserted against the debtor, including the in pari delicto defense (which prevents recovery by a plaintiff who shares responsibility for the causes of action against it). The court then held that the in pari delicto defense applied to claims arising from one of the subject transactions because the debtors played a significant role in that transaction and derived a substantial benefit because they used the proceeds to pay down corporate liabilities.


However, the court also held that other of the trustee’s claims were not subject to dismissal on the basis of the in pari delicto defense because of the “adverse interest exception.” Under the “adverse interest exception,” the in pari delicto defense will not be applied where outright fraud or looting is committed against the debtor and that fraud or looting does not benefit the debtor in any way.  In reaching this holding, the court determined that, as alleged in the complaint, the remaining fraudulent transactions plausibly amounted to outright looting of the debtors’ corporate assets from which the debtors received no benefit.


The court also denied Santander’s motion to dismiss most of the remaining claims against it, including a claim for violating New Jersey’s RICO statute.


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Brendan J. Schlauch, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 9, 2016

SDNY Reiterates the Standards for Altering, Amending, or Granting Relief from a Judgement


In Perez v. Terrestar Corporation, et al. (In re Terrestar Corporation, et al.), Case No. 11-10612, Adv. Pro. No. 13-01334 (Bankr. S.D.N.Y. Jan. 15, 2016), the court denied the motion of the plaintiff seeking reconsideration of the court’s order dismissing the plaintiff’s action. The court noted that the plaintiff’s motion failed to include any statutory basis for the requested relief. Nevertheless, the court examined the request under rules 59(e) and 60(b) of the Federal Rules of Civil Procedure. The court explained that under rule 59(e), a motion to alter or amend a judgment will be granted if the moving party can show that the court overlooked controlling law or facts that would have affected its decision. It further explained that under rule 60(b), the court could only provide relief from a final judgment if the plaintiff demonstrated one of the following: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under rule 59(b); (3) fraud, misrepresentation, or misconduct by an opposing party; (4) the judgment is void; v) the judgment has been satisfied, released, or discharged; is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or (5) any other reason that justifies relief. The plaintiff failed to make the required showing under either rule 59(e) or rule 60(b). The plaintiff raised the same issues that he had raised earlier in the proceedings and which the court already had addressed. Likewise, the plaintiff failed to demonstrate that the court overlooked any controlling law or facts that would have affected the court’s decision. The court also rejected the plaintiff’s attempt to raise several new arguments and cautioned that a motion to reconsider is not the appropriate occasion to repeat previously rejected arguments or to make new arguments that previously could have been made.


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Alexander G. Najemy, Richards, Layton & Finger, P.A., in Wilmington, DE. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 9, 2016

BAP of the Ninth Circuit Reiterates Higher Standard for Court-Initiated Sanctions


In In re Nakhuda, Case No. 14-41156 (9th Cir. BAP Feb. 4, 2016), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit Court of Appeals, or BAP, ruled that the bankruptcy court used the incorrect standard when imposing court-initiated sanctions against a party. In its decision, the BAP reiterated previous courts’ rulings that, under Bankruptcy Rule 9011, the standard for a bankruptcy court to impose sanctions initiated by a party motion was “objective reasonableness” while the standard for a bankruptcy court to impose sanctions sua sponte was higher and was more “akin to contempt.” The BAP justified this difference, in part, because unlike the party-initiated motions, court-initiated sanctions do not involve the 21-day safe harbor provision allowing for the offending party to correct or withdraw its submission. The BAP then noted that the factual findings by the bankruptcy court did not support the heightened standard of “akin to contempt” and reversed the lower court’s decision regarding sanctions under Bankruptcy Rule 9011.


The BAP subsequently determined that the bankruptcy court correctly interpreted 11 U.S.C. § 329 when it ordered the disgorgement of $4,000 in legal fees paid to the appellant by the debtor. The BAP agreed with the bankruptcy court that the applicable standard was whether the $4,000 the appellant was paid was excessive for what he accomplished for the debtor, not whether the amount was equal to the time and expense incurred by the appellant. The bankruptcy court’s decision was not illogical, implausible, or without support in the record and therefore the BAP affirmed it. Finally, the BAP addressed the appropriateness of the bankruptcy court’s suspending the appellant’s electronic case filing privileges. The appellant argued that his failure to obtain the debtor’s signature on documents was a genuine oversight, was not done in bad faith and was therefore not sanctionable under 11 U.S.C. § 105. The BAP noted that, in failing to secure the debtor’s signature on numerous filings, the appellant had violated the bankruptcy court’s local rules and the bankruptcy court had, therefore, the authority to suspend the appellant’s privileges. The BAP noted that the bankruptcy court did not rely on 11 U.S.C. § 105 in order to justify the sanction and that the issue of the appellant’s “bad faith” was therefore irrelevant.


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Alexander G. Najemy, Richards, Layton & Finger, P.A., in Wilmington, DE. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

November 5, 2015

Maine and Illinois Courts Disagree Over Fair Debt Collections Practices Act


In Martel v. LVNV Funding LLC and Resurgent Capital Servs. (In re Martel), Case No. 14-20198, Adv. Proc. No. 15-2001, 2015 WL 5984890 (Bankr. D. Me. Oct. 13, 2015), the Bankruptcy Court for the District of Maine held that filing an accurate proof of claim—one that contains all required information including the timing of the underlying debt—in accordance with the Bankruptcy Rules and Code even when that debt is barred by the statute of limitations does not violate the Fair Debt Collections Practices Act (FDCPA). The court concluded that creditors who file such proofs of claim do not mislead or harass debtors in violation of the FDCPA. Likewise, they do not abuse the bankruptcy process because nothing in the Bankruptcy Code prohibits filing a proof of claim when the underlying debt is subject to a statute of limitations defense. The bankruptcy court further held that the Bankruptcy Code does not preempt or preclude application of the FDCPA, and in doing so, observed that creditors are obligated to follow both. In reaching its holding, the court acknowledged a split of authority as to whether filing a proof of claim for a stale claim violates the FDCPA and recognized that the Eleventh Circuit had reached a different result.  Nevertheless, the court determined that its holding sided with the majority of other courts that have addressed the issue.


The Bankruptcy Court for the Northern District of Illinois reached the opposite conclusion in Edwards v. LVNV Funding LLC and Resurgent Capital Servs. (In re Edwards), Case No. 14-13263, Adv. Proc. No. 15-384, 2015 WL 5830823 (Bankr. N.D. Ill. Oct. 6, 2015).


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Brett M. Haywood, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

October 30, 2015

Illinois Bankruptcy Court Applies Fair Debt Collections Practices Act to Proof of Claim


In Edwards v. LVNV Funding LLC and Resurgent Capital Servs. (In re Edwards), Case No. 14-13263, Adv. Proc. No. 15-384, 2015 WL 5830823 (Bankr. N.D. Ill. Oct. 6, 2015), the Bankruptcy Court for the Northern District of Illinois held that filing a proof of claim to collect on an unenforceable debt violates the Fair Debt Collections Practices Act (FDCPA). The court noted that the Seventh Circuit Court of Appeals has held that filing a legal action outside of bankruptcy to collect a debt barred by the statute of limitations violates the FDCPA.  It also acknowledged a split among the trial courts of the Seventh Circuit as to whether the FDCPA applies in bankruptcy proceedings and to proofs of claims filed by creditors. The court surveyed the opposing case law within the circuit and held that, with respect to the FDCPA, there was no persuasive justification for treating a filed proof of claim differently from a filed collection action. Accordingly, the court held that filing a proof of claim to recover on a claim otherwise barred by the applicable statute of limitations violates the FDCPA.


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Brett M. Haywood, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

October 30, 2015

Third Circuit: Bad Faith Is Independent Ground to Dismiss Involuntary Petition


In In re Forever Green Athletic Fields, Inc., No. 14-3906 (3d Cir. Oct. 16, 2015), the Third Circuit Court of Appeals ruled that an involuntary petition may be dismissed for bad faith even when the statutory requirements for filing an involuntary petition are satisfied and the debtor is not paying its debts as they become due. Although creditors are presumed to act in good faith, the court concluded that a court may dismiss an involuntary petition if the debtor demonstrates by a preponderance of the evidence that a petitioning creditor acted in bad faith. The court adopted a “totality of the circumstances” standard for determining bad faith under 11 U.S.C. § 303. The court noted that this fact-intensive inquiry may consider a number of factors, including, but not limited to, whether


  • the creditors satisfied the statutory criteria for filing the petition; the involuntary petition was meritorious,

  • the creditors made a reasonable inquiry into the relevant facts and pertinent law before filing,

  • there was evidence of preferential payments to certain creditors or of dissipation of the debtor’s assets,

  • the filing was motivated by ill will or a desire to harass,

  • the petitioning creditors used the filing to obtain a disproportionate advantage for themselves rather than to protect against other creditors doing the same,

  • the filing was used as a tactical advantage in pending actions,

  • the filing was used as a substitute for customary debt-collection procedures, and

  • the filing had suspicious timing.


Perhaps significantly, the court credited evidence that suggested that the bad-faith petitioning creditor’s motive in filing the involuntary proceeding was in part to coerce the putative debtor to abandon a potentially significant estate asset; namely pending litigation by the debtor against that petitioning creditor. The Court left open the question of whether the joinder of a good-faith petitioning creditor prior to the petition’s dismissal could have saved the involuntary filing.


Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim


Brett M. Haywood, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

October 20, 2015

Delaware Bankruptcy Court Issues Bench Ruling in In re Colt Holding Company, LLC


On October 7, 2015, Judge Laurie Selber Silverstein of the United States Bankruptcy Court for the District of Delaware issued a bench ruling in In re Colt Holding Company, LLC, No. 15-11296, denying without prejudice a motion filed by the official committee of unsecured creditors seeking derivative standing. The committee sought standing to sue the landlord of the debtors’ manufacturing facility in Connecticut in order (according to the committee) to prevent the eviction of co-debtor and tenant Colt Defense LLC upon expiration of the lease of the facility. The committee argued that conflicts of interest justified granting it derivative standing, because two members of Colt Defense LLC’s governing board were alleged to hold ownership interests in the landlord and to have been appointed to positions with both entities by the stalking horse bidder in the case. In denying the request for derivative standing, Judge Silverstein noted that the debtors had taken steps to ensure the independence of the lease renewal process. However, the court also concluded that the committee had not shown that the debtors were unjustified in failing to bring suit, given that the debtors were circulating a draft plan term sheet that would settle the causes of action and give the debtors the option to renew the lease of the facility.


Keywords: bankruptcy and insolvency litigation, automatic stay, labor law, Norris-LaGuardia Act, property of the estate


Andrew M. Dean, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients. Richards, Layton & Finger, P.A. serves as co-counsel to the debtors in the above referenced bankruptcy cases.


 

October 20, 2015

Third Circuit: Bad Faith Is Independent Ground to Dismiss Involuntary Petition


The Third Circuit Court of Appeals issued an opinion in In re Revel AC, Inc., No. 15-1253 (3d Cir. Sept. 30, 2015) providing guidance on how to balance the four factors that determine whether to grant a stay pending appeal. The court reaffirmed its adoption of a “sliding-scale” approach, noting that the greater the moving party’s likelihood of success on the merits, the less heavily the balance of harms must weigh in its favor, and vice versa. The court also indicated that the first two factors (likelihood of success on the merits and irreparable injury absent a stay) are the most critical of the four factors, noting that if a movant does not make the requisite showing on either of these two factors, the inquiry is at an end and the stay should be denied without further analysis. The court further clarified that even when the balance of harms and the public interest weigh against granting a stay, a strong showing of likelihood of success on the merits is sufficient to support the imposition of a stay. The dissent, however, contended that Third Circuit and Supreme Court precedent requires a movant to demonstrate all four factors to obtain a stay pending appeal. The dissent emphasized that a stay pending appeal is an extraordinary remedy and asserted that the majority’s interpretation weakens the existing test by permitting the grant of a stay even when monetary damages can remedy the alleged harm.


Brendan J. Schlauch, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

September 22, 2015

The Apparent Conflict Between the Norris-LaGuardia Act and Section 362


In In re Trump Entertainment Resorts, Inc., the court, in denying the debtors’ amended motion for declaratory judgment that the activities of a non-debtor labor union violated the automatic stay under section 362 of the Bankruptcy Code, appeared to reconcile the potential conflict between the broad scope of the automatic stay and the prohibition against enjoining labor disputes under the Norris-LaGuardia Act (NLA). Due to the facts and circumstances of the case, however, the court was not required to squarely address whether the automatic stay of the Bankruptcy Code or the “anti-injunction” provision of the NLA controls when in direct conflict.


The debtors in Trump Entertainment sought to enforce the automatic stay against a labor union representing some of the debtors’ employees. Prior to the September 9, 2014 petition date, the labor union and the debtors had a collective bargaining agreement (CBA) that governed their relationship. The CBA expired on September 14, 2014. Under the National Labor Relations Act, the debtors were required to maintain the status quo, which was generally defined by the terms of the old CBA. The days after the CBA expired, the debtors made a proposal to the labor union in respect of a new agreement. The labor union rejected that proposal. On September 26, 2014, the labor union began contacting potential customers of the debtors, discussing the ongoing labor dispute and encouraging the debtors’ potential clients to relocate their events to other sites.


The debtors filed a motion under section 1113 of the Bankruptcy Code to reject the CBA, which was granted. The labor union filed a $10 million proof of claim based on this rejection. On October 8, 2014, the debtors filed a motion for an order to enforce the automatic stay against the labor union, claiming that it was violating the stay and demanding attorney fees and expenses. At the subsequent hearing, the debtors modified their request for relief, asking the court for only a declaratory judgment that the labor union’s contact with the potential clients violated the automatic stay.


In denying the debtors’ motion, the court reviewed both the NLA and the automatic stay provisions of the Bankruptcy Code. It first determined that the labor union’s activities fell within the scope of the NLA and were not one of the enumerated exceptions under the NLA, such as for unlawful conduct. The debtors’ argued that, because the automatic stay was a statutory injunction created upon the filing of a voluntary petition, (as opposed to a court-issued injunction), the prohibition on injunctions under the NLA were not applicable. The court rejected that argument, pointing out that the automatic stay functioned as the equivalent of a court-issued injunction. Thus, the NLA was applicable. The court noted that a contrary result would cause the court to become more heavily involved in labor relations, a result that, the court stated, the U.S. Congress apparently wanted to avoid.


The court also rejected the debtors’ assertion that the labor union’s actions violated the automatic stay. The debtors alleged that the labor union was attempting to gain possession or exercise control over property of the estate—namely the contractual relationships between the debtors and the potential clients. The court agreed that such relationships were property of the estate, but it rejected the argument that the labor union’s actions constituted an attempt to gain possession or exercise control. In reaching this conclusion, the court employed a three-part test, evaluating the nexus between the conduct at issue and the property interest of the bankruptcy estate, the degree of impact on the bankruptcy estate and the competing legal interests of the non-debtor parties. The court determined that, while the first two factors weighed slightly in the debtors’ favor, the third factor weighed so heavily in favor of the labor union that the automatic stay under Section 362(a)(3) could not apply to their actions.


Finally, the court rejected the debtors argument that the automatic stay under section 362(a)(6) was applicable to the labor union’s actions, as such actions in reality constituted an attempt to collect on its CBA rejection damages claim. Disagreeing with this argument, the court noted that the CBA had not been rejected when the labor union had contacted the debtors’ potential clients.


While the Trump Entertainment opinion addresses the intersection of federal bankruptcy and labor law, the court was able to reach its decision without resolving the potential conflict between the Bankruptcy Code and the NLA. Whether and how the courts will address such potential conflicts awaits further development.


Keywords: bankruptcy and insolvency litigation, automatic stay, labor law, Norris-LaGuardia Act, property of the estate

Alexander G. Najemy, Richards, Layton & Finger, P.A., in Wilmington, DE


 

June 15, 2015

SCOTUS Rules in Baker Botts vs. Asarco


The United States Supreme Court issued its opinion today in the matter of Baker Botts L.L.P. v. Asarco LLC, No. 14-103, holding that a law firm hired pursuant to section 327(a) of the Bankruptcy Code cannot be awarded fees for defending its fee applications under section 330(a).  As decided by the Supreme Court, “[b]ecause §330(a)(1) does not explicitly override the American Rule with respect to fee-defense litigation, it does not permit bankruptcy courts to award compensation for such litigation.” 


Keywords: bankruptcy and insolvency litigation, section 327(a), Bankruptcy Code, fee applications, American Rule


Robert C. Maddox, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

June 11, 2015

In Wellness International, SCOTUS Approves Consent


On May 26, 2015, the United States Supreme Court ruled in Wellness International Network, Ltd. v. Shariff (No. 13-935) that Article III of the U.S. Constitution is not violated when bankruptcy courts decide matters with the knowing and voluntary consent of the litigants. The Supreme Court’s ruling in Wellness is its third decision in four years addressing the powers of bankruptcy court judges. The Court’s first decision, Stern v. Marshall, held that there are certain claims—claims that neither “stem from the bankruptcy itself”  nor “would necessarily be resolved in the claims allowance process”—that a bankruptcy court cannot constitutionally enter a final order on. After Stern, there was widespread uncertainty regarding whether litigants could cure that constitutional deficiency through their consent to a bankruptcy court adjudication. The Seventh Circuit held that the bankruptcy court, as a non-Article III court, lacked the constitutional authority to enter a final order on state law claims, and that the bankruptcy court could not rule, even if the parties consented to proceed in bankruptcy court. A majority of the Court rejected the argument that parties may not consent to bankruptcy court adjudications, holding that “Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.”


The Court went on to hold that litigant consent need not be express but may be implied through a litigant’s conduct; the only test for consent is whether it “knowing and voluntary.” Wellness would appear to have significance far beyond just the bankruptcy context as it not only confirms the broad powers of the bankruptcy courts but also confirms the authority of magistrate judges, whose power to enter final orders is even more dependent on notions of consent than is the power of bankruptcy courts, to enter final orders with litigant consent as well.


Keywords: bankruptcy and insolvency litigation, Article III, consent, Wellness International


Landon S. Raiford, Jenner & Block, Chicago, IL


 

June 10, 2015

PA Bankruptcy Court Rules in In re Merritt


The Bankruptcy Court for the Eastern District of Pennsylvania (the Honorable Jean K. FitzSimon presiding) recently declined to decide whether a chapter 13 debtor can be granted standing to prosecute a fraudulent transfer claim on behalf of its estate under Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) because the debtor had failed to first demonstrate that it was able to satisfy the prerequisites for standing under Cybergenics. In re Merritt, No. 11-18134 JKF, 2015 WL 1403093 (Bankr. E.D. Pa. May 19, 2015).


Prior to its petition date, the debtor invested in a limited liability company that engaged in real estate ventures. A parade of horribles ensued: The ventures soured, the debtor lost a series of related lawsuits, the LLC’s real property was sold at auction pursuant to a state court order and the debtor’s membership in the LLC was stripped from it pursuant to a state court order. The debtor thereafter filed its bankruptcy petition.


Mere days before the expiration of the two-year statute of limitations to commence avoidance claims, the debtor made demand on its trustee to file a constructive fraud claim under section 548 against the party who had purchased the LLC’s real property at auction. After the trustee declined to file the claim, the debtor filed the proceeding itself, and the defendant thereafter moved to dismiss on the grounds that the debtor lacked standing.


While the debtor argued that it should be accorded standing under Cybergenics to prosecute the fraudulent transfer claim, the court declined to expressly consider whether Cybergenics may be extended to grant standing to a chapter 13 debtor. The court relied on Geiger v. Federal Home Loan Mortgage Corp. (In re Weyandt), 544 F. App’x. 107 (3d Cir. 2013) to support its view that a chapter 13 debtor has two equal and independent burdens to demonstrate that is should be granted standing. First, the debtor must persuasively explain why Cybergenics should apply to a chapter 13 case. Second, the debtor must demonstrate that, under the particular circumstances of its case, the trustee wrongfully failed to carry out its duties in declining to bring the action directly.


Here, the court held that it did not need to determine whether Cybergenics could apply to grant standing to a chapter 13 case because the debtor had failed to demonstrate that it could satisfy the Cybergenics factors even if that test were applicable. In this regard, the court noted that the debtor had materially delayed in making demand on the trustee and the trustee did not have adequate time to fairly evaluate the claim pursuant to rule 9011 of the Federal Rules of Bankruptcy Procedure. The court noted that the property at issue was sold at auction pursuant to a state court order, and therefore the sales price arguably equated to reasonably equivalent value as a matter of law. Finally, the court noted that the property sold at auction and subject to the fraudulent transfer claim was owned by the LLC. As the property was not owned by the debtor but by the LLC, the debtor had no interest under state law in the property on which to base a claim under section 548.


Keywords: bankruptcy and insolvency litigation, standing, fraudulent Transfer, section 548, Cybergenics


Marcos A. Ramos and David Queroli (Summer Associate), Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

June 10, 2015

Lawyer Cannot Discharge Client's Claim Based on Funds Stolen by Lawyer


In a recent decision, the Ninth Circuit Court of Appeals held that a debtor-attorney could not use the unclean hands doctrine to render dischargeable a former client’s claim based on the lawyer’s misappropriation of funds entrusted to him by the former client. See Northbay Wellness Group, Inc. v. Beyries, No. 13-17381 (9th Cir. June 5, 2015). The creditor was a medical marijuana dispensary, and the debtor acted as counsel to the creditor and served on its board of directors. In the ordinary course of its business, the creditor engaged in cash sales, including as depository institutions were not permitted to accept business from marijuana dispensaries under applicable federal regulations. The creditor entrusted certain cash funds to the lawyer, and the lawyer later diverted a portion of those funds to himself. The lawyer filed his bankruptcy petition after the creditor obtained a judgment against him for the amount of the diverted funds. The bankruptcy court (later affirmed by the district court) accepted that claims based on misappropriation ordinarily are not dischargeable. However, it also concluded that the creditor had engaged in the unlawful sale of marijuana, the doctrine of unclean hands therefore applied to preclude the creditor’s claim in the bankruptcy case and its debt was dischargeable.


The Ninth Circuit reversed. It held that the bankruptcy court abused its discretion in applying the doctrine of unclean hands solely based on the fact that the creditor had engaged in wrongful activity. Here, the debtor-attorney participated in the alleged wrongful conduct and also misappropriated the funds on which the creditor’s claim was based.  Under these circumstances, the lower court was required to weigh the parties’ respective alleged wrongdoing before deciding whether the unclean hands doctrine should be applied. Moreover, the Ninth Circuit held that the public interest in holding attorneys to high ethical standards also compelled a different result than that reached by the lower court.  On this basis, the Ninth Circuit concluded and held that “the doctrine of unclean hands cannot prevent recovery of funds stolen from a client by his or her lawyer.”


Keywords: bankruptcy and insolvency litigation, discharge, unclean hands, medical marijuana


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

June 3, 2015

Delaware Bankruptcy Court Denies Request for Fee Enhancement


The propriety of a fee enhancement for an estate professional was considered by the Delaware Bankruptcy Court in In re FAH Liquidating Corp., Case No. 13-13087 (Bankr. D. Del. Jan. 21, 2015). There, legal and financial advisors to the unsecured creditors’ committee moved for the approval of fee enhancements that could have earned the professionals an additional 50 percent of their approved fees and expenses. In denying their motion, the bankruptcy court noted (among other things) that it is not inclined to award fee enhancements in cases where professionals have been paid market-rate hourly fees and creditors have received less than full recovery.


Fisker Automotive (with its debtor affiliates) produced electric hybrid automobiles, and prior to its petition date it had entered into a $169.3 million loan facility with the U.S. government. Hybrid Tech Holdings, LLC, purchased the U.S. government’s position at an auction for $25 million and later entered into an asset purchase agreement to acquire substantially all of the debtors’ assets that included a $25 million credit bid as part of the consideration. The debtors filed for bankruptcy protection and moved the bankruptcy court to approve the sale to Hybrid on an expedited basis.


The bankruptcy court approved the committee’s retention of its professionals under section 328(a) of the Bankruptcy Code and the committee and its professionals were active in the case. Among other things, the committee investigated the debtors’ financing and moved for a competitive auction process and a cap on Hybrid’s credit bid. The committee also courted alternative buyers, including Wanxiang America Corporation, an entity that the committee’s professionals had dealt with in a different bankruptcy proceeding. The committee also negotiated a settlement agreement with Hybrid relating to, among other things, the committee’s investigation of Hybrid’s liens. Under the terms of the settlement, Hybrid committed to pay certain professional fees and administrative claims. Ultimately, an auction resulted in the purchase of the debtors’ assets by Wanxiang, not Hybrid, for more consideration to the estate and for a greater potential distribution to unsecured creditors than that provided under the Hybrid asset purchase agreement.


The committee’s professionals moved under section 330(a) for a fee enhancement. Generally, the professionals argued that they were entitled to a fee enhancement because they undertook significant risk of nonpayment for services and overcame considerable odds to achieve a better sale result than otherwise would have been obtained. The United States Trustee (the UST) and Hybrid (which would be obligated to pay the committee’s additional fees under the settlement agreement) objected. The UST argued that no enhancement was warranted because unsecured creditors were not receiving a full recovery and the risk undertaken by the committee’s professionals was not greater than that taken by professionals in any other case in which unsecured creditors may not be paid in full. The UST further argued that the professionals were compensated at full market rates and simply performed the job that they were hired to do. Hybrid additionally argued that the professionals were retained under section 328 but were improperly seeking a fee enhancement under section 330 and that the professionals did not meet the standards under section 328(a) of the Bankruptcy Code for a fee enhancement.


The bankruptcy court agreed that the relevant provision for the professionals’ requests was section 328(a) and held that the professionals did not merit a fee enhancement under that section.  The bankruptcy court further held that the professionals did not merit a fee increase under section 330, to the extent that section was relevant.


First, the court noted that under section 328(a) a fee arrangement can be altered only if the terms and conditions prove improvident in light of developments that could not have been anticipated at the time of the retention. Here, the court found nothing in the record that would support a fee enhancement under this standard, including because (a) the amount of work was expected; (b) the professionals were involved in the case prior to their appointment; (c) the expedited timing of the auction was known from the outset of the case (and the committee never sought to extend the timing); and (d) the professionals did not need to undertake an extensive marketing process to identify Wanxiang as a potential bidder for the debtors’ assets. Accordingly, the court concluded that a fee enhancement was not justified under section 328(a).


Second, the court held that even if section 330 applied to the professionals’ fee applications, they still would not be entitled to a fee enhancement. The bankruptcy court noted that under section 330 a fee enhancement may be justified considering, among other things, the following:


  • The time spent on such services

  • The rates charged for such services

  • Whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of the bankruptcy case

  • Whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed

  • With respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field

  • Whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.


The bankruptcy court found that enhancement of the professionals’ fees was not warranted under any of these criteria because


  • the time expended was normal,

  • the rates were not discounted,

  • the services were necessary and not extraordinary,

  • nothing was unusual about the time or complexity of the services provided,

  • compensation was reasonable based on comparable bankruptcy professionals and engagements, and

  • the compensation was commensurate with that of similarly skilled practitioners in non-bankruptcy settings.


Importantly, the bankruptcy court noted that it is disinclined to award fee enhancements in cases where professionals have been paid “handsome” market-rate hourly fees and creditors have received less than full recovery. Where attorneys charge and are paid over $1,000 per hour, the court noted, it expects that work performed will be exceptional.


Keywords: bankruptcy and insolvency litigation, section 328, section 330, Bankruptcy Code, Delaware Bankcruptcy Court, fee enhancement


Robert C. Maddox, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

June 3, 2015

SCOTUS Rules in Bank of America v. Caulkett


In Bank of America v. Caulkett, the Supreme Court decided by unanimous decision on June 1 that a debtor in a Chapter 7 proceeding may not avoid a junior mortgage under section 506(d) of the Bankruptcy Code even where the debt owed on the senior mortgage exceeds the value of the debtor’s collateral.


Section 506(d) provides (in material part) that a lien that secures a claim that is not an allowed secured claim is void. See 11 U.S.C. §506(d). According to the debtors, section 506(a)(1) provides that an allowed claim only is secured to the extent of the value of the creditor’s collateral, and the creditor holds an unsecured claim for any amount in excess of the value of the collateral. Accordingly, a junior mortgagee who has no recourse to collateral because the value is completely subject to the senior mortgagor’s claim cannot be an “allowed secured creditor” so as to prevent the debtors from avoiding the junior mortgagor’s lien under Section 506(d).


The Supreme Court agreed that the debtors’ straightforward, textual approach supported their position that the junior liens could be avoided, a conclusion that had been reached by the Bankruptcy Court, the district court and the Eleventh Circuit, each of which had previously ruled in favor of the debtors. However, the Supreme Court decided that the issue had to be determined in light of the earlier decision in Dewsnup v. Timm, 502 U.S. 410 (1992). There, the Court had defined the term “secured claim” under section 506(d) to mean a claim “supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. Under this definition, [section] 506(d)’s function is reduced to ‘voiding a lien whenever a claim secured by the lien itself has not been allowed.’”


The Court noted that the debtors had not asked the Court to overrule Dewsnup and had instead argued that Dewsnup did not apply, was distinguishable, or could be limited to its express facts. The Court, however, disagreed and determined that Dewsnup directly applied and therefore controlled the Court’s ultimate determination here that the bank’s claims could not be avoided under section 506(d) because those claims were both secured by a lien and allowed under section 502. Accordingly, the Court reversed the lower court’s judgments and remanded for further proceedings consistent with its opinion.


Keywords: bankruptcy and insolvency litigation, 506(d), lien, Dewsnup, Bank of America v. Caulkett


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 29, 2015

Fifth Circuit Rules in Villegas v. Schmidt


The Fifth Circuit Court of Appeals recently decided (by decision entered on May 28, 2015) that the Barton doctrine (which requires a plaintiff that wants to sue a trustee to seek leave of the court that appointed such trustee) applies irrespective of whether the underlying claims at issue are claims over which the bankruptcy court lacks final adjudicative authority under Stern v. Marshall.  The Fifth Circuit also determined that the putative plaintiff cannot avoid seeking the leave of the bankruptcy court by filing its action directly in the supervisory court, such as the district court.  Read a copy of the Fifth Circuit’s decision in Villegas v. Schmidt.


Keywords: bankruptcy and insolvency litigation, Barton doctrine, Stern


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 20, 2015

Delaware Bankruptcy Court rules in In re SS Body Armor I, Inc.


The Delaware Bankruptcy Court recently determined that a shareholder’s right to move the Delaware Chancery Court to compel a shareholder meeting is not stayed by operation of the automatic stay, although the bankruptcy court retains the authority to enjoin the occurrence of the meeting (or any actions taken at such meeting) if the court concludes that there is “clear abuse,” as defined by the court to include delay and “real jeopardy” to the debtor’s ability to reorganized. In re SS Body Armor I, Inc., Case No. 10-11255 (Bankr. D. Del. Apr. 1, 2015) (CSS).


The movant filed for relief from the automatic stay to file and prosecute a proceeding before the Delaware Chancery Court to compel the debtor to hold an annual shareholder meeting.  Under Delaware’s General Corporations Law (DGCL 211(c)), the chancery court may summarily order a meeting to be held upon the application of any stockholder if the company fails to hold one within a period of 13 months. See Del. Code Ann. tit. 8, § 211(c) (West). The movant presented no evidence in support of its motion, instead relying on the (uncontested) fact that the debtor had not held a shareholder meeting in several years. The debtor acknowledged that it had not held a shareholder meeting but argued that the bankruptcy court should deny the motion because the movant wanted to frustrate the debtor’s reorganization plans and prospects.


The bankruptcy court principally relied on the Second Circuit’s Johns-Manville decision (Manville Corp. v. Equity Sec. Hldrs. Cmt. (In re Johns-Manville Corp.), 801 F.2d 60 (2d Cir. 1986)), the Delaware Chancery Court’s decision in U.S. Energy Systems (Fogel v. U.S. Energy Systems, Inc., 2008 WL 151857 (Del. Ch. Jan. 15, 2008)) and the Delaware District Court’s decision in In re Marvel Entm’t. (Official Bondholder Cmt. v. Chase Manhattan Bank (In re Marvel Entm’t Grp., Inc.), 209 B.R. 832 (D. Del. 1997)). According to the bankruptcy court, these authorities demonstrated that: (1) a shareholder’s right to move to compel a shareholder meeting continues after a bankruptcy filing; (2) the automatic stay provisions of the Bankruptcy Code generally are not implicated by a shareholder’s exercise of its governance rights; and (3) the bankruptcy court has the authority to enjoin the exercise or implementation of such rights if the court finds clear abuse, which includes delay or other threats to the debtor’s prospects for or ability to reorganize.


In light of these authorities, the court concluded that the automatic stay did not apply to stay the movant’s proposed action and granted the movant’s motion on that basis. While the court also noted that there appeared to be grounds on which the court could make a finding of clear abuse, it also determined that it could not issue an injunction because an injunction must be sought in an an adversary proceeding under Fed. R. Bankr. Proc. 7001(7).


Keywords: bankruptcy and insolvency litigation, shareholder meetin, Delaware Bankruptcy Court, shareholder rights


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

May 20, 2015

Delaware Court of Chancery Revisits Creditor Derivative Standing


In a significant decision, the Delaware Court of Chancery has rejected several proposed limitations on the ability of creditors to maintain derivative suits following a corporation’s insolvency. In doing so, however, the court reaffirmed the deference owed to a board’s decisions, regardless of the company’s financial condition and the high hurdles faced by creditors in seeking to prove a breach of fiduciary duty. Quadrant Structured Prods. Co. v. Vertin, C.A. No. 6990-VCL (May 4, 2015).


Quadrant, a creditor of Athilon Capital, brought a derivative action claiming that when Athilon was insolvent, its directors violated their fiduciary duties, including by authorizing repayments of debt owed to Athilon’s equity owner. The defendants moved for summary judgment on the basis that Quadrant lacked standing to sue under the Delaware Supreme Court’s decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (see WLRK memo of May 24, 2007), which permits creditors to sue directors for breach of fiduciary duty only on a derivative basis, and only once the corporation is insolvent.


First, the defendants argued that Quadrant lost its ability to sue because Athilon had been restored to solvency. The court disagreed, declining to require that a corporation be “continuously” insolvent from the date of the challenged transaction through the end of the creditor’s derivative litigation. Instead, the court required corporate insolvency only at the time of the transaction.


Second, the defendants argued that Quadrant had to show that Athilon was “irretrievably insolvent,” the standard used in receivership proceedings. Again, the court rejected the defendants’ position, holding that a creditor is required to show corporate insolvency only on a balance-sheet basis—i.e., liabilities in excess of the fair market value of assets.


In rejecting these “additional hurdles,” the court explained that, following Gheewalla and a series of Chancery Court decisions issued by now-Chief Justice Strine, a creditor’s derivative fiduciary duty claim is a “less potent” tool that: (1) can only be used after a corporation is actually insolvent (rather than in the “zone of insolvency”); (2) is generally subject to the business judgment rule and not “facilitated by any inherent conflict between duties to creditors and duties to stockholders”; and (3) serves only as “a vehicle for restoring to the firm self-dealing payments and other disloyal wealth transfers.”


Quadrant thus makes clear that a creditor’s claim for breach of fiduciary duty is not “an easily invoked theory” in need of further “impediments.” Rather, under Delaware law, directors of a corporation—whether solvent or insolvent—are protected by the business judgment rule in making good-faith decisions aimed at maximizing the value of the firm, even if those decisions benefit shareholders or favor certain non-insider creditors over others.


Keywords: bankruptcy and insolvency litigation, creditor derivative standing, Delaware Court of Chancery, Quadrant


Paul K. Rowe, William Savitt, Emil A. Kleinhaus, and Alexander B. Lees, Wachtell, Lipton, Rosen, and Katz, New York City, New York


 

February 20, 2015

Third Circuit Rules in In Re Allen


The Third Circuit Court of Appeals decided recently that a debtor does not need to actually possess property recovered under Section 550 for such property to constitute property of the debtor’s estate under Section 541(a)(3). See In re Allen, No. 13-3543 (3d Cir. Sept. 26, 2014).


In Allen, the debtor commenced an adversary proceeding in the Middle District of Florida against a former employee to recover $6 million in alleged fraudulent conveyances pursuant to Sections 544 and 550 of the Bankruptcy Code.  During the course of that litigation, the defendant transferred certain funds to an extraterritorial asset protection trust.  The debtor obtained a judgment against the defendant under Sections 544 and 550, but the defendant commenced its own bankruptcy proceeding in the District of New Jersey prior to satisfying the judgment or repatriating the subject funds to the United States as required by order of the debtor’s bankruptcy court. The debtor thereafter moved the New Jersey bankruptcy court for relief including a determination that the judgment amount was not property of the defendant’s bankruptcy estate and the debtor did not require relief from the stay in order to continue to pursue such funds. The New Jersey court determined that the judgment amount was not property of the debtor’s estate under Section 541 because the debtor did not have actual, tangible possession of the funds. 


On appeal, the Third Circuit interpreted what it means to “recover” property under Section 541(a)(3). The Third Circuit decided that the New Jersey court had improperly read into Section 541(a)(3) the concept of “actual, tangible possession” of property, even though the plain text of the provision does not include such a requirement. Section 541(a)(3) defines estate property as “any interest in property that the trustee recovers under … Section 550,” and the Third Circuit refused to “impose such a high hurdle” as actual possession where the plain language did not require it. For the Third Circuit, the debtor already had, “in a legal sense, recovered the funds for its estate by securing a Section 550 recovery order.” Additionally, the Third Circuit reasoned that requiring “actual possession” would create internal inconsistency in the code as it would render Section 541’s “wherever located and whomever held by” clause superfluous. Accordingly, the Third Circuit held that “where a debtor avoids a fraudulent transfer and obtains a recovery order, it has sufficiently ‘recovered’ those funds such that they are part of that debtors’ estate under the Code.”


Keywords: bankruptcy and insolvency litigation, property of the estate, Bankruptcy Code Sections 541 and 550


Marcos A. Ramos and William A. Romanowicz, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

January 27, 2015

Delaware Bankruptcy Court Rules in Antecedent Debt Case


Can a plaintiff state a preference claim by generally alleging that one or more of the debtor entities made the transfer at issue on account of an antecedent debt? The Delaware Bankruptcy Court (the Honorable Mary F. Walrath, presiding) recently reminded plaintiffs that the answer is no. See Stanziale v. DMJ Gas-Marketing Consultants, LLC. In DMJ, the defendant moved to dismiss the plaintiff’s preference claim including on the grounds that the plaintiff had parroted the statutory language when alleging an antecedent debt and failed to identify the specific debtor that made the transfer at issue. To survive a motion to dismiss, the Court noted that a plaintiff must include in its complaint: (a) an identification of the nature and amount of each antecedent debt; and (b) an identification of each alleged transfer by (1) date, (2) name of transferor, (3) name of transferee, and (4) amount of transfer.


Moreover, “[w]hen there are multiple debtors in a case, the Complaint must state which debtor owed the antecedent debt and that the same debtor made the preferential transfer.” Here, the plaintiff did not identify the transferor by name in the body of its complaint, but it did identify a specific transferor in an exhibit attached to the complaint. For the Court, that was sufficient to survive the motion to dismiss. However, the Court granted the motion to dismiss for failure to allege sufficient facts regarding the parties’ business relationship. While the plaintiff generally alleged that the parties conducted business together and the transfers were made on account of an antecedent debt, the plaintiff did not allege any specific facts regarding that relationship, including but not limited to the nature of the service or good provided by the defendant to the debtor. For the Court, the plaintiff’s allegations amounted to little more than “[t]he recitation of the elements of section 547 in place of factual allegations” and were not sufficient to survive the motion to dismiss. 


Keywords: bankruptcy and insolvency litigation, motion to dismiss, antecedent debt, transferor, Rule 12(b)(6)


Marcos Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

 

January 26, 2015

Time Period in Bankruptcy Rule 9023 Does Not Apply to Motion for Reconsideration of Denial of Summary Judgment


Does Bankruptcy Rule 9023 impose a time limit to file a motion to reconsider the denial of summary judgment? The Delaware Bankruptcy Court (the Honorable Christopher S. Sontchi, presiding) recently decided no. See Stanziale v. Southern Steel & Supply, L.L.C. In Southern Steel, the defendant moved the court to reconsider its denial of the defendant’s motion for summary judgment on the ordinary course of business defense. The plaintiff-trustee opposed the motion, including on the grounds that it was untimely. The defendant’s motion for reargument was filed 27 days after entry of the court’s order, or within the 28-day time period provided under Federal Rule of Civil Procedure 59(e) to file a motion to alter or amend a judgment.  See Fed. R. Civ. P. 59(e) (“A motion to alter or amend a judgment must be filed no later than 28 days after the entry of the judgment.”). According to the plaintiff, however, while Bankruptcy Rule 9023 incorporates Civil Rule 59(e), the 14-day period provided under Rule 9023 controls over the 28-day period provided under Rule 59(e). See Fed. R. Bankr. P. 9023 (“[e]xcept as provided in this rule . . . Rule 59 . . . applies in cases . . . .  A motion . . . to alter or amend a judgment shall be filed . . . no later than 14 days after the entry of judgment.”). The court was not required to expressly resolve the dispute over the 14- or 28-day time period because it instead found that “[t]he time period in Rule 9023 . . . does not apply to a motion to reconsider denial of a summary judgment” because “the Court’s denial of Defendant’s motion for summary judgment is not a final judgment that implicates the time bar of Rule 9023.” Instead, the filing of a motion for reconsideration of such a ruling “is nothing more than an interlocutory motion invoking the . . . court’s general discretionary authority to review and revise interlocutory rulings prior to entry of final judgment.” Moreover, while “the doctrine of laches might apply if there were an inordinate delay in filing such a motion” here the “motion was filed 27 days after entry of the Opinion and Order and cannot be considered untimely.”

Keywords: bankruptcy and insolvency litigation, reconsideration, timeliness, Bankruptcy Rule 9023


Marcos Ramos, Richards, Layton & Finger, P.A., Wilmington, DE. The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

 

November 19, 2014

Second Circuit: Equitable Mootness Doctrine Applies in Chapter 11 Liquidations


Equitable mootness is a doctrine under which appellate courts refrain from hearing bankruptcy appeals relating to plan confirmation when it would be “inequitable” to do so. In Beeman v. BGI Creditors’ Liquidating Trust (In re BGI, Inc. f/k/a/ Borders Group, Inc.), the Second Circuit held that the doctrine applies in Chapter 11 liquidations, thereby extending the doctrine from the Chapter 11 reorganization context in which it has previously been applied in the circuit.


Borders filed a petition for voluntary reorganization in February 2011, and in November 2011, a Chapter 11 liquidation plan under section 1125 of the Bankruptcy Code. At that time, Borders disseminated a disclosure statement and provided notice of its confirmation hearing. None of the appellants filed claims by the bar date, objected to the plan, or appeared at the confirmation hearing. In December 2011, the Bankruptcy Court issued an order confirming the plan, which was to be effectuated on January 12, 2012. Shortly thereafter, on January 4, 2012, the appellants sought to file untimely proofs of claim, arguing that they had received inadequate notice of the bankruptcy proceedings and the bar date, and certification of a class of all holders of Borders gift cards issued prepetition. 


The Bankruptcy Court denied appellants’ requested relief in August 2012. First, the Bankruptcy Court determined that the appellants were “unknown” creditors at the time the debtor gave notice, because Borders had no reasonable method for discerning gift card holders’ address or identifying information. Thus, the debtor’s publication of the bar date in a nationwide newspaper was all the notice to which appellants were entitled. The Bankruptcy Court further held that appellants’ failure to file timely proofs of claim was not “excusable neglect,” in part because, by that time, the plan had already been substantially consummated. The Bankruptcy Court finally denied appellants’ class certification motion as moot. On appeal, the district court dismissed appellants’ appeals as equitably moot.


Reviewing the decisions below, the Second Circuit first held that the doctrine of equitable mootness applies in Chapter 11 liquidation proceedings as well as reorganization proceedings. The court noted that it saw no principled reason not to extend the doctrine to a Chapter 11 liquidation, because in a Chapter 11 liquidation, affected parties may have devoted months of time and resources toward developing an acceptable plan; creditors with urgent needs may have been stayed from accessing assets and funds to which they are entitled; and extensive judicial resources may have been consumed. Thus, in liquidation as in reorganization, the parties involved have an interest in preventing tardy disruption of a confirmed and substantially consummated plan.

The court then examined the application of the equitable mootness doctrine to appellants’ claims below. The court found no clear error in the Bankruptcy Court’s determination that the plan had been substantially consummated as of August 2012, and that, as of the plan’s effective date, Borders transferred its relevant property to the BGI Creditors’ Liquidating Trust, and the trust had begun administering timely filed claims and making distributions to holders of allowed administrative and priority claims. As in the Chapter 11 reorganization context, the presumption of equitable mootness may be rebutted in a Chapter 11 liquidation by demonstrating that all five factors articulated in Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaguay Corp.), 10 F.3d 944 (2d Cir. 1993) are satisfied:

1. The court can still order some effective relief.

2. Such relief will not affect the re‐emergence of the debtor as a revitalized corporate entity.

3. Such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court.

4. The parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings.

5. The appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order[,] if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.


The court further agreed with the district court that appellants had failed to satisfy the fourth Chateaugay factor, because the appellants had not established that the general unsecured creditors, who could be affected if the proposed class was certified, had received notice of their appeal to the district court, and had further failed to satisfy the fifth Chateaugay factor, because appellants did not appear at the plan confirmation hearing, file objections to the plan, appeal the confirmation order, or seek a stay of the plan’s effective date.

Keywords: bankruptcy and insolvency litigation, equitable mootness, substantial consummation


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

 

November 11, 2014

DE Bankruptcy Court: Pre-BACPA Burden of Proof on Ordinary Course of Business Defense No Longer Applies


Under an opinion dated October 14, 2014, the Delaware Bankruptcy Court denied opposing motion for summary judgment in a proceeding initiated by the plaintiff-trustee to avoid and recover alleged preferential transfers.


The defendant (a pre-petition creditor of the debtor) moved for summary judgment on the ordinary course of business defense, arguing that the payments to it were made in the ordinary course of business under 11 U.S.C. § 547(c)(2). The trustee similarly moved for summary judgment, arguing that the defendant could not establish the ordinary course of business defense because the debtor's payments to it were late and the defendant only engaged in business with the debtor during the preference period. The court denied both motions in part because the record before it was insufficient and there appeared to be material factual issues in dispute regarding the parties' payment practices. However, the court also addressed the somewhat novel issue of whether a defendant with limited payment history must—in accordance with certain long-standing, pre-BACPA case law—establish an industry norm to demonstrate that the parties' payment practices were ordinary.


The court noted that pre-BACPA case authority (in certain circumstances) imported industry analysis into the proof of the parties' payment history and was developed when the relevant statute required a defendant to establish ordinariness of the payments as compared to the parties' actual payment history and also industry standards. The statute, however, was amended to provide that the defendant could benefit from the defense if it established either the ordinariness of the payments in the parties' actual payment history or industry standards. Accordingly, the court held that "[t]o require a defendant to show that transfers were made under industry norms to establish that the transfers were made in the ordinary course of the parties' relationship would be to rewrite the statute to its pre-2005 terms. To be consistent with the current statutory structure, the Court cannot import the industry practice into its review of the parties' business relationship. The Court must do the best it can with the evidence before it as to the parties' relationship. Moreover, under the current statute it would be inappropriate to subject the evidence of industry norms to stricter scrutiny because the parties' business relationship has been for a relatively short time." 

 

Marcos Ramos and Alexander G. Najemy, Richards, Layton & Finger, P.A., in Wilmington, DE


 

 

November 11, 2014

DE Bankruptcy Court Denies Motion to Convert


Under a memorandum order dated October 23, 2014, the Delaware Bankruptcy Court denied a party’s request to have the debtors’ chapter 11 cases converted to chapter 7 cases.  While sympathetic to the movant’s request, the court ultimately determined that the relevant parties were making some progress toward the goal of a plan of reorganization and therefore conversion was not warranted at this time.


Debtors Simplexity LLC, et al, filed a chapter 11 petition on March 16, 2014. On May 14, 2014, First Third Bank (FTB), in its role as agent under the debtors’ pre-petition secured facility and the debtors’ debtor-in-possession financing, filed a motion to convert the debtors’ three related chapter 11 cases into chapter 7 cases.  FTB argued that the debtors could not be rehabilitated, the continued chapter 11 cases would harm creditors of the debtors, and Section 1112(b) of the Bankruptcy Code required the court to convert the debtors’ cases upon their showing of cause.  The court denied FTB’s May 14 motion on the grounds that the incomplete record and early nature of the debtors’ cases constituted an unusual circumstance (as provided under Section 1112(b)(2)) that warranted denial of the motion.


Later, on September 25, 2014, FTB filed a second motion to convert the debtors’ cases. FTB argued therein that the reasons previously relied on by the court to deny FTB’s earlier motion (such as an incomplete record and the early status of the case) no longer warranted denial of the motion to convert.  FTB again cited Section 1112(b) (that provides for conversion upon good cause shown) arguing that conversion was necessary because there was not a reasonable likelihood that the debtors could confirm a plan in a reasonable amount of time.


While the court agreed with certain of FTB’s arguments, it declined to grant the motion at this time. The court accepted that its earlier reasons for denying the motion to convert (i.e., an incomplete record and the early stage of the case) no longer were sufficient to find unusual circumstances under Section 1112(b)(2). However, relying on the statements of counsel for various parties, the court also concluded that there were sufficient grounds to find that there was a reasonable likelihood of a plan being confirmed. In this regard, the court credited statements of counsel for the debtors and the Official Committee of Unsecured Creditors regarding their ongoing discussions toward an agreement regarding a confirmable plan. According to the court, these discussions were sufficient at this time to satisfy “unusual circumstances” under Section 1112(b)(2). The court also credited that FTB would be exposed to minimal harm from the denial of its motion, particularly as the court indicated that it would enter an order to convert the debtors’ cases if the parties were not successful in reaching agreement on a confirmable plan by December 1, 2014.


Marcos Ramos and Alexander G. Najemy, Richards, Layton & Finger, P.A., in Wilmington, DE


 

October 15, 2014

Eleventh Circuit Clarifies Standing to Appeal a Bankruptcy Court Order


In Atkinson v. Ernie Haire Ford Inc., the Eleventh Circuit held that a mere defendant in an adversary proceeding was not “aggrieved” for the purposes of standing to appeal an order entered by the bankruptcy court in the main bankruptcy case.

Procedural Posture
Debtor, a former automobile dealership, filed a chapter 11 bankruptcy case.  Approximately one year into the case, Debtor confirmed its second proposed plan of reorganization.  The confirmed plan was a liquidating plan, which empowered a liquidating agent to bring lawsuits against third parties in the liquidating agent’s sole discretion.  Moreover, the confirmed plan provided that all litigation must be commenced by the liquidating agent within 120 days from the effective date of the confirmed plan (“litigation bar date”).  Finally, the confirmed plan provided for an injunction against persons attempting to commence or institute litigation that is “barred pursuant to the Plan . . . [upon request of] a defendant.”

Well after the 120 day litigation bar date passed, the liquidating agent named Appellant as a defendant in 16 individual adversary proceedings.  Appellant is a former employee of Debtor.  The adversary proceedings asserted claims against the Appellant for fraud and misappropriation relating to Appellant’s time as an employee at Debtor. 

Appellant filed a motion seeking to enjoin the liquidating agent from prosecuting the adversary proceedings, under the authority provided for in the confirmed plan.  In response, Debtor moved to modify its confirmed plan to extend the litigation bar date so that the adversary proceedings against Appellant would be timely.  The Bankruptcy Court granted Debtor’s motion, finding that the plan had not been substantially consummated as Debtor remained in possession of substantial assets that needed to be administered.

Appellant appealed the order to the District Court, which affirmed, and then again to the Eleventh Circuit.

Only “Aggrieved Persons” May Appeal a Bankruptcy Court Order
The Eleventh Circuit began its analysis by considering whether Appellant had the right to appeal the order entered in Debtor’s bankruptcy case amending the terms and conditions of the confirmed plan.  The Court referenced § 39(c) of the now-repealed Bankruptcy Act of 1898, for the standard, which provides that “only ‘a person aggrieved’ could appeal from an order of the bankruptcy court.”  The Court noted that “[a]lthough the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549, does not include a similar provision limiting who can appeal, courts continue to apply the person aggrieved standard because ‘Congress [did not] intend[] to alter the definition set forth in the prior law.’”  This standard comports with earlier decisions by the Eleventh Circuit and the holdings of certain of the Eleventh Circuit’s sister courts.

The case law defines aggrieved persons as those individuals who are “directly, adversely, and pecuniarily affect[ed] by a bankruptcy court's order.”  Thus, “[a]n order will directly, adversely, and pecuniarily affect a person if that order diminishes their property, increases their burdens, or impairs their rights.”

“Aggrieved” Defendants in Adversary Proceedings
The Court then considered the holdings of its sister circuits, ultimately concluding that “a party is not aggrieved, for the purposes of appealing from a bankruptcy court order, when the only interest allegedly harmed by that order is the interest in avoiding liability from an adversary proceeding.”   The Court reasoned that “an order subjecting a party to litigation, or the risk thereof, causes only indirect harm to the asserted interest of avoiding liability.”   Thus, “[o]rders allowing litigation to go forward do not burden a party’s ability to defend against liability; they simply require parties to exercise that ability.”  These circumstances “do not constitute the direct harm necessary to satisfy our person aggrieved standard.”

The Court further narrowed the standard by holding that “for a person to be aggrieved, the interest they seek to vindicate on appeal must be one that is protected or regulated by the Bankruptcy Code.”   Again, the Eleventh Circuit adopted the reasoning and holdings offered by several other Circuit Courts.

The rationale for the rule was defined: “The person aggrieved standard was developed as an answer to the argument that the failure to limit who can appeal a bankruptcy court's order would cause ‘bankruptcy litigation [to] become mired in endless appeals brought by the myriad of parties who are indirectly affected by every bankruptcy court order.’”  Thus, the two-part test was adopted and affirmed in the Eleventh Circuit: the appellant must have suffered direct harm and must be seeking to vindicate an interest that is protected by or regulated by the Bankruptcy Code.

Appellant’s Procedural Misstep
Nearly two years after confirmation of Debtor’s plan, Appellant withdrew his proof of claim and resigned from serving on the Unofficial Committee of Unsecured Creditors.  Accordingly, the Court found that Appellant came “to us merely as an adversary defendant with an interest in avoiding liability; an interest that is antithetical to the goals of bankruptcy.”  As such, Appellant was not an “aggrieved person” for purposes of the Bankruptcy Court’s order extending the litigation bar date.  The Court clarified that not every adversary proceeding defendant would fail to meet the “aggrieved person” standard, particularly if the adversary defendant was attempting to defend a right protected by the Bankruptcy Code, such as a failed bidder at an auction.

Ultimately, the Court rejected Appellant’s argument that he was an “aggrieved person” on the ground that the confirmed plan expressly provided for an injunction against suits brought after the litigation bar date.  The Court found that this “right” to an injunction arose solely from the terms of the plan, not from the Bankruptcy Code.  Fearful of the floodgates of litigation potentially arising from bankruptcy appeals filed by non-aggrieved parties, the Court affirmed the lower court decisions holding that Appellant did not have the right to appeal the order extending the litigation bar date.

Keywords: bankruptcy and insolvency litigation, standing, aggrieved person


Garrett A. Nail, Thompson Hine LLP, Atlanta, GA


 

 

October 7, 2014

Grant of Summary Judgment Affirmed Because Appellant Did Not Demonstrate that Debtor was Left with Unreasonably Small Capital


On September 30, 2014, the United States District Court for the District of Delaware entered an order affirming the Delaware Bankruptcy Court’s grant of summary judgment to a defendant/appellee on a plaintiff/appellant’s claims to avoid and recover two equity distributions totaling $55 million as constructively fraudulent transfers. Whyte v. Ritchie SH Hldgs. LLC, et al (In re: SemCrude, L.P.), Civ. Nos. 13-1375 & 13-1376 (D. Del. Sept. 30, 2014). The issues on appeal included the bankruptcy court’s conclusion that the appellant had not demonstrated that the debtor was left with unreasonably small capital after the distributions at issue. 

The debtor provided goods and services related to the transportation, storage, and distribution of oil and gas products. At the time of the distributions at issue, the debtor also was party to credit facilities and had actual bank loans and lines of credit. Between July 2007 and February 2008, the debtor increased its borrowings under such facilities from about $800 million to $1.7 billion. In July 2008, the lenders declared the debtor to be in default, and the debtor thereafter filed for bankruptcy.

The Delaware District Court relied heavily on the Third Circuit decision in Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056 (3d Cir. 1992). Quoting liberally from Moody, the District Court noted that the concept of unreasonably small capital denotes “a financial condition short of equitable insolvency” and refers to an “inability to generate sufficient profits to sustain operations.  The test looks to a period of time before the entity’s inability to pay debts as they become due (a separate “insolvency” test under federal and state law). In assessing the debtor’s capital, the test assumes “reasonable foreseeability” and it is proper for the court to consider the availability of credit. The reasonableness of projections is determined by an objective standard “anchored in the company’s actual performance,” but the court must recognize that “businesses fail for all sorts of reasons, and  . . . fraudulent [conveyance] laws are not a panacea for all such failures.” Moreover, there must be a causal connection between the transfers at issue and the likelihood of the debtor’s business failure. In this regard, a “debtor’s later failure, alone, is not dispositive . . . . [and the] Court’s analysis must be done as of the time of the transfers in question.”


The district court noted that the debtor had substantial credit available to it at the time of the distributions at issue, the appellant did not allege that the debtor concealed its activities or engaged in fraud, and the appellant had not presented evidence that the debtor’s lenders had declared a default under the debtor’s lending facilities on account of the distributions at issue. Further, while the appellant alleged that it had raised a genuine issue of material fact as to whether the distributions were known to the lenders or otherwise inconsistent with the terms of the debtor’s lending facilities, the district court agreed with the bankruptcy court that such evidence (if any) was not sufficient to withstand entry of summary judgment because the appellant was not able to reliably demonstrate that the lenders would have declared a default that precipitated a bankruptcy filing if the lenders had known of the distributions at issue. Instead, the district court agreed that the bankruptcy court’s entry of summary judgment was appropriate because “what appellant proposes is a ‘speculative exercise’ not rooted in the case law.”


Marcos Ramos, Richards, Layton & Finger, P.A., Wilmington, DE


 

 

October 5, 2014

District Court Reverses Bankruptcy Court's Entry of Final Judgment on Non-Core Claims


In N.Y. Skyline, Inc. v. Empire State Building Trust Co. (In re N.Y. Skyline, Inc.), the United States District Court for the Southern District of New York held that the debtor did not consent to the bankruptcy court’s authority to enter final judgment on non-core claims, even though the debtor’s chapter 11 plan stated that the bankruptcy court had jurisdiction to “determine all adversary proceedings.” The district court ruled that a bankruptcy court may not enter a final judgment on non-core claims absent the express consent of the parties and, as a result, the general statement in the debtor’s plan was not sufficient to indicate express consent. 


The 2005 Agreement and 2008 State Court Action
The debtor, New York Skyline, Inc. (Skyline), ran a flight simulator attraction in New York.  In February 1993, Skyline entered into a lease and license agreement with Empire State Building Trust Company L.L.C. and Empire State Building Associates L.L.C. (collectively, ESB), which allowed Skyline to operate the attraction on the second floor of the Empire State Building.  A 2005 modification to the lease agreement led to a variety of disputes between the parties.  In July 2008, ESB demanded that Skyline pay $431,000 in security fees pursuant to the 2005 modification.  In response, Skyline filed an action in state court against ESB seeking declaratory, injunctive, and monetary relief.


Skyline Files for Bankruptcy
In January 2009—while the state court action was pending—Skyline filed a voluntary petition for chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York.  ESB then filed an adversary proceeding against Skyline and removed the state court action.  But Skyline contested removal, arguing that the bankruptcy court should remand or abstain because the state court action turned on issues of state law, and therefore it was a non-core proceeding under the Bankruptcy Code.


In April 2009, the bankruptcy court denied Skyline’s motion to remand or abstain.  The bankruptcy court concluded that the claims at issue in the state court action were core to the extent they “intertwined” with Skyline’s pending decision to assume or reject the lease and license agreement with ESB, and “arguably core to the extent they related to the allowability of ESB’s proof of claim.”  Skyline subsequently filed an amended complaint in the bankruptcy court in May 2009.  The complaint alleged that the bankruptcy court had jurisdiction because the causes of action were core matters “[f]or the reasons articulated [by the bankruptcy court] in connection with the denial of Skyline’s motion to remand.”


The bankruptcy court ultimately confirmed Skyline’s chapter 11 plan of reorganization in October 2010.  Among other things, the plan provided that the bankruptcy court would retain post-confirmation jurisdiction to “determine all adversary proceedings,” as well as other specified actions. 


Skyline Questions the Bankruptcy Court’s Authority after Stern
In July 2011, ESB moved for partial summary judgment. Before Skyline filed its opposition, however, it questioned the bankruptcy court’s authority to rule on claims at issue in the adversary proceedings based on the Supreme Court’s decision in Stern.  There, the Supreme Court held that Article III of the Constitution prohibits a bankruptcy court from entering final judgment on certain claims designated as core, even though the Bankruptcy Code authorizes bankruptcy courts to enter such judgments.


After briefing, the bankruptcy court concluded that it had the authority to enter final judgment on the parties’ claims for two reasons. First, the court held that, at the time the adversary proceedings were commenced, “the claims and counterclaims asserted, at a minimum, ‘related to’ or were non-core claims in Skyline’s bankruptcy case.”  As such, the bankruptcy court found that it had jurisdiction over the parties’ claims and counterclaims.  Second, the court held that Skyline expressly consented to the bankruptcy court’s authority to enter final judgments on non-core claims in the jurisdiction retention provision of its chapter 11 plan. 

With no qualms about its authority, the bankruptcy court granted ESB’s motion for partial summary judgment, and, after two trials, ruled in ESB’s favor on the remaining claims. At the conclusion of the adversary proceedings, the bankruptcy court enjoined Skyline from performing certain activities on the premises of the Empire State Building.  Skyline appealed the injunction to the district court.


The District Court Reverses: Consent of the Parties
The district court reversed, reaffirming the general rule that a bankruptcy court may not enter a final judgment on non-core claims absent the express consent of the parties.  The district court concluded that Skyline never consented here for two reasons.  First, at the time ESB commenced the adversary proceedings, the bankruptcy court held that the claims were core—a determination that Skyline did not challenge. Before Stern, of course, Skyline had “little reason to believe that it had a viable challenge to the determination that the claims were core or that [the bankruptcy court] was not constitutionally empowered to enter judgment on the claims.” 


Second, Skyline did not consent in its chapter 11 plan to entry of final judgment on non-core claims. The district court emphasized that “[a] waiver of important rights should only be found when it is voluntary and knowing.”  The general statement in Skyline’s plan that the bankruptcy court retained jurisdiction to “determine all adversary proceedings” was not sufficient and, therefore, Skyline did not adequately consent to the bankruptcy court’s final adjudicative authority.


“Related to” Bankruptcy
The district court also remanded the case for the bankruptcy court to reconsider whether the adversary proceedings “related to” Skyline’s bankruptcy case. The bankruptcy court found that it had authority over the adversary proceedings because they were “related to” Skyline’s bankruptcy case at the time they were commenced. But the district court rejected this reasoning: just because jurisdiction exists at the outset—and even if it continues to exist—“it does not follow that the adversary proceedings continued to be ‘related to’ the bankruptcy case.”  To the contrary, the district court suggested that the “nature of the claims that went to trial, the confirmation of the [p]lan, and the issuance of the [f]inal [d]ecree strongly suggest that the claims were no longer related to Skyline’s bankruptcy case.” 


If the adversary proceedings were no longer “related to” Skyline’s bankruptcy case, then the bankruptcy court not only lacked the authority to rule on the parties’ claims, even with the parties consent, but it likewise lacked the authority to issue proposed findings of fact and conclusions of law.  Accordingly, the district court remanded the case for the bankruptcy court for consideration of this issue.


Pete Farrell, Faegre Baker Daniels, LLP, Minneapolis, MN, and Steve Winkelman, a former summer associate at Faegre Baker Daniels, LLP


 

October 1, 2014

Fifth Circuit's Hindsight Approach Can Be Expensive for Professionals


Bankruptcy Code section 330 authorizes reasonable compensation to professionals. Some courts use a “reasonableness” test—whether the services were objectively beneficial toward the completion of the case at the time they were performed. In In re Pro-Snax Distributors, Inc., the Fifth Circuit adopted a hindsight approach—whether the services “resulted” in an identifiable, tangible, and material benefit to the bankruptcy estate. Pro-Snax, 157 F.3d 414, 426 (5th Cir. 1998) (emphasis added). Which test applies can dramatically affect the fees awarded.

Recently, a Fifth Circuit panel affirmed a bankruptcy court’s order allowing less than $20,000 of a more than $130,000 fee application applying the hindsight approach. See Barron & Newburger, P.C. v. Texas Skyline, Ltd., et al. (In re Woerner), 758 F.3d 693 (5th Cir. 2014). It is likely that a reasonableness approach, the law in most other circuits, would not have supported such a restrictive award, and the panel explicitly recommended reconsideration of the Fifth Circuit’s rule. 

In Woerner, Barron & Newburger (B&N) represented an individual in a Chapter 11 bankruptcy case. The case was converted to Chapter 7 approximately 11 months later. The bankruptcy petition was filed as a result of adverse determinations in state court partnership litigation. B&N assisted in preparation of the bankruptcy filing, schedules, and statements; defended an adversary proceeding concerning nondischargeability; defended a request for stay relief to permit the state court litigation to proceed; amended the bankruptcy schedules and amended the statement of financial affairs; represented the debtor in unsuccessful negotiations with the major creditor and sought to enforce a tentative settlement; worked on a plan and disclosure statement; worked on employment and fee applications; worked briefly on proposed financing and more extensively on proposed sale, use, and lease of estate assets. Notably, the firm sought to remedy prior client errors in the statements and schedules, and to fight for reorganization against the odds.

After conversion, the United States Trustee opposed B&N’s final fee application. The bankruptcy court applied the Pro-Snax hindsight test and allowed all fees requested for initial investigation of assets, alternative dispute resolution, and communication with the client; half of the request for the schedules and statements; 25 percent of the amount sought for stay relief proceedings; less than 11 percent of the amounts sought for case administration (only allowing fees for the creditor’s meeting and related filings), and allowed a small request for business operations. All fees sought for determination of claims, addressing dischargeability of debt, the disclosure statement and plan, employment and fee applications, financing and sale, use and lease of assets were denied as unreasonable or without material benefit to the estate. The district court affirmed almost a year later. Eighteen months later the Fifth Circuit also affirmed.

The Fifth Circuit’s analysis began with the Pro-Snax standard. A Fifth Circuit panel may not overrule another panel, so that was the applicable standard. In applying the standard, B&N argued that its efforts in obtaining amended schedules and statements and finding errors in the debtor’s original filings were necessary services by counsel for debtor and therefore compensable. The bankruptcy court found that instead of investigating and amending the schedules and statements, B&N should have withdrawn because it represented an unworthy client, so that B&N was largely denied compensation. This was proper application of the hindsight test. Because the bankruptcy court applied the right legal standard (Pro-Snax), the amount of fees to be allowed is in the bankruptcy court’s discretion. B&N could not show abuse of that discretion on appeal.

Circuit Judge Prado specially concurred, joined in by the other two judges on the panel, to express concern about the hindsight test in Pro-Snax. Section 330 strongly suggests that compensable services are those reasonably likely to benefit the debtor’s estate or necessary to the administration of the case. Thus, “services [which] were reasonable when rendered but which ultimately may fail to produce an actual benefit,” may be compensable under Section 330.

The Fifth Circuit Pro-Snax standard is in the minority, rejected by the Second, Third, and Ninth Circuits.  See In re Ames Department Stores, Inc., 76 F.3d 66 (2d Cir. 1996), abrogated on other grounds by Lamie v. U.S. Trustee, 540 U.S. 526 (2004); In re Top Grade Sausage, Inc., 227 F.3d 123, 132 (3d Cir. 2000), abrogated on other grounds by Lamie, 540 U.S. 526; In re Smith, 317 F.3d 918, 926 (9th Cir. 2002); see also In re Taxman Clothing Co., 49 F.3d 310, 314–16 (7th Cir. 1995) (bankruptcy court abused discretion granting fees for a performance action that was not reasonably likely to benefit the estate). The concurring opinion sought Fifth Circuit reconsideration of the Pro-Snax standard en banc. 

Counsel with a “bad client” in the Fifth Circuit must be cautious that application of the hindsight test may serve to turn counsel’s efforts to correct the client’s mistakes into pro bono service.


Rob Charles, Lewis Roca Rothgerber LLP, Tucson, AZ


 

 

September 29, 2014

"Remains Unpaid" Approach Rejected


On August 14, 2014, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware issued an opinion in Miller v. JNJ Logistics, LLC, 514 B.R. 426 (Bank. D. Del. 2014) rejecting the “remains unpaid” approach for determining the extent of a preference defendant’s new value under Section 547(c)(4)(B) and adopting instead the “subsequent advance” approach.  Judge Sontchi rejected as dicta the Third Circuit’s pronouncement in New York City Shoes, Inc. v. Bently International, Inc., 880 F.2d 679, 680 (3d Cir. 1989) that a defendant “is entitled to set off the amount of the ‘new value’ which remains unpaid on the date of the petition….”  Judge Sontchi’s rejection of the “remains unpaid” approach builds on several of his prior opinions addressing the calculation of new value under 548(c)(4)(B)—Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), 463 B.R. 302 (Bankr. D. Del. 2012), Burtch v. Masiz (In re Vaso Active Pharm.), Inc., 500 B.R. 384 (Bankr. D. Del. 2013)—and parallels Judge Kevin J. Carey’s opinion in Wahoski v. American & Efrid, Inc. 416 B.R. 123 (Bankr. D. Del. 2009).

 

Read Judge Sontchi’s decision


Robert C. Maddox , Richards, Layton & Finger, P.A., Wilmington, DE


 

 

September 11, 2014

Delaware Bankruptcy Court Denies Motion to Compel Production of Post-Sale Financial Information


Under an opinion dated August 6, 2014, the Delaware Bankruptcy Court denied a motion to compel the production of post-sale financial information. The plaintiff’s claims were for breach of fiduciary duty and aiding and abetting thereof arising from the debtor’s pre-petition sale of certain assets to the defendants. The defendants were the former officers of the subject assets, debtor’s former wholly-owned subsidiary. The plaintiff moved the court to compel the production of post-sale financial information, purportedly to test the accuracy and reasonableness of pre-sale projections. The court denied the motion, noting that while confirmatory data can be used to determine the accuracy and reasonableness of projections and related valuations, in this case the court’s principal focus would be on the decision-making process of the sale rather than the mere accuracy of a valuation that may have been relied on.

 

Marcos Ramos, Richards, Layton & Finger, P.A., Wilmington, DE


 

 

September 5, 2014

New Article on Common Issues Faced by Parties in Financial Distress


In our Articles section, Mark Platt and Ryan Manns highlight some common issues that parties new to bankruptcy might consider when confronted a bankruptcy filing.


 

 

September 3, 2014

Delaware Grants Motion for Contempt and Indicates that Incarceration Can Be Appropriate Sanction


Have you ever considered moving for incarceration as a sanction for non-compliance with a discovery order? Recently, the Delaware Bankruptcy Court considered just such a request. Read the case note detailing the ruling, by editor Marcos Ramos.


 

 

August 22, 2014

Four New Case Notes from Various Circuits


Several case notes were added to the website today. From the Ninth Circuit, we examine the court’s decision to reject a complaint of judicial misconduct filed by a disappointed financial advisor whom the bankruptcy judge refused to appoint as estate representative and its decision to affirm the lower court’s determination to compel the transfer of an interest in foreign realty.  From the First Circuit, we examine the United States Bankruptcy Court for the District of Puerto Rico’s decision to deny a creditor’s request to amend its claim and compel the trustee to recover monies paid to other unsecured creditors.  And finally, from the Third Circuit, we examine a decision by the Delaware Bankruptcy Court to dismiss with prejudice claims that sounded in deepening insolvency and breach of fiduciary duty under Texas statutory law.


 

August 1, 2014

Enforcing Settlements


Have you ever had to enforce a settlement in the bankruptcy court? In our articles section, Marcos A. Ramos and Cory D. Kandestin review certain related case law, including whether a party can unilaterally walk-away prior to the court's consideration of the settlement.


 

Notes from the Seventh Circuit


In our case notes section, Jamie Netznik and Catherine Steege discuss two recent decisions from within the Seventh Circuit. Jamie outlines a decision of the United States Bankruptcy Court for the Northern District of Illinois under 11 U.S.C. § 548(c), and Catherine outlines a decision of the Seventh Circuit that discusses an intersection between abstention, a transfer order and whether (or not) to remand.


 

 

July 2, 2014

Proposed Changes to Rule 37(e)


Are you wondering about the proposed changes to Rule 37(e)?  Camisha L. Simmons, of Norton Rose Fulbright, discusses the proposed revised Rule 37(e).


 

 

June 23, 2014

Summary Judgment Denied in Case Filed Against Partners of Bankrupt Law Firm


Contributing Editor Lynn Hinson provides an overview of a recent decision by the United States Bankruptcy Court for the Southern District of New York in the In re Thelen LLP bankruptcy case. There, the court denied a Chapter 7 trustee’s motion for summary judgment under which the trustee sought to determine the date of the subject transfers for purposes of the trustee’s constructive fraudulent transfer claim. Read Lynn's case note to learn more.


 

 

June 12, 2014

Tax Foreclosure Sales and Fraudulent Transfers


Have you ever wondered whether a tax foreclosure sale is or should be insulated from liability on a claim to avoid the sale as a fraudulent transfer?  In our Articles section, Lynn Hinson discusses certain recent case law regarding this very topic and outlines the nature of the related issues considered by courts.


 

 

June 4, 2014

Debtor's Sale of Business Equipment Collateral "Out of Trust" Is Willful and Malicious Injury


In Bradley, the Sixth Circuit Bankruptcy Appellate Panel (BAP) held that the debtor’s sale of equipment owned by his business “out of trust”—that is, without turning over the proceeds to the secured creditor—was not embezzlement because a security interest does not rise to the level of ownership necessary for embezzlement. However, the court held that the injury caused by the debtor was “willful” and “malicious” within the meaning of the non-dischargeability statute because the debtor knew that his conduct was substantially certain to harm the creditor’s rights in the collateral and the debtor consciously disregarded those rights without justification. Therefore, the court held that the debt was not dischargeable.


On November 30, 2010, Dean and Cynthia Bradley filed a joint, voluntary chapter 7 bankruptcy petition. Dean Bradley, the debtor, owned Bradley Machinery, LLC, which did not file for bankruptcy. On March 21, 2011, Kraus Anderson Capital, Inc., the lender, filed an adversary proceeding against Bradley. Kraus Anderson alleged that Bradley tortiously sold certain equipment that was collateral for Bradley Machinery’s loan from the lender “out of trust” (i.e., without providing the collateral proceeds to Kraus Anderson). The basis of the proceeding was alleged as embezzlement (11 U.S.C. §523(a)) and willful and malicious injury (11 U.S.C. §523(a)(6)). Kraus Anderson later added a claim that Bradley secured additional financing via misrepresentation (11 U.S.C. §523(a)(2(A)). On February 5, 2013, the Bankruptcy Court held that Kraus Anderson did not demonstrate that the debt was non-dischargeable. Following the Bankruptcy Court’s denial of Kraus Anderson’s motion to amend and make additional findings of fact and conclusions of law and to alter, amend, or vacate judgment, Kraus Anderson appealed.

 

Read the full case note.

 

Charles Parker II


 

 

May 23, 2014

Fourth Circuit Confirms Standard for Section 548(c) Good-Faith Defense


In Gold v. First Tennessee Bank National Association (In re Taneja), a split Fourth Circuit confirmed the relevant standard applicable to a good-faith defense under Section 548(c) and determined that a party can satisfy the objective prong of the standard by presenting competent objective non-expert testimony.


The trustee of Financial Mortgage, Inc. (FMI), a home mortgage originator, sought to avoid as fraudulent certain prepetition transfers made from FMI to First Tennessee Bank (First Tennessee), one of FMI’s warehouse lenders. First Tennessee asserted that the transfers were not avoidable because it had taken the transfers for value and in good faith under Section 548(c). First Tennessee established that it provided value. Applying existing Fourth Circuit precedent for good-faith under Section 550, both the bankruptcy court and district court below held that First Tennessee established its good faith based on the testimony of First Tennessee’s employees. The Fourth Circuit affirmed.

 

Read the full case note.

 

Robert C. Maddox, Richards, Layton & Finger, Wilmington, Delaware


 

 

May 19, 2014

Fifth Circuit Affirms Fee Enhancement, Reverses Fees Incurred in Defending Fee Application


In In re Asarco, the Fifth Circuit held that 11 U.S.C. § 330 permits the bankruptcy court to enhance the fees of counsel but does not permit the bankruptcy court to award attorney fees incurred by counsel in defending its fee application.


ASARCO was a copper mining, smelting and refining company. Two years before it commenced its bankruptcy case, ASARCO’s parent company directed ASARCO to transfer a controlling interest in the Southern Copper Corporation to the parent company. After ASARCO filed its bankruptcy petition, bankruptcy counsel prosecuted fraudulent transfer and related litigation against the parent company. The litigation against the parent company was successful and resulted in the recovery of funds sufficient (among other things) to fund a reorganization plan that included full payment to ASARCO’s creditors and a reorganized ASARCO that emerged from bankruptcy with $1.4 billion in cash.

 

Read the full case note.

 

Marcos Ramos, Richards, Layton & Finger, P.A., Wilmington, DE


 

May 2, 2014

Orders Denying Motions to Dismiss for Abuse and Convert Chapter 7 Case to Chapter 11 Are Interlocutory


In Gebhardt, Acting United States Trustee, v. Hardigan, 2014 WL 132006 (N.D. Ga. March 31, 2014), the United States District Court held that bankruptcy court orders denying motions to dismiss a Chapter 7 case for abuse and to convert the case to Chapter 11 are interlocutory orders.  The district court also held that it was appropriate to grant leave to appeal the orders in accordance with 28 U.S.C. § 158(a)(3).


Procedural History
Following the filing of the individual debtor’s Chapter 7 case, the United States Trustee and SunTrust Bank filed motions to dismiss for abuse under 11 U.S.C. § 707(b) and to convert the case to Chapter 11 under 11 U.S.C. § 706(b). The Bankruptcy Court consolidated and denied both motions.


The United States Trustee and SunTrust Bank then filed motions in the United States District Court for leave to appeal the Bankruptcy Court’s orders and to consolidate the appeals. The debtor filed a motion to dismiss the United States Trustee’s appeal as untimely. The District Court granted the motions for leave to appeal and to consolidate the appeals, and denied the motion to dismiss the United States Trustee’s appeal.

 

Read the full case note.

 

Lynn Hinson, Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A., Orlando, FL


 

 

April 28, 2014

Eighth Circuit Expands New Value Defense in Preference Actions to Include New Value Not Provided By Preferential Transferee

 

On March 20, 2014, the United States Court of Appeals for the Eighth Circuit considered an issue of first impression and held that in tripartite relationships where a debtor’s preferential transfer to a third party benefits the debtor’s primary creditor, a preference defendant may offset their avoidance liability with new value provided by the debtor’s primary creditor. Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.), Nos. 12-3899, 12-4011, 2014 WL 1063209 (8th Cir. Mar. 20, 2014).


Facts
The debtors, LGI Energy Solutions, Inc. and LGI Data Solutions Company, LLC (LGI) performed bill-payment services for its clients, large utility customers, including Buffets, Inc. and Wendy’s International, Inc. Utility company defendants, San Diego Gas & Electric Company and Southern California Edison Company, would send customer invoices directly to LGI, who would then periodically provide invoice summaries to its customers.  Customers would then send a check payable to LGI for the aggregate amount, deposited by LGI into its own commingled account, and then LGI would send a check drawn from its account to the various utility companies to cover the invoices. The utility companies had no separate contracts with LGI but only received payments from LGI by reason of LGI’s contractual obligations to utility customers.

 

Read the full case note.

 

Jamie R. Netznik, Sugar Felsenthal Grais & Hammer LLP, Chicago Illinois


 

 

March 28, 2014

New Maine Bankruptcy Judge Takes Bench


On September 6, 2013, the First Circuit Court of Appeals announced that the Honorable Peter G. Cary had been selected as the new bankruptcy judge for the District of Maine, filling a vacancy created by the retirement of Judge James B. Haines. Judge Cary officially took the bench for the first time on January 3, 2014.


Judge Cary was born and raised in Springfield, Massachusetts, though his family had regularly visited Maine since the early 1970s, when his father purchased an undeveloped lot on the backside of Peak’s Island, off the coast of Portland, Maine. After graduating from the University of Massachusetts at Amherst and Boston College Law School, he moved to Maine to clerk for the Honorable Morton A. Brody, then a justice on the Maine Superior Court.


After his clerkship ended in 1988, Judge Cary joined the law firm of MittelAsen, LLC, in Portland, eventually rising to be the firm’s managing partner. Throughout his career in private practice, he maintained a general civil practice that included corporate counseling, litigation, bankruptcy, and alternative dispute resolution. Judge Cary’s bankruptcy practice was broad and included the representation of debtors, creditors, trustees, and other parties-in-interest in consumer and commercial chapter 7, 11, and 13 cases, as well as related adversary proceedings. Judge Cary also regularly served as a private mediator in bankruptcy and non-bankruptcy commercial disputes.


Prior to taking the bench, Judge Cary was actively engaged in Maine’s legal community. He served on the Local Rules Committee for the Maine bankruptcy court and co-chaired the ADR Section of the Maine State Bar Association. He also volunteered for several legal aid organizations, including the Campaign for Justice, the C.A.R.E. (Credit Abuse Resistance Education) Program, and the Volunteer Lawyers Project.


Keywords: bankruptcy and insolvency litigation, Maine bankruptcy court


Jeremy R. Fischer, Drummond Woodsum, Portland, ME


 

February 25, 2014

Judicial Estoppel Judgment Affirmed, Chapter 7 Real Party in Interest Arguments Denied


On February 10, 2014, the Eleventh Circuit again considered the doctrine of judicial estoppel. See Robinson v. Tyson Foods, Inc., 595 F.3d 1269 (11th Cir. 2010); Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003); De Leon v. Comcar Industries, Inc., 321 F.3d 1289 (11th Cir. 2003); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002). The appeal at issue, Dunn v. Advanced Medical Specialties, Inc., 2014 WL 503050 (11th Cir. Feb. 10, 2014), came before the court out of the United States District Court for the Southern District of Florida and specifically concerned two orders entered by the District Court. The first order granted summary judgment in favor of Advanced Medical Specialties, Inc., a creditor in the underlying bankruptcy case and the appellee on appeal. The second order denied Chapter 7 bankruptcy trustee (and appellant) Marcia T. Dunn’s amended motion to vacate.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, judicial estoppel, disclosure of causes of action, real party in interest


Stephen B. Porterfield and Thomas B. Humphries, Sirote & Permutt, P.C., Birmingham, AL


 

January 10, 2014

Second Circuit Rules in Bankruptcy Code Section 109 Case


In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), the Second Circuit held that Section 109 of the Bankruptcy Code, which requires that a debtor reside or have domicile, a place of business, or property in the United States, applies to a debtor in a foreign main proceeding under Chapter 15 of the Bankruptcy Code.


Procedural History

Octaviar Administration Pty Ltd., an Australian company, was placed into “external administration” in Australia in October 2008, and the Supreme Court of Queensland, Australia, ordered that Octaviar be liquidated in July 2009. In April 2012, Octaviar’s liquidators (hereafter the “foreign representatives”), filed a lawsuit against certain Australian affiliates of Drawbridge Special Opportunities Fund LP, seeking recovery of A$210 million.


In August 2012, the Foreign Representatives petitioned the U.S. Bankruptcy Court for the Southern District of New York for recognition of the Australian liquidation of Octaviar as a foreign main proceeding under Chapter 15 of the Bankruptcy Code, with the goal of seeking, among other things, to take discovery from Drawbridge. On September 6, 2012, the Bankruptcy Court entered a recognition order granting the petition; Drawbridge filed a notice of appeal two weeks later. Subsequently, on October 5, 2012, the foreign representatives filed a motion seeking discovery from Drawbridge and other parties.  Drawbridge sought a stay pending appeal.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, debtor, Chapter 15, foreign proceedings


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

October 1, 2013

American Airlines Has Right to Repay $1.3 Billion Without Paying Make-Whole Amount


In U.S. Bank Trust National Association, et al. v. American Airlines, Inc., et al. (In re AMR Corp.), Nos. 13-1204-cv, 13-1207-cv, 13-1208-cv (2d Cir. Sept. 12, 2013), the Second Circuit ruled that American Airlines, Inc. had the right to repay $1.3 billion in debt (or “notes”) without payment of a make-whole amount, a contractual premium that may be required under the terms of a debt agreement if debt is paid before it matures.


Procedural History
On November 29, 2011, AMR Corp. and a number of its subsidiaries, including American Airlines, filed for bankruptcy. At the time of the filing, American was party to three separate prepetition aircraft financings. In October 2012, American filed a motion seeking to enter into a new aircraft financing and to repay the three prior financings without payment of the make-whole amount. The bankruptcy court granted American’s motion, ruling that American was entitled to repay the prior financings without payment of the make-whole amount and was authorized to enter into a new aircraft financing.


U.S. Bank appealed, and the bankruptcy court certified the appeals for direct appeal to the Second Circuit. The Second Circuit authorized the appeals.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, acceleration, ipso facto clauses, Section 1110, automatic stay, bankruptcy estate, aircraft


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

September 25, 2013

Fourth Circuit Rules in Grayson Consulting v. Wachovia Securities


In In re Derivium Capital LLC, a case of first impression, which involved an alleged Ponzi scheme, the Fourth Circuit Court of Appeals affirmed the decision of the lower court, and held that (1) debtors’ customers’ transfers of stock into debtor’s brokerage accounts were not avoidable as fraudulent transfers because such transfer did not constitute a transfer of a debtor’s interest in property; (2) brokerage firms were not initial transferees because they acted at the direction and control of the customers; (3) the commissions charged by a brokerage firm were settlement payments and thus shielded from avoidance and recovery; (4) margin interest payments made to brokerage firms were subject to the stockbroker defense; (5) in pari delicto was applicable to the assignee of Chapter 7 trustee with regard to non-insider claims; and (6) owners of debtor were sole actors and, as a result, the adverse interest exception to the in pari delicto defense was not applicable.


Derivium filed for bankruptcy after the collapse of its stock loan lending program, which was alleged to be a Ponzi scheme.  Pursuant to this scheme, the debtors extended financing to customers who deposited securities in debtor’s accounts. While debtor promised to hold and return such securities at the end of the loan term, debtor instead liquidated the securities and made use of the associated funds.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, 546(e), settlement payment, margin payment, Ponzi scheme


Damarr M. Butler Esq.Washington, D.C.


 

September 24, 2013

Arkansas Bankruptcy Court Sustains Objection to Debtors' Claims of Exempt Property


In In re Ponce, the Bankruptcy Court for the Western District of Arkansas sustained in part the Chapter 7 trustee's objection to the debtors' claim of exemptions after finding marital dissolution law inapplicable in bankruptcy proceedings but denied the trustee's related motion for turnover of property without prejudice to allow for the debtors to amend their exemptions.


Debtors Randy James Ponce and Sarah Leigh Ponce commenced their joint case when they filed their voluntary chapter 7 petition and schedules on February 28, 2013.  By filing a “joint petition,” the debtors created a single case for administrative purposes, as allowed under 11 U.S.C. § 302. Even though the debtors filed a single petition, the joint case consists of two separate estates, unless the court orders consolidation under 11 U.S.C. § 302(b). The court did not order consolidation here. On March 28, 2013, the debtors filed amended Schedules B and C to correct the amount listed on those schedules for a 2012 tax refund. The debtors indicated that all of the property listed on Schedule B was joint property.


Read the full case note for In re Ponce.


Keywords: bankruptcy and insolvency litigation, claim of exemption, joint petition, Chapter 7 trustee, motion for turnover


—Clarence Westbrook, Gardena, CA


 

September 19, 2013

Second Circuit's Ruling Reinforces Broader View of the Automatic Stay


In Residential Capital, LLC v. Fed. Hous. Fin. Agency (In re Residential Capital, LLC), debtor Residential Capital (ResCap) sought to stay a lawsuit brought by the Federal Housing Finance Agency (FHFA) against ResCap’s corporate parents and affiliates, in which the FHFA sought recovery (as the conservator for Fannie Mae and Freddie Mac) against ResCap’s affiliates for alleged false and misleading statements and omissions in various public filings regarding mortgage-backed securities.


Section 362 of the Bankruptcy Code provides for an automatic stay on a variety of actions and proceedings upon the filing of the bankruptcy petition.  Specifically relevant in ResCap, the automatic stay bars the commencement or continuation of litigation against the debtor, as well as other actions by creditors to exercise control over property of the estate or to assess claims against the estate.  See 11 U.S.C. § 362(a).  Courts in the Second Circuit have articulated that the automatic stay serves a number of purposes, including providing the debtor with a fresh start, protecting the assets of the estate, and allowing the bankruptcy court to centralize disputes concerning the estate.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, automatic stay, bankruptcy estate


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

July 15, 2013

Ninth Circuit Holds that a Bankruptcy Court May Recharacterize Debt As Equity If Consistent with State Law


In In re Fitness Holdings Int'l, Inc., 714 F.3d 1141 (9th Cir. 2013), the Ninth Circuit held that a bankruptcy court may recharacterize a purported loan as an equity investment and that a transaction creates a debt if it gives rise to a “right to payment” under state law.


Over several years, Fitness Holdings executed a series of promissory notes to its sole shareholder, Hancock Park. Fitness Holdings later obtained two secured loans from Pacific Western Bank. Approximately $12 million of the Pacific Western Bank loan proceeds were disbursed to Hancock Park to pay its unsecured promissory notes.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, recharacterization, Bankruptcy Code


Bradley Pack, Engelman Berger, P.C., Phoenix, AZ


 

July 12, 2013

Ninth Circuit Rules that Courts Have No Discretion to Retroactively Extend Deadlines for Filing Nondischargeability Complaints


In Anwar v. Johnson, the Ninth Circuit Court of Appeals affirmed the district court’s affirmance of the bankruptcy court’s dismissal of nondischargeability complaints. The issue presented was whether the Federal Rules of Bankruptcy Procedure afford the bankruptcy court the discretion to retroactively extend the deadline for filing nondischargeability complaints when an attorney’s computer difficulties cause him to miss the electronic filing deadline.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, nondischargeability, 11 U.S.C. § 523(c), Federal Rule of Bankruptcy Procedure 4007, Federal Rule of Bankruptcy Procedure 9006


Jennifer M. Taylor, O'Melveny & Myers LLP, San Francisco, CA


 

June 25, 2013

"Best Practices Report on Electronic Discovery (ESI) Issues in Bankruptcy Cases" Is Now Available


Electronic discovery is a current hot topic in the litigation world, but surprisingly little has been written about it from a bankruptcy perspective in both the caselaw and commentary.  An ABA Working Group, comprised of attorneys, judges and academics from across the country, was formed by the Bankruptcy Court Structure and Insolvency Process Committee of the Business Law Section of the ABA to study and prepare a report on electronic discovery and electronically stored information (ESI) issues in bankruptcy cases. The Working Group has prepared a Best Practices Report. It is anticipated that the final draft of this report, expected to be in substantially the form attached subject to final editing, will be published in the August issue of The Business Lawyer.


The Best Practices Report covers both debtor and creditor obligations to preserve electronically stored information (ESI) not only in connection with adversary proceedings, but also contested matters and the bankruptcy case itself.  The Report is divided into six sections.  The first three sections discuss ESI principles and guidelines in large chapter 11 cases, middle market and smaller chapter 11 cases, and chapter 7 and chapter 13 cases.  Those sections are followed by sections discussing ESI issues in connection with filing proofs of claim and objections to claims, creditors’ obligations in connection with electronically stored information, and rules and procedures applicable to ESI in adversary proceedings and contested matters in bankruptcy cases.


It is the hope of the Working Group that the report will be a helpful resource guide for attorneys and judges in considering and addressing electronic discovery and ESI issues in bankruptcy cases.


Keywords: bankruptcy and insolvency litigation, ESI, best practices


Richard L. Wasserman, Venable LLP in Baltimore, Maryland.


 

May 9, 2013

Second Circuit Says Feeder Fund Investors Are Not Customers under SIPA


In Kruse v. Securities Investor Protection Corp. (In re Bernard L. Madoff Investment Securities LLC), the Second Circuit held that certain investors who indirectly invested with Bernard L. Madoff Investment Securities LLC (BLMIS) through feeder funds were not “customers” of BLMIS under the Securities Investor Protection Act (SIPA), and therefore were not entitled to compensation for their investment losses from the Securities Investor Protection Corporation (SIPC). The ruling affirmed the district court’s and bankruptcy court’s affirmance of the BLMIS trustee’s denial of the indirect investors’ claims against BLMIS.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, Madoff, customer, SIPA, SIPC, feeder funds


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

March 15, 2013

Debtor's Ability to Pay Debts May Be Considered Under Totality of Circumstances Test


The Eleventh Circuit recently considered an issue of apparent first impression: whether a court may take into account a debtor’s ability to pay his or her debts when determining whether the “totality of the circumstances” test for abuse provided for in 11 U.S.C. § 707(b)(3)(B) warrants dismissal of the debtor’s case.


Robert and Jennifer Witcher filed a voluntary Chapter 7 petition, and the bankruptcy administrator moved to dismiss the case or convert it to Chapter 13 on the grounds that the petition constituted an abuse of the Chapter 7 process. The bankruptcy court first looked at the “means test” found in 11 U.S.C. § 707(b)(2) and determined there was no presumption of abuse by the Witchers. The court then considered the “totality of the circumstances” test found § 707(b)(3)(B). The court determined that the Witchers’ Chapter 7 petition did, in fact, constitute abuse under this section. A primary factor in the court’s decision was its finding that the debtors had kept certain luxury items—including a camper, a boat, a trailer, and a tractor—and had continued making payments on these items to their secured creditors. The bankruptcy court stated, “[T]he Debtors’ ability to pay, as well as their reluctance to change their lifestyle in order to provide a distribution to creditors, together indicate that granting relief in this chapter 7 case would be an abuse.”


Read the full case note.


Keywords: bankruptcy and insolvency litigation, means test, ability to pay debts, totality of circumstances test


Stephen B. Porterfield and Ashten Kimbrough, Sirote & Permutt, PC, Birmingham, AL


 

January 22, 2013

Limitation on Fraud Exception to Parol Evidence Rule Overruled

The parol evidence rule protects the integrity of written contracts by making their terms the exclusive evidence of the parties’ agreement, but a long-standing exception allows a party to present extrinsic evidence to show that the agreement was tainted by fraud. However, in 1935, the California Supreme Court adopted a limitation on the fraud exception: evidence offered to prove fraud “must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.” Bank of Am. v. Pendergrass, 48 P.2d 659 (Cal. 1935).


In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, the California Supreme Court recently overturned the Pendergrass Rule.

 

Read the full case note.


Jennifer M. Taylor, O'Melveny & Myers LLP, San Francisco, CA


 

December 21, 2012

Ninth Circuit Limits Power of Bankruptcy Courts


In Executive Benefits Ins. Agency v. Arkison, the Ninth Circuit Court of Appeals affirmed the Bankruptcy Court’s holding that a non-Article III bankruptcy judge lacks constitutional authority to enter a final judgment in a fraudulent conveyance action against a nonclaimant to the bankruptcy estate, but the nonclaimant in this particular case waived its right to an Article III hearing.


Aegis Retirement Income Services, Inc. (ARIS) designed and administered defined-benefit pension plans and the Bellingham Insurance Agency, Inc. (BIA) sold insurance and annuity products that funded those plans. BIA became insolvent in 2006. Two weeks after closing its doors, BIA assigned the insurance commissions from one of its largest clients to Peter Pearce, a long-time employee. The day after BIA stopped operating, BIA funds were used to incorporate the Executive Benefits Insurance Agency, Inc. (EBIA). In 2006, Pearce and EBIA deposited $373,291.28 of commission income earned between January 1 and June 1 into an account held jointly by ARIS and EBIA. At the end of the year, all of the deposits were credited to EBIA via an “intercompany transfer.”

 

Read the full case note.


Jennifer M. Taylor, O'Melveny & Myers LLP, San Francisco, CA


 

December 18, 2012

Fifth Circuit Reiterates "Specific and Unequivocal" Standard


One of the most debated intricacies of the reorganization process under the U.S. Bankruptcy Code in recent years has been the level of detail a debtor must disclose to pursue a claim against third parties after a plan is confirmed. Two separate questions are at the heart of the debate: What must a debtor do to preserve its standing to bring a particular claim; and what information about the claim must be disclosed to creditors to preserve the claim itself?


Courts have ranged from approving a general description of the nature of the claim and the status or category of likely defendants, on one hand, to requiring detailed facts about the claim, identifying the defendants by name, and asserting an express intent to file the suit.


Most recently, in Compton v. Anderson, et al., (In re MPF Holdings US LLC), Case No. 11-20478 (5th Cir. Nov. 14, 2012), the Fifth Circuit Court of Appeals reiterated what it calls the “specific and unequivocal” standard, originally articulated by the Fifth Circuit in Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008), and further developed in Spicer v. Laguna Madre Oil & Gas II, L.L.C. (In re Tex. Wyo. Drilling, Inc.), 647 F.3d 547 (5th Cir. 2011).


Read the full case note.


Toby L. Gerber, Kristian W. Gluck, and Ryan E. Manns, Fulbright & Jaworski L.L.P., Dallas, TX


 

November 27, 2012

Iowa Court Grants Compromise in Lump-Sum Divorce Settlement


In February 2009, Janice Hildreth filed a voluntary Chapter 7 petition. Schedule B of the debtor’s filing lists an asset: an uncollected divorce settlement valued at $80,000. (Schedule B, ECF Doc. No. 1, at 18.) The debtor had not received any portion of the settlement payments from her ex-husband, Marvin Hildreth. The payments were intended to buy out her interest in the marital real estate and business. The trustee proposed to compromise the claim by accepting a lump-sum settlement in the amount of $20,000. The debtor objected to the trustee’s motion to compromise, arguing that the trustee would likely be successful if he litigated the claim and pursued collection. The debtor argued there would likely be a surplus—after paying unsecured creditors—to which she would be entitled.


Read the full case note.


— Clarence Westbrook, Gardena, CA


 

November 26, 2012

IRS's Tax Payment Freeze Did Not Violate Automatic Stay


In Harchar v. United States (In re Harchar), 694 F.3d 639 (6th Cir. 2012), the Sixth Circuit’s holdings reconciled two different legal issues. The Sixth Circuit first held that the bankruptcy court correctly granted summary judgment in favor of the United States on the debtors’ claim that the IRS violated the automatic stay. The Sixth Circuit next held that the United States did not violate the bankruptcy plan and the debtors’ rights under the Fifth Amendment Due Process Clause.


Read the full case note.


Keywords: bankruptcy and insolvency litigation, automatic stay, sovereign immunity, tax refund, proof of claim, plan violation


— Christopher S. Baxter, Columbus, OH


 

November 26, 2012

Pending Hourly-Fee Matters Not Partnership Assets in New York


In Geron v. Robinson & Cole LLP, a Southern District of New York court (Pauley, J.), held that under New York law, a dissolved law firm’s pending hourly-fee matters are not partnership assets. Geron arose from the bankruptcy of a major law firm, Thelen LLP. In late 2008, Thelen’s partners voted to wind up Thelen’s business under a plan of dissolution. The plan included a Jewel waiver, which is a waiver of the rights of any partner or the partnership to any “unfinished business” of the partnership. Thelen thereafter filed a voluntary Chapter 7 petition in September 2009. The Chapter 7 trustee brought fraudulent transfer and accounting and turnover claims against Seyfarth Shaw LLP and Robinson & Cole LLP, seeking the return of profits from those firms’ continued work on hourly-fee matters that were pending at the time of Thelen’s dissolution as “unfinished business.”


Read the full case note.


Keywords: bankruptcy and insolvency litigation, dissolution, unfinished business, accounting


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

November 19, 2012

Course of Business Defense is Path to Preference Dismissaln


In Gellert v. Coltec Indus., Inc., the Delaware Bankruptcy Court held that the ordinary course of business defense under 11 U.S.C. § 547(c)(2)(A) can be applied on a motion to dismiss, and that a transfer cannot be constructively fraudulent when payment of the transfer resulted in a dollar-for-dollar satisfaction of an antecedent debt


Read the full case note.


Keywords: litigation, bankruptcy, insolvency, Third Circuit, preferential transfer, ordinary course of business defense, constructively fraudulent transfer, reasonably equivalent value, motion to dismiss


Marcos A. Ramos and Robert C. Maddox, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

November 13, 2012

Equitable Tolling Applied to Adversary Proceeding Limitation


In Liberty Brands, LLC v. Feit, the Delaware Bankruptcy Court denied the defendants’ motions to dismiss the plaintiff-trustee’s claims to recover unauthorized post-petition transfers under 11 U.S.C. § 549. According to the defendants, the trustee’s claims were time-barred because the trustee did not file within two years after the date of the transfer at issue. The court denied the defendants’ motions to dismiss after concluding that the doctrine of equitable tolling applied to extend the limitations period under Section 549(d)(1).


Read the full case note.


Keywords: litigation, bankruptcy, insolvency, Third Circuit, 11 U.S.C. § 549, equitable tolling


Marcos A. Ramos and Andrew C. Irgens, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

October 2, 2012

Fifth Circuit Affirms Certification of Injunctive Class


In a decision regarding class actions in bankruptcy proceedings, the U.S. Court of Appeals for the Fifth Circuit, in Rodriguez v. Countrywide Home Loans, Inc. [PDF], Case No. 11-40056 (5th Cir. Sept. 14, 2012), issued an opinion affirming the class certification order of the U.S. Bankruptcy Court for the Southern District of Texas in the Ydalia Rodriguez bankruptcy case. In affirming the certification of an injunctive class, the Fifth Circuit adopted the bankruptcy court’s interpretation of Wilborn v. Wells Fargo Bank, N.A., 609 F.3d 748 (5th Cir. 2010)—a similar mortgage lender case in which the plaintiffs attempted to certify a class action in a bankruptcy proceeding—which set the standard for class certification in the Fifth Circuit when it ruled that a bankruptcy court has authority to certify a class action of debtors whose petitions are filed within its judicial district. Wilborn, 609 F.3d at 754.


Read the full case note.


Keywords: litigation, bankruptcy, insolvency, Fifth Circuit, Bankruptcy Court, Chapter 13, consent judgment


Ryan Manns and Mark Platt, Fulbright & Jaworski LLP, Dallas, Texas


 

October 2, 2012

First Circuit Upholds Exempt Property Surcharge under Section 105


Under section 522(c) of the Bankruptcy Code, “[u]nless the case is dismissed, property exempted under this section is not liable . . . after the case for any debt . . . that arose . . . before the commencement of the case. . . .” However, in Malley v. Agin, No. 11-2042, 2012 WL 3326629 (1st Cir. Aug. 15, 2012), the First Circuit held that section 105(a) of the Bankruptcy Code “authorizes a charge against the value of otherwise exempt assets as a remedy for the debtor’s wrongful concealment of non-exempt and now unavailable property” to satisfy creditors’ pre-petition claims. Id. at *1.


Read the full case note.


Keywords: litigation, bankruptcy, insolvency, First Circuit, Bankruptcy Code, Chapter 7, David Souter, section 105


Jeremy R. Fischer, Bernstein Shur, Portland, Maine


 

September 25, 2012

Delaware Court Denies Motion to Stay Order, Pending Appeal


In In re W.R. Grace & Co., the Delaware District Court denied the motion of Garlock Sealing Technologies, LLC, to stay the court’s amended order confirming the debtors’ joint plan of reorganization, pending Garlock’s appeal to the Third Circuit. Garlock had objected to confirmation of the joint plan, but the court found that Garlock lacked standing, and concluded that the substantive objections were unfounded in any event. Garlock appealed and filed an emergency motion seeking to stay the confirmation order to prevent alleged irreparable harm to its set-off and contribution claims should the joint plan become effective before its appeal could be adjudicated.


Read the full case note.


Keywords: litigation, bankruptcy, insolvency, Third Circuit, stay pending appeal, irreparable harm; equitable mootness


Marcos A. Ramos and Andrew C. Irgens, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

August 14, 2012

Changes Considered for Calculating a Debtor's Projected Disposable Income


In In re Quigley, the Fourth Circuit Court of Appeals reversed and remanded a decision of the district court and held that a debtor’s projected disposable income should reflect changes that have occurred or that will occur and that are known as of the date of plan confirmation.


In Morris, the debtor filed a Chapter 13 bankruptcy petition. On her Schedule B (listing personal property), the debtor listed two all-terrain vehicles (ATVs). On her Schedule D (listing secured debt), the debtor stated that both ATVs were collateral for promissory notes that she executed. However, in the debtor’s proposed repayment plan, the debtor represented that she would be surrendering both ATVs to the secured creditors. Thus, she would no longer be required to make payments on the ATVs. In addition, the debtor listed on her Schedule B a truck as personal property, although the same schedule noted that the truck belonged to the debtor’s former boyfriend. The truck’s title listed the debtor as a legal owner. However, the former boyfriend was making payments on the truck. On the debtor’s statement of current monthly income, the debtor listed the payments owed on the two ATVs and the truck as expense deductions, and she represented that she had no disposable income even though she stated that she would be surrendering both ATVs and thus would no longer be required to make payments on them.


Read the full case note.


Keywords: bankruptcy, litigation, projected disposable income, bankruptcy, Fourth Circuit, Quigley, Morris, Hamilton v. Lanning


Damarr M. Butler, Washington, D.C.


 

May 4, 2012

Circuit Affirms Denial of Under-Secured Lender Plan


IIn In re River East Plaza, LLC, 669 F.3d 826 (7th Cir. 2012), the Seventh Circuit considered a Bankruptcy Court’s orders denying plan confirmation in a single-asset, real-estate case. The rejected plan proposed to replace an under-secured lender’s lien on the debtor’s real estate with a lien on 30-year treasury bonds. The plan proponent argued that 11 U.S.C. § 1129(b)(2)(A)(iii)—which allows a court to confirm a plan over a secured lender’s objection if it grants the secured lender the “indubitable equivalent” of its claim—permits this result. The Seventh Circuit disagreed and affirmed the Bankruptcy Court.


The secured lender asserted a $38.3 million claim against the debtor secured by real estate that the debtor valued at $13.5 million. The secured lender elected, pursuant to Bankruptcy Code section 1111(b), to have its entire claim treated as secured, giving up any deficiency claim. Following such an election, a debtor may confirm a plan over the secured lender’s objection if the proposed plan either:


  • allows the lender to retain its lien and pays the lender a stream of payments equal in amount to the face value of the secured lender’s claim and equal in value to the value of the collateral on the plan’s effective date (11 U.S.C. § 1129(b)(2)(A)(i));
  • sells the collateral pursuant to section 363(k)’s procedures and attaches the lien to the proceeds (11 U.S.C. § 1129(b)(2)(A)(ii)); or
  • provides the secured lender the “indubitable equivalent” of its claim (11 U.S.C. § 1129(b)(2)(A)(iii)).

The debtor argued that confirmation was appropriate because its plan provided the secured lender with the indubitable equivalent of its interest. The Seventh Circuit disagreed on two bases. First, it invoked its recent decision in River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 645 (7th Cir. 2011), which held that a debtor could not rely on section 1129(b)(2)(A)(iii)’s general “indubitable equivalent” requirement to evade section 1129(b)(2)(A)(ii)’s specific protections for secured lenders—namely, the protection that a secured lender must be allowed to credit bid in the sale of its collateral. The River Road court observed that to hold otherwise would effectively render section 1129(b)(2)(A)(i) superfluous and would be inconsistent with how other sections of the Bankruptcy Code treat secured claims. Id. at 651–53. In light of River Road, the River East court held that a debtor may not rely on section 1129(b)(2)(A)(iii) to evade section 1129(b)(2)(A)(ii)’s specific protection that a secured lender’s lien must remain in place until the secured claim is paid.


Read the full case note.


Keywords: bankruptcy, litigation, plan approval, indubitable equivalent of claim, 11 U.S.C. § 1129(b)(2)(A)(iii)


Michael J. Kelly, Jenner & Block LLP, Chicago, Illinois


 

 

May 4, 2012

Court Clarifies Entitlement to Severance Pay


In Matson v. Alarcon, 651 F.3d 404 (4th Cir. 2011), the Fourth Circuit Court of Appeals in resolving an issue of first impression held that employees earned the full amount of their severance pay on the date they became entitled to receive such compensation, subject to the satisfaction of the contingencies provided in the severance plan. Thus, the employees in question earned their severance pay on their termination date and because their termination date was within the 180-day period of their employer filing a bankruptcy petition, their severance payment was entitled to priority, subject to the statutory maximum.


In Matson, LandAmerica (debtor) established a severance benefits plan that was established to assist eligible employees upon termination of employment, subject to certain conditions. Between August 2008 and November 2008, which was within 180 days of the debtor filing its bankruptcy petition, 125 employees (claimants) were terminated and became participants in the plan. However, the debtor did not pay any of the claimants’ severance payments, which were due as a result of the claimants being terminated and meeting other conditions. After the debtor filed its bankruptcy petition on November 26, 2008, the claimants filed proofs of claims against the bankruptcy estate for severance compensation due under the plan and asserted priority treatment up to the statutory maximum pursuant to 11 U.S.C. § 507(a)(4).


The trustee objected to the requested priority treatment, contending that the claimants earned their severance compensation over the entire course of their employment and therefore under 11 U.S.C. § 507(a)(4) only a pro-rated portion of the claims was earned within the 180 days preceding the debtor’s bankruptcy petition, and only that portion was entitled to priority.


Read the full case note.


Keywords: bankruptcy, litigation, severance pay, 11 U.S.C. § 507(a)(4)


Damarr M. Butler Esq., Washington, D.C.


 

 

April 23, 2012

Court Calculates Debtor's Projected Disposable Income


In Morris v. Quigley, No. 19-2102, ---F.3d.---, 2012 WL 718894 (4th Cir. Mar. 7, 2012), the Fourth Circuit Court of Appeals reversed and remanded a decision of the district court and held that a debtor’s projected disposable income should reflect changes that have occurred or that will occur which are known as of the date of plan confirmation.


In Morris, the debtor filed a Chapter 13 bankruptcy petition. On her Schedule B (listing personal property), the debtor listed two all-terrain vehicles (ATVs). On her Schedule D (listing secured debt), the debtor stated that both ATVs were collateral for promissory notes that she executed. However, in the debtor’s proposed repayment plan, the debtor represented that she would be surrendering both ATVs to the secured creditors. Thus, she would no longer be required to make payments on the ATVs. Additionally, the debtor listed on her Schedule B a truck as personal property, although the same schedule noted that the truck belonged to the debtor’s former boyfriend. The truck’s title listed the debtor as a legal owner. However, the former boyfriend was making payments on the truck. On the debtor’s statement of current monthly income, the debtor listed the payments owed on the two ATVs and the truck as expense deductions and that she had no disposable income even though she stated that she would be surrendering both ATVs and thus would no longer be required to make payments on them.


Read the full case note.


Keywords: bankruptcy, litigation, calculation of projected disposable income in bankruptcy


Damarr M. Butler Esq., Washington, DC


 

 

April 5, 2012

Amended Bankruptcy Rule 2019 in Effect


On December 1, 2011, the amended Federal Rule of Bankruptcy Procedure 2019 came into effect. The revised rule imposes certain disclosure obligations on creditor groups, committees, and other entities.


Under the iteration of Rule 2019 in force prior to December 1, “every entity or committee representing more than one creditor or equity security holder and, unless otherwise directed by the court, every indenture trustee” was required to file a verified statement disclosing information about its claims. Specifically, such entities were required to disclose


  • the amounts of claims or interests owned by the entity;
  • the members of the entity;
  • the times when the entity’s interests were acquired;
  • the amounts paid by the entity for their interests; and
  • any sales or dispositions of the entity’s interests.

If a committee or indenture trustee failed to disclose any of this information, the court could, on its own initiative or on motion by any interested party, refuse to allow the committee or indenture trustee to be heard or intervene in the proceedings and hold invalid any authority, acceptance, rejection, or objection that was given, procured, or received by the entity.


However, implementation of Rule 2019 was inconsistent. As a result, the Advisory Committee on Bankruptcy Rules proposed amendments to Rule 2019. After consultation and debate, a revised rule emerged.


The main changes reflected in the amended Rule are as follows:


  • Indenture trustees, administrative agents under credit agreements, and groups of insiders or affiliates are exempt from disclosure requirements.
  • Groups, committees, and entities subject to the amended rule are required to disclose an expanded array of transactions, such as credit default swaps, owing to the expanded, broad definition of “disclosable economic interests” as encompassing all economic and strategic positions that an interested party takes in a case, including “any other right or derivative right that grants the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.”
  • The type of information that is required to be disclosed in relation to “disclosable economic interests” is narrower relative to the prior version of Rule 2019 in that the timing of the acquisition of interests and the amounts paid for such interests is no longer required to be disclosed under the rule.

The practical impact of the amendments to Rule 2019 will become apparent as Bankruptcy Courts apply them. In particular, bankruptcy litigators should note the Advisory Committee Notes to the amendment that state although Rule 2019 no longer requires the disclosure of the dates on which interests are acquired or the amount of consideration paid for such interests, “nothing in this rule precludes the discovery of that information when it is relevant or its disclosure when ordered by the court pursuant to its authority outside this rule.” As a result, clients of bankruptcy litigators may be able to obtain, or be compelled to disclose such information, in the course of bankruptcy proceedings. Bankruptcy litigators thus ought to be aware of cases involving the application of the amended Rule 2019.


Keywords: bankruptcy, litigation, Bankruptcy Rule 2019, creditor committees


Lisa Brost, McMillan LLP, Toronto, Ontario


 

 

March 6, 2012

Circuit Defines Bankruptcy Court’s Core Jurisdiction Broadly


In Ace American Insurance Co. & Pacific Employers Insurance Co. v. DPH Holdings Corp. (In re DPH Holdings Corp.), No. 10-4170-bk, 2011 WL 5924410 (2d Cir. Nov. 29, 2011), the Second Circuit held that disputes over workers’ compensation liability contracts constituted core proceedings falling within the constitutional and statutory jurisdiction of the Bankruptcy Court.


Delphi Corporation, a General Motors parts manufacturer, emerged from Chapter 11 bankruptcy in October 2009 and formed DPH Holdings to hold assets to be sold or wound down. Shortly thereafter, debtor’s insurers Ace American Insurance Co. and Pacific Employers Insurance Co. filed an adversary proceeding against DPH Holdings and against the State of Michigan Workers’ Compensation Agency and State of Michigan Funds Administration, the state’s workers’ compensation fund, seeking declaratory judgment that policies that they had earlier issued to the debtor did not provide workers’ compensation coverage for the debtor’s employees. In addition, the insurers filed claims for payment of administrative expenses in an amount of $67,311,662.50, arguing that the debtor must reimburse the insurers for any claims paid to the injured workers. See In re DPH Holdings Corp., 437 B.R. 88, 93 (S.D.N.Y. 2010). The Michigan defendants moved to dismiss the case based on lack of Bankruptcy Court jurisdiction. The Bankruptcy Court denied the motion to dismiss, and the district court affirmed.


Read the full case note.


Keywords: litigation, bankruptcy, jurisdiction, core proceeding, Stern v. Marshall


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, New York


 

 

February 22, 2012

Two-Year Look-Back Period Cannot Be Equitably Tolled


In Industrial Enters. of Am., Inc. v. Burtis, the Delaware Bankruptcy Court denied a motion to reconsider its holding that equitable tolling cannot enlarge the two-year look-back period under 11 U.S.C. § 548(a).


Section 548(a) provides that the trustee may seek to avoid a transfer of property by the debtor that was made on or within two years before the debtor’s petition date. The defendants moved to dismiss as the plaintiff sought to avoid the transfer of property that occurred earlier than two years before the debtor’s petition date. The plaintiff conceded that the transfers at issue occurred outside of the two-year timeframe but argued that its claim should not be dismissed because the look-back period was subject to equitable tolling.


The court agreed with the defendants. The plaintiff sought to avoid transfers of property that occurred more than two years prior to the debtor’s petition date. Therefore “§ 548 simply does not apply” and the plaintiff’s claim was dismissed.


Read the full case note.


Keywords: bankruptcy, litigation, 11 U.S.C. § 548(a); Fraudulent transfer; Equitable tolling


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware.
The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

 

February 7, 2012

Recharacterization of Debt to Equity—Not Limited to Insiders


In Grossman v. Lothian Oil Inc. (In re Lothian Oil Inc.), No. 10-50683 (5th Cir. Aug. 9, 2011), the Fifth Circuit held that recharacterization of claims from debt to equity extends beyond insiders.


Years before bankruptcy, a non-insider loaned money to Lothian Oil pursuant to a handwritten document and a loan agreement, both of which provided that in consideration for the loan, the non-insider would be paid from royalties of gross production and equity placements. Neither document specified an interest rate, the term of repayment, or a maturity date. After Lothian Oil filed bankruptcy, the non-insider filed proofs of claim based upon the debts created by these documents.


The bankruptcy court recharacterized the non-insider’s claims as equity, holding that the claims “assert common equity interests at best.” In re Lothian Oil, Inc., No. 07-7012, Dkt. No. 1832 at 2 (Bankr. W.D. Tex. Dec. 17, 2008). The district court reversed the recharacterization, applying a per se rule to prohibit bankruptcy courts from recharacterizing contributions or investments from non-insiders.


In this case of first impression, the Fifth Circuit began its analysis with 11 U.S.C. section 502(b)(1), which authorizes a bankruptcy court to disallow a claim that is unenforceable against the debtor under applicable law. Relying on the Supreme Court’s holding in Butner v. United States, 440 U.S. 48, 54 (1979)—that applicable law in a bankruptcy context is state law—the Fifth Circuit applied a multifactor test under Texas law to distinguish between debt and equity. Determining that Texas law would not have recognized the non-insider’s claims as a debt interest, the Fifth Circuit rejected the district court’s per se rule and held that the bankruptcy court correctly disallowed the claims as debts and recharacterized them as equity interests, stating that “because insiders and non-insiders alike can mischaracterize their claims in contravention of state law, we decline to limit recharacterization to insider claims.”


In its analysis of the proper authority under which a bankruptcy court may recharacterize a claim, the Fifth Circuit rejected the Third, Fourth, Sixth, and Tenth Circuits’ reasoning that recharacterization is grounded in the bankruptcy court’s equitable authority under 11 U.S.C. section 105(a). The non-insider’s petition for a rehearing en banc was denied.


Keywords: bankruptcy, litigation, recharacterization, equity, contribution, investment, non-insider, § 502(b), § 502(b)(1)


Liz Boydston, Fulbright & Jaworski LLP, Dallas, Texas.


 

 

February 7, 2012

Creditors May Lose Secured Status Due to Note Problems


In Rogan v. Litton Loan Servicing, L.P. (In re Collins), 456 B.R. 284, 2011 WL 4445451 (6th Cir. BAP Aug. 12, 2011), the Sixth Circuit Bankruptcy Appellate Panel ruled that validly perfected mortgages may be invalidated by a bankruptcy trustee if the mortgagee fails to produce a properly indorsed note. The ruling addressed two different mortgages on the debtor’s residence. Both mortgages were validly perfected, but the notes secured by the mortgages were problematic. The court reversed a Rule 12(b)(6) dismissal of the trustee’s complaint.


The bankruptcy trustee conceded that both mortgages were validly perfected. The trustee argued that the mortgagees did not demonstrate that they were the holders of the notes and therefore were not creditors of the debtor. Kentucky state law provides that a mortgage without an underlying debt is ineffective.


The first mortgagee’s note had a chain of title issue. The debtor gave the note to Wilmington Finance, which assigned the note to Popular Financial Services, LLC. The note was then assigned from Popular ABS, Inc. to J.P. Morgan Chase, which eventually assigned the note postpetition to Defendant Bank of New York. The first mortgagee asserted that because the mortgage was concededly valid, any issue relating to the note was irrelevant.


The note underlying the second mortgage was never produced to the court. The second mortgagee did not file the note with a proof of claim or motion for relief from stay. Given the Rule 12(b)(6) context of the ruling, the mortgagee asserted that it was not required to produce a copy of the note because the validity of the note was not relevant to the validity of the second mortgage. The court disagreed.


The court reversed the Rule 12(b)(6) dismissal, holding that the mortgages would be invalid if the trustee could prove that the notes were not properly assigned. Upon remand, the first mortgagee has a chance to repair the issue by obtaining an assignment from Popular Financial Services, LLC to Popular ABS, Inc. The second mortgagee must produce a copy of the note or attempt to locate substitute evidence in order to defend its interest upon remand.


The court’s ruling gives bankruptcy trustees another weapon in the mortgage avoidance battles. This tactic is particularly aggressive because it renders the mortgagee not a creditor of the estate, meaning that the mortgagees cannot participate in the distribution as they do in cases where the mortgage is avoided but the debt is preserved.


The hasty practices during the housing boom gave rise to chain of title issues and, in some cases, lost notes. Secured creditors are sometimes hard pressed to produce the note with all necessary assignments. The problem is compounded in situations where the note and mortgages were transferred multiple times. If the bankruptcy trustee notes a problem with the note’s chain of title, the creditor may be able to cure the issues postpetition by obtaining revised assignments assuming that the relevant entities are still operating and can execute revised assignments. If the creditor cannot produce a copy of the note, then the debt itself may be invalidated and the mortgagee left without a remedy.


Keywords: bankruptcy, litigation, mortgage avoidance, chain of title, lost note


Christy A. Prince, Kegler, Brown, Hill & Ritter Co., LPA, Columbus, Ohio.


 

 

February 3, 2012

Study Suggests Blacks Face Bias in Bankruptcy Choice


Steering consumer debtors into a Chapter 7 or a Chapter 13 bankruptcy filing involves a careful consideration of many factors. Included among these factors are the debtor’s type of assets, what assets the debtor wishes to retain, and the debtor’s likelihood of success in the respective chapter. Shedding light on some of the issues not often associated with bankruptcy filings is a study, to be published later this year in the Journal of Empirical Legal Studies, which finds that blacks are about twice as likely as whites to endure the more costly and burdensome Chapter 13 bankruptcy. A Chapter 7 filing typically results with the discharge of most debts at the completion of the debtor’s case. Chapter 13 bankruptcy requires debtors to use their disposable income to pay back their debts over a three to five-year period.


The study found the disparity persisted even when controlling for income, assets, education, and homeownership. Keeping one’s home is often a driving force for filing a Chapter 13 bankruptcy because that chapter allows for a debtor to be able to keep his home. In assessing how lawyer’s influence a debtor’s choice of bankruptcy chapter, the authors of the study note that attorneys may be pushing debtors into Chapter 13 to collect higher fees but that this effect would be present across all races.


The authors of the study are not arguing that there is an overt conspiracy in steering blacks to Chapter 13 but that these issues merit discussion with an eye toward addressing the issue. Practitioners realize the complexities that arise in counseling a client’s choice of bankruptcy chapter. This study can illuminate any inherent or unintentional biases that an attorney has when helping a client with such an important decision.


Keywords: bankruptcy, litigation, racial bias


—Pavan Mehrotra, third-year law student, UNC Chapel Hill


 

 

January 24, 2012

Upcoming ABA CLE Program Focuses on Bankruptcy Preference Defence


On Tuesday, February 14th, 2012, the ABA Section of Litigation and the ABA Center for Continuing Education will present a live webinar, centring on new developments and strategies for defending bankruptcy-preference claims.


The hour-long program will offer insights from both the creditor and the debtor perspectives and will review recent developments in areas such as jurisdiction and venue. The distinguished panel will also offer insights into case-management strategies and changes in preference-defence tactics.


The webinar will feature an esteemed panel including:


  • Kenneth M. Misken (moderator), a principal at Miles & Stockbridge PC, in Tysons Corner, Virginia
  • Christopher A. Jones, a partner at Whiteford Taylor Preston, LLP, in Falls Church, West Virginia
  • Deborah Kovsky-Apap, an associate at Pepper Hamilton LLP, in Detroit, Michigan
  • Neil Steinkamp, a director at Stout Risius Ross, Inc., in New York, New York

 

Bankruptcy and insolvency litigators will not want to miss the program, which will also include guidance and recommendations on the use of expert witnesses in evaluating industry standards, calculations of value, and the history of payments between the parties, as well as other considerations involving the retention and use of experts.


Register for what is sure to be an informative and insightful CLE program. (This program will qualify for CLE credit in most states.)


Keywords: bankruptcy, litigation, preference actions, CLE, use of experts


Lisa Brost, McMillan LLP, Toronto, Canada.


 

 

January 24, 2012

Under-Secured Claims Not Automatically Bifurcated under Section 506


11 U.S.C. § 506(a)(1) provides that an under-secured creditor, meaning the value of the collateral is less than the full value of the debt, holds both a secured claim and an unsecured claim. However, the 11th Circuit has decided that a creditor must designate a portion of its claim as unsecured to protect the unsecured portion.


JH Investment Services, Inc., engaged in fraudulent real-estate investment schemes, and its creditors initiated an involuntary Chapter 11 case and had a trustee appointed. A trustee recovered and sold several real properties, and the Bankruptcy Court ordered that one percent of the sale proceeds be set aside for unsecured creditors.


The IRS filed several claims against the debtor for unpaid taxes, and the last amended claim filed by the IRS characterized its entire $46 million dollar claim as secured. The trustee filed a liquidating plan that excluded the unsecured creditors’ carve-out from the IRS claim, and a disclosure statement listed the total estate value of approximately $750,000.


Read the full case note.


Keywords: bankruptcy, litigation, 11 U.S.C. section 506(a)(1), under-secured claims


Stephen B. Porterfield, Sirote & Permutt, P.C., Birmingham, Alabama


 

 

January 12, 2012

Four Bankruptcy Judges Appointed in California


The Ninth Circuit Court of Appeals has recently appointed four new bankruptcy judges to preside over cases in California.


On October 24, 2011, Neil W. Bason was appointed to serve as a judge of the U.S. Bankruptcy Court for the Central District of California. Judge Bason was formerly counsel at Duane Morris in Los Angeles. Judge Bason also acted as a law clerk for Judge Dennis Montali of the U.S. Bankruptcy Court for the Northern District of California and the Bankruptcy Panel of the Ninth Circuit from 2000 to 2008. Judge Bason was sworn in on October 24, 2011. Judge Bason’s chambers are in the Edward R. Roybal Federal Building and Courthouse in Los Angeles.


Mark D. Houle has also been appointed by the Ninth Circuit Court of Appeals to serve as a judge of the U.S. Bankruptcy Court for the Central District of California. Houle practiced at Pillsbury Winthrop Pittman LLP, exclusively in the areas of bankruptcy and insolvency. His appointment will land him in familiar terrain, as his experience includes a two-year clerkship with Bankruptcy Judges Robert Alberts, James N. Barr, Lynne Riddle, and John J. Wilson of the U.S. Bankruptcy Court for the Central District of California. Houle is also a veteran of the U.S. Air Force and Massachusetts National Guard. He will likely be very busy as the court is one of the nation’s busiest, reporting 139,882 filings in 2011. Houle was appointed to replace Judge Ellen Carroll, who has announced her retirement, effective February 16, 2012. Houle will be sworn into the position on February 17, 2012, and he intends to maintain chambers in Riverside.


The Ninth Circuit Court of Appeals has recently announced the appointment of Mary E. Hammond to serve as a judge of the U.S. Bankruptcy Court for the Northern District of California. Hammond is a partner at Friedman Dumas, whose practice focuses on commercial and bankruptcy law. Hammond will take over the position of U.S. Bankruptcy Judge Edward D. Jellen, who will retire, on February 2, 2012. Notably, Hammond served as a law clerk for Judge Jellen from 1998 to 2000. She will maintain chambers in Oakland.


Finally, the Ninth Circuit Court of Appeals has also appointed Fredrick E. Clement to serve as a judge of the U.S. Bankruptcy Court for the Eastern District of California. Clement will be sworn in on March 16, 2012 and plans to maintain chambers in Fresno. He has practiced as a solo practitioner and is a certified specialist in all areas of bankruptcy law. He will also likely be busy, as the U.S. Bankruptcy Court for the Eastern District of California is the fifth busiest Bankruptcy Court in the nation, with 51,481 filings in 2011. He will succeed Judge Whitney Rimel, who intends to retire from the bench on March 15, 2012. Judge Rimel will, however, continue to serve as a recalled bankruptcy judge.


Keywords: bankruptcy, litigation, bankruptcy judges appointed, Judge Houle, Judge Clement, Judge Hammond


Lisa Brost, McMillan LLP, Toronto, Ontario


 

 

January 10, 2012

New Bankruptcy Judges Take the Bench


On October 1, 2011, Judge David R. Jones took the bench as U.S. Bankruptcy Judge for the Southern District of Texas. Prior to his appointment, Judge Jones was a partner at Porter Hedges. Judge Jones has a particularly interesting and varied background. Prior to his legal career, he was an engineer and an accountant. Judge Jones replaced Judge Wesley W. Steen, who retired.


Judge Alan Stout was appointed by the U.S. Court of Appeals for the Sixth Circuit as U.S. Bankruptcy Judge for the Western District of Kentucky. Judge Stout took this position on October 26, 2011. He replaced Judge David T. Strosberg, who retired. Prior to his appointment, Judge Stout practiced bankruptcy law in Paducah and Marion, Kentucky.


The U.S. Bankruptcy Court for the District of Oregon also has a new judge. Judge Thomas Renn was sworn in on October 28, 2011. He was appointed by the U.S. Court of Appeals for the Ninth Circuit in light of the sudden death of Judge Albert E. Radcliffe. Prior to his appointment, Judge Renn was a solo practitioner in Portland. Starting in 2002, he acted as a Chapter 7 panel trustee in the Portland Division of the Oregon Bankruptcy Court, handling nearly 14,000 cases. Judge Renn also taught business law at Pacific University in Forest Grove from 1989 to 1994 and advanced bankruptcy as an adjunct professor at Northwestern School of Law, Lewis and Clark College in Portland from 1995 to 1997. Judge Renn sits in the federal courthouse in Eugene.


Finally, Judge Carlota M. Bohm now sits on the U.S. Bankruptcy Court for the Western District of Pennsylvania. Prior to her appointment, Judge Bohm was a Bankruptcy Trustee on the U.S. Trustee’s Panel for the Western District of Pennsylvania and practiced at the firm of Houston Harbaugh in Pittsburgh. Her experience also includes a clerkship with two bankruptcy judges. Judge Bohm was appointed after the passing of Judge M. Bruce McCullough.


Keywords: bankruptcy, litigation, bankruptcy judges appointed, Judge David R. Jones, Judge Stout, Judge Renn, Judge Bohm


Lisa Brost, McMillan LLP, Toronto, Ontario


 

 

December 1, 2011

Creditors May Lose Secured Status Due to Note Problems


The Sixth Circuit Bankruptcy Appellate Panel has ruled that validly perfected mortgages may be invalidated by a bankruptcy trustee if the mortgagee fails to produce a properly indorsed note. The ruling addressed two different mortgages on the debtor’s residence. Both mortgages were validly perfected, but the notes secured by the mortgages were problematic. The court reversed a Rule 12(b)(6) dismissal of the trustee’s complaint.


The bankruptcy trustee conceded that both mortgages were validly perfected. The trustee argued that the mortgagees did not demonstrate they were the holders of the notes and therefore were not creditors of the debtor. Kentucky state law indicates that a mortgage without an underlying debt is ineffective.


The first mortgagee’s note had a chain-of-title issue. The debtor gave the note to Wilmington Finance, which assigned the note to Popular Financial Services, LLC. The note was then assigned from Popular ABS, Inc. to J.P. Morgan Chase, which eventually assigned the note post-petition to the defendant, Bank of New York. The first mortgagee asserted that because the mortgage was concededly valid, any issue relating to the note was irrelevant.


Read the full case note.


Keywords: bankruptcy, litigation, mortgage avoidance, chain of title, lost note


––Christy A. Prince, Kegler, Brown, Hill & Ritter Co., L.P.A., Columbus, Ohio


 

 

November 29, 2011

Lack of Oversight May Leave Operators Liable


In Lemington, the Third Circuit considered an appeal from the decision of the U.S. District Court for the Western District of Pennsylvania to enter summary judgment in favor of the directors and officers (D&Os) of a Pennsylvania nonprofit corporation on claims for breach of fiduciary duty and deepening insolvency. The court reversed, finding genuine issues of material fact as to whether the D&Os breached their duties of care and loyalty. The court also discussed the application of the business-judgment rule, the doctrine of in pari delicto, and deepening insolvency as a viable independent cause of action, each under Pennsylvania law.


Read the full case note.


Keywords: litigation, bankruptcy, deepening insolvency, duty of care, duty of loyalty, in pari delicto


––Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware.


The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.

 

 

 

November 17, 2011

Recharacterization of Debt to Equity—Not Limited to Insiders


The Fifth Circuit held that recharacterization of claims from debt to equity extends beyond insiders.


Years before bankruptcy, a non-insider loaned money to Lothian Oil pursuant to a handwritten document and a loan agreement, both provided that in consideration for the loan, the non-insider would be paid from royalties of gross production and equity placements. Neither document specified an interest rate, the term of repayment, or a maturity date. After Lothian Oil filed bankruptcy, the non-insider filed proofs of claim based upon the debts created by these documents.


The Bankruptcy Court recharacterized the non-insider’s claims as equity, holding that the claims “assert common equity interests at best.” In re Lothian Oil, Inc., No. 07-7012, Dkt. No. 1832 at 2 (Bankr. W.D. Tex. Dec. 17, 2008). The district court reversed the recharacterization, applying a per se rule to prohibit Bankruptcy Courts from recharacterizing contributions or investments from non-insiders.


Read the full case note.


Keywords: bankruptcy, litigation, recharacterization, equity, contribution, investment, non-insider, § 502(b), § 502(b)(1)


Liz Boydston, Fulbright & Jaworski L.L.P., Dallas, Texas

 

 

November 15, 2011

Third Circuit Provides Guidance on Determining Value


In Am. Home Mortg., the Third Circuit addressed an issue of apparent first impression: whether the term “commercially reasonable determinants of value” under section 562(b) is limited to market or sale value. The U.S. Bankruptcy Court for the District of Delaware held that commercially reasonable value can be demonstrated through a discounted cash flow analysis (DCF) under appropriate circumstances. The Third Circuit affirmed the Bankruptcy Court’s holding and reasoning in substantial measure.


The debtor and Calyon New York Branch were parties to a mortgage loan repurchase agreement as defined in section 101(47) of the Bankruptcy Code. Pursuant to such agreement, Calyon had purchased a portfolio of approximately 5,700 mortgage loans with a principal unpaid balance of approximately $1.2 billion. Before the debtor’s petition date, the debtor defaulted, and Calyon accelerated the debtor’s obligations under the repurchase agreement, including the debtor’s purported obligation to repurchase the loan portfolio for approximately $1.143 billion. At issue was Calyon’s claim for damages under section 562 for amounts in excess of the debtor’s purported $1.143 billion repurchase obligation.


Read the full case note.


Keywords: litigation, bankruptcy, repurchase agreement, Section 562, commercially reasonable determinants of value


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware.

The views expressed in this submission are those of the author and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.

 

November 14, 2011

Reliance on Client’s Automated Information System May Support Rule 9011 Liability


A recent decision of the Third Circuit, In re Taylor, 2011 WL 3692440 (3d Cir. Aug. 24, 2011), a personal bankruptcy case, suggests that, in certain circumstances, counsel’s reliance on a client lender’s information systems can lead to the imposition of sanctions against not only the client, but also against counsel. The decision underscores the need for bankruptcy litigators to take steps to verify the accuracy of information provided to them by their client and, in particular, to speak to their clients to ensure that the information that they are putting before the court is not obviously erroneous.


The case involved a home mortgage lender’s representations to the Bankruptcy Court in support of the lender’s claim and request for relief from stay. The Third Circuit was presented with an appeal from the district court’s reversal of the Bankruptcy Court’s entry of sanctions against the home mortgage lender and its counsel under Federal Rule of Bankruptcy Procedure 9011.


Read the full case note.


Keywords:  litigation, bankruptcy, Rule 9011, reasonable reliance, automated information system


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware.


 

October 21, 2011

Redemptions of Commercial Paper “Settlement Payments” under Section 546(e)


In In re Enron Creditors Recovery Corp., the Second Circuit decided that Enron Corp.’s payments to redeem its commercial paper constituted settlement payments and thus were protected from avoidance under the safe harbor in section 546(e) of the Bankruptcy Code, even though the redemption payments were made prior to stated maturity. Section 546(e) provides a limited exception to a trustee’s ability to recover allegedly fraudulent payments, by excluding from recovery settlement payments made by or to, among others, commodity brokers, financial institutions, and securities clearing agencies before a case commences.


Enron’s repurchases of debt from its noteholders had been challenged as preferences and constructively fraudulent transfers, and the reorganized entity sought recovery of those payments in adversary proceedings against 200 financial institutions, including appellees Alfa and ING. The Bankruptcy Court determined that section 546(e) did not protect these payments and that, these redemption payments were avoidable. The district court reversed, finding section 546(e) safe harbor applicable to these debt retirement payments. Enron appealed to the Second Circuit.


Read the full case note.


Keywords: bankruptcy, settlement payment, § 546(e), avoidance actions, redemption


Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY


 

October 19, 2011

Third Circuit Addresses Issue of First Impression


In Marcal, the Third Circuit addressed an issue of first impression under the Employee Retirement Income Security Act (ERISA) as amended by the Multiemployer Pension Plan Amendments Act (MPPAA): Can the portion of withdrawal liability attributable to post-petition services qualify as an administrative expense of the debtor’s estate? The Bankruptcy Court said no, the district court said yes, and the Third Circuit affirmed the district court’s decision.


The Third Circuit noted that in finding “the post-petition portion [of the withdrawal liability] can be classified as an administrative expense, we harmonize the purposes of the Bankruptcy Code and ERISA, as amended by MPPAA.” The court further noted that “by limiting what constitutes an administrative expense to only that portion of the withdrawal liability which can be fairly allocated to the post-petition period, we help preserve the estate and prevent it from being devoured by the entire withdrawal liability claim.”


Keywords: litigation, bankruptcy, withdrawal liability, administrative expense, ERISA, MPPAA


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware


 

October 19, 2011

Court Awards Costs, Not Attorney Fees, Due to American Rule


In Claybrook v. Autozone Texas, L.P., the Delaware Bankruptcy Court awarded costs to the defendants based in part on the court’s finding that the plaintiff-trustee failed to demonstrate a viable basis for his claims against the defendants. The court, however, declined to award attorney fees, relying on the American Rule “that all parties must pay their own way.”


In its opinion, the court made several findings in support of its award of costs to the defendants. First, the court questioned the trustee’s good-faith basis for filing its claims. In this regard, the court noted that the trustee testified at deposition that he did not review the complaint before it was filed or take any specific action to verify the allegations of the complaint. Second, the court found that the trustee and his counsel unfairly refused to consider evidence adduced by the defendants during discovery and instead initiated additional and protracted discovery against the defendants. For the court, the trustee’s tactics amounted to a “bad faith discovery campaign” for which the court already had awarded $100,000 to the defendants in sanction against the trustee and its counsel. Third, the court noted that the trustee had failed to present any evidence at trial in opposition to the defendants’ essential underlying defenses. Accordingly, the court found that the trustee’s “decision to proceed to trial without any evidence supporting his claims can only be seen as harassing.”


Keywords: litigation, bankruptcy, 28 U.S.C. § 1927; Fed. R. Bankr. P. 7054(b), American Rule, sanction


Marcos A. Ramos, Richards, Layton & Finger, P.A., Wilmington, Delaware


 

October 6, 2011

Standards Set for Subordination of Junior Debt to Post-Petition Interest on Senior Debt


Under 11 U.S.C. § 510(a), “[a] subordination agreement is enforceable in a [bankruptcy case] to the same extent that such an agreement is enforceable under applicable non-bankruptcy law.” In HSBC Bank USA v. Branch (In re Bank of New England Corp.), No. 10-1456, 2011 WL 2476470 (1st Cir. Jun. 23, 2011) (HSBC II), the First Circuit addressed under what circumstances pre-petition principal and interest owed on junior debt is subordinated to post-petition interest on senior debt.


Between 1984 and 1989, Bank of New England Corporation (BNEC) issued three series of junior bonds. Junior bondholders executed subordination agreements that stated, “the obligation of the Company to make any payment . . . of principal or interest . . . shall be subordinate and junior . . . in right of payment . . . to the holders of Senior Indebtedness . . . .” HSBC II, 2011 WL 2476470, at *1. The subordination agreement further provided that, “upon . . . any distribution of assets . . . all principal . . . and interest due or to become due upon all Senior Indebtedness of the Company shall first be paid in full . . . .” Id.


In 1991, BNEC filed for Chapter 7 bankruptcy. By 2001, the trustee had paid all principal and pre-petition interest amounts to senior bondholders, and thus he determined that senior debt had been “paid in full.” The trustee then moved the Bankruptcy Court for authorization to make a distribution to junior bondholders for principal and pre-petition interest. Senior bondholders objected, arguing that the subordination agreements entitled them to post-petition interest before any distribution to junior creditors. The Bankruptcy Court granted the trustee’s motion, and the senior bondholders appealed to the district court and then the First Circuit.


In 2004, the First Circuit reversed and remanded the Bankruptcy Court’s order. See HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355 (1st Cir. 2004) (HSBC I). The First Circuit held that the enactment of section 510(a) of the Bankruptcy Code in 1978 abrogated the so-called “rule of explicitness,” whereby senior creditors could only recover post-petition interest prior to a distribution to junior creditors if the junior creditors had explicitly agreed to such treatment under a subordination agreement. Instead, the court held that section 510(a) requires application of general state contract law when enforcing subordination agreements. Finding the agreements ambiguous, the court remanded to the Bankruptcy Court for a “contextual examination of the parties’ intent.” Id. at 366–68.


On remand, the Bankruptcy Court held a three-day trial about the parties’ intent regarding the scope of the subordination agreements.


Read the full case note.

 

Jeremy R. Fischer, Bernstein Shur, Portland, ME


 

September 16, 2011

Insurers’ Tangible Disadvantage Is Sufficient Injury for Article III Standing


The Third Circuit held that two liability insurance carriers have standing to object to their insured’s plan of reorganization because “when a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed.”


Debtor Global Industrial Technologies, Inc. (GIT) was the holding company for a collection of companies that manufactured and sold heat shielding and other products. As a part of its business, GIT acquired A.P. Green Industries, Inc. (APG), a company that produced asbestos and/or silica containing products. APG later experienced significant asbestos-related liabilities—approaching $500 million—but its silica-related liabilities were substantially less. The debtors filed their bankruptcy cases in substantial measure to address their asbestos-related liabilities.


The Debtors’ plan included a channeling injunction that would require both asbestos and silica-related claimants to seek satisfaction of their claims from trusts to be funded by proceeds of the policies of the appellant insurers (the Insurers). The plan provided for a separate trust for each of the asbestos and silica claimants. Prior to soliciting votes on the plan, the Debtors obtained a list of potential, but not yet filed, silica claimants and contacted those claimants’ counsel. “An explosion of silica claims ensued” in the Debtors’ proceedings and many of the newly filed silica claimants were represented by counsel who also represented existing asbestos claimants.


Read the full case note.

 

Marcos A. Ramos and Robert C. Maddox, Richards, Layton & Finger, P.A., Wilmington, Delaware. The views expressed in this submission are those of the authors and not necessarily those of Richards, Layton & Finger, P.A. or any of its clients.


 

September 16, 2011

Bankruptcy Judges Appointed in North Carolina, North Dakota, and Virginia


Shon Hastings has been appointed by the Eighth Circuit Court of Appeals as a federal bankruptcy judge for North Dakota. She is the first woman appointed to that position in North Dakota. Prior to her appointment, Judge Hastings acted for many years as an assistant U.S. attorney, serving as chief prosecutor and supervisor for the office’s civil division. She was appointed to replace Judge William Hill, who retired after 28 years on the bench.


Brian F. Kenney has been appointed by the Fourth Circuit Court of Appeals as a bankruptcy judge in the Alexandria Division of the U.S. Bankruptcy Court for the Eastern District of Virginia. His appointment became effective September 1, 2011. Prior to his appointment, Judge Kenney practiced at Miles & Stockbridge, P.C. in Fairfax County, Virginia. He was named as one of Virginia’s “Legal Elite” by Virginia Business Magazine from 2006 to 2010, inclusive, and was certified as a business bankruptcy specialist by the American Board of Certification. He succeeds Judge Stephen S. Mitchell, who retired from the bench on August 31, 2011.


The Bankruptcy Court in the Western District of North Carolina will also soon have a new judge. In light of the retirement of Judge George R. Hodges, Laura Turner Beyer has been appointed by the U.S. Court of Appeals for the Fourth Circuit. It will likely be a very smooth transition for Ms. Beyer, as she has been the law clerk to Judge Hodges for many years. Prior to acting as Judge Hodges’ clerk, Ms. Beyer practiced at Helm Mulliss & Moore, LLP. Ms. Beyer will be sitting in Charlotte, North Carolina.


In other news, Judge Elizabeth W. Magner has been appointed as Chief Judge of the U.S. Bankruptcy Court for the Eastern District of Louisiana.


Lisa Brost, McMillan LLP, Toronto, Ontario


 

August 18, 2011

“Absolute Priority Rule” May Be First Raised on Appeal


The absolute priority rule, implemented in 11 U.S.C. § 1129(b)(2), comes into play when the requirement under section 1129(a)(8) that all impaired creditor classes vote to accept a proposed Chapter 11 reorganization plan is not met. In re: Lett, 632 F.3d 1216, 1228–9 (11th Cir. 2011). Even if all impaired creditors do not vote for plan confirmation, the Bankruptcy Court may still confirm the plan if all requirements under section 1129(a) are met, as long as the plan does not discriminate unfairly and is “fair and equitable.” Section 1129(b). The meaning of “fair and equitable” in this context is that an objecting class must be paid in full before any junior claim or interest may be paid at all. Lett, 632 F.3d at 1228.


The Eleventh Circuit held that although the Alabama Department of Economic & Community Affairs (ADECA) did not formally object to confirmation of the plan on the basis of the absolute priority rule, the Bankruptcy Court was required to ensure compliance with section 1129(b), which mandates the issue be raised. Id. at 1239.


Read the full case note.

 

Stephen Porterfield, and Robin Beardsley Mark, Birmingham, AL.


 

August 4, 2011

Property Sold in Noticed Foreclosure Sale Is Not Property of the Estate


In Scott v. Bierman, No. 10-1483, 2011 WL 1807330 (4th Cir. May 12, 2011), an unpublished opinion, the Fourth Circuit Court of Appeals affirmed the decision of the Bankruptcy Court, which concluded that real property previously belonging to the debtor but sold in a properly noticed foreclosure sale consummated before the filing of the bankruptcy petition and which the debtor did not contest in a timely manner, was not property of the bankruptcy estate.


In Scott, one of the petitioners sought relief under Chapter 13 of the Bankruptcy Code in December 2009. Subsequently, he initiated an adversary proceeding, along with his mother, claiming that they retained legal title to certain real property that had been subjected to a foreclosure sale that was ratified by a Maryland state court in May 2009. The deed reflecting the sale was recorded in June 2009. Before the purchaser of the foreclosed property could take possession, it brought a motion seeking possession of the property because the petitioner’s mother refused to vacate the property. In opposing the motion, the Scotts argued for the first time that the deed was defective and, therefore, that the entirety of the property was not sold in the foreclosure sale. During the pendency of this action, the petitioning son filed for Chapter 13 relief.


Read the full case note.

 

Damarr M. Butler, Esq., Washington, D.C.


 

July 26, 2011

Recording of Fees Does Not Violate Automatic Stay


In re Jacks, [PDF] 2011 WL 2183979, 3 (11th Cir. 2011), the Jacks argued that, when Wells Fargo recorded bankruptcy-related expenses totaling $310 on the Jacks’ customer account activity statement, they violated these provisions of section 362. The Eleventh Circuit held that because Wells Fargo had not actually modified the lien, it had not committed any act in violation of the stay.


This case allows lenders to keep track of bankruptcy-related expenses categorized by individual borrowers. So long as the creditor does not attempt to collect these expenses from the debtor in bankruptcy, they have not violated the automatic stay.

 


Read the full case note.

 

Stephen Porterfield and Robin Beardsley Mark, Sirote & Permutt, P.C., Birmingham, Alabama


 

July 14, 2011

Supreme Court Narrows Core Bankruptcy Jurisdiction


Under 28 U.S.C. § 157(b)(2)(C), counterclaims against creditors who have filed claims against the estate are “core matters” upon which Bankruptcy Courts may enter final judgments. In Stern v. Marshall, ___ S.Ct. ___, 2011 WL 2472792 (Jun. 23, 2011), the U.S. Supreme Court held that section 157(b)(2)(C) is unconstitutional to the extent that it allows Bankruptcy Courts “to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Id. at *27.


Read the full case note.

 

Jeremy R. Fischer, Bernstein Shur, Portland, Maine


 

July 14 , 2011

Private Employers May Deny Employment Based on Bankruptcy Status


Under 11 U.S.C. section 525(b), private employers may not “terminate the employment of, or discriminate with respect to employment against” an individual because of that person being in or having been in bankruptcy. The Eleventh Circuit decided that section 525(b) did not prohibit an employer from denying employment to a person based on his or her status as a former or current debtor in bankruptcy.


Read the full case note.

 

Stephen Porterfield and , Robin Beardsley Mark Sirote & Permutt, P.C., Birmingham, AL


 

June 28 , 2011

ABA CLE Program to Focus on the Mortgage Foreclosure Crisis


On Thursday, July 21, 2011, the ABA Section of Litigation and the ABA Center for Continuing Education will present a live webinar centering on regulatory, litigation, and enforcement trends stemming from the mortgage foreclosure crisis. 


As a result of the financial crisis, mortgage servicing and enforcement has been the subject of regulatory scrutiny and litigation. Issues surrounding mortgage enforcement have increasingly been the focus of bankruptcy and insolvency litigation. The controversy surrounding “robo-signers” is only one of the myriad issues that has arisen in relation to mortgage enforcement. 


The ABA webinar will feature an esteemed panel including:


  • Andrew Sandler, moderator, a partner at BuckleySandler LLP, Washington, D.C.;
  • Terry Goddard, former Attorney General of the State of Arizona; and
  • Jonice Gray Tucker, a partner at BuckleySandler, LLP, Washington, D.C.

Bankruptcy and insolvency litigators will not want to miss the program, which will include discussions on bankruptcy and foreclosure issues. The expert panel will discuss current regulatory, enforcement, and litigation trends relating to default servicing, including issues related to loan workouts, discrimination in servicing, compliance with the Servicemembers Civil Relief Act. The discussion will also cover activity by the federal banking regulators and state attorneys general, anticipated enforcements priorities, and emerging patterns in private litigation.


Register for what is sure to be an informative and insightful CLE program. This program will qualify for CLE credit in most states.

 

Keywords: litigation, bankruptcy, mortgage enforcement, CLE, foreclosure

 

— Lisa Brost, McMillan LLP, Toronto


 

June 20 , 2011

Chapter 7 Petition Dismissed on Grounds of Abuse


In Calhoun v. U.S. Trustee, ___F.3d___, 2011 WL 1651228 (4th Cir. May, 2011), the Fourth Circuit Court of Appeals affirmed the Bankruptcy Court’s decision to dismiss a Chapter 7 petition on the grounds of abuse, concluding that a husband and wife were able to pay their creditors based on the totality of circumstances of their financial situation.


In Calhoun, a husband and wife filed a voluntary Chapter 7 petition seeking to discharge more than $100,000 in unsecured debt. The husband received $8,772 in monthly income and the wife did not receive any independent income. After accumulating debt on a second mortgage and five credit cards, the couple entered into a payment plan and paid their creditors a total of $2,638 per month. This payment arrangement continued for 22 months until the couple became discouraged because the payment arrangement did not leave any money for emergencies. Thereafter, they explored bankruptcy options.


As amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), section 707(b) of the Bankruptcy Code permits a court to dismiss a case filed by an individual debtor whose debts are primarily consumer debts if it finds that the granting of relief would be an abuse. 11 U.S.C. § 707(b)(1). An essential element to BAPCPA is the means test, which is a formula that screens a debtor’s income and expenses to determine whether the debtor is able to repay his or her debt. 11 U.S.C. § 707(b)(1), (2). The purpose of the means test is to distinguish between debtors who can repay a portion of their debts and those who cannot. Basically, when a debtor’s income exceeds the highest median family income of the applicable state for a family of the same number or fewer individuals, the means test is applied to create a rebuttable presumption of abuse. 11 U.S.C. § 707(b)(2), (6), (7).


The debtor may rebut this presumption by demonstrating special circumstances such as a medical condition or military service, which justify additional expenses for which there is no reasonable alternative. 11 U.S.C. § 707(b)(2)(B)(i). When the presumption does not arise or is rebutted, the court still must determine whether granting a debtor relief would be an abuse by considering whether the debtor filed in bad faith or by considering the totality of the circumstances. 11 U.S.C. § 707(b)(3). Whether the petition was filed because of sudden illness, calamity, disability, or unemployment; whether the debtor incurred advances and made consumer purchases in excess of his or her ability to repay; whether the debtor’s proposed budget is excessive or unreasonable; whether the debtor’s schedules and statement of current income and expenses reasonably and accurately reflect the true financial condition; and whether the petition was filed in good faith are all factors that play a role in evaluating the totality of the circumstances in the Fourth Circuit. Green v. Staples (In re Green), 934 F.2d 568 (4th Cir. 1991).


In the instant case, the couple’s fixed income, excluding the husband’s social security benefits, was $7,313 per month, or $87,756 per year, which was well above the $46,521 median income for a household of two in South Carolina. Moreover, the couple’s monthly deductions allowed under the means test was $7,330.19, which when subtracted from their income left a monthly net income that was insufficient to trigger a presumption of abuse. However, the Fourth Circuit agreed with the bankruptcy court’s reasoning that it was appropriate for the bankruptcy court to proceed under section 707(b)(3) and using the totality of the couple’s financial situation evidenced an abuse of Chapter 7.


The couple contended that their petition should not be dismissed based solely on their ability to repay; that social security benefits should be excluded from the analysis of their ability to repay; and that the means test is conclusive of eligibility for Chapter 7 relief.


The couple’s last argument was readily dispensed because the means test is not conclusive. Specifically, the presumption is rebuttable and a court may still find abuse even if there is no presumption. In re Crink, 402 B.R. 159, 168 (Bankr. M.D.N.C. 2009). The Fourth Circuit did not address the couple’s other arguments because they found a multitude of factors weighing in favor of abuse and that there was no error in those findings. Specifically, the couple was determined to have the ability to pay creditors because they made payments in the amount of $2,638 a month to their unsecured creditors for 22 months before the filing of the petition; bankruptcy filing was not the result of a sudden illness, calamity, disability, or unemployment; monthly expenses were extravagant ($439 per month on two life insurance policies), regardless of the fact that the wife would receive 75 percent of her husband’s monthly income from his retirement account; there were expenses for cable, internet, laundry, and dry cleaning; and the couple was unable to justify their excessive transportation expenses.

 

Keywords: bankruptcy petition, abuse of process, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

 

— Damarr M. Butler Esq., Washington, D.C.


 

May 25, 2011

Bankruptcy Judges Appointed for California, Ohio, and Washington


The U.S. Court of Appeals for the Ninth Circuit has appointed William J. Lafferty as a judge of the U. S. Bankruptcy Court for the Northern District of California. He succeeds Judge Randall J. Newsome. Judge Lafferty’s appointment became effective on April 20, 2011.


Judge Lafferty was previously at Howard Rice Nemerovski Canady Falk & Rabkin PC. Prior to joining this law firm, Justice Lafferty served as a law clerk for the Honorable Thomas E. Carlson, U. S. Bankruptcy Judge for the Northern District of California.


Judge Lafferty will be busy. According to the U.S. Bankruptcy Court for the Northern District of California, in 2010, the court received 33,025 bankruptcy filings, up 16.8 percent from the previous year.


More information about Judge Lafferty and his background can be found at the U.S. Bankruptcy Court, Northern District of California’s website at the following link: http://www.canb.uscourts.gov/judges/lafferty.


The U. S. Court of Appeals for the Ninth Circuit has also appointed Timothy Dore as a judge of the U. S. Bankruptcy Court for the Western District of Washington. He succeeds Judge Samuel Steiner.


Judge Dore was previously at Ryan, Swanson & Cleveland.


Judge Dore will also be busy. The U.S. Bankruptcy Court for the Western District of Washington received 26,671 bankruptcy filings in fiscal 2010, up nearly 19 percent from a year earlier.


Finally, the U. S. Court of Appeals for the Sixth Circuit has appointed Beth A. Buchanan as a judge of the U. S. Bankruptcy Court for the Southern District of Ohio. She was sworn in on May10, 2011, and succeeds Judge Vincent Aug Jr.


Judge Buchanan was previously at Frost Brown Todd, where she practiced in bankruptcy and insolvency law with a focus on commercial bankruptcy, creditors’ rights, and out of court restructuring transactions.


Judge Buchanan is a graduate of the University of Dayton School of Law and Ohio State University. Prior to her legal career, she worked in commercial banking for more than eight years for two major financial institutions.


Keywords: bankruptcy judges appointed, Judge Buchanan, Judge Dore, Judge Lafferty


— Lisa Brost, McMillan LLP, Toronto


 

April 21, 2011

Previously Discharged Tax Liabilities Precludes Discharge of Adjustments

Maryland v. Ciotti (In re Ciotti) F.3d (4th Cir. 2011) No. 10-1083, 2011 WL 790309 (4th Cir. Mar. 8, 2011)

In Maryland v. Ciotti (In re Ciotti), the Fourth Circuit Court of Appeals held that a Chapter 7 debtor’s failure to file a report with tax authorities regarding adjusted tax liabilities precluded discharge of those adjusted liabilities.


In In re Ciotti, the debtor filed state tax returns for the 1992–96 tax years. Subsequently, the debtor filed for Chapter 7 protection and received a discharge. After the case was closed, the Internal Revenue Service (IRS) made adjustments to each of the debtor’s returns, resulting in a significant increase in federal adjusted income for each of the tax years in which a returned was filed. Pursuant to Md. Code Ann., Tax-Gen. § 13-409(b), the debtor was required to report the amount of the changes to the Maryland tax authorities. The debtor did not report the changes, but the IRS forwarded its determination to the Maryland Comptroller. Based on the IRS’s report, the Maryland Comptroller made adjustments to the debtor’s state returns, resulting in an assessment of more than $500,000 in taxes, penalties, and interest.


The debtor successfully moved to reopen her case, seeking a declaration that her Maryland income tax liabilities had been discharged. The Maryland Comptroller contended that the tax liabilities were excluded from discharge pursuant to 11 U.S.C.A. § 523(a)(1)(B) (West Supp. 2010), which prohibits a discharge of a tax debt when there is a failure to file a return or an equivalent required report or notice. The debtor prevailed before the Bankruptcy Court and the district court reversed.


In affirming the decision of the district court, the Fourth Circuit concluded that the debtor’s tax debt was precluded from discharge because the debtor did not file a return or an equivalent required report or notice. Section 523(a)(1)(B) provides that an individual debtor is not discharged from any debt for a tax with respect to a return or equivalent report or notice, if required, was not filed.


In drafting the original § 523(a)(1)(B), which did not include reference to an “equivalent report or notice,” Congress sought to balance the tension among the interests of general creditors, the ability of the debtor to have a fresh start, and the tax collector’s ability to collect taxes. S. Rep. No. 95–989, at 13, reprinted in 1978 U.S.C.C.A.N. 5787, 5800. Moreover, the exception from discharge of tax claims embodied the concept that tax claims are those whose staleness the debtor contributed to by some wrongdoing or serious fault. S. Rep. No. 95–989, at 14, reprinted in 1978 U.S.C.C.A.N. 5787, 5800. The Fourth Circuit reasoned that the same policy rationale applies to the current statute.


The debtor argued that her failure to file a report under Md. Code Ann., Tax-Gen. § 13–409(b) did not trigger the application of § 523(a)(1)(B), because the report required under Maryland law was not sufficiently similar to an “equivalent report or notice” as embodied in § 523(a)(1)(B). Disagreeing with the debtor, the Fourth Circuit explained that a document is a return under bankruptcy or tax law if it: (1) purports to be a return; (2) is executed under penalty of perjury; (3) contains sufficient data to allow calculation of tax; and (4) represents an honest and reasonable attempt to satisfy the requirement of the tax laws. Moroney v. United States (In re Moroney), 352 F.3d 902, 905 (4th Cir. 2003). As a result, the report required under Md. Code Ann., Tax-Gen. § 13-409(b) was an equivalent report or notice because:


  • even though it did not require a signature, the law provided for punishment if the report contained false or misleading information;
  • the report was required to include a complete copy of the federal audit, including all exhibits; and
  • the taxpayer was required to provide information additional to that which would be found in a return in the report, namely an explanation of any disagreement that the taxpayer has with the federal adjustment.

 

As a result, the report required under Md. Code Ann., Tax-Gen. § 13-409(b) was deemed similar to a return and therefore was an equivalent report or notice under § 523(a)(1)(B).
The debtor also argued that even if the report under Md. Code Ann., Tax-Gen. § 13-409(b) is similar to a return and indeed the type of report to which Congress intended § 523(a)(1)(B) to apply, the report was given to the Maryland Comptroller when the IRS forwarded its audit determinations, resulting in notice. The court disagreed, reasoning that the IRS’s report to Maryland did not satisfy the taxpayer’s statutory obligation to report the information. Specifically, if a debtor is obligated under non-bankruptcy law to file an amended return or give notice to a governmental unit of an amendment or correction to a prior filed federal tax return, the failure to do so will render non-dischargeable any corresponding tax liability to the governmental unit. See Collier on Bankruptcy ¶ 523.07 (2010).


Keywords: discharge of tax liability; Section 523(a)(1)(B)


Damarr M. Butler Esq., Washington, D.C.


 

April 8, 2011

Seventh Circuit to Hear River Road and RadLAX


Under 11 U.S.C. § 1129(b), a debtor may “cram down” a Chapter 11 plan of reorganization on non-accepting creditors if, among other things, the plan provides for the “fair and equitable” treatment of claims and interests. With respect to secured creditors, a plan is fair and equitable if it provides:


  • that the secured creditor will retain its lien and receive deferred cash payments equaling the total amount of its claim;
  • for the sale of the secured creditor’s collateral free and clear of any liens, subject to the secured creditor’s right to “credit bid” its indebtedness toward purchasing the collateral; or
  • that the secured creditor will receive the “indubitable equivalent” of its claim.

 

Two recent decisions, In re River Road Hotel Partners, LLC and In re RadLAX Gateway Hotel, LLC, Case Nos. 09 B 30029 and 09 B 30047 (Bankr. N.D. Ill. Oct. 5, 2010), address whether a debtor attempting to sell its encumbered assets free and clear of any liens must always proceed under § 1129(b)(A)’s second prong and permit credit bidding or whether a debtor may instead proceed under the indubitable equivalent prong and preclude credit bidding.


In River Road and RadLAX––two related Chapter 11 cases pending before Bankruptcy Judge Bruce Black in the Northern District of Illinois––the debtors’ plans contemplated auctions of substantially all of their assets free and clear of any liens. Each debtor procured a stalking-horse bid of between $42 million and $47.5 million for the respective debtor’s hotel and related assets. Under the debtors’ plans, the secured lenders––who were owed more than $100 million in each case––would not be able to credit bid at the auction and instead would have to submit cash bids to purchase their collateral.


The debtors proposed to satisfy the lenders’ secured claims by giving the lenders lump-sum cash payments equal to the winning bids at the auction. The debtors argued that this treatment was “fair and equitable” because it gave the lenders the “indubitable equivalent” of their secured claims under § 1129(b)(2)(A)(iii). That is, the winning bids necessarily establish the value of the lenders’ collateral and therefore also establish the secured portion of the lenders’ claims; giving the lenders’ a lump-sum cash payment equal to the secured portion of their claims would then be the indubitable equivalent of those claims.


The debtors relied on the Third Circuit’s majority opinion in In re Philadelphia Newspapers, LLC, 599 F.3d 289 (3d Cir. 2010), and the Fifth Circuit’s decision in Scotia Pacific Co., LLC v. Official Unsecured Creditors Committee (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009), to argue that they could proceed under the indubitable equivalent prong instead of the credit-bidding prong. In Philadelphia Newspapers, the Third Circuit emphasized that the disjunctive “or” separates § 1129(b)(2)(A)’s three requirements, so the plain meaning of the provision permits debtors to proceed under any of the three alternatives. 599 F.3d at 308. The Third Circuit, however, did not decide the question of whether the debtor’s plan actually gave the secured lender the indubitable equivalent of its claim, a separate factual issue that would be decided at confirmation. Id. at 317–18. In Pacific Lumber, the Fifth Circuit went a step further, holding that under the facts of the case, giving a lender a lump-sum cash payment equal to the value of its collateral satisfies the indubitable equivalent test:


Whatever uncertainties exist about indubitable equivalent, paying off secured creditors in cash can hardly be improper if the plan accurately reflected the value of the Noteholders’ collateral.


584 F.3d at 247.


In River Road and RadLAX , the secured lenders largely adopted Judge Ambro’s dissenting opinion from Philadelphia Newspapers to argue that they must be allowed to credit bid under § 1129(b)(2)(A)(ii). Judge Ambro determined that § 1129(b)(2)(A) sets forth three distinct channels to confirmation:


  • § 1129(b)(2)(A)(i) governs when a plan provides that the secured creditor will retain its lien and be paid on account of its claim;
  • § 1129(b)(2)(A)(ii) governs when a debtor seeks to sell its assets free and clear of any liens; and
  • § 1129(b)(2)(A)(iii) is a “catch-all” provision applicable when the plan utilizes a different method for satisfying the secured claim, such as abandoning the collateral back to the creditor.

 

599 F.3d at 325–26.


Judge Ambro also emphasized that allowing debtors to sell assets under the indubitable equivalent prong without permitting secured creditors to credit bid would render superfluous § 1129(b)(2)(A)(ii). Id. at 330–31. Moreover, Judge Ambro stated that other provisions of the Bankruptcy Code and their legislative histories indicate that the Bankruptcy Code vests secured lenders with the right to credit bid. For example, § 363(k) permits secured creditors to credit bid when assets are sold outside of a plan. Additionally, § 1111(b) allows a secured creditor to elect to have its entire claim treated as fully secured, notwithstanding the value of the collateral, and to forego any unsecured deficiency claim. These provisions act as checks against undervaluation of the collateral, and courts should interpret § 1129(b)(2)(A) consistent with these other Code provisions. Id. at 333–34.


In River Road and RadLAX, Judge Black denied the debtors’ motion to approve bid procedures, adopting Judge Ambro’s dissent in full and without additional analysis. The debtors then appealed the decision, and Judge Black certified the matter for a direct appeal to the Seventh Circuit.


It will be interesting to see if the Seventh Circuit follows the Third and Fifth Circuits, or if it creates a circuit-split on this important issue. In particular, the Seventh Circuit may consider the question that the Third Circuit did not answer––whether denying a secured creditor the right to credit bid necessarily fails to provide the creditor with the indubitable equivalent of its claim. Ultimately, the Supreme Court will likely be the final arbiter of this issue.


Keywords: litigation, bankruptcy, insolvency, plan of reorganization, credit bid, cram down


David H. Hixson, Jenner & Block LLP, Chicago, Illinois


 

March 17, 2011

Failure to Contest a Threshold Issue Is Not a Concession


In In re FirstPay Incorporated, Nos. 09–1076 and 09–1107, 2010 WL 3199858 (4th Cir. Aug. 13, 2010), an unpublished opinion (unpublished opinions are not binding precedent in the Fourth Circuit), the Fourth Circuit Court of Appeals held that the government’s failure to contest the Chapter 7 trustee’s motion for summary judgment by raising a threshold issue regarding preference claims did not amount to a concession of the issue. Moreover, the Fourth Circuit held that the government’s failure to raise an affirmative defense in its answer did not preclude it from subsequently raising such a defense.


Damarr M. Butler Esq., Washington, D.C.



 

February 23, 2011

Bankrupt Corporation's Creditors May Sue Shareholders


The U.S. Court of Appeals for the Ninth Circuit recently held that a creditor of a bankrupt corporation may assert alter ego claims against the corporation’s sole shareholders. In Ahcom, Ltd. v. Smeding, 623 F.3d 1248 (9th Cir. 2010), Ahcom, a creditor of Nuttery Farms, Inc. (NFI), obtained an arbitration award against NFI. When NFI subsequently filed for bankruptcy, Ahcom responded by suing the sole shareholders of NFI, Hendrik and Lettie Smeding, in California state court under an alter ego theory, seeking to pierce the corporate veil and hold the Smedings personally responsible for the arbitration award against NFI. In an attempt to defeat Ahcom’s claim on the basis of lack of standing, the Smedings removed the collection action to the district court and brought a motion to dismiss Ahcom’s action. In response, Ahcom argued that its alter ego claim affected not just Ahcom, but all creditors of NFI’s bankruptcy estate and, therefore, that the claim was exclusively the property of the bankruptcy estate. The lower courts, citing prior case law, agreed and dismissed the action against the shareholders.


Andy S. Kong, Arent Fox LLP, Los Angeles, California



 

February 16, 2011

Arrearage Cure Amount in Chapter 13 Includes Legal Fees


The Sixth Circuit Court of Appeals has ruled that Chapter 13 debtors are required to pay all fees required by the underlying loan documents to cure a default even if the total debt exceeds the value of the collateral. A copy of the decision may be found here.


The debtor signed a promissory note secured by a mortgage in August 2004. She filed Chapter 13 bankruptcy in February 2008. Her bankruptcy schedules valued the real property, securing the debt at $88,000. Deutsche Bank filed a secured proof of claim for $103,328.84, of which $23,286.89 was arrearages required to be paid to cure the default. The underlying note and mortgage permitted the recovery of all the fees, including attorney fees. Attorney fees of $4,660.42 were included as part of the arrearages. The reasonableness of the attorney fees was not in dispute.


Christy A. Prince, Kegler, Brown, Hill & Ritter Co., L.P.A., Columbus, Ohio



 

February 10, 2011

Court Holds Trustees Not Liable for Debt Arising from Judgment


An Arkansas Bankruptcy Court held that trustees were not personally liable for a judgment against them in their capacity as trustees. In Donny & Lori Edwards v. Rock & Dianna Spencer, the Edwards asked the court to hold the Spencers personally liable for a debt that arose primarily as a result of a judgment against the Spencers in their capacity as trustees of living trusts.


Clarence Westbrook, Lawndale, California



 

January 26, 2011

CLE Program to Focus on Foreclosures and Mortgage Enforcement


On Tuesday, February 8, 2011, the ABA is holding a teleconference and live audio webcast focusing on enforcement activity in the wake of the recent foreclosure crisis. As enforcement activity surrounding the financial industry has expanded dramatically, issues relating to mortgage enforcement will undoubtedly often arise in bankruptcy and insolvency litigation.


During the CLE program, "The Foreclosure Crisis Tsunami," an esteemed three-member panel will provide its views on:

 

  • issues on which state and federal regulators are focusing

  • potential private causes of action

  • strategies for response

  • best practices

 

This program will qualify for CLE credit in most states.


Register for what is sure to be an informative and insightful CLE program.


 

January 25, 2011

Fifth Circuit Emphasizes Fundamental Protections for Secured Lenders


The Fifth Circuit ruled, more than two years after consummation of Pacific Lumber’s reorganization plan, that the reorganized debtors must pay $29.7 million to their former secured lenders on account of a section 507(b) administrative priority claim.


There were three main issues in the case: 1) whether the court had jurisdiction over the appeal of the Bankruptcy Court’s denial of section 507(b) claim, 2) whether the appeal was equitably moot, and 3) whether the Bankruptcy Court erred in denying the section 507(b) claim.

 



 

January 25, 2011

Bankruptcy Court Rules on Aggregate Value and Constructive Fraud


The Honorable John J. Thomas of the Bankruptcy Court for the Middle District of Pennsylvania issued an opinion of apparent first impression under section 547(c)(9) of the Bankruptcy Code. Section 547(c)(9) provides that the trustee in a case filed by a debtor whose debts are not primarily consumer debts may not avoid a transfer under section 547 if “the aggregate value of all property that constitutes or is affected by such transfer is less than $5,475.” The question posed was whether section 547(c)(9)’s $5,475 threshold should be evaluated on a transfer-by-transfer basis or in relation to the aggregate value of the transfers at issue. The court also considered whether Rule 9(b) of the Federal Rules of Civil Procedure applies to a claim for constructive fraud.


Read the full case note.


 

November 30, 2010

CLE Program to Focus on the Future of Credit Bidding and Asset Sales


On Wednesday, December 15, 2010, the ABA is holding a teleconference and live audio webcast focusing on the recent decision of the Third Circuit Court of Appeals in In re Philadelphia Newspapers, LLC. In Philadelphia Newspapers, the court allowed a debtor to proceed with a plan that provided for a sale of its assets free and clear of all liens in an auction process that did not permit a secured creditor to credit bid. For additional information, read the case note on the decision.


During the CLE program, an esteemed three-member panel will provide its views on how the decision will impact the future of credit bidding and asset sales in bankruptcy. The panel, which includes counsel to the Creditors’ Committee in Philadelphia Newspapers, will discuss, among other things, the legal history of lien stripping, the purposes of the relevant sections of the Bankruptcy Code, and decisions emanating from other circuits relating to credit bidding. This program will qualify for CLE credit in most states.


Register for what is sure to be an informative and insightful CLE program.



 

November 17, 2010

Bankruptcy Judge Appointed by Ninth Circuit Court of Appeals


Stephen L. Johnson has been appointed judge of the U.S. Bankruptcy Court for the Northern District of California, San Jose Division. He succeeds Judge Leslie J. Tchaikovsky who left the bench on August 30, 2010. Judge Johnson’s appointment became effective on October 13, 2010.


Judge Johnson had served as an assistant U.S. attorney for the Northern District of California since 2002, handling bankruptcy and civil matters. From 1995 to 2002, Judge Johnson worked as a trial attorney in the Office of the U.S. Trustee in San Francisco, where he served as the lead attorney for the U.S. Trustee in the Pacific Gas & Electric Company Chapter 11 case.


Judge Johnson will be busy. According to the U.S. Bankruptcy Court for the Northern District of California, in 2009 the court received 33,025 bankruptcy filings, up 55.8 percent from the previous year.


Andy S. Kong, Arent Fox LLP, Los Angeles



 

In re: Richard Timothy Anderson and Ethel M Anderson

Debtor's Motion for Sanctions for violation of 11 U.S.C. Section 362(a).


 

Recovery of Attorney Fees in Bankruptcy


A claim for attorney fees authorized by a prepetition contract with the debtor and incurred in postpetition litigation may not be categorically disallowed solely because the postpetition litigation involves issues of federal bankruptcy law. The contrary rule adopted by the Ninth Circuit of Appeals — i.e., that attorney fees are not recoverable in bankruptcy where the litigated issues are peculiar to federal bankruptcy law, absent the losing party's bad faith or harassment (see In re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991) — finds no support in the Bankruptcy Code. Unless expressly disallowed by a provision of the Bankruptcy Code, claims enforceable under applicable state law enjoy the general presumption that they will be allowed in bankruptcy. The fact that otherwise‑recoverable attorney's fees may be generated litigating issues of federal bankruptcy law does nothing to overcome this presumption. The Bankruptcy Code provides no basis for disallowing claims for attorney fees pursuant to the rule expressed in Fobian; if anything, section 502(b)(4)'s express disallowance of certain attorney fees suggests that Congress did not intend to disallow other categories of attorney's fees recoverable under state law. The court expresses no opinion with regard to whether section 506(b) of the Bankruptcy Code might provide an independent basis for disallowing unsecured contractual claims for attorney fees. (Alito,J., writing for a unanimous Court) (vacating and remanding Travelers Cas. & Sur. Co. v. Pac. Gas and Elec. Co., 167 Fed. Appx. 593 (9th Cir. 2006))



 

Right to Convert from Chapter 7 to 13 Held Not Absolute


In a 5-4 ruling released on Wednesday, February 21, 2007, the United States Supreme Court held that an individual debtor who files misleading and inaccurate schedules in his chapter 7 case to protect his principal assets from his creditors may forfeit his right to convert from chapter 7 to chapter 13. Marrama v. Citizens Bank of Massachusetts, et al., No. 05-996, 2007 WS 517340, 549 U.S. ________ (2007). The majority opinion, written by Justice Stevens and joined by Justices Kennedy, Souter, Ginsburg, and Breyer, rejected the debtor's contention that the right to convert is absolute. In his dissenting opinion, Justice Alito (joined by Chief Justice Roberts and Justices Scalia and Thomas) stated that the Bankruptcy Code does not authorize a bankruptcy judge to override a debtor's exercise of his unambiguous conversion right under section 706(a) on grounds not expressly set forth in the Code.



 

New Bankruptcy Law Limits Charitable Donations


The Washington Times reports that a federal judge ruled recently that new bankruptcy laws that took effect last October limit the ability of some people seeking bankruptcy protection to make charitable donations to churches and other causes. Until the new laws took effect, bankruptcy judges were required to allow debtors to use a portion of their incomes as donations to their churches. However, the new laws prohibit any debtor whose income is above the median level for their state to make charitable donations. A debtor with income below the median level is still allowed to make the donations. Some religious leaders have called on Congress to amend the bankruptcy laws to allow more debtors to donate.



 

ABA Adopts Policy to Advance Electronic Case Filing in Bankruptcy Cases


The ABA House of Delegates at the Midyear Meeting in Chicago on February 13, 2006 passed Recommendation #301, which recommends that the United States Bankruptcy Courts in each federal district permit lawyers who have received electronic case filing training in any district to file documents electronically in bankruptcy cases in any other district, provided that they satisfy all other requirements for filing in bankruptcy cases in that district. The background report supporting the recommendation notes that while 87 bankruptcy courts have electronic case filing systems, and 53 require that all documents filed in all cases be filed electronically, many require that lawyers attend local training before receiving the password to enable them to submit documents electronically, placing additional barriers in the way of a lawyer's ability to practice. The goal of the policy is to remove barriers to electronic filing and thus to treat paper filing and electronic filing equally. The Recommendation will now be forwarded to the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States



 

Director's Interim Guidance Regarding Tax Information under 11 U.S.C. § 521


Effective October 17, 2005, all tax information provided in accordance with section 521 of the Bankruptcy Code is subject to the Judicial Conference of the United States Policy on Privacy and Public Access to Electronic Case Files (JCUS Policy; JCUS Sep./Oct. 2001, pp.49-50). In accordance with the JCUS policy, the debtor should take the following steps to redact personal identifiers in any tax information filed with the court or provided to the trustee or creditor(s), in either electronic or paper form.


  • Social Security Numbers. If an individual's Social Security number is included, only the last four digits of that number should appear
  • Names of Minor Children. If a minor child is identified by name, only the child's initials should appear
  • Dates of Birth. If an individual's date of birth is included, only the year should appear
  • Financial Account Numbers. If financial account numbers are provided, only the last four digits of these number should appear

Court employees are not responsible for redacting any of the personal identifying information. The responsibility for redacting personal identifiers rests solely with the debtor. Please refer to the Director's Interim Guidance regarding Tax Information [PDF] under 11 U.S.C § 521 for more information on implementing the JCUS policy.


 

Recommendations Offered on New Bankruptcy Law as to Attorney Liability


The ABA Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes has appointed a Task Force on Attorney Discipline, which is working to discern how the new bankruptcy law will affect lawyers and their liability under section 707(b)(4).


The bankruptcy law, enacted in October 2005, imposes new certification standards directed at lawyers who represent debtors in Chapter 7 cases, whose debts are primarily consumer debts.


The Task Force has studied the new law and written a report that provides recommendations in the interpretation of several key words and phrases in the law, including "reasonable investigation," "inquiry," "knowledge" and "not an abuse under Section 707(b)(1)." The Task Force made its recommendations based on existing case law interpreting language from Rule 9011 of the Federal Rules of Bankruptcy Procedure, which contains language that is the same or similar to the new Section 707(b)(4).


The Task Force did not make recommendations on several phrases, including "well grounded in fact" or "warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law" because it felt that these phrases needed to await judicial interpretation.


The views in the report have not been adopted by the ABA House of Delegates or Board of Governors and do not represent policy of the American Bar Association. The ad hoc committee is housed in the Business Law Section, and includes members from that section as well as the GP/Solo Division and the Judicial Division.



 

ABA Governmental Affairs Office Mobilizes on New Bankruptcy Provisions


The ABA Governmental Affairs Office is fighting to repeal provisions of the new bankruptcy law that place the burden of certifying a debtor's bankruptcy allegations and ability to make repayment under a reaffirmation agreement on the lawyer. The ABA's Legislative and Governmental Advocacy site provides (1) ABA Proposed Amendments to Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; (2) ABA Fact Sheet on Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; (3) Sample Constituent Letter to Congress; (4) ABA September 16, 2005 Letter to House Judiciary Committee; (5) ABA September 16, 2005 Letter to Senate Judiciary Committee; (6) ABA March 11, 2005 Letter to House Judiciary Committee; and (7) ABA February 8, 2005 Letter to Senate Judiciary Committee.


 

Bankruptcy Law Changes Mean New Responsibilities for Lawyers


Changes to the U.S. bankruptcy law that take effect on October 17, 2005 also means new obligations and liabilities for bankruptcy lawyers. The changes make attorneys personally liable for the accuracy of their clients' filings. In addition, attorneys handling bankruptcy cases will be required to advertise themselves as "debt relief agencies." Lawyers will also be barred from giving their clients certain information, such as that it is legal to incur new debt just prior to filing for bankruptcy and will be required to give certain advice that is contrary to other sections of the U.S. Bankruptcy Code. For example, lawyers will be required to advise their clients to list asset values at replacement cost, but will also be required to certify the accuracy of the client's petition, which will be impacted if a client uses replacement values rather than actual values. Read the full story at Law.com.


 

US Supreme Court to Examine Whether Congressional Use of Article I Bankruptcy Clause Abrogates States' Sovereign Immunity


The U. S. Supreme Court has granted cert. in a case, Central Virginia Community College v. Katz, U. S. Sup. Ct. Case No 04-885, in which the issue is framed as: May Congress use the Article I Bankruptcy Clause to abrogate the States' sovereign immunity? The case comes up from the Sixth Circuit. In its unpublished opinion, reported at 106 Fed. Appx. 341 (6th Cir. 2004), the Sixth Circuit simply applied its prior opinion in Hood v. Tennessee Student Assistance Corp., 319 F. 3d 755 (6th Cir. 2003). The Supreme Court had granted cert. in the Hood case but ended up deciding the case on the ground of in rem jurisdiction, sidestepping the Constitutional issue. The merits briefs can be accessed online.