The long weekend is almost here, and we at the Weil Bankruptcy Blog know that, if Mother Nature does not cooperate with your plans for the long weekend, the best hedge against getting stuck inside playing endless games of Heads Up! is to claim that you have work to do. That’s where catching up on your blog reading comes in. Once again, we have summarized below what you may have missed over the last couple of months. Even if you may not be able to come back from the long weekend with an impressive tan, you still will be able to wow your colleagues with your bankruptcy expertise.
When Will We Be Able to Forget Frenville?
Ever since the Third Circuit overturned Frenville in its 2010 Grossman’s decision, we have seen a series of decisions that underscore that the “accrual test” is still relevant for older cases. In Timing Is Everything – Frenville Continues to Surface in Pre-2011 Cases, Kevin Bostel addressed the latest decision, this time from the District of New Jersey. In In re Kara Homes, Inc., a homeowners’ association that had participated in a chapter 11 case brought claims against the original debtor developer and the purchaser of the debtor’s property to recover claims on account of latent construction defects caused by the debtor. Because the debtor had confirmed its plan while Frenville was still good law, the court was required to determine when the cause of action accrued under New Jersey law. Although New Jersey law provides that a cause of action accrues when the wrongful act or omission resulting in the injury occurs, the cause of action can be tolled by the “discovery rule,” which tolls the accrual until the injured party discovers, learns, or reasonably should learn, the existence of facts that may equate in law with an actionable claim. The bankruptcy court determined that it needed additional facts to determine the homeowner association’s knowledge of the construction defects prior to the debtor’s confirmation hearing.
Third Circuit Upholds Trump Entertainment’s CBA Rejection
Yvanna Custodio evoked a time (seemingly long ago) when “trump” was just a verb and not a candidate in Debtors Trump Union in 1113 Appeal (Trump the verb, not the Donald). She reported on the Third Circuit’s affirmance of the bankruptcy court’s approval of Trump Entertainment’s rejection of its collective bargaining agreements under section 1113 of the Bankruptcy Code, even though the CBA expired postpetition. At issue was the tension between section 1113, which permits debtors to avoid catastrophic consequences to their businesses by following the procedures for rejection of CBAs, and the National Labor Relations Act, which “prohibits an employer from unilaterally changing the terms and conditions of a CBA even after its expiration.” The Third Circuit came down on the side of section 1113, explaining that, if the effect of maintaining the status quo under the terms of the expired CBA undermines the debtor’s prospect of reorganization, then the bankruptcy court, rather than the National Labor Relations Board, must decide whether the CBA may be rejected.
Boomerang Tube Keeps Coming Back in Delaware
We keep following the efforts to contract around Baker Botts v. ASARCO, and so far the Delaware courts have been uniformly unsympathetic to these efforts. Kate Doorley highlighted several of the Delaware bankruptcy courts’ rulings on the issue in two entries: Delaware Bankruptcy Judges Expand Boomerang Tube Holding That Professionals Cannot Contract Around Baker Botts v. ASARCO and ASARCO Update: Fee Premium Disallowed Under Baker Botts v. ASARCO and Boomerang Tube. Subsequent to Judge Walrath’s ruling in Boomerang Tube, Judges Sontchi and Shannon have adopted and expanded Boomerang Tube to apply to debtors’ counsel. Judge Shannon also explicitly rejected Baker Botts’ request in New Gulf Resources for approval of a “fee premium” payable in the event of litigation over Baker Botts’ fees. Although Judge Shannon “acknowledge[d] the creative approach,” he did not find a meaningful distinction between the fee premium in New Gulf and the fee structure Judge Walrath rejected in Boomerang Tube.
Reconciling Jury Trial Rights With a Debtor’s Need to Estimate Personal Injury Claims
In Bringing Certainty to Uncertainty: Estimation of Tort Claims, Debora Hoehne addressed the tension between an individual personal injury or wrongful death claimant’s right to a jury trial under 28 U.S.C. § 1411 and a debtor’s need to demonstrate the potential magnitude of claims against it in the context of confirmation. Her entry discusses the framework adopted by the Bankruptcy Court for the Central District of California in In re North American Health Care, Inc. for addressing claims such as elder abuse, wrongful death, and personal injury that had been asserted against chapter 11 healthcare debtors. Because many of the claims had been filed as contingent and unliquidated, the debtors proposed a tort claims resolution proposal that contemplated estimation of a claim for purposes of plan voting, confirmation, and distribution if the debtors and the claimant could not resolve the claim through mediation. Although the court approved the mediation process, it only permitted the debtor to estimate personal injury and wrongful death claims in the aggregate for purposes of voting and plan confirmation. To preserve the claimants’ jury trial rights, the court stated that it would not cap distributions to the individual tort claimants through such estimation unless non-settling tort claimants themselves elected for the court to determine the amount of their claim for all purposes, including distribution.
More Make-Whole Law Out of EFIH
The Energy Future Holdings cases have generated quite a few blog entries on make-whole issues, and Jessica Liou reported on the latest rulings in The Saga Continues: A Brief Update on the EFIH First Lien Make Whole Litigation. Jessica focuses on the decision by the United States District Court for the District of Delaware denying the indenture trustee’s claim for rescission-related damages. The trustee had asserted that it should be awarded either a contingent claim for the make-whole or rescission-related damages to compensate it for its inability (due to imposition of the automatic stay) to exercise its state law contract right to rescind under the debt documents. The district court, however, determined that the bankruptcy court had correctly disallowed a claim for damages based on a purported right to rescind the acceleration. It noted that the indenture did not provide for any fee, cost or charge for the breach of the purported right to rescind and that the trustee merely asserted a “vague claim” for damages arising out of its inability to decelerate the notes (and thereby preserve the make-whole). The district court also declined to follow a line of cases that suggest that creditors could pursue unsecured damages claims for breach of a no-call provision, finding more persuasive the decisions that question whether a debtor should be liable for damages where the breach of the no-call provision was a function of the automatic stay made applicable by federal bankruptcy law.
This Is Really a Series of Unfortunate Events for a Pro Se Creditor
We don’t often report on pro se matters, but Charlie Chen told a fairly compelling story of bad luck in Pro Se Creditor Out of Luck (and Time) When He Did Not File Timely Appeal – Because He Never Received Notice of Entry of the Order! After the bankruptcy court took six months to enter an order denying a pro se creditor’s motion, the clerk of the bankruptcy court mailed the notice of entry of the order to the creditor’s former counsel (who not did forward the notice) and not to the creditor. To top it off, two months after the bankruptcy court had entered its order, the clerk erroneously informed the creditor that the bankruptcy court had not issued its decision. Unfortunately, the creditor discovered the entry of the order both after the expiration of the 14-day period for filing an appeal under Bankruptcy Rule 8002 and after the additional 21-day period that could be granted if the appellant demonstrates “excusable neglect.” Noting that Bankruptcy Rule 9022(a) provides that failure to receive notice of the entry of an order does not affect the time to appeal under Bankruptcy Rule 8002, the bankruptcy court held that the creditor was out of luck and refused to re-enter the order to allow the appeal clock to start running again.
A Lesson in Chicken Fried Steak (and Venue)
Charlie Chen served up a piece on the glories of chicken fried steak and the beleaguered Black-Eyed Pea Restaurant chain in Don’t Mess With Texas (Unless You Are Properly Venued in the Delaware Bankruptcy Court)! Texas Comptroller’s Motion to Transfer Venue of Chapter 11 Case Is Denied. Along the way, Charlie also discusses Judge Gross’s denial of a venue transfer motion on the grounds that the movants, the Texas Comptroller and the Texas Workforce Commission, had not demonstrated that a transfer would be in the “interest of justice or for the convenience of the parties.” Judge Gross held that the debtor’s choice of forum should be given substantial deference, and three factors weighed heavily against transfer: (i) proximity of the creditors, a significant percentage of which were based outside of Texas; (ii) proximity of the debtor, whose management was willing to travel to Delaware; and (iii) the economic administration of the case, which Judge Gross concluded would be impaired because the debtor, its lenders, and its trade creditors had invested substantial time and resources in Delaware. Although most of the debtors’ employees were based in Texas, Judge Gross noted the liberal policy in Delaware bankruptcy court for telephonic participation by creditors.
Informal Proof of Claim – an Issue “Drenched in Uncertainty”
Rounding out his trifecta, Charlie Chen returned to his bad luck theme with How Are Informal Proofs of Claim Like Informal Dress Codes? What You Can Get Away With May Depend on Whom You Ask. As Charlie notes, the elements of an “informal proof of claim” are established by case law and subject to interpretation by the bankruptcy court. In In re Acuity Medical International, Inc., the bankruptcy court rejected a petitioning creditor’s argument that its involuntary petition indicated “an intent to pursue the claim” and, therefore, held that the creditor had not filed a proof of claim by the bar date. Under precedent established by the Eighth Circuit BAP, an informal proof of claim must “state the nature and amount of the claim as well as indicate the claimant’s intent to hold the debtor liable and pursue the claim.” The bankruptcy court characterized the issue as one “drenched in uncertainty.” Although the involuntary petition stated the nature and amount of the creditor’s claim, as well as the claimant’s intent to hold the debtor liable, the court held that the petition did not sufficiently indicate the creditor’s intention to pursue its claim. The bankruptcy court characterized the involuntary petition as only a “first step” to pursue a claim in bankruptcy.
Despite Likely Breach of Indenture, Court Will Not Issue an Injunction Without a Demonstration of “Irreparable Harm”
Brian Wells reminded us of the importance of working through a default litigation strategy in Exchange Offer Litigation: SDNY Finds Exchange Likely in Breach of Indenture, But Does Not Issue Preliminary Injunction.Brian discusses a complaint brought by an indenture trustee against Norske Skog seeking to enjoin a proposed exchange offer violating the indenture’s limitation on incurring additional debt. Although the district court concluded that the indenture trustee had a likelihood of succeeding on the merits of its breach claim, the court nevertheless refused to enjoin the exchange offer because the trustee had not demonstrated “irreparable harm,” a necessary element of any preliminary injunction. Because all parties seemed to agree that Norske Skog likely would commence a bankruptcy case if the exchange offer failed, the court was not satisfied that the proposed “cure” was any better than the “disease.” The court dismissed as irreparable harm the prospect of a bankruptcy filing after the exchange, concluding that the possibility of a bankruptcy filing was far too remote and theoretical to constitute irreparable harm. The court also refused to apply the “insolvency exception,” which holds that monetary damages are only an adequate remedy at law if the defendant actually would be able to pay them. This exception did not apply because (1) Norske Skog already was insolvent (precluding any argument that Norske would be rendered insolvent by the exchange), and (2) the court determined that sufficient collateral existed to satisfy the notes in full. Moreover, the court reasoned that intercreditor disputes over competing priorities to assets are appropriately resolved by a bankruptcy court, not through a preliminary injunction.
Prepetition Lease Termination Raises Issues for Landlords
Every now and then I take a break from editing to write an entry. In Seventh Circuit’s Warning to Landlords: Getting Out of Your Lease With a Distressed Company May Expose You to Bankruptcy Risk, I discussed Judge Posner’s decision that prepetition lease terminations (whether or not voluntary) constituted “transfers” within the meaning of section 101(54)(D) of the Bankruptcy Code. As a result, the landlord was subject to avoidance claims brought by the creditors’ committee. Because the bankruptcy court had concluded that no transfers had occurred, the case was remanded to the Seventh Circuit to determine if the landlord had provided reasonably equivalent value in exchange for the debtor’s agreement to terminate the leases in question.