Perhaps Next Time the Debtor Will Speak Up a Little Sooner

Litigants sometimes may make a strategic decision to lie back and wait before asserting causes of action. As Yonit Caplow discussed in Fourth Circuit Finds That Bankruptcy Court Sale Orders Should Be Granted Preclusive Effect, however, the risk of such strategy is that the court later finds that the litigant is bound by orders of the court that the litigant could have challenged. The Fourth Circuit addressed a case in which the chapter 11 trustee had sold the debtor’s properties and used the proceeds to satisfy loans secured by the properties. After the bankruptcy court dismissed the debtor’s case, the debtor commenced a lawsuit against the lender seeking recovery on various lender liability theories. The Fourth Circuit agreed with the lender that the debtor’s action was barred by principles of res judicata. In so holding, it found that (1) an identity of claims existed because the bankruptcy court approved the liquidation of certain properties in satisfaction of the debtor’s obligations arising from the very same transactions that the debtor was seeking to challenge, (2) an identity of parties existed because the chapter 11 trustee was the representative of the debtor’s bankruptcy estate, and (3) the chapter 11 trustee could have litigated the causes of action asserted by the debtor during the bankruptcy case.

Another 363 Sale Issue, But This Time the Focus Is on the Contract

Blaire Cahn addressed the effect of a parties’ agreement and the sale of property under section 363 in Words Matter—Ninth Circuit Decides Issue of Contract Interpretation. At issue was the right of the non-debtor development partner to recover funds deposited into escrow after the land that was the subject of the development agreement was sold in the land developer’s bankruptcy case. The agreement governing the escrow was silent on the effects of a sale of the property in bankruptcy and only contemplated returning excess funds in the escrow to the development partner if a lender exercising remedies elected to buy out the development partner’s interest. The Ninth Circuit scrutinized the language of the parties’ agreement and concluded that the development partner’s repayment right had not been triggered by the 363 sale and, in fact, never would be triggered after the debtor sold its property. Moreover, the development partner did not get any additional protection from section 363(e) of the Bankruptcy Code because that only requires that the bankruptcy court preserve the amount of a disputed interest pending a determination of the interest’s value, and the sale of the underlying property rendered the development partner’s interest in the escrow worthless.

And This Chapter 7 Debtor Did Speak Up

As we saw in Yonit Caplow’s post, sometimes the failure of a debtor to speak up and assert its rights can preclude the debtor from later asserting those rights. The question raised in Matthew Goren’s entry, I’m Still Here!! Individual Debtor-out-of-Possession May Appeal Bankruptcy Court Order Allowing Claims in Chapter 7 Case, is the extent to which a debtor in a chapter 7 case has standing to appeal from a bankruptcy court order allowing claims in such case. The debtor, an individual, cared about the allowance of the claims because, at the same time, the creditors were objecting to the dischargeability of their claims, pursuant to section 523 of the Bankruptcy Code, and to the debtor’s discharge generally pursuant to section 727. The Fifth Circuit noted that a debtor-out-of-possession often has no interest in how the bankruptcy court divides up the estate. In this case, though, a successful appeal by the debtor of the order allowing the creditors’ claims would have a dispositive impact on the bankruptcy court’s adjudication of the pending discharge complaint. The Fifth Circuit noted that several courts have extended that reasoning and stated that “a debtor’s challenge to a claim order by a bankruptcy court is not moot if the relevant debt may still be found nondischargeable.”

PACA Case Gives Us a Good Excuse to Make a Lot of Bad Food Puns

You have to read the whole entry to get its real flavor, but Alana Katz’s piece, A Loss for the Broccoli Bar: Fifth Circuit Rules That Attorneys’ Fees Cannot Be Paid From PACA Trust Assets, allowed Alana to go whole hog on the food puns. Alana discussed a case in which the bankruptcy court authorized the estate to retain a member of the “broccoli bar” as special counsel to preserve, collect, and administer PACA assets for the benefit of all PACA claimants, with the retention order stating that the attorney would be paid from the PACA trust fund. After the attorney filed fee applications, though, the PACA claimants argued that the PACA assets were held in trust, and the fees could not be paid out of the collections. The Fifth Circuit agreed with the PACA claimants and held that the attorney was not entitled to be paid from PACA trust assets until the objecting PACA creditor received full payment.

Trademark Infringement Is a Willful and Malicious Injury

The Weil Bankruptcy Blog has continued to follow the saga of Asher Horowitz, whose company was found to have infringed the Burberry™ trademark and who was held personally liable for the damages when the New York State Supreme Court found that Burberry also could pierce the corporate veil. In Knock Off the Knock-Offs, Part II: SDNY Bankruptcy Court Holds That Defendant’s Judgment Debt on Account of His Company’s Trademark Infringement Is Not Dischargeable Under Section 523(a)(6), Debra McElligott recounted Mr. Horowitz’s latest problem – a determination in his chapter 7 case that Burberry’s judgment debt against him is not dischargeable under section 523(a)(6) of the Bankruptcy Code as a debt for “willful and malicious injury by the debtor.” Because a determination of willful infringement under the Lanham Act requires a finding that “the defendant had knowledge that [his] conduct represented infringement or perhaps recklessly disregarded the possibility,” Burberry successfully argued to the court that the state court’s judgment established the elements needed to apply collateral estoppel: the identical issue was raised in a previous proceeding, the issue was actually litigated and decided in that proceeding, Horowitz had a full and fair opportunity to litigate the issue, and resolution of the issue was necessary to support a valid and final judgment on the merits. Moreover, even though the infringer was Horowitz’s company, the court held that the state court’s veil piercing judgment made Horowitz responsible for the actions of its company and was sufficient for a finding under section 523(a)(6) that Horowitz was responsible for willful and malicious injury to Burberry.

No Gifts for RadioShack Gift Card Counsel Under Substantial Contribution Theory

Disputes over the treatment of the claims of gift card holders in a retail bankruptcy case sometimes can be contentious, and RadioShack’s case was no exception. When a lawyer asks the court to form a class of such holders and then the treatment of such claims is settled without the participation of that lawyer, is the lawyer entitled to be compensated for his or her fees for having made a “substantial contribution” under section 503(b)(3) of the Bankruptcy Code? That was the issue discussed by Amy Oden in Bar Remains High for Substantial Contribution: Delaware Bankruptcy Court Denies § 503(b)(3) Claim. After the RadioShack debtors settled claims brought by the Texas AG’s office relating to the treatment of gift card claims (to which the putative class’ lawyer objected), the lawyer asked for reimbursement of his fees as having made a substantial contribution. Although the lawyer was not a party to the settlement, he claimed that, by filing his own motion (after the Texas AG had filed a complaint), he broke the litigation deadlock between the parties, thereby pressuring them to settle. The bankruptcy court, however, didn’t buy his theory. The court held that the lawyer had not overcome the presumption that his efforts were not primarily designed to serve his own interests because certification of a class of gift card claims would have entitled counsel to attorneys’ fees. Moreover, winning priority status for all gift card claims would have diminished funds available to general unsecured creditors and would not have enhanced overall creditor recoveries.

It’s Hard to Undo a 363(m) Finding, Even With New Facts

Purchasers in 363 sales place a lot of stock in the good faith finding under section 363(m). Andriana Georgallas noted that such finding is not completely free from challenge in Ninth Circuit B.A.P. Drove Down Bayshore Boulevard and Rendered a Decision on the Merits of a Section 363(m) Appeal in the Face of New Facts. Notwithstanding new facts that allegedly called into question the bankruptcy court’s finding of good faith, though, in In re Zuercher Trust of 1999, the Ninth Circuit BAP declined to remand the case for a supplemental finding of good faith and instead disposed of the appeal on the merits. To reverse a good faith finding on appeal, the appellate court must determine that the bankruptcy court’s finding was “illogical, implausible, or without support in the record.” Although the typical process would be to remand to the bankruptcy court for additional findings, the Ninth Circuit in Zuercher Trust determined that it could find on the record before it that the appellant had failed to meet this heavy burden.

How Far Should Courts Take Section 105(a)?

We often are reminded of the limits of the bankruptcy court’s equitable powers under section 105(a), and Christina Brown featured a case in which the bankruptcy court had to consider its authority to issue sanctions against a creditor for filing a stale claim. In Section 105(a): No Roving Writ, Much Less a Free Hand, she discusses the debtor’s request of the bankruptcy court to send a message to a creditor whose business model was to buy time-barred debt and then file the claims against debtors, essentially betting that the debtor in possession or trustee in bankruptcy would not object to such claims. Noting that an equitable remedy under section 105(a) must be based upon another right under or provision of the Bankruptcy Code, the court concluded that it could not impose sanctions because nothing in the Bankruptcy Code prohibits a creditor from filing a time-barred, but otherwise valid, debt.

A Different Twist on an Involuntary Filing Issue – This Time, Abstention

It seems as if we are seeing more and more involuntary filings, coupled with decisions addressing the issues raised by such filings. As she discussed in Florida Bankruptcy Court Finds That It Should Abstain From Involuntary Cases Against Florida Real Estate Developer (No, Not THAT Florida Real Estate Developer), Brenda Funk found one case in which the court determined that the petitioning creditors likely satisfied the requirements of section 303 of the Bankruptcy Code, but nevertheless determined that it should abstain and dismissed the case under section 305 of the Bankruptcy Code.In In re Peter H. Bos, Jr. and Legendary Holding, Inc., the court held that the petitioning creditor had met its burden of demonstrating that it held an undersecured claim (with the alleged debtors putting on no evidence to contest the value) that was not subject to a bona fide dispute. The court also went through a painstaking analysis to whittle down the list of the debtors’ alleged 42 creditors to eliminate contingent guaranty claims, insider claims, claims by taxing authorities that were not yet due, fully secured claims, claims held by recipients of avoidable transfers, and claims that simply didn’t exist. The court also excluded de minimis claims for items such as utilities and the phone bill, relying upon a Fifth Circuit decision that Congress did not intend for small and recurring obligations to derail the commencement of involuntary cases by one or two more substantial creditors. Accordingly, because the debtors had fewer than twelve creditors, a single petitioning creditor was sufficient. The thornier issue, though, was whether the alleged debtors were generally not paying their debts as they came due because the alleged debtors were paying everyone other than the petitioning creditor. Rather than determine if the petitioning creditor’s claim was large enough to allow the court to make the determination, the court found that abstention under section 305 was the better approach because the judgment creditor could continue to pursue its remedies, and dismissal would be less disruptive to the alleged debtors, their employees, and other creditors.

Another Court Excludes Rents Subject to an “Absolute” Assignment From Property of the Estate

The Weil Bankruptcy Blog has reported on a number of decisions addressing just what exactly “absolute” means in the context of an assignment of rents by a borrower to a mortgagee. David Li reported on one court that addressed the issue in Can Assigned Rents Be Excluded From a Debtor’s Estate? In Michigan, Absolutely. As David explains, the district court found that, under Michigan law, when a creditor has validly enforced and perfected its interest in assigned rents prepetition, absolute really means absolute.

Second Circuit Continues to Interpret the Settlement Payment Exception Broadly

Although the Second Circuit previously has issued decisions interpreting section 546(e) of the Bankruptcy Code broadly so that it protects a wide range of transfers from the avoidance powers of debtor in possession or trustee, a question remained whether actions brought by creditors also would be subject to such defense. Sunny Singh explained in Second Circuit Slams the Door Shut on a Loophole in Section 546(e) of the Bankruptcy Code that the Second Circuit unanimously rejected such a workaround in an appeal arising from the Tribune Media Company bankruptcy cases. The court found that, even though section 546(e) of the Bankruptcy Code does not expressly refer to actions brought by creditors, the prosecution of state law claims by creditors that otherwise would be barred if prosecuted by the trustee in a bankruptcy proceeding were preempted and barred by federal bankruptcy law: “Once a party enters bankruptcy, the Bankruptcy Code constitutes a wholesale preemption of state laws regarding creditors’ rights.” Upon a bankruptcy filing, those state law claims vest with the bankruptcy trustee (or debtor in possession) and are subject to the limitations on such claims imposed by Congress, such as section 546(e). To hold otherwise, the court reasoned, would be to encourage piecemeal litigation and be contrary to the equality of distribution principles of bankruptcy law.