Now that we’ve recovered from the balmy holidays, survived a record snowstorm in New York, eaten way too many snacks at Super Bowl parties, wished everyone a Happy Year of the Monkey, enjoyed two long weekends, and debated the effects of the passing of Justice Scalia, it’s time to settle back down to business and take the rest of this short week to catch up on what you may have missed in the Weil Bankruptcy Blog so far this year.
Bankruptcy Code Preempts McCarran-Ferguson Act in Dispute Over Courts’ Jurisdiction
Insurance rehabilitations are the province of state courts, and bankruptcy cases are the province of bankruptcy courts. What happens, though, when a dispute arises between an insurance company in rehabilitation and a debtor in a bankruptcy case? That is the issue Hannah Geller discussed in McCarran-Fer-get About It: Insurance Rehabilitation Proceeding Does Not Reverse-Preempt Bankruptcy Court Jurisdiction, Says S.D.N.Y. Bankruptcy Court. As Hannah notes in her entry, Congress pass the McCarran-Ferguson Act in 1945, pursuant to which it placed the regulation of insurance companies firmly within the control of the states and preempted any federal law that interfered with such regulation (known as “reverse preemption”). That control bumped up against bankruptcy court jurisdiction when the rehabilitator for Lumbermen’s Mutual Casualty Company argued that an adversary proceeding arising in the Ames Department Stores chapter 11 case should be heard in the state rehabilitation court and not in bankruptcy court. In a report and recommendation to the SDNY District Court, Judge Gerber found that allowing the case to proceed in federal bankruptcy court would not contravene the Illinois regulatory scheme in any meaningful way because any bankruptcy court judgment against Lumbermen’s would remain subject to the priority scheme of the Illinois rehabilitation. Therefore, Judge Gerber recommended to the district court that it find that the Ames bankruptcy court has jurisdiction to preside over the adversary proceeding.
In Case You Thought the Purchaser Could Relax 21 Years After Entry of a Sale Order …
If Ames sounds like ancient history to you, wait until you hear about the Roussos brothers’ cases. Jessica Diab told the tale of the two brothers in Court Sets Aside 21-Year Old Bankruptcy Sale for Fraud on the Court Despite Absence of Specific Allegations That Fraud Reduced the Sale Price! Although the purpose of section 363(m) of the Bankruptcy Code is to afford good faith purchasers finality in the context of bankruptcy court-approved sales, the section does not protect sales of assets that are tainted by collusion or fraud. That was the problem faced by the Roussos brothers. In an ongoing effort to eliminate a third party’s interest in their two apartment buildings, the Roussos brothers commenced chapter 11 cases in the summer of 1993. The bankruptcy court authorized the sale of the two buildings, relying upon the brothers’ declarations that the sale was an arm’s-length transaction to unaffiliated entities. Taking up the cause of her late husband, the third party’s widow didn’t give up, and she discovered that the Roussos brothers secretly controlled the two purchasers. The bankruptcy court reopened the brothers’ chapter 7 cases (to which the chapter 11 cases had been converted after the sale), and chapter 7 trustee commenced an action to reconsider the sale order under Federal Rule of Civil Procedure 60(d)(3) (to which no statute of limitations applies). Even though the complaint had not alleged that the purchase price was affected by the Roussos brothers’ fraud, the bankruptcy court found that the failure to disclose the brothers’ connection to the purchaser meant that the court failed to apply the “heightened scrutiny” standard that should apply to transactions with insiders.
Another Reminder of the Importance of Disclosure
Although not as bad as the Roussos brothers, Mr. and Mrs. Allen learned the importance of full disclosure to the bankruptcy court. In Court of Appeals Reminds Debtors That Honesty Is Not Only the Best Policy, But Is Required, Abigail Lerner discussed the Fifth Circuit’s holding that individual debtors bringing a personal injury suit were judicially estopped from doing so because they never disclosed the existence of the lawsuit or the claim to the bankruptcy court. Their bankruptcy case could, however, be reopened to allow the chapter 7 trustee to pursue the action for the benefit of the Allens’ estate so long as the trustee decided to pursue the claim within a reasonable period of time. The ruling is consistent with sections 521(a)(1) and 1306(a)(1) of the Bankruptcy Code, pursuant to which a chapter 13 debtor has a continuing obligation to disclose claims that arise, or assets that are acquired, after the commencement of a bankruptcy case, regardless of whether the debtor confirmed its plan.
Protecting Directors’ Rights to D&O Coverage
Sometimes, creditors look to a company’s D&O coverage as the pot of gold at the end of the rainbow (or, possibly, the only pot of something for them at the end of the case). Alana Heumann addressed what happens when the right of officers and directors for defense cost coverage bumps up against the estate’s right to recover under the policy in D&O Debate: Directors and Officers are Not Down-and-Out When it Comes to Defense Costs. Following precedent from theThird and Fifth Circuits, as well as the SDNY, the bankruptcy court in In re Valley Forge held that, although the debtor may own a D&O policy, it does not own the proceeds of that policy payable to non-debtors. Therefore, the proceeds of the policy are not property of the estate, and the attempt by officers to access the policy to pay their defense costs is not subject to the automatic stay.
An Examination of Section 108(c) of the Bankruptcy Code
As part of our “Breaking the Code” series, Debra McElligott examined the rarely-mentioned section 108(c) of the Bankruptcy Code, which governs the extension of certain deadlines for parties to take actions outside of the bankruptcy case as a result of the commencement of a bankruptcy case. Debbie’s entry focuses on decisions that interpreted the words “commencing” and “continuing” in the statute and held that a creditor’s renewal of a judgment lien constituted a “commencement” or “continuation” that was tolled by section 108(c).
A Rare Finding of “Bid Rigging” in One Bankruptcy Court
In Claim for Amount Owed in Bid Rigging Scheme Disallowed by Connecticut Bankruptcy Court, Brenda Funk reminded us that it is (fortunately) rare that bankruptcy courts have to address claims of bid rigging (but probably not as rare, we suspect, as revisiting a sale 21 years later – sorry, Roussos brothers). In In re Sagecrest II LLC, the bankruptcy court found that bid rigging had occurred and disallowed the claim of a party to the scheme – finding that the contracts supporting the claim were unenforceable. Sagecrest centered on a secret “Settlement Agreement” entered into by two bidders after one bidder agreed not re-submit his offer for the property and to support the other bidders’ bid. In exchange, the remaining bidder agreed to hire the withdrawing bidder or his designee as a “redevelopment consultant” for the property and pay him a fixed retainer and a commission on any future sale of the property. After the successful bidder filed its own bankruptcy case, the bankruptcy court found the settlement and consulting agreements unenforceable under both Canadian and U.S. law. In so ruling, the bankruptcy court found the parties’ “collusive thwarting of a rival bid” was “offensive to the integrity of the Canadian legal system and/or a manifest interference with the administration of justice.”
The Continuing Tension Between “Highest and Best” and Respecting the Sale Process
The debate continues regarding whether a bankruptcy court should reopen bidding when a better, but late, offer arises. Doron Kenter reported on the most recent decision in Faced With a Belated Offer for the Debtor’s Assets, Bankruptcy Court Converts the Case to Chapter 7 to Allow a Trustee to Run the Sale Process. Although the case may be framed as another instance in which the bankruptcy court allowed a late offer, it involved a situation in which a relatively small chapter 11 debtor had hired a real estate broker to run a sale process for its property and then came to the court for approval of a sale only to find another party objecting to the sale and offering a higher purchase price. That situation is not so unusual in the context of sales without approved bidding procedures. What was unusual was the bankruptcy court’s reaction – instead of reopening the bidding, it granted the US Trustee’s motion to convert the case to chapter 7 so a chapter 7 trustee could run a new process.