Justia Bankruptcy Opinion Summaries

A medical device distributor sued a former employee, alleging that he breached a non-compete agreement, his duty of loyalty, and misappropriated trade secrets after joining a competitor. The employee responded with counterclaims and third-party claims. During the litigation, the employee filed for Chapter 7 bankruptcy, which stayed the district court proceedings. In the bankruptcy case, the distributor filed a proof of claim for damages, which the employee did not contest. The bankruptcy court allowed the claim, and the distributor received a partial distribution from the bankruptcy estate. The employee also waived his right to discharge, leaving him potentially liable for the remaining balance.After the bankruptcy case closed, the United States District Court for the District of Vermont lifted the stay. The distributor sought summary judgment for the balance of its allowed claim, arguing that the bankruptcy court’s allowance of its claim should have preclusive effect. Initially, the district court denied this request, finding that using claim preclusion offensively would be unfair. Upon reconsideration, however, the district court reversed itself and granted summary judgment to the distributor for the remaining balance, holding that claim preclusion applied.On appeal, the United States Court of Appeals for the Second Circuit reviewed the district court’s grant of summary judgment de novo. The Second Circuit held that, even if claim preclusion could sometimes be used offensively, it could not be applied in this case because it would be unfair to the employee, who had less incentive to contest the claim in bankruptcy. The court vacated the district court’s judgment in favor of the distributor and remanded the case for further proceedings. The main holding is that claim preclusion cannot be used offensively to secure a judgment for the balance of an allowed bankruptcy claim under these circumstances. View "Thermal Surgical, LLC v. Brown" on Justia Law

Several investment funds based in the British Virgin Islands invested heavily in Bernard L. Madoff Investment Securities and were forced into liquidation after the Madoff Ponzi scheme was exposed in 2008. Liquidators were appointed in the BVI insolvency proceedings. Before the collapse, certain investors redeemed their shares in the funds for cash, receiving over $6 billion in payments. The liquidators, seeking to recover these redemption payments for equitable distribution among all investors, initiated approximately 300 actions in the United States, alleging that the payments were inflated due to fictitious Net Asset Value (NAV) calculations based on Madoff’s fraudulent statements.The U.S. Bankruptcy Court for the Southern District of New York consolidated the actions after recognizing the BVI proceedings under Chapter 15 of the Bankruptcy Code. The bankruptcy court dismissed most claims, finding it lacked personal jurisdiction over some defendants, that the liquidators were bound by the NAV calculations, and that the safe harbor for securities transactions under § 546(e) of the Bankruptcy Code barred the claims. However, it allowed constructive trust claims to proceed against certain defendants alleged to have known the NAVs were inflated. The U.S. District Court for the Southern District of New York affirmed the bankruptcy court’s judgment, leaving only the constructive trust claims.On appeal, the United States Court of Appeals for the Second Circuit held that all of the liquidators’ claims, including the constructive trust claims, should have been dismissed under the safe harbor provision of § 546(e), which applies extraterritorially via § 561(d) in Chapter 15 cases. The court concluded that the safe harbor bars both statutory and common-law claims seeking to avoid covered securities transactions, regardless of the legal theory or proof required. The Second Circuit reversed the district court’s judgment allowing the constructive trust claims and otherwise affirmed the dismissal of the remaining claims. View "In re Fairfield Sentry Ltd." on Justia Law

Debtor-Appellant Julia Soussis filed for Chapter 13 bankruptcy, proposed a repayment plan, and made $362,100 in pre-confirmation payments to the standing trustee. Before the court could confirm the plan, Soussis requested the dismissal of her case. The standing trustee returned most of the payments but retained $20,592 as his percentage fee. Soussis moved for disgorgement of this fee, arguing that the trustee should return all pre-confirmation payments if no plan is confirmed.The Bankruptcy Court denied Soussis’s motion, concluding that the trustee was entitled to keep the percentage fee regardless of plan confirmation. The District Court affirmed this decision, agreeing with the Bankruptcy Court’s interpretation of the relevant statutes.The United States Court of Appeals for the Second Circuit reviewed the case de novo. The court held that a standing trustee cannot keep any percentage fee collected from the debtor’s pre-confirmation payments if no plan is confirmed. The court interpreted Section 1326(a)(2) of title 11, which directs the trustee to return the “payments . . . proposed by the plan” if no plan is confirmed. The court reasoned that since the percentage fee is collected from these payments, it must also be returned. The court noted that Congress explicitly allowed for the deduction of the trustee’s fee in Chapter 11 (Subchapter V) and Chapter 12 bankruptcies but did not include similar language for Chapter 13 plans.The Second Circuit concluded that the trustee may collect the percentage fee from pre-confirmation payments but must return it if no plan is confirmed. The court reversed the District Court’s judgment and remanded the case for further proceedings consistent with this opinion. View "In re: Soussis" on Justia Law

Little Hearts Marks Family II L.P. ("Little Hearts") was a member of 305 East 61st Street Group LLC, a company formed to purchase and convert a building into a condominium. 61 Prime LLC ("Prime") was the majority member and manager, and Jason D. Carter was the manager and sole member of Prime. In 2021, the company filed for bankruptcy and sold the building to another company created by Carter. The liquidation plan established a creditor trust with exclusive rights to pursue the debtor’s estate's causes of action. Little Hearts sued Prime and Carter for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, seeking damages for lost capital investment and rights under the Operating Agreement.The bankruptcy court dismissed all claims, ruling that they were derivative and belonged to the debtor’s estate, thus could only be asserted by the creditor trustee. The district court affirmed this decision.The United States Court of Appeals for the Second Circuit reviewed the case. The court affirmed the dismissal of the breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, agreeing that these were derivative and could only be pursued by the creditor trustee. However, the court vacated the dismissal of the breach of contract and breach of the implied covenant of good faith and fair dealing claims, determining that these were direct claims belonging to Little Hearts and could proceed. The unjust enrichment claim was dismissed as duplicative of the contract claims. The case was remanded for further proceedings consistent with this opinion. View "In re 305 East 61st Street Group LLC" on Justia Law

Debtor-Appellant Avianca Holdings S.A. agreed to pay additional rental payments to Creditors-Appellees Burnham Sterling and Company LLC and Babcock & Brown Securities LLC under 20 aircraft leases. Avianca failed to make certain payments that were due more than 60 days after filing for bankruptcy but before the leases were assumed or rejected. The creditors moved to compel payment under 11 U.S.C. § 365(d)(5), which requires timely performance of obligations arising from or after 60 days post-bankruptcy filing under an unexpired lease of personal property until the lease is assumed or rejected.The bankruptcy court granted the creditors' motion, concluding that Avianca's obligation to pay arose when the payments came due under the lease terms. Avianca appealed, arguing that the obligation arose pre-petition when the leases were executed. The district court affirmed the bankruptcy court's decision, agreeing that the obligations arose as the payments came due.The United States Court of Appeals for the Second Circuit reviewed the case and affirmed the lower courts' decisions. The court held that under 11 U.S.C. § 365(d)(5), a debtor's obligation to make payments arises when the payments come due according to the lease terms, not when the lease was executed. The court emphasized that the statutory language requires the debtor to perform obligations that originate from or after 60 days post-petition, aligning with the "billing date" approach rather than the "accrual" approach. The court also noted that this interpretation is consistent with the broader statutory scheme and bankruptcy policy, which aims to balance creditor protection with the debtor's ability to reorganize. View "In re Avianca Holdings S.A." on Justia Law

Avoca Plaintiffs filed suits against New Kerr-McGee, alleging toxic tort claims. The suits were stayed when the owners/operators of the Avoca Plant, Tronox debtors, filed for bankruptcy. In this appeal, Avoca challenged the district court's order enforcing a permanent anti‐suit injunction issued after the bankruptcy settlement. New Kerr‐McGee had moved in the district court for an order enforcing the Injunction and for sanctions, asserting that the Injunction forecloses claims that arise from liabilities derived from or through the Tronox debtors that are also generalized and common to all creditors. The district court concluded that the claims are barred by the Injunction and, without imposing sanctions or finding contempt, ordered the Avoca Plaintiffs to dismiss with prejudice their state‐court complaints. The court rejected the Avoca Plaintiffs' assertions of appellate jurisdiction, concluding that the district court's order is not "final" for purposes of 28 U.S.C. 1291, because it neither found contempt nor imposed sanctions; the order is not a decision by the district court on review of a bankruptcy court order, as required by 28 U.S.C. 158(d); and the court lacked jurisdiction under 28 U.S.C. 1292(a)(1) because the district court properly construed (and neither modified nor continued) the Injunction. The court held that the Avoca Plaintiffs' personal injury claims based on conduct of the Tronox debtors, and asserted against New Kerr‐McGee on a variety of state‐law indirect‐liability theories, are generalized "derivative" claims that fall within the property of the bankruptcy estate. Accordingly, the court lifted the stay and dismissed the appeal for lack of jurisdiction. View "In re Tronox Inc." on Justia Law

Plaintiffs, unsuccessful bidders in a bankruptcy proceeding, appealed the district court's dismissal of their suit alleging claims for breach of fiduciary duty, tortious interference, and common law fraud against the law firm K&L Gates, LLP and two of its former partners. Plaintiffs alleged that defendants used their prior representation of plaintiffs to undermine plaintiffs' attempt to acquire assets in a bankruptcy sale.  The district court granted defendants' motion to dismiss based on res judicata. The court agreed with plaintiffs that they could not have brought their claims during the bankruptcy proceedings, and that this present action would not disturb the orders of the bankruptcy court. The court explained that the circumstances in this case did not demand that plaintiffs raise their claim in the bankruptcy proceeding, and noted that the relevant issues were not litigated through an adversary proceeding or otherwise. Accordingly, the court reversed and vacated, remanding for further proceedings. View "Brown Media Corp. v. K&L Gates, LLP" on Justia Law

After Old GM filed for bankruptcy, New GM emerged. This case involves one of the consequences of the GM bankruptcy. Beginning in February 2014, New GM began recalling cars due to a defect in their ignition switches. Many of the cars in question were built years before the GM bankruptcy. Where individuals might have had claims against Old GM, a ʺfree and clearʺ provision in the bankruptcy courtʹs sale order barred those same claims from being brought against New GM as the successor corporation. Various individuals nonetheless initiated class action lawsuits against New GM, asserting ʺsuccessor liabilityʺ claims and seeking damages for losses and injuries arising from the ignition switch defect and other defects. The bankruptcy court enforced the Sale Order to enjoin many of these claims against New GM. The court concluded that the bankruptcy court had jurisdiction to interpret and enforce the Sale Order; the ʺfree and clearʺ provision covers pre‐closing accident claims and economic loss claims based on the ignition switch and other defects, but does not cover independent claims or Used Car Purchasersʹ claims; the court found no clear error in the bankruptcy court's finding that Old GM knew or should have known with reasonable diligence about the defect, and individuals with claims arising out of the ignition switch defect were entitled to notice by direct mail or some equivalent, as required by procedural due process; because enforcing the Sale Order would violate procedural due process in these circumstances, the bankruptcy court erred in granting New GMʹs motion to enforce and these plaintiffs cannot be bound by the terms of the Sales Order; and the bankruptcy courtʹs decision on equitable mootness was advisory. Accordingly, the court affirmed in part, reversed in part, vacated in part, and remanded. View "In re Motors Liquidation Co." on Justia Law

Appellants, representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company, appealed the grant of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune’s former shareholders. The court held that appellants are not barred by the Bankruptcy Code’s automatic stay because they have been freed from its restrictions by orders of the bankruptcy court and by the debtors’ confirmed reorganization plan. The court also held that appellants’ claims are preempted by Bankruptcy Code Section 546(e), where that section shields from avoidance proceedings brought by a bankruptcy trustee transfers by or to financial intermediaries effectuating settlement payments in securities transactions or made in connection with a securities contract, except through an intentional fraudulent conveyance claim. Accordingly, the court affirmed the judgment. View "In re: Tribune Co. Fraudulent Conveyance Litig." on Justia Law

Appellants, representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company, appealed the grant of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune’s former shareholders. The court held that appellants are not barred by the Bankruptcy Code’s automatic stay because they have been freed from its restrictions by orders of the bankruptcy court and by the debtors’ confirmed reorganization plan. The court also held that appellants’ claims are preempted by Bankruptcy Code Section 546(e), where that section shields from avoidance proceedings brought by a bankruptcy trustee transfers by or to financial intermediaries effectuating settlement payments in securities transactions or made in connection with a securities contract, except through an intentional fraudulent conveyance claim. Accordingly, the court affirmed the judgment. View "In re: Tribune Co. Fraudulent Conveyance Litig." on Justia Law