Justia Bankruptcy Opinion SummariesArticles Posted in US Court of Appeals for the Third Circuit
In re: Energy Future Holdings Corp.
The latency period for some asbestos-related diseases may last 40 years In bankruptcy, most classes of asbestos plaintiffs are divided between those who have already contracted an asbestos-related disease and those who have been exposed and are at risk but may not realize the fact of their exposure. Normally, a bankruptcy court sets a bar date before which proofs of claim against the estate must be filed; upon confirmation of a plan, all claims for which proofs are not filed are discharged. Under 11 U.S.C. 524(g) a court can deal with latent claims by establishing a trust and appointing a representative of future claimants’ interests. EFH, a holding company, and its subsidiaries filed a Chapter 11 bankruptcy petition. EFH’s holdings included Oncor, the largest electricity company in Texas. EFH could not sell Oncor alone without triggering massive tax liability; a buyer would need to acquire EFH’s other properties, including the Asbestos Debtors. A potential buyer proposed avoiding section 524(g) by relegating discharged claimants to the post-confirmation process. Federal Rule of Bankruptcy Procedure 3003(c)(3) provides that a bankruptcy court “shall fix and for cause shown may extend” the time within which proofs of claim may be filed; claimants may file after the bar date if they show “excusable neglect.” Latent asbestos claimants unsuccessfully argued that the plan would violate their due process rights. EFH implemented a notice plan for potential claimants. The bankruptcy court confirmed the plan, discharging claims that were not filed before the bar date. The Federal Circuit affirmed. Rule 3003(c)(3) is capable of affording latent claimants a fair opportunity post-confirmation to seek reinstatement of their claims The court noted the flaw in debtors attempting to circumvent section 524(g). This alternative route has produced a similar result as a section 524(g) trust but with unnecessary back-end litigation. View "In re: Energy Future Holdings Corp." on Justia Law
In re: Somerset Regional Water Resources, LLC
Mostoller owned the Debtor, a business that serviced oil and gas wells. The Debtor owed the Trust $3 million, secured by a blanket lien on most of the Debtor’s assets and a personal guarantee by Mostoller. The Debtor petitioned for Chapter 11 reorganization. To entice the Trust to lend more money, Mostoller agreed to assign his anticipated federal tax refund. The taxable income and losses of the Debtor, an S Corporation, passed through to Mostoller, who had paid millions of dollars in federal taxes on that income. He could file amended 2013 and 2014 tax returns to carry back the Debtor’s 2015 losses, which would offset his taxable income for those two years and trigger a refund. 26 U.S.C. 172(a), (b)(1)(A)(i). Mostoller pledged “any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor. The bankruptcy court approved the agreement The Debtor defaulted on the emergency loan and converted to a Chapter 7 liquidation. Mostoller first refused to file the tax returns. When the tax refund came, Mostoller tried to keep it. The district court and Third Circuit affirmed in favor of the Trust, rejecting Mostoller’s argument that he pledged his refund on taxes that he paid for 2015 alone, excluding any refund on his 2013 and 2014 taxes. That reading would make the collateral worthless, so the Trust would never have made the loan. View "In re: Somerset Regional Water Resources, LLC" on Justia Law
Wells Fargo, N.A. v. Bear Stearns & Co., Inc.
HomeBanc, in the residential mortgage loan business, obtained financing from Bear Stearns under 2005 repurchase agreements and transferred multiple securities to Bear Stearns. In 2007 HomeBanc failed to repurchase the securities or pay for an extension of the due date. Bear Stearns issued a notice of default. HomeBanc filed voluntary bankruptcy petitions. Bear Stearns, claiming outright ownership of the securities, auctioned them to determine their fair market value. After the auction closed, Bear Stearns’s finance desk determined that Bear Stearns’s mortgage trading desk had won. Bear Stearns allocated the $60.5 million bid across 36 securities. HomeBanc believed itself entitled to the August 2007 principal and interest payments from the securities. HomeBanc claimed conversion, breach of contract, and violation of the automatic bankruptcy stay. Following multiple rounds of litigation, the district court found that Bear Stearns acted reasonably and in good faith. The Third Circuit affirmed. A bankruptcy court’s determination of good faith regarding an obligatory post-default valuation of collateral subject to a repurchase agreement receives mixed review. Factual findings are reviewed for clear-error while the ultimate issue of good faith receives plenary review. Bear Stearns liquidated the securities at issue in good faith compliance with the Repurchasing Agreement. Bear Stearns never claimed damages; 11 U.S.C. 101(47)(A)(v) “damages,” which may trigger the requirements of 11 U.S.C. 562, require a non-breaching party to bring a legal claim for damages. The broader safe harbor protections of 11 U.S.C. 559 were relevant. View "Wells Fargo, N.A. v. Bear Stearns & Co., Inc." on Justia Law
In re: Millennium Lab Holdings II LLC
Millennium provides laboratory-based diagnostic services. In 2014, it entered into a $1.825 billion credit agreement with several lenders, including Voya. Millennium refinanced existing financial obligations and paid a $1.3 billion special shareholders dividend. The U.S. Department of Justice, which had been investigating since 2012, then filed a False Claims Act complaint; Millennium’s Medicare billing privileges were revoked. Millennium agreed to pay the government entities $256 million to settle. Millennium lacked adequate liquidity to pay both its debt and the settlement and began working with the lenders, including Voya, to restructure its obligations. The lenders suggested that there were potential claims based on Millenium's lack of disclosure regarding the government’s investigation. Millennium, its equity holders, and the lenders, except Voya, entered into an agreement that required Millennium’s equity holders to transfer their equity interests to the lenders, including Voya. The equity holders were to “receive full releases.” Millennium filed a petition for bankruptcy with a “Prepackaged Joint Plan of Reorganization” that contained broad releases that would bind even non-consenting lenders. Voya objected, stating that it intended to assert claims for material misrepresentations in connection with the 2014 credit agreement against Millennium and Millennium’s equity holders and that the Bankruptcy Court lacked authority to approve the releases. The Bankruptcy Court overruled Voya’s objections and confirmed the plan. Voya filed suit, asserting RICO and other claims. The district court affirmed the Bankruptcy Court’s ruling on constitutional authority. The Third Circuit affirmed. On these facts, the Bankruptcy Court can, without running afoul of Article III of the Constitution, confirm a Chapter 11 reorganization plan containing nonconsensual third-party releases and injunctions. The releases and injunctions were “integral to the restructuring of the debtor-creditor relationship.” View "In re: Millennium Lab Holdings II LLC" on Justia Law
L&L Painting Co., Inc. v. Odyssey Contracting Corp.
A contractor and the prime contractor, involved in repainting the Queensboro Bridge, became embroiled in a dispute. The subcontractor stopped work. The parties sued each other for breach of contract. The subcontractor filed for bankruptcy. At the final pre-trial conference on an adversary proceeding, the parties entered into a stipulation that if the Bankruptcy Court determined that the subcontractor was the breaching party, then “all of the [p]arties’ pending claims will be withdrawn and disposed of in their entirety with prejudice” and the adversary proceeding “shall be deemed to be finally concluded in all respects.” Following a bench trial, the Bankruptcy Court concluded that the subcontractor was the breaching party and ordered compliance with the stipulation. Instead, the subcontractor appealed. The district court concluded that the subcontractor had released its claims and waived its right to appeal and modified the Bankruptcy Court’s order to make it a dismissal of the adversary proceeding with prejudice. The Third Circuit affirmed. The stipulation’s language confirms an intent to end all pending claims based on the Bankruptcy Court ruling: a party that seeks to appeal must make its intent to do so clear at the time of the stipulation setting the manner for resolution. View "L&L Painting Co., Inc. v. Odyssey Contracting Corp." on Justia Law
In re: Denby-Peterson
Denby-Peterson purchased a Chevrolet Corvette. Several months later, the Corvette was repossessed by creditors after Denby-Peterson defaulted on her car payments. Denby-Peterson subsequently filed an emergency voluntary Chapter 13 petition, notified the creditors of the bankruptcy filing, and demanded that they return the Corvette to her. They did not comply with her demand. Denby-Peterson filed a motion in the Bankruptcy Court, seeking to require the creditors to return the Corvette and sanctions for alleged violation of the Bankruptcy Code’s automatic stay. The court ordered turnover of the Corvette to Denby-Peterson but denied her request for sanctions. The district court and Third Circuit affirmed. As a matter of first impression, the Third Circuit held that a secured creditor’s failure to return collateral that was repossessed pre-bankruptcy petition upon notice of the debtor’s bankruptcy is not a violation of the automatic stay. A secured creditor does not have an affirmative obligation under the automatic stay to return a debtor’s collateral to the bankruptcy estate immediately upon notice of the debtor’s bankruptcy because failure to return the collateral received pre-petition does not constitute “an act . . . to exercise control over property of the estate,” 11 U.S.C. 362(a)(3). View "In re: Denby-Peterson" on Justia Law
In re: Healthcare Real Estate Partners LLC
Healthcare managed investment funds. Investors filed an involuntary bankruptcy petition with the intention of seeking Healthcare's removal as the fund manager. Healthcare was not served with process; the petition was uncontested. The bankruptcy court entered an order for relief. Healthcare was removed as the fund manager. The investors installed Summit as the new manager. Summit then dissolved the funds. About a month later, having learned what had transpired, Healthcare successfully moved to vacate the order for relief. Healthcare opposed dismissal asserting that it had claims for damages under 11 U.S.C. 303(i) because the investors filed the petition in bad faith. The bankruptcy court granted the investors’ motion for voluntary dismissal but retained jurisdiction, stating that “nothing herein shall limit [Healthcare’s] right to seek damages, including without limitation, fees and costs.” Healthcare sought section 303(i) damages and instituted an adversary proceeding against the investors asserting section 362(k) claims for violation of the automatic stay by the removal of Healthcare as the fund manager and the installation of Summit without court orders. The district court affirmed the dismissal of the 362(k) action. The Third Circuit reversed and remanded for reinstatement of the claim. The bankruptcy court had jurisdiction over Healthcare’s 362(k) adversary action. A section 362(k) action, no matter when instituted, is a case under title 11. The bankruptcy court lacked authority to limit what claims Healthcare could bring in the bankruptcy court after the dismissal of the bankruptcy petition. View "In re: Healthcare Real Estate Partners LLC" on Justia Law
In Re: Hackler
Arianna Holding Company purchased a tax lien on a piece of property owned by the Hacklers and eventually obtained title to the Hacklers’ property via foreclosure proceedings. Shortly after Arianna obtained title, the Hacklers filed for Chapter 13 bankruptcy and sought to void the transfer of the title as preferential, 11 U.S.C. 547(b). The Bankruptcy Court and the district court ruled in favor of the Hacklers. The Third Circuit affirmed. The title transfer meets 547(b)’s requirements for avoidance. The transfer was made to or for the benefit of a creditor, was made for an antecedent debt, was made while the debtor was insolvent, was made on or within 90 days before filing for bankruptcy, and enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding. The petition and schedules listed the value of the property at $335,000, which far exceeded the value of the liens against the property; Arianna filed a proof of claim for $42,561.21 and other liens totaled no more than $89,000. The Hacklers’ Chapter 13 plan proposed to pay Arianna’s claim in full. Federalism concerns raised by Arianna cannot overcome the plain language of the Code. View "In Re: Hackler" on Justia Law
SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP
Brooks, Debtor's CEO, was charged with financial crimes. In class action and derivative lawsuits, Debtor proposed a global settlement that indemnified Brooks for liability under the Sarbanes Oxley Act (SOX), 15 U.S.C. 7243. Cohen, Debtor’s former General Counsel and a shareholder, claimed that the indemnification was unlawful. The district court approved the settlement, Cohen, represented by CLM, appealed. The Second Circuit vacated, noting that the EDNY would determine CLM’s attorneys’ fees award. Debtor initiated Chapter 11 bankruptcy proceedings. The Bankruptcy Court confirmed Debtor’s liquidation plan, with a trustee to pursue Debtor’s interest in recouping its losses from the ongoing actions. Brooks died in prison. Because his appeal had not concluded, some of his convictions and restitution obligations were abated. Stakeholders negotiated a second global settlement agreement, under which $142 million of Brooks’ restrained assets were to be distributed to his victims; $70 million has been remitted to Debtor. The Bankruptcy Court awarded CLM fees for the SOX 304 claim; the amount would be determined if Debtor received any funds on account of the claim. CLM’s Fee Appeal remains pending at the district court. CLM requested a $25 million reserve for payment of its fees. The Bankruptcy Court ordered Debtor to set aside $5 million. CLM’s Fee Reserve Appeal remains pending. CLM then moved, unsuccessfully, for a stay of Second Settlement Agreement distributions. In its Stay Denial Appeal, CLM’s motion requesting a stay of distributions was denied. The Third Circuit affirmed. The $5 million reserve is sufficient. A $5 million attorneys’ fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. In common fund cases where attorneys’ fees are calculated using the lodestar method, multiples from one to four are the norm. View "SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP" on Justia Law
In re: Titus
In 1999, the Titus & McConomy law firm dissolved and, apparently, abandoned its commercial lease. Titus joined the Schnader firm, which deposited Titus’s wages into a bank account he owned jointly with his wife. The landlord sued the former Titus & McConomy partners and secured a multimillion-dollar judgment, then brought a fraudulent-transfer action in Pennsylvania state court against Mr. and Mrs. Titus. This triggered an involuntary bankruptcy. After two Bankruptcy Court trials and two appeals, the Third Circuit concluded that the Tituses are liable for a fraudulent transfer. When the wages of an insolvent spouse are deposited into a couple’s entireties account, both spouses are fraudulent transferees. The bankruptcy trustee waived any challenge to the method used to calculate their liability but the Third Circuit clarified how future courts should measure liability when faced with an entireties account into which deposits consist of both (fraudulent) wages and (non-fraudulent) other sources, and from which cash is spent on both (permissible) household necessities and (impermissible) other expenditures. Until now, a trustee had to show that wage deposits were impermissibly spent on non-necessary expenditures, even though wage and nonwage deposits had become commingled in the account. Rather than expect a trustee to trace the untraceable, future courts should generally presume that wage deposits were spent on non-necessary expenditures in proportion to the overall share of wages in the account as a whole. View "In re: Titus" on Justia Law