Justia Bankruptcy Opinion SummariesArticles Posted in US Court of Appeals for the Third Circuit
In re Venoco, LLC
Venoco operated a drilling rig off the coast of Santa Barbara, transporting oil and gas to its Onshore Facility for processing. Venoco did not own the Offshore Facility but leased it from the California Lands Commission. Venoco owned the Onshore Facility with air permits to use it. Following a 2015 pipeline rupture, Venoco filed for Chapter 11 bankruptcy and abandoned its leases, relinquishing all rights in the Offshore Facility.Concerned about public safety and environmental risks, the Commission took over decommissioning the rig and plugging the wells, paying Venoco $1.1 million per month to continue operating the Offshore and Onshore Facilities. After a third-party contractor took over operations, the Commission agreed to pay for use of the Onshore Facility. The Commission, as Venoco’s creditor, filed a $130 million claim for reimbursement of plugging and decommissioning costs. Before the confirmation of the liquidation plan, Venoco and the Commission unsuccessfully negotiated a potential sale of the Onshore Facility to the Commission. The Commission stopped making payments, arguing it could continue using the Onshore Facility without payment under its police power.After the estates’ assets were transferred to a liquidation trust, the Trustee filed an adversary proceeding, claiming inverse condemnation, against California. The district court affirmed the bankruptcy court’s rejection of California's assertion of Eleventh Amendment sovereign immunity. The Third Circuit affirmed. By ratifying the Bankruptcy Clause of the U.S. Constitution, states waived their sovereign immunity defense in proceedings that further a bankruptcy court’s exercise of its jurisdiction over the debtor's and the estate's property. View "In re Venoco, LLC" on Justia Law
The Weinstein Co. Holdings, LLC v. Spyglass Media Group, LLC.
Cohen entered into a work-for-hire agreement with SLP, a special purpose entity formed by TWC to make the film, Silver Linings Playbook. Cohen was to receive $250,000 in fixed initial compensation and contingent future compensation of roughly 5% of the movie’s net profits. The movie was released to critical acclaim in 2012. TWC purports to own all the rights pertaining to the movie, including the Cohen Agreement.In 2017, following a flood of sexual misconduct allegations against its co-founder, Harvey Weinstein, TWC filed for Chapter 11 bankruptcy. The bankruptcy court approved TWC’s Asset Purchase Agreement with Spyglass, 11 U.S.C. 363. Spyglass sought a declaratory judgment that the Cohen Agreement and had been sold to Spyglass. If the Cohen Agreement were an executory contract, assumed and assigned under section 365, Spyglass would be responsible for approximately $400,000 in previously unpaid contingent compensation. If Spyglass instead purchased the Cohen Agreement as a non-executory contract, Spyglass would be responsible only for obligations on a go-forward basis. Other writers, producers, and actors with similar works-made-for-hire contracts made similar arguments.The bankruptcy court granted Spyglass summary judgment. The district court and Third Circuit affirmed. Cohen’s remaining obligations under the Agreement are not material and the parties did not clearly avoid New York’s substantial performance rule; the Cohen Agreement is not an executory contract. View "The Weinstein Co. Holdings, LLC v. Spyglass Media Group, LLC." on Justia Law
The Weinstein Co. Holdings, LLC v. Y Movie, LLC
In March 2018, following sexual misconduct allegations against TWC’s co-founder Harvey Weinstein, TWC sought bankruptcy protection. TWC and Spyglass signed the Asset Purchase Agreement (APA). The sale closed in July 2018. Spyglass paid $287 million. Spyglass agreed to assume all liabilities associated with the Purchased Assets, including some “Contracts.” The APA identifies “Assumed Contracts,” as those Contracts that Spyglass would designate in writing, by November 2018.In May 2018, TWC filed an Assumed Contracts Schedule, with a disclaimer that the inclusion of a contract did not constitute an admission that such contract is executory or unexpired. A June 2018 Contract Notice, listed eight Investment Agreements as “non-executory contracts that are being removed from the Assumed Contracts Schedule.” The Investment Agreements, between TWC and Investors, had provided funding for TWC films in exchange for shares of future profits. Spyglass’s November 2018 Contract Notice listed nine Investment Agreements as “Excluded Contracts,”In January 2019, the Investors requested payments from Spyglass--their asserted share of a film’s profits. The Bankruptcy Court rejected the Investors’ claim that Spyglass bought all the Investment Agreements under the APA. The district court and Third Circuit affirmed. The Investment Agreements are not “Purchased Assets” and the associated obligations are not “Assumed Liabilities.” The Investment Agreements are not executory contracts under the Bankruptcy Code. View "The Weinstein Co. Holdings, LLC v. Y Movie, LLC" on Justia Law
In re: Orexigen Therapeutics, Inc.
Orexigen produced a weight management drug, Contrave. In June 2016, Orexigen agreed to sell Contrave to McKesson, which provided the drug to pharmacies. The Distribution Agreement permitted “each of [McKesson] and its affiliates … to set-off, recoup and apply any amounts owed by it to [Orexigen’s] affiliates against any [and] all amounts owed by [Orexigen] or its affiliates to any of [McKesson] or its affiliates.” MPRS and Orexigen entered into a “Services Agreement” weeks later; MPRS managed a customer loyalty discount program for Orexigen. MPRS would advance funds to pharmacies selling Contrave and later be reimbursed by Orexigen. The agreements did not reference each other. McKesson and MPRS were distinct legal entities.When Orexigen filed its 2018 Chapter 11 petition, it owed MPRS $9.1 million under the Services Agreement. McKesson owed Orexigen $6.9 million under the Distribution Agreement. With setoff, Orexigen would have owed MPRS $2.2 million; McKesson would have owed Orexigen nothing. McKesson objected to a sale of Orexigen's assets. McKesson agreed to pay the $6.9 million receivable; Orexigen agreed to keep that sum segregated pending resolution of the setoff dispute. Parties may invoke setoff rights when the debts they owe one another are mutual, 11 U.S.C. 553.The bankruptcy court, the district court, and the Third Circuit rejected McKesson’s request to set off its debt by the amount Orexigen owed MPRS. McKesson wanted a triangular setoff, not a mutual one, as allowable under section 553. View "In re: Orexigen Therapeutics, Inc." on Justia Law
In re: Energy Future Holdings Corp.
The Debtors’ most valuable asset was an economic interest in Texas’s largest power transmission and distribution company, which NextEra agreed to buy through a Merger Agreement. The sale was not approved by the Public Utility Commission and did not go through. NextEra sought a $275 million Termination Fee. The Bankruptcy Court and Third Circuit rejected that claim. NextEra then sought to recover approximately $60 million in administrative fees under 11 U.S.C. 503(b)(1)(A), arguing that the Merger Agreement required the parties to bear their own expenses. The district court affirmed the Bankruptcy Court’s dismissal, finding that NextEra failed to benefit the estate. The Third Circuit reversed.NextEra plausibly alleged that through a post-petition transaction, the Merger Agreement, it benefitted the estate by providing valuable information, and accepting certain risks, that paved the way for a later deal. The precise monetary value of this benefit and the costs imposed on the estate cannot be distilled from pleadings alone. NextEra plausibly alleged that it is not foreclosed from receiving administrative expenses under Section 503(b)(1)(A). Although NextEra and the Debtors entered into an agreement that generally provided each party would bear its own costs, the agreement exempted from that general rule expenses addressed in the Plan of Reorganization, which unambiguously provides for the recovery of administrative claims under Section 503(b). View "In re: Energy Future Holdings Corp." on Justia Law
In re: Tribune Co.
In Tribune’s reorganization bankruptcy plan, Senior Noteholders were assigned their own class (1E) of unsecured creditors. When they did not accept the Plan but other classes did, the Bankruptcy Court confirmed it under the cramdown provision.The provision at issue, 11 U.S.C. 1129(b)(1), provides: Notwithstanding section 510(a) … [making subordination agreements enforceable in bankruptcy to the extent they would be in nonbankruptcy law], if all of the applicable requirements of subsection (a) of this section  other than paragraph (8) [which requires that each class of claims has accepted the plan] are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph  if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.The Third Circuit agreed with the district court that the text of section 1129(b)(1) supplants strict enforcement of subordination agreements. When “cramdown plans play with subordinated sums, the comparison of similarly situated creditors is tested through a more flexible unfair discrimination standard.” Subsection 1129(b)(1) does not require subordination agreements to be enforced strictly. The difference in the Senior Noteholders’ recovery is not material. Although the Plan discriminates, it is not presumptively unfair. View "In re: Tribune Co." on Justia Law
In re: Wilton Armetale Inc
Artesanias recorded its $900,000 judgment as a lien on Wilton’s warehouse. Artesanias learned that Wilton was insolvent and that its previous owner and North Mill, another creditor had plotted with Wilton’s law firm, Leisawitz, to plunder the company’s remaining assets. They had engineered a sale of Wilton’s non-real estate assets; allowed North Mill to file inflated judgments against Wilton; and paid Leisawitz future legal fees. North Mill tried to foreclose on the warehouse. Artesanias sued North Mill and Leisawitz, alleging they had hindered Artesanias’ ability to enforce and collect Wilton’s obligations.Wilton filed for Chapter 7 bankruptcy. The automatic stay stopped the warehouse foreclosure. The trustee entered settlements, agreeing to split the warehouse sale proceeds between North Mill and Artesanias, release the estate’s claims against North Mill, and not interfere with Artesanias’s claims against North Mill and others. All agreed that nothing in the settlements would “affect [Artesanias’s] litigation” against North Mill. After selling the warehouse, Wilton’s bankruptcy estate had few assets. Among them were legal claims against those who had allegedly plundered the company. Rather than spend the estate’s remaining assets pursuing those claims, the bankruptcy court let the trustee abandon all but professional-liability claims against Leisawitz.Artesanias’s claims against North Mill were dismissed for lack of standing. The Third Circuit vacated. Chapter 7 trustees can relinquish the statutory authority to pursue a claim back to a creditor. View "In re: Wilton Armetale Inc" on Justia Law
In re: SS Body Armor I Inc.
In 2005, revelations surfaced that Body Armor—a publicly-traded company—was manufacturing its body armor, which it sold to law enforcement agencies and the U.S. military, using substandard materials. Its stock price plummeted, prompting shareholders to bring numerous actions that were consolidated into a shareholders’ class action and a derivative action on behalf of Body Armor against specified officers and directors. Since then, the matter has traveled, through bankruptcy, trial, and appellate courts throughout three U.S. jurisdictions. In its second review of the case, the Third Circuit affirmed a 2015 Bankruptcy Court for the District of Delaware order, approving a settlement entered in the Chapter 11 bankruptcy case of S.S. Body Armor I. The court reversed in part the Bankruptcy Court’s order that granted the objector fees on a contingent basis and remanded for a determination of the appropriate amount of the fee award. The court affirmed the part of that order that denied the objector’s claim to attorneys’ fees and expenses under the Bankruptcy Code and an order awarding fees to counsel in one of the underlying lawsuits. View "In re: SS Body Armor I Inc." on Justia Law
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