Justia Bankruptcy Opinion SummariesArticles Posted in US Court of Appeals for the Third Circuit
In re: WR Grace & Co
Grace operated a Montana asbestos facility, 1963-1990. Facing thousands of asbestos-related suits, Grace filed for Chapter 11 bankruptcy. Its reorganization plan provided for a several-billion-dollar asbestos personal-injury trust to compensate existing and future claimants. All asbestos-related personal injury claims were to be channeled through the trust (“Grace Injunction,” 11 U.S.C. 524(g)(4)). CNA provided Grace's general liability, workers’ compensation, employers’ liability, and umbrella insurance policies, 1973-1996 and had the right to inspect the operation and to make loss-control recommendations. After 26 years of litigation regarding the scope of CNA’s coverage of Grace’s asbestos liabilities, a settlement agreement ensured that CNA would be protected by Grace’s channeling injunction. CNA agreed to contribute $84 million to the trust.The “Montana Plaintiffs,” who worked at the Libby mine and now suffer from asbestos disease, sued in state court, asserting negligence against CNA based on a duty to protect and warn the workers, arising from the provision of “industrial hygiene services,” and inspections. The Bankruptcy Court initially concluded that the claims were barred by the Grace Injunction but on remand granted the Montana Plaintiffs summary judgment.The Third Circuit vacated. Section 524(g) channeling injunction protections do not extend to all claims brought against third parties. To conform with the statute, these claims must be “directed against a third party who is identifiable from the terms of such injunction”; the third party must be “alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor”; and “such alleged liability” must arise “by reason of” one of four statutory relationships, including the provision of insurance to the debtor. The Bankruptcy Court erred in anlyzing the “derivative liability” and “statutory relationship” requirements. While the claims meet the derivative liability requirement, it is unclear whether they meet the statutory relationship requirement. View "In re: WR Grace & Co" on Justia Law
In re: Aleckna
When Aleckna filed for Chapter 13 bankruptcy, she still owed the University (CCU) tuition. The filing of her bankruptcy petition imposed an “automatic stay” of all collection actions against her. While her case was pending, Aleckna, who had completed her coursework, asked CCU for a copy of her transcript. The University would only provide her with an incomplete transcript that did not include her graduation date, explaining that a “financial hold” had been placed on her account. Aleckna filed a counterclaim in the Bankruptcy Court arguing that CCU violated the automatic stay by refusing to provide her with a complete certified transcript, 11 U.S.C. 362(a)(6).The Bankruptcy Court found in Aleckna’s favor, concluding that she was entitled to receive her complete transcript, plus damages and attorneys’ fees because CCU’s violation was “willful.” The district court and Third Circuit affirmed. Section 362(k) provides that an individual who commits a willful violation is liable for damages and attorneys’ fees unless “such violation is based on an action taken by an entity in the good faith belief” that the stay had terminated. Precedent establishes a “willfulness” defense that is distinct from one of good faith but CCU failed to show that the law regarding the transcript issue was sufficiently unsettled to establish a lack of willfulness within the meaning of that precedent. View "In re: Aleckna" on Justia Law
Ellis v. Westinghouse Electric Co LLC
Westinghouse filed for Chapter 11 bankruptcy. In June 2017, the Bankruptcy Court set a “General Bar Date” of September 1, 2017—the deadline by which creditors had to file proofs of claims for most prepetition claims. The Bankruptcy Court confirmed a Reorganization Plan on March 28, 2018, 11 U.S.C. 1129. The effectiveness of the confirmed Plan was delayed to August 1, 2018, pending the closing of a transaction that required approval from government agencies. Westinghouse gave notice that, under the confirmed Plan, August 31, 2018, was the deadline for filing administrative expense claims.In May 2018, Westinghouse terminated Ellis’s employment, explaining that his department was being restructured. Ellis, age 67, believed he was unlawfully fired due to his age. He filed an EEOC charge in July 2018. The discrimination claim “arose” when he was terminated, so it is a claim after confirmation of the Plan but before its Effective Date. Ellis never took any action in the Bankruptcy Court. In October 2018, Ellis filed suit against Westinghouse, which moved for summary judgment, arguing that Ellis’s claim, as an administrative expense claim not timely filed by the Administrative Claims Bar Date, was discharged. The Third Circuit reversed summary judgment in favor of Ellis. As a matter of first impression, the court reasoned that the holder of a post-confirmation administrative expense claim cannot choose to bypass the bankruptcy process, so if the claim is not timely filed by the bar date, it faces discharge like a preconfirmation claim. View "Ellis v. Westinghouse Electric Co LLC" on Justia Law
Insurance Co of the State of Pennsylania v. Giuliano
Before filing for bankruptcy, the Debtors provided general contracting services for large construction projects, including many projects for departments of the federal government. To enter into contracts with the United States, contractors are generally required to post both a performance bond and a payment bond signed by the contractor and a qualified surety (such as ICSP), 40 U.S.C. 3131. When the Debtors defaulted on the contract at issue, ICSP stepped in to make sure that the work was completed. ICSP claims that it is subrogated to the United States’ rights to set off a tax refund (owed to one or more of the Debtors) against the losses that ICSP covered. However, to settle various claims in the Debtors’ Chapter 7 bankruptcy proceedings, the United States and the Trustee agreed that the United States would waive its setoff rights.The Bankruptcy Court, district court, and Third Circuit held that ICSP is not entitled to the tax refund. The United States had not yet been “paid in full,” within the meaning of 11 U.S.C. 509(c), when the Bankruptcy Court approved the settlement, so ICSP’s subrogation rights were subordinate to the remaining and superior claims of the United States at the time of the settlement. The United States was entitled to waive its setoff rights in order to settle its remaining and superior claims; the waiver of its setoff rights extinguished ICSP’s ability to be subrogated to those rights. View "Insurance Co of the State of Pennsylania v. Giuliano" on Justia Law
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