Univ. of Richmond Law School’s Professor A. Benjamin Spencer, founder of the Split Circuits Blog (previously noted here), has posted today on a split recently discussed by Columbus Bankruptcy Judge John E. Hoffman, Jr. regarding the level of proof (whether "preponderance" vs. "clear and convincing") necessary to establish the existence of an intentional fraudulent transfer under Bankruptcy Code section 548(a)(1)(A) (which enables a trustee to avoid a transfer or obligation incurred "with actual intent to hinder, delay, or defraud" the debtor’s creditors).  See In re Canyon Systems Corp., 343 B.R. 615 (Bankr. S.D. Ohio 2006) (pdf)

According to Chicago’s Bankruptcy Judge Eugene R. Wedoff, the reason the preponderance standard must apply is because the US Supreme Court held in Grogan v. Garner, 498 U.S. 279, 286 (1991) (WL), that the "preponderance" standard of proof applies to all causes of action arising under the Bankruptcy Code “unless particularly important individual interests or rights are at stake.”  As Judge Wedoff explained in Baldi v. Lynch (In re McCook Metals, L.L.C), 319 B.R. 570 (Bankr. N.D. Ill. 2005) (pdf): 

There is a dispute over whether the higher, clear and convincing evidence standard applies to proof of actual fraud under 548(a)(1).  See Taylor v. Rupp (In re Taylor), 133 F.3d 1336, 1338 (10th Cir. 1998) [pdf].  The same dispute exists under the UFTA [i.e., the Uniform Fraudulent Transfer Act, adopted in most states (but not NY)].  See In re Solomon, 300 B.R. 57, 62-63 (Bankr. N.D. Okla. 2003) (holding that Oklahoma would apply the preponderance standard); Word Investments, Inc. v. Bruinsma (In re TML, Inc.), 291 B.R. 400, 436 [Bankr. W.D. Mich. 2003] (collecting authorities, and holding that Michigan would apply the clear and convincing standard under its version of the UFTA’s predecessor, the Uniform Fraudulent Conveyance Act). The Illinois courts do not appear to have addressed the question.

There is no apparent reason for treating the interests of a defendant in an actual fraud proceeding under § 548(a)(1) as more important than the interests at stake in Garner-the dischargeability of a debt under § 523(a)(2). 

Conversely, while there are cases holding that the "preponderance" standard applies in state law-based intentional fraudulent transfer actions, a strong majority of UFTA cases appear to favor application of the "clear and convincing" standard to such cases.  See, e.g., Grochocinski v. Zeigler  (In re Zeigler), 320 B.R. 362 (Bankr. N.D. Ill. 2005), where Chicago’s Bankruptcy Judge John Squires (author of these handy tips) wrote:

Continue Reading Proving an Intentional Fraudulent Transfer under the Bankruptcy Code and the UFTA: A Clear and Convincing Preponderance of Uncertainty

For a federal agency, the Bonneville Power Administration (BPA) is surely unique. Unlike most federal agencies, this one is self-funding. It boasts that it “recover[s] all of its costs through sales of electricity and transmission and repay[s] the U.S. Treasury in full with interest for any money it borrows.” The story of the origins and growth of the BPA is one worth reading, as it holds many lessons regarding the social, political, and economic development in the Pacific Northwest and the US generally. To take one more extreme example, did you know that the BPA served as the inspiration for some of Woody Guthrie‘s most famous songs? According to one documentary, entitled Roll on Columbia: Woody Guthrie and the Bonneville Power Administration:

In spring 1941, the cusp of the Great Depression and Pearl Harbor, a 28 year old, unemployed Dust Bowl balladeer, Woodrow Wilson Guthrie took a one month, temporary job with the U.S. Department of the Interior’s Bonneville Power Administration (BPA) on the Columbia River. The BPA needed a folksinger to promote the benefits of building dams to produce cheap electricity. Guthrie, and his wife and 3 kids needed the paycheck. He wrote 26 songs in 30 days – classics like Roll on Columbia and Pastures of Plenty. This … is the … most prolific moment in Guthrie’s extraordinary career.

The BPA also is one of the lesser publicized casualties in the largest bankruptcies ever (Enron, Mirant, Calpine, Kaiser, PG&E, Longview Aluminum, to name a few), and its advocates both internally and at the Department of Justice have fought tooth and nail on behalf of the BPA against some of the best bankruptcy lawyers in the land.
Recently, the Fifth Circuit weighed in on a long-standing split among the circuits in the law regarding assumption and termination of non-assignable executory contracts. It held that the BPA could not unilaterally terminate its executory contract with Mirant for future electric power purchases under the contract’s “ipso facto” clause (which excuses the solvent party from performance of the contract when the other party becomes insolvent or goes bankrupt) simply because the federal Anti-Assignment Act prohibited the assignment of the contract. In re Mirant Corp., 2006 WL 33012 (5th Cir., 2/13/06) (pdf).
In reaching this result, the Fifth Circuit stepped into the debate over whether to adopt the “actual” or “hypothetical” approach in determining whether, under Bankruptcy Code section 365(e)(2)(A), the contract can be terminated as a matter of law because —

applicable law [such as the federal Anti-Assignment Act – 41 USC § 15] excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties.

The Fifth Circuit framed the differing positions of the parties as follows:Continue Reading 5th Circuit Holds that Federal Anti-Assignment Act Doesn’t Trigger “Ipso Facto” Termination of Mirant’s Energy Contract

The British Independent recently announced here that Marie Antoinette may well be the “historical personality of the year” for 2006. According to the paper,

Marie-Antoinette lives again. The last great queen of France, guillotined in 1793, threatens to make us all lose our heads in 2006. She may rival, or even eclipse, her close contemporary

…

Last Friday, nine of 16 judges of the 5th Circuit Court of Appeals ruled, following an en banc rehearing, that crop disaster relief payments authorized by legislation enacted postpetition are not “property of the debtor’s estate.” Burgess v. Sykes (In re Burgess), 2006 WL 205043 (5th Cir. 1/27/06) (pdf).
This must-read decision rests…

One very important issue sharply dividing courts and commentators alike is that of “reverse cramdown,” whereby an undersecured creditor with a lien on the debtor’s assets will join with debtor’s management and existing equity holders (often dominated by insiders) in a reorganization plan that offers existing equity holders a piece of the reorganized debtor despite the fact that a non-consenting intervening class of unsecured creditors receives little or nothing under the plan.
In an article distributed at the November 2005 National Conference of Bankruptcy Judges in San Antonio, Hugh Ray and Jon Daly, of Houston’s Andrews Kurth LLP, strongly criticized this “tip” by undersecured creditors to junior equity classes, writing:

Underlying the practice of reverse cramdown is the rationale that since the secured lender has a lien on all the debtors’ property and is undersecured, the secured lender can share or “give up” a portion of the enterprise value of the debtor to which it would otherwise be entitled to under the plan to whoever it want to, including the debtor’s existing equity interest holders, who, absent the secured lender’s generosity, would otherwise receive nothing under the plan. Courts have applied this rationale to circumvent not only the absolute priority rule but the prohibition against “unfair discrimination” contained in 11 U.S.C. § 1129(b)(1) as well.
[We] contend, however, that this rationale is flawed. Secured creditors should not be permitted to collatorate with junior creditors or equity owners to squeeze out intervening classes of creditors who are not provided for in full under a plan of reorganization. The legislative history to 11 U.S.C. § 1129(b)(2) expressly prohibits the practice of reverse cramdown. Moreover, it was inequitable practice similar to reverse cramdown that led to the creation of the absolute priority rule in the first place.

In issuing its final opinion in a civil case for 2005, the Third Circuit Court of Appeals rejected on de novo review a “reverse cramdown” proposed in a plan of reorganization by Armstrong World Industries (AWI), stating that such a plan violated the absolute priority rule incorporated into 11 U.S.C. § 1129(b)(2)(B)(ii). In re Armstrong World Indus., Inc., 2005 WL 3544810 (3d Cir. 12/29/05) (pdf here). To understand the Court’s ruling, one must first understand what was proposed in AWI’s reorganization plan. The Third Circuit summarized the relevant plan provisions as follows:Continue Reading Third Circuit Rules that “Reverse Cramdown” Plan Proposed by Armstrong World Industries Violates the Bankruptcy Code’s “Absolute Priority Rule”

Rutgers Law School’s Professor Keith Sharfman, an outspoken critic of “creditor derivative standing” in bankruptcy (see Sharfman, Derivative Suits in Bankruptcy, 10 Stan. J. L. Bus. & Fin. 1 (2004)), took note in a recent guest blog post on Ideoblog of a case from the Fourth Circuit, Scott v. National Century Financial Enterprises, Inc. (In re Baltimore Emergency Services II, Corp.), 2005 WL 3470039 (4th Cir., 12/20/05), which “denied creditors standing in the particular case and cast doubt on whether creditor standing could ever be available.” Given the proliferation of litigation being commenced in bankruptcy courts “for the benefit of” and “on behalf of” aggrieved creditors left holding the bag, and the diverse decisions of courts across the land, the question of a plaintiff’s standing to commence adversary litigation in the bankruptcy context has gained increased importance in the past several years.
The Baltimore Emergency Services II case is a worthwhile read. In it, the Fourth Circuit actually ruled very narrowly, holding that the plaintiffs lacked standing to seek a preliminary injunction against the chapter 11 debtor’s former CEO who “oversaw the debtors’ business operations, guided them into bankruptcy, and then abruptly jumped ship [by seeking] to undermine the debtors by securing for himself their workforce and their most valuable contracts.” If any case cried out for a court’s acceptance of creditor standing (with or without the debtor’s consent), it is this one (which had the support of the lead secured creditor and the creditors’ committee, whose aggregate claims against the debtor exceeded $430 million).
The opinion in Baltimore Emergency Services II begins by first examining the doctrine of “derivative standing,” which itself — according to the Court — encompasses two situations: first, when the trustee or debtor-in-possession refuses to bring suit on its own; second, when the trustee or debtor-in-possession grants consent. The Court stated:Continue Reading Creditor Derivative Standing: Some Recent Cases Explore the Contours of the Doctrine and Split Among the Circuits

In Amedisys, Inc., v. JP Morgan Chase Manhattan Bank as Trustee, 2005 WL 3497805 (Bankr. S.D. Ohio, 12/22/05), the plaintiff appealed the bankruptcy court’s order granting the defendants’ partial summary judgment motion. The plaintiff designated items to be included in the record on appeal, and the defendants moved to strike some of these items.
The bankruptcy court looked at the split among the circuits on whether a bankruptcy court has the power to rule on disputes regarding the contents of the appellate record. In this well-researched opinion, the Court found that that a majority of courts hold that bankruptcy courts do have the power to rule on such disputes, stating:Continue Reading Who Decides Disputes Over the Content of the Appellate Record? Ohio Bankruptcy Court Sides with Majority in Holding that Bankruptcy Court Decides Those Disputes

In a recent post, I noted the recent 10th Circuit case of In re Commercial Financial Services, Inc., 427 F.3d 804 (10th Cir., 10/25/05). In that case, the 10th Circuit cut a $1.9 million fee request by Houlihan, Lokey, Howard & Zukin Capital (“Houlihan”) by over $1 million. The 10th Circuit focused, among other things, on boilerplate-type language in the retention application stating that Houlihan’s fee request would be “[s]ubject to the approval of the court” as well as to “final review by the Bankruptcy court as to the relative fairness” of the proposed fee. In essence, the 10th Circuit adopted the “reasonable” standard of Bankruptcy Code section 330(a) in reviewing the appropriateness of Houlihan’s monthly fixed fee request.
Last week, in Houlihan, Lokey v. NorthWestern Corp. (In re NorthWestern Corp.), 2005 WL 3018590 (D. Del., 11/8/05), Judge Farnan for the District Court for the District of Delaware affirmed in part and reversed in part a fee order of the bankruptcy court, holding that since the Bankruptcy Court had already approved Houlihan’s $175,000 monthly fee as “reasonable” in Houlihan’s retention order, the Bankruptcy Court erred by applying the “reasonable” standard of Bankruptcy Code section 330(a) instead of the “improvident” standard of Bankruptcy Code section 328(a). Under this standard, the Court noted, “only ‘developments not capable of being anticipated at the time of the fixing of [the] terms and conditions’ of engagement may render a previously approved term improvident.”
Additionally, in allowing the fixed monthly fees, the District Court found that the potential for duplication of services by Houlihan and Lazard Freres (the Debtor’s financial advisor), which the Bankruptcy Court had found “could not have been foreseen … at the time it approved the Committee’s application,” was a “clearly erroneous” finding of fact because “whether or not those services were inappropriately duplicative, the potential for duplication was certainly not unforeseeable.”
The crux of the District Court’s analysis in reversing the Bankruptcy Court’s decision regarding the standard of review applicable to a monthly fixed fee retention agreement is provided below:Continue Reading Delaware District Court Holds that Houlihan Lokey’s Fixed Fee Retention Arrangement Is Governed by the “Improvident” Standard, Not the “Reasonableness” Standard