As predicted here, Judge Posner sealed the fate of UAL’s retired pilots by rejecting their challenge to UAL’s confirmed plan (and thanks to How Appealing’s Howard Bashman for his post declaring this blog’s prediction "correct" following issuance of the opinion). In re UAL Corp., No. 06-2780 (7th Cir. 10/25/06) (pdf / WL). 

Along the way, Judge Posner made the following observations that bankruptcy practitioners should find of interest:

Continue Reading 7th Circuit’s KO’s Retired Pilots’ Objection to UAL’s Confirmed Reorganization Plan

Last December, I reported here on NY Bankruptcy Judge Stan Bernstein’s "must read" opinion in Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 334 B.R. 89 (Bankr. E.D.N.Y. 2005) (pdf), in which he barred the defendants’ valuation expert, Scott Peltz, from testifying in a $7.5 million fraudulent transfer case, finding both that Mr. Peltz failed to qualify as a business valuation expert and that his testimony was unreliable "because he did not employ the same level of intellectual rigor that characterizes the practice of an expert in the field of business valuation."

With no one left to rebut the plaintiff’s proposed valuation expert, one would have expected that the post-confirmation litigation trust would be laughing all the way to the bank, but last week, in this written opinion, Judge Bernstein put a pox on the plaintiff’s house by equally ripping the plaintiff’s expert, Robert Cimasi, and finding that his testimony and report also were "fundamentally unreliable."  Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 2006 WL 2242288 (Bankr. E.D.N.Y. 8/2/06).  In reaching this conclusion, Judge Bernstein pulled no punches, writing:

Continue Reading “A Pox On Both Your Houses”: NY’s Judge Stan Bernstein Next Tosses Plaintiff’s Business Valuation Expert in Another “Must Read” Decision

At my alma mater’s faculty blog, my friend and former classmate, Professor Bob Rasmussen, writes about a business’s "Prime Directive"; that is, "first hire the right person as CEO, [then] ensure that the CEO is shown the door at the appropriate time."  Bob concludes his post by noting that "law can influence the discussion. Doctrines such as lender liability, equitable subordination, and the tort of deepening insolvency, if pushed too far, can make lenders hestitate, thus prolonging the tenure of managers that need to go."

Speaking of "pushing too far," consider the highly controversial case of Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) (pdf), in which the Third Circuit — "predicting Pennsylvania law" — declared that deepening insolvency is a separate and independent tort in Pennsylvania and that the resultant "injury" from this tort is "to [a debtor’s] corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life."   

In Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX, Inc.), 2006 WL 1453117 (3d Cir. 5/26/06) (pdf), the Third Circuit pushed back in a follow up to its much-maligned opinion in Lafferty.  In CitX, the Third Circuit commented on the controversy spawned by Lafferty, stating (at footnote 11):

Continue Reading Deepening Insolvency: The Third Circuit Steps Back from the Breach

Once upon a time, bankruptcy courts — like the one overseeing Kmart’s chapter 11 case in late 2002 — routinely entered orders (like these) granting the debtor “open-ended permission to pay any debt to any vendor deemed ‘critical’ in the exercise of unilateral discretion, provided that the vendor agreed to furnish goods on ‘customary

Jonathan Alper of the Florida Bankruptcy Law Blog considers here the following situation involving an individual chapter 7 debtor client where the bankruptcy trustee sought to control the business in which the debtor was the sole shareholder:

The debtor’s assets included 100% of the stock in an operating business with assets including real property. The question arose concerning the debtor’s operation of the business after filing personal bankruptcy. Since the debtor’s stock is part of the bankruptcy estate, does the trustee by virtue of owning all the stock assume control of the business? Or, can the debtor as president of the business operate the business including disposing of business assets after filing? In this case, the trustee took the position that the debtor’s bankruptcy did not act as a stay against business operations.

Similar questions were addressed this week by Judge Mary P. Gorman of the Bankruptcy Court for the Central District of Illinois in Swartz v. Billingsly (In re Billingsley), 2006 WL 538437 (Bankr. C.D. Ill., 3/6/2006) (pdf). The difference between the situation facing Judge Gorman and that posited by Jonathan is that in Judge Gorman’s case, the debtor only owned 50% of the non-debtor corporation’s stock, whereas in Jonathan’s example, the debtor owned 100% of the non-debtor’s stock.
This difference is significant because when the trustee is the sole shareholder, it should have the freedom to run the non-debtor corporation as it pleases (subject to compliance with state law corporate formalities). Conversely, when the trustee controls 50% or less of the non-debtor’s equity, significant decisions involving the non-debtor would require the consent of other equity participants, and thus the trustee could not make unilateral decisions regarding the non-debtor corporation’s affairs.
Here’s what Judge Gorman said:

Continue Reading Illinois Bankruptcy Court Denies Trustee’s Attempt to Exercise Control Over Nondebtor Corporation’s Assets

In an article entitled A Matter of Style, 19-SEP Am. Bankr. Inst. J. 32 (2000), San Antonio’s Bankruptcy Judge Leif M. Clark wrote these noteworthy remarks:

A lawyer is more than a mouthpiece, more than an agent, more than a mere compendium of legal truths. A lawyer is more than a mere translator of a client’s desires. A lawyer is representative not just of the client’s interests, but in some ways the embodiment of the client. It is for that reason that a lawyer’s style is more than just stylistic. How a lawyer comes off in court can all too often dramatically affect the perception the judge is likely to develop of both the client and the merits of the client’s position in a case. In short, style matters. Some styles work better than others, of course. Every judge has their favorite style, as well as styles that rub them the wrong way. (Emphasis added).

So what does Judge Clark do when someone’s style REALLY rubs him the wrong way? He calls him the bankruptcy equivalent of Adam Sandler in the movie Billy Madison, and writes this:

Before the court is a motion entitled “Defendant’s Motion to Discharge Response to Plaintiff’s Response to Defendant’s Response Opposing Objection to Discharge.” As background, this adversary was commenced on December 14, 2005 with the filing of the plaintiff’s complaint objecting to the debtor’s discharge. Defendant answered the complaint on January 12, 2006. Plaintiff responded to the Defendant’s answer on January 26, 2006. On February 3, 2006, Defendant filed the above entitled motion. The court.cannot determine the substance, if any, of the Defendant’s legal argument, nor can the court even ascertain the relief that the Defendant is requesting. The Defendant’s motion is accordingly denied for being incomprehensible. [FN 1]

[FN 1] Or, in the words of the competition judge to Adam Sandler’s title character in the movie, “Billy Madison“, after Billy Madison had responded to a question with an answer that sounded superficially reasonable but lacked any substance,

Mr. Madison, what you’ve just said is one of the most insanely idiotic things I’ve ever heard. At no point in your rambling, incoherent response was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

Deciphering motions like the one presented here wastes valuable chamber staff time, and invites this sort of footnote.

I’m sure many judges have often felt that litigants (pro se or not) deserve to be thrashed as Adam Sandler was in Billy Madison. I suspect, however, that judges are more often inclined to invoke that most famous of movie lines, “Frankly, my dear, I don’t give a damn.”
Special thanks to an anonymous donor for the tip to Judge Clark’s ruling.
[NB: Judge Clark was one of the first to rip BAPCPA’s anti-consumer protection provisions when he penned an article in 2003 entitled Things Change, 22-MAY Am. Bankr. Inst. J. 40 (2003). He said:

Continue Reading Judge Leif Clark Cites to Adam Sandler’s “Billy Madison” in Dismissing Pro Se Defendant’s Convoluted Motion

The case of Penthouse Media Group v. Guccione (In re General Media, Inc.), 2005 WL 3529148 (Bankr. S.D.N.Y., 12/27/05), involves an adversary proceeding filed by the reorganized debtor against Bob Guccione, the debtor’s former Chairman and CEO. Mr. Guccione is best known for having founded Penthouse Magazine, as well as such quality, trend-setting publications as Spin Magazine and Omni Magazine. Unquestionably, however, his absolutely worst legacy shall always be the movie Caligula, which cost a whopping $20 million in 1979 and is often cited, to this day, as possibly the worst film ever made.
For me, the case has special sentimental value because 25 years ago, while cooling my heels in New York City between college and law school, I spent two hours a week as private tutor to Mr. Guccione’s youngest son at Mr. Guccione’s very posh E. 67th Street townhouse (reportedly NY’s largest residence), which was at the heart of the dispute in this case.
Anyway, in this case, the reorganized debtor filed a five count complaint against Mr. Guccione. The first three counts sought turnover of certain intellectual property, as well as 10 unnamed items of property still in the townhouse, which he was now renting from a third-party owner. The final two counts alleged conversion and breach of fiduciary duty for a certain transaction involving possible self-dealing. [NB: In fact, the 10 items likely were imported statutes and other antiques or antiquities of immense weight and value, as to which there were pre-confirmation disputes over whether the items were fixtures of personal property under applicable non-bankruptcy law. Imagine, though, what fun David Letterman would have with this “top ten” list!]
Guccione moved to dismiss for lack of subject matter jurisdiction and for failure to state a claim on which relief can be granted. The Court summarized the positions of the parties on these issues as follows:

Guccione argues, in the main, that the Court lacks subject matter jurisdiction. In addition, he contends that a turnover action will not lie post-confirmation because there is no trustee and no estate. Next, he maintains that the Plan released him from liability based on pre-petition conduct other than conduct that was fraudulent, willful or grossly negligent. Finally, he asserts that the plaintiff should be estopped from asserting the claims because they were not raised during the bankruptcy case or disclosed to the creditors, and the plaintiff procured Guccione’s support for confirmation without disclosing its intention to bring this action.
The plaintiff counters that (1) the Court retained jurisdiction over these claims in the Plan, (2) the plaintiff acquired the right to pursue these claims as consideration for PET’s funding of the Plan, and (3) the turnover claims were preserved under the Plan. Furthermore, the Townhouse Property was the subject of a prior Court order, which the First Cause of Action seeks to enforce. Lastly, some of the damage claims are clearly within the statute of limitations, and the release defense, which excludes intentional wrongs, cannot be decided on a motion to dismiss.

In dismissing the action based on lack of subject matter jurisdiction, the Court noted that “a party invoking the bankruptcy court’s post-confirmation jurisdiction must satisfy two requirements”:

Continue Reading New York Bankruptcy Court Finds No Post-Confirmation Jurisdiction Exists to Support Reorganized Debtor’s Case Against Penthouse Magazine Founder

A popular method of distinguishing a case that contains harmful reasoning is to call it “mere dicta.” In Tate v. Showboat Marina Casino Partnership, 05-1681 (7th Cir., 12/13/05), Judge Richard Posner ponders exactly what “dicta” (or, better put, “dictum”) is. He wrote:

The plaintiffs call the statements in Harkins that we quoted merely “dicta”�that is, things the court said, not what it held; and only what a court holds is binding (within the limits of stare decisis, discussed below) in subsequent cases. But what does “dictum” (the singular of “dicta,” the two words being used interchangeably by most opinion writers these days) mean exactly? There are two principal contenders. The first�that dictum is anything besides the facts and the outcome�is unacceptable; as a practical matter, it would erase stare decisis because two cases rarely have identical facts. Michael Dorf, “Dicta and Article III,” 142 U. Pa. L. Rev. 1997, 2035-37, 2067 (1994). But Harkins and this case do have identical facts; so even if “dictum” were construed so broadly, these plaintiffs would be out of luck.
The sensible alternative interpretation is that the holding of a case includes, besides the facts and the outcome, the reasoning essential to that outcome. Henry J. Friendly, “In Praise of Erie�and of the New Federal Common Law,” 39 N.Y.U.L. Rev. 383, 385-86 (1964) (“a court’s stated and, on its view, necessary basis for deciding does not become dictum because a critic would have decided on another basis”).

Continue Reading Judge Posner’s “Dictum” on “Dicta”

Thanks to Tom Kirkendall for his post on his Houston’s Clear Thinkers blog to a 102 page opinion (available here also) issued by Dallas’ Bankruptcy Judge Robert McGuire in a case that challenged the grant (and funding) of over $100 million in retention bonuses to approximately 300 highly-coveted energy traders and related management employees on the eve of Enron’s bankruptcy filing in December 2001.
Tom K. says that BAPCPA’s “recent amendments to the Bankruptcy Code limit the precedential value of the decision [because] [u]nder those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case.” Let me add two qualifications to this comment:

First, while Tom K. is right that Bankruptcy Court approval is now needed for all proposed postpetition payments of retention bonuses (even if the bonuses were authorized prepetition), BAPCPA’s amendments to new Code Section 548(a)(1)(B)(ii)(IV) do not presume that prepetition retention bonuses payments are voidable. Rather, such payments are voidable under the new Code section only to the extent that (i) the debtor “received less than a reasonably equivalent value in exchange,” and (ii) the transfers were made to “an insider,” “under an employment contract,” and “not in the ordinary course of business.” Notably, the new law does not appear to shift the burden of proof, which remains with the plaintiff/trustee as to all elements.
Second, the case has significant precedential value for a bankruptcy litigator because of the Court’s analysis (often extensive) of such bread and butter issues for a bankruptcy litigator as:

  • when an “antecedent debt” arises for preference purposes (pp. 38-43);
  • whether the “new value” defense applies (pp. 43-48);
  • whether the “ordinary course” defense applies to the preference action [N.B.: discussion of what constitutes “ordinary course” for purposes of an affirmative defense to a preference action may well become the standard in future litigation under new Code section 548(a)(1)(B)(ii)(IV) regarding whether a prepetition payment under an employee contract was in the “ordinary course”] (p.48);
  • whether the debtor “was insolvent” at the time of the transfer (both from a “balance sheet” and “equitable” perspective and from a “going concern” vs. “liquidation” perspective) (pp. 48-79);
  • whether, applying the doctrine of Moore v. Bay (the case I love to hate), there existed at least one pre-existing creditor with standing to avoid the transaction (pp. 82-84);
  • whether the bonuses, being on the eve of bankruptcy, were intentional fraudulent transfers (pp. 86-88);
  • whether the bonuses were accepted for value and in good faith under Code section 548(c) (pp. 89-94);
  • whether “reasonably equivalent” value was given in exchange (pp. 94-97).

This matter was initiated by the “Official Employment-Related Issues Committee of Enron Corporation (the “Employment Committee”), an official committee formed by the US Trustee in Enron’s bankruptcy case primarily to investigate these challenged payments and to commence avoidance litigation regarding them, as appropriate. Initially, over 300 defendants were sued, 40 of whom went to trial to defend their right to the bonuses (several of whom, the record suggests, apparently were unaware of the saying that “one who represents himself has a fool for a client and an idiot for a lawyer”).
With extensive references to the voluminous record (which included over 1,000 documentary exhibits), Judge McGuire methodically ruled that:

Continue Reading Enron’s Retention Bonuses Avoided by Texas Court as Preferential Transfers and Intentional and Constructive Fraudulent Transfers