The bankruptcy court overseeing Conseco’s massive bankruptcy case has issued a second opinion addressing the scope of a bankruptcy court’s post-confirmation jurisdiction in litigation involving the reorganized – or “New” – Conseco. In its earlier ruling (318 B.R. 425), the court concluded that it did not have jurisdiction over the reorganized debtor’s adversary…

Generally, a creditors’ committee or individual creditors seek derivative standing to sue when the debtor-in-possession (DIP) refuses to bring suit. Recently, the Second Circuit addressed a “converse situation” of first impression in In re Smart World Technologies, LLC: that is, whether derivative standing is approriate in the Rule 9019 settlement context when the debtor is alleged to be unjustifiably pursuing a claim and/or refusing to settle.
The Second Circuit’s opinion provides many important lessons to bankruptcy litigators. One is that the buck apparently stops with the debtor-in-possession when it comes to pursuing and/or settling litigation claims. Another is that zealous advocacy of your client’s interests, even when everyone–including the judge–thinks you’re a moron, sometimes pays off.
In overturning the decision of the bankruptcy court, the Second Circuit stated:

We conclude that while authority to pursue a Rule 9019 motion may, in certain limited circumstances, be vested in parties to the bankruptcy proceeding other than the debtor-in-possession, those circumstances are not present here…. We do not rule out that in certain, rare cases, unjustifiable behavior by the debtor-in-possession may warrant a settlement over the debtor’s objection, but this is not such a case.

In passing, the Second Circuit did not hide it’s displeasure at the bankruptcy court’s having apparently ruled more on emotion, than on a developed record:

[H]aving searched the record in vain for anything more than a conclusory statement from the bankruptcy court as to the merits of Smart World’s claims against Juno, we find it difficult to understand how the lower courts could have formed such a firm opinion that Smart World’s claims lacked viability.

At the Rule 9019 hearing, for instance, Smart World’s counsel stated “[w]e think Your Honor needs to make a record here, and make findings as to the range of reasonableness as to the settlement.” Counsel further offered to provide testimony as to “the factual circumstances underlying the various claims” and a “calculation based on [the witness’s] knowledge of the potential value of the claims.” The bankruptcy court brushed the offer aside, stating “[t]here’s no need for him to do that.” Even WorldCom’s counsel pointed out to the bankruptcy court that it had not heard Smart World’s explanation of its “theory of recoveries, claims and damages,” a fact that the court found untroubling….

Continue Reading When It Comes to Settlements, the Debtor in Possession Makes the Call

Two recent cases from Delaware (2005 WL 2148563) and Illinois (326 B.R. 116) remind us that a defendant’s right to a jury trial in bankruptcy litigation should be timely asserted and periodically affirmed if it is to be preserved at the time of trial. Otherwise, the judge is likely to find…

Though they likely occur far less frequently than the drafters of the Bankruptcy Code originally expected, estimation proceedings in bankruptcy are one way to convert uncertainty into certainty.
A recent decision from Delaware’s district court in the In re Federal-Mogul Global, Inc., bankruptcy case illustrates how estimation proceedings can swiftly — and conclusively — convert uncertainty into certainty, much to the chagrin of the losing parties who had toiled for years in complex litigation. The need to estimate the foreign asbestos claims arose because of a conflict between the plan’s proponents and a committee representing the interests of approximately 3,200 municipalities, school districts, hospitals, businesses, and individuals who owned and operated buildings where asbestos products manufactured by the debtor’s non-US subsidiaries were installed, and who had filed proofs of claim for damages in the debtor’s US bankruptcy case.
The Court noted the importance in bankruptcy of reducing uncertain claims to certainty, however rough that justice may be. Without much ado, the Judge fixed total liability at $9 billion, and with one decisive blow, resolved decades of potential litigation against the debtor, to the sure dismay of not only the defendants whose claims would be significantly diluted, but the many asbestos lawyers for the defense whose gravy train would soon be coming to an end.
An interesting sidenote from a procedural perspective is that — surprisingly given the magnitude of the claims involved — neither the Debtors, nor any of the Official Committees in the Chapter 11 proceeding, nor the administrators appointed in the Debtors’ United Kingdom insolvency proceedings, nor the trustees for the T&N Pension Trustees, nor any other U.S. or U.K. creditor made an appearance at the estimation hearing. Instead, the need for estimation of the foreign asbestos claims was precipitated by the conflict between the reorganization plan’s proponents and the committee representing the approximately 3,200 British municipalities and agencies. In essence, the parties who did not appear at the estimation hearing did not have a dog in the fight (though that generally never stops bankruptcy shops from sending SWAT teams in anyway to observe). Perhaps they shunned the hearing under the theory that nothing good can come from their attendance (particularly on res judicata or issue preclusion grounds) and that prudence, therefore, is the better part of valor.
In deciding that estimation was clearly appropriate in resolving this dispute between competing claimants to a limited fund, the Court explained (citations omitted):

Estimation helps the court “avoid the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions.” The Bankruptcy Code [in section 502(c)] states that estimation is necessary when liquidation outside of bankruptcy would unduly delay the administration of the case. The object of such a proceeding is to establish the estimated value of a creditor’s claim for purposes of formulating a reorganization plan. Although courts have disagreed about whether estimation is mandatory or permissive, it is apparent that the Bankruptcy Code requires an estimation in order to prevent undue delay in the administration of the estate. It is undisputed that the Personal Injury Claims are contingent and unliquidated, and that liquidation of each claim by a trial would unduly delay the administration of these cases. Moreover, the parties are attempting a plan for reorganization; thus, in accordance with the underlying principles in bankruptcy of promoting the quick and efficient administration of the estate, the estimation of the aggregate allowable amount on all United States and United Kingdom pending and future asbestos claims will be determined by this Court.

Continue Reading Estimation Proceedings: Rough Justice in a Rough World

Bankruptcy litigation is generally no lovefest, but few cases are so vicious that they spur Judges to include famous quotes commenting on the perniciousness of base hatred, vengence, resentment, delusion, lies, and “scorched earth” litigation. In In re Nartron, the Honorable Jo Ann Stevenson, Chief Judge of the Bankruptcy Court for the Western District…