Recent Case Law Developments

Subscribe to Recent Case Law Developments via RSS

Blogging has enabled me to meet many people I otherwise likely would never have met.  On such person is Yitzhak Greenberg, a bankruptcy attorney in New York City who clerked for Judge Arthur Gonzalez and whose practice is focused on all aspects of bankruptcy (including the representation of both debtors and creditors).  Yitzhak is passionate about contributes to the advancement of our understanding of complex bankruptcy law issues.  Among other things, he has written for The Bankruptcy Strategist and the Norton Bankruptcy Advisor and has participated in panels sponsored by the PLI and Law Journal Newsletters.  He can be reached at YitzhakGreenberg@gmail.com or YGreenberg@bgandg.com.

Yitzhak has long taken an interest in the bankruptcy jurisprudence expounded by the US Supreme Court.  His discussion in the July 2011 issue of the Norton Bankruptcy Advisor, entitled Credit Bidding After Philadelphia Newspapers: The Fat Lady Has Not Sung, merited citation by the Radlax petitioner in its opening merits brief on the subject of credit bidding.

Yitzhak now graciously offers, through this guest post, an analysis of whether a bankruptcy court can enter a final order in a Stern proceeding with the parties’ consent.  Yitzhak shows that the seemingly obvious answer is anything but.  His discussion is a good preview of the issues that the Supreme Court will address this coming term in Bellingham (see also Weil Bankruptcy Blog for further background into case).  

The famed Professor Karl Llewellyn equated the study and practice of law to the boy in the nursery rhyme who jumps into a bramble bush, thereby scratching out his eyes, and then summons "all his might and main" to jump into a second bush, thereby having them scratched back in.  Yitzhak in this guest post offers "a modest proposal" out of the bramble bush through amendments to the local district courts’ standing orders of reference.  Still, even if Courts were to adopt Yitzhak’s proposal, thereby avoiding further needless brain damage on the issue, the Supreme Court will rule on the issue, thus allowing us to both have the bramble bush and eat it (as suggested by John Heywood in his book of proverbs in 1546).

Special thanks to Yitzhak for offering to share his wisdom with readers of this blog.  My blogging has been a definite casualty of a busier work schedule and pretty mischievous twin boys (now five years older than in this post).  I hope Yitzhak’s second guest post (first one on "Stub Rent") encourages other guest post submissions (and his return).  With total page views on the blog to date at over 750,000, it’s a good way to hit one’s target audience.Continue Reading A Guest Post by Yitzhak Greenberg: “Deeper into the Darkling Abyss: The 5th Circuit joins the 6th and 7th Circuits in Finding that Consent Cannot Cure A Bankruptcy Court’s Stern Infirmity”

A 7th Circuit opinion authored by Chief Judge Easterbrook last week had me again looking across the street at 203 North LaSalle and wondering whether the US Supreme Court will ever finally decide whether there is a “new value” exception to the absolute priority rule (which requires that when an unsecured creditor class…

Whatever you may think about the fact that Refco’s outside corporate counsel, Joe Collins, was convicted on 5 criminal counts and sentenced today to 7 years in prison, one has to wonder how the system got so turned upside down on the civil side that while the law firm’s lead lawyer is torched in criminal court, his firm is summarily dismissed from a civil case for precisely the same conduct on a simple motion to dismiss (based on a theory that the Refco trustee lacked standing to bring suit to recover for damages arising from a fraudulent scheme devised and carried out by Refco’s own senior management).  One could argue that this result is unique to the Second Circuit (and the Seventh) because of the Wagoner decision and its progeny (which are not followed in the First, Third, Fifth, Eighth, or Eleventh Circuits).  Even in those circuits, however, management’s wrongful conduct has been imputed to the corporation under the in pari delicto doctrine to just as effectively knock the props out from civil actions involving some of the most spectacular commercial frauds of the century.  Of course, all this may change if the NY Court of Appeals has an epiphany and, in response to the Second Circuit’s 8 question-long certification of 12/28/09 in the Refco trustee’s appeal, completely rewrites the Wagoner rule (and the in pari delicto doctrine too).

DSI’s Cathy Vance has long been this blog’s resident guru.  In her first post, she unlocked the mystery behind the origin of BAPCPA’s section 1102(b)(3).  On BAPCPA’s second birthday, she surveyed BAPCPA’s unruly landscape as it entered its terrible two’s and drove record numbers of readers here.  The next year, on the third anniversary of BAPCPA’s passage, as anger and frustration turned to resignation, she untangled the purpose and application of the new Bankruptcy Rule 6003. 

Recently, Cathy has turned her attention to understanding how the in pari delicto defense morphed into one of the more powerful and complete defenses to professionals that are complicit–through their negligence–in a company’s wrongdoing.  In last November’s issue of the ABI Journal, Cathy wrote an article entitled, In Pari Delicto, Reconsidered, in which she posited–as none had before–that the in pari delicto doctrine is being inappropriately used by federal courts to supplant traditional tort law defenses that derive from state, not federal, law.

Cathy has graciously expanded upon the theme of her ABI article and written exclusively for this blog a follow up piece entitled In Pari Delicto and a Jurisprudential House of Cards, for which I am very grateful.  So without further ado, heeeeeeerrrrrreeee’s Cathy! ……..

© Steve Jakubowski 2010Continue Reading Cathy Vance, Resident Guru, Calls Expansive Invocation of the In Pari Delicto Defense a “Jurisprudential House of Cards”

[1/13/10 Update:  Thanks to Steve Sather from A Texas Bankruptcy Lawyer’s Blog for his comment below.  In his post today, he discusses in greater length the opinion of Judge Edith Jones in holding that "related to" jurisdiction exists over a non-debtor dispute if the indemnity right is contractually based, and hence had already "accrued."  Lone Star Fund V (US), LP v. Barclays Bank, PLC, No. 08-11038 (5th Cir. 1/11/10) (pdf).

To further complicate matters, take a look at a recent decision of Judge Laurel Isicoff, who held that regardless of whether the Pacor test was satisfied, the court had "related to" jurisdiction over a third party franchisor’s claims against the debtor’s principal where the proceeding arose out of same core of facts as one whose outcome could have a Pacor-type effect, and thus the prerequisites for exercise of "supplemental jurisdiction" were satisfied. Century 21 Real Estate, LLC v. Prestige Realty Group of Ohio & Florida, LLC (In re Prestige Realty Group of Ohio & Florida, LLC), 2009 WL 3817297 (Bankr. S.D. Fla. 11/13/2009).  Respectfully, Judge Isicoff’s ruling is not the law in the 7th Circuit, however, so be sure to check your local practice first.  See, Banc of America Inv. Servs., Inc. v. Fraiberg (In re Conseco, Inc.), 305 B.R. 281 (Bankr. N.D. Ill. 2004) (bankruptcy court cannot exercise supplemental jurisdiction under § 1367(a) because it is not a district court.and such exercise would amount to "related to related to" jurisdiction).  It’s also a position at odds with 3rd Circuit’s decision in In re Exide Techs., 544 F.3d 196 (3d Cir. 2008), which expressly rejected the “intertwinement” theory under which otherwise non-core disputes among non-debtors could be treated as core bankruptcy matters based on the extent of their "intertwinement" with core disputes between those parties and the debtor.]

***

As noted in this post last June, it is fair to assume that the U.S. Supreme Court would not permit a bankruptcy court to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  In perhaps the final bankruptcy decision of 2009, the Third Circuit rang in the new year with yet another important case–consistent with this general principle– interpreting the scope of a bankruptcy court’s subject matter jurisdiction.  W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 2009 WL 5151089 (3d Cir. 12/31/09) (pdf).  In it, the Third Circuit both reaffirmed its previous holdings on the limited scope of a bankruptcy court’s "related to" jurisdiction and further held that Code section 105(a) does not expand a bankruptcy court’s subject matter jurisdiction beyond its statutory boundaries in 28 U.S.C. § 1334(b) (which grants bankruptcy courts "original but not exclusive jurisdiction of all civil proceedings arising under [the Bankruptcy Code] or arising in or related to a case under [the Bankruptcy Code]").

The Third Circuit’s seminal opinion in Pacor, Inc. v. Higgins, 743 F.2d 984 (1984), is the most often cited case on the scope of a bankruptcy court’s so-called "related to" jurisdiction under 28 U.S.C. § 1334(b). The "Pacor test," which has been nearly universally adopted by federal Courts of Appeal around the country, provides:

[In] determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.  Thus, the proceeding need not necessarily be against the debtor or against the debtor’s property.  An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.  Pacor, 743 F.2d 994.

The U.S. Supreme Court, too, looked to Pacor in its first discussion of the scope of a bankruptcy court’s "related to" jurisdiction and agreed with Pacor that a bankruptcy court’s "related to" jurisdiction is broad, but "cannot be limitless."  Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995).

The Third Circuit fine-tuned the Pacor test in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002), stating that “[t]he test articulated in Pacor for whether a lawsuit could ‘conceivably’ have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.”  Id. at 382.  Put another way, there’s no "related to" jurisdiction over a third-party claim "if there would need to be another lawsuit before the third-party claim could have any impact on the bankruptcy proceedings."  W.R. Grace, 2009 WL 5151089 at *5 (Op. at 15). 

The Third Circuit further refined the boundaries of the Pacor test in In re Combustion Engineering, Inc., 391 F.3d 190, 225 (3d Cir. 2004), when it held that consideration of additional elements like "unity of interest," "shared production," and "shared insurance" among the debtor and its non-debtor affiliates failed to establish "related to" jurisdiction over third party claims against the non-debtor affiliates "when the third party claim did not directly result in liability for the debtor," but only a potential claim for contribution that "would require the intervention of another lawsuit to affect the bankruptcy estate."  Id. at 231-32.  (Op. at 16-17).

In the recently decided W.R. Grace case, the Third Circuit reaffirmed its holdings in Pacor, Federal-Mogul, and Combustion Engineering, and held that an injunction granted in 2001 (shortly after Grace filed for bankruptcy) against  further prosecution of a lawsuit against Grace for injuries caused by exposure to asbestos at a Montana mine over a 37 year period would not be extended to the State of Montana, who had also been sued by the same plaintiffs for negligence in failing to warn them of the asbestos risks at the mine.  The Montana Supreme Court held that the State of Montana in fact owed the plaintiffs a duty of disclosure of potentially adverse health risks, and so remanded the case back to the trial court for a "determination by the fact-finder of whether the State breached its duty to the [plaintiffs], and if so, whether such breach caused the damages claimed by them."  (Op. at 7).  Grace subsequently moved in the Bankruptcy Court to expand the 2001 injunction to include the plaintiffs’ now remanded actions against the State of Montana.  The bankruptcy court refused to so extend the injunction, and the Third Circuit affirmed, holding:

In short, our recently reaffirmed precedent dictates that a bankruptcy court lacks subject matter jurisdiction over a third-party action if the only way in which that third-party action could have an impact on the debtor’s estate is through the intervention of yet another lawsuit. Here, we are presented with state court actions that have only the potential to give rise to a separate lawsuit seeking indemnification from the debtor. Accordingly, we must affirm the Bankruptcy and District Courts’ conclusion that subject matter jurisdiction does not exist for the purpose of expanding the § 105(a) injunction to preclude the Montana Actions.  (Op. at 18).

Significantly, the Third Circuit also rejected an alternative ground for expansion of the bankruptcy court’s subject matter jurisdiction on the basis that "a bankruptcy court has subject-matter jurisdiction to adjudicate a motion in an adversary proceeding initiated by a debtor in its own bankruptcy case, regardless of the subject matter of that motion."  (Op. at 21).  Citing Celotex, the Third Circuit flatly rejected this opportunity to expand upon the bankruptcy court’s subject-matter jurisdiction, stating:Continue Reading 3d Circuit Further Explains the Limited Scope of a Bankruptcy Court’s Subject Matter Jurisdiction

To Shakespeare’s Juliet, "a rose by any other name would smell as sweet."  To Gertrude Stein, "a rose is a rose is a rose."  In an article referenced here, titled "When Is a Lease Not a Lease? Seventh Circuit Adopts ‘Substance Over’ Form Test for True Lease Determination," Jones Day’s Mark Douglas and  David Hatch reviewed the first of the 7th Circuit’s rulings on whether UAL’s airport leases were "true leases" or secured financings.

Last week, Judges Manion, Easterbrook, and Bauer, in the final installment of their "trilogy" on whether "a lease is a lease is a lease by any other name," concluded that the answer — at least for airport leases — depends on whether "the ground and facilities arrangements were addressed in separate documents."  United Air Lines, Inc. v. HSBC Bank USA (In re United Air Lines, Inc.), 2006 WL 1841461 (7th Cir. 7/6/06) (Manion, J.) (pdf).  Judge Manion, writing on behalf of the same unanimous panel that decided the previous two installments of the trilogy, summarized the facts and issues presented as follows:Continue Reading When Is a Lease a “Lease”? The 7th Circuit’s “Trilogy of the UAL Leases” Tackles This Perennial Question

Congratulations are in order for fellow blogger and friend, Francis X. Pileggi of the Delaware Litigation Blog, who’s made some new law in Delaware. As he reports here, the Delaware Supreme Court issued an opinion on March 14 (which favored Francis!) that is “must reading for anyone who drafts or needs to interpret an arbitration clause in an agreement governed by Delaware law.” Francis writes that in the opinion —

Delaware’s highest court affirmed the trial court and with pithy reasoning addressed the issues of: (i) who decides arbitrability if the agreement incorporates the rules of the American Arbitration Association (AAA); and (ii) based on the terms of the specific agreement at issue, whether the claims raised were governed by the arbitration clause. The Court determined that based on the terms of the particular agreement involved, the parties intended that the trial court determine the threshold issue of arbitrability, and that likewise injunctive relief should be decided by the trial court. CAVEAT: If the parties to an agreement simply incorporate the rules of the AAA without more, one should be aware that the AAA will likely be empowered to not only decide the issue of arbitrability, but the AAA will also be the forum to dispense equitable relief.

Coincidentally, just before reading Francis’s post on the ruling, I was reading this opinion from the Third Circuit on whether an arbitration proceeding violated the automatic stay, and — if so — whether both the panel’s deliberations and the resulting award were void. Acands, Inc. v. Travelers Casualty and Surety Co., 435 F.3d 252 (3d Cir., 1/19/2006).
What most caught my eye about this case, however, was the composition of the panel, which included former Third Circuit Judge — now Supreme Court Justice — Samuel A. Alito and Judge Milton I. Shadur, district court judge for the Northern District of Illinois (and himself a Chicago institution). A bankruptcy case resolved by these two judges seemed worth reading for this reason alone.
While not a “must read,” it’s a good read to be sure, for it reaffirms Judge Cristol’s reminder (mentioned here) that “a little neglect may breed mischief.” Here, it appears the only thing Travelers needed to have done to preserve the hard-fought benefits of painstaking arbitration proceedings (initiated by the debtor!) was to have filed a lift stay motion in the bankruptcy court in advance of filing a counterclaim against the debtor in those proceedings. Given that the debtor had initiated the arbitration proceedings, it is likely the bankruptcy court would have entered an order lifting the stay. Because Travelers failed to do so, the Third Circuit ruled, the proceeding was rendered a nullity, and the debtor — having lost at arbitration — was given a second bite at the apple.
In reaching this seemingly draconian result, the Third Circuit noted that the result was compelled because “no equitable power to grant relief from the automatic stay rests with the District Court. To the extent that an equitable exception to the automatic stay exists, it rests solely in the Bankruptcy Courts.”
Judge Alito wrote this about the nature of the case, and of the results compelled by the automatic stay:Continue Reading Arbitration Clauses in Delaware and the Third Circuit Recently Examined

Knowing when a bankruptcy order is final and appealable is not always obvious in a bankruptcy case, as demonstrated by a recent decision from the Second Circuit in In re The Bennett Funding Group, Inc., 2006 WL 436006 (2d Cir., 2/24/06). You may recall The Bennett Funding Group, which in 1997 had earned the dubious distinction of being the largest Ponzi scheme in history. This scheme was effected through sales of bogus equipment leases, often pledged to multiple parties as collateral, and resulted in nearly $700 million in losses to approximately 12,000 hapless investors. It also landed Patrick Bennett, the Group’s CFO, 30 years in jail.
Here, after nearly six years of litigation over who had right to insurance proceeds to cover shortfalls in lease collections, the bankruptcy trustee and the settlement class in the District Court for the Southern District of New York reached an agreement with certain lease collection insurers for payment of $27.5 million in exchange for full releases. The agreement, however, was expressly conditioned upon the occurrence of two events:

  • first, entry of an order by the Bankruptcy Court for the Northern District of New York approving the settlement “substantially in the form annexed” (which proposed form of order was styled as a “Final Order and Judgment Pursuant to Rule 54(b) of the Federal Rules of Civil Procedure and to Rules 7054(B) and 9019 of the Federal Rules of Bankruptcy Procedure Approving Settlement and Compromise of Trustee’s Claims Against the Settling Defendants”);
  • second, entry of a judgment approving the settlement agreement in the parallel class action case pending in the Southern District of New York.

According to the Second Circuit, the relevant facts were as follows:

  • On May 22, 2003, the Bankruptcy Court issued a “Memorandum Decision, Findings of Fact, Conclusions of Law, and Order” on May 22, 2003 that granted the Trustee’s 9019 motion and authorized the Trustee to consummate a settlement agreement.
  • On June 12, 2003, the District Court for the Southern District of New York in connection with related class action litigation also approved the settlement agreement pursuant to a “Final Order and Judgment.” The Southern District then remanded the case to the Bankruptcy Court for the distribution of settlement proceeds.
  • On June 17, 2003, the objectors to the 9019 settlement moved to alter or amend the 9019 order pursuant to Rules 9023 and 9024 of the Federal Rules of Bankruptcy Procedure (which adopt Fed. R. Civ. P. 59 and 60, respectively).
  • On June 23, 2003, pursuant to Rule 8002(c) of the Federal Rules of Bankruptcy Procedure (which permits a motion to extend the time to file a notice of appeal, but if the motion is filed untimely, requiring “excusable neglect”), the objectors moved the Bankruptcy Court for an extension of time to file a notice of appeal from the 9019 Order and filed a notice of appeal from that Order.
  • On July 10, 2003, the Clerk of the Bankruptcy Court issued a certificate of non-compliance to the objectors, noting that the notice of appeal from the 9019 Order was untimely under Rule 8002.
  • On February 9, 2004, the Bankruptcy Court ruled that the 9019 motion arose as “a discrete matter within the larger bankruptcy case,” that the appeal was not timely filed, and that the objectors’ other requests relief lacked merit.
  • On February 2, 2005, the Northern District Court affirmed the bankruptcy court’s judgment.

The Second Circuit affirmed, rejecting the appellants’ arguments that “the Bankruptcy Court’s 9019 Order did not constitute a final order [because]: (i) the 9019 Order did not conform to the proposed Final Order and Judgment that was attached to the Agreement; and (ii) the Agreement upon which it was based was contingent upon the Southern District Court’s entry of a final judgment approving the Agreement.” The Second Circuit ruled first that “nonconformity of the 9019 Order with the stipulated form of judgment did not affect the finality of the 9019 Order, which is final on its face.” It then ruled, consistent with the Bankruptcy Court’s ruling, that “the approval of the Bankruptcy Court and the approval of the Southern District Court were each ‘distinct’ and that each approval ‘was, itself, a final order.’”
In conclusion, the Second Circuit summed up its views on finality as follows:Continue Reading 2d Circuit Rules that 9019 Order Approving Settlement Is Final Upon Entry Even Though Separate Stipulated Judgment Hadn’t Been Entered and Condition Precedent Hadn’t Been Satisfied

Below you’ll find our weekly roundup for the week ending 11/27/05 of some recently decided bankruptcy cases. More to follow, so stay tuned!
Automatic Stay – Nondebtors: In re Gemini Equipment Business Trust, 2005 WL 3050174 (M.D. Pa., 11/14/05)
Claims Objections – Choice of Law – Circuits’ Split: Global Indus. Techn., Inc. v. Ash Trucking Co., Inc. (In re Global Indus. Techn., Inc.), 2005 WL 3074184 (Bankr. W.D. Pa., 11/2/05)
Claims Objections – Evidentiary Issues // Derivative Suits – Standing: Carey v. Ernst, 2005 WL 3018334 (S.D.N.Y., 11/8/05)
Claims Objections – Preclusion: Kadish v. K-Mart Corp., 2005 WL 3077605 (N.D.Ill., 11/14/05)
Discharge – Willful and Malicious: Norm Gershman’s Things to Wear, Inc., v. Peterson (In re Peterson), 2005 WL 3046491 (Bankr. D. Del., 11/15/05)
Fee Applications – Objections: Hennigan Bennett & Borman LLP v. Goldin Associates, LLC (In re Worldwide Direct Inc.), 2005 WL 3071275 (D. Del., 11/16/05)
***Continue Reading Notable Reported Cases for the Week Ending 11/27/05

Here’s our popular weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 11/20/05. Enjoy!
Administrative Claim – Critical Vendor – Setoff: In re TSLC I., Inc., 332 B.R. 476 (Bankr. M.D. Fla., 11/1/05)
Plan – Feasibility: In re Repurchase Corp., 332 B.R. 336 (Bankr. N.D. Ill., 10/31/05)
Plan – Third Party Release: Simmons v. 22 Acquisition Corp., 2005 WL 3018726 (E.D. Tex., 11/10/05)
Preference – Ordinary Course: In re Terry Manufacturing Company, Inc., 2005 WL 3003701 (M.D. Ala., 11/9/05)
Setoff – Mutuality: Universal Guaranty Life Ins. Co. v. Health Receivables Management, Inc. (In re Health Management Limited Partnership), 332 B.R. 360 (Bankr. C.D. Ill., 11/2/05).
Bonus Supplement: Reed Smith’s guide to recent bankruptcy decisions.Continue Reading Notable Reported Cases for the Week Ending 11/20/05