Here are the picks of the month for November 2007, a month when we Americans reflected on all there is to be thankful for.  The book to the right, The Moment of Truth in Iraq: How a New "Greatest Generation" of American Soldiers is Turning Defeat and Disaster into Victory and Hope, contains a remarkable set of essays by a very brave freelance journalist, Michael Yon, and reminds us of all we have to be thankful for.  Michael has been embedded with the US troops in Iraq and Afghanistan for several years now and his searing daily narratives of events in Iraq and Afghanistan provide a unique and important perspective to the advances, setbacks, and challenges faced in these conflicts.  This book is required reading whether you’re for, against, indifferent, or ambivalent about America’s present wars. 

Here’s a link to the 108 customer reviews on Amazon.com, 94 of whom gave it 5 stars.  General David Petraeus said this about Michael’s book: 

He’s fearless … provides a candid, soldier’s-eye view … from the very unique perspective of being there with them for weeks and months at a time … delv[ing] deep into the human component.

Michael’s blog (now an "online magazine") has long been listed at the end of my blogroll.  Please take the time to read Michael’s blog posts and to lend support to his ventures, for which you are guaranteed he’ll be most thankful.

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Continue Reading Picks of the Month: Required Bankruptcy Reading for November 2007

Often, the only unencumbered assets left after a company goes bankrupt are potential causes of action against deep-pocketed professionals that witnessed or contributed to the debtor’s demise.  Of course, it’s one thing to allege misconduct; proving it (as noted here) is a horse of a different color.  A trilogy of recent decisions from the 7th Circuit Court of Appeals, however, demonstrates the increasing impatience of courts with plaintiffs who, as the 7th Circuit’s Chief Judge Frank Easterbrook recently put it in one of these cases, sue the debtor’s professionals in an “attempt to find a deep pocket to reimburse investors for the costs of managers’ blunders.”  HA2003 Liquidating Trust v. Credit Suisse Secs. (USA) LLC, 517 F.3d 454 (7th Cir. 2008) (pdf)

The latest failed effort is found in a decision authored by Judge Diane P. Wood, as compassionate and fair–and inspirational!–a judge as you’ll find (and possibly the next Supreme Court justice), in Joyce v. Morgan Stanley & Co., Inc., 2008 WL 3844111 (7th Cir. 8/19/08) (pdf).  In this case, Morgan Stanley, once the advisor to RCN, was engaged by 21st Century Telecom Group in late 1999, just before the telecom industry busted, to serve as 21st Century’s financial advisor in an ill-fated stock-for-stock merger with RCN.  As part of its engagement, Morgan Stanley delivered a “fairness opinion” to 21st Century’s board.  Between the 12/12/1999 date of the merger agreement and the 4/28/2000 effective date of the merger, RCN’s stock price plummeted and 21st Century’s stockholders ended up left holding the bag.

Nobody, however, leaves Ed Joyce–a famed Chicago commercial litigator–holding the bag and gets away with it, at least not without a good fight.  The problem for Ed, however, was finding a deep pocket to compensate him and his fellow stockholders for their losses, not an easy task particularly since they first filed suit more than six years after the merger’s effective date.  In their one-count complaint, which alleged “constructive fraud” on the part of Morgan Stanley, Ed and his fellow plaintiffs argued that Morgan Stanley had a duty to advise 21st Century’s shareholders about how to minimize their exposure to a potential drop in RCN’s stock price following execution of the merger agreement.  Morgan Stanley didn’t, they alleged, because that would likely have caused RCN’s stock price to decline.  Further, they alleged, Morgan Stanley didn’t want that to happen because of its conflict-of-interest stemming from the fact that it had served as RCN’s financial advisor before the merger.

Judge Wood, together with Judges William J. Bauer and Terence T. Evans, agreed that Ed and the other shareholders had standing to sue because their claims were direct, not derivative.  That’s all they agreed with, however.   While everyone recognized that in order to tag Morgan Stanley with liability, Morgan Stanley had to owe the 21st Century shareholders a fiduciary duty, here’s where the wheels fell off the bus because the 7th Circuit would not agree that Morgan Stanley owed the 21st Century shareholders a duty of full and fair disclosure.  To the 7th Circuit, the duties of Morgan Stanley were rooted in its engagement agreement, and no extra-contractual fiduciary duty existed to require Morgan Stanley to advise the 21st Century shareholders about hedging strategies that might minimize their exposure to fluctuations in the value of RCN stock.  Judge Wood wrote:

Continue Reading 7th Circuit Nixes Attempts to Hold Investment Bankers Responsible for Matters Beyond Their Engagement Agreements

Here are the picks of the month for October 2007.

To the right is a Stu’s Views cartoon by Stu Rees, and was the feature cartoon for Halloween 2007 on Tom Kirkendall’s Houston Clear Thinkers Blog under the blog post entitled, "A Halloween Harbinger?"

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Continue Reading Picks of the Month: Required Bankruptcy Reading for October 2007

As everyone watching this year’s entertaining (and sleep-depriving) Beijing Olympics knows, records are made to be broken.  Blogging records are no exception, with my latest post on Judge Markell’s bombshell ruling nearly, but not quite, breaking with 1,482 page views this blog’s two-day record of 1,519 page views from April 2006 (featuring BAPCPA-Guru Cathy Vance’s roundup of BAPCPA’s "terrible two’s").  Cathy’s post, too, holds the single-day "Ruthian" record of 1,074 page views.  Thanks to all for tuning in and continuing to inspire me to blog!

With the weekend upon us, here’s another in the picks of the month series, this one covering September 2007.  Special thanks to the firm’s phenomenal interns, 3L-Jamie Johnson and Barnard-bound Marie Whittaker, for their help in assembling this post.

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Continue Reading Picks of the Month: Required Bankruptcy Reading for September 2007

At the end of last May, Chicago’s ten bankruptcy judges gathered at a day-long, TMA-sponsored event and shared their candid, sometimes off-the-cuff, non-binding views on various hot bankruptcy topics.  One of the liveliest panel discussions focused on various issues arising in bankruptcy 363 sales.  In it, former Bankruptcy—now District Court—Judge David H. Coar asked whether any of the bankruptcy judges on the panel (or in the room) would refuse to recognize as the high bidder in a 363 sale a secured creditor who credit bid the full amount of its secured claim.  Everyone in attendance agreed, without fanfare, that if the credit bid reflected the highest bid for the assets, the secured creditor would be declared the winning bidder, even if the creditor was undersecured. 

Judge Coar didn’t ask whether the winning credit bidder would, just like any winning cash bidder, take the assets free and clear of all junior liens, claims, and encumbrances, but all in attendance likely would have conceded that point too.  In the end, however, Chief Judge Carol Doyle emphatically cautioned, don’t take anything for granted because Code Section 363 is a statutory provision, and it’s VERY important to review the statute itself in every case, because a bankruptcy judge’s job is to interpret and enforce the statute, not the will of the parties.

When it comes to statutory construction in bankruptcy, as noted in this post, Nevada’s Judge Bruce Markell—probably the only judge in US history to have Wittgenstein’s entire collected writings on a shelf in his chambers—is one of the best.  So when Judge Markell says that Section 363 doesn’t say what everyone thinks it says, now that’s news!  Surprisingly though, until today, nothing has yet been publicly reported on Judge Markell’s decision (issued late May and released for publication last month), though rumor has it that Arizona’s Bankruptcy Judge Randolph Haines, himself no philosophical slouch (having a Yale Ph.D in philosophy), is planning a spirited counter-assault on Judge Markell’s reasoning in an upcoming Norton’s Bankruptcy Law Advisor release.

So what is it that Judge Markell has said that has judicial colleagues calling him "just plain nuts," that has bankruptcy lawyers consulting Nostradamus seeking confirmation of Baird & Rasmussen’s prediction of the End of Bankruptcy, and that has title companies refusing to insure cases of lien stripping in bankruptcy asset sales?  It’s found not in his 1992 scholarly article, The Case Against Breakup Fees in Bankruptcy, but in his judicial opinion in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 2008 WL 2840659 (9th Cir. BAP 7/18/08) (pdf), where—joined by the Eastern District of Washington’s Chief Bankruptcy Judge Frank Kurtz and Idaho’s Chief Bankruptcy Judge Jim D. Pappas, themselves judicial heavyweights in their own right—he wrote as follows:

Continue Reading Judge Markell’s Bombshell BAP Ruling That a Winning Credit Bid in a Bankruptcy 363 Sale Doesn’t Strip Off Junior Liens Confirms Ominous Predictions That the End of Bankruptcy Is Near!

Houston draws many visitors looking for the hottest and spiciest foods in Texas.  A recent Houston tradition is the “Houston Hot Sauce Festival,” which last September for its 8th annual fest drew over 40 competitors statewide.  So who’s got the hottest sauce in Texas?  The festival’s “2006 People’s Choice Award” for the festival’s hottest sauce went to the sauce aptly-named “Stupid Hot aka Unbearable.”  Sadly, the planners report, “due to a combination of personal tragedy and the general economy, it is not feasible to put on the festival this year.”  To the right is last year’s official festival t-shirt, an eerie premonition of this year’s salmonella-laced deadliest batch.

Houston also is home to one of the hottest bankruptcy districts, whose judges include Judge Marvin Isgur, whose opinions have stirred much controversy on several fronts, and Chief Judge Wesley Steen, who last year completed his term as the first sitting judge to serve as President of the American Bankruptcy Institute.  Much personal gratitude is due Judge Steen for his recommendation of this blog as a resource to incoming judicial clerks, and for the establishment of the ABI Bankruptcy Blog Exchange under his watch, which includes this blog at the top of the list.

As often observed on this blog, Houston’s Judge Isgur has laid enough of his own special hot sauce to send debtors, creditors, and lawyers alike rushing for the exit.  Early on, I pinned the classic “Don’t Mess with Texas”  label on him for his pathbreaking decision tossing poor Mother Hubbard from her cupboard (though he later reversed himself on other grounds).  Here, he cited to Abe Lincoln’s stirring 278-word Gettysburg address to find meaning in 278 words of statutory gibberish.  And here (at p.94, In re Porcheddu, 338 B.R. 729), his extreme hot sauce cost a prominent Texas firm $65,000 for trying to pull the wool over his keen eyes.  Finally, early last year, at a luncheon sponsored by the Houston Association of Debtors Attorneys, Judge Isgur served up some more hot sauce after a credit counseling firm’s CEO spouted off about how his firm never hires bankrupts, thus prompting Judge Isgur to launch this investigation into that firm’s hiring practices and whether they violated the anti-discrimination provisions of Bankruptcy Code section 525(a).  After laying the hot sauce on thick at this status conference, the CEO finally conceded in these sworn affidavits he was effectively “out to lunch” (which he technically was) when it came to his having real knowledge of the firm’s hiring practices (and that, moveover, he wasn’t trying to be cute in earlier affidavits to avoid possible sanction).

Judge Steen, for his part, also has his own fiery sauce for lawyers, as reported last year by the WSJ Law Blog’s founder, Peter Lattman.  And, of course, who can forget the fiery rebuke of Countrywide and its lawyers delivered by another Houston Bankruptcy Judge, Jeff Bohm, for “negligent bungling” that came within a hair’s breadth of “full-blown bad faith.”  Finally, let’s not forget Houston Bankruptcy Judge Letitia Clark’s flaming sauce served in issuing a TRO that enjoined the Russian government’s planned auction of Yukos (as reported at length in these series of articles by Houston’s Clear Thinker, Tom Kirkendall).  Given recent events in Georgia, she’s looking braver and braver by the minute.

So, in the end, just as Houston’s Hot Sauce Festival’s promoters warn that great sauces may be obscured by ordinary labels, don’t let the calm and friendly demeanors of Houston’s bankrutpcy judges fool you.  One dose of their own respective blends and you’ll feel about as “sharp as a mashed potato,” as they say in Texas.

All this is a long-winded late Friday afternoon introduction to the real point of this post, which is Judge Steen’s latest decision in In re Premiere Holdings of Texas LP, 2008 WL 2963041 (Bankr. S.D. Tex. 7/28/08) (pdf).  This long running case began shortly after 9/11 and was one of the first sub-prime mortgage debacles, eventually landing the founders in hot water, according to the criminal complaint described here by Tom Kirkendall.  Coincidentally, one of the founders, David Lapin, just pled guilty to criminal charges this past Monday, and the trial of his two other partners is set for later this month (looks like the dominant strategy ruled this prisoner’s dilemma).

Meanwhile, Premiere’s reorganization plan, confirmed on June 18, 2002, has run its course, and the liquidating trustee made its final distribution to creditors on 4/14/08.  Of the millions distributed, $25,969 in checks remained unclaimed.  Because the plan didn’t economically provide for disposition of these unclaimed funds, the liquidating trustee filed a motion to deposit the funds into the Court’s registry.  Despite the lack of response or opposition, Judge Steen found himself in a quandary since “deposit of unclaimed funds into the registry of the court is only available under Bankruptcy Code § 347(a) and only for unclaimed funds in chapters 7, 12, and 13.”  Conversely, unclaimed funds in a chapter 11, he noted, is governed by Bankruptcy Code § 347(b), which requires that the funds revert to the debtor or to the entity acquiring the assets of the debtor under a plan.

Continue Reading Houston’s Chief Judge Wesley Steen Refuses to Let Unclaimed Funds Escheat to the Cheats

With classic reorganizations a relic of the past, and retail bankruptcies and distress sales way up, the question of what assets may be sold in a retailer’s 363 auction of its primary business assets early in the case is of paramount importance.  One of Delaware’s newest Bankruptcy Judges, Kevin P. Gross, addressed this issue last week in the Whitehall Jewelers’ bankruptcy case, one day before the bid deadline and ten days before the scheduled August 8th auction.  In re Whitehall Jewelers Holdings, Inc., 2008 WL 2951974 (Bankr. D. Del. 7/28/08) (pdf).  The Deal’s Jamie Mason provided this background to the auction:

A Delaware judge has approved the bidding procedures for bankrupt jewelry retailer Whitehall Jewelers Holdings Inc.’s going-out-of-business sales at all of its stores but not the stalking-horse bidder’s breakup fee. Since the breakup fee was denied, the group has reserved the right not to participate in the auction, so it’s unclear if there will be a stalking-horse bidder for the sale. The stalking-horse bidders had agreed to pay Whitehall, which sells diamonds, gold, precious and semiprecious jewelry and watches, 55.5% of the value of the inventory if it’s between $169 million and $177 million. However, if the inventory is worth between $138 million and $145 million, Whitehall will receive 53.5% of the value. This means that Whitehall could receive between $73.8 million and $98.2 million, depending on what its inventory is worth.

With much riding on the value of the inventory, Judge Gross was asked to determine whether it is permissible under Code section 363(f)(4) to sell approximately $63 million of consigned goods in inventory from Whitehall’s 373 retail stores in a 363 sale?  The consigned goods weren’t segregated at the stores, and the vendors themselves split into two general groups: 

  • Those who failed to file financing statements and those who filed improperly or who failed to comply with UCC Article 9, including those who did not refile when Debtors changed their name (too conveniently so, charged these consignment vendors) from "Whitehall Jewellers" to "Whitehall Jewelers"; and
  • Those whose consignments are governed by UCC Article 2 and therefore are subject to the claims of Debtors’ creditors.

Section 363(f)(4) was implicated because the Debtors argued that the consignment vendors’ interests in the consigned goods is in bona fide dispute within the meaning of Section 363(f)(4), which permits assets sales free and clear of any third party interest in the property only if such interest "is in bona fide dispute." 

After reviewing various cases within and outside the district, Judge Gross concluded that no sale of the consigned inventory was permitted under Code section 363(f)(4) "without first demonstrating to this Court that the consigned goods are property of the estate." Judge Gross, however, would only resolve that issue by way of a full-blown adversary proceeding and not through a contested sale motion under Section 363. While recognizing the burden on Whitehall from having to initiate over 120 adversary proceedings (i.e, complaints) in the short time available before the sale, Judge Gross concluded that he had no choice in the matter, stating:

Continue Reading Delaware’s Judge Kevin Gross Rules That, Absent Adequate Protection, Whitehall’s Asset Sale May Not Include Consigned Jewels

The mantra of the real estate world is that the three most important factors in determining the value of a piece of property are "location, location, location." 

Justice Clarence Thomas (whose sense of humor is surely unappreciated, as my former suitemate and friend Mike Coffield proved one memorable night), writing for a 7-2 majority, today suggests that this mantra should not be forgotten in interpreting Bankruptcy Code provisions.  In Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. 2008 WL 2404077 (pdf), which not surprisingly (see prior post) restricted the stamp tax exemption only to postconfirmation transfers, the Court based its decision in large measure on the particular subchapter of the Bankruptcy Code in which §1146(a) is located (i.e., "Subchapter III – Postconfirmation Matters").  (Op. at 13.)  The Court also agreed, after reviewing each side’s competing grammatical and textual interpretations, that Florida’s narrower reading was "clearly the more natural." (Op. at 7.)

The most interesting part of the case, however, is Justice Thomas’s conclusion that the decision is further compelled by application of two "substantive canons":

Continue Reading “Location, Location, Location”: US Supreme Court Holds The Stamp Tax Exemption Only Applies To Post-Confirmation Asset Transfers

Thanks to Francis Pileggi, Delaware’s premier blogger, for kindly alerting me to Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., 5/6/08), in which Vice Chancellor Strine issued a well-crafted discourse on the interplay between Delaware’s law governing corporate fiduciaries and federal bankruptcy law governing their conduct.  Francis wrote a long post quoting extensively from Vice Chancellor Strine’s opinion, which I strongly recommend you first read, and will not repeat here.

Briefly, in this case, the company’s former officer, director, and shareholder, wearing his tough guy hat as the company’s major secured creditor, unsuccessfully challenged the company’s bankruptcy filing in Chicago, with Bankruptcy Judge Jack B. Schmetterer issuing a lengthy opinion finding that (i) the former insider’s claims should be only partially recharacterized as equity, but not equitably subordinated, and (ii) most importantly for purposes of this post, the debtor’s chapter 11 filing was not in bad faith because there was a business to reorganize and the filing was a "rational reaction" to the creditor’s threat to foreclose on debtor’s business assets.  Repository Technologies, Inc. v. Nelson (In re Repository Technologies, Inc.), 363 B.R 868 (Bankr. N.D. Ill. 2007) (pdf). 

District Court Judge Amy St. Eve, who’s had one of the more interesting years as federal judge while overseeing the Tony Rezko and Lord Conrad Black of Crossharbour trials, heard the appeal in her spare time, and affirmed Judge Schmetterer’s decision in its entirety.  Nelson v. Repository Technologies, Inc., 381 B.R. 852 (N.D. Ill. 2008) (pdf).  This opinion itself is worth reading for its reminder that "[b]ankruptcy is not a ‘free-for-all’ equity balancing act" and that dicta is defined by the Seventh Circuit (see my previous post entitled, Judge Posner’s "Dictum" on "Dicta") as what a court "says" not what it "holds."  Id. at 867, 873.  As regards the latter point, Judge St. Eve concluded, "Nelson’s argument that the Bankruptcy Court’s language is dictum is defeated by his own motion requesting a finding of bad faith in support of dismissing [Repository]’s bankruptcy case."  Id., 381 B.R. at 873. 

After Judge St. Eve had ruled, Nelson backtracked and recrafted his theory of the case as a breach of fiduciary duty case instead of a bad faith bankruptcy case and filed a complaint in Delaware Chancery Court asserting that management breached its fiduciary duties to the corporation by filing bankruptcy in bad faith.  Adopting the standards for claim preclusion from the 7th Circuit, not Delaware (which were noted to be essentially the same as the 7th Circuit’s), Vice Chancellor Strine held that Nelson was collaterally estopped from asserting a breach of duty claim based on management’s alleged bad faith in filing the bankruptcy petition because, in the first instance, Judge St. Eve had already ruled in the district court case that Judge Schmetterer’s finding on the bad faith issue was not "dicta."  As an aside, one has to wonder whether Nelson miscalculated by first having the District Court, not the Chancery Court, decide whether Judge Schmetterer’s ruling was dicta.  Indeed, Judge St. Eve’s own ruling looks a bit like dicta itself, since that ruling on dicta really wasn’t essential to affirming Judge Schmetterer’s decision.  But once she was asked to decide whether it was in fact dicta, and she did so decide, then Nelson was most definitely bound by that result.

Still, Vice Chancellor Strine covered his bases by not relying exclusively upon Judge St. Eve’s holding that Judge Schmetterer ruling wasn’t dicta, and instead undertook his own independent analysis of Judge Schmetterer’s decision, drawing the following important two conclusions:

Continue Reading Be Careful What You Wish For: Delaware Chancery Court Provides a Cautionary Tale Against Perfunctory Requests “For Other And Further Relief As The Court Deems Just And Equitable”

It’s been a while since I’ve talked about the subprime mess.  For the record, I believe I was the first person to ever link the words "subprime" and "tsunami" in a single article when I predicted back on March 16, 2006, in a post entitled "The Subprime Squeeze," that "tsunami-like" waves of defaults would likely result from the "hockey stick" growth patterns in the subprime industry.  In fact, I just did a search of WESTLAW’s newspaper database, and no one had ever used the words subprime and tsunami in the same article before I had written that post.  How things have changed!  The "Subprime Tsunami" has hit land, deluged households, stalled the economy, revived a moribund class action industry, and become the full employment act for a battalion of defense lawyers worldwide.

Back about a year ago when subprime litigation was first revving up, I was moved to comment in this post on the Bankers Life v. Credit Suisse case, one of the first subprime litigation complaints filed nationwide, based on a post I had read in the Calculated Risk Blog (which remains to this day my number 1 "go-to" blog for timely, insightful, and depressing financial news).  In that post, I predicted the 8-count complaint wouldn’t fare too well.

Well, my prediction proved correct, as the plaintiff substantially amended the complaint about five months later to drop the four securities law-related counts and the third party beneficiary count that I predicted would be dismissed.  In its 17-count amended complaint, the plaintiff kept the fraud claims, which I predicted would be dismissed for lack of particularity, and added several new breach of fiduciary duty and breach of contract causes of action.  It also repled the negligent misrepresentation claim, which I predicted would be dismissed, by smartly beefing up this count to include specific allegations pointing to alleged misstatements in the prospectus upon which plaintiff allegedly relied in purchasing the depressed securities.

So how did the amended complaint fare against BigLaw’s motion to dismiss?

Continue Reading Subprime Litigation Update: Plaintiff’s Victory a Near Certainty in Bankers Life v. Credit Suisse