In advance of her coming to Chicago on May 1 to speak at this upcoming all day symposium sponsored by the CLLA and DePaul’s Business & Commercial Law Journal, America’s BAPCPA guru, Cathy Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc., has graciously agreed to again guest blog.

Last year, in her first guest post, Cathy reflected on BAPCPA’s unruly landscape at the close of its "terrible two’s." This year, as BAPCPA closes a less rambunctious third year, Cathy looks at a post-BAPCPA bankruptcy rule change enacted on December 1, 2007 to address, in Rule 6003, the potential for overreaching in the blizzard of "first-day" papers filed at the outset of a case. The new rule requires a showing of "immediate and irreparable harm" if an order retaining professionals, using or selling assets outside of the ordinary course, or assuming or assigning executory contracts or unexpired leases is to be entered on less than 20 days’ notice after the filing of the case. Cathy surveys the litigation and literary landscape on what constitutes "immediate and irreparable harm" and, because she’s a guru, "speculate[s] about the [new rule’s] effects until live controversies emerge that are decided by the courts."

Thanks again for blogging Cathy! Your post last year broke this blog’s single and three-day records for page views, and hasn’t been matched since. May the next year be a good one for you! 

Finally, thanks to Bankruptcy Court Decisions, home of the ever-resourceful Kate Colangelo, for permission to reprint the article of former Chief Judge Spector, cited by Cathy below.

So without further ado, heeeeeeerrrrrreeee’s Cathy! ……..

Continue Reading BAPCPA Guru Cathy Vance Untangles the Purpose and Application (So Far) of New Bankruptcy Rule 6003

Davey and Zack are now 6 1/2 months, and finally consistently sleeping through the night!  The temperature in Chicago has also finally hit 60 degrees in Chicago, for only the seventh time this year. Put ’em together, add another great post from my good friend Francis X. Pileggi, the Lou Gehrig of legal blogging, and–without making any vows–it’s time to dust off the blog and awaken from my blogging hibernation.  Thanks to those who’ve reached out to me in the interim with their kind words, comments, suggestions, and encouragement.

Here’s a link to Francis’s recent post on his Delaware Corporate and Commercial Litigation Blog about a decision handed down by one of the country’s preeminent bankruptcy judges, Judge Peter J. Walsh, in Miller v. McDonald (In re World Health Alternatives, Inc.), 2008 WL 1002035 (Bankr. D. Del. 4/9/08) (pdf). In this decision, Judge Walsh refused to dismiss this complaint filed by Francis and his colleagues against Brian Licastro, the former vice-president of operations and in-house general counsel of World Health Alternatives.  The opinion is a must read because–

  • it explicitly extends the so-called Caremark duties to officers of a corporation, and in particular here, to the VP-operations and in-house general counsel, who was alleged "responsible for failing to implement any internal monitoring system and/or failing to utilize such system as is required by Caremark and Araneta"; (Op. at 26.)  
  • it sustains, by a narrow margin, a corporate waste count against the VP/GC, despite his not having personally benefited from the alleged waste, based on the allegation that he was "aware of the alleged corporate waste and took no action, as fiduciaries, to prevent such conduct";  (Op. at 33.)
  • it upholds a negligent misrepresentation count against the VP/GC alleging that "if [he] properly performed his duty as in-house counsel, these misrepresentation[s] [in public filings] would not have been made and the resulting harm [resulting in a $2.7 million payout in a shareholder class action] would have been avoided.  (Op. at 36-37.)

On January 14, 2007, I linked to various 27 bankruptcy-related cases discussed on Francis’s blog.  Time for an update linking to the next 27 bankruptcy-related posts by Francis since then:

Continue Reading Delaware’s Premier Blogger Wins Important Motion Before Delaware’s Judge Walsh Imposing the Caremark Fiduciary Duty on Corporate General Counsel

6/16/08 Update:  Here’s a link to my post on the Court’s decision reversing the 11th Circuit’s decision. 

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Bankruptcy lawyers and bloggers eyeing the Supreme Court’s docket this term had to be concerned at the absence of any bankruptcy cases on the Court’s docket after two straight banner years of bankruptcy decision-making.  Thankfully, the Court on Friday granted the State of Florida’s cert. petition in State of Florida v. Piccadilly Cafeterias, Inc., Case No. 07-312.  

The issue facing the Court is one that has split the circuits, and asks: 

Does Code section 1146, which exempts sales under a confirmed plan from state and transfer taxes, apply to pre-confirmation sales of assets under Section 363? 

At first blush, the answer seems obvious given that Section 1146 on its face is limited to transfers "under a plan confirmed under section 1129 of this title."  But just to show you how creative bankruptcy lawyers—and judges—can get, the Eleventh Circuit agreed with the argument that the Section 1146 exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan."  State of Florida Dept. of Rev. v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), 484 F.3d 1299, 1304 (11th Cir. 2007) (emphasis in original).  In so holding, the Eleventh Circuit disagreed with the holding of the Third Circuit in In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243 (3d Cir. 2003), which concluded that "the most natural reading of the phrase ‘under a plan confirmed’ in 11 U.S.C. § 1146(c) is ‘authorized’ by such a plan" and held that the § 1146(c) exemption does not apply to pre-confirmation transfers."  Id. at 252-254.

One small problem for the respondents, and Bingham McCutcheon’s Eric Brunstad, who represents the respondent-debtor; that is, Hechinger was decided by none other than then-Judge, now-Justice Alito, the author of the two latest bankruptcy opinions decided by the Supreme Court (i.e., Travelers & Marrama).  I think that it’s fair to say that reversal of the Eleventh Circuit’s decision is about as safe a bet as you’ll find.

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Note:  The inset picture is a famous pre-Revolutionary War political cartoon depicting "Bostonians paying the excise-man by tarring and feathering."  Ahh, the good ol’ days!

And thanks again to the many well-wishers on the birth of my twin boys, now 10 weeks old, who clearly prefer bottles to blogging.

© Steve Jakubowski 2007

 

As winter’s glove descends on Chicago with the onset of standard time, many of us in Chicago begin to count the weeks until "May Day," that festive day the world over when hope springs eternal and workers (and pagans) of the world unite.

Next year’s "May Day" offers lawyers an opportunity to reflect on the state of their profession, but only if they attend the 6th Annual DePaul Business & Commercial Law Journal Symposium, whose program this year is entitled "Lawyers, Law Firms & the Legal Profession."  Some–such as my former classmate, and now Stanford Law dean, Larry Kramer–scream "May Day" when they ponder the state of the legal profession today.  This rallying cry, Larry hopes, will encourage today’s generation of law students to "secure the future of our profession" and "preserv[e] the qualities that attracted so many of us to the study of law in the first place."  Of course, if Larry’s more radical, anti-establishmentarian generational predecessors could be overseeing today’s system where–as he sees it–success and prestige are first and foremost judged by how well the firm’s "profits-per-partner" are maximized, then Larry’s hopes of a sea-change in attitude among today’s newly-minted lawyers when they assume the profession’s leadership reins 25 years from now will likely go unrequited.

My firm’s founder, Bob Coleman, and many others at the Coleman Law Firm, have spent much of their professional careers analyzing, advising, and litigating issues regarding a lawyer’s professional and ethical responsibilities.  Many are also DePaul Law grads.  It is thus with great pride that Coleman Law Firm will co-sponsor (with Development Specialists, Inc., and Financial Solutions Network) DePaul’s "May Day" Symposium on Lawyers, Law Firms & the Legal Profession.

To that end, Holly D. Howes, Editor-in-Chief of the DePaul Business & Commercial Law Journal, has graciously agreed to guest blog today’s post and describe the one-day symposium’s topics, distinguished panels, and enrollment details.  To say that the $75.00 entry fee is a real bargain for the one-day event is an obvious understatement given the quality of the presenters, the complimentary catered lunch, the many hours of CLE credits earned by those attending, and thick stack of program materials distributed to all.  It’s also a great time to visit Chicago!

So, without further ado, heeeeeeere’s Holly!

***

© Steve Jakubowski 2007

Continue Reading May Day, May Day! Readying for DePaul’s Spring Symposium on Lawyers, Law Firms & the Legal Profession

Ahh, the joy of twin boys!  A great blessing no matter how you slice it.  The first, David Charles, was born at 3:55 p.m. on October 1, and weighed a healthy 6 lbs. 14 oz.  The picture you see of him was about 2 weeks ago, and was about the only time I could catch him not crying.  Since then, the miracle of Baby Zantac has snuffed the curse my mother must have put on me for my three months of non-stop crying as a colicky baby.

Needless to say, life’s priorities have changed for me a bit since the twins’ birth, and blogging was an early victim of my sleep-deprived days.  But with Baby Zantac not only having controlled Davey’s colic, but also having given me a near full night’s rest, it’s time to catch up on my "Picks of the Month" series of posts, these being for June 2007, and dedicated to my newborn son, Dave.  Thanks to everyone for their good wishes this past month!

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Update – 10/31/07:   My wife read the post, and wanted me to know that Davey’s colic is neither "cured" nor "controlled."  Guess I’m leaving early tonight.

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Continue Reading Twin Picks of the Month: Dave’s Required Bankruptcy Reading for June 2007

It’s always gratifying to learn that bankruptcy legends read this blog.  Lynn LoPucki is one of those people. 

Last night I opened an email I received from Professor LoPucki letting me know that he and my (not-so-old) old law school professor, Doug Baird, would be duking it out at the University of Chicago Faculty Law Blog over issues raised in Professor LoPucki’s recent paper (written with empiricist Joseph W. Doherty) entitled Bankruptcy Fire Sales, 106 Mich. L.R. 1 (2007).  The article was posted on SSRN last April, accompanied by the following abstract:

For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy (pdf), an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete.  Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period.  We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales.  We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices.  Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor’s industry is lower – the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992 [entitled Liquidation Values and Debt Capacity: A Market Equilibrium Approach, 47 J. Fin. 1343 (1992)].

This "H2H"–as the U of C Law Blog calls the "head to head" grudge match–is sure to be a classic, as Professors LoPucki and Baird have been sparring over bankruptcy’s most fundamental questions since 1990, when Professor LoPucki first challenged Professor Baird’s "faith" in the free market’s ability to properly value a company’s worth in chapter 11.  See LoPucki, Bargaining Over Equity’s Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. Penn. L. Rev. 125 (1990).  Their ongoing debate remains central to bankruptcy jurisprudence, as noted in this last post, with recent opinions by the Seventh Circuit’s Judge Cudahy (while sitting by designation as a Third Circuit judge in VFB LLC v. Campbell Soup Co.) and Judge James M. Peck (in the Iridium bankruptcy) suggesting that judges, by placing a heavy burden of proving market folly on the party challenging the market’s indication of value, are beginning to share Professor Baird’s faith in free market valuations.

Professor LoPucki also took issue early on with the idea that chapter 11 should be eliminated and companies forced instead to liquidate expeditiously in chapter 7, an idea he attributes first to a 1986 article by Professor Baird (and Professor Baird’s former writing partner, Thomas H. Jackson).  See LoPucki, Strange Visions in a Strange World:  A Reply to Professor Bradley and Rosenzweig, 91 Mich L. Rev. 79 n.2 (1992); and LoPucki & Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 Univ. Pa. L. Rev. 669 (1993).

Professor LoPucki stepped up the rhetoric in the debate in 1994, paying Professor Baird this back-handed compliment at an interdisciplinary conference at Wash. U. Law School:  "Without the unrealistic work done by Baird and Jackson during the 1980s, bankruptcy scholarship might not have gone beyond the relatively shallow analysis produced by doctrinalism in the 1970s."  See LoPucki, Reorganization Realities, Methodological Realities, and the Paradigm Dominance Game, 72 Wash. U. L. Q. 1307, 1312 (1994).

Continue Reading LoPucki v. Baird Redux: Bankruptcy Titans Blog “Head to Head” Over Chapter 11’s Utility or Futility

As every blogger will agree, "thank goodness for guest bloggers!" (especially with my wife now 37 weeks and counting–laboriously so–with twins).

Today’s guest blog is from my colleague at The Coleman Law Firm, Elizabeth E. Richert, who has been at my side–for better or for worse–since her graduation from Duke Law School in 2001.

If you’re wondering how I had the time to blog, it’s in large measure because Elizabeth does a lot of the spade work for me.  If you’re also wondering why I’m not blogging as regularly, well, Elizabeth’s starting to do that for me too.   Unfortunately, I don’t think she does diapers (but see training video here).

So thanks Elizabeth for stepping up to the plate, and congratulations on your first of what I hope will be many more excellent posts!

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Continue Reading Judge Peck Rules in Iridium’s Bankruptcy That Stock Market Valuations Are No “Fool’s Game”

Last year, then "Junior Scholar" — and now Associate Professor of Law at Georgetown — Adam Levitin (who is also a long-time reader of this blog!) wrote an excellent piece entitled Finding Nemo: Rediscovering the Virtues of Negotiability in the Wake of Enron, 2007 Colum. Bus. L. Rev. 83 (WL) / (pdf).  In it, he strongly criticized a decision by Bankruptcy Judge Arthur Gonzalez denying a good faith bankruptcy claim purchaser’s motion to dismiss the Enron estate’s cause of action for equitable subordination based not on the purchaser’s own misconduct, but on the conduct of previous owners of the claims purchased, regardless of whether the conduct related to the claims themselves.  Enron Corp. v. Springfield Assocs., L.L.C. (In re Enron), 2005 WL 3873893 (Bankr. S.D.N.Y.  11/28/05) (pdf).  Professor Levitin sums up his critique of Judge Gonzalez’s ruling as follows (at pp. 90-91):

The problems in Enron speak to a fundamental commercial law question about choice of property transfer rules.  Enron was based on the commercial law principle of nemo dat quod non habet — you can only transfer what you have.  Nemo dat means that defenses travel with property transfers, so if bankruptcy claims would be subject to equitable subordination in the hands of a transferor, they should remain so in the hands of a transferee.

Nemo dat is the default rule for property transfers, but there is a competing commercial law paradigm: negotiability [as in Articles 2, 3, 7, and 8 of the UCC], and the law of real estate mortgages and titles.  The essential characteristic of negotiability is that only limited defenses travel with property, and thus a transferee can receive more than the transferor had–a property right free of certain defenses against its enforcement.  This means that there is some level of negotiability in any area of law with a good faith purchaser defense…. 

Historically, the law has differentiated between whether it adopts a nemo dat regime or a negotiability regime based on whether transactions are commercial or consumer….  [T]his article argues in favor of applying a negotiability regime to bankruptcy claims trading and proposes a general reconsideration of the rules governing the defenses that travel with a property transfer in commercial contexts.

Last January, District Court Judge Shira A. Scheindlin (herself no stranger to high-stakes bankruptcy controversies) granted the disheartened claims purchasers’ request for leave to file an interlocutory appeal of Judge Gonzalez’s ruling.  She also concurrently granted the request filed in connection with an analogous interlocutory ruling by Judge Gonzalez in Enron Corp. v. Avenue Special Situations Fund II, LP (In re Enron), 340 B.R. 180 (Bankr. S.D.N.Y. 2006) (pdf), in which he disallowed under Code section 502(d) the claim of an entity that purchased its claim from a party who had received a potentially avoidable prepetition transfer.  Judge Scheindlin granted these interlocutory appeals, she said, so that she could consider the following question that "although fairly simply stated, is complex and of first impression in this Circuit, and will have serious ramifications well beyond the parties involved in this particular appeal":

Whether equitable subordination under 510(c) and disallowance under 502(d) can be applied, as a matter of law, to claims held by a transferee to the same extent they would be applied to the claims if they were still held by the transferor based on alleged acts or omissions on the part of the transferor.

Last week, Judge Scheindlin was again the toast of distressed debt industry based on her lengthy decision vacating Judge Gonzalez’s decisions.  See Springfield Assocs., L.L.C. v. Enron Corp. (In re Enron), 2007 WL 2446498 (S.D.N.Y. 8/27/07) (pdf).  Though Judge Scheindlin never cites to Professor Levitin’s article, she does note — as does Professor Levitin — that the central distinction to be made in analyzing the question presented is whether the "well-established doctrine of nemo dat qui non habet" applies.  (Op. at 20-22.) 

To Judge Scheindlin, if the claims are being asserted by good faith purchasers of bankruptcy debt, then the doctrine doesn’t apply and the claims cannot be equitably subordinated under Code section 510(c) or disallowed (pending receipt of the avoidable transfer) under Code section 502(d).  Conversely, Judge Scheindlin ruled, if the transferee obtained the claim by way of "assignment," then the nemo dat doctrine applies, the "personal disabilities" of the claimant "travel with the claim," and the assignee’s claim is subject to possible subordination and disallowance.  (Op. at 29-44.)

Notably, Judge Scheindlin emphasizes, her decision is not based on policy concerns, and in particular the impact that an affirmance would surely have on depressing values in an already depressed market for distressed debt.  See, e.g., Levitin Article at 161-164 ("Developments in the Refco bankruptcy provide an early look at … how seriously Enron has affected the claims trading market….  As soon as rumors surfaced of BAWAG’s alleged misdeeds, all claims that had ever passed through BAWAG’s hands became radioactive before the other Refco creditors filed suit against BAWAG.  No one would purchase them for any price because of the fear of subordination or disallowance.")  Still, she seemed relieved to be able to note not only that "[t]he unnecessary breadth of the Bankruptcy Court’s decisions threatened to wreak havoc on the markets for distressed debt," but also that, with this decision, "[t]hat result has now been avoided."  (Op. at 52.)

What then was the basis for Judge Scheindlin’s reversal? 

© Steve Jakubowski 2007

Continue Reading Nemo Filleted: Judge Scheindlin Rules that Good Faith Purchasers of Claims in Bankruptcy Need No Longer Choke on the Personal Disabilities of the Claims Transferor

It’s been a while since I’ve created a new category, but this article by Marcia Coyle in the National Law Journal (including a quote from resident guru, Cathy Vance) about Congressional hypocrisy in having enacted draconian bankruptcy laws and then complaining when US Trustees enforce them made me wonder just what other pearls Congress has up its sleeve that we haven’t heard much about.  Turns out, a lot more than you’d think!  Here are a few bits of pending legislation I found interesting:

HR 430 — to rename the Bankruptcy Court in Brooklyn the "Conrad B. Duberstein US Bankruptcy Courthouse."  A slam dunk that was swiftly approved on 3/13/07 within two months of its introduction by Representative Edolphus Towns (D-NY), with 2/3 in the House agreeing to "suspend the rules" and pass the bill.

S.1561 — responding in part to the student loan scandals, to limit the discharge exception for student loans only to those made, insured, or guaranteed by a governmental unit and exclude the the broader non-governmental entities now covered by the discharge exception.  Introduced June 7, 2007 by Senator Dick Durbin (D-IL).

HR 1449 — to permit peremptory challenges to designation of a bankruptcy judge to a case within 20 days after assignment if all parties on "one side" of a case file an application requesting reassignment (with the chief judge of the circuit’s court of appeals to decide who is on "a side").   Introduced by Representatives Daniel Lundgren (R-CA), Trent Franks (R-AZ), Bill Sali (R-ID), and Buck McKeon (R-CA) on March 9, 2007.  Including bankruptcy judges in this legislation makes no sense given the difficulty in determining what "side" anyone is on in a bankruptcy case.  Nor does the problem get resolved by having the provision applicable to adversary proceedings instead of cases.  Bankruptcy judges assigned to a case have learned too much about the case to justify moving it to another judge at the whim of one of the "sides" to the adversary proceeding.

HR 4477 — giving new meaning to a bankruptcy judge’s ability to "shoot down" counsel’s arguments, by authorizing bankruptcy judges to carry a firearm on the bench, "whether concealed or not."  Introduced by Rep. Phil English (R-PA) on December 8, 2005.  Its proximity to BAPCPA’s effective date is likely pure coincidence.

Happy hunting! 

More to come in this periodic series.

© Steve Jakubowski 2007

Back from a blogging R&R to take time to smell the roses, catch up on the ever-burgeoning e-precedent file, reflect on a year gone by since my mom’s passing, and–most significantly–get the house ready for Malthusian growth with a pair of twins due sometime next month (adding to the two young Jakubowski’s already here)!  So please excuse my patchy blogging as of late, but as Livy first wrote, "better late than never…" (though, for the sake of completeness, I suppose I should add that Livy concluded, "but better never late").

Anyway, back to blogging, and thanks for reading.

As Bob Eisenbach, Francis Pileggi, and Scott Riddle were quick to observe, the Delaware Supreme Court just put the official kibosh on "deepening insolvency" as an independent cause of action.  That is not the end of the story for bankruptcy litigators, however, since Vice-Chancellor Strine’s opinion in Trenwick America Litigation Trust v. Billet, 906 A.2d 168 (Del. Ch. 2006) (pdf), upon which the Delaware Supreme Court relied, doesn’t address whether deepening insolvency remains valid as a theory of damages. 

As to the latter point, as I recapped here and here, last year the Third Circuit in Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX, Inc.), 448 F.3d 672 (3d Cir. 2006) (pdf), held that–at least under Pennsylvania law–deepening insolvency "is not an independent form of corporate damage" and that its earlier decision in Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) (pdf), "should not be interpreted to create a novel theory of damages for an independent cause of action like malpractice … [or] for any other cause of action, such as fraud."  In support of this proposition, the Third Circuit pointed to bankruptcy lawyer/novelist Sabin Willett’s oft-cited article, The Shallows of Deepening Insolvency, 60 Bus. Law. 549, 575 (2005), for the proposition that "[w]here an independent cause of action gives a firm a remedy for the increase in its liabilities, the decrease in fair asset value, or its lost profits, then the firm may recover, without reference to the incidental impact upon the solvency calculation."

Two recent opinions authored by the Seventh Circuit’s Judge Posner and the Southern District of New York’s Judge Lewis A. Kaplan, however, don’t adopt this per se rule (or at least, as regards Judge Kaplan, not in its entirety).  In Fehribach v. Ernst & Young LLP, 2007 WL 2033734 (7th Cir. 7/17/07) (pdf), Judge Posner provides the following short discourse on the "controversial theory" of deepening insolvency as a theory of damages (including answering how shareholders might be "ineluctably" harmed by a company’s deepening insolvency):

Continue Reading Damages for Deepening Insolvency: Judges Posner and Kaplan Consider the Elements of Proof