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

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!

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© 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