Jonathan Alper of the Florida Bankruptcy Law Blog considers here the following situation involving an individual chapter 7 debtor client where the bankruptcy trustee sought to control the business in which the debtor was the sole shareholder:

The debtor’s assets included 100% of the stock in an operating business with assets including real property. The question arose concerning the debtor’s operation of the business after filing personal bankruptcy. Since the debtor’s stock is part of the bankruptcy estate, does the trustee by virtue of owning all the stock assume control of the business? Or, can the debtor as president of the business operate the business including disposing of business assets after filing? In this case, the trustee took the position that the debtor’s bankruptcy did not act as a stay against business operations.

Similar questions were addressed this week by Judge Mary P. Gorman of the Bankruptcy Court for the Central District of Illinois in Swartz v. Billingsly (In re Billingsley), 2006 WL 538437 (Bankr. C.D. Ill., 3/6/2006) (pdf). The difference between the situation facing Judge Gorman and that posited by Jonathan is that in Judge Gorman’s case, the debtor only owned 50% of the non-debtor corporation’s stock, whereas in Jonathan’s example, the debtor owned 100% of the non-debtor’s stock.
This difference is significant because when the trustee is the sole shareholder, it should have the freedom to run the non-debtor corporation as it pleases (subject to compliance with state law corporate formalities). Conversely, when the trustee controls 50% or less of the non-debtor’s equity, significant decisions involving the non-debtor would require the consent of other equity participants, and thus the trustee could not make unilateral decisions regarding the non-debtor corporation’s affairs.
Here’s what Judge Gorman said:

Continue Reading Illinois Bankruptcy Court Denies Trustee’s Attempt to Exercise Control Over Nondebtor Corporation’s Assets

In an article entitled A Matter of Style, 19-SEP Am. Bankr. Inst. J. 32 (2000), San Antonio’s Bankruptcy Judge Leif M. Clark wrote these noteworthy remarks:

A lawyer is more than a mouthpiece, more than an agent, more than a mere compendium of legal truths. A lawyer is more than a mere translator of a client’s desires. A lawyer is representative not just of the client’s interests, but in some ways the embodiment of the client. It is for that reason that a lawyer’s style is more than just stylistic. How a lawyer comes off in court can all too often dramatically affect the perception the judge is likely to develop of both the client and the merits of the client’s position in a case. In short, style matters. Some styles work better than others, of course. Every judge has their favorite style, as well as styles that rub them the wrong way. (Emphasis added).

So what does Judge Clark do when someone’s style REALLY rubs him the wrong way? He calls him the bankruptcy equivalent of Adam Sandler in the movie Billy Madison, and writes this:

Before the court is a motion entitled “Defendant’s Motion to Discharge Response to Plaintiff’s Response to Defendant’s Response Opposing Objection to Discharge.” As background, this adversary was commenced on December 14, 2005 with the filing of the plaintiff’s complaint objecting to the debtor’s discharge. Defendant answered the complaint on January 12, 2006. Plaintiff responded to the Defendant’s answer on January 26, 2006. On February 3, 2006, Defendant filed the above entitled motion. The court.cannot determine the substance, if any, of the Defendant’s legal argument, nor can the court even ascertain the relief that the Defendant is requesting. The Defendant’s motion is accordingly denied for being incomprehensible. [FN 1]

[FN 1] Or, in the words of the competition judge to Adam Sandler’s title character in the movie, “Billy Madison“, after Billy Madison had responded to a question with an answer that sounded superficially reasonable but lacked any substance,

Mr. Madison, what you’ve just said is one of the most insanely idiotic things I’ve ever heard. At no point in your rambling, incoherent response was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

Deciphering motions like the one presented here wastes valuable chamber staff time, and invites this sort of footnote.

I’m sure many judges have often felt that litigants (pro se or not) deserve to be thrashed as Adam Sandler was in Billy Madison. I suspect, however, that judges are more often inclined to invoke that most famous of movie lines, “Frankly, my dear, I don’t give a damn.”
Special thanks to an anonymous donor for the tip to Judge Clark’s ruling.
[NB: Judge Clark was one of the first to rip BAPCPA’s anti-consumer protection provisions when he penned an article in 2003 entitled Things Change, 22-MAY Am. Bankr. Inst. J. 40 (2003). He said:

Continue Reading Judge Leif Clark Cites to Adam Sandler’s “Billy Madison” in Dismissing Pro Se Defendant’s Convoluted Motion

In the movie business, the success of a movie is often defined by how good its “legs” are. One thing you have to say about Anna Nicole Smith’s case before the US Supreme Court, “It sure has great legs!”
Here’s more postings that caught my eye, in addition to the ones previously reported here:

  • Arianna Huffington reports on her blog here that “bombshells” beat “bombs” for airtime coverage on the CBS Evening News, with Anna’s story going for 1 minute, 56 seconds, compared with the story on deadly suicide bombs in Iraq, which lasted 1 minute, 39 seconds.
  • The Houston Chronicle’s Nick Anderson draws this political cartoon.
  • Houston’s Clear Thinkers’ Tom Kirkendall joins Althouse in predicting Anna wins.
  • SCOTUSblog’s Tom Goldstein, co-counsel to Pierce Marshall, wrote this extended analysis on the oral argument, in which he summarized the four things that struck him about the oral argument “from the inside-baseball perspective of Supreme Court advocacy.” His final observation (about Judge Alito): Watch out for that new reliever in the bullpen. He may not say a lot, but he’s gotta heck of a sinker!
  • The WSJ Law Blog reminds us that J. Howard Marshall was a T&E professor at Yale. This, however, is challenged here at the Wills, Trusts & Estates Prof Blog. I think the WSJ Law Blog wins this dispute, since Pierce Marshall’s response brief (found here) says on page 3 that J. Howard Marshall was a former T&E professor at Yale. [NB: I guess that answers the question of what do Yale T&E professors do after they retire? Become T&A professors, of course!].

Even French blogs have picked up on the craze, with one saying: “Anna fera tout pour r�cup�rer les 1,6 milliard de dollars de son ancien grabataire de mari“. [NB: Even if it doesn’t translate out that way, the French version sure sounds like it echos Anna’s argument that “the son grabbed the old man’s money.”]
© Steve Jakubowski 2006

With MSM focused on Anna Nicole Smith’s case before the Supreme Court, there’s lots of enlightening reading to be found. Here’s some that have caught my eye [NB: vol. 2 here]:

  • Althouse reports on the oral argument and predicts Anna will win on the merits.
  • Broadsheet quotes Univ. of Chicago Law School’s Doug Baird as saying: “I’d suspect some justices haven’t the slightest idea who Anna Nicole is.” [NB: I suppose they’d have a far better idea if the issues had been more “prurient” in nature.]
  • How Appealing! provides links to photos and to news reports from Newsweek, NPR (here and here), the AP (here and here), the Houston Chronicle, and USA Today.
  • SCOTUSblog, whose founders at Goldstein & Howe represent Anna’s adversary, recaps the oral argument.
  • The Volokh Conspiracy links here to Dahlia Lithwick’s “Supreme Court dispatches” on Slate.com (including a link to her story on NPR). Volokh’s Jim Lindgren also separately provides this solid analysis of the case from a “T&E” (trusts and estates) perspective (though some may prefer the “T&A” perspective here).
  • Wonkette! offers some color commentary on the oral argument and the circus atmosphere outside (with links).
  • The WSJ Law Blog offers good background reading, updates, and links here, here, and here.

You can also find more background reading on the case at my posts here, here, here, and here.
Finally, Anna’s reply brief, filed last week, can be found here (courtesy of SCOTUSblog). It provides the following two short — but significant — retorts:

Continue Reading Anna Nicole Smith Case Roundup

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

For a federal agency, the Bonneville Power Administration (BPA) is surely unique. Unlike most federal agencies, this one is self-funding. It boasts that it “recover[s] all of its costs through sales of electricity and transmission and repay[s] the U.S. Treasury in full with interest for any money it borrows.” The story of the origins and growth of the BPA is one worth reading, as it holds many lessons regarding the social, political, and economic development in the Pacific Northwest and the US generally. To take one more extreme example, did you know that the BPA served as the inspiration for some of Woody Guthrie‘s most famous songs? According to one documentary, entitled Roll on Columbia: Woody Guthrie and the Bonneville Power Administration:

In spring 1941, the cusp of the Great Depression and Pearl Harbor, a 28 year old, unemployed Dust Bowl balladeer, Woodrow Wilson Guthrie took a one month, temporary job with the U.S. Department of the Interior’s Bonneville Power Administration (BPA) on the Columbia River. The BPA needed a folksinger to promote the benefits of building dams to produce cheap electricity. Guthrie, and his wife and 3 kids needed the paycheck. He wrote 26 songs in 30 days – classics like Roll on Columbia and Pastures of Plenty. This … is the … most prolific moment in Guthrie’s extraordinary career.

The BPA also is one of the lesser publicized casualties in the largest bankruptcies ever (Enron, Mirant, Calpine, Kaiser, PG&E, Longview Aluminum, to name a few), and its advocates both internally and at the Department of Justice have fought tooth and nail on behalf of the BPA against some of the best bankruptcy lawyers in the land.
Recently, the Fifth Circuit weighed in on a long-standing split among the circuits in the law regarding assumption and termination of non-assignable executory contracts. It held that the BPA could not unilaterally terminate its executory contract with Mirant for future electric power purchases under the contract’s “ipso facto” clause (which excuses the solvent party from performance of the contract when the other party becomes insolvent or goes bankrupt) simply because the federal Anti-Assignment Act prohibited the assignment of the contract. In re Mirant Corp., 2006 WL 33012 (5th Cir., 2/13/06) (pdf).
In reaching this result, the Fifth Circuit stepped into the debate over whether to adopt the “actual” or “hypothetical” approach in determining whether, under Bankruptcy Code section 365(e)(2)(A), the contract can be terminated as a matter of law because —

applicable law [such as the federal Anti-Assignment Act – 41 USC § 15] excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties.

The Fifth Circuit framed the differing positions of the parties as follows:

Continue Reading 5th Circuit Holds that Federal Anti-Assignment Act Doesn’t Trigger “Ipso Facto” Termination of Mirant’s Energy Contract

I just learned that two very able bankruptcy lawyers from Florida are leaving private practice to further distinguish themselves as bankruptcy judges for the Southern District of Florida. Congratulations to John Olson, formerly of Stearns, Weaver, Miller, Weissler, Alhadeff & Sitterson in Tampa, who was appointed to the bench in Fort Lauderdale, and Laurel Isicoff, from Miami’s Kozyak Tropin & Throckmorton (they run ABI’s BAPCPA Blog), who was appointed to the bench in Miami.
Ms. Isicoff will be the Southern District’s first woman bankruptcy judge! Amen!
The Miami Herald reports this on their recent appointments:

Isicoff and Olson were each appointed to serve 14-year terms by the 12-judge 11th Circuit Court of Appeals in Atlanta. They will earn annual salaries of $151,984 [health and pension benefits aren’t too bad either]. The appointments increase the number of bankruptcy judges in South Florida to seven. The two new positions were authorized by Congress last year to address the increased case load in South Florida, according to Norman Zoller, an official with the 11th Circuit Court of Appeals.

© Steve Jakubowski 2006

Bankruptcy Judge Bruce Markell, whose courtroom is in Las Vegas, has written extensively on bankruptcy law topics. His first article, written in 1988 following his becoming a partner in Sidley & Austin’s LA office, was entitled Toward True and Plain Dealing: A Theory of Fraudulent Transfers Involving Unreasonably Small Capital, 21 Ind. L. Rev. 469 (1988). This extensively researched article was a major contribution to bankruptcy scholarship as it was the only one out there that hit every case you’d ever want to read on the topic back through the enactment in 1571 of the “Statute of Elizabeth” (a penal statute that prohibited conveyances made with “intent to delay, hinder or defraud creditors and others of their just and lawful actions”). I vividly recall this article because I was then a third year associate responsible for writing — from scratch — a comprehensive memo on the meaning of “unreasonably small capital” in fraudulent transfer law. The results of my research obviously were no match for Judge Markell’s essay, so I could only marvel at the timely publication of this providential article that saved me and others hundreds of hours of painstaking research into cases well over 100 years old.
Since that very auspicious start, Judge Markell (who tutored logic in his four years of college, graduated 1st in his class at UC-Davis Law School, and clerked for then 9th Circuit Judge — now Supreme Court Justice — Anthony M. Kennedy) has written, taught, and lectured extensively on bankruptcy law and practice. He was appointed Bankruptcy Judge for the District of Nevada in July 2004 to fill a vacancy on the Court, and was again appointed for a full 14 year term in October 2004.
Judge Markell’s latest scholarly contribution, however, is not about bankruptcy, but about that famed enigmatic philosopher, Ludwig Wittgenstein (don’t go to sleep yet!), about whose works Judge Markell wrote a thesis in college entitled Grice’s Recursive Definition of Truth and Wittgenstein’s View on Meaning in Tractatus Logico Philosophicus and in the Philosophical Investigations. In his latest article, entitled Bewitched by Language: Wittgenstein and the Practice of Law, 32 Pepp. L. Rev. 801 (2005), Judge Markell asks a question few would dare to posit (and many more would not care to posit). He asks:

Have courts considered Wittgenstein’s philosophy when deciding cases?

Judge Markell answers yes, but clearly he’s not impressed by the overall level of judicial scholarship in the forty opinions of record that cite to Wittgenstein. Notably, even Judge Easterbrook’s references to Wittgenstein fall short in Judge Markell’s eyes. He writes:

Continue Reading Judge Markell Invokes Justice Antonin Scalia’s Canons of Statutory Construction Over the Philosophical Theories of Ludwig Wittgenstein in Resolving the Judicial Debate Over How to Close BAPCPA’s New “Mansion Loophole”

The British Independent recently announced here that Marie Antoinette may well be the “historical personality of the year” for 2006. According to the paper,

Marie-Antoinette lives again. The last great queen of France, guillotined in 1793, threatens to make us all lose our heads in 2006. She may rival, or even eclipse, her close contemporary and fellow Austrian, Mozart, as “historical personality” of the year. Mich�le Lorin, the president of the Marie-Antoinette Association in France, confidently predicts that we are about to plunge into a warm bath of “Marie-Antoinette mania”.

Professor Larry Ribstein’s reference on his Ideoblog to this working paper he co-authored with Gardner Carton’s Kelli Alces entitled “Directors’ Duties in Failing Firms” brought to mind a statement most commonly — though wrongly — ascribed to Marie Antoinette: “Let them eat cake!”
In their paper, Professor Ribstein and Ms. Alces conclude that “corporate directors of failing firms do not have special duties to creditors” and that “creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms.” In other words, “Let the[] [creditors] eat cake!” They write:

[W]hile the [Production Resources] court acknowledged the slight possibility that an individual creditor might have a fiduciary duty claim that was outside the bounds of specific creditor remedies, the scope of any such relief would be narrow. If the creditor of a corporation in or near insolvency can recover, it would most likely be under a traditional fraud or other theory whose application is shaped by the circumstances, including the corporation’s insolvency.

These conclusions, however sound and noteworthy they may be, are not exactly the conclusions one would expect to obtain from a random sampling of bankruptcy professionals and judges being questioned about fiduciary duties owed to creditors upon the debtor’s insolvency or entry into the “zone of insolvency.” In Miller v. Dutil (In re Total Containment, Inc.), 335 B.R. 589, 603 (Bankr. E.D. Pa., 12/18/2005), for example, the bankruptcy court stated categorically, “Where a company becomes insolvent, the fiduciary duty owed by corporate officers and directors shifts to the company’s creditors.” Similarly, in FDIC v. Sea Pines Co., 692 F.2d 973, 976-77 (4th Cir. 1982), cert denied, 461 U.S. 928 (1983), the Fourth Circuit stated:

[W]hen the corporation becomes insolvent, the fiduciary duty of the directors shifts from the stockholders to the creditors. The law by the great weight of authority seems to be settled that when a corporation becomes insolvent, or in a failing condition, the officers and directors no longer represent the stockholders, but by the fact of insolvency, become trustees for the creditors, and that they cannot by transfer of its property or payment of cash, prefer themselves or other creditors.

Finally, in Rafool v. Goldfarb (In re Fleming Packaging Corp.), 2005 WL 2205703 (Bankr. C.D. Ill., 8/26/2005), the bankruptcy court concurred with the trustee that fiduciary duties to creditors arise upon the debtor’s insolvency, stating:

Relying on the recent case of Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch., Nov. 17, 2004), the Trustee asserts that upon insolvency, the existing duties owed by the directors to the corporation are not destroyed, but rather that additional duties, owed to the corporation’s creditors, arise. The Trustee maintains that he may properly bring this action directly on behalf of the Debtor. In addition, because those duties which arise upon insolvency are owed to the creditors as a class and because any recovery for a breach of those duties would inure to the corporation, the Trustee contends that he has standing to bring those claims derivatively. This Court agrees.

The law may someday mirror the logically compelling conclusions reached by Professor Ribstein and Ms. Alces, but it doesn’t appear that courts are there quite yet. Until then, expect that litigation by trustees and committees will continue to allege breaches of fiduciary duties by directors to creditors (and related claims of “deepening insolvency” — whether arising as an injury from an independent wrong, as a measure of damages, or as an independent tort in its own right) in an attempt to pressure director defendants (and their D&O carriers) to pony up their allocable share of creditor losses (or at least a good chunk of the available D&O policy limits).
© Steve Jakubowski 2006