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