A popular method of distinguishing a case that contains harmful reasoning is to call it “mere dicta.” In Tate v. Showboat Marina Casino Partnership, 05-1681 (7th Cir., 12/13/05), Judge Richard Posner ponders exactly what “dicta” (or, better put, “dictum”) is. He wrote:

The plaintiffs call the statements in Harkins that we quoted merely “dicta”�that is, things the court said, not what it held; and only what a court holds is binding (within the limits of stare decisis, discussed below) in subsequent cases. But what does “dictum” (the singular of “dicta,” the two words being used interchangeably by most opinion writers these days) mean exactly? There are two principal contenders. The first�that dictum is anything besides the facts and the outcome�is unacceptable; as a practical matter, it would erase stare decisis because two cases rarely have identical facts. Michael Dorf, “Dicta and Article III,” 142 U. Pa. L. Rev. 1997, 2035-37, 2067 (1994). But Harkins and this case do have identical facts; so even if “dictum” were construed so broadly, these plaintiffs would be out of luck.
The sensible alternative interpretation is that the holding of a case includes, besides the facts and the outcome, the reasoning essential to that outcome. Henry J. Friendly, “In Praise of Erie�and of the New Federal Common Law,” 39 N.Y.U.L. Rev. 383, 385-86 (1964) (“a court’s stated and, on its view, necessary basis for deciding does not become dictum because a critic would have decided on another basis”).

Continue Reading Judge Posner’s “Dictum” on “Dicta”

Thanks to Tom Kirkendall for his post on his Houston’s Clear Thinkers blog to a 102 page opinion (available here also) issued by Dallas’ Bankruptcy Judge Robert McGuire in a case that challenged the grant (and funding) of over $100 million in retention bonuses to approximately 300 highly-coveted energy traders and related management employees on the eve of Enron’s bankruptcy filing in December 2001.
Tom K. says that BAPCPA’s “recent amendments to the Bankruptcy Code limit the precedential value of the decision [because] [u]nder those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case.” Let me add two qualifications to this comment:

First, while Tom K. is right that Bankruptcy Court approval is now needed for all proposed postpetition payments of retention bonuses (even if the bonuses were authorized prepetition), BAPCPA’s amendments to new Code Section 548(a)(1)(B)(ii)(IV) do not presume that prepetition retention bonuses payments are voidable. Rather, such payments are voidable under the new Code section only to the extent that (i) the debtor “received less than a reasonably equivalent value in exchange,” and (ii) the transfers were made to “an insider,” “under an employment contract,” and “not in the ordinary course of business.” Notably, the new law does not appear to shift the burden of proof, which remains with the plaintiff/trustee as to all elements.
Second, the case has significant precedential value for a bankruptcy litigator because of the Court’s analysis (often extensive) of such bread and butter issues for a bankruptcy litigator as:

• when an “antecedent debt” arises for preference purposes (pp. 38-43);
• whether the “new value” defense applies (pp. 43-48);
• whether the “ordinary course” defense applies to the preference action [N.B.: discussion of what constitutes “ordinary course” for purposes of an affirmative defense to a preference action may well become the standard in future litigation under new Code section 548(a)(1)(B)(ii)(IV) regarding whether a prepetition payment under an employee contract was in the “ordinary course”] (p.48);
• whether the debtor “was insolvent” at the time of the transfer (both from a “balance sheet” and “equitable” perspective and from a “going concern” vs. “liquidation” perspective) (pp. 48-79);
• whether, applying the doctrine of Moore v. Bay (the case I love to hate), there existed at least one pre-existing creditor with standing to avoid the transaction (pp. 82-84);
• whether the bonuses, being on the eve of bankruptcy, were intentional fraudulent transfers (pp. 86-88);
• whether the bonuses were accepted for value and in good faith under Code section 548(c) (pp. 89-94);
• whether “reasonably equivalent” value was given in exchange (pp. 94-97).

This matter was initiated by the “Official Employment-Related Issues Committee of Enron Corporation (the “Employment Committee”), an official committee formed by the US Trustee in Enron’s bankruptcy case primarily to investigate these challenged payments and to commence avoidance litigation regarding them, as appropriate. Initially, over 300 defendants were sued, 40 of whom went to trial to defend their right to the bonuses (several of whom, the record suggests, apparently were unaware of the saying that “one who represents himself has a fool for a client and an idiot for a lawyer”).
With extensive references to the voluminous record (which included over 1,000 documentary exhibits), Judge McGuire methodically ruled that:

Continue Reading Enron’s Retention Bonuses Avoided by Texas Court as Preferential Transfers and Intentional and Constructive Fraudulent Transfers

The Seventh Circuit has just issued a short, important decision in a case in which a chapter 11 debtor’s secured creditors challenged the right of the chapter 11 trustee to settle an executory contract dispute with the contracting party instead of abandoning the debtor’s rights under the contract to them. In re Resource Technology Corp., 2005 WL 3336525 (7th Cir., 12/9/05).
In this case, the debtor had entered into a prepetition agreement with a party (Chastang) to build a gas collections system for collecting methane gas from landfills. The contract was the subject of three successive adversary proceedings, with the final result being a settlement between the Chastang and the trustee whereby the Chastang would release the debtor/trustee from its executory obligations, forgive a promissory note, release any damage claims, and pay $75,000 in exchange. For its part, the trustee would release the debtor’s rights under the contract to complete the gas collection system and collect the methane gas.
The debtor’s principal secured creditors, holding $40 million in debt secured by a floating lien on the debtor’s assets, objected to the settlement, offering to pay the estate $200,000 and release $2 million in debt in exchange for the debtor’s contract rights. The trustee preferred this deal, and asked the bankruptcy court to permit it to abandon the contract rights to the lenders, who claimed a security interest in all the debtor’s contract rights.
Judge Wedoff, Chief Judge for the Bankruptcy Court for the Northern District of Illinois, however, concluded that an executory contract cannot be abandoned under 11 U.S.C. § 554, and that the trustee could only assume or reject the contract 11 U.S.C. § 365. Further, Judge Wedoff held, once the contract has been assumed (as was the case here), the debtor’s only options are to perform under the contract, or to breach. According to Judge Wedoff, “[a]bandonment would just break the debtor’s promise and support a claim for damages; it could not transfer Resource Technology’s rights to the lenders.” Thus, Judge Wedoff approved the settlement with the Chastang and the district court affirmed. In re Resource Technology Corp., 2005 WL 2588860 (N.D. Ill., 3/18/05).
In affirming the lower courts’ rulings, the 7th Circuit touched upon a number of important concepts that bankruptcy practitioners regularly consider. For starters, the Court addressed the ever-present issue of mootness in bankruptcy. Here, the lower courts denied all requests for a stay pending appeal, thus resulting in consummation of the settlement and a third party’s assumption of the debtor’s contract responsibilities for completion of the system and collection of gas. Notably, the 7th Circuit held that these changed circumstances did not moot the lenders’ appeal. Judge Easterbrook, who delivered the opinion of the Court’s panel that included fellow University of Chicago law professors Judge Richard Posner and Judge Diane Wood, wrote:

Continue Reading 7th Circuit Denies Secured Lenders’ Request to Unscramble a Court-Approved Settlement that Rejected an Executory Contract Instead of Abandoning It to the Lenders

Back in 1998, Campbell Soup spun-off its Vlasic Foods and other “specialty” (i.e., “dog”) businesses to its shareholders. Campbell also transferred a $500 million debt obligation to the spun-off entity (VFI). The spun-off entity didn’t perform too well thereafter, and filed for bankruptcy nearly three years later. A post-confirmation litigation trust (VFB) was created to pursue fraudulent transfer claims against Campbell. Nearly 96% of the VFB creditor interests arose from a $200 unsecured debenture offering fifteen months after the spin-off. Another VFB creditor interest was VFI’s landlord, who had a $1.66 million claim. Significantly, Campbell entered into this lease before the spin-off and VFI assumed it on the date of the spin-off. The rest of the creditors were small trade creditors.
On September 13, 2005, Judge Jordan from the United States District Court for the District of Delaware, issued this 74 page post-trial memorandum (parts 1, 2, and 3 here) containing its findings of fact and conclusions of law. In the end, the Court found that Campbell’s encumbering VFI with over $500 million in debt at the time of the spin-off did not constitute a constructive fraudulent transfer.
Students of bankruptcy litigation will learn much from delving into the details of this litigation, which pitted a litigation team from Andrews & Kurth led by John Lee against a litigation team from Wachtell Lipton led by Mike Schwartz. The amended complaint (which sought more than $500 million from Campbell), the entire nearly 4,900 page trial transcript (encompassing 10 days of fact witness testimony in March 2005 and 5 days of expert witness testimony in August 2005), and all post-trial submissions are available here.
The Court’s decision denying relief to the VFB litigation trust received little attention, and didn’t even earn a slip copy citation in the West Reporter System (though West did just report Judge Jordan’s decision denying VFB’s motion for a new trial [at 2005 WL 3293039] and the decision of a NJ appellate court upholding a decision that Campbell Soup’s insurer was not required to defend or indemnify Campbell in connection with the VFB litigation [at 885 A.2d 465]).
What’s also interesting about this case is how VFB almost avoided a $500 million transaction because its trustee could step into the shoes of a single remaining creditor (the corporate landlord owed only $1.66 million) whose claim was in existence at the time of the spin-off transaction in 1998. Under Moore v. Bay, this trustee standing in the shoes of this single creditor could accomplish in bankruptcy what all the creditors combined could not do outside of bankruptcy: that is, avoid the entire transaction by proving that VFI was rendered insolvent by the transaction.
As to this point, the Court matter of factly made the following conclusions of law (see Opinion pt. 2, at pp. 45-46):

Continue Reading Moore v. Bay Nearly Sinks Campbell Soup in Fraudulent Transfer Litigation Challenging the 1998 Vlasic Spinoff