Recently, I pointed to a case where a law firm got tripped up on language in a retention order stating “compensation will be [insert approved terms], or as otherwise may be allowed by the Court upon proper application thereof.” See In re Toohey, 2005 WL 2850417 (Bankr. W.D. Ky., 10/27/05).
Along these lines, the 10th Circuit in In re Commercial Financial Services, Inc.,, (2005 WL 274669) (10th Cir., 10/25/05), cut a $1.9 million fee request by Houlihan, Lokey, Howard & Zukin Capital (“Houlihan”). Here, among other things, the Court focused on boilerplate-type language in the retention application stating that Houlihan’s fee request would be “[s]ubject to the approval of the court” as well as to “final review by the Bankruptcy court as to the relative fairness” of the proposed fee.
The case provides a rare glimpse into high-stakes contested fee hearings, with the Court noting:

In its brief, Houlihan goes to great pains to distinguish the quality and nature of its work from all of the other financial advisors present in the case in an apparent effort to demonstrate that its employees were of an entirely superior class and should not be compared with the other financial advisors [like DSI, Intecap, Policano, and ABS LLC]…. Even if we were to assume Houlihan was more skilled than the other financial advisors in this case, we note the bankruptcy court awarded Houlihan’s employees a fee at the “high end” of the pay scale for comparable financial advisors. Houlihan, however, has provided no legitimate basis for concluding it is a categorically superior financial firm.

Significant chunks of the Court’s opinion follow for those interested in the juicy details supporting this judicial slam:

Continue Reading 10th Circuit Rules that a Professional’s Flat Monthly Fee Payments Must Be Reasonable, and that Houlihan Lokey “Isn’t a Categorically Superior Financial Firm”

Below are notable blog posts on topical bankruptcy issues of interest to the bankruptcy litigator and practitioner for the week ending 11/11/05. Enjoy! Meanwhile, Cassie and I are off to LexThink’s BlawgThink 2005 Conference, described as the “first of its kind two-day event brings together the largest group of legal bloggers ever assembled for two days of education, innovation, fellowship and fun.”
Most importantly, remember our veterans today, the 87th anniversary of the end of the war that killed or wounded 37 million and was naively believed to be the “war to end all wars,” only to be cruelly followed by a punishing flu pandemic the following winter than killed another between 20 and 40 million people. We, as Americans, should be most thankful for our veterans’ achievements, and our founders’ vision.

Continue Reading Weekly Blog Roundup on Bankruptcy-Related Topics for the Week Ended 11/11/05

[This post was retitled to highlight its connection with prior criticisms of Moore v. Bay]
Arthur Levitt, Jr., the former chairman of the SEC, and perhaps its best chairman to date, sounded a stern warning in a lengthy op-ed in today’s W$J, entitled “Pensions Unplugged,” about the dire consequences sure to follow for America generally “unless immediate action is taken to bring accuracy, transparency, and accountability to pension accounting.” He begins:

As the wave of pension defaults that began with the steel companies and the airlines now threatens to engulf auto-parts makers and even car companies themselves, the pension crisis has grabbed headlines. Proposals to shore up the Pension Benefit Guaranty Corporation (PBGC) are making their way through Congress. Meanwhile, the problem — in the private and the public sector — will only get worse unless immediate action is taken to bring accuracy, transparency and accountability to pension accounting.
Over the past three decades, we have allowed a system of pension accounting to develop that is a shell game, misleading taxpayers and investors about the true fiscal health of their cities and companies — and allowing management to make promises to workers that saddle future generations with huge costs. The result: According to a recent estimate by Credit Suisse First Boston, unfunded pension liabilities of companies in the S&P 500 could hit $218 billion by the end of this year. Others estimate that public pensions — the benefits promised by state and local governments — could be in the red upwards of $700 billion.
Claims on the PBGC have skyrocketed. If serious reform is not undertaken, the non-partisan Center on Federal Financial Institutions estimates that the PBGC could easily face a $100 billion hole, delivering to our overburdened treasury a crisis exceeding the massive savings-and-loan bailout of the late 1980s. It’s imperative that we reform the regulatory incentives and accounting rules that encourage employers to make, and employees to accept, promises that can’t be kept.

He then outlines three critical steps that need to be undertaken if disaster is to be averted. These are:

First, “bring transparency and honesty back to pension accounting”;
Second, “investors and pensioners deserve relevant and understandable information from pension plans about their fiscal health and operations, not impenetrable financial statement footnotes”;
Third, “while the most recent headlines have focused on the impending crisis in corporate pension plans, there is perhaps an even larger problem with the public pensions of state and local governments. Not only are unfounded liabilities moving toward $1 trillion, but the accounting standards in this arena lag behind that of corporate America.”

Levitt’s final two paragraphs read more like a passage from the Book of Isaiah: a long passage detailing society’s prospective demise from its self-inflicted failings, followed by a few words of hope, rooted in the possibility — however unlikely — of effective human action. He writes:

Unrealistic pension assumptions already have gotten a number of public entities — such as the city of San Diego and the states of Colorado and Illinois — into economic difficulty, trouble that will spread if these impractical assumptions are not reined in. This past year, I have served as a member of the audit committee charged with investigating and remediating allegations of problems surrounding San Diego’s pension funds and finances. I have seen firsthand how devastating apparent examples of bad pension accounting and mismanagement can be, and how vital correcting both are to the overall health of the capital markets and the retirements of tens of millions of workers and retirees.

Untangling the web of problems plaguing the automotive and airline industries, as well as those of municipalities and states, has not been easy. Putting their pension plan and finances on sound footing will require great sacrifice for all affected: investors, employees, management and citizens. To avoid the pain that Delphi and San Diego are undergoing, we must now place defined-benefit pension plans on solid ground. Doing so may be difficult for many cities and companies. But it will be very good for America.

We can only hope that this country’s politicians, bureaucrats, and corporate and union stewards will heed Mr. Levitt’s passionate call for action.
What does this have to do with bankruptcy litigation? A lot, actually. As often noted on these pages (including here and here), bankruptcy courts can be expected in the coming years to enter orders terminating pension plans, leaving the PBGC and us taxpayers holding the bag.
Also, if he’s right, as we know he is, then large numbers of companies are likely presently insolvent (at least from a balance sheet perspective, if not from an “equitable” or cash flow perspective). Split-offs, spin-offs, divestitures, and the like that have been or will be consummated by these insolvent companies may well be challenged years later by trustees in bankruptcy (or their post-confirmation equivalents) asserting that these transactions were constructive fraudulent transfers because the companies were insolvent at the time of the transaction and received less than “reasonably equivalent value” in exchange.
Given the unjust, but universally-acknowledged, rule of Moore v. Bay (referenced here, here, and here), any such transaction that is avoidable under state law as to even just a single creditor is avoidable to the full extent of the transaction’s value for the benefit of the entire estate (thus providing significant numbers of creditors with a bankruptcy windfall that would otherwise be unavailable under applicable state law).
Hence, for those contemplating vulture-style purchases of assets from companies that are technically insolvent based on their real (i.e., understated) pension liabilities, carefully consider Arthur “Isaiah” Levitt’s stern admonitions, for they carry another simple, implicit message: CAVEAT EMPTOR! (or, alternatively, consult your preferred bankruptcy advisor).
Steve Jakubowski
© Steve Jakubowski 2005

Another solid opinion from the Bankruptcy Court for the Northern District of Illinois, this time in In re Mid-City Parking, Inc., 2005 WL 2857728 (Bankr.N.D.Ill, 10/31/05). In this case, Mid-City (the debtor in possession or “DIP”) filed a petition for relief under chapter 11. Subsequent to the filing, the DIP appealed a judgment that had been entered against it prepetition in favor of Clark Polk Land, LLC (“Clark Polk”). Notably, the DIP did not seek to modify the stay under section 362(d) in advance. Clark Polk shrewdly filed a motion in the state court to dismiss debtor’s appeal, arguing that the appeal violated the automatic stay. The Illinois Appellate Court granted Clark Polk’s motion. Not satisfied leaving well enough alone, Clark Polk then filed a motion in the DIP’s bankruptcy case seeking costs and attorneys’ fees related to the effort to seek dismissal of the appeal. The Bankruptcy Court undertook an extensive analysis of two central unsettled questions which have generated significant splits among the circuits:

1. Does a bankruptcy court have exclusive jurisdiction over whether a state court proceeding is subject to the automatic stay?
2. Can the trustee or debtor in possession unilaterally waive the protections of the automatic stay “with acts of estate administration that would otherwise violate 11 U.S.C. § 362(a) if performed by anyone else”?

After an extensive review of applicable law, Judge Jacqueline Cox answers the first question by choosing the first of three distinct approaches taken by various courts (including an earlier case from the same district that had selected the second of the three alternative approaches):

(A) the bankruptcy and state courts have concurrent jurisdiction to determine jurisdiction, with the bankruptcy court having the final say;
(B) the bankruptcy court has exclusive jurisdiction (and thus the state court ruling has no legal effect);
(C) the bankruptcy and state courts have concurrent jurisdiction to determine jurisdiction, but a prior state court ruling strips the bankruptcy courts of jurisdiction under the Rooker-Feldman doctrine. [Ed. Note: Though the Bankruptcy Court did not raise this, consider whether another ground for rejecting this third approach is the US Supreme Court’s unanimous ruling last term in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 125 S.Ct. 1517 (2005), which held that the Rooker-Feldman doctrine could not be invoked in cases involving concurrent or parallel state and federal court proceedings.]

The Court answered the second question in the affirmative, stating:

A Chapter 11 debtor-in-possession or case trustee may waive the protections afforded by § 362(a) when the actions that would otherwise violate the stay are in furtherance of his statutory duties of administering the bankruptcy estate, including appealing judgments against the debtor’s estate in nonbankruptcy forums. In so holding, this Court approves the result reached by the U.S. Court of Appeals for the Tenth Circuit and the Indiana Supreme Court rather than that reached by the First Circuit and the Ninth Circuit. Until a debtor-in-possession or trustee takes affirmative action showing an intent to prosecute the appeal of a judgment claim, however, an appeal from a judgment against the debtor’s estate is stayed pursuant to § 362(a)(1).

In support of this conclusion, the Court provides a thoroughly researched analysis, much of which follows:

Continue Reading Illinois Bankruptcy Court Addresses Circuits’ Split Regarding a State Court’s Jurisdiction Over the Automatic Stay’s Applicability and a Debtor’s Right to Unilaterally Waive the Automatic Stay’s Protections

As the W$J reports here, with the PBGC on track to becoming one of the largest shareholders in several of this country’s basic industries, there’s not a lot of joy these days in the Pre-Termination Processing Division (PTPD) at the Pension Benefit Guaranty Corporation (PBGC). According to this article, the PBGC owns about 7% of US Air, and is expected to own between 15% and 35% of UAL upon emergence from chapter 11. Regarding the PBGC’s mounting exposure to pension plans terminated in bankruptcy, the WSJ reports:

PBGC’s assumption of corporate pensions is resulting in a sharply widening deficit. At the end of 2004, the PBGC had $62.3 billion in obligations and $39 billion in assets — a gap of $23.3 billion. The deficit could swell if the Chapter 11 filings of Delta, Northwest and Delphi lead them to offload unfunded pension liabilities on the agency. The Congressional Budget Office estimates that the shortfall will widen to $86.7 billion by 2015….
The shares in the reorganized [US Air] that were awarded by the court to the PBGC amount to compensation for the $2.3 billion in unfunded pension liabilities it took over….
If Northwest and Delta shed their pension plans, it could saddle the PBGC with an estimated $11.2 billion in new unfunded liabilities.
Moreover, the PBGC estimates that Delphi, the largest U.S. auto-parts supplier in terms of sales, has an unfunded pension liability of $10.8 billion — and that the agency itself would be on the hook for $4.1 billion.

In related news from the UAL bankruptcy proceedings, Pension Benefit Guaranty Corp. v. United Air Lines, Inc., (Bankr. N.D. Ill., 10/26/05), the Bankruptcy Court ruled on the PBGC’s motion for an order of the Court terminating the UAL Pilot Defined Benefit Plan (the “Pilot Plan”) and establishing 12/30/04 as the plan termination date. According to the PBGC, if the Pilot Plan continued just six more months, the PBGC’s liability upon termination would rise by as much as $138 million (an amount disputed by UAL and the Pilots Union). The Bankruptcy Court for the Northern District of Illinois, however, denied the PBGC’s motion for summary judgment, stating:

Continue Reading UAL’s Bankruptcy Court Shifts Burden of Establishing Grounds for Pension Plan Termination to the PBGC, Which Faces Ever Widening Deficits as Plan Terminations Mount

Here’s our popular weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 11/06/05. Guaranteed, you’ll read here about decisions you won’t ever find in West’s Bankruptcy Reporter.
Reliance Ins. Co. v. Colonial Penn Franklin Ins. Co. (In re Montgomery Ward & Co., Inc.), 2005 WL 2877750 (3d Cir., 11/3/05)
In re Weber, 2005 WL 2862229 (BAP 10th Cir., 11/2/05)
Briarpatch Limited L.P. v. Geisler Roberdeau, Inc., 2005 WL 2861604 (S.D.N.Y., 11/1/05)
American Nat. Bank & Trust Co. v. Matrix IV, Inc. (In re S.M. Acquisitions Co.), 2005 WL 2857717 (Bankr. N.D. Ill., 10/31/05)
In re Toohey, 2005 WL 2850417 (Bankr. W.D. Ky., 10/27/05)
In re Ingrid Olsen, 2005 WL 2838986 (S.D.N.Y., 10/27/05)

Continue Reading Notable Reported Cases for the Week Ended 11/6/05

Thanks to our friends at the Delaware Litigation Blog, for letting us know of Professor Ribstein’s works and Professor Bainbridge’s works on the fiduciary duties of directors in the “zone of insolvency.”
Along these lines, I also highly recommend a recent article reviewed at the NCBJ entitled “Deepening Insolvency,” authored by J.B. Heaton (partner at Barlit Beck Herman Palenchar & Scott LLP). This well-researched article, published in the Spring 2005 issue of The Journal of Corporation Law (vol. 30, no. 3), provides an excellent summary of the development and current state of “this theory of corporate injury.” In this article, Heaton writes:

Deepening insolvency theories originated in efforts to avoid imputing the wrongdoing of corporate directors and officers to a bankrupt plaintiff corporation by invoking the so-called “adverse interest exception” [to the in pari delicto doctrine], evolved to a theory of standing and damages, and finally “morphed” into an independent cause of action. (Citing In re Global Service Group LLC., 2004 Bankr. LEXIS 1702, at *11 (Bankr. S.D.N.Y., 11/4/04) (recognizing that “[w]hat began as a justification for recognizing the ‘adverse interest’ exception soon morphed into a theory of recovery”)).

Steve Jakubowski
© Steve Jakubowski 2005

Last Wednesday, the Office of the Circuit Executive for the U.S. Court of Appeals for the Third Circuit selected four men to serve in the open slots finally created for Delaware’s grossly understaffed Bankruptcy Court (which for nearly 15 years had been denied the addition of permanent judges primarily, in my view, because of fear by out-of-state lawyers/lobbyists that enhancing Delaware’s ability to handle premiere cases would adversely impair their out-of-state, big city practices). The four are:
Kevin Gross, Rosenthal Monhait Gross & Goddess
Brendan Shannon, Young Conaway Stargatt & Taylor
Kevin Carey, Bankruptcy Judge of the Eastern District of PA
Christopher Sontchi, Ashby & Geddes
The Office of the Third Circuit Executive is now taking comments on the qualifications of these designates through December 1st, and decide soon thereafter. For those who know the candidates personally, I hope that you take the time to send in your comments.
The Bankruptcy In$ider had this to say about their backgrounds, Delaware’s woefully understaffed bankruptcy bench, and the selection process generally:

Continue Reading Movin’ on Up, Finally! — Long Overdue Selections to Delaware’s Overworked Bankruptcy Court Announced

In Allen v. J.K. Harris & Co, LLC, 2005 WL 2600205 (E.D. Pa., 10/12/05), a state court consumer class action seeking damages based on unfair trade practices was removed by the defendants to federal district court following the plaintiff/debtor’s filing of a chapter 13 petition for relief. The plaintiff/debtor then moved to remand the case back to state court.
The district court considered whether abstention is mandatory under 28 U.S.C. § 1334(c)(2), which says that courts “shall abstain” from exercising jurisdiction over an adversary proceeding where a party timely moves for abstention based on a state law claim that does not arise in the bankruptcy case and could be “timely adjudicated” in the state forum.
In noting the split among the circuits as to whether the doctrine of mandatory abstention can be applied to an already removed case, the Court (indicating that the Third Circuit has not decided the matter) sided with the majority view that the doctrine of mandatory abstention may be applied to a removed proceeding. The Court stated:

Continue Reading Mandatory Absention of a Removed State Court Action: A New Case Reviews the Split Among the Circuits

As all bankruptcy practitioners know, lawyers are increasingly being held accountable for losses suffered by their bankrupt clients. To meet the blogosphere’s demand for quality legal postings, the Coleman Law Firm has developed a second blog, The Illinois Legal Malpractice Blog (www.illinoislegalmal.com). The blog is moderated by my colleague Cassie Crotty, who quickly understood the great potential of blogging, and developed a zeal for it. Given her talents, the blog is sure to be a great one. Please stop by the site and add it to your RSS feeds. You’ll be glad you did!
Steve Jakubowski
© Steve Jakubowski 2005