Many lawyers and clients unfamiliar with the upside-down world of avoidance litigation tend to think that traditional rules of setoff should govern the resolution of avoidance action litigation: “the debtor’s entitled to “x”; the creditor’s entitled to “y”; net-net….” As the Fourth Circuit reminds us in In re Coleman, (2005 WL 2665798) (4th Cir., 10/20/05), avoidance litigation often starts with a more “all or nothing” approach.
The case reminds me of another classic “all or nothing” type case that often trips people up: Moore v. Bay, 284 U.S. 4 (1931). Unlike today’s weighty US Supreme Court opinions, Moore v. Bay is only one page. Apparently that’s all Justice Oliver Wendell Holmes (then about 90 and one year from retirement) had the strength to say about the topic. Subject to some important nuances, that case is generally understood to mean that a transfer avoidable by a bankruptcy trustee as to a single creditor (even as to just a nickel), is avoidable to the entire extent of the transaction (even if the transaction is worth millions). This is as inequitable a result as one gets in bankruptcy, and if any bankruptcy case deserves to be reviewed again by the US Supreme Court it’s Moore v. Bay, but that’s a discussion for another day.
In the Fourth Circuit’s Coleman case, a bank initiated foreclosure proceedings against a debtor’s home, which was stayed by the debtor’s chapter 11 filing on the day before the planned foreclosure sale. The Fourth Circuit described the interesting procedural posture of the case as follows:

Continue Reading Avoidance Actions Are All or Nothing, the Fourth Circuit Rules

Summers v. UAL Corporation, et al., (2005 WL 2648670) (N.D. Ill., 10/12/05), pitted the United Airlines ESOP participants against the plan trustee, State Street Bank and Trust Company, among others. In their complaint, the plaintiffs claimed that when UAL’s stock prices declined prior to UAL’s filing for bankruptcy, the UAL ESOP Committee, State Street Bank (the plan trustee), and others failed to take appropriate action to protect plan assets (e.g., by diversifying the ESOP’s stockholdings and shedding UAL shares). All defendants except State Street Bank settled.
Plaintiffs and State Street filed cross-motions for summary judgment, and State Street Bank moved to strike or exclude the opinions and testimony of Plaintiffs’ expert witness, Lucian Morrison (“Morrison”), who opined that “UAL’s bankruptcy was imminent in October 2001, and that Defendants failed to act prudently by neglecting to sell the UAL stock to protect the interests of the Plan participants.” United’s bankruptcy imminent in October, 2001? Doesn’t sound too unreasonable if you were in the bankruptcy or turnaround business at the time, does it? Now just try and prove it!
In granting State Street’s motion to exclude the Morrison’s opinion, Judge Deryeghiayan reminded us that “the district court acts as a ‘gatekeeper with respect to testimony proffered under Rule 702 to ensure that the testimony is sufficiently reliable to qualify for admission,’ ” and opined:

Continue Reading Expert’s “Half-Baked” Opinions Thrown Out in Action Against UAL’s ESOP Trustee

As people in the oil & gas business know, some wells never go dry. The IPO allocation shareholder litigation, which spawned hundreds of shareholder suits against investment banks who had improperly allocated shares in hot IPO’s to favored investors, is one such well that is now yielding tangible benefits for bankruptcy estates. In In re Quintus Corp, (2005 WL 2594600) (Bankr. D. Del. 10/13/05), the Bankruptcy Court for the District of Delaware, recently refused to dismiss a chapter 11 trustee’s complaint against Donaldson, Lufkin & Jenrette Securities Corporation. In Quintus, the trustee’s complaint alleged that DLJ caused the stock issued in Quintus’ 1999 IPO to be underpriced because it was simultaneously allocating the underpriced shares to favored clients who, in exchange, would share part of their profits with DLJ through side agreements. Notably, the Court in Quintus refused to dismiss any counts of the Complaint, which alleged not only breach of fiduciary duty, but also breach of the covenant of good faith and fair dealing, breach of contract, fraud and fraudulent concealment, negligence, and unjust enrichment.
This case represents another recent victory for bankruptcy estates in actions against securities underwriters who underpriced and misallocated an issuer’s IPO shares during the high-tech boom of the late 1990’s. Recently in EBC I Inc. v. Goldman Sachs & Co., (2005 WL 1346859) (N.Y., 6/7/05), for example, the New York Court of Appeals, in a case of first impression, held that a valid claim for breach of fiduciary duty had been asserted against Goldman Sachs, the lead underwriter in eToys’ IPO. There, the Court stated that when Goldman set the IPO price of eToys’ stock, it had a duty to advise eToys of conflicts of interest stemming from an alleged scheme that resulted in Goldman netting millions of dollars in kickbacks from clients who had flipped the debtor’s discounted stock into the market at a windfall. This case, brought by the Creditors’ Committee in the eToys bankruptcy case, is also notable because the New York Court of Appeals held that the complaint failed to state a claim for breach of contract, professional malpractice, or unjust enrichment. As such, unlike the Bankruptcy Court in Quintus, the Court in EBC I narrowed the complaint to a single breach of fiduciary duty count based on Goldman’s role as adviser in setting the IPO price, while simultaneously failing to disclose its relationships with clients to whom it had allocated the discounted shares.
© Steve Jakubowski 2005

While I’ve spent quite of bit of time bashing BAPCPA, it’s not all bad. One change, for example, that was long overdue was an amendment to the Bankruptcy Code that addressed the so-called “Deprizio problem,” a problem the drafters of the Code’s amendments in 1994 thought they had resolved once and for all.
In In re ABC-Naco, (2005 WL 2649305) (Bankr. N.D. Ill., 10/13/05), Judge Wedoff, Chief Judge of the Bankruptcy Court for the Northern District of Illinois, in addressing a challenge to the constitutionality of BAPCPA’s Deprizio amendment, first succinctly summarized the purpose of the amendment, and then affirmed its constitutionality.
For those contemplating constitutional challenges to BAPCPA based on violations of the Takings and Due Process Clauses of the US Constitution, this case is worth reading as it well demonstrates the challenges facing the litigant who contests garden variety amendments to BAPCPA like the “Deprizio amendment.” (See also, Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr. L. J. 571 (2005) (“identify[ing] the constitutional issues most likely raised by BAPCPA”)).
Excerpts from the Court’s opinion follow:

Continue Reading Bankruptcy Court Affirms Constitutionality of BAPCPA’s Deprizio Amendment

In the first case to address who is (or is not) a “debt relief agency” under BAPCPA, an important question given the “new and significant restrictions on the activities of debt relief agencies,” Judge Lamar W. Davis, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Georgia, ruled sua sponte on October 17, 2005, BAPCPA’s effective date, that attorneys who are members of the bar of that court, as well as those admitted pro hac vice, are not “debt relief agencies” within the meaning of BAPCPA, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise. In re Attorneys at Law and Debt Relief Agencies, (2005 WL 2626199) (Bankr. S.D. Ga. 10/17/05). The matter raises interesting “case or controversy” issues, as it’s not exactly clear what specific situation(s) the Court was addressing, other than the obvious theoretical ones. Still, it’s hard to imagine anyone challenging or disagreeing with this opinion and order. You have to wonder whether this Court’s proactive style will catch on elsewhere.
Without explicitly casting aside “plain meaning” canons of statutory construction, the Court drew support from a wealth of current critical commentary on the topic in rejecting the plain meaning of BAPCPA’s relevant provisions (which seemingly include attorneys within BAPCPA’s definition of “debt relief agencies”), stating:

Continue Reading Georgia Bankruptcy Court Rules Sua Sponte that Attorneys Admitted to Practice in the District are Not “Debt Relief Agencies” Under BAPCPA

Multi-Year Litigation Seeking $17 Million in Damages Ends With $150,000 Settlement

FRIEDRICHSDORF, Germany, Oct. 17, 2006 (PRIMEZONE) — AM GmbH, a privately held German company, today announced that a federal bankruptcy court in Chicago has approved a settlement between the bankruptcy litigation trust of Chinin USA, Inc. and the company concerning financing services provided by AM GmbH to Chinin between 1992 and 1997. AM GmbH paid $150,000 in the settlement in exchange for a complete release of all possible claims against the company and its founders. The bankruptcy court order approving the settlement is now final and non-appealable, and the case was dismissed with prejudice yesterday by stipulation of the parties.

 

"Our position since the beginning has been that the litigation lacked merit. This settlement provides a resolution to a matter that had become a significant nuisance over a several-year period and we look forward to more productive use of management’s time," said Arnold Mattschull, chairman and president of AM GmbH.

Steve Jakubowski of The Coleman Law Firm, based in Chicago, represented AM GmbH in the litigation.

About AM Group

The AM Group produces "ready-to-wear" clothing from designs with modern machinery, trained skilled employees, and effective logistics with a total capacity of more than one million garments per month. The AM Group currently operates four state-of-the-art production facilities in India, Sri Lanka, and China with more than 2,400 employees. Additional information is available at www.AM-Fashion.com

CONTACT:  Maier & Company, Inc.
Gary S. Maier/Crystal Warner
(310) 442-9852

© Steve Jakubowski 2005

Here’s our weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 10/16/05.
In re Kreisler, (2005 WL 2436451) (Bankr. N.D. Ill., 10/4/05)
In re CK Liquidation Corp., (2005 WL 2436444) (D. Mass., 10/4/05)
In re Aldar Investments, Inc., (2005 WL 2429094) (Bankr. M.D. La., 9/30/05)
In re Onco Investment Co., (2005 WL 2401908) (D. Del., 9/29/05)
In re Millenium Seacarriers, Inc., (2005 WL 2398014) (S.D.N.Y., 9/28/05)
Argentinian Recovery Company, LLC v. Board of Directors of Multicanal, S.A., (2005 WL 2375074) (S.D.N.Y., 9/28/05)
IRS v. Harvard Secured Creditors Liquidation Trust, (2005 WL 2397224) (D.N.J., 9/28/05)
In re Insilco Technologies, Inc. (2005 WL 2371982) (Bankr. D. Del., 9/27/05)

Continue Reading Notable Reported Cases for the Week Ended 10/16/05

Something’s very wrong when an estimated 500,000 Americans felt compelled in the last week to file for bankruptcy in order to avoid the chance that if they do have to file in the future, they’ll regret not having done so now. As most know, these filings were precipitated by BAPCPA (the “Bankruptcy Reform and Consumer Protection Act of 2005″), which goes effective at midnight on October 17, 2005.
What a misnomer that Act is proving to be! Doubt any consumers who recently filed for bankruptcy relief would say the new law made them feel protected. Some have suggested that the new legislation should have been called BARF (Bankruptcy Abuse Reform Fiasco), not BAPCPA.
The unprecedented crush of pro se consumer filings in Chicago (where electronic filings are mandatory) was so great on Friday that it overwhelmed the servers, shutting them down until around midnight the next day. Stories from NY, Denver, DC, Fresno, and Montana show that no section of the country was spared from the onslaught of bankruptcy filings. Many creditors will feel pain too as hundreds of thousands of debtors walk from debts they may have paid absent the new law.
In the end, the new legislation has spawned a pathetic mess for poor and middle America, as well as for bankruptcy’s machinery, though I suppose some will benefit. I suspect that bankruptcy judges will show up a bit tired and ornery at this year’s NCBJ, rightly feeling overworked, underpaid, and ignored on policy and drafting issues. Ask, for example, Judge Robert Mark, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Florida, who opined last week in only the second reported BAPCPA opinon (where he categorically disagreed with the first reported BAPCPA opinion that reached an intuitively wrong result based on the “plain meaning” of one of BAPCPA’s raison d’etres, the provision purporting to eliminate the “Mansion Loophole” whereby the wealthy in states like Florida and Texas shirked their debts while keeping their mansions):

After reading the several hundred pages of text in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Reform Act”), one conclusion is inescapable. The new law is not a model of clarity. Implementing the changes will present a daunting challenge to judges, clerk’s offices, attorneys and the parties who seek relief in the bankruptcy court after October 17, 2005, the date most of the provisions become effective.

In re Kaplan (2005 WL 2508151) (Bankr. S.D. Fla., 10/6/05).
Not a good start for this legislation, and it sure looks downhill from here.
© Steve Jakubowski 2005

This New York Times story reports on the potential conflicts of interest at credit counseling firms, whose advice must (in all but emergency situations) be first sought by consumer debtors in advance of their filing for bankruptcy following BAPCPA’s October 17, 2005 effective date.
The NYT reports that “critics say that the new counseling requirement, part of the law that takes effect on Monday, increases the risk that people will be improperly steered away from the courts and into debt management plans, for which the counseling agency often receives part of any debts repaid.”
The story also quotes NYU’s Professor Karen Gross (who is also president of the Coalition for Consumer Bankruptcy Debtor Education) as saying, “Lots of people see the opportunity to make lots of money off the backs of consumer debtors, and that should make people extremely cautious about this.”
The Offices of the US Trustee for each district are responsible under BAPCPA for approving credit counseling agencies. We can only hope that they figure out how best to avoid this potential problem before it explodes in everyone’s face.
© Steve Jakubowski 2005

You have to check out JibJab’s new movie, Big Box Mart. Another JibJab classic. Get there early, because if the past is any guide, the servers are going to be overwhelmed with traffic.
This short clip makes you laugh at Middle America’s squeeze, but the reality is, it’s no laughing matter. With the US auto industry in peril (see, e.g., Delphi, GM, Ford, Visteon), hundreds of thousands of jobs are in jeopardy, and individual dislocations will be severe as union workers and middle management bear the brunt of the industry’s assault on costs. Present and future bankruptcy courts can be expected to enter orders in the next 5 years terminating pension plans and modifying collective bargaining agreements. With BAPCPA’s legislation about to go effective, these squeezed workers and retirees will find that bankruptcy isn’t the “home court” it once was for new debtors.
JibJab picked up on the coming squeeze of the middle class (with BAPCPA’s onerous provisions supplying some additional squeeze), and has created another gem.
© Steve Jakubowski 2005