The bankruptcy court overseeing Conseco’s massive bankruptcy case has issued a second opinion addressing the scope of a bankruptcy court’s post-confirmation jurisdiction in litigation involving the reorganized – or “New” – Conseco. In its earlier ruling (318 B.R. 425), the court concluded that it did not have jurisdiction over the reorganized debtor’s adversary proceeding against the debtor’s former officers and directors who had defaulted under Conseco’s prepetition loan programs. The court reasoned that bankruptcy’s broad “related to” jurisdiction is far more limited following plan confirmation than it is pre-confirmation, and that it “exists primarily to ensure that the plan is implemented and to protect estate assets devoted to implement the confirmed plan.”
More recently, the Conseco court held that, despite the fact that “the Seventh Circuit takes the most restrictive view of bankruptcy jurisdiction of any circuit,” “related to” jurisdiction existed over an adversary proceeding in which New Conseco sought to enjoin a class action filed in Pennsylvania state court against the reorganized debtor based primarily on contracts that took effect post-confirmation. (2005 WL 2292706). This is because, the court explained, the question of whether the class action violates a discharge injunction is within the “core” jurisdiction of the court.
The existence of post-confirmation jurisdiction in a bankruptcy court is a fact intensive matter that requires careful consideration and planning before the plan is confirmed, not afterwards. And as these cases illustrate, resolution of the question can yield surprising and disappointing results for the losing litigant. Surely New Conseco didn’t expect to be precluded from suing its officers and directors for prepetition loan defaults. Nor is it likely that the class action plaintiffs expected to have to defend themselves in the bankruptcy court for asserting claims that arose post-confirmation. Such are the traps that await experienced and unexperienced bankruptcy litigators alike. Caveat Litigator!
© Steve Jakubowski 2005

Generally, a creditors’ committee or individual creditors seek derivative standing to sue when the debtor-in-possession (DIP) refuses to bring suit. Recently, the Second Circuit addressed a “converse situation” of first impression in In re Smart World Technologies, LLC: that is, whether derivative standing is approriate in the Rule 9019 settlement context when the debtor is alleged to be unjustifiably pursuing a claim and/or refusing to settle.
The Second Circuit’s opinion provides many important lessons to bankruptcy litigators. One is that the buck apparently stops with the debtor-in-possession when it comes to pursuing and/or settling litigation claims. Another is that zealous advocacy of your client’s interests, even when everyone–including the judge–thinks you’re a moron, sometimes pays off.
In overturning the decision of the bankruptcy court, the Second Circuit stated:

We conclude that while authority to pursue a Rule 9019 motion may, in certain limited circumstances, be vested in parties to the bankruptcy proceeding other than the debtor-in-possession, those circumstances are not present here…. We do not rule out that in certain, rare cases, unjustifiable behavior by the debtor-in-possession may warrant a settlement over the debtor’s objection, but this is not such a case.

In passing, the Second Circuit did not hide it’s displeasure at the bankruptcy court’s having apparently ruled more on emotion, than on a developed record:

[H]aving searched the record in vain for anything more than a conclusory statement from the bankruptcy court as to the merits of Smart World’s claims against Juno, we find it difficult to understand how the lower courts could have formed such a firm opinion that Smart World’s claims lacked viability.

At the Rule 9019 hearing, for instance, Smart World’s counsel stated “[w]e think Your Honor needs to make a record here, and make findings as to the range of reasonableness as to the settlement.” Counsel further offered to provide testimony as to “the factual circumstances underlying the various claims” and a “calculation based on [the witness’s] knowledge of the potential value of the claims.” The bankruptcy court brushed the offer aside, stating “[t]here’s no need for him to do that.” Even WorldCom’s counsel pointed out to the bankruptcy court that it had not heard Smart World’s explanation of its “theory of recoveries, claims and damages,” a fact that the court found untroubling….

Continue Reading When It Comes to Settlements, the Debtor in Possession Makes the Call

Two recent cases from Delaware (2005 WL 2148563) and Illinois (326 B.R. 116) remind us that a defendant’s right to a jury trial in bankruptcy litigation should be timely asserted and periodically affirmed if it is to be preserved at the time of trial. Otherwise, the judge is likely to find that the right has been waived, even absent the defendant’s filing of a proof of claim. Don’t snooze on this one, or your client will lose.
© Steve Jakubowski 2005

Though they likely occur far less frequently than the drafters of the Bankruptcy Code originally expected, estimation proceedings in bankruptcy are one way to convert uncertainty into certainty.
A recent decision from Delaware’s district court in the In re Federal-Mogul Global, Inc., bankruptcy case illustrates how estimation proceedings can swiftly — and conclusively — convert uncertainty into certainty, much to the chagrin of the losing parties who had toiled for years in complex litigation. The need to estimate the foreign asbestos claims arose because of a conflict between the plan’s proponents and a committee representing the interests of approximately 3,200 municipalities, school districts, hospitals, businesses, and individuals who owned and operated buildings where asbestos products manufactured by the debtor’s non-US subsidiaries were installed, and who had filed proofs of claim for damages in the debtor’s US bankruptcy case.
The Court noted the importance in bankruptcy of reducing uncertain claims to certainty, however rough that justice may be. Without much ado, the Judge fixed total liability at $9 billion, and with one decisive blow, resolved decades of potential litigation against the debtor, to the sure dismay of not only the defendants whose claims would be significantly diluted, but the many asbestos lawyers for the defense whose gravy train would soon be coming to an end.
An interesting sidenote from a procedural perspective is that — surprisingly given the magnitude of the claims involved — neither the Debtors, nor any of the Official Committees in the Chapter 11 proceeding, nor the administrators appointed in the Debtors’ United Kingdom insolvency proceedings, nor the trustees for the T&N Pension Trustees, nor any other U.S. or U.K. creditor made an appearance at the estimation hearing. Instead, the need for estimation of the foreign asbestos claims was precipitated by the conflict between the reorganization plan’s proponents and the committee representing the approximately 3,200 British municipalities and agencies. In essence, the parties who did not appear at the estimation hearing did not have a dog in the fight (though that generally never stops bankruptcy shops from sending SWAT teams in anyway to observe). Perhaps they shunned the hearing under the theory that nothing good can come from their attendance (particularly on res judicata or issue preclusion grounds) and that prudence, therefore, is the better part of valor.
In deciding that estimation was clearly appropriate in resolving this dispute between competing claimants to a limited fund, the Court explained (citations omitted):

Estimation helps the court “avoid the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions.” The Bankruptcy Code [in section 502(c)] states that estimation is necessary when liquidation outside of bankruptcy would unduly delay the administration of the case. The object of such a proceeding is to establish the estimated value of a creditor’s claim for purposes of formulating a reorganization plan. Although courts have disagreed about whether estimation is mandatory or permissive, it is apparent that the Bankruptcy Code requires an estimation in order to prevent undue delay in the administration of the estate. It is undisputed that the Personal Injury Claims are contingent and unliquidated, and that liquidation of each claim by a trial would unduly delay the administration of these cases. Moreover, the parties are attempting a plan for reorganization; thus, in accordance with the underlying principles in bankruptcy of promoting the quick and efficient administration of the estate, the estimation of the aggregate allowable amount on all United States and United Kingdom pending and future asbestos claims will be determined by this Court.

Continue Reading Estimation Proceedings: Rough Justice in a Rough World

Bankruptcy litigation is generally no lovefest, but few cases are so vicious that they spur Judges to include famous quotes commenting on the perniciousness of base hatred, vengence, resentment, delusion, lies, and “scorched earth” litigation. In In re Nartron, the Honorable Jo Ann Stevenson, Chief Judge of the Bankruptcy Court for the Western District of Michigan, combined each subheading of her findings of fact and conclusions of law with apt quotes on the human condition.

The Beginning: “Mighty things from small beginnings grow.” John Dryden (1631-1700)
Nartron and Amway Do Business: “Trust can be a powerful weapon.” Unknown
The Long and Winding Litigious History Between Nartron and Amway/Alticore: “Hate traps us by binding us too tightly to our adversary.” Milan Kundera (1929-
Richard J. Pluta’s Betrayal of Nartron and Rautiola: “Resentment is like taking poison and waiting for the other person to die.” Malachy McCourt, (1931-)
Nartron’s Problems With General Motors: “Delusions, errors and lies are like huge, gaudy vessels, the rafters of which are rotten and worm-eaten, and those who embark in them are fated to be shipwrecked.” Buddha (563-483 B.C.)
The Bankruptcy: “An eye for an eye makes the whole world blind.” Mahatma Gandhi (1869-1948) [NB: Actually, the “eye for an eye” approach to compensation for damages is well-established in Jewish law as strictly monetary in nature. I suppose this explains why we don’t hear of storehouses of eyeballs and other body parts being discovered in the archeological digs from the Temple Mount, at least not yet.]
Alticore’s Motion to Appoint a Chapter 11 Trustee: “Scarcely any law [of humanity] is more openly transgressed, or more industriously evaded than that which [commands us] to forgive injuries and prohibits .. the gratification of the desire which every man feels to return pain upon him that inflicts it. Many who could have conquered their anger are unable to combat pride, and pursue offenses to the extremity of vengeance, lest they should be insulted by the triumph of an enemy.” Samuel Adams (1722-1803)
Factual Findings: “I am here to make decisions and whether they prove right or wrong I am going to make them.” Harry S. Truman (1884-1972)
The Court’s Own Observations: “It is reasonable that everyone who asks justice should do justice.” Thomas Jefferson (1743-1826)
Conclusions of Law: “You can’t shake hands with a clenched fist.” Indira Gandhi (1917-1984)

She ultimately decides, Solomonically, that “cause” has been established to appoint a Chapter 11 trustee, but that its powers would be limited.
Though she goes out of her way at the beginning of the opinion to praise counsel to these spiteful combatants for being “extremely well prepared and zealous in the pursuit of their clients’ positions,” the case leaves me wondering whether lawyers really deserve praise for scorching the earth, even if they’re very good at it.
© Steve Jakubowski 2005