Historian Bruce Mann, author of Republic of Debtors: Bankruptcy in the Age of American Independence (2002), has submitted a sweeping 30 page review of bankruptcy law in the days of our founding fathers in an amicus curiae brief to the US Supreme Court in Central Virginia Comm. College v. Katz. “He files this brief,” he writes, “because this case, which addresses an issue of vital importance to the bankruptcy system, turns in large part on eighteenth-century American history.”
Professor Mann sides squarely with the bankruptcy trustee’s position (as respondent) that individual states have no right of sovereign immunity in federal bankruptcy proceedings:

Contrary to the petitioners’ argument, there is no evidence that at the time of the ratification of the Constitution the states reserved any right to assert sovereign immunity in any bankruptcy proceedings established pursuant to any Congressional exercise of the bankruptcy power conferred in art I, sect. 8, cl. 4. None of the known public or private discussions of bankruptcy – before, during or after the adoption and ratification of the Constitution – drew any distinction between public and private creditors. Any such distinction would have undermined the concept of a “fresh start,” which was generally understood even then to be the fundamental purpose of the bankruptcy discharge. . . .

Both proponents and opponents of federal bankruptcy legislation recognized that the federal bankruptcy power necessarily entailed a concomitant abrogation of state sovereignty by binding states to discharges and by otherwise interfering with state sovereignty.

It will be interesting to see if the Petitioners from the State of Virginia find someone with an equally compelling opposing perspective. Stay tuned.
© 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

With the effective date of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA) fast approaching (October 17, 2005), this recent article from The National Law Journal provides some helpful hints on BAPCPA’s changes to the law, practice, and procedure, as well as the assured wave of litigation that will follow in its wake. But don’t say we didn’t warn you about the loopholes and gaping holes in the legislation that was pushed through Congress! Now we all get to fight about them for a while.
Guess who benefits from all that litigation? Probably not the client. It’s said that tax lawyers benefit the most from every change to the tax code. I wonder if the same will be true for bankruptcy litigators in this round of bankruptcy law changes? Reminds me of a sadly entertaining book by Sol Stein, A Feast for Lawyers, in which he bitterly recounts the demise of his genteel old-line publishing house at the hands of “feasting” bankruptcy lawyers at one of NY’s finest (caution: shield eyes before viewing).
© Steve Jakubowski 2005

The Chicago Tribune reports that Sandra Butler, former courtroom deputy to Judge Jacqueline Cox (and before that to former Judge Ron Barliant), has been charged with attempted extortion for allegedly soliciting $500 from a debtor by promising to halt the sale of the debtor’s house. The Tribune reports:

Butler had no power to influence the bankruptcy proceeding, but she acted otherwise, even pretending to call the debtor’s bank to negotiate a more favorable repayment plan, according to an affidavit filed by FBI agent Kenneth Samuel.
According to the affidavit, Butler, talking into a phone earlier this month, “asserted that she knew [the debtor] very well” and that while the amount “is supposed to be 10 percent, that was all [he] had.” Butler then led the debtor to her office, where she took the money, according to the affidavit.
Butler appeared Monday before U.S. Magistrate Judge Sidney Schenkier. She was allowed to remain free on a $4,500 bail, and a court date was set for Sept. 27.
Butler was employed by Ken Gardner, clerk of the U.S. Bankruptcy Court in Chicago, and was assigned to the courtroom of Judge Jacqueline P. Cox. Gardner said he fired Butler from the $69,000-a-year job Monday morning.
“I’m shocked this would occur in the courthouse,” Gardner said. “I’m shocked this would occur with someone working for me.”
Butler had worked for the clerk’s office since 1985 and had been assigned to Cox’s courtroom for about two years, Gardner said. Bankruptcy Court officials cooperated with the sting operation, according to the affidavit.
The FBI became suspicious of Butler in August 2002, when a debtor in a bankruptcy case told them Butler had asked for $5,000 to stop the sale of her home, according to Samuel’s affidavit. The debtor in that case later learned the money wasn’t used for that purpose and contacted the FBI.
In the sting operation, FBI officials filed a fake bankruptcy case, giving the debtor a false name, Stanley Kozubal, and listing his home as an address in Des Plaines. The bankruptcy filing said Kozubal owed $130,000 to a bank in Kentucky.
The undercover witness was wearing an audio and video recording device when he went to Butler’s office at the beginning of the month, according to the affidavit. He said he was afraid to lose his home and asked Butler for help.
“Butler responded that she could `off the record’ make some phone calls to try and stop the sale of his property,” Samuel said in the affidavit. “Butler asked the [debtor] if he had any `funds today.'”
Officials in U.S. Atty. Patrick Fitzgerald’s office would not elaborate on Samuel’s affidavit. A federal defender representing Butler could not be reached for comment.

Our condolences to the Judges and staff at the Bankruptcy Court for this horrible and most undeserved news. Having practiced in a number of jurisdictions around the country, I can tell you that Chicago’s bankruptcy court is among the most skilled, diverse, and efficient in the land. Its judges always afford great compassion, time, and respect to even the most indigent pro se debtor caught up in the upside-down world of consumer bankruptcy. How sad it is that this news, which clearly caught everyone from Chief Judge Eugene R. Wedoff on down by surprise, might detract from the Court’s painstaking efforts to lead the way in fairly administering justice in today’s very contentious and litigious bankruptcy environment.
Steven Jakubowski

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

It is natural to think that a federal case involving a multiplicity of armed parties sharing a common nucleus of operative facts should be waged in one massive armageddon (provided of course that federal jurisdiction is appropriately found in the initial instance). This concept of “ancillary jurisdiction” has been codified in 28 U.S.C. 1367, and applies in district courts throughout the land.
Bankruptcy litigation, however, is a horse of a different color, as Judge Schmetterer reminds us in In re Ha-Lo Industries, Inc. (2005 WL 2160087), and a trap for the unwary. That case reminds us that even a host of apparent connections to the debtor and the estate (fraudulent transfer action of hundreds of millions of dollars, partial settlements, filed proofs of claim, D&O indemnities, recoveries directly inuring to creditors’ benefit) will not necessarily confer subject matter jurisdiction over a third party complaint.
Failure to remember that bankruptcy courts can’t exercise ancillary jurisdiction (at least in the 7th Circuit–check your own circuit to be sure) can lead to much wasted time and effort and a sure loss of critical momentum.
The case does leave you wondering whether the third party complaint would have been dismissed had the third party plaintiffs first filed a motion to withdraw the reference of the case to the district court, which then presumably could have exercised ancillary jurisdiction over the third party complaint (assuming the motion were granted), even though the proceeding was initially commenced in the bankruptcy court. Worthwhile considering if you’re faced with a similar situation.
© Steve Jakubowski 2005

United filed its draft 130 page Plan of Reorganization and supporting 430 page Disclosure Statement (Parts 1 and 2), and it’s looking like a blood bath for unsecured creditors (4-7 cents on the dollar) and equity holders (no distributions whatsoever). Another very well-drafted plan by K&E’s bankruptcy group, that contemplates the substantive consolidation of all United entities (this request alone makes the treatment sections of the Plan very cumbersome because the plan is drafted in the alternative to accommodate the possibility that United’s substantive consolidation request is denied by the Bankruptcy Court). While sources say that the lack of distributions under the Plan to equity was long expected, the 50% drop in the stock price within moments after the Plan was filed suggests otherwise among professional traders (though the fact that the price is even $.65 a share tells me that people haven’t quite yet figured out that “nothing” in bankruptcy really means “nothing”).
This plan gives a bone to unsecured creditors, though valuations probably don’t really justify it. Rough cut at the numbers suggests that total combined take for all unsecured creditors and common stockholders will be only about 2-3 times total expected professional fees earned in the case. It also makes you wonder about whether holders of publicly-traded shares should ever be restrained from selling at will for fear of impairing net operating loss carryforwards. The 7th Circuit clearly wasn’t too impressed with the idea of restraining shareholders from selling shares in order to avoid jeopardizing post-confirmation use of NOL’s. Turns out, the use of NOL’s will be severely limited anyway under the Plan as presently drafted.
Special thanks to Kevin O’Keefe and his staff at LexBlog for their getting this blog up and running so quickly in order to accommodate the breaking news, as well as my incessant desire to share news and information with others.
More to follow. Thanks for reading.
© Steve Jakubowski 2005