1.)  Sheet Metal Workers’ National Pension Fund v. Collins and Walton Plumbing and Heating Contractors, Inc., 2013 U.S. Dist. LEXIS 84812 (W.D.N.Y., June 17, 2013):

Can a district court sever a plaintiff’s claim against a bankrupt debtor to allow the plaintiff to continue the litigation against the non-debtor party? 

The Plaintiff filed its action seeking damages against both the corporation and its principal. Upon the corporation’s Chapter 11 Bankruptcy filing, the Plaintiff moved the District to sever the action pursuant to Federal Rule of Civil Procedure 21. This would allow the Plaintiff to continue in its pursuit of the principal while the action was stayed as against the bankrupt corporation.

Judge Telesca found the individual was not protected by the corporation’s automatic stay and “the failure to sever the alleged claims against the bankrupt corporation would be unjust, unless it was an indispensible party to this action.”  Here the causes of action were divided, with specific claims against the principal as an ERISA (29 U.S.C. § 1104) fiduciary and specific claims specifically against the corporation for breach of contract. Citing supporting caselaw on point, the District Court found in such circumstances the bankrupt corporation was not an indispensable party to the action against the individual fiduciary. Based on the foregoing, the Court granted the Plaintiff’s motion to sever the claim against the corporation.

2.)  In Bugnacki v. Rzasa (In re Bugnacki), 2013 U.S. App. LEXIS 12633 (2d Cir. June 20, 2013):

 Can an appellate court remedy a jurisdictional defect in a bankruptcy appeal?

A pro se Chapter 7 Debtor attempted to appeal a District Court’s order denying the Debtor’s motion to reconsider. The deadline to appeal was 30 days from the date of the order – June 20, 2012.  On that date, the Debtor filed with the District Court an unsigned copy of the same notice of appeal she had filed initially with the Bankruptcy Court many months earlier; not the actual order of the District Court at issue. In short, the “notice of appeal” failed to meet the listed criteria under Fed R. App. P. 3 (including failure to identify and attached the order/decision appealed and to identify the Court issuing the decision and to which the appeal is directed). The Debtor attempted to remedy those deficiencies later. 

The Second Circuit found the Debtor’s appeal filed on the deadline was deficient and failed to meet the jurisdictional requirements. As to her attempt to remedy the appeal after the deadline past, this was seen as an equitable remedy and the Court “lacks authority to create equitable exceptions to jurisdictional requirements.” Based on the foregoing, the Second Circuit dismissed the appeal for lack of jurisdiction.

3.)  In re Residential Capital, LLC, 2013 U.S. App. LEXIS 14185 (2d Cir. July 15, 2013):

Can a debtor’s bankruptcy stay extend to its corporate parents and affiliates?

The District Court denied the Debtor’s motion to stay a lawsuit that had been brought against its (non-debtor) corporate parents and affiliate, finding sections 362(a)(1) and (a)(3) of the Bankruptcy Code only applied to proceedings against a debtor and property of a debtor’s estate.

On appeal, the Second Circuit agreed with the District Court’s general summary of sections 362(a) and that the proceedings and property here were not that of the Debtor. However, as outlined in its decision of Queenie, Ltd v. Nygard Int’l, 321 F.3d 282 (2d Cir. 2003), “the automatic stay can apply to non-debtors, but normally does so when a  claim against the non-debtor will have an immediate adverse economic consequence for the debtor’s estate.” Since the District Court failed to explore any arguments under section 105 of the Code regarding a possible immediate adverse economic consequences to the estate, the Second Circuit remanded the case to the District Court.

4.)  Giminiani v. Cesar, 2013 U.S. App. LEXIS 19148 (2d Cir. Sept. 17, 2013):

Is it an abuse of discretion for a Bankruptcy Court to refuse to allow an expert witness to testify if the party did not identify that witness within the deadline set in its Scheduling Order?

A creditor appealed from the dismissal of his section 523(a)(2)(A) objection to discharge complaint. The heart of the appeal was that the Bankruptcy Court abused its discretion in refusing to allow the testimony of his expert witness. 

The Second Circuit found little merit in the creditor’s argument, especially in light of the fact the creditor was required to demonstrate an abuse of discretion. The Bankruptcy Court set a discovery deadline and the creditor failed to timely honor that deadline. The fact the Bankruptcy Court precluded the creditor’s expert based thereon is generally not an abuse of discretion.

Moreover, the Second Circuit found no evidence of fraud to sustain the objection to discharge.  The Debtor’s comment immediately prior to closing that “business was booming and it’s too bad we hadn’t already had the closing because…he could be there making good money,” while inaccurate, was not fraudulent as the creditor was contractually obligated to go through with the closing regardless of how the business was performing. 

5.)  In re Greenwich Sentry, L.P., 2013 U.S. App. LEXIS 18645 (2d Cir. Sept. 5, 2013):

Can a creditor in Chapter 11 rely on a debtor’s schedules rather than filing a claim if the specific debt is vaguely identified as an exhibit to those schedules?

Pursuant to 11 U.S.C. § 1111(a), “a proof of claim is deemed filed under section 501 for any claim or interest that appears in the schedules filed under section 521(a)(1)…except a claim or interest that is scheduled as disputed, contingent, or unliquidated.”  Here, the creditors in question were not actually identified in the Debtor’s schedules, but in “Attachment B” to it’s Statement of Financial Affairs. Moreover, the Attachment was ambiguous as to whether the claims therein were liquidated or unliquidated. The claim bar date passed and the creditor was forced to argue the Attachment satisfied section 1111(a) for purposes of an allowed claim in the Bankruptcy.

This case may have offered an opportunity for the Second Circuit to explore legal question such as whether an attachment to a debtor’s schedules constitute “schedules” for purposes of 1111(a) (the Court began with “assuming, arguendo, that Attachment B to the Debtors’ SOFA is a schedule as referenced by 11 U.S.C. 1111(a)…”).  However, the matter was quickly decided because the underlying Bankruptcy Court already noted the ambiguities associated with the Debtor’s identification of creditors through the Attachment. For that very reason, the Bankruptcy Court issued an “Extended Bar Order” that held in Bold, Capital type:

Regardless of Whether your interest is not scheduled as ‘disputed,’ contingent’ or ‘unliquidated’ in the list of equity holders annexed to each debtor’s statement of financial affairs, you are still required to file a timely proof of interest.

By failing to file a claim after this unconditional order and clear notice from the Bankruptcy Court, the Second Circuit found no basis under section 105 or elsewhere to allow the creditor a claim in the Bankruptcy.

6.) In re RAMA Group of Companies, Inc., 2013 Bankr. LEXIS 3017 (Bankr. W.D.N.Y., C.J. Bucki, July 12, 2013):

What issues arise if an attorney represents both the debtor corporation and its principal?

In this Chapter 11 Bankruptcy that dates back to May 2000, the Unsecured Creditors’ Committee filed a series of adversary proceedings alleging, among other things, the diversion of corporate assets by and between the corporate Debtor and its principal owner.  As to the AP against the Debtor’s principal the Committee entered into a settlement and a recovery to the estate of $385,000. As part of that settlement, the parties entered into a Settlement and Release Agreement that included the following provision:

“[The Principal] and the Committee, on behalf of the Debtor’s estate, their successors and assigns, if any, and their agents, representatives and attorneys, do hereby unconditionally and irrevocably hold harmless, remise, release, quit claim and forever discharge the other’s respective succors or assigns, agents, representatives and attorneys, if any, of and from any and all rights, liabilities debts…..whether known or unknown, contingent or accrued, which either party has or might subsequently have against the other by reason of any matter or thing whatsoever arising out of or in any way connected directly or indirectly with the facts surrounding the [Adversary Proceeding].”

Following this settlement, the Committee filed a motion against the Debtor’s law firm alleging counsel had violated its fiduciary duties and professional responsibilities while representing both the Debtor and its principal before and during the bankruptcy proceeding. The Committee sought the disgorgement of all fees (pre-and post-petition) previously paid, disallowance of any additional fee requests and compensatory sanctions in excess of $2 million.

Beginning with the demand of compensatory sanctions, the Court reasoned that this was really a “proceeding to recover money or property” and thus, required an adversary proceeding rather than a motion. Regardless, the above-quoted release included the law firm in question and was based on the same facts surrounding the earlier AP. It therefore, precluded the type of compensatory sections requested now by the Committee from the law firm.

As to any pre-petition fees paid to the law firm, Chief Judge Bucki found the Code does not require judicial ratification of fees due during that period. Prior to its appointment as special counsel in the Bankruptcy, the law firm owed no duty to creditors or to the Bankruptcy estate, and therefore, the Court found no reason to address fees incurred and paid during that period.

Finally, as to the post-petition fees, the law firm had submitted two interim fee applications, but had not yet filed a final fee request. Interim fee orders leave for the final application the provision of 330(a)(4), which sates “the court shall reduce the amount of compensation awarded by the amount of any inter compensation awarded under section 331, and, if the amount of such interim compensation exceeds the amount of compensation awarded under this section, may order the return of the excess to the estate.” Section 328(c) also specifically allows a court to deny compensation to a professional who is not a “disinterested person” (as defined under sedition 101(14)), or who represents an interest adverse to the interest of the estate. The Court found that the Committee’s motion properly questions whether the law firm met its fiduciary, ethical and statutory duty of loyal representation of the Bankruptcy estate and necessitated a thorough review under the context of sections 101(14), 327, 328 and 330.  

Based on the foregoing, the Court dismissed all of the Committee’s motion, but for the request to disgorge the law firm of previously received post-petition fees and issued a scheduling order to allow the Court to fully review the relevant factors of section 330(a)(3) as to the firm’s total fee.

7.)  In re Madoff, 721 F.3d 54 (2d Cir, June 20, 2013):

 Does a trustee have standing to bring an action against a third-party on behalf of a creditor of the debtor?

Following Madoff’s guilty plea to a vast ponzi scheme that defrauded his customers of millions, the appointed Securities Investor Protection Act Trustee (given the same authority as a bankruptcy trustee) filed separate adversary proceedings in the SDNY Bankruptcy Court against JP Morgan Chase, HSBC and other financial institutes seeking $19 billion in damages on behalf of Madoff’s customers. The Trustee asserted common law claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, unjust enrichment and conversion. For example, Chase collected an estimated half billion dollars in fees, interest payments and revenue from Madoff’s illegal activities; activities to which Chase allegedly ample knowledge. The Trustee contended Chase “was “at the very center of Madoff’s fraud and was thoroughly complicit in it.”

The issue before the Second Circuit was the Trustee’s standing to bring these actions. Under the doctrine of pari delicto, one wrongdoer may not recover against another; it bars a debtor from suing third parties for a fraud in which he himself participated. Quoting Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991), the Second Circuit determined a “claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.” The Trustee stands in the shoes of Madoff (and his corporation), and therefore, the Trustee is barred from suing to recover for a wrong that he himself essentially took part in.

If he cannot assert claims against the Defendants on behalf of himself, what about on behalf of Madoff’s customers? The Court found that these were in fact claims of the customers against the third-party defendants. A trustee in bankruptcy, according to the Second Circuit, is not empowered to collect money owed to creditors, but is instead tasked with collecting and reducing to money the property of the estate. “It is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only asset claims held by the bankruptcy corporation itself.” In a footnote to the Decision, the Court revealed that the Trustee abandoned on appeal his earlier argument that his standing arose from section 544(a) of the court (giving the trustee the rights of a hypothetical lien creditor). Based on foregoing the Second Circuit affirmed the lower court’s order dismissing the adversary proceedings for lack of standing.

8.)  MCD Plumbing, Inc., 2013 Bankr. LEXIS 3020 (W.D.N.Y., C.J., Bucki, July 23, 2013):

What elements must be met to reject a collective bargaining agreement under section 1113 of the Bankruptcy Code?

The Chapter 11 Debtor filed a motion under section 1113 of the Bankruptcy Code seeking to reject its collective bargaining agreement with Local Union #22. The Court noted that section 1113 establishes procedural and substantive standards a debtor must meet to reject these type of agreements, which courts have generally interpreted as:

  1. The debtor in possession must make a proposal to the Union to modify the collective bargaining agreement.
  2. The proposal must be based on the most complete and reliable information available at the time of the proposal.
  3. The proposed modifications must be necessary to permit the reorganization of the debtor.
  4. The proposed modifications must assure that all creditors, the debtor and all of the affected parties are treated fairly and equitably.
  5. The debtor must provide to the union such relevant information as is necessary to evaluate the proposal.
  6. Between the time of the making of the proposal and the time of the hearing on approval of the rejection of the existing collective bargaining agreement, the debtor must meet at reasonable times with the Union.
  7. At the meetings the debtor must confer in good faith in attempting to reach mutually satisfactory modifications of the collective bargaining agreement.
  8. The Union must have refused to accept the proposal without good cause.
  9. The balance of the equities must clearly favor rejection of the collective bargaining agreement.

Quoting the Second Circuit decision of In re Carey Transportation, Chief Judge Bucki determined the Court here need only focus on the three substantive provisions:

Briefly stated, the statute permits the bankruptcy court to approve a rejection application only if the debtor, besides following the procedures set forth by Congress, makes three substantive showings. The first is that its post-petition proposal for modification satisfies § 1113(b)(1), which in turn limits the debtor to proposing only ‘those necessary modifications in . . . benefits and protections that are necessary to permit the reorganization of the debtor,’ and obliges the debtor to assure the court that ‘all creditors, the debtor and all affected parties are treated fairly and equitably.’ Second, the debtor must show that the union has rejected this proposal without good cause. Bankr. Code §1113(c)(2). Third, the debtor must prove that ‘the balance of the equities clearly favors rejection of [the bargaining] agreement.’ Code § 1113(c)(3).

Truck Drivers Local 807 v. Carey Transp., Inc. (In re Carey Transp., Inc.), 816 F.2d 82, 88 (2nd Cir. 1987).

Here, the Bankruptcy Court determined the Debtor’s Motion must fail because it was unable to satisfy the second and third of these substantive requirements. Specifically, the Union met with the Debtor and rejected its proposed modifications because of four well-articulated reasons. One of which was that the agreement was a multi-employer agreement that establishes salary and benefits for approximately 1000 union members. Modifying the terms for the Debtor (who never employed more than a few plumbers) would undoubtedly jeopardize the entire agreement with all other participating contractors. For this reason, the Union had good cause to reject the Debtor’s proposal. In addition, the Court found the Debtor’s financial troubles were based primarily on recent poor job estimates, and it had several profitable years while operating under the terms of the current collective bargaining agreement. The Court thought the Motion was designed primarily to give the Debtor a competitive advantage over other contractors who must continue to honor the collective bargaining agreement. While rejection of the agreement might provide a financial benefit to the Debtor, the Debtor did not meets its burden of demonstrating the balance of equities clearly favor the result.

Based on the foregoing, the Court denied the Debtor’s Motion.

9.)  U.S. Bank Trust National Association v. AMR Corporation, American Airlines, Inc. (In re AMR Corporation,  Inc.), 2013 U.S. App. LEXIS 18900 (2d Cir. Sept. 12, 2013):  

Are ipso facto clauses entirely prohibited under the Bankruptcy Code?

Prior to filing Chapter 11 in 2011, the Debtors entered into three separate financing transactions. The Debtors’ bankruptcy filing constituted an event of default under the indentures that governed this prepetition financing, which, in turn, resulted in the automatic acceleration of the debt. In addition, the indentures included “make whole provisions” to compensate the lender for the early repayment of the loans. Interestingly, the indentures provided that no make-whole payment was payable in connection with an event of default and acceleration of the debt.

Post-petition, the Debtors sought court approval to obtain financing of $1.5 billion to, in part, repay the prepetition financing (American admitted the new financing was to take advantage of low interest rates, which alone saved in excess of $200 million). The refinancing and prepayment of the loans did not include, over the objection of the creditor, the payment of the make whole provisions. The Debtors claimed the filing of the Bankruptcy constituted a contractual event of default triggering the automatic acceleration of the debt. By its own terms, the indentures stated that the no make whole payment was due in the event of default and the acceleration of the debt. 

The Second Circuit agreed with the Debtor.  While it had already held earlier that “there is no dispute that make-whole amounts are permissible” (In re AMR Corp. I, 485 B.R. 279, 303 (Bankr. S.D.N.Y. 2013)), the issue here was the plain language of the indentures themselves. While the lender was correct that it did not actually declare a default based on the Bankruptcy or affirmatively accelerate the debt, the plain language of the Indentures cannot be ignored, and by there terms no such affirmative action was needed by the lender. The Second Circuit had no reason to delineate from the contractual agreement entered into by the parties prepetition.

The lender’s next argument was that ipso facto provisions are prohibited and unenforceable under the Bankruptcy Code.  The Second Circuit turned to each section of the Code that may support such an argument. First and foremost, pursuant to section 365(e)(1) an executory contract or an unexpired lease may not be terminated or modified based on an ipso facto clause. Both parties, however, stipulated that the indentures were not unexpired leases or executory contracts, rendering section 365(e)(1) irrelevant to the instant facts. Next, section 541(c)(1)(B) provides that upon the petition date, any property interest of the debtor becomes property of the bankruptcy estate, notwithstanding any ipso facto clause. The pertinent provisions of the instant indentures, however, do not attempt to prevent property of the Debtor from becoming property of the estate. Finally, section 363(l) states that a trustee may use, sell, or lease property of the estate, notwithstanding any type of ipso facto clause or statute that may cause a forfeiture, modification or termination of the debtor’s interest in such property. Again, the indenture clauses at issue here do not prevent the bankruptcy trustee from using, selling or leasing estate property rendering section 363(l) inapplicable. 

Based on the foregoing, the Second Circuit found no specific section of the Bankruptcy Code that would prohibit the instant ipso facto clause in the indentures. As such, the Bankruptcy filing did trigger an event of default, the debt was automatically accelerated and under the terms of the agreement between the parties the make whole provisions did not apply. 

10.)  In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir. 2013):

Is the safe haven of 546(e) available if: (a) the financial institution is just an intermediary; and (b) the transaction is really just a redemption rather than a purchase?

Prepetition, Quebecor World Capital Corp. (QWCC) sought to redeem certain notes from various note holders. If QWCC had redeemed the notes itself, however, the redemption would have resulted in significant tax implications. Instead it had a sister corporation, Quebecor World (USA) (QWUSA) purchase the notes from the note holders for cash and then QWCC would in turn redeem the notes from QWUSA in exchange for a forgiveness of intercompany indebtedness owed by QWUSA to QWCC.  In October 2007, QWUSA issued notice to the note holders indicating it would pay the “redemption price” to purchase the notes. QWUSA transferred $376 million (through CIBC Mellon as trustee) to the note holders and “purchased” the notes, which were surrendered directly to QWCC. 

Less then 90 days later, QWUSA filed chapter 11 Bankruptcy and brought an action under section 547 of the Code seeking to avoid the $376 million transfer. 

Citing 546(e) of the Code, the Second Circuit found the Debtor was prohibited from pursing the action because the transfer “fit squarely within the plain working of the securities contract exemption.”

Section 546(e) holds as follows:

Limitations on avoiding powers…

(e) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), commodity contract, as defined in section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

Over the Debtor’s objection, the Court found: (1) the funds were immediately transferred (albeit only temporarily) to CIBC Mellon, which was a financial institution even though Mellon was simply a conduit or intermediary; and (2) the agreements at issue were securities contracts. The Debtor argued that this was a note redemption and the section 741(7)’s definition of a securities contract is limited to a “contract for the purchase, sale, or loan of a security…” The Court disagreed, and expanded on the broad safe harbor interpretation/protection of 546(e) that it began in In re Enron Creditors Recovery Corp, 651 F.3d 329 (2d Cir. 2011). The Debtor here, QWUSA, “was not ‘regaining’ its own Notes; [rather], it was acquiring for the first time the securities of another corporation QWCC.” As such and as a matter of law, QWUSA could not be considered a “redeemer” of the notes, but a “purchaser” – fitting the transaction squarely within the definition of section 741(7).

Based on the foregoing, and without even having to address the Defendant’s other argument that the transfer was protected as a “settlement payment” under section 546(e) (an argument accepted by both the Bankruptcy Court and District Court), the Second Circuit affirmed the dismissal of the turnover complaint.

Devin Palmer is a Partner in Boylan Code’s Creditor’s Rights Group, and serves as Chair of the Monroe County Bar Association’s Bankruptcy Law Committee.