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February 2005 issue: Wahington Hot News Ask Your Senator to Support Fairness in Bankruptcy Legislation Today! We need your assistance to get the Fairness in Bankruptcy Litigation Act of 2005 (S. 314) into the debate next week when Bankruptcy Reform (S. 256) is debated. If we act right now, we can help give this proposed amendment a chance to be heard. Upcoming Education Opportunities! The Bankruptcy Section is pleased to sponsor three programs this April in Chicago. Topics include “Threats and Terror: The Daily Practice of Law”, “Litigation Strategies and Evidence Presentation” and “Multijurisdictional Practice in Bankruptcy”. Authors needed! The Bankruptcy Section Newsletter Committee is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive at www.cllabankruptcy.org. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. Changes to your e-mail address and all other comments can be sent to Editor@cllabankruptcy.org CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
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the online version can be found here: Sua Sponte Alan I. Nahmias Last week, I attended a monthly meeting of the Los Angeles Bankruptcy Forum, which, like your local bankruptcy bar association, counts virtually all prominent members of the bankruptcy community among its members. Cocktails and dinner are always followed by a topical program, but none more so than last week’s presentation, which featured UCLA Professor Lynn LoPucki and, as his foil and counterpart, Tom Salerno, a Phoenix bankruptcy attorney. Professor LoPucki has just published a book, “Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts,” published by the University of Michigan Press. Case AnalysisJeffrey N. Schatzman In Re: Kmart Corporation: A Day Late and $750,000 Short. Summary: The Court of Appeals for the 7th Circuit affirmed the Bankruptcy and District Courts’ decisions barring a creditor’s $750,000 personal injury proof of claim filed one day after the bar date. Case Law UpdatePaige E. Barr Debtor May Recover Damages for Emotional Distress under § 362(h) for Violation of Automatic Stay. Reversing its earlier decision in Dawson v. Washington Mutual Bank, 367 F.3d 1174 (9th Cir), the Ninth Circuit found that a debtor may recover damages for emotional distress under § 362(h) when a creditor violates the automatic stay. The Court reasoned that by “limiting the availability of actual damages under § 362(h) to individuals, Congress signaled its special interest in redressing harms that are unique to human beings. One such harm is emotional distress, which can be suffered by individuals but not by organizations.” ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteLast week, I attended a monthly meeting of the Los Angeles Bankruptcy Forum, which, like your local bankruptcy bar association, counts virtually all prominent members of the bankruptcy community among its members. Cocktails and dinner are always followed by a topical program, but none more so than last week’s presentation, which featured UCLA Professor Lynn LoPucki and, as his foil and counterpart, Tom Salerno, a Phoenix bankruptcy attorney. Professor LoPucki has just published a book, “Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts,” published by the University of Michigan Press. His premise, arrived at after years of research and interviews with leading bankruptcy practitioners nationwide, is that forum shopping, as encouraged by the current bankruptcy venue statute, has corrupted the United States bankruptcy system, resulting in attorneys choosing courts that offer the most favorable outcome for their bankrupt clients, rather than the courthouse in which the company is headquartered where there might be more favorable treatment of creditors. The courts, attracted by the power and prestige that mega cases draw, then tailor their local rules and procedures to those most able to place these cases and ignore not only key provisions of the Bankruptcy Code, but the best interests of creditors, solely to compete in what LoPucki describes as “the beauty contest” in hopes of attracting these high-profile cases. According to Professor LoPucki, all of this has resulted in a litany of failed reorganizations of America’s most prominent companies through carefully made decisions by the very executives who brought about the demise of their companies. Although I have not yet read the book in its entirety, I can assure all of you that as a result of Professor LoPucki’s willingness to name names and call individual judges to task, this book is nothing short of the most controversial exposé on our shared practice in recent years, and will certainly spark considerable debate, especially in light of currently pending bankruptcy reform legislation. Professor LoPucki starts out by analyzing the Enron filing, one of the biggest bankruptcy cases in U. S. history, asserting that whichever court ended up with that case would remain in the center of the bankruptcy world’s spotlight for a very long time, overseeing the payout of many millions of dollars to those bankruptcy professionals fortunate enough to be involved. He then goes on to analyze Delaware’s dominance in the mega-case arena and the “competition” with other districts, namely the Southern District of New York, that was spawned from this dominance. “Courting Failure” asserts that the competition first broke out amongst U. S. Bankruptcy Courts during the 1990s as a result of Delaware’s dominance and other jurisdictions’ desire to attract a portion of the overwhelming number of large cases that were being filed there, adding that this competition was spurred on when the National Bankruptcy Review Commission’s recommendation to eliminate the venue provision large companies were relying upon to end up in Delaware was not enacted. In response, LoPucki maintains that judges in districts which sought to compete became more responsive and accessible to lawyers and other professionals, allowing fees to increase and relaxing conflict of interest standards, not to mention indemnification of those concerned for liability brought on by their own conduct, as well as allowing payments of substantial bonuses to retain the services of these very executives. Another casualty of the competition was the failure to appoint trustees in even the most egregious cases of fraud, thereby allowing the executives of the reorganizing companies, themselves potential targets of litigation a trustee might bring, to pick their own, more friendly, successors. All of this, LoPucki believes, has resulted in a far greater percentage of failed reorganizations, leading many of these entities to refile within a year or two of plan confirmation. Perhaps most controversial is Professor LoPucki’s assertion the bankruptcy judicial bar is actively involved in the competition, purportedly for one or more of the following reasons: (1) the opportunity to work with leading professionals in the fields of bankruptcy and finance, which in turn makes that judge the most powerful person in the room, with millions and occasionally billions of dollars resting on that judge’s decision on any given matter; and (2) the celebrity and the benefits that flow from presiding over such cases, including invitations from professional organizations to travel to resort cities at the organizations’ expense to give speeches and receive various honors, leaving the door open to a return to private practice at a much higher level of visibility. Finally, while Professor LoPucki does concede that when forced to choose between popularity and integrity, most judges will choose integrity, he concludes that to corrupt the bankruptcy system, it is only necessary to corrupt a few bankruptcy judges, which, as evidenced by the title of his book, he believes has occurred. Whether you agree or disagree with LoPucki’s premise or find fault with any of the numerous sets of statistics he provides, you will have to agree that few books have been as frank or candid in identifying not only the cause of the current state of affairs, but also many of the individuals responsible for bringing it about. The Section Education Chairs are exploring the possibility of having Professor LoPucki and Mr. Salerno provide an encore performance for the CLLA at the New York Conference next November. I’ll let you know if this becomes a reality! As many of you are aware, the CLLA’s 75th Annual Chicago Conference is upcoming April 7 through 10, 2005. We will be holding our Section’s Future Planning Conference, facilitated by Nancy Southern, on Thursday, April 7, 2005 morning. Attendance will be limited to approximately 35 people and will be by invitation only. If you are interested in receiving an invitation, please contact either myself or Sarah Jolie by email as soon as possible in order that we may forward an invitation to you. I look forward to seeing all of you there. Alan I. Nahmias Email: anahmias@prnlaw.com Case AnalysisIn Re: Kmart Corporation: A Day Late and $750,000 Short. Summary: The Court of Appeals for the 7th Circuit affirmed the Bankruptcy and District Courts’ decisions barring a creditor’s $750,000 personal injury proof of claim filed one day after the bar date. Facts: Appellant, Wilhemina Simmons, suffered a fall in a Kmart store in St. Croix, U.S. Virgin Islands, on December 13, 2001. She sought to pursue a $750,000.00 pre-petition personal injury claim against Kmart based upon her accident, which she asserts was caused by a malfunctioning store door. On March 26, 2002, the bankruptcy court entered an order establishing July 31, 2002 as the deadline for filing proofs of claim (“Original Bar Date”). Later, upon Kmart’s motion, the bankruptcy court established a supplemental bar date of January 22, 2003 (“Supplemental Bar Date”) for a limited set of pre-petition date creditors who had not previously been sent notice of the Original Bar Date. Notice of the Original Bar Date was sent to Simmons at her address as listed in the files of Kmart’s third-party claims administrator, Trumbull Services. The mailing was never returned to Kmart as “undeliverable.” However, Simmons asserts that she never personally received the notice because the address used by Trumbull was not her actual mailing address. Nonetheless, it is undisputed that Simmons’ attorney had actual knowledge of the Original Bar Date, as he had filed timely proofs of claim for over two dozen other Kmart creditors. Despite counsel’s awareness of the Original Bar Date, Simmons’ proof of claim was untimely, delivered to Kmart on August 1, 2002, one day after the Original Bar Date. The day prior to the Original Bar Date, Simmons’ attorney delegated to a clerk the task of mailing Simmons’ proof of claim. Unfortunately, the clerk waited until late in the day to prepare the mailing. Either because of an oversight by the clerk or because the post office refused to guarantee a next-day delivery given the late hour, the clerk checked the box for “Second Day Delivery” on the mail delivery instructions and the package arrived one day later than Simmons and her attorney intended. Although the claim form recommended that claimants include a self-addressed stamped envelope so that Trumbull could mail verification of its receipt of the form to the claimant, Simmons’ attorney did not do so. Nor did counsel make any follow-up phone calls to ensure that the proof of claim was timely received. As a result, Simmons (through counsel) did not realize that her filing was late until September 23, 2002, when a notice from Kmart was received, informing Simmons that her claim was now barred. For unknown reasons, Simmons’ attorney then waited until October 21, 2002 to move under Rule 9006(b)(1) for Simmons’ proof of claim to be deemed timely filed. Simmons’ motion to deem the proof of claim timely filed was denied. She then filed a motion to have her claim covered under the Supplemental Bar Date. The court again denied her motion, reasoning that because her attorney had actual knowledge of the Original Bar Date, Simmons could not be considered one of the limited class of creditors for whom the Supplemental Bar Date applied. The district court and the 7th Circuit affirmed both rulings. Discussion: The Court of Appeals for the 7th Circuit reviewed the case de novo. Citing Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380 (1993), the court explained that under Rule 9006(b), a bankruptcy court may, in its discretion, grant such relief if the late filing was the result of “excusable neglect.” In Pioneer, the Supreme Court established four factors to guide courts’ excusable neglect analyses. Specifically, a court assessing whether to grant a motion under Rule 9006(b) to have a late-filed proof of claim deemed timely must evaluate “[1] the danger of prejudice to the debtor, [2] the length of the delay and its potential impact on judicial proceedings, [3] the reason for the delay, including whether it was in the reasonable control of the movant, and [4] whether the movant acted in good faith.” Id. at 395. Simmons did not dispute that the bankruptcy court correctly considered the four factors outlined by Pioneer, but that the court abused its discretion by improperly analyzing the facts. In analyzing the bankruptcy court’s determination that allowing Simmons’ claim would cause prejudice to Kmart, the 7th Circuit did not find any clear error. Although Simmons argued that her claim was filed nearly seven months prior to the filing of Kmart’s first amended plan of reorganization, the bankruptcy court reasoned that Simmons’ delay in bringing her Rule 9006(b) motion and the not so small size of her claim created prejudice to the debtor. If Simmons’ claim was allowed, it would encourage holders of similarly sized claims to petition the court for allowance of their untimely claims. Notwithstanding the fact that Simmons’ claim was filed only one day late, the bankruptcy court focused on the fact that it took Simmons so long (eighty-one days after the Original Bar Date) to seek relief under Rule 9006(b). Because Simmons’ attorney did not include a self addressed stamped envelope with the proof of claim or make a follow-up phone call to inquire whether the claim was timely filed, Simmons did not discover that her claim was untimely filed until fifty-three days after the Original Bar Date. Then, Simmons waited an additional twenty-eight days to file her motion. Simmons further argued that at the time she filed her Rule 9006(b) motion, the Supplemental Bar Date had not yet passed. However, the court determined that due process concerns which necessitated the Supplemental Bar Date were not applicable to Simmons. While Simmons argues that the reason for delay was nothing more than an innocent mistake, the court found that reasoning to be weak. Citing to several sister circuits, the 7th Circuit explained that the “fault in the delay” factor is the most important and should be given the greater weight. Because Simmons’ counsel left the filing of the proof of claim to the “eleventh hour,” delegated the responsibility to a clerk and took no steps to follow up to determine if the claim was timely filed, the delay in filing the claim was entirely within Simmons’ control and inexcusable. The court further found that Simmons did not meet the “good faith” requirement. While the court did not doubt that Simmons attempted to timely file her proof of claim, nothing extraordinary or diligent was done to ensure the timely filing or seek judicial relief after discovery that the claim was not timely filed. Comment: There is nothing more disconcerting to an attorney than missing a deadline. Although it appeared over a decade ago that Pioneer widened the net for excusable neglect, one must still be cautious in meeting deadlines and ensuring that proper procedures are in place to swiftly correct mistakes, if they happen. Jeffrey N. Schatzman Case Law UpdateDebtor May Recover Damages for Emotional Distress under § 362(h) for Violation of Automatic Stay. Reversing its earlier decision in Dawson v. Washington Mutual Bank, 367 F.3d 1174 (9th Cir), the Ninth Circuit found that a debtor may recover damages for emotional distress under § 362(h) when a creditor violates the automatic stay. The Court reasoned that by “limiting the availability of actual damages under § 362(h) to individuals, Congress signaled its special interest in redressing harms that are unique to human beings. One such harm is emotional distress, which can be suffered by individuals but not by organizations.” The Court also relied on the legislative history, which demonstrates that Congress was concerned with financial losses as well as emotional damages. Furthermore the Court held that a “claim for emotional distress is available if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.” Dawson v. Washington Mutual Bank (In re Dawson), 2004 U.S. App. Lexis 25463 (9th Cir. Dec. 10, 2004). Bankruptcy Court Should Determine Value of a Secured Claim for Confirmation of a Plan under § 1325(a) at the Time of Filing the Petition. Since the Code entitles a secured creditor to the present value of its claim at the beginning of the automatic stay, in order to confirm a plan under §1325(a), the value of collateral should be determined as of the filing of the petition and the plan should provide the replacement value less any adequate protection payments already paid. Chase Manhattan Bank USA v. Stembridge (In re Stembridge), 2004 U.S. App. Lexis 26457 (5th Cir. Dec. 20, 2004). Eleventh Circuit Holds Congress’ Attempt in 11 U.S.C. § 106(a) to Abrogate States’ Eleventh Amendment Immunity is Invalid. The Eleventh Circuit joined five other circuits that have held that § 106(a)’s abrogation of the Eleventh Amendment immunity in bankruptcy proceedings is invalid in light of the Supreme Court’s decision in Seminole Tribe v. Florida, 517 U.S. 44 (1996). Furthermore, the Court found that federal courts, including bankruptcy courts, have no authority to entertain § 362 claims against two state agencies absent the sovereign’s consent. Georgia Higher Education Assistance Corp. v. Crow (In re Crow), 2004 U.S. App. Lexis 26872 (11th Cir. Dec. 23, 2004). Retroactive Rejection of Unexpired Nonresidential Lease Allowed. Agreeing with the First Circuit, the Ninth Circuit held that an “approving court has the equitable power, in suitable cases, to order a rejection to operate retroactively.” Furthermore, the Court held that the retroactive date may be earlier than the date on which the landlord retakes possession of the premises. Pacific Shores Development, LLC v. At Home Corp. (In re At Home Corp.), 2004 U.S. App. Lexis 26893 (9th Cir. Dec. 28, 2004). Ninth Circuit Adopts “Close Nexus” Test for Post-Confirmation “Related To” Jurisdiction. Previously the Ninth Circuit adopted the Pacor test for determining the scope of “related to” bankruptcy court jurisdiction. Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984). However, as of the date of this opinion, the Pacor test (whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy) had not been applied in the post-confirmation context. Here the Court adopted the Third Circuit’s approach that “the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter.” Therefore, the Court adopted the “close nexus” approach “because it recognizes the limited nature of post-confirmation jurisdiction but retains a certain flexibility, which can be especially important in cases with continuing trusts.” State v. Goldin (In re Pegasus Gold Corp.), 2005 U.S. App. Lexis 399 (9th Cir. Jan. 11, 2005). Administrative Expense Retained in Conversion from Chapter 11 to Chapter 13. The Court found that 11 U.S.C. § 348(d) requires federal employment taxes, incurred as an administrative expense in operating debtor’s nursing home business after debtors filed for Chapter 11 bankruptcy protection, but before they converted to a Chapter 13, retain their priority status as administrative expenses under 11 U.S.C. § 503(b). Further, § 348(d) preserves the administrative expense status upon conversion from Chapter 11 to Chapter 13 under § 1112(d). USA v. Flower (In re Flower), 2005 U.S. App. Lexis 481 (9th Cir. Jan. 12, 2005). Sixth Circuit Adopts Brunner Test. Joining the Third, Fifth, Seventh, Ninth, Tenth, and Eleventh Circuits, the Sixth Circuit adopted the Brunner test in evaluating whether a debt poses an “undue hardship.” The Court reasoned that the Brunner test “subsumes the criteria we have treated as distinct and independent” and “easily accommodates factors we look to in evaluating undue hardship. Oyler v. Educational Credit Management Corp. (In re Oyler), 2005 U.S. App. Lexis 1711 (6th Cir. Feb. 3, 2005). Paige E. Barr Phone: (312) 558-6444 Washington Hot NewsWe need your assistance to get the Fairness in Bankruptcy Litigation Act of 2005 (S. 314) into the debate next week when Bankruptcy Reform (S. 256) is introduced. If we act right now, we can help give this proposed amendment a chance to be heard.
You can find Senate contacts at http://www.senate.gov/ What you need to know: The Fairness in Bankruptcy Litigation Act of 2005 (S. 314) will help to eliminate the forum shopping that skews the bankruptcy process and will foster greater local control over important business and community decisions. We also provide the following resources for your consideration: Statement of Senator Cornyn from Senate Floor Proposed letter/script for contacting your Senator: The Honorable ______________________ The United States Senate Washington, DC 20510 Re: Fairness in Bankruptcy Litigation Act of 2005 I am one of your constituents. I am asking that you support the Fairness in Bankruptcy Litigation Act of 2005 which protects consumers, creditors, workers, pensioners, shareholders and businesses by reforming the rules governing venue in bankruptcy cases to combat forum shopping by corporate debtors. I am contacting you to encourage your support for the Act, and when the Senate begins debate on Bankruptcy Reform next week that you support this Act as an amendment that provides important reforms. Not only would passage of Senator Cornyn's bill promote good public policy for our country's bankruptcy laws but also would ensure that important bankruptcy cases would remain in their home states so that the distinct needs of each community are addressed and not overlooked or, worse, ignored by a distant court proceeding. Thank you for your consideration in this matter. Sincerely,
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If you send a letter, make a phone call or email your Senator, please send an email to sjolie@clla.org Thank you for your time! More Washington Hot News can be found by clicking here. David Goch Upcoming Education Opportunities75th Chicago Meeting Threats and Terror: The Daily Practice of Law How often has a salesperson heard "I don't have a collection problem!" when calling. This seminar explores an unfortunate part of the law's daily practice: the making and receiving of threats. Threats can be made to involve criminal authorities unless a satisfactory settlement is made in a civil case, or to report a lawyer to the Disciplinary Board. Additionally, lawyers may draft contractual provisions that are simply ineffectual legally but designed to scare the uneducated into desired conduct. Speaker: Professor Mark Yochum, Duquesne University School of Law, Pittsburgh, Pennsylvania Multijurisdictional Practice in Bankruptcy Issues of multijurisdictional practice have reached the forefront of concern for practitioners working in bankruptcy. This concern may be the product of representation of both creditors and debtors with interstate interests, or perhaps, the product of interstate practice interests of the professionals themselves. At a practical level, practice in a jurisdiction, even in federal court, wherein one is not licensed may lead to a loss of fee or disciplinary sanction. The debate over what ought to be rules for the professional from out-of-town illustrations the continuing fission of the legal profession. Speaker: Professor Mark Yochum, Duquesne University School of Law, Pittsburgh, Pennsylvania Litigation Strategies and Evidence Presentation: Trial Demonstration of Relief for Automatic Stay Chief Bankruptcy Judge Eugene R. Wedoff, for the Northern District of Illinois in Chicago, Frederic M. Luper, William I. Kohn and R. Brian Calvert present a trial demonstration utilizing a standard Motion for Relief from the Automatic Stay. The session will demonstrate litigation strategies, address burden of proof issues and review the pleadings and discovery involved in the motion. There will be direct and cross-examinations of one or more valuation experts and the presentation will deal with Daubert issues, Rule 807 (17) and (18) concerns and other evidentiary matters. |