|
January 2004 issue: Washington Hot News January 29, 2004 On Wednesday, January 28th, House Republicans were successful in substituting the text of HR 975, the omnibus bankruptcy reform bill, into S.1920 (previously passed by the Senate and intended to temporarily extend Chapter 12 or Title 11, which expired the end of December at the end of the first session of the 108th Congress). Want some RECOGNITION? 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 one can use their 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 . Click here to view newsletter archives. 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: |
If you are having trouble navigating through the newsletter, the online version can be found here. Sua SponteLouis S. Robin My first order of business is to reaffirm what you should have seen in the Legislative Alerts over the past few days. House Republicans succeeded on January 28, 2004 , in substituting the text of HR 975, the omnibus bankruptcy reform bill, into S.1920. S1920, as previously passed by the Senate, was intended solely to temporarily extend Chapter 12 or Title 11, which expired the end of December, 2003. The next step is for S.1920 to go to conference, where House Republican leadership hopes that the bill would be sent to the House and Senate without further changes, so that the Senate would be forced to pass the bill in order to continue Chapter 13. Case AnalysisCatherine E. Vance Debtor's Chapter 11 Plan May Settle Creditors' Committee Suit Against Third Parties Summary: In In re Exide Technologies , 2003 Bankr. LEXIS 1768 (Bankr. D. Del. , Dec. 30, 2003 ), the Bankruptcy Court held that a debtor's Chapter 11 plan may settle estate claims where the creditors' committee, rather than the debtor is prosecuting those claims. However, the Court must be satisfied the proposed settlement is fair and equitable, employing the four factor test applicable to review of settlements in bankruptcy cases generally. Case Law UpdatePaige Barr Untimeliness Leads to Forfeiture of Rule 4004 Defense. The United States Supreme Court unanimously held that debtor forfeited the right to rely on Rule 4004 since the debtor did not raise the rule's time limitation before the bankruptcy court reached the merits of the creditor's objection to discharge. Creditor alleged debtor had transferred property, within one year of filing his petition, with the intent to defraud creditors, and therefore did not qualify for discharge under 11 U.S.C. §§ 727(a)(2)-(5). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua Sponte
It is indeed unfortunate that financially depressed farmers are subject to such legislative gymnastics (although, in all fairness, I'm sure that credit card companies and banks believe they, and their often spent political contributions, have been on a tortuous path). The League has generally understood the need for some reforms, but it generally opposes the present omnibus bankruptcy reform bill legislation. Although David Goch, the League's Washington lobbyist, believes that this procedural move is unlikely to be effective, we should not underestimate (i) the path that legislation sometimes takes and (ii) your ability to effect the legislative process. Accordingly, I urge each and everyone of you to call or write you Representative and Senators. If you call, simply tell them that you oppose the substitution of HR975 into S.1920, and any effort to pass the omnibus bankruptcy reform bill. A sample letter can be found here. You should also know that I and Peter Califano, Chair of the Legislative Committee of the Bankruptcy Section, plan to visit the Hill in early March. We had anticipated that there would be no urgency at that time, and we would simply be letting people know that the League is generally concerned about legislation. Our visit may take a different turn. Finally, on this first order of business, I want to thank David Goch for his attention to this matter. He was one of the first to recognize this legislative tactic and possibility. He alerted others, including the press. (You can read an article from the San Francisco Daily Journal by clicking here) . Although it is unlikely that the House Republican Leadership would have been able to effect this maneuver without significant opposition and attention, David's efforts assured us that this approach would be controversial and, hopefully, unsuccessful. My second order of business is to ask each of you to consider a contribution to the League's Patron Fund. The Patron Fund Board was formed in 1993. Its five members work to promote Patron membership and to advise the Board of Governors as to how Patron members' dues and the interest from the Patron Fund should be invested and spent. Generally, the Patron Fund has provided financial support to the Bankruptcy Section, the Creditors' Rights Section, the Commercial Collection Agency Association, the Expansion and Promotion Committee, the Membership Committee, the joint Western-Southern Regional Meeting and others have received financial support in the form of grants. The money has been used for many purposes, including subsidizing the cost of speakers and panelists at League functions, supporting the new database for the League, and paying for computer hardware for the League office Concerning the Bankruptcy Section, the Patron Fund has been invaluable. It has paid a portion of the salary for Cathy Vance as our Legal Writer and National Education Coordinator, provided general grants in August, 2002, and April, 2003, of $25,000 and $10,000, co-sponsored last year a symposium with DePaul University, provided an annual for the expenses of a bankruptcy judge to act as the League's liaison to the NCBJ, and last year funded $10,000.00 to pay part of the annual cost of producing the DePaul Business & Commercial Law Journal. Most immediately relevant, the Patron Fund has funded the retainer and costs of League Counsel, David Goch, and lobbying at both the state and federal levels. For these reasons, I hope each of you consider a contribution to the Patron Fund. Only with your support can we assure the support of this invaluable resource of the League. Thank you for your time, and, hopefully, your assistance in the matters discussed above. Louis S. Robin Case AnalysisDebtor's Chapter 11 Plan May Settle Creditors' Committee Suit Against Third Parties Summary: In In re Exide Technologies , 2003 Bankr. LEXIS 1768 (Bankr. D. Del. , Dec. 30, 2003 ), the Bankruptcy Court held that a debtor's Chapter 11 plan may settle estate claims where the creditors' committee, rather than the debtor is prosecuting those claims. However, the Court must be satisfied the proposed settlement is fair and equitable, employing the four factor test applicable to review of settlements in bankruptcy cases generally. Facts: The Official Committee of Unsecured Creditors in the bankruptcy cases of Exide Technologies, et al. (“Debtorâ€�) commenced, pursuant to court authorization, an adversary proceeding against Credit Suisse First Boston, and Salomon Smith Barney individually and in their various capacities on behalf of approximately 81 banks and other lenders which had loaned money or extended credit to Exide debtors and others (the “Prepetition Lendersâ€�). The Committee's complaint stated causes of action for recharacterization of loans as equity contributions, equitable subordination, avoidance of transfers as preferential and/or fraudulent, deepening insolvency, and aiding and abetting the Debtor's breach of fiduciary duties to unsecured creditors. These causes of action, according to the Committee, derived from a transaction financed by the Prepetition Lenders that allowed them to obtain significant control over the Debtor, enabling them to force the Debtor to provide additional collateral, and to control the Debtor's bankruptcy filing. Some of the Committee's causes of action were dismissed on motion of the Prepetition Lenders, but others remained at the time the Debtor sought confirmation of its plan. See Official Comm. Of Unsecured Creditors v. Credit Suisse First Boston (In re Exide Tehnologies, Inc.) , 299 B.R. 732 (Bankr. D. Del. 2003). The Debtor's plan sought to deal with the Committee's causes of action that survived the motion to dismiss. More specifically, the plan proposed a distribution of up to $8.5 million in exchange for a broad release of claims relating to the transactions giving rise to the adversary proceeding. The Committee objected, arguing inter alia that the Debtor had no standing to settle the adversary proceeding, and that even assuming standing, the settlement was unreasonable and could not be approved by the Court. Discussion : The Court determined that the Debtor was authorized to propose a settlement of the Committee's action against the Prepetition Lenders in the plan. However, other than citing “the plain language of § 1123(b)(3)(A) and . . . relevant decisional law on the issue,â€� the Court does not discuss its reasoning. Instead, the Court proceeds directly to an inquiry of whether the proposed settlement is fair and equitable. On its face, § 1123(b)(3)(A), which states that the plan may “provide for the settlement or adjustment of any claim belonging to the debtor or to the estate,â€� appears to lend unequivocal support to the Court's decision. Although the Committee acquired the right to pursue the Prepetition Lenders, the claims against them plainly remained property of the estate. However, the Court's reliance on this language does not address the Committee's argument that, in the Order authorizing the Committee to pursue causes of action against the Prepetition Lenders, the Debtor waived its claims against them and reserved no rights with respect to those claims. The logical inference is that among the rights of action the Debtor relinquished was the § 1123(b)(3)(A) authority to settle estate claims. In addition, the decisional law to which the Court refers appears to be sufficiently distinct to warrant a more complete justification for the Court's determination. The circumstances presented in the cases cited in the Exide decision, which are set forth as comprising the Debtor's argument, include 1) a joint plan filed by secured and unsecured creditors settling the debtor's claims against the secured creditors; 2) a secured creditor's plan that settled claims between it and the debtor; and 3) a secured creditor's plan that settled the debtor's lender liability claims, a settlement that was negotiated with the creditors' committee but not the debtor. A fourth case was much closer factually, in that there was committee action against the secured lenders, but the creditors committee was involved in the settlement negotiations and only the equity committee objected. In none of these cases were unsecured creditors' committees blocked from the legitimate prosecution of causes of action by virtue of a settlement arrived at without committee involvement. Despite approving of the Debtor's authority to propose a settlement of the claims against the Prepetition Lenders, the Court rejected the proposal itself. The Court employed the commonly used four-factor test which examines the probability of success on the merits; the likely difficulties in collection; the complexity of the litigation, and the expense, inconvenience and delay necessarily attending it; and the paramount interest of the creditors. On balance, the Court found these factors weighed against approving the settlement. Of the factors the Court considered in determining the settlement was not fair and equitable, the paramount interest of the creditors seems to have had the most persuasive effect. In addition to the unsecured creditors' overwhelming rejection of the plan and a settlement amount that was below the level of reasonableness, the Court relied on the same decisions it found persuasive in determining the Debtor could properly seek to settle the Committee's lawsuit as part of the plan. It is here that the Court noted the critical distinction; that is, “in many of the cases in which courts approved plan settlements that had not been negotiated with the opposing party . . . the settlements were negotiated with and/or supported by the Creditors Committee.â€� Ultimately, and for a variety of reasons including the Court's disapproval of the proposed settlement of claims against the Prepetition Lenders, the Court denied confirmation of the plan. Still, the Court's determination that a Chapter 11 debtor may propose a settlement of litigation to which it is not a party and against which it waived its rights without reservation will stand as precedent for future cases. Catherine E. Vance Case Law UpdateJanuary, 2004 Untimeliness Leads to Forfeiture of Rule 4004 Defense. The United States Supreme Court unanimously held that debtor forfeited the right to rely on Rule 4004 since the debtor did not raise the rule's time limitation before the bankruptcy court reached the merits of the creditor's objection to discharge. Creditor alleged debtor had transferred property, within one year of filing his petition, with the intent to defraud creditors, and therefore did not qualify for discharge under 11 U.S.C. §§ 727(a)(2)-(5). Creditor then filed an amended complaint, with leave of court, but without seeking or gaining a court-approved time extension. The amended complaint alleged with particularity that debtor had fraudulently transferred money from his estate within one year of filing bankruptcy. Debtor's answer to the amended complaint did not raise the untimeliness of the claim; on the merits, the answer admitted the transfers but denied that debtor had violated § 727(a)(2)(A). The Court held rule 4004 was a claim-processing rule which was subject to forfeiture based on unwarranted delay in raising the issue, and the debtor failed to preserve the issue by asserting the time prescription in a pleading or amended pleading prior to the decision on the merits. Kontrick v. Ryan , 2004 LEXIS 663 ( U.S. Jan. 14, 2004 ). Landlord's Improper Retention of a Security Deposit Amounts to "Defalcation While Acting in a Fiduciary Capacity" For Purposes of § 523(a)(4). Tenants rented home from debtor. A $2500 security deposit was required under the lease. Having demanded and received $ 2,500 under (statutory) terms designed to ensure that the money would be available for return to the tenants if they kept their own promises, the debtor was obliged to act as the tenants' fiduciary in investing and preserving the funds. Instead she made off with the money, an act of defalcation that disqualified her from receiving a discharge under § 523(a)(4). In re McGee , 2003 U.S. App. LEXIS 26155 (7th Cir. Dec. 29, 2003 ). Purchase Money Mortgage Debts are Consumer Debts for Purposes of § 707(b). The bankruptcy court found that the debtor's debts were primarily consumer. Debtor's contention that purchase money mortgage debts should not be considered consumer debts for purposes of § 707(b) since inclusion discriminates against homeowners in violation of federal housing policies favoring home ownership was rejected. Debtor relied on the Homeless Assistance Housing Assistance Supportive Housing Program and the Internal Revenue Code's home mortgage interest deduction federal policies. The court responded that generalized expressions of federal policy contained in other statutes do not take precedence over specific provisions of the Bankruptcy Code. Also, § 707(b) does not discriminate against homeowners since a finding of substantial abuse must also be found before the case may be dismissed; therefore, a debtor truly in need of a fresh start will not be subject to dismissal. Price v. United States Trustee (In re Price) , 2004 U.S. App. LEXIS 118 (9th Cir. Jan. 7, 2004 ). Examiner Mandated to Disgorge All Fees Received in a Successful Chapter 11 Reorganization. Examiner was found to have violated his duty to remain disinterested, violated his disclosure obligations, and violated his duty of loyalty after privately seeking to negotiate a success fee with three of the estate's unsecured creditors, by which they would pay him a percentage of their increased recovery on top of the hourly fee authorized by the bankruptcy court for his services. The court found disgorgement of all fees received the appropriate remedy. United States v. Schilling (In re Big Rivers Elect. Corp.) , 2004 U.S. App. LEXIS 170 (6th Cir. Jan. 8, 2004 ). Standard for Evaluating Bad Faith in a Chapter 11 Single Asset Real Estate Cases. Settling a dispute among bankruptcy courts, the Court held that guidelines for evaluating whether a Chapter 11 petition in a single asset real estate case was filed in bad faith, as set forth in Phoenix Piccadilly , were not modified by the Bankruptcy Reform Act of 1994. Phoenix Piccadilly set forth the following factors: (1) the debtor has only one asset, the property at issue; (2) the debtor has few unsecured creditors whose claims are relatively small compared to the claims of the secured creditors; (3) the debtor has few employees; (4) the property is subject to a foreclosure action as a result of arrearages on the debt; (5) the debtor's financial problems essentially are a dispute between the debtor and the secured creditors which can be resolved in the pending state court action; and (6) the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights. However, the Court did caution that the factors are non-exhaustive and not to be rigidly applied. State St. Houses, Inc. v. N.Y. State Urban Devel. Corp. (In re State St. Houses, Inc.) , 2004 U.S. App. LEXIS 561 (11th Cir. Jan. 15, 2004 ). The Bankruptcy Code Does Not Authorize a Trustee Delivering Title Under § 365(i)(2)(B) To Deliver Such Title Free and Clear of Liens. A husband and wife contracted with debtor to build a home on property owned by debtor's trust and to transfer the property to them. After the house was built, the couple moved in but were not given title. After debtor filed bankruptcy , creditor sought relief from the automatic stay so that it could foreclose on its mortgage. The couple claimed that it was entitled, pursuant to § 365(i)(2)(B), to an order compelling the bankruptcy trustee to deliver title to the property to them upon their payment of the balance of the purchase price under their contract and also that the conveyance be free and clear of existing liens. The court held that the Bankruptcy Code did not authorize a trustee delivering title under § 365(i)(2)(B) to deliver such title free and clear of liens. In re Delaney , 2003 Bankr. LEXIS 1765 (D. Mass. 2003). Paige Barr Washington Hot NewsJanuary 29, 2004 On Wednesday, January 28th, House Republicans were successful in substituting
the text of HR 975, the omnibus bankruptcy reform bill, into S.1920 (previously
passed by the Senate and intended to temporarily extend Chapter 12 or Title 11,
which expired the end of December at the end of the first session of the 108th
Congress).
Member NewsLuper Neidental & Logan has had three bankruptcy lawyers listed as "Top Lawyers (The City's Best and Brightest)" in the November 2003 Columbus Monthly magazine. Frederick M. Luper, William B. Logan, Jr., and David M. Whittaker have all been selected. Only 242 of more than 6,000 lawyers in Columbus were selected to be honored in the magazine. The firm's offices are located at 50 West Broad Street, Suite 1200 , Columbus , Ohio 43215 . In India , the Companies Act has been recently amended to facilitate appointment of professional firms of advocates, accountants,company secretaries, costs and works accountants or combination thereof as liquidator in insolvency proceedings. Till now, only liquidators from the government department were eligible for appointment. The amendment is expected to come into effect in a few months. In view of this development, the leading insolvency professionals of India met and announced the formation of "Indian Society of Professional Liquidators (ISPL)" . Mr. P.V.Kapur, Senior Counsel and Mr. Sumant Batra , Partner, Kesar Dass B & Associates, Corporate Lawyers have been elected as the Founder President and Secretary-General of ISPL, respectively.ISPL has constituted a Task Force comprising of Mr. Sumant Batra, Mr. Vikesh Mehta, Partner, Grant Thorton, Mr. V. Ganda, Former President of Indian Institute of Company Secretaries and Mr. S.C.Mittal, Former Official Liquidator, Department of Company Affairs, Govt. of India to decide the frame work, road map for future activities and finalise bye laws of ISPL by 7.2.2004." |
My
first order of business is to reaffirm what you should have seen in the Legislative
Alerts over the past few days. House Republicans succeeded on January 28, 2004
, in substituting the text of HR 975, the omnibus bankruptcy reform bill, into
S.1920. S1920, as previously passed by the Senate, was intended solely to temporarily
extend Chapter 12 or Title 11, which expired the end of December, 2003. The next
step is for S.1920 to go to conference, where House Republican leadership hopes
that the bill would be sent to the House and Senate without further changes,
so that the Senate would be forced to pass the bill in order to continue Chapter
13.