| #Name#, this is your June, 2002 Edition of the | ||||||||||||||||||
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| BANKRUPTCY SECTION NEWSLETTER Commercial Law League of America |
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| SUA SPONTE Jay Welford, Chair Jaffe, Raitt, Heuer & Weiss Detroit, Michigan jwelford@jafferaitt.com I am writing this Sua Sponte as my tenure as Chair of the Bankruptcy Section draws to a close. It has been an eventful and challenging year for all of us. My father-in-law has a motto: “If it ain’t broke, fix it anyway. Make good better and better best.” This has been my unwritten mission statement for the Bankruptcy Section this year. Our Section is newly invigorated.
CASE ANALYSIS Summary: In In re Vortex Fishing Systems, Inc., 277 F.3d 1057 (9th Cir 2001, amended 2002), the Ninth Circuit Court of Appeals analyzes several disputes arising in a contested involuntary bankruptcy petition and provides a caution against creditors seeking to use an involuntary petition to resolve business disputes. The case provides guidance on when a petitioning creditor may withdraw from an involuntary petition, the standard under which a bankruptcy court should analyze disputed claims, and when a bankruptcy court must provide notice of an involuntary petition to non-petitioning creditors.
Catherine E. Vance, Esq. Columbus, Ohio Email: vance76@earthlink.net Jurisdiction. State court was without jurisdiction to make determination that creditor received inadequate notice of debtor’s bankruptcy or to modify discharge injunction upon finding such inadequacy. Bankruptcy court was required to reopen case to protect its exclusive jurisdiction over the enforcement of its own orders. McGhan v . Rutz (In re McGhan), 288 F.3d 1172 (9th Cir. 2002).
My father-in-law has a motto: “If it ain’t broke, fix it anyway. Make good better and better best.” This has been my unwritten mission statement for the Bankruptcy Section this year. Our Section is newly invigorated. Our newsletter has been revamped and has drawn unsolicited praise from many. Our legislative endeavors have kept us at the forefront of the legislative process and, to date, have helped to educate Congress and others on major deficiencies in the bankruptcy reform legislation. We have a new slate of Executive Council members who will be bringing extensive professionalism, expertise and fresh ideas to the Section. Our membership continues to grow. Our coffers are swelling. I’m proud to have been a part of making us better. This is only the beginning. Our annual conferences in New York, Chicago and elsewhere will have cutting edge educational programs and under the guidance of past Chair Mary Whitmer and our National Education director, Cathy Vance, we are creating a National Education Committee to further enhance our educational programming. The Fund for Public Education sponsored its “Annual Survey of Business Bankruptcy,” an exceptional educational program presented by Professor Bruce Markell. This telephone seminar, which was held June 24th, covered all the major business bankruptcy cases in the last 18 months on topics such as critical vendor motions, plan solicitation and confirmation, and the effect of a prior bankruptcy when the debtor files again. If you weren’t able to attend, the audiotapes are available for purchase at www.clla.org. The Commercial Law Journal has been improved through the League’s affiliation with DePaul College of Law. The League and DePaul will jointly publish the DePaul Business and Commercial Law Journal. Daily operations will be handled by the student Editorial Board, while the League retains some editorial control and decision making with respect to article selection. This affiliation elevates the Journal from an association journal to an academic one, which will enhance the quality of the articles published. I leave you in very good hands. My successor, Judith Greenstone Miller, has more energy and drive than two of me, so I’m sure that this year will be one of even more change and improvement for the Section. Judy has already shuffled the chairmanship decks of the Section committees, which will bring new initiatives and leadership to our Section. This year has been one in which our profession has been at the forefront of the news throughout the year, but in a quiet way. From Enron to Kmart to Global Crossing to Napster, bankruptcy is a household word. The bankruptcy bar has become an integral part of our economic environment. We have been the fixers and the healers, rather than the spreaders of disease in this time of extreme public and financial scrutiny. We have gained the respect of the media and Wall Street as the facilitators of economic revitalization and reorganization. We should be proud that members of the bankruptcy bar are among the most respected of all attorneys in our profession. These past few years we have watched bankruptcy doctrines move at lightning speed through the courts. Creativity abounds. Dow Corning and other mass tort litigation cases have brought us to the outer edges of third party releases. Kmart has caused us to test the limits of the necessity doctrine. Enron has caused us to define the outer bounds of fiduciary duty and disclosure concepts. New value has yet to be fully developed. Cross border issues are just now working their way into our global reorganization dialect. Indemnity demands of bankruptcy professionals are now being debated. The Director & Officer insurance industry will change dramatically over the next few years, as will accounting standards, to better balance the risk-reward in these professional arenas. The Bankruptcy laws allow us to be creative and ever changing in our approach to reorganization and the equitable redeployment of human and physical capital. Those of us who have practiced for a period of time are able to look at how bankruptcy law has evolved from what most of us thought was a relatively straightforward set of statutory edicts to a legal literary playing field. The League is committed to helping each of us navigate thorough these ever changing waters, and is proud to be part of a very professional process. I’ll be gone soon, but like the law, hopefully not forgotten. Just remember, if it ain’t broke, fix it anyway; make good better and better best.
Facts: Two businessmen, Scott and Higgins, formed a company which Higgins managed. Scott, a minority shareholder, provided capital for the company. In 1994, after several unprofitable years, and with the company deeply in debt, Scott seized control of the company. Eventually, Higgins’ ownership interest was reduced to less than 1%. Under Scott’s leadership, the company made progress on reducing its debt. In 1999, Higgins organized the filing of an involuntary Chapter 11 bankruptcy petition against the company. The petition included four petitioning creditors. One week after filing, one of the creditors successfully moved to withdraw from the petition stating that Higgins had misrepresented facts. Finding that the claims of the three remaining creditors were disputed, and, therefore, that the petition failed to meet the Bankruptcy Code’s minimum of three petitioning creditors with undisputed claims requirement for an involuntary petition, the Bankruptcy Court dismissed the petition. Higgins appealed, asserting, among other grounds, that the Bankruptcy Court erred in allowing the first creditor to withdraw its claim, that claims of remaining creditors were not subject to a bona fide dispute, and that the Bankruptcy Court failed to provide notice and an opportunity to join the petition to other creditors as required by Bankruptcy Rule 1003(b). Issues: The principal issues presented include: (1) under what circumstances a petitioning creditor may withdraw from an involuntary petition; (2) the standard for determining whether a creditor’s claim is subject to bona fide dispute; and (3) how much discretion a bankruptcy court has in providing notice of an involuntary petition and a reasonable opportunity for other creditors to join the petition. Holding: The Ninth Circuit held that: (1) a petitioning creditor may withdraw where the withdrawal does not result from a debtor “paying off” the petitioning creditor; (2) courts must apply an objective test to determine whether a bona fide dispute exists; and (3) where there are at least three petitioning creditors, a bankruptcy court is not required to notify other creditors of an involuntary petition. Discussion: On the first issue, the right of a petitioning creditor to withdraw from a petition, the Court of Appeals focused on the reason for the withdrawal. The Court noted long-standing case law and policy against withdrawals resulting from debtors “paying off” petitioning creditors in order to defeat an involuntary petition. Vortex, 277 F.3d at 1065. However, in this case, because the creditor sought to withdraw based on a misrepresentation, such policy considerations were not implicated and the withdrawal was properly permitted. On the second issue, evaluating whether a bona fide dispute exists, the Court followed other circuits in adopting an “objective standard.” Bankruptcy Code section 303(b) states that, where there are twelve or more creditors, an involuntary petition requires a filing by three or more creditors holding claims totaling at least $11,625 and not subject to a bona fide dispute. Prior to this case, the Ninth Circuit had not established the standard for determining what constitutes a bona fide dispute. After noting that the “objective standard” has been adopted by other circuit courts, and that the alternative, subjective standard, which inquires into whether claims were made in good faith, presents unnecessary complications, the Court adopted the objective test. The objective test requires a bankruptcy court to “determine whether there is an objective basis for either a factual or a legal dispute to the validity of the debt.” Vortex, 277 F.3d at 1064, quoting In re Busick, 831 F.2d 745, 750 (7th Cir.1987). Based on facts specific to the claims of this case, the Court of Appeals found that the Bankruptcy Court did not commit clear error in finding that the petitioning creditors’ claims were subject to bona fide disputes. Finally, on the third issue, notice of an involuntary petition to non-petitioning creditors, the Court of Appeals held that a bankruptcy court has significant discretion. Bankruptcy Rule 1003(b) requires that, where a debtor contends that an involuntary petition lacks the three creditors required by statute, the debtor must file a list of all creditors and the court “shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.” See also 11 U.S.C. 303(c) (permitting additional creditors to join an involuntary petition). Here, although the debtor asserted that the petition contained less than three creditors holding undisputed claims, the Bankruptcy Court failed to provide any notice of the involuntary petition to non-petitioning creditors. The Court of Appeals held that not providing notice was within the Bankruptcy Court’s discretion. The Court noted that the initial petition contained four petitioning creditors and that the petitioning creditors had failed to ask for release of a list of creditors from the Bankruptcy Court. (The parties had agreed that the list would only be released by court order). The Court of Appeals held that where a petition contains three or more creditors, a bankruptcy court has discretion over providing notice to other creditors even where the creditors’ claims are disputed. The Court based its holding on the plain language of Rule 1003(b) which requires notice only for involuntary petitions “filed by fewer than three creditors” and on Rule 1013(a) which requires a bankruptcy court to “’determine the issues of a contested [involuntary] petition at the earliest practical time and forthwith’ enter an appropriate dispositive order.” Vortex, 277 F.3d at 1071. Conclusion: Vortex shows the discretion vested in a bankruptcy court considering a contested involuntary petition. A bankruptcy court may permit petitioning creditors to withdraw from a petition, must determine whether a petitioning creditor’s claim is subject to a factual or legal dispute, and, as long as a petition is filed by at least three creditors, a bankruptcy court may avoid notifying other creditors of the petition even where the three creditors’ claims are disputed. Robert N. Amkraut
Jurisdiction. State court was without jurisdiction to make determination that creditor received inadequate notice of debtor’s bankruptcy or to modify discharge injunction upon finding such inadequacy. Bankruptcy court was required to reopen case to protect its exclusive jurisdiction over the enforcement of its own orders. McGhan v . Rutz (In re McGhan), 288 F.3d 1172 (9th Cir. 2002). Setoff. A creditor in bankruptcy proceedings may expressly waive a right of setoff, and court may imply a right of setoff from the creditor’s conduct if that conduct fairly demonstrates the creditor’s intent; a waiver of setoff rights, whether express or implied, is not necessarily irrevocable unless the case is a proper one for court to apply estoppel. United States v. Fleet Bank of Mass. (In re Calore Express Co., Inc.), 288 F.3d 22 (1st Cir. 2002). Priority Claims. Where nonprofit debtor elected to make payments in lieu of contributions to state’s unemployment compensation fund, reimbursing the fund after the fact for benefits paid to former employees, and state elected not to require a surety bond of nonprofit entity, amounts owed were not entitled to priority as taxes, but were to be paid pro rata with debtor’s general unsecured creditors. State was entitled to administrative expense priority based on services performed by terminated employees after the filing of the petition. Mass. Div. of Employment and Training v. Boston Reg’l Med. Ctr., Inc. (In re Boston Reg’l Med. Ctr., Inc.), 2002 U.S. App. LEXIS 10277 (1st Cir. May 31, 2002), aff’g Mass. Div. of Employment & Training v. Boston Reg’l Med. Ctr., Inc. (In re Boston Reg’l Med. Ctr., Inc.), 265 B.R. 838 (1st Cir. B.A.P. 2001). Attorney Compensation. Acknowledging split among the Courts of Appeal, court held that the plain language of 11 U.S.C. § 330 does not permit counsel for debtor to be compensated from the estate for services performed after Chapter 11 case was converted to one under Chapter 7. United States Trustee v. Equipment Serv’s., Inc. (In re Equipment Servs., Inc.), 2002 U.S. App. LEXIS 10563 (4th Cir. May 31, 2002). Gap Period Interest. Debtor, who successfully completed her Chapter 11 plan, was liable to the Internal Revenue Service for interest that had accrued on her pre-petition, nondischargeable tax debt in the period between the commencement of her case and confirmation of her Chapter 11 plan. Tuttle v. United States (In re Tuttle), 2002 U.S. App. LEXIS 10171 (10th Cir. May 29, 2002). Willful and Malicious Injury. Dischargeability under 11 U.S.C. § 523(a)(6) for willful and malicious injury to person or property requires proof that debtor had a subjective motive to inflict injury or believed that injury was substantially certain to result from debtor’s conduct; bankruptcy court erred in applying an objective standard. Carillo v. Su (In re Su), 2002 U.S. App. LEXIS 9524 (9th Cir. May 20, 2002) aff’g Su v. Carillo (In re Su), 259 B.R. 909 (9th Cir. B.A.P. 2001). Judicial Estoppel. Debtor judicially estopped from pursuing monetary damages against his employer after he failed to disclose potential discrimination claim at the time his Chapter 13 was commenced, nor did he amend his schedules when suit against employer was actually filed or when case was converted to one under Chapter 7. Debtor could pursue discrimination claims only as to injunctive relief. Burnes v. Pemco Aeroplex, Inc., 2002 U.S. App. LEXIS 9529 (11th Cir. May 20, 2002). Criminal Contempt. Debtor’s officer was convicted of criminal contempt for violating court’s order barring him from physical location of bankruptcy court after officer engaged in conduct intended to disrupt the court’s business. Held, debtor barred from challenging the constitutionality of court’s order by collateral bar rule; exception for transparently invalid orders did not apply; and evidence was sufficient to show violation of court order was willful. United States v. Mourad, 2002 U.S. App. LEXIS 9155 (1st Cir. May 14, 2002). Catherine E. Vance, Esq. Baby steps advance bankruptcy bill. However, although a step toward passage, staff indicate, that it is not a done deal. The lawmakers agreed in principle on how to word an amendment to prevent anti-abortion demonstrators from filing for bankruptcy protection to discharge court-ordered fines imposed on them from illegally blocking access to abortion clinics, but have not agreed on the actual language. Often, the devil is in the details. But this recent development confirms that: 1) bankruptcy is not dead, and 2) key parties continue to work on it Mary Whitmer, former Chair of the Bankruptcy Section and member of the League’s Board of Governors, has joined the law firm of Vorys, Sater, Seymour & Pease. Her new address is 2100 One Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio, 44114-1724. Mary’s email is mkwhitmer@vssp.com, and her phone number is (216) 479-6100. Bob Bernstein (bob@bernsteinlaw.com) traveled from Pittsburgh to Lake Erie – by bike! Bob, his kids, Katie and Alex, and other team members participated in the MS 150 Bike Ride, riding 150 miles and personally raising $6,000 (which included donations from many Section members) to benefit the National Multiple Sclerosis Society. There were 1,700 other riders in the event, which brought in an amazing $800,000. A new League member, Brett Johnson, is conducting one of the education programs at National next month. Brett is an associate Snell & Wilmer of Salt Lake City, Utah, where he concentrates his practice on commercial litigation, including bankruptcy litigation. His program, “Rubber Checks & Bankruptcy: Nondischargeability and Related Issues,” takes an in-depth look at the law on bad checks in bankruptcy. REMINDER: Summer Membership Meeting There will be a general meeting of the Bankruptcy Section membership on Sunday, July 14, 2002 in Park City, Utah. The agenda for this meeting includes the Annual Section Elections and Bylaw amendment discussion and vote. The meeting will begin at 10:00 a.m. in White Pine 1 Room of the Grand Summit Hotel in Park City, Utah. As a reminder, the Nominating Committee for the Bankruptcy Section met to select a slate of candidates for positions on the Section's Executive Council for terms beginning in July, 2002. Section bylaws specify that any section member may submit a nominating petition for a position on the Executive Council. Each petition must have signatures of at least ten Section members and be submitted to Wanda Borges , Nominating Committee Chair, with a copy to Sarah Jolie at the League Office at least five days before the Section's Annual Meeting in July. Elections will be held on July 14, 2002 at the general membership meeting of the Bankruptcy Section. Also, as reported in the April, 2002 edition of the Bankruptcy Section Newsletter, at the April meeting of the Executive Council, the Section leadership voted to recommend the following bylaw changes. These changes need membership approval, per the Bylaws of the Section. There will be a discussion of them during this General Membership Meeting and a vote. Article VI, Item 13 to be changed as follows: Comment: When the bylaws were changed in 1999 so that Council officers and board members would begin their term of office in July (previously service began in November), this provision was not adjusted. Due to the Nominating deadlines for National Office occurring in August, the current language necessitates that the Section’s Representative not run for National office within two National election cycles. The proposed language change allows the Representative to run for National Office upon completion of his/her term as Representative to the Board of Governors for the Bankruptcy Section. In addition, inserting the word “term” at the beginning of this Section is a grammatical correction. Article IV, item 2 to be changed as follows: Comment: This is a housekeeping issue. In 1999 non-lawyer members of the CLLA were admitted to membership in the Bankruptcy Section, per other bylaw changes. Corporate Rescue in Times of Transition INSOL International is a world-wide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 30 Member Associations world-wide with over 7,700 professionals participating as Members of INSOL International. Beijing will be the Host City for the INSOL Annual Regional Conference. The city of Beijing has had an exceedingly colourful history since its establishment in around 1,000 BC. It currently looks forward to hosting the 2008 Olympics. Home to the Forbidden City, the Great Wall and many other cultural and historic sites and monuments, it is a superb venue to host the annual conference of INSOL. The last conference in the region was held in 1999 in Auckland, New Zealand and there have been many changes in the culture and practice of the insolvency profession since that time. Following on from INSOL 2001 where over 700 delegates met in London, this Annual Regional Conference allows INSOL members the opportunity to meet within a year in order to focus specifically on issues concerning Asia. INSOL is pleased to have the Research Centre of Bankruptcy Law & Restructuring, China University of Politics & Law as a sponsor of this conference. Members will also have the opportunity to meet local delegates from China and gain some insight into how the concept and practice of insolvency and restructuring is put to work in a socialist economy context. This conference will focus on the rescue culture that has developed in the Asia Pacific Region since the Asian Financial Crisis, in addition to updating delegates on the latest world-wide trends in insolvency conceptual development and thinking. This is a superb opportunity to network with your colleagues in the region and from around the world. Online registration and full program information can be found by clicking here
©2002, Commercial Law League of America |
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