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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 Bankruptcy Reform : As most of you know, the bankruptcy legislation
is not dead, but instead hinges on a traditional dogfight between the
Democrats and the Republicans on the issue of abortion. Specifically,
the issue concerns the dischargeability of debts related to violence,
intimidation or other activities of anti-abortion activists targeted at
clinics, abortion providers, and patients.
CASE ANALYSIS Cathy Pike SYNOPSIS: The Sixth Circuit Court of Appeals in Browning v. Levy, 283 F.3d 761 (6th Cir. 2002) held that plaintiffs’ claims against debtor’s special counsel were barred by res judicata, in that plaintiffs failed to raise or reserve their claims against debtor’s special counsel prior to confirmation of the debtor’s Plan of Reorganization.
Catherine E. Vance, Esq. Columbus, Ohio Email: vance76@earthlink.net Validity of Liens. Before bankruptcy, creditor had lien on debtors’ corporation’s assets and debtor’s home, and bank continued to extend funds to corporation after debtors personally filed bankruptcy. Bank’s lien on debtors’ home for postpetition funds advanced held valid; court authority was not needed for bank to advance funds to corporation, and doing so did not violate the automatic stay. Bank’s priority to proceeds of sale, however, limited to extent of prepetition advances because further advances were optional. Beeler v. Jewell (In re Stanton), 285 F.3d 888 (9th Cir. 2002).
We recently sent an e-mail to our New York members, inviting them to be heard on the current debate and to urge Senator Schumer to stand firm. A refusal to compromise on this issue may lead to the ultimate defeat of the bankruptcy reform bill, which most agree is the needed result for this ill-conceived legislation. As you know, the conferees met on May 22 and failed to come to any agreement, but stated publicly that they intent to continue to work to reach compromise. Many insiders believe that because resolution was not reached by the Memorial Day recess, the likelihood that the legislation will pass this year has diminished significantly. Lawrence King Award Information As I discussed in last month’s Sua Sponte, we are excited to open the nominating process to identify the 2nd Annual Professor Lawrence M. King Lifetime Achievement Award. This award is given in recognition of a lawyer, judge, teacher or legislator who exemplifies the best in scholarship, advocacy, judicial administration or legislative activities in the field of bankruptcy. The recipient will exemplify the standards set by Professor King during a lifetime of devotion to the practice and practitioners of bankruptcy. She or he will have made a lasting contribution to the improvement of commerce and to the fair and ethical treatment of debtors, creditors, and the public at large. Nominations are due by July 15. The Nominating Form is available online by clicking here. Another Benefit of Membership -- Recognition As a new member service, we are inviting you to provide us with your notable achievements, and we will include them in our monthly newsletter. These could include articles published, presentations given, honors bestowed upon you or other noteworthy accomplishments. Simply e-mail a complete description of the achievement to cllanewsletter@aol.com. If possible, attach an electronic copy of any writing related to your achievement and we will attempt to make it available to the members at large, should you so wish. CLLA Educational Opportunities There are many upcoming educational opportunities for you at the National and New York conferences. At this year’s National conference in Park City, Utah, you can attend a roundtable discussion on First Day orders in Chapter 11 cases. Wanda Borges is leading this discussion, which will emphasize the Doctrine of Necessity and examine the procedural and substantive issues that need to be considered, sometimes on very short notice, by debtors-in-possession and creditors alike. You can also get the basics of Revised Article 9 of the Uniform Commercial Code in a program sponsored by the Creditors’ Rights Section, and attend a primer on the treatment of bad checks in bankruptcy. For those of you who have not yet signed up for the National Convention, it is not too late. Please attend this outstanding opportunity to network, see the great mountains of Utah, and enjoy a little R & R. Full convention information can be found by clicking here Things are also shaping up for the League’s annual conference in New York this coming November. Your Bankruptcy Section is sponsoring a program on advanced issues in Chapter 11 cases for the seasoned bankruptcy professionals and, in a program jointly sponsored with Young Members, we’ll have a program that thoroughly covers the basics of bankruptcy. The League’s Agency and Creditors’ Rights Sections are also putting together dynamic programs that you can put to use in your practice.
SYNOPSIS: The Sixth Circuit Court of Appeals in Browning v. Levy, 283 F.3d 761 (6th Cir. 2002) held that plaintiffs’ claims against debtor’s special counsel were barred by res judicata, in that plaintiffs failed to raise or reserve their claims against debtor’s special counsel prior to confirmation of the debtor’s Plan of Reorganization. FACTS: The Employee Stock Ownership Plan (the “ESOP”) of Nationwise Automotive, Inc. (the “Debtor” or “Nationwise”) and NW Liquidating, Inc. (“NW”), the successor to the Debtor after confirmation, claimed that the law firm of Squire, Sanders & Dempsey (“SSD”), former counsel for the Debtor’s majority shareholder (Saul Levy) and special counsel to the Debtor, breached its fiduciary duties and engaged in transactions, prior to the bankruptcy filing, which were prohibited under ERISA. The complained-of transactions revolved around a settlement agreement and release executed by the ESOP, Nationwise, Saul Levy (“Levy”) and other affected parties in 1992 to resolve litigation involving allegations by Nationwise of fraud having been committed by Levy. Under the terms of the settlement agreement, Levy, who was represented by SSD, paid $1.6 million to Nationwise under a stock subscription agreement, rather than the $9 million for which the Board of Directors of Nationwise had previously made a cash call upon Levy. Nationwise filed Chapter 11 bankruptcy in 1995. At the time of its bankruptcy filing, and for approximately a month thereafter, the Debtor was represented solely by SSD. Another law firm assumed duties as general counsel for the Debtor, and SSD continued to represent the Debtor as special counsel only. A few days after the bankruptcy filing, participants in the ESOP brought suit against Levy, alleging that the 1992 settlement was procured by fraud, and requesting that the settlement be set aside. The ESOP and NW later intervened as plaintiffs. The ESOP and NW joined SSD as an additional defendant, contending that SSD committed legal malpractice and other breaches of duty under state law in negotiating and consummating the 1992 settlement. The plaintiffs contended that, as a result of the settlement, the value of the shares owned by the ESOP was diluted, and that the Debtor received substantially less cash than it should have received, which necessitated the bankruptcy filing. The ESOP entered its appearance in the bankruptcy proceeding, filed a proof of claim and objected to confirmation of the Debtor’s Plan of Reorganization. Nevertheless, the Debtor’s Plan of Reorganization was confirmed in 1996. Neither the ESOP nor NW reserved the claims which they later asserted against SSD. However, the Debtor did include an omnibus reservation of rights in its Disclosure Statement which accompanied its Plan. SSD moved for summary judgment on all claims raised against it by the ESOP and NW. The court granted summary judgment in favor of SSD, holding that the ESOP’s and NW’s claims were barred by res judicata and judicial estoppel. DISCUSSION: The court of appeals affirmed the finding of res judicata, but found that judicial estoppel did not apply. In reaching its decision, the appellate court flatly rejected NW’s argument that it neglected to reserve its cause of action due to SSD’s “wrongful concealment” in failing to disclose to the bankruptcy court the fact that SSD’s representation of Levy in 1992 was adverse to Nationwise, and SSD’s engaging in obstructionist discovery tactics which prevented NW from receiving documents to substantiate its claims against SSD until after confirmation of the Plan. The court commented that the adverse representation was known to NW through first-hand knowledge, the representation was a matter of public record, and that NW had sufficient knowledge of the facts to bring suit against SSD before confirmation of the Debtor’s Plan. The Sixth Circuit further reiterated the general rule that confirmation of a plan of reorganization constitutes a final judgment in bankruptcy proceedings, and that res judicata principles bar relitigation of any issues raised or that could have been raised in the confirmation proceedings. The Court also commented that not only do res judicata principles bar the actual parties to the earlier bankruptcy proceeding, they also bar those in privity with the parties, which included NW, successor in interest to Nationwise. The court also concluded that SSD participated in the bankruptcy proceedings as special bankruptcy counsel for the Debtor, and thus was a party to the bankruptcy proceedings. Thereafter, the Court conducted an analysis of whether NW’s claims against SSD should have been brought in the bankruptcy court, and noted that the initial inquiry is whether the claims could have been brought in that forum. After observing that the cause of action was a “non-core” proceeding, the court found that the claims could have been brought in the bankruptcy court. Accordingly, the Court held that res judicata principles apply, since NW’s claims against SSD were “related to” the Nationwise bankruptcy proceeding because any recovery by NW against SSD would have represented an asset available for distribution to the Debtor’s creditors and shareholders. In seeking to avoid the effect of res judicata on its claims against SSD, NW argued that it reserved its right to sue SSD through the omnibus provisions of the Disclosure Statement containing a general reservation of rights. However, the Court found that the blanket reservation of rights was insufficient, and that a specific reservation of rights was required. In reaching its decision, the Court’s opinion discussed SSD’s
argument in support of judicial estoppel, which was that NW’s failure
to include its claims against SSD in its Disclosure Statement amounted
to its asserting a position in the current litigation that was contrary
to that asserted under oath in the bankruptcy proceeding. In rejecting
SSD’s argument, the Court found that because NW’s failure to
disclose its claim against SSD was inadvertent, the application of judicial
estoppel was inappropriate to bar NW’s claim. Cathy S. Pike
Validity of Liens. Before bankruptcy, creditor had lien on debtors’ corporation’s assets and debtor’s home, and bank continued to extend funds to corporation after debtors personally filed bankruptcy. Bank’s lien on debtors’ home for postpetition funds advanced held valid; court authority was not needed for bank to advance funds to corporation, and doing so did not violate the automatic stay. Bank’s priority to proceeds of sale, however, limited to extent of prepetition advances because further advances were optional. Beeler v. Jewell (In re Stanton), 285 F.3d 888 (9th Cir. 2002). Substantial Compliance in Filing Notice of Claim. Despite failure to strictly comply with notice requirements set forth in post-confirmation stipulation for asserting claim, claimant substantially complied and could recover from settlement trust fund established to satisfy damages related to asbestos installation. Mayor v. W. Va. (In re Eagle-Picher Indus.), 285 F.3d 622 (6th Cir. 2002). Indemnification. Corporate officer, who was sued by former employer for misappropriation of proprietary information or improper use of trade secrets, was not entitled to indemnification under state law because he was not sued by reason of the fact that he was an officer. West v. Balfour Beatty Constr., Inc. (Matter of Miller), 2002 U.S. App. LEXIS 7856 (5th Cir. April 24, 2002). Fraudulent Transfer. Casino, which had been paid on debtor’s markers within a year of involuntary petition against debtor, failed to establish good faith defense to fraudulent transfer action where it had sufficient knowledge to be on inquiry notice of debtor’s insolvency. Meeks v. Red River Entertainment (In re Armstrong), 2002 U.S. App. 6845 (8th Cir. April 15, 2002). Fraudulent Misrepresentation. Although bank did not have fiduciary relationship with debtors, it was liable to them for fraud in revealing an appraisal of property debtors sought to purchase while concealing other appraisals that called validity of disclosed appraisal into question. Waiver executed by debtors was unenforceable because bank fraudulently induced its execution. Sallee v. Fort Knox Nat’l Bank, N.A. (In re Sallee), 2002 U.S. App. LEXIS 6841 (6th Cir. April 15, 2002). Rate of Postpetition Interest. In using the phrase “interest at the legal rate” in 11 U.S.C. § 726(a)(5), the intent was to require application of a uniform interest rate set by federal statute. Thus, state court judgment creditors were not entitled to interest at ten percent as required under state law. Onink v. Cardelucci (In re Cardelucci), 2002 U.S. App. LEXIS 6770 (9th Cir. April 12, 2002). Extent of Ad Valorem Tax Lien. Amounts owed to taxing authorities for ad valorem personal property taxes determined based on gross value of the property that entered into the bankruptcy estate. Universal Seismic Assoc., Inc. v. Harris County (In re Universal Seismic Assoc., Inc.), 2002 U.S. App. 6434 (5th Cir. April 8, 2002). Discovery/Civil Protective Orders. Acknowledging split among circuits,
Court of Appeals for the Fourth Circuit held a grand jury subpoena seeking
information protected in civil proceeding supersedes the civil protective
order unless the party seeking to avoid the subpoena demonstrates the
existence of exceptional circumstances that clearly favor enforcement
of the protective order. In re Grand Jury, 2002 U.S. App. LEXIS 6241
(4th Cir. April 5, 2002). Catherine E. Vance, Esq. Nominating Committee Selects Candidates 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 during the National Convention at the Grand Summit Hotel in Park City, Utah. Members of the Nominating Committee are: Wanda Borges (Syosset, NY), I. William Cohen (Pepper Hamilton, LLC, Detroit, MI), Harry Greenfield (Buckley, King & Bluso, Cleveland, OH) and Robert Hertzberg (Pepper, Hamilton LLC, Detroit, MI). Wanda Borges, Nominating Committee Chair, announced the following candidates: Officers (1 year term: 2002-2003) Executive Council (three year terms: 2002-2005) William A. Brandt Jr., Development Specialists, Inc., Chicago, IL Executive Council (two year term, 2002-2004) Henry G. Swergold, Platzer, Swergold, Karlin, Levine, Goldberg & Jaslow, LLP, New York, NY
Annual Survey of Business Bankruptcy Monday, June 24, 2002, 1 pm - 3 pm Eastern This review will cover recent cases on business bankruptcy, ranging from recent Chapter 11 cases at the circuit level to smaller cases from around the country. This seminar will focus on how recent cases will affect a business bankruptcy practice, be that business small or large. The featured speaker will again be Professor Bruce Markell. Professor Markell received rave reviews when he last presented this program in 2000! Register on-line at http://www.clla.org/conference_details/ann_bb_survey/survey.pdf Bruce A. Markell is a professor of law at the William S. Boyd School of Law at the University of Nevada, Las Vegas. He has taught and written in the areas of bankruptcy, contracts and commercial law. He is a contributing editor to the Collier Bankruptcy Manual, and is the author of several chapters in Collier on Bankruptcy, including the chapter on Section 1129. After practicing for nine years in the areas of bankruptcy and commercial law he joined academia in 1990, teaching at Indiana University, Emory University and as the Bruce W. Nichols Visiting Professor of Law at Harvard Law School. He is currently “Of Counsel” to Stutman, Treister & Glatt in Los Angeles. In addition to being a conferee of the National Bankruptcy Conference, a fellow of the American College of Bankruptcy and a charter member of the International Insolvency Institute, Professor Markell is a former member of the American Bankruptcy Law Journal’s editorial advisory board. For the last five years, he has advised the Government of Indonesia on the reform of their bankruptcy and secured transactions laws. He also has been official observer for the International Bar Association on a new international receivables financing law currently being undertaken by the United Nations Commission on International Trade Law (UNCITRAL). About Telephone Seminars: Convenient and Time Saving -- no beating rush-hour
traffic, no parking problems - in fact, no travel time and expenses at
all! Just call in from your office, home or anywhere there is a touch-tone
phone to hear and participate in this important seminar. With the site
license pricing (see page 2), you can invite other listeners to your office...save
money and discuss these important issues. The faculty’s interaction
with you, the listener, will make this program enjoyable to listen to,
and you can ask questions from wherever you are. This feature is much
like participating in a talk radio program. Washington Hot News The conference committee met on May 22, 2002. Schumer and Hyde did not
come to agreement on the abortion provision language. Although the inaction by the conference committee is considered a serious
blow to the potential of final passage of H.R. 333, the bankruptcy reform
bill, contrary to some reports the bill is not yet "dead". If
any "break through" occurred, it is that Representative Hyde
(R-IL) and Senator Schumer (D-NY) agreed to continue to meet in private
as well as have their staffs meet in an attempt to find language that
two can agree on. Furthermore, the two apparently reached consensus about
their intent of the law. Schumer and Hyde agreed on two basic principals:
that abortion clinic protesters who unintentionally interfere with services
should not be subject to nondischargeability of their debts, and, second,
that protesters who intentionally block or interfere with services should
be subject to it. The difficult part is expressing these principles in
law; in other words, defining "blockade". Possibly as incentive to come to agreement, Senator Leahy (D-VT) indicated that as chair of the Senate Judiciary Committee, regardless of the outcome, he would not take up bankruptcy next year. In other news, on May 22, House Majority Leader Armey (R-TX) issued a letter to Senate Majority Leader Daschle (D-SD) urging action on the bankruptcy bill.
©2002, Commercial Law League of America |
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