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October 2004 issue: Legislative Committee Reminder The Bankruptcy Critical Issues Survey identified six issues that will be developed into formal positions by the League. The Legislative Committee is looking for individuals to be a part of topic working groups. You will serve as expert resources to help us develop positions to take before Congress. New York Meeting Mark your calendars to visit New York, the city that never sleeps, November 11 through 14, 2004! The Commercial Law League of America and the Eastern Region Members' Association present the 84th New York Meeting featuring networking, education, and more. The meeting will be held at the Sheraton New York Hotel and Towers in Midtown Manhattan just steps away from Broadway! 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 Having returned from this year's NCBJ and had a few days to reflect on the experience, I send this month's Sua Sponte to you having never been more proud of the Commercial Law League or our Section. Our Section's programs were nothing short of outstanding and overwhelmingly successful. The breakfast, which featured James Carville was attended by almost 600, which was a record turn out. Mr. Carville was insightful, extremely witty, and surprisingly non-partisan. Case Analysis Brian Behar Third Circuit Reaffirms Clear and Convincing Standard as Level of Proof Required Appointment of a Chapter 11 Operating Trustee. Synopsis: The Third Circuit has had an opportunity to reaffirm the strict clear and convincing standard required of a movant before a Chapter 11 operating Trustee will be appointed. This burden is not lessened even where the Debtor is a mere holding company, and no particular expertise to "operate" the Debtor's business as required. In re G-I Holdings, Inc., 2004 WL 2125621, 2004 U.S. App. LEXIS 20112 (3d Cir. Sept. 24, 2004). Case Law UpdatePaige Barr, J.D. Appellants Found to be Bankruptcy Petition Preparers through Their Website. Appellants sold licenses over the Internet for software which generated completed bankruptcy petitions, schedules, and statements of financial affairs from information users entered into dialog boxes on appellants' websites. Court found that appellants were bankruptcy petition preparers within the definition of 11 U.S.C. § 110(a)(1). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteHaving returned from this year's NCBJ and had a few days to reflect on the experience, I send this month's Sua Sponte to you having never been more proud of the Commercial Law League or our Section. Our Section's programs were nothing short of outstanding and overwhelmingly successful. The breakfast, which featured James Carville was attended by almost 600, which was a record turn out. Mr. Carville was insightful, extremely witty, and surprisingly non-partisan. After polling the audience to determine whether each had decided for whom they would be voting for President, and learning that virtually the entire audience had already made up their collective minds, he shifted from his originally prepared comments to provide a behind-the-scenes look at what was really going to be happening at the third and final presidential debate, which was to follow two days later. The CLLA's educational program was also tremendous and well received. We should be proud of each of our program chairs, moderator and panelists, each of whom spent considerable amounts of time preparing detailed and up-to-the minute materials. Please join me in thanking our Program Co-chairs The Honorable Judith Fitzgerald and The Honorable Michael Williamson, our Program Vice Chair and Moderator, Judith Greenstone Miller and all of our panelists: The Honorable Randy Haines, The Honorable Thomas Waldron, Karen Cordry, Laura Ellison, Leonard Gerson, Professor Elizabeth Gibson and Larry Schantz. Our Section and the CLLA owes each of them a debt of gratitude. Everywhere I went within the sprawling Opryland Hotel compound, I was greeted with kudos and plaudits for each of the programs, which only strengthened the CLLA's reputation for excellence at our industry's largest and most high-profile gathering. Professor David Epstein was honored at our annual breakfast with the Lawrence P. King Award for Excellence in the Field of Bankruptcy, and based upon the reception he received after the presentation, it was clear that we chose the right person for this distinguished award. My thanks again to the members of the King Committee for all of your hard work and insight into selecting such a worthy recipient. At the commencement of our educational program, the Honorable Judith Fitzgerald was also honored for her tireless work on the NCBJ Liaison Committee. Judge Fitzgerald has given generously of her time and has now turned over her position on the Committee to the Honorable Michael Williamson. Our Section again thanks Judge Fitzgerald and welcomes Judge Williamson, whom we look forward to working with for years to come.
Each of our Section's other committees will also be meeting in New York. These include Legislative, Newsletter, and the King Committee. In addition, rumblings persist that bankruptcy reform legislation will again emerge as an issue to be dealt with. The Bankruptcy Section of the CLLA has consistently played an active role in commenting upon and helping to shape bankruptcy legislation, and we will continue to do so, if necessary. In that regard, our Legislative Committee Chair, Peter Califano, will be forming task forces which will be proactive in nature and ready to deal with such critical issues as bankruptcy judgeships, venue, the homestead exemption cap, definition of disinterestedness in hiring professionals, preference defenses, and provisions to address serial filers, as well as other bankruptcy-related issues which might arise. These task force working groups will be organized to most effectively use your expertise while not overwhelming the committee's availability. We plan on utilizing email and conference calls. So, if you aren't able to come to the New York meeting, you can still get involved in this important work. If you are interested, please click here. Finally, if you've not yet made your reservations for New York, do so now. We have a full slate of educational programs scheduled which includes the following programs: Ethics Potpourri—Insolvency Landmines, Pitfalls and Tripwires: What are the latest ethical issues in insolvency and bankruptcy, and how can you avoid the sometimes all-too-subtle snares? This program will provide important perspectives on a gamut of ethical issues, from pre-bankruptcy representation of creditors and insolvent debtors, through representation of various parties in bankruptcy proceedings. State codes of ethics will be considered, as well as the Bankruptcy Code and Rules, and practice tips such as dealing with the Office of the U.S. Trustee. Employment and fees, the roles and duties of lawyers and nonlawyers, conflicts, and criminal implications are just a few of the issues that will be covered. The panel will feature a sitting bankruptcy judge, two leading bankruptcy attorneys, and a well-known turnaround and crisis manager. Avoidance Powers of the Trustee: A Review of the Basics: After our attendees rated him as one of the best speakers they had ever heard speak, the Section has brought back Professor Douglas Whaley to provide this review. The trustee has many weapons when attacking creditors' interests in property of the estate and this lecture will cover the basic concepts involved in legal battles that follow: lien stripping, the strong arm clause, preferences, setoff, statutory liens, fraudulent conveyances, and the dangerous doctrine of Moore v. Bay. Litigating in Bankruptcy Court: Litigating in bankruptcy court requires different skills than litigating in state court, or in U.S. District Court. The pace is faster and the decisions are more definitive. Yet, the dollars at stake are often higher. Bettie Kelley Sousa draws on her years of experience litigating in state and federal courts to present practical suggestions for success in litigating. Both procedural and substantive topics will be discussed. Fiduciary Duties of Principals in Insolvent Companies : Speaker Erven Nelson will speak on this important topic. Officers and directors of any company have fiduciary duties owed to the company and its shareholders. These duties include the Duty of Loyalty and the Duty of Care. Fiduciaries have traditionally been protected by the Business Judgment Rule which creates a rebuttable evidentiary presumption that business decisions are made by disinterested directors and officers on an informed basis and with good faith belief that the transaction will benefit the company. When a company enters into the vicinity of insolvency," however, the rules change and the fiduciaries owe duties also to the creditors of the company, creating a very difficult situation for the officers, directors and advisors of the company. A financially distressed company's shareholders and creditors become competing constituencies, both demanding the protections of care and loyalty from the company's officers and directors. This session will review the historical basis of the law, examine the evolving doctrines and suggest measures that fiduciaries can take to protect themselves and their companies. If you haven't yet registered…..the meeting should provide the opportunity to make many new acquaintances while renewing contacts with old friends you may not have seen in a while. You can register online by clicking here. I look forward to seeing you all there. Alan I. Nahmias Email: anahmias@prnlaw.com Case AnalysisThird Circuit Reaffirms Clear and Convincing Standard as Level of Proof Required Appointment of a Chapter 11 Operating Trustee. Synopsis: The Third Circuit has had an opportunity to reaffirm the strict clear and convincing standard required of a movant before a Chapter 11 operating Trustee will be appointed. This burden is not lessened even where the Debtor is a mere holding company, and no particular expertise to “operate” the Debtor’s business as required. In re G-I Holdings, Inc., 2004 WL 2125621, 2004 U.S. App. LEXIS 20112 (3d Cir. Sept. 24, 2004). Facts and Procedural History: The case was before the Third Circuit on an appeal by the Official Committee of Asbestos Claimants from a District Court Order that had affirmed a Bankruptcy Court Order denying the Committee’s Motion for the appointment of a Chapter 11 Trustee. The Committee did not take issue with the clear and convincing evidentiary burden of proof, but contended that where the strong presumption in favor of a Debtor’s current management remaining in possession is not applicable, the Committee’s burden for the appointment of an operating trustee should be reduced to a proof by the preponderance of the evidence standard. The Third Circuit found no support for this proposition that the evidentiary standard should ever change in such circumstances, and therefore affirmed the lower Court’s denial of the appointment of a Trustee. The Debtor, G-I Holdings, Inc., filed for Chapter 11 in January 2001. The Debtor is a holding company, beneficially owned by one Samuel Heyman. Beginning in the 1970s, the Debtor and other formal producers of asbestos products faced mass tort litigation throughout the United States. Indeed, the Debtor had inherited responsibility for some 150,000 pending asbestos lawsuits. Just shy of two years after the bankruptcy was filed, the Committee filed a Motion to appoint a Trustee. Over 250 exhibits were reviewed by the bankruptcy Judge. The Committee presented two central arguments in favor of its Motion: first, that there was an excessive conflict between the Debtor and asbestos claimants, which constituted sufficient “cause” for the appointment of a Trustee pursuant to Bankruptcy Code § 1104(a)(1), and, second, that it was in the best interests of creditors to appoint a Trustee pursuant to Bankruptcy Code § 1104(a)(2) because the Debtor’s current management is subordinating the interests of the asbestos claimants to those of certain favored creditors and beneficial owner of the Debtor. The Committee contended that the Debtor’s current management refused to bring fraudulent conveyance actions against the owner and others, while funding lawsuits against three law firms that represented many of the asbestos claimants. In denying the Motion for an operating Trustee, the Bankruptcy Court found that while a Trustee may be called for when there is extreme acrimony between Debtor and its creditors, management of the Debtor had been in place for many years and was familiar with the company’s operations, and there was a lack of sufficient evidence to show that a Trustee would be helpful. Finally, with respect to litigation against the owner and litigation against the law firms representing the asbestos claimants, the Bankruptcy Court noted that those actions were pending in another Court, and would be decided in those proceedings. On appeal to the District Court, the Committee argued that the usual presumption in favor of maintaining current management was inapplicable for three reasons: (1) the Debtor was nothing more than a holding company, (2) a Trustee would simply need to manage asbestos claims, and would not have to expend costs to learn the Debtor’s business, and finally (3) the Debtor would not be able to exercise its fiduciary duties to creditors due to the controlling shareholder being subject to fraudulent transfer claims. The Committee contended that since the usual presumption was no longer applicable, the standard of proof should be lessened to a preponderance of the evidence. The District Court affirmed the Bankruptcy Court, finding no abuse of discretion. The District Court held the Committee up to the clear and convincing standard. The District Court found no support for the proposition that if the Court finds inapplicable the presumption in favor of keeping current management, then a lesser standard of proof would be required for the appointment of an operating trustee. Discussion: Before the Third Circuit, the Committee presented two major arguments: First, that the usual presumption in favor of existing management should not have been applied due to the lack of significant experience by the managers of the Debtor. Second, the Committee maintained that with the presumption in favor of current management out of the way, the standard of proof should be lessened to a preponderance of evidence for the appointment of the Trustee. The Third Circuit rejected these arguments. The Third Circuit reaffirmed its previous decision in In re Marvel Entertainment Group, Inc., 140 F.3d 463 (3d Cir. 1998), that a clear and convincing standard is required for the appointment of an operating Trustee. The Committee hung its hat on language in the Marvel decision, whereby the Third Circuit recognized the “strong presumption against appointing an outside Trustee.” The Committee’s view was that once the presumption is out of the way, then a preponderance of evidence should apply to the appointment of a Trustee. The Third Circuit recognized that there are two plausible interpretations of its reference to the strong presumption against appointing an outside Trustee, as stated in the Marvel decision. The first interpretation is that the word “presumption” was being used in the technical sense expressed in Rule 301 of the Federal Rules of Evidence. As the Third Circuit recognized, pursuant to Rule 301 of the Federal Rules of Evidence, a presumption does not shift the ultimate burden of proof in the sense of the risk of non-persuasion, which remains throughout the trial upon the party on whom it was originally set. As the Bankruptcy Court always recognized that the ultimate burden of persuasion remained on the Committee, and that the Committee simply had not met that burden, the Bankruptcy Court did not err in denying the motion to appoint a Trustee. The other plausible interpretation of the use of the aforementioned phrase in Marvel was simply another way for the Appellate Court to refer to the heavy burden of persuasion. The Third Circuit affirmed in the instant case that that is precisely what was intended by that language, and that the clear and convincing standard always applies. The Third Circuit rejected the Committee’s suggestion that this Rule should be modified to essentially state that in seeking the appointment of a Trustee, a movant sometimes is required to prove its case by clear and convincing evidence. The Committee contended that if the Debtor’s management lacks special expertise in running the business, and the appointment of a Trustee would not impose large costs, then the standard of proof should be lessened. The Third Circuit rejected this view and again reiterated that the burden of proof does not shrink or shift. Whether a Debtor’s management has any special expertise and whether there would be substantial costs in the appointment of a Trustee are relevant factors, but they do not affect the burden of persuasion. Brian S. Behar Phone: 305-931-3771 Case Law UpdateAppellants Found to be Bankruptcy Petition Preparers through Their Website. Appellants sold licenses over the Internet for software which generated completed bankruptcy petitions, schedules, and statements of financial affairs from information users entered into dialog boxes on appellants' websites. Court found that appellants were bankruptcy petition preparers within the definition of 11 U.S.C. § 110(a)(1). Since the software that appellants sold did not simply place the debtors' answers, unedited and unmediated, into official forms where the debtors had typed them on a screen, but rather took debtors' responses to questions, restated them, and determined where to place the revised text into official forms, the Court found that appellants were bankruptcy petition preparers . Frankfort Digital Servs. v. Neary (In re Reynoso), 2004 Bankr. LEXIS 1497 (B.A.P. 9th Cir. Sept. 20, 2004).
Circumstances or Conditions in Existence at Time Debtor Obtained Education Loan Considered in Brunner Test. Court rejected creditor’s argument that a circumstance or condition in existence at the time the debtor obtained an educational loan must be excluded from consideration in the persistence analysis, or that the debtor must show a worsening or exacerbation to carry his burden on the second prong of the Brunner Test, In re Brunner, 46 B.R. 752 (S.D.N.Y. 1985) (holding that debtor must show "that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans"). Debtor’s additional circumstance in this case was the learning disability he has had since childhood. Creditor argued that debtor may not rely on a condition known to him when he signed the notes to satisfy the "additional circumstances" test, unless that condition has been somehow exacerbated since the loan was taken out. Court held that contrary to creditor’s assertions, no Circuit ever held this way. Furthermore, the argument was contrary to public policy and would deter anyone with a known disability from seeking to finance post-secondary education. Since by law, a student loan lender cannot discriminate on the basis of disability in making loans, therefore, a bankruptcy court should not be precluded from considering the disability as an "additional circumstance" when, because of that condition, the repayment would impose an undue hardship on the borrower. Educational Credit Management Corp. v. Mason (In re Mason), 2004 Bankr. LEXIS 1498 (B.A.P. 9th Cir. Sept. 21, 2004).
Whether Debt Arose From Different Transactions Does Not Affect Setoff. Court found that the obligations between the debtor and the creditor were mutual and that principles of equity did not foreclose a setoff. The debtor and the creditor held mutual obligations in the same capacity as obligor and obligee. Whether or not the debt arose from different transactions did not affect the creditor's right to a setoff because the debt was in the same right and same capacity. Even though creditor acted as a provider for one obligation and a lender for the other, mutuality was still present because both parties were an obligor and obligee. Meyer Medical Physicians Group v. Health Care Service Corp. (In re Meyer Medical Physicians Group), 2004 U.S. App. LEXIS 19888 (7th Cir. Sept. 23, 2004).
Whether a Court "Pre-Approves" a Fee Arrangement Under § 328 Should be Judged by the Totality of the Circumstances. The attorney was hired by the debtor to litigate a breach of contract action. The attorney agreed to work on a contingency fee basis. The case was eventually settled and the attorney applied to the bankruptcy court for an award of fees based on the contingency fee amount. The bankruptcy court approved only a fraction of the requested fees. The appellate court found that neither the attorney's application nor the order that approved his employment referred to § 328 and neither discussed the reasonableness of the fee. Thus the Court found that under the circumstances the bankruptcy court never "pre-approved" the contingency arrangement under § 328. Disagreeing with the Ninth (which requires a professional’s retention application to unambiguously specify that it seeks approval under § 328) and Third (which requires the application to specifically list terms of the retention agreement or else the terms used when there is no agreement will be implemented) Circuits, the court held that whether a court "pre-approves" a fee arrangement under § 328 should be judged by the totality of the circumstances, looking at both the application and the bankruptcy court's order. Nischwitz v. Miskovic (In re Airspect Air, Inc.), 2004 U.S. App. Lexis 20794 (6th Cir. Oct. 4, 2004).
No Excusable Neglect Found For Filing Proof of Claim After Bar Date. An individual tripped and fell in one of the corporation's stores and filed a personal injury action. While the case was pending, the corporation filed a Chapter 11 petition. The individual was notified of the filing, but nevertheless failed to file a timely proof of claim. Individual’s counsel did not receive the court’s order within 10 days. Court did not find this a valid reason for not filing a proof of claim since 1) the law clearly states that the date of "entry" is the critical event from which to measure the timeliness of an appeal; and 2) individual’s counsel was present in open court when that ruling was announced, and thus could not claim to “be in the dark” on the issue. Counsel could have filed his claim on the next business day. Thus, the individual did not establish excusable neglect for filing her proof of claim nearly seven months after the bar date. Brooks v. Kmart Corp. (In re Kmart), 2004 U.S. Dist. LEXIS 19560 (N.D. Ill. Sept. 28, 2004). Paige Barr, J.D. Washington Legislative UpdateOctober 26: As a first step in formalizing a practice started by the judiciary almost three years ago, a proposed rule authorizing federal courts to accept electronic filings will come before the Civil Rules Advisory Committee of the U.S. Judicial Conference October 28; which is expected to approve publishing the proposed rule change for public comment at its fall meeting in Santa Fe, NM. The proposed revision amends Federal Rule of Civil Procedure 5 to "make explicit" that federal courts throughout the United States will allow electronic filings. The federal judiciary started its electronic filing program on a limited basis in 2001 in U.S. bankruptcy courts. October 22: President Bush has signed into law The American Jobs Creation Act (HR 4520) (no Pub. Law number assigned yet). The bill would permit the IRS to use private debt collection professionals to locate/contact taxpayers owing outstanding liabilities and to arrange payments of those taxes. The IRS is required to report biannually to Congress. On September 29th, California Gov. Schwarzenegger (R) signed into law S.B. 1618, requiring employers to issue itemized paycheck stubs "showing no more than the last [four] digits of the employee's social security number or an existing employee identification number." The requirement also applies to state, county, and municipal entities. The law would take effect Jan. 1, 2008. More Washington Hot News can be found by clicking here. David Goch Legislative Committee ReminderThe Bankruptcy Critical Issues Survey identified six issues that will be developed into formal positions by the League. The Legislative Committee is looking for individuals to be a part of topic working groups. You will serve as expert resources to help us develop positions to take before Congress. The business of each working group will be done by email and conference calls, in lieu of face-to-face meetings. This is your opportunity to leverage your experience and knowledge with peers throughout the country. You can make a contribution to the League and the development of the Code. Your efforts will be recognized both inside the Bankruptcy Section and outside as one of the experts who will be listed as authors as we publicize our efforts. The working groups are:
If you are interested in and willing to get involved as an expert on one of our working groups, please click here. Thanks for your time. New York MeetingMark your calendars to visit New York, "the city that never sleeps," November 11 through 14, 2004! The Commercial Law League of America and the Eastern Region Members' Association present the 84th New York Meeting featuring networking, education, and more. The meeting will be held at the Sheraton New York Hotel and Towers in Midtown Manhattan just steps away from Broadway! The New York Meeting is perennially popular because of the in-depth educational sessions designed to offer information on the issues important to CLLA professionals. Take in a Broadway play and feel the excitement that only New York can offer. Plan now to join your colleagues for networking, socializing, and education in November at the 84th New York Meeting. Click here for online registration and meeting brochure.
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A final thought on Nashville -- none of our programming could have been accomplished without the financial assistance of each of our sponsors, which this year included