September 23, 2011

September 22, 2011

Lawyers are officers of the court and they are responsible to the judiciary for the propriety of their professional activities. As an officer of the court, every lawyer must avoid compromising the integrity of his or her own reputation and that of the legal process itself. Lawyers' duties are found not only in the specific rules of conduct and rules of procedure, but also in courtesy, common sense and the constraints of our judicial system. Filed pleadings which, in language or tone, are discourteous to a court violate an attorney's duties as an officer of the court, to maintain the integrity of the court by demonstrating respect for the legal system and for judges. Here, the lawyer's "shockingly sarcastic" language is violate and warrants sanctions.

If an attorney believes that a ruling is incorrect, he may seek reconsideration or file an appeal. If an attorney believes that a judge is unfairly prejudiced, he may seek the judge's recusal. If an attorney has concerns about a bankruptcy judge's behavior, he may file a judicial misconduct complaint. There are many avenues for redress. However, a pleading containing a hostile, undignified and insulting tirade against a particular judge or the court in general is obviously not the way to redress an unfavorable ruling or a judge's alleged unfairness. There is a distinction between zealous advocacy and judicial denigration.

The district court erred in granting summary judgment for defendant officers and directors on a committee's claims for breach of fiduciary duty and deepening insolvency. Under applicable State law, fiduciary duties are owed not only to the corporation and its shareholders, but also to the creditors of an insolvent entity. Among these duties is the obligation that directors' reliance upon the information provided by one or more officers or employees be in "good faith," and that there be a reasonable basis for relying upon officers and employees of the corporation. Here, there is a material issue of fact as to whether the board's reliance on information provided by an administrator was reasonable when the board knew that the administrator was working part-time in violation of state-law requirements, and had a string of deficiencies on her watch. There are also issues as to whether the board followed its own governance procedures. A reasonable fact finder could find that the employees were not competent.

The board is not protected in this instance by the business judgment rule, which is triggered ""absent breach of fiduciary duty, lack of good faith or self-dealing." Where there are material issues of fact concerning breaches of fiduciary duty, summary judgment on the basis of the business judgment rule is inappropriate.

Nor is the board protected by the in pari delicto doctrine, which imputes the fraud of an agent (the board) to the corporation and bars claims by the corporation against the agent. The doctrine does not apply where the corporation does not receive any personal benefit, and is harmed by, the agent's alleged fraud. Here, there is considerable evidence that the alleged acts of the agents (the board) were for the personal benefit of the board and did not benefit the debtor.

The committee further stated a cognizable claim for deepening insolvency based upon the board's secret decision to close the debtor and delay the debtor's bankruptcy filing during the wind down.

As a general rule, the public is permitted access to litigation documents and information produced during discovery. The fruits of pretrial discovery are, in the absence of a court order to the contrary, presumptively public. A person (including a non-party) opposing disclosure has the burden of proving "good cause," which requires a showing "that specific prejudice or harm will result" if the protective order is not granted. There is a sequential two-part test to determine whether discovery information can be shielded from the public: (i) first, the court must determine whether "particularized harm will result from disclosure and (ii) then, if the court concludes that such harm will result from disclosure of the discovery documents, it must proceed to balance "the public and private interests to decide whether maintaining a protective order is necessary. Even if this test indicates that disclosure is not favored, a court must still consider whether redacting portions of the discovery material will nevertheless allow disclosure.

Here, a diocese's records produced in discovery under a protective order contained information about non-party priests against whom allegations of abuse had been received. The priests carried their burden under the first part of the test ( showing particularized harm that would result from disclosure). However, as to a priest who was still working, the bankruptcy court did not err in finding that the public interest (in public safety and preventing future harm to children) outweighed the priest's private interest. As to the priest who was retired, the bankruptcy court erred in applying the second part of the test. For similar reasons, the bankruptcy court did not in refusing to redact the working priest's name, but did err in refusing to redact the retired priest's name.

11 USC 107 displaces the common law right of access in the bankruptcy context. Under section 107, there is a public right to access to papers filed in a bankruptcy case. However, "scandalous" information can be protected from disclosure. The statute does not define "scandalous," so the court uses the word's ordinary, dictionary meaning. The party seeking non-disclosure must establish only that the matter is scandalous as that word is commonly understood. Allegations that a priest has sexually abused children are most assuredly "scandalous" because they bring discredit onto the alleged perpetrators. Thus, the bankruptcy court erred in not shielding from disclosure a punitive damages estimation memorandum filed with the court. The same reasoning applies with respect to deposition transcripts filed with the court. In those documents, identifying information about the priests should be redacted.

September 20, 2011

Defunct foreign funds which had held Madoff securities for the benefit of investor clients obtained Chapter 15 ancillary relief in the United States. The funds then commenced and/or removed hundreds of Bankruptcy Court lawsuits against their former clients who had redeemed their interests in the funds prior to the funds' insolvencies. The gist of all of the litigation claims was that the funds had overpaid for the clients' redemptions because Madoff's fraud had obscured the true value of the Madoff-related securities. The defendants challenged the Bankruptcy Court's subject matter jurisdiction over the funds' claims.

The claims do not fall within the Bankruptcy Court's core jurisdiction because the claims are not "arising in" or "arising under" claims.

11 USC 1521(a) ("Relief that may be granted upon recognition") does not provide a basis for core jurisdiction. There are only two arguably applicable subsections in section 1521(a), subsections (a)(5) and (a)(7). Subsection (a)(5) permits relief to recover tangible or intangible property of a foreign debtor located in the United States. Here however, the claims all involve foreign transfers. No party credibly contended that the claims involve recovery of assets in the US. Subsection (a)(7) is a catchall provision that allows the bankruptcy court to grant "any additional relief that may be available to a trustee." However, subsection (a)(7) does not allow the use of Bankruptcy Code avoidance powers unless the foreign debtor files a plenary bankruptcy case. Plaintiffs argued however, that they did not seek to use US avoidance laws, but rather sought to employ the avoidance laws of their own (foreign) jurisdiction (BVI). The court finds however that the structure of Chapter 15 requires that the law is limited to assets located in the US, and use of foreign avoidance law would thwart this purpose. ("The purpose of Chapter 15 is to disallow debtors from squirreling away assets in the United States outside of the reach of the foreign jurisdiction. In the scenario here, no assets sought are located within the territorial jurisdiction of the United States.")

The court also finds that adjudication of the claims by the Bankruptcy Court would violate Stern v. Marshall. The claims are not independent federal claims or even independent foreign law claims. They are classic common law claims for money had and received or mistaken payment. The claims are matters of private right because they are disputes between two private parties about whether the redemptions were proper. Moreover, even if the Bankruptcy Court had "related to" jurisdiction over the claims, it is ordered to reconsider its decision not to abstain in light of the various jurisdictional issues and other factors.

September 21, 2011

Although an excess D&O carrier was entitled to declare the policy void ab initio and rescind it as to all insureds after the criminal conviction of the debtor's principals, the insurer may have waived such right by accepting a premium for tail coverage.

28 USC 1409 provides:

Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,175 or a consumer debt of less than $17,575, or a debt (excluding a consumer debt) against a noninsider of less than $11,725, only in the district court for the district in which the defendant resides.

There is a split of authority as to whether the omission of the category of "arising under" proceedings excludes avoidance actions from this venue provision. The court finds that although the legislative history of this statute clearly indicates that Congress (in BAPCPA) intended it to cover preference actions, the final language clearly does not cover preference actions. The court states that if Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent.

September 19, 2011

To determine whether a series of transactions should be "collapsed" and viewed as a single integrated transaction, courts focus on the substance rather than on the form of the transactions and consider the overall intent and impact of the transactions. The parties must have the requisite knowledge and intent to warrant consideration of the asserted transactions in the aggregate. Factors include: (i) whether all parties involved in the individual transactions had knowledge of the other transaction, (ii) whether each transaction sought to be collapsed would have occurred on its own and (iii) whether each transaction was dependent or conditioned on the other transactions. In the LBO context, courts will frequently collapse a series of transactions upon a showing that these transactions are part of an overall scheme to defraud the estate and its creditors by depleting all the assets through the use of a leveraged buyout. The plaintiff creditors' committee has sufficiently pled transactions in a pre-petition refinancing following an acquisition are subject to collapse.