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New Cases For the Week of September 14, 2015 - September 18, 2015

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September 18, 2015

In Re: Marion and Alfred Charles Foundation

Bankr. SD FL

After questioning the bona fides of a Ch. 11 bankruptcy filing by a non-profit trust, the bankruptcy court sets a hearing on dismissal:

The Debtor’s sole instance of charitable contributions were five donations of $21,000 each made in late 2012, aggregating $105,000. Other than the lease of its cubicle from one of Ociepka’s lawyers, there is no other evidence of business activity by the Debtor reflected in any of its filings. The Debtor’s lawyers, a highly regarded firm of excellent bankruptcy counsel, were paid their retainer and the Chapter 11 filing fee by Ociepka [See ECF 17]. The Debtor seeks to hire a very sophisticated financial advisory company as its tax accountants [See ECF 25], and to retain a very highly regarded crisis and insolvency management firm as its Chief Restructuring Officer [See ECF 39]. The need for sophisticated professionals of this caliber for this “business” is not apparent. Indeed, this Debtor appears to need professionals of this high level of sophistication about as much as a fish needs a bicycle.

So why are they here? It appears that these professionals have been retained to make this case look like a real Chapter 11 bankruptcy case. But no matter how much makeup and fancy ribbons you put on a pig, it’s still a pig. And no matter how many first-rate bankruptcy professionals you put around this Debtor, it’s still a charity of contested origin whose business records will never consist of much more than a checkbook, a file of bank statements, and an annual Form 990 filing with the IRS. And that assumes that Ociepka and the Foundation survive Skinner’s challenge to the legitimacy of the origins and very existence of the Foundation. The only apparent reason for this case to be in this Court is that Ociepka and the Debtor Foundation want to escape from the Undue Influence Litigation before Judge Greene. The disputes in that litigation seem to be uniquely within the province of the Probate Court, and concomitantly outside the competence of this Court.


In Re: Butler Logging, Inc.
Bankr. SD GA

The bankruptcy court denies a trustee's request for equitable tolling of the limitations period for an avoidance action. The trustee argued that the debtor intentionally delayed conversion to let the limitations period run out:

There is no dispute the black-letter statutory deadline of §546 expired while the case was a chapter 11 case. Nevertheless, the Trustee opposes the motion to dismiss arguing the statute of limitations should be equitably tolled. Namely, the Trustee contends Debtor intentionally remained in a chapter 11 case to allow the §546 statute of limitations to expire. The Trustee contends this is evidenced by Debtor remaining in chapter 11 and untimely filing operating reports when Debtor was no longer in business, and by Debtor's failure to turnover its bank account statements until the Trustee filed a motion for turnover. At the hearing on the motion to dismiss, the Trustee contended Debtor formed a new entity, T-3, post-petition with its assets and Hall knowingly conducted business with the new entity while being paid from Debtor's Debtor-in- Possession account.

* * *

[T]he facts alleged by the Trustee do not state a claim of "extraordinary circumstances" justifying equitable tolling. The alleged facts that Debtor delayed filing its operating reports, formed T-3 with its assets, remained in the chapter 11 case after its operations ended until after the statute of limitations expired, and that Hall knowingly continued to accept payments from Debtor are not sufficient to state a claim of equitable tolling. Many courts have held that a debtor's delay in conversion of a chapter 11 is insufficient to overcome the plain language of §546.

The court also held that even though the trustee's state law UFTA claim filed via 11 USC 544(b) would have been deemed timely-filed under state law (due to a longer state law limitations period), 11 USC 546 displaces state law limitations periods:

Section 546 specifically includes actions brought pursuant to §544, and, in regards to this case, provides such actions may not be commenced two years after the order for relief. . . . Even though the four year state statute of limitations of O.C.G.A. §18-2-79 had not expired when the Trustee filed his complaint, the Trustee's action for this claim is barred because he is pursuing the claim through his authority as a lien creditor under §544 and §546 and he did not bring the action within the time set forth under §546(a). . . . The Georgia four year statute of limitations is still relevant to ensure the time to bring the cause of action has not expired as of the petition date; however, if it has not expired, the Trustee must file the action within the time frames set forth in §546 (a) . . . . In certain circumstances, creditors may still be able to pursue their state law fraudulent transfer causes of action against non-debtor transferees, such as when the §546 statute of limitations has expired or the Trustee abandons such claims.

* * *

Furthermore, in these circumstances, §108(a) does not toll the statute of limitations set forth in §546 because the Trustee's state fraudulent transfer action is brought under §544, where the Trustee is standing in the shoes of a "creditor" not the "debtor" and the statute of limitations for the cause of action is governed by §546.

In Re: Alvion Properties, Inc.
Bankr. SD IL

The bankruptcy court denies a creditor's motion to declare that raw land and mineral rights owned in two tracts by a Ch. 11 debtor qualify the debtor as a SARE debtor. The court found that the debtor's development efforts had not progressed to the point where a "project" existed, as required by 11 USC 362(d)(3):

This Court does not disagree with the assertion that “intentions do not constitute projects.” But it must be recognized that such an assertion is applicable to both a debtor and a creditor. It prevents a debtor from claiming multiple projects and prevents a creditor from claiming a single project based merely on intent. If mere intent does not constitute multiple projects as claimed by a debtor, mere intent does not constitute a “single “project” as claimed by a creditor. The movant has the burden of proving a “single project” and if mere intent is insufficient to prove multiple projects, it is insufficient to prove a “single project.”

Nor does this Court disagree with those courts that, based on the facts of their cases, conclude raw land or raw land with no income is a “single project.” But it does not follow that in every instance raw land awaiting potential development is a “single project.” On a continuum starting with mere ownership or control of raw land and ending with conversion to a functional use of the land, there is a point at which a project starts to exist. As the court in Hassen Imports points out, there is a difference between ownership and a project.

* * *

The evidence also was that while there have been discussions about a possible conservation easement or a possible sale of mineral rights, no firm plan has been developed or commitment received. Therefore three possibilities exist (1) there is a single project; (2) there are multiple projects; or (3) there is no real project(s) and the property remains idle. If the mineral rights are to be developed there could be a “single project” as the Debtor controls the mineral rights to both tracts. However if timber removal or stone removal are to be developed, the project would be limited to the fee simple tract and the mineral rights tract would have to be developed separately and differently. It is also possible the property will remain idle. Furthermore, the project(s) could be developed by the Debtor and/or a third party or parties. Multiple developers would indicate multiple projects. . . . [T]here no business activity currently being conducted on the property, the last business activity occurred in 2007. Nor has any action been taken to implement a specific use of the property.

Without a plan or action taken to implement a plan, it cannot be concluded that the use of the property has progressed to the point that a project, or projects, have come into existence. As the Bank has the burden of proof as to the existence of a “single project” and the burden has not been met, its motion should be denied.

In Re: Schmalenberg
Bankr. WD WA

In a case involving a debtor who provided a personal guarantee to enable a bank holding company to obtain a loan from another bank, the bankruptcy court holds that the debtor cannot offset his claim against the holding company against his separate liability to a bank owned by the holding company:

The facts of this case, however, involve different debts owed to different creditors. The Debtors are requesting to both setoff and recoup a debt owed to Sunwest, as successor to Westside Bank, against money they assert are owed to them by the Holding Company. The attempted recoupment and setoff stem from the Debtors’ guarantee of a Columbia Bank loan that benefited the Holding Company that they seek to adjust against a debt they owe to Westside Bank, the predecessor to Sunwest. As the debts on their face are with different creditors, Westside Bank and the Holding Company, the setoff claim and recoupment defense fail because the debts are not mutual.
In Re: Hoffman
Bankr. ID

Finding that "the treatment of liens in chapter 13 is sufficiently different to warrant a different analysis than in [a] chapter 11 case", the bankruptcy court concludes that an allowed non-recourse claim (liens on which the debtor has no personal liability) is an "allowed unsecured claim" even if the liens are stripped due to lack of equity:

[U]nder § 1327(c), property revests in the debtor “free and clear of any claim . . . of a creditor provided for by the plan” unless “otherwise provided in the plan . . . .” Thus, the Court must look to the Plan to determine the effect of Plan confirmation on the Meyers’ and the State of Idaho’s liens. In doing so, the Court concludes that Trustee’s contention that the creditors’ bifurcated or stripped liens are “unenforceable” post-confirmation is inconsistent with the language of the Plan.

The Plan makes clear that the State of Idaho?s statutory lien will be retained, post-confirmation, until Debtor completes the Plan. See Amended Chapter 13 Plan, Dkt. No. 32, ¶ 5.4 (providing “To each of these creditors, your timely filed claims will be treated in this plan as unsecured claims and upon the successful completion of this plan your lien will be avoided.”) (emphasis added). In other words, until Debtor completes the Plan, the statutory lien of the State of Idaho remains enforceable against Debtor’s property.

In regards to the Meyers? second deed of trust lien, while the Plan seemingly calls for the avoidance of the lien to the extent it exceeds any equity in the house upon confirmation of the Plan, the Plan also provides that ?[i]f the case is dismissed or converted without completion of the plan, such lien shall be retained by the secured creditors to the extent recognized by applicable non- bankruptcy law [i.e., the full amount of the lien].” Id. at ¶ 5.2. Thus, the partial avoidance of the Meyers’ second deed of trust lien is also contingent on Debtor’s successful completion of the Plan.


In Re: Meier
Bankr. ND IL Overruling a claim objection by Ch. 11 counsel in a converted case, the bankruptcy court finds that a $300,000 claim for unpaid post-petition pre-conversion domestic support is entitled to priority.
In Re: Parker

"[W]hile courts may apply equitable principles to section 502, they must do so within the circumscriptions imposed by the statutes outlining creditors' rights. As section 502 currently stands, courts may not exercise their equitable powers to deny creditors' claims for pre-petition interest."

As it pertains to interest, the Eleventh Circuit held that, "[a]lthough an award of post-petition interest is governed generally by the equities of the case, the Bankruptcy Code provides oversecured creditors with certain statutory rights to interest."

* * *

In the context of section 506, [c]ourts [can] not equitably deviate from a contractually-agreed upon default interest rate where the contract rate does not (1) violate state usury laws, (2) function as a penalty, or (3) exceed the value of the collateral.

* * *

The extent of courts' equitable powers to adjust or deny default interest will particularly be affected by whether the claim is for pre- or post-petition interest. This is because "[a]fter a debtor files for bankruptcy, a creditor's rights are generally 'more restricted because of the codified public policy of giving a debtor an opportunity to attempt to reorganize." . . . courts' equitable powers will be weaker before a debtor has filed for bankruptcy and broader afterwards. Because of this, the equitable analysis for pre- and post-petition default interest must accordingly differ, with the former being much more limited in its power and scope.

With respect to section 502, creditors' statutory rights appear so strong so as to possibly preclude bankruptcy courts from using their equitable powers to deny claims for pre-petition interest. . . . Such a conclusion likely explains why this Court has been unable to find cases applying equitable principles to section 502 claims for pre-petition interest outside of the Eastern District of North Carolina. While the Court does not hold that equitable principles can never apply to claims for pre-petition interest, the language of section 502, as it currently stands, does not leave room for courts to exercise their equitable powers.


September 17, 2015
In Re: Liberty State Benefits of Delaware, Inc.
Bankr. DE The bankruptcy court denies a motion to transfer the venue of an adversary proceeding from Delaware to New Jersey, noting that there is a presumption in favor of keeping litigation in the location of the main case and also noting that convenience was a minor issue since the NJ court was 33 miles form the DE court
In Re: AGE Refining, Incorporated
5th Cir.

A committee appealed several orders of the bankruptcy court, including an order approving a settlement and an order confirming a plan. The district court affirmed the bankruptcy court's rulings. On appeal to the Court of Appeals, the committee framed many of its appellate issues in terms of the actions of the district court. The Court of Appeals held that this resulted in waiver of the issues:

The Committee ostensibly designates eight issues on appeal. Of those eight issues, all but two challenge district court actions. 21 Acting as a “second review court” in a Chapter 11 bankruptcy case, we do not review the findings or conclusions of the district court—rather, we review the findings and conclusions of the bankruptcy court. As an initial matter, we conclude that the issues the Committee designates challenging exclusively district court actions do not require our consideration, and we do not address those issues.

Further, although the Committee challenges Chase’s eligibility to vote as an impaired creditor vis-à-vis the district court’s decision affirming the bankruptcy court’s approval of the Fourth Plan, nowhere in the Committee’s voluminous briefing does it designate an issue or raise a substantial argument regarding an erroneous conclusion of law or finding of fact on the part of the bankruptcy court. We do not address this challenge, as the Committee has waived it

The Court of Appeals found that the bankruptcy court did not err in approving the settlement, since it employed the test required by precedent. The Court rejected the committee's argument the bankruptcy court should have valued the secured creditor's lien on an insurance claim based on what the claim ultimately produced ($2.3M). However, at the time of approval of the settlement the claim had not settled and the bankruptcy court did not err by considering a range of values from $0 - $6.6M.

The Court found that the bankruptcy court did err in refusing to issue findings and conclusions regarding the committee's objection to the secured creditor's claim which was considered at the same time as the settlement approval. 11 USC 502(b) requires the court to determine the amount of a claim. However, since the committee fully developed the record, there was no harm in the bankruptcy court's error:

We agree that the bankruptcy court erred. Under section 502(b), the Committee had a right to have the bankruptcy court “determine the amount of” Chase’s allowed claim before it approved the Settlement Agreement. In this particular case, however, the bankruptcy court did provide the Committee, as an objecting party in interest, with notice and a hearing regarding its objection, allowing it to develop the record fully. The bankruptcy court then explicitly concluded that the Settlement Agreement was “in the best interest of the estate.”41 It is bare that the bankruptcy court could not have simultaneously approved the Settlement Agreement and granted the substantive relief the Committee sought. Implicit in the bankruptcy court’s approval of the Settlement Agreement is a rejection of the Committee’s position—a determination that, while not compliant with the statute, persuades us that the error complained of was harmless. Having carefully reviewed the record, in this case—albeit not a template for future like cases—we need not remand.

In contrast, the Court determined that the bankruptcy court did not err in refusing to value the secured creditor's secured claim pursuant to the committee's motion to value which was also considered at the settlement approval hearing:

The Committee urges that the bankruptcy court was required to “determine” the absolute value of Chase’s secured collateral under section 506(a) in response to the Motion to Value. We disagree. Whereas section 502(b) pertains to a determination of the allowed amount of any claim, section 506(a) applies only in situations involving the valuation of a secured creditor’s collateral. And in contrast to section 502(b), where Congress used mandatory language—“shall determine”—to require an action on the part of the bankruptcy court, section 506(a) contains no such language. Section 506(a) provides only that, if a bankruptcy court undertakes to determine the value of secured collateral, “[s]uch value shall be determined in light of the purpose of the valuation.” 46 But nowhere do we read the language of section 506 to require a “determination.” A plain reading of section 506(a) in context makes clear that “determine” under that provision is permissive rather than mandatory.


Brecher v. Republic of Argentina
2nd Cir. The district court erred in certifying a class in litigation regarding Argentina's defaulted bond indebtedness. The class definition’s reference to objective criteria is insufficient to establish an identifiable and administratively feasible class.
Lance v. PNC Bank, N.A.
D MA The court finds that because a Ch. 7 discharge does not terminate lien rights a creditor who reported to credit agencies post-discharge that debtor had an overdue balance did not violate the discharge injunction. The court also found that even if a credit relationship did not survive the bankruptcy the mere reporting of a discharged debt to a credit agency is not a discharge injunction violation.
September 16, 2015
In Re: ICL Holding Company, Inc.
3rd Cir.

"11 U.S.C. § 363 allows a debtor to sell substantially all of its assets outside a plan of reorganization. In modern bankruptcy practice, it is the tool of choice to put a quick close to a bankruptcy case. It avoids time, expense, and, some would say, the Bankruptcy Code’s unbending rules."

The court finds that payments to professionals and unsecured creditors which came from a secured creditor's collateral pursuant to a court-approved settlement of a committee's sale objection (leaving another administrative claim unpaid) do not offend the priority scheme of the Bankruptcy Code. The court held that the payment to unsecured creditor never involved estate funds and was thus distinguishable from Armstrong World, which involved a gift of estate funds:

Though it is true that the secured lenders paid cash to resolve objections to the sale of LifeCare’s assets, that money never made it into the estate. Nor was it paid at LifeCare’s direction. In this context, we cannot conclude here that when the secured lender group, using that group’s own funds, made payments to unsecured creditors, the monies paid qualified as estate property. . . . [T]he settlement sums paid by the purchaser were not proceeds from its liens, did not at any time belong to LifeCare’s estate, and will not become part of its estate even as a pass-through.

* * *

Our focus is on whether the settlement proceeds were given as consideration for the assets bought at the § 363 sale. The evidence we have leads us to conclude they were not.

* * *

[T]he Bankruptcy Code’s creditor-payment hierarchy only becomes an issue when distributing estate property. Thus, even assuming the rules forbidding equal-ranked creditors from receiving unequal payouts and lower-ranked creditors from being paid before higher ranking creditors apply in the § 363 context, neither was violated here.

The court also held that the funds escrowed under the APA to pay professionals were also not estate property even though they were part of the "consideration" for the sale as defined in the APA:

Whether the professional fees and wind-down expenses (which make up the escrowed funds) qualify as property of the estate is a more difficult question. As noted, the Bankruptcy Court held that the funds did not so qualify because they “belong[ed] to the purchaser[] [and] not to the debtors’ estate.” The Government urges us to reverse that ruling because the funds were listed in subsections 3.1(a) and (b) of the Asset Purchase Agreement as part of the purchase price (indeed, they were called “[c]onsideration”) for LifeCare’s assets and thus qualify as estate property under Bankruptcy Code § 541(a)(6) (including as property of the estate “proceeds” from a debtor’s asset sale). Though aspects of the Government’s argument are factually correct, we cannot ignore the economic reality of what actually occurred.

Subsection 2.1(l) of the Asset Purchase Agreement makes clear that the secured lender group purchased all of LifeCare’s assets, including its cash, by crediting $320 million owed by LifeCare to the secured lenders. Thus, once the sale closed, there technically was no more estate property. Put another way, getting $320 million of its secured debt forgiven resulted in the secured lender group getting all the property of LifeCare. This is an important point. The Government’s argument presumes that any residual cash from the sale—namely the monies earmarked for fees and wind-down costs—would become property of LifeCare. See Reply Br. at 20–21 (arguing that “if [the value of LifeCare’s] cash is said to have been paid as part of the ‘purchase price,’ . . . it cannot be said to remain the property of the purchaser”) (emphases added). But that is impossible because LifeCare agreed to surrender all of its cash. And, per the sale order, whatever remains of the $1.8 million in escrow goes back to where it came from—the secured lenders’ account (as indeed happened by the time of oral argument to over $800,000 placed into escrow). Thus, as a matter of substance, we cannot conclude that the escrowed funds were estate property.

* * *

Though the sale agreement gives the impression that the secured lender group agreed to pay the enumerated liabilities as partial consideration for LifeCare’s assets, it was really “to facilitate . . . a smooth . . . transfer of the assets from the debtors’ estates to [the secured lenders]” by resolving objections to that transfer. To assure that no funds reached LifeCare’s estate, the secured lenders agreed to pay cash for services and expenses through escrow arrangements.

In this respect, an interesting argument the Government could have made, but didn’t, is that the escrowed funds resemble elements of an ordinary carve-out—best understood as “an arrangement under which secured creditors permit the use of a portion of their collateral [that is, estate property] to pay administrative costs, such as attorney fees,” and something the Bankruptcy Code allows debtors and secured lenders to agree to in the normal course.

* * *

Ultimately the argument fails, for the difference between a carve-out and what we have here is the obvious. We are not dealing with collateral (if we were, this would suggest it was LifeCare’s property) but with the purchaser’s property because the payments by the purchaser were of its own funds and not LifeCare’s bankruptcy estate.

The court also held that equitable mootness did not affect the outcome since that doctrine applies only in a plan context:

[T]he Committee’s reliance on the doctrine of equitable mootness misses the mark. In re SemCrude, L.P., 728 F.3d 314 (3d Cir. 2013), makes clear that the doctrine “comes into play in bankruptcy (so far as we know, its only playground) after a plan of reorganization is approved.” Id. at 317. Outside the plan context, we have yet to hold that equitable mootness would cut off our authority to hear an appeal, and do not do so here. And though we are sympathetic to the Committee’s position that it cannot recover its ability to object to a sale it viewed as unfair, we also note that without the Settlement Agreement it would have received nothing, thus canceling (or at least mitigating) the claimed unfairness of considering the Government’s appeal.


In Re: ICP Strategic Credit Income Fund
Bankr. SD NY

In a cross-border case, the bankruptcy court dismisses, on in pari delicto grounds, claims brought against DLA Piper for aiding and abetting fraud and breach of fiduciary duty:

[T]he Court concludes that the Liquidators have (though just barely) alleged claims for primary violations (as that expression is used in aiding and abetting jurisprudence) of breach of fiduciary duties owed to the Funds. But the Liquidators have not done so for fraud or fraudulent trading. The Court further concludes that (assuming that the Liquidators could show substantial assistance by the delivery of routine legal services if DLA Piper provided them knowing that it was doing something wrong) the Liquidators have failed to plausibly allege the “knowledge” prong of the claim for aiding and abetting breaches of fiduciary duty—that DLA Piper knew that it was assisting in a violation of duty. And most obviously, the Liquidators are barred from recovery by the in pari delicto defense under New York’s “Wagoner Rule.”


In Re: Northshore Mainland Services, Inc.
Bankr. DE

The bankruptcy court dismisses most of the cross-border bankruptcy cases related to a 3.3 million square foot resort in the Bahamas:

The matter before me is truly an international case with the main contestants hailing from Wilmington, Delaware, to Beijing, China, to Nassau, The Bahamas. The central focus of this proceeding, however, is the unfinished Project located in The Bahamas. The Debtors argue that Bahamian law limits their options to a liquidation proceeding. This argument has been challenged by the Movants, who argue that a provisional liquidator may work with the parties to come to an arrangement or compromise that involves a restructuring. The Movants' argument is supported by the September 4, 2015 ruling by the Bahamian Supreme Court, which appointed provisional liquidators with limited powers to preserve the Debtors' assets while promoting a scheme/plan of compromise among all stakeholders.

I acknowledge the deep and important economic interest of the Government of The Bahamas in the future of the Project. However real and important as that interest is, it is no more important than the right of a company incorporated in the United States to have recourse to relief in a United States Bankruptcy Court. The Debtors' preference for restructuring under the protections of the United States Bankruptcy Code is understandable and entitled to some weight. Chapter 11 of the United States Bankruptcy Code, with all stakeholders participating, under these circumstances, would be an ideal vehicle for the restructuring of this family of related companies with the ultimate goal of finishing a project said to be 97% complete and, upon its exit from chapter 11, to be in sound financial footing, with appropriate treatment of creditors. I am consequently disappointed that the parties have been so far unable to formulate a consensual exit strategy, whether that would involve taking a plan to confirmation or providing for an agreed dismissal as part of a consensual resolution of their disputes.

The Debtors, cleverly, have proposed a plan that leaves treatment of the Bahamian creditors for disposition outside of this Court. However, the proposed plan provides for treatment of the Debtors' two main adversaries (CCA and CEXIM) to be determined by this Court under the United States Bankruptcy Code. The Debtors' proposed plan, in effect, only invites further dispute, that is, litigation in this forum and in others. If I were convinced that denying the Dismissal Motions would have the effect desired by the Debtors - - bringing CCA, CEXIM and the government of The Bahamas back to the bargaining table, I might consider denying the Dismissal Motions. But the evidence does not reflect this and I am not convinced this will happen in short order. I am convinced, however, that prompt judicial action will enhance the likelihood of a successful outcome.

I agree with Justice Winder's determination in his July 31, 2015 ruling that many stakeholders in the Project would expect that any insolvency proceedings would likely take place in The Bahamas, the location of this major development Project. I perceive no reason - - and have not been presented with any evidence - - that the parties expected that any "main" insolvency proceeding would take place in the United States. In business transactions, particularly now in today's global economy, the parties, as one goal, seek ce1iainty. Expectations of various factors - - including the expectations surrounding the question of where ultimately disputes will be resolved - - are important, should be respected, and not disrupted unless a greater good is to be accomplished.


In Re: Transwest Resort Properties, Inc.
9th Cir.

Following the grant of a motion for rehearing the panel withdrew it prior opinion and held that the district court erred in dismissing an appeal of the confirmation of a substantially consummated plan as equitably moot, since the appellant had diligently sought a stay, and it would be possible to devise an equitable remedy to at least partially address the appellant's objections without unfairly impacting third parties or entirely unraveling the plan. The court found that the new investor who would be adversely-affected by reversal was not protected by the equitable mootness doctrine since the doctrine was intended to protect innocent third parties. Because the new investor was deeply-involved in the bankruptcy case and plan confirmation it could not be an "innocent third party" if the plan was objectionable:

Lender argued that the plan’s exception to the due-on-sale clause negates its § 1111(b) election. If Lender prevailed on the merits of this argument, Lender’s proposed relief would be the elimination of the exception to the due-on-sale clause. Without the exception, the due-on-sale clause would prevent Reorganized Debtors from selling or refinancing the hotels without paying Lender the remainder of the total loan amount.

The relief requested by Lender affects only the division between Lender and Reorganized Debtors of any appreciation in value of the hotels (or from any inaccurately low valuation of the hotels during the bankruptcy proceeding). No party other than Lender and Reorganized Debtors (and their owner SWVP) would be affected by this division.

Reorganized Debtors argue that SWVP, as the owner of Reorganized Debtors, is the type of innocent third party that the equitable mootness doctrine is meant to protect. In light of SWVP’s participation at every stage of these proceedings, we hold that SWVP is not an innocent third party. SWVP became involved in the reorganization as a new investor and as the proposed owner of the reorganized entity before the confirmation of the plan. Although Debtors put forward the initial version of the plan, SWVP participated in the hearings held by the bankruptcy court regarding confirmation of the plan, and the bankruptcy court acknowledged that it considered SWVP’s pleadings in reaching its decision to confirm the plan. In fact, SWVP negotiated with Lender over the final form of the confirmation order (in other words, the final version of the plan), including the portions that gave rise to Lender’s objections.

* * *

[I]n evaluating whether any remedy would unduly affect innocent third parties, “[a]n important consideration is whether all the parties affected by the appeal are before the court.” In re Thorpe, 677 F.3d at 882. Reorganized Debtors are a party to this appeal, and SWVP called itself an appellee—and participated as such—in the first stage of this appeal in the district court. Counsel for SWVP has not appeared in the proceedings before this court, but regardless of whether that means SWVP is not “before the court” in the sense anticipated by Thorpe, the involvement SWVP had at every other step in the process means it is not an innocent third party. Indeed, when a sophisticated investor such as SWVP helps craft a reorganization plan that “press[es] the limits” of the bankruptcy laws, appellate consequences are a foreseeable result.

In Re: Kachina Village, LLC
Bankr. NM

The bankruptcy court finds that the exception to the SARE classification for properties with "fewer than 4 residential units" applies only to improved property. This debtor's undeveloped raw land could not qualify for the exception and SARE.

The court also found that although courts faced with a SARE question typically discount the debtor's plans for the property, consideration of those plans is appropriate here, since the debtor's plans (development of more than 4 units) are "clearly inconsistent " with the SARE exception.

In Re: Midstate Mills, Inc.
Bankr. WD NC Following a court-approved settlement between the estate and certain defendants, individual plaintiffs commenced state court litigation against the same defendants. The bankruptcy court found that two of the counts (alter ego and injunction/fraudulent transfer) were estate property, and thus settled, but that the remaining counts were individual claims of the plaintiffs.
In Re: Lyondell Chemical Company
Bankr. SD NY In a suit seeking to recover payments to shareholders pursuant to an LBO the bankruptcy court declines to certify a class of defendants but directs the plaintiff to file an amended motion for class certification to give the defendants a new opportunity to respond to the request for a class.
In Re: Nortel Networks UK Limited
Bankr. DE

In a cross-border case, the bankruptcy court denies the motion of debtors in a UK foreign main proceeding to bar suit against them in the US in connection with a post-petition sale:

[T]he Joint Administrators for Nortel Networks UK Limited (“NNUK”) and affiliates1 (collectively, the “EMEA Debtors”) are seeking relief from being added as a third party to litigation pending before the Court. The EMEA Debtors have moved pursuant to sections 105(a), 1520(a) and 1521(a) of the Bankruptcy Code to (1) enforce the automatic stay to efforts by Nortel Networks, Inc. and affiliated entities (the “U.S. Debtors”) to implead the EMEA Debtors as third-party defendants in an adversary proceeding discussed below (the “Adversary Proceeding”), and (2) enjoin NNI and SNMP Research, Inc. and SNMP Research International, Inc. (collectively, “SNMP Research”) from prosecuting direct or contribution claims in any court other than the English Court where the EMEA administration is pending.

* * *

The EMEA Debtors’ Motion which is the subject of this ruling was precipitated by the filing by the U.S. Debtors of a motion to implead the EMEA Debtors in the Adversary Proceeding (the “Impleader Motion”). The U.S. Debtors seek leave to file a third-party complaint against the EMEA Debtors. In the Impleader Motion, the U.S. Debtors claim that if the Court determines that SNMP Research is entitled to damages for or relating to a portion of the Business Line Sale proceeds, then the U.S. Debtors will be entitled to a judgment for contribution against the EMEA Debtors. The Impleader Motion is scheduled to be heard on September 22, 2015.

It is the Court’s view that the U.S. Debtors’ case against the EMEA Debtors – if there is a case at all – is post-Petition and if the Court grants the Impleader Motion it should be heard in this Court. The EMEA Debtors were parties to the Business Line Sales and the Court retained exclusive jurisdiction to “enforce the terms and provisions of, and to resolve any and all disputes.“ There are problems with the U.S. Debtors’ contribution claim. In addition to the yet to be resolved defenses to the Impleader Motion, there is the EMEA Debtors’ substantial defense of the Settlement Agreement and its release of the EMEA Debtors, but the Court will need to hear more on the release at a more appropriate time, which this is not. As the Court will discuss, however, the Settlement Agreement is germane to the present dispute.

* * *

The Adversary Proceeding relates solely to the Business Line Sales which occurred post-Petition and, therefore, claims to which the automatic stay of Sections 362 and 1520(a)(1) do not apply. It is equally clear that the automatic stay does, indeed, apply to the prepetition claims that SNMP Research filed against the U.S. Debtors. The EMEA Debtors are entitled to a stay of prepetition claims by either SNMP Research or the U.S. Debtors. Any party seeking prepetition claims against the EMEA Debtors will have to file claims in the English Court. But that is not the case here. Instead, the U.S. Debtors are seeking contribution from the EMEA Debtors for a portion of the proceeds from the Business Line Sales that accrued to the EMEA Debtors. Since the EMEA Debtors participated in the Business Line Sales, benefited from them and the Court retained “exclusive jurisdiction to interpret, construe, implement, and enforce the terms and provisions of, and to resolve any and all disputes that may arise under or in connection with” the Business Line Sales, it seems only fair and just that the automatic stay does not apply to the U.S. Debtors’ contribution claims.


In Re: Tolomeo
Bankr. ND IL

The bankruptcy court finds that the alter ego doctrine warrants the piercing of the corporate veil of a Ch. 7 corporate debtor to reach the assets of: (i) the debtor's shareholder and (ii) a non-owner corporate officer:

Defendants argue that, while there is no dispute that the veil of the Corporate Defendants can be pierced as to their sole shareholder, Laura, there is no factual or legal basis for piercing the veil as to a corporate officer-the Debtor in this matter.

* * *

In fact, contrary to the Defendants' argument, Illinois courts have consistently held that "lack of shareholder status-and, indeed, lack of status as an officer, director, or employee-does not preclude veil-piercing." . . . Rather, the fundamental question is "whether a person exercises equitable ownership and control over a corporation such that separate personalities no longer exist."


September 15, 2015
In Re: Landmark Fence Company, Inc.
9th Cir. "As Chief Justice Roberts recently observed in the context of determining whether a bankruptcy court order is final, parties considering the filing of an appeal would do well to remember the maxim: “It ain’t over till it’s over.”
In Re: Lopez
Bankr. SD TX

Addressing an evidentiary objection by a sanctions defendant to admission of a state court judgment awarding sanctions against the same defendant, the bankruptcy court finds that the judgment should be admitted:

The facts of Mejia and the court’s reasoning will be instructive as to the contemplated sanctions at bar. Factually, the pattern of PRA’s misconduct in Mejia is similar to PRA’s alleged pattern here. The court pointed out that it ordered PRA to produce requested documents, PRA did not comply with that order, the court issued a second production order with the threat of severe sanctions, PRA made futile motions rather than comply, the court ordered production a third time, and PRA still did not fully comply. Ex. P-142, p.2. PRA’s noncompliant conduct leading to the court’s severe sanctions included giving evasive answers to Mejia’s discovery request while actually being able to produce those particular documents, performing substantially obstructive redactions on policy and procedure manuals, and stonewalling discovery by waiting for a protective order for Mejia’s social security number while PRA already knew of the number. Ex. P-142, p.3-4. Mejia offers three useful insights into the alleged discovery misconduct: (1) the misconduct here may be attributable to PRA and not to its counsel; (2) PRA’s misconduct is part of a plan or strategy and not a mistake; (3) and to what extent sanctions are necessary to deter PRA from misconduct.

This Court does not find that the probative value of the admission of the Mejia opinion and its adjunct exhibits will be ”substantially outweighed by unfair prejudice, confusing the issues, … undue delay, wasting time, or needlessly presenting cumulative evidence.” Fed. R. Evid. 403. It is understandable that PRA is concerned over being punished here on account of conduct for which it has been punished elsewhere by a court. [ECF No. 143, p. 4 ¶ 8]. There may also be a risk of prejudice if the trier of fact were to read Mejia as proof of PRA’s misconduct. This Court is the trier of fact for the sanctions it contemplates, and it will assess PRA’s misconduct in Mejia only to better understand the relevant facts, which essentially involve PRA’s state of mind. This Court embraces its authority to review a party’s relationship with other court systems in assessing possible sanctions.

In Re: Parvin
Bankr. WD WA

The bankruptcy court grants the motion of the UST to convert a debtor's Ch.7 case to Ch. 11 on the grounds that the debtor (a surgeon) has sufficient disposable income to fund a Ch. 11 plan. The court rejects the debtor's Constitutional argument that the conversion amounts to involuntary servitude:

The Debtor’s arguments are premature. Federal courts are limited to deciding cases and controversies under Article III of the Constitution. Bova v. City of Medford, 564 F.3d 1093, 1095 (9th Cir. 2009). “Two components of the Article III case and controversy requirement are standing and ripeness,” which are closely related. Id. at 1095-06, citing and quoting Colwell v. Dep’t of Health & Human Servs., 558 F.3d 1112, 1121, 1123 (9th Cir. 2009). The Debtor has neither constitutional nor prudential standing to challenge the constitutionality of the proposed conversion. The ripeness doctrine also precludes the Debtor’s constitutional challenge to conversion.

The Debtor fails to show that he has suffered an injury in fact. First, he does not have a legally protected interest that can be harmed by the conversion of his case from chapter 7 to chapter 11. The bankruptcy court in Gordon observed that a debtor has no right to be shielded from creditors under chapter 7:

A party has a statutory right to file bankruptcy, but then only pursuant to the terms of the statute. If he does not want to comply with all the requirements of the Bankruptcy Code, he may not get a discharge. Refusing a debtor a discharge may have the practical effect of making a debtor address the debts he incurred. A creditor may seize property or garnish wages, but no one requires the debtor to work or places him in jail for failure to pay. The consequences he faces are those of his own creation – he will continue to owe his creditors.

Second, the Debtor does not stand to suffer the actual or imminent injury of involuntary servitude from the conversion of his case from chapter 7 to chapter 11 under § 706(b). Again, the Debtor will not be forced to work for anyone upon conversion:

[T]he mere conversion of the case from chapter 7 to chapter 11 is not a type of physical or legal coercion constituting involuntary servitude. [In truth], conversion does not require anything of the Debtor. Conversion does not require the Debtor to work for a particular employer, or in a particular job, or to work at all, nor does it require the Debtor to pay his creditors. Conversion simply places the Debtor in another chapter within the Bankruptcy Code . . . .

* * *

The Debtor does not assert a right within the zone of interests protected by the Thirteenth Amendment. He has not shown that, as an individual debtor with primarily non-consumer debt seeking bankruptcy relief, he is within the class of persons intended to be benefited by the Thirteenth Amendment. The Thirteenth Amendment is intended to protect individuals from involuntary servitude situations “that are truly ‘akin to African slavery.’” The Debtor thus lacks prudential standing to challenge the constitutionality of conversion.


September 14, 2015
In Re: Vertis Holdings, Inc.
Bankr. DE

The bankruptcy court denies a plaintiff's motion to amend a complaint by adding 11 new counts since: (i) the proposed amended complaint would significantly alter the landscape of the litigation, forcing defendants to defend against novel theories of the case at an exceedingly late stage in the proceedings and (ii) defendants would be forced to engage in substantial additional discovery, work that could have been accomplished in connection with the extensive discovery the parties have already undertaken.

The court rejected the plaintiff's argument that the proposed new counts were base don the same facts as the pre-existing counts:

Plaintiff repeatedly states that the proposed claims are “based on the same facts as the original complaint.” The question is, however, whether the proposed counts constitute “new legal theories.”

* * *

Plaintiff rejects the “new theory” arguments, describing them as “exaggerated.” Plaintiff explains, “it is not seeking to expand the scope of its claims beyond those already known to all parties within this litigation under the present set of facts.” Plaintiff further asserts that the claims are not “new” because RAG pursued some of them in the State Action and attached a copy of its State Action complaint as an exhibit to the Complaint in the instant action.

* * *

Plaintiff’s argument that the newly proposed claims are not “new,” because Plaintiff previously pled, and later abandoned some of them in the State Action, is misplaced. Although the claims might not have been “new” to Defendants in a sense that they were aware that RAG pursued them before, they constitute “new legal theories” for purposes of this action.

The court also criticized plaintiff's argument that plaintiff need not provide a reason for the delay in seeking amendment:

Plaintiff asserts that it does not have to provide this Court with a reason as to why it did not seek an amendment earlier. However, courts regularly inquire about a movants’ reasons in determining whether there is undue delay.

* * *

[C]ourts clearly expect a movant to explain why an amendment was not sought earlier. In fact, trials courts are even obligated to consider movants’ reasons in determining whether there is “undue delay.” This makes sense. RAG seems to suggest that litigants can come to court months or even years after the filing of an original pleading to seek an amendment without providing an explanation as to why the amendment was not sought earlier. This view, however, is misplaced as it would exceed the already “liberal pleading philosophy of the federal rules.”


In Re: A.P.I., Inc.
Bankr. MN

The bankruptcy court holds that it lacks subject matter jurisdiction over a removed case filed by a law firm which asserts a charging lien against a 524(g) trust on account of post-confirmation services allegedly provided to the trust by the firm. The trust argued that the case could be resolved based upon third party claim bar language in the confirmed plan which states:

. . . All Entities which have held or asserted, which hold or assert, or which may in the future hold or assert any Third Party Claim shall be permanently stayed, restrained, and enjoined, from taking any action for the purpose of directly or indirectly collecting, recovering, or receiving payments or recovery with respect to any such Third Party Claim, including, but not limited to: . . .

(C) creating, perfecting, or enforcing any Lien of any kind against the Protected Party, or the property of any Protected Party, with respect to any such Third Party Claim . . . .

The bankruptcy court held that since a post-confirmation trust is not a "bankruptcy estate", jurisdiction was lacking:

[T]here is no longer a bankruptcy estate in administration in the Debtor’s case. There has not been for nearly a decade.

* * *

The A.P.I. Trust and its corpus do not substitute for a bankruptcy estate. This trust was funded in large part by assets that were once property of the Debtor’s bankruptcy estate, i.e. assets of the Debtor and the rights to indemnification under liability insurance policies owned by the Debtor, later monetized into funds paid by insurers in consideration for the protection of the channeling injunctions. But once paid into the Trust, those assets became the property of a different entity--one established under Minnesota law,10 not § 541 of the Bankruptcy Code11--and one administered by a trustee empowered under the same state-law governance and not having fiduciary status directly imposed by federal statute.12 The only bankruptcy estate cognizable in the Debtor’s case ceased to exist after the Plan was consummated on its effective date and the A.P.I. Trust was activated.

* * *

So, whether it is analyzed as a matter of statutory classification or from more basic structure, the bankruptcy jurisdiction does not lie as to the assets currently in the A.P.I. Trust; and hence it can not lie for a proceeding over a lien asserted to have arisen as to those assets years after the consummation of the Debtor’s Plan. The exclusive federal jurisdiction over the assets of the Debtor’s bankruptcy estate ended when those assets were transferred to the A.P.I. Trust. Hence, there can be no federal bankruptcy jurisdiction over any dispute regarding the legal status of those assets as encumbered or not.

The court also rejected the argument that "interpretation of the plan" could support jurisdiction over the matter:

To invoke “post-confirmation jurisdiction” in the bankruptcy court, the Trust relies on several decisions from other districts that are not really on-point with the situation at bar.14 Using the terminology of those decisions, the Trust argues that Faricy’s claim to an attorney’s lien “has the requisite close nexus to the Plan because it directly affects the interpretation, implementation, and administration of the confirmed Plan, which on its face bars such claims against the Trust.”

While never quite stooping to flattery, the pitch is that there is no forum better-versed to address a defense based on the terms of the Debtor’s Plan than the court that got familiar with the original parties and their alignment, confirmed the Plan, gave the relief ancillary to that, and hence got the best understanding of their position under the remedies accorded through confirmation. The unspoken insinuation is that a more accurate interpretation of those documents could not be had from any other court.

Locally, this sort of suasion has had some appeal in earlier cases. However, the underlying assumption of greatest-competence is certainly not a categorical verity. It cannot justify continuing returns to an earlier forum of bankruptcy on its broad notion alone.

* * *

In any event, were this sort of expertise-centered consideration relevant to the exercise of “post-confirmation jurisdiction,” there would be no strong case to drive the outcome here on such considerations of judicial efficiency. As noted earlier, the A.P.I. Trust is a free-standing entity that has been in existence for nearly a decade. Its options, protections, powers, and latitude in exercising them are governed by the Plan and the Confirmation Order--documents that are long, and that have their complexities in the interrelation of their terms, but are well-organized and comprehensible nonetheless.

The court noted that the plan documents were complex, but well-drafted, and discounted the "superiority" of the bankruptcy court to interpret the documents:

This discussion is just a summary of some provisions culled from the organic documents of the Debtor’s reorganization. It is not intended to be a ruling on the merits of the Trust’s claimed defense of bar-by-injunction. Rather, it addresses a central point in the Trust’s entreaty to the supposed superiority of this court as a forum: the defense is not as simply-supported as the Trust argued, and not as readily-rejected as Faricy insisted; but it is capable of analysis on a basic, methodical construction of the governing documents. This does not require an experienced-derived familiarity with the parties or any expertise in the remedies of Chapter 11 that have been long-seated for the Debtor, to resolve the Trust’s asserted defense of bar-by-injunction.

So, even were there a basis to assume related-proceeding jurisdiction on some sort of general retention from the original reorganization process, it would not be necessary to exercise it for an interpretive adjudication. Deference to the abilities of the judiciary of the Minnesota state courts would prompt abstention and remand on even this limited point, despite the Trust’s tenacity in arguing it as essential to bankruptcy processes. The current parties’ long absence from the forum of bankruptcy probably would drive the outcome.

In Re: Kao
Bankr. SD TX The bankruptcy court finds that counsel, who met with a creditor to discuss possible representation in a pending stay relief matter (but who was not hired) was disqualified to represent another creditor in the same matter whose interests were adverse to the first creditor.
In Re: Grossman
Bankr. ED CA "Revenge porn comes to bankruptcy".
In Re: Brown
Bankr. MN

A Ch. 13 debtor divorced pre-petition and received and recorded a quitclaim deed conveying her ex-spouse's interest in the couple's home to her. The property was subject to two mortgages.

Post-petition, the debtor sought to strip the wholly-unsecured second lien from the property. However, the ex-spouse's unreleased liability precluded such lien-stripping:

[T]he history at bar put the property into a specific posture as HomeTown’s collateral, as of the Debtor’s filing under Chapter 13: it still secured her ongoing liability to HomeTown, and her ex-husband’s continuing personal debt obligation to HomeTown. The former gave rise to a “claim” that nominally came within Schmidt’s ambit--i.e., in theory, it could be modified through the use of Chapter 13's remedies. The latter did not. The lien stripping remedy could not extend to the whole of HomeTown’s lien as it encumbered the interest that the Debtor held in the real estate, even though she held full ownership in it when she filed under Chapter 13. The Debtor took title to her ex-husband’s undivided one-half interest in the property once he executed and delivered the quit claim deed to her; but that conveyance carried HomeTown’s lien with the ex-husband’s interest as it had attached to that interest.

It is not necessary to get into the abstract inquiry of whether lien stripping might still lie to divest HomeTown’s lien, to the extent that it nominally secured the Debtor’s liability on the underlying debt. In the end, lien stripping simply cannot divest the lien to the extent that it continues to secure the ongoing liability of the Debtor’s ex-husband. His liability to HomeTown is not a debt matchable to a claim that is allowable or cognizable in the bankruptcy case of a third party to that debt--i.e. the Debtor.

* * *

Her plan provides for a release of HomeTown’s lien in its entirety after she completes payments. The Debtor’s motion is proffered as the platform for such comprehensive relief against the lien, to free the property entirely from HomeTown’s mortgage. That release cannot be compelled or judicially imposed as to the persisting lien previously granted by her ex-husband, because that lien does not match to a claim that is subject to allowance and treatment under a plan or any other remedy under bankruptcy law, within this debtor’s case. Because that relief cannot be granted in the end, there is no reason at this time to value the claim in the abstract as it relates to the undivided one-half interest against which the Debtor gave a mortgage lien. Nor can this plan be confirmed.

In Re: Walsh
Bankr. ND IL

The bankruptcy court holds that a law firm's $196,000 claim against the Ch. 13 debtor's estate for work on state court litigation during the Ch. 13 case must be wholly disallowed:

The Court agrees with the Trustee's argument that despite, not because of, Freeborn's efforts, the Judgment was deemed the property of the bankruptcy estate. Instead of representing the estate's interests, Freeborn repeatedly argued to the state court that the Judgment was not property of the estate, in violation of the automatic stay. As the Trustee points out, even after Freeborn had notice of the Debtor's bankruptcy case, rather than notify the Trustee of the Litigation, Freeborn chose to continue with the state court appeal. In fact, Freeborn never informed the Trustee of the Litigation; Wright did. Upon her appointment as Chapter 7 Trustee, Ms. Steege became responsible for administering all property of the bankruptcy estate.

Because Freeborn received neither pre-approval nor retroactive approval, § 503(b )(1 )(A) does not apply. It is well-established that§ 503(b)(l)(A) may not be used to pay or give priority to professional services requiring approval under§ 327. Milwaukee Engraving, 219 F.3d at 639. Therefore, Freeborn is precluded from avoiding the requirements of§§ 327 and 330 by seeking an administrative expense allowance under § 503(b )(I )(A). See Id.


In Re: CLSF III IV, Inc.
Bankr. SD FL

Congress' addition of the words "or for the benefit of" to 11 USC 546(e) overruled the Mumford decision and clarified that the transfer of funds from one bank to another qualifies for the second element of the 546(e) defense regardless of whether the financial institutions hold a beneficial interest in the funds transferred:

The court also holds that life insurance policies which were purchased from individuals and then transferred into trust or corporations which sold beneficial interests or shares to European buyer were "securities contracts" for the purposes of section 546(e).

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