This Court thus viewed the practice of providing a ballot with a box affording the creditor the opportunity to “opt out” to be a matter of administrative convenience. In the absence of this kind of ballot, such a creditor could be required to file an objection to the plan on the ground that the high standard established by Continental for nonconsensual third-party releases was not met, and that the plan was therefore unconfirmable. If the creditor filed such an objection, the debtor would carve that creditor out of the third-party release, which would then be enforceable only against those creditors who did not raise an objection – those who “consented” to it. The practice of including a box on creditors’ ballots to check if they objected to the release was just an administrative shortcut to relieve those creditors of the burden of having to file a formal plan objection.

But that analysis is no longer viable after Purdue Pharma. Under established principles, courts in civil litigation will enter default judgments against defendants only after satisfying themselves that the relief the plaintiff seeks is relief that is at least potentially available to the plaintiff in litigation. Where it is clear that the complaint seeks relief that is unavailable as a matter of law, a court should not enter a default judgment under the ordinary application of Civil Rule 55.

After Purdue Pharma, a third-party release is no longer an ordinary plan provision that can properly be entered by “default” in the absence of an objection. It is unlike the listed cure amount where one can properly impose on a creditor the duty to object, and in the absence of such an objection bind the creditor to the judgment. The nonconsensual third-party release is now per se unlawful. As such, it is not the kind of provision that would be imposed on a creditor on account of that creditor’s default.

And in the absence of the default theory of “consent,” no other justification for treating the failure to “opt out” as “consent” to the release can withstand analytic scrutiny.

Debtor argues that the Complaint violates Rule 9011(b)(1) and (2) and, therefore, asks the Court to evaluate the Complaint for both frivolousness and improper purpose. It is clear to the Court that Plaintiff violated Rule 9011(b)(2) and (b)(1) when he filed the Complaint. First, a reasonable attorney would not have refiled the preference claim without first seeking the Court’s permission to bring the claim on behalf of the bankruptcy estate.

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Second, the claim seeking a determination that Defendant owned an interest in the Premises suffered from the same legal infirmity as the preference claim, and a minimal amount of research would have confirmed this. The Court finds that Defendant has established a prima facie case that Plaintiff’s counsel knew or should have known that Plaintiff could not pursue such a claim, and Plaintiff has failed to present evidence or argument to rebut this conclusion.

* * *

As to whether Plaintiff filed the Complaint in bad faith for an improper purpose, the Court found above that Plaintiff knew he lacked standing to assert the preference claims when he filed the Complaint and when he refused to dismiss it. Plaintiff has failed to respond to the Rule 9011 Motion or to Defendant’s contention that he filed the Complaint to harass Defendant and to increase the costs of these proceedings with no legitimate purpose. Given Plaintiff’s prior conduct in the Bankruptcy Case and in the instant case, and no argument to the contrary by Plaintiff, the Court agrees.

Throughout these proceedings, Plaintiff’s litigation strategy appears to have been designed to increase the burden on Defendant’s counsel and, consequently, the costs, and to interfere with Defendant’s attempt to propose a confirmable Chapter 11 plan. For example, Plaintiff made excessive and overbroad discovery requests when he filed his twelve motions for Rule 2004 examinations in the Bankruptcy Case. He sought dismissal of the Bankruptcy Case and insisted on having his motion heard on shortened notice yet failed to present sufficient evidence that Defendant filed the Bankruptcy Case in bad faith or failed to comply with its reporting requirements. He filed the Preference Motions without conducting sufficient research to determine that he lacked statutory authority to pursue the claim and that such a claim required the filing of an adversary proceeding. Then he filed the Complaint but failed to serve it and, when put on notice by Defendant’s counsel’s filing of a motion to dismiss for lack of service of process, rather than correct the deficiency, he apparently decided to rely on his lack of proper prosecution to argue that he remained entitled to rely on Rule 2004 to conduct his discovery. He also claimed in his response to Defendant’s motion to dismiss the Complaint that he asked Defendant’s counsel to cooperate by waiving service of process, but Plaintiff’s own evidence attached to the response contradicts his contention by showing that Plaintiff’s counsel made that request hours after Defendant filed the motion to dismiss.

The debtors (and the courts in Franco’s Paving and Hot’z Power Wash) are correct that Congress appears to have intended that subchapter V plans would be confirmed as consensual plans under § 1191(a) whenever possible. See, e.g., 11 U.S.C. § 1183(b)(7) (one role of the subchapter V trustee is to “facilitate the development of a consensual plan of reorganization”). But the Court cannot use this policy to contravene the express requirements of the applicable statutes and rules. Section 1129(a)(8) applies in all chapter 11 cases, not just cases under subchapter V. Nothing in the Bankruptcy Code or rules suggests that the Court can adopt an interpretation of § 1129(a)(8), § 1126, and Rule 3018 that is unique to subchapter V. Perceptions of the purpose of subchapter V should not dictate the interpretation of a provision of general application.

A creditor’s acceptance of a chapter 11 plan, whether under subchapter V or otherwise, must be in writing and conform to the requirements of Rule 3018. Wells Fargo did not accept the plan in writing before the ballot deadline. Therefore, all classes of impaired claims did not vote in favor of the plan, and the plan cannot be confirmed under § 1191(a).

While the Court agrees that precise calculations are not required at this stage, the allegations must contain more that allegations of net losses in 2015-2016 (as of the 2016 LBO Transaction closing), coupled with conclusory statements that the Debtor’s financial picture never improved through the Relief Date. The Amended Complaints do not sufficiently correct the vague, conclusory allegations about insolvency at the time of the Transfers in the original complaint and, therefore, the Motion to Amend the constructive fraud claim will be denied as futile.

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The Trustee further contends that the Court’s analysis should not be limited to the badges of fraud but should also consider other facts establishing fraudulent intent. “If the ‘natural consequence’ of a debtor’s action is to hinder, delay or defraud creditors, a court may infer an intentional fraudulent conveyance.”40 The Trustee argues that fraud was the natural consequence of not telling the vendors that the Debtor was winding down its business and was holding a going-out-of-business sale, while paying increased commissions to the Stylists. Although the Amended Complaints describe a liquidation sale that included a robust incentive program to encourage the Stylists to aggressively pursue sales, but the allegations are too vague to jump to a conclusion of a fraudulent scheme against vendors.

The standard for assessing futility of the Amended Complaints is the same standard of legal sufficiency as applies under Federal Rule of Civil Procedure 12(b)(6). Assuming that truth of the Trustee’s averments that the Debtor failed to notify the vendors about the Debtor’s winddown plans, without more facts, does not establish a plausible basis for an actual fraud claim.

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While the Court agrees that the Trustee has not caused undue delay here,43 it cannot ignore the prejudicial effect to the individual Stylists caused by the length of time between the allegedly preferential or fraudulent transfers and the filing of the original complaints and the Motion to Amend. Much of the delay in this case occurred due to the unusual gap between the filing of the involuntary petition and the entry of the order for relief. Much of the prejudice appears due to lack of the Debtor’s verified business records. The unusual procedural history of this case and the lack of the Debtor’s business records, neither of which is any fault of the individual Stylists, results in undue prejudice to the Stylist defendants.

The debtor complains that “the U.S. Trustee’s failure of timely and fair communication with the Debtor’s counsel, conflicting communications between the U.S. Trustee Office’s attorney and staff, fundamentally denied the Debtor – and the Debtor’s counsel who is ‘new’ to the bankruptcy bar of the Southern District, of a reasonable opportunity to fully comply. This presents a ‘due process of law’ violation in the form of divestiture of the right to ‘meaningful court access.’” The debtor’s own filings in this case contradict this argument. Exhibit B to the debtor’s response to the motion to dismiss includes the initial correspondence from the United States Trustee to the debtor. ECF No. 37-2. On August 2, 2024, the day after the petition was filed, the United States Trustee provided the debtor with the date and time of the initial debtor interview, information on how to access that interview by video conference, access to the guidelines and reporting requirements, and the deadlines to provide information to the United States Trustee. The initial email itself includes a link to the list of authorized depositories for debtor-in-possession bank accounts. The attached letter includes a link to the United States Trustee Operating Requirements and Reporting Requirements and every form for the debtor to provide to the United States Trustee along with instructions. The Court tested these links.3 In spite of these clear instructions, counsel for the debtor repeatedly emailed the United States Trustee’s office asking for them to provide the same data and forms. See ECF No. 37-3. That the debtor’s counsel was unable to obtain information required of all chapter 11 debtors in this district is not the United States Trustee’s fault. Nor does the debtor’s status as a minority owned business enterprise present any inherent reason why the debtor should be treated differently from any other debtor-in-possession when it comes to providing the most basic information necessary for administration of its bankruptcy case.

The debtor argues that the United States Trustee may continue a meeting of creditors under section 341 to permit the debtor to provide information not yet submitted. The United States Trustee does have discretion to continue the meeting of creditors in appropriate circumstances. However, the failure to provide complete insurance information presents a potential threat to the bankruptcy estate itself. This is the reason section 1112(b)(4)(C) includes the failure to maintain insurance as an independent basis for conversion or dismissal of a case. In the Court’s experience, the United States Trustee routinely moves to dismiss cases on an emergency basis when the debtor lacks important insurance coverage. In this case, one general liability policy was not provided until after the hearing on the motion to dismiss4, and the debtor has never provided proof of insurance for its largest asset, real property the debtor values at $925,000. The United States Trustee was well within its discretion, consistent with regular practice in this district, to seek to dismiss or convert this case on an emergency basis.

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The debtor failed timely to provide information reasonably requested by the United States Trustee. The debtor lacks property insurance for its most valuable real estate asset and such lack poses an undue risk to the estate. It also appears that the debtor used cash collateral without authorization. Each of these facts, by themselves, was sufficient cause to dismiss this case under 11 U.S.C. § 1112(b). There was nothing unusual about the United States Trustee’s requests for information or the filing of the emergency motion to dismiss or convert such that the constitutional or statutory rights of the debtor or debtor’s counsel were implicated. The debtor has essentially no possibility of success in any appeal. Nor is there any potential harm to the debtor if the order of dismissal is not stayed or vacated. The Court dismissed this case without prejudice, meaning the debtor may file a new bankruptcy petition at will.

SouthState Bank (the “Bank”) filed a Motion for Sanctions (the “Rule 9011 Motion,” Doc. 347) against Jon Michael Hayes Shibley (“Debtor”), seeking an award of attorney’s fees under Rule 9011 of the Federal Rules of Bankruptcy Procedure because Debtor filed a Motion for Sanctions against the Bank (Doc. 340, the “Sanctions Motion”). The Court denied the Sanctions Motion, after finding that the claims raised therein were barred by res judicata and had also been released by Debtor. The Bank asserts that Debtor’s filing of the Sanctions Motion violated Rule 9011,1 and Debtor opposes the Rule 9011 Motion.

“Rule [90]11 deters attorneys and litigants from clogging federal courts with frivolous filings. It also rewards litigants who admit their mistakes within a 21-day safe harbor period—and penalizes those who refuse.” Huggins v. Lueder, Larkin & Hunter, LLC, 39 F.4th 1342, 1344 (11th Cir. 2022). Based on the following findings of fact and conclusions of law, made pursuant to Rule 7052, the Court finds that, to deter future bad conduct, Debtor should be penalized for clogging this Court with a frivolous filing and refusing to withdraw it when given the opportunity.

The Motion seeks generally to void the $280,000 deposit (the “Down Payment”) that the Debtor’s co-debtor, Cash4Cases, Inc. (“Cash4Cases”), paid to Carob Bean Realty Corp. II (the “Defendant”) for property located at 134 East 38th Street, New York, New York (the “Premises”).

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After careful consideration, and for the reasons set forth below, the Court finds that the Debtor is an alter ego of Cash4Cases, and the zoning variance provided by Defendant constituted fair consideration in exchange for the Down Payment. Accordingly, because fair consideration was provided for the transfer, the Trustee is unable to recover under New York Debtor and Creditor Law (“DCL”) Sections 273–76. For substantially the same reasons, the Court finds that the Trustee is unable to recover for its constructive fraud claim under Section 548(a)(1)(B) of the Bankruptcy Code. Finally, given Defendant’s good faith and the value provided for the Down Payment, the Court concludes that Defendant is entitled to the protections provided by Section 548(c) of the Bankruptcy Code with respect to the actual fraud claim arising under Section 548(a)(1)(A). Accordingly, the Motion is DENIED, and Defendant’s cross-motion for summary judgment is GRANTED.

Pending before the Court is the contested motion (the “Motion,” ECF Doc. # 19) of Jefferies Strategic Investments, LLC (“JSI”) and Leucadia Asset Management Holdings LLC (“LAM Holdings,” and with JSI, the “Jefferies Entities” or “Defendants”). The Motion seeks partial dismissal of the First Amended Complaint2 (the “FAC,” ECF Doc. # 13-2) filed by GWA, LLC (“GWA”), Weiss Multi-Strategy Advisers LLC (“WMSA”), OGI Associates, LLC (“OGI”), Weiss Special Operations LLC (“WSO”), and Weiss Multi-Strategy Funds LLC (“WMSF” and, together with GWA, WMSA, OGI, and WSO, the “Debtors” or “Plaintiffs”) in the above-captioned adversary proceeding (the “Adversary Proceeding”) pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure.

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For the reasons discussed below, the Court GRANTS the Motion in part and DENIES the Motion in part as follows:

• Counts I, II, VIII, IX, X, and XI are dismissed in their entirety.

• Count III is dismissed except to the extent it asserts a preference claim that seeks to avoid the granting of security interests under the 2024 Forbearance Agreement (defined below) pursuant to 11 U.S.C. § 547(b).

• Counts IV and V are dismissed except to the extent they relate to the avoidance of security interests and guarantees arising under the 2024 Forbearance Agreement as preferential transfers under 11 U.S.C. § 547(b).

• Count VI is dismissed except to the extent such claim is asserted against OGI, WSO, and WMSF as is and WSMA with respect to the Jefferies Entities’ threats of clawback litigation and freezing of bank accounts.

• Count VII is dismissed except to the extent it seeks a judgment that the 2024 Forbearance Agreement is null and void for lack of consideration as to OGI, WSO, and WMSF.

• Count XII survives dismissal in its entirety.

The Debtors may amend the FAC in accordance with the Court’s ruling.

The Decision that the Talc Claimants have appealed began with two points on which the parties agree or do not seriously disagree: First, the Talc Claimants assert pre-petition “claims” against the Reorganized Debtor as that term is defined by the Bankruptcy Code. Second, Revlon’s confirmed Plan and the Confirmation Order included discharge and injunctive provisions that are typical of those found in many plans, which, by their unambiguous language, applied to the Talc Claimants’ claims. The Decision rejected the Talc Claimants’ contention that the Bankruptcy Code permitted such a discharge of their claims only by means of a plan that satisfied the requirements of Section 524(g) of the Bankruptcy Code, which Revlon’s Plan did not. Further, the Decision held that, to the extent compliance with Section 524(g) was not mandatory under the Code, deeming the claimants’ claims to be discharged did not violate constitutional due process requirements in light of constructive notice that had been provided to unknown creditors.

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In this Court’s view and despite the contrary assertion of the Reorganized Debtor, this case presents systemically important issues both for the parties now before the Court and for similarly situated individuals and debtors in the future. First, as the Talc Claimants protest, this Court’s ruling concluded that the Plan injunction barred them from pursuing a non-bankruptcy pathway to recover from the Reorganized Debtor notwithstanding that their disqualifying failures to file a claim or object to the Plan assertedly occurred before they even knew they were sick. The Decision serves as precedent that will aid future debtors’ efforts to discharge similar claims (and to enforce such discharges), and a reversal would advance the efforts of similar claimants in the future and limit the relief available to debtors. Second, the Talc Claimants now argue or suggest (as they did not squarely argue previously) that due process bars discharging or enjoining claims arising from exposure to toxins where illness has not yet manifested. Adopting such an interpretation of due process could have systemic impacts by at least implicitly overriding key Bankruptcy Code provisions, in the process significantly curtailing the fresh start that Congress directed be afforded through the confirmation of plans of reorganization. The Court views these not as party-specific or inconsequential issues, but rather as publicly important questions with possible broad-ranging effects.

Transfix Productions LLC (the “Debtor” or “Transfix”) is a chapter 7 debtor herein. Deborah Piazza is the chapter 7 trustee of the Debtor’s estate (the “Trustee”). Heather Gallagher (“Movant”), a former employee of the Debtor, filed a proof of claim for $281,603.00 for alleged unpaid wages and other damages.

On April 24, 2024, Movant filed a motion for relief from the automatic stay to sue the Debtor and its former chief executive officer, Michael Blatter (“Mr. Blatter”), in California state court (the “Motion”). She seeks to recover from the proceeds of the Debtor’s Insurance Policy. The Trustee filed opposition to the Motion (the “Opposition” or “Opp.”). Movant filed a reply to the Opposition (the “Reply”).

The issue before the Court is whether cause exists to lift the automatic stay to allow Movant to litigate her claims in state court, and relatedly, whether the insurance proceeds she seeks to recover are property of the bankruptcy estate and protected by the automatic stay. The Court heard argument on the Motion. For the reasons set forth below, the insurance proceeds are property of the estate and there is no cause to lift the stay. Accordingly, the Court denies the Motion.

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The Trustee argues that by filing the Gallagher Claim, Movant availed herself of the jurisdiction of this Court and is precluded from pursing the same claim in a California court. The Trustee contends that litigating the claim in state court would essentially allow Movant to jump the line to recover against the estate’s property to the detriment of the other claimants, and that cause does not exist to lift the stay.

The Trustee says that pursuant to Endorsement No. 44 of the Insurance Policy, the maximum liability amounts of the EP Section and D&O Sections are aggregated. Therefore, she argues that if Movant were allowed to prosecute her state-court action, the Insurance Policy proceeds would be directed towards the Debtor’s and Mr. Blatter’s defense costs, as well as any potential judgment Movant might secure. The Trustee maintains that the amount of proceeds from the Insurance Policy available to satisfy the Trustee’s claim against Mr. Blatter could be substantially reduced.

* * *

Pursuant to Endorsement No. 44 of the Insurance Policy, the proceeds paid under the Insurance Policy’s EP Section and D&O Section are subject to an aggregate limit. For that reason, even if Movant could recover against only either the Insurance Policy’s EP Section or the D&O Section in her state court litigation, any dollar toward Movant’s claim is a dollar that may not be available to the Debtor. If those proceeds were depleted, the Debtor’s other assets would be used to satisfy the claims of some part of the other claimants. Thus, the proceeds of the Insurance Policy’s EP Section and D&O Section are property of the estate.15

Before the Court is CNB Bank’s (“CNB’s”) motion to reconsider the Court’s July 24, 2024, order ruling that two orders entered in a state court action violated the automatic stay and were void. CNB argues that the Court’s order ran afoul of the Rooker-Feldman doctrine and should be set aside. CNB also argues that it did not violate the automatic stay because the assets addressed in the state court orders were not property of the bankruptcy estate. Finally, CNB argues that the Court’s order should not apply to one of the individual defendants in the state court action because she did not file for bankruptcy protection. Having considered the motion, the Court finds that it lacks merit and should be denied.

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While the Court respects and follows the Rooker-Feldman doctrine, it does not apply here. It is universally acknowledged that Rooker-Feldman does not prevent a bankruptcy court from determining whether the automatic stay applies to pending state court litigation.

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Thus, while state courts may determine their jurisdiction by deciding whether the automatic stay applies to an action before them, see, e.g., In re Oakwood Acceptance Corp., 308 B.R. 81, 85 (Bankr. D. N.M. 2004) (“state courts have the authority to determine whether the stay in bankruptcy applies to proceedings before them”), if the state court errs in finding that the automatic stay does not apply, the bankruptcy court is not bound by the error.

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Thus, CNB’s main argument lacks merit: Rooker-Feldman places no bar to a bankruptcy court’s authority to determine the extent of, and enforce, the automatic stay. CNB’s Rooker-Feldman argument is overruled.