In a recent opinion, the U.S. District Court for the Northern District of Texas held that an Equal Employment Opportunity Commission (“EEOC”) action brought against an employer for alleged violations of Title VII of the Civil Rights Act of 1964 is excepted from the automatic stay by 11 U.S.C.§ 362(b)(4) (police and regulatory power exception).

The district court held that the whether the claim was excepted from the automatic stay depended upon, whether the EEOC’s primary purpose in bringing the action was to protect public policy and welfare, or whether the claim is based on the debts of private parties.

Acknowledging that the Fifth Circuit Court of Appeals has not addressed whether an EEOC enforcement action under Title VII falls within Section 362(b)(4)’s exception to the automatic stay provision, the district court followed the Fourth Circuit’s reasoning in EEOC v. Mclean, 834 F.2d 398, 402 (4th Cir. 1987):

Of the relief sought by the EEOC in this case, first and foremost is its request for a permanent injunction, which is not limited in application to the individuals named in the EEOC’s pleadings. There is also no indication from the EEOC’s pleadings that it brought this action to protect a pecuniary governmental interest in Shepherd’s property, and, while the EEOC seeks monetary relief on behalf of specific individuals, it is also vindicating the public interest by seeking to prevent discrimination in the workplace under Title VII. In other words, there is no indication that the EEOC’s primary purpose in bringing this action was to recover property from Shepherd’s bankruptcy estate, whether on its own claim, or based on the debts of private parties.

Moreover, the EEOC is not seeking to enforce a money judgment; rather, it seeks to prosecute its Title VII claims against Defendant in this action for purposes of preventing Shepherd from engaging in religious discrimination in the future and to also obtain a money judgment on behalf of the named employees. The EEOC also acknowledges that it will not be able to use this proceeding to enforce any money judgment entered against Shepherd. Accordingly, the court determines that the public policy and pecuniary interest tests are satisfied, and that this action falls within the EEOC’s police and regulatory powers. Section 362(b)(4), therefore, applies, and the EEOC is entitled to prosecute its claims and requests for relief in this court notwithstanding Defendant’s bankruptcy proceeding.

Read the full opinion here.

In a recent opinion, the Bankruptcy Court for the Eastern District of New York concluded that the “law of the case” doctrine did not bind the court to its prior ruling that a trustee had adequately alleged claims against debtors for turnover, conversion, and violations of the automatic stay.

In Geltzer v. Brizinova, et al., the court considered a second attempt by the debtors to obtain an order dismissing the adversary proceeding filed against them based on the new theory that the property at issue was not property of the estate.  Adv. Pro. No. 15-01073-ess (Bankr. E.D.N.Y. Sept. 26, 2018).  The trustee had commenced an adversary proceeding against the debtors, who are husband and wife, alleging that the debtors improperly refused to turn over estate property in the form of post-petition sale proceeds (the “Post-Petition Sale Proceeds”) from an auto supply parts company (the “Company”) listed on the debtors’ schedules as owned one hundred percent by the wife.

The debtors initially filed a motion to dismiss the complaint for failure to state a claim (the “Motion to Dismiss”).  In Geltzer v. Brizinova (In re Brizinova), 554 B.R. 64 (Bankr. E.D.N.Y. 2016) (“Brizinova I”), the court denied the Motion to Dismiss and sustained the Trustee’s turnover and stay violation claims.  The court also dismissed the trustee’s conversion claim with respect to the Post-Petition Sale Proceeds on grounds that the Trustee did not adequately allege that the debtors converted specifically identifiable funds.

Soon thereafter, the trustee commenced a second adversary proceeding against the debtors’ daughter-in-law, (the “Soshkin Complaint”) seeking to recover the same Post-Petition Sale Proceeds. Once again, the trustee asserted claims for turnover, stay violations, and conversion of the Post-Petition Sale Proceeds. The daughter-in-law moved to dismiss the Soshkin Complaint, and arguing, for the first time, that the property at issue was property of the Company – not property of the estate.  On this theory, the court granted the motion and dismissed the Soshkin Complaint.

Following the court’s dismissal of the Soshkin Complaint, the debtors filed a motion for judgment on the pleadings and for the entry of an order dismissing the complaint for lack of subject matter jurisdiction (the “Motion for Judgment”).  The debtors adopted the theory that the Company’s assets were not assets of the debtors and did not form any part of the estate.  Therefore, the debtors argued that they were entitled to judgment in their favor on the trustee’s claims and also that the court lacked subject matter jurisdiction over the complaint.

In response, the trustee argued that in Brizinova I the court not only ruled that he had adequately pled that the Post-Petition Proceeds were property of the estate, but that the court explicitly held that it had jurisdiction over the trustee’s claims for turnover, conversion and violation of the automatic stay.  Such holdings, according to the trustee, constituted “the law of the adversary proceeding.”  Therefore, in light of the court’s decision in Brizinova I and the law of the case doctrine, the court should conclude that the trustee’s claims were adequately pled, and deny the Motion for Judgment.

In considering the trustee’s argument on the “law of the case” doctrine, the court relied on a recent Second Circuit case that noted “that [the doctrine of law of the case] is not a rule that bars courts from reconsidering prior rulings, but is rather ‘a discretionary rule of practice [that] generally does not limit a court’s power to reconsider an issue.’” Colvin v. Keen, 900 F.3d 63, 68 (2d Cir. 2018) (quoting In re PCH Assocs., 949 F.2d 585, 592 (2d Cir. 1991)).  The court acknowledged that courts generally consider a range of circumstances in determining whether to apply the law of the case doctrine, however, two such considerations stood out as fundamental: (i) whether there is identity of parties between the prior and subsequent matters; and (ii) whether the prior decision is a final one.

Applying those considerations to the case at hand, the court found that neither its prior decision in Brizinova I, nor the “law of the case” doctrine required it to deny the Motion for Judgment.  While there was an identity of parties, the decision in Brizinova I on the debtors’ Motion to Dismiss was not a final judgment.  Ultimately, the court agreed that the Post-Petition Sale Proceeds were not property of the estate and granted the debtors’ Motion for Judgment as to all claims.

In a recent an opinion, the Delaware Bankruptcy Court enforced the broad release language in a confirmation plan to release certain entities that were never intended to be released.

The debtors and the creditors’ committee engaged in hard-fought negotiations, and the committee supported confirmation of the plan in large part because the settlement trust, to be created under the plan, was to pursue post-confirmation litigation against individuals and entities related to the former owner of the debtors’ business. The plan as confirmed contained broad releases.

When an adversary proceeding was filed by the settlement trust against various entities related to the former owner, certain defendants promptly sought summary judgment on the ground that they are each “Released Parties” under the plan, and thus immune from suit. The trustee argued that the adversary proceeding against the former owner entities was central to the committee’s support of the plan, and thus the plan could not operate to release any of these defendants. The bankruptcy court disagreed.

Reviewing the release language in the plan, the bankruptcy court found it unambiguous and adopted its plan meaning. Applying the plain meaning of the release, the bankruptcy court found that at least one of the defendants was entitled to summary judgment on their contention that they were released from liability in the adversary by operation of the plan.

The bankruptcy court reasoned: “Courts have held that a plan is effectively a contract between a debtor and its stakeholders. Those stakeholders vote upon a plan based upon their assessment of what the plan will accomplish, and what they will receive under it. Once a plan is confirmed and the order becomes final, the parties’ rights, obligations and expectations are fixed. The Trustee’s argument – that plan treatment is driven not by reading the plan but by what may have been told to the bankruptcy judge during the case, or by prior plan provisions that were discarded in the final confirmed plan – is inconsistent with applicable law and contrary to sound policy. The Plan here was confirmed by an Order that has become final. Its provisions control.”

To read the full opinion here.

In ruling a motion to dismiss, the Third Circuit Court of Appeals considered whether the purchaser of the Debtors’ shares post-confirmation was bound by releases contained in the plan of reorganization (the “Plan”).  A copy of the opinion is available here.

The Plan included “broad releases of liability,” that protected the Debtor and its officers from claims related to or arising out of the bankruptcy, with exceptions for gross negligence and willful misconduct.  Id. at 4.  After creditors had been paid in full, a notice was provided that there would be a distribution of dividends to shareholders.

photo of glacierAfter these announcements, appellants purchased millions of shares in the Debtor, Arctic Glacier, assuming that they would be subject to FINRA rules and would receive the dividends.  However, the dividends were paid only to the original owners of the shares.  Appellants then sued Arctic Glacier and four of its officers.  The Delaware Bankruptcy Court dismissed the Complaint as barred by the Plan releases and by the res judicata effect of the Plan.  This decision was affirmed by the District Court.

Before the Third Circuit Court of Appeals, the appellants argued that plan releases “can never insulate a debtor from liability for post-confirmation acts.”  Id at 8.  The Third Circuit explained that a bankruptcy court order confirming a plan is a “final judgment,” and “like any other judgment, is res judicata. . . It bars all challenges to the plan that could have been raised.”  Id.  Thus, the Third Circuit found that the “entire Plan is res judicata, including its releases.”  Id. at 9.

Regarding whether the releases could preclude liability for acts that took place after confirmation of the plan, the Court explained that appellants’ argument was essentially based on a single sentence contained in a U.S. Supreme Court decision.  Given this, the Third Circuit reasoned that a plan can only be implemented after confirmation and if releases could not bar post-confirmation conduct, that would “nullify the res judicata effect of confirmed plans.”  Id. at 10.  Thus, the Court affirmed the lower court decisions dismissing the Complaint and found that the releases barred the appellants’ claims because the releases precluded claims arising out of the bankruptcy, including those based on to distributions under the Plan.

This decision out of the Third Circuit Court of Appeals serves as a reminder of the nature of confirmation orders — and the releases contained therein — as final judgments that carry res judicata implications.

The U.S. Bankruptcy Court for the District of Delaware is about to begin its annual process to review and consider comments to its local rules.

The comment period will continue from October 1 through October 31, 2018.  Here is a link to the instructions from the Court on how to provide comments, should you have any.  And, here is a link to the current version of the Local Rules.

 

In a suit by the trustee of the liquidation trust of Green Field Energy Services, a defunct oil services business, against the debtor’s former CEO and others, the U.S. Bankruptcy Court for the District of Delaware found that the trustee can recover almost $17 million.  See Halperin v. Moreno, et al. (In re Green Field Energy Services, Inc.), Bankr. D. Del. Adv. No. 15-50262(KG), D.I. 535.

Oil PlantIn a 126-page decision, Judge Kevin Gross found that the former CEO had caused entities he controlled to fail to make required payments under two Share Purchase Agreements (the “SPAs”) that resulted in damages to the debtor in the amount of $16.6 million (inclusive of prejudgment interest).  In particular, the SPAs required that entities controlled by the CEO make quarterly purchases of preferred stock.  Although the CEO was not a party to these SPAs, the trustee brought related claims against him for the entities’ failures to perform.

In the face of these contractual obligations for quarterly share purchases, and despite that the CEO / his entities had cash on hand to make the required payments, the Court found that the former CEO caused his controlled entities to fail to make the required purchases / payments which deprived the Debtor of much needed cash.  These failures eventually led to Green Field’s defaults on secured loans and resulted in its bankruptcy filing.  The Court found that the CEO had diverted funds that could be used for the share purchases.

Ultimately, the Court found that the entities controlled by the CEO had breached the SPAs and were liable for contract damages.  Further, the Court found that the former CEO “intentional and tortuously interfered with the obligations” under the SPAs.  Id. at 125.  Although the opinion is long, and a lot to take in, one thing is clear — preservation of litigation claims in liquidating or litigation trusts after plan confirmation remains a valuable asset and can substantially increase the recovery for unsecured creditors.  Read our prior blogs on Liquidation Trusts here.

 

In entertainment and bankruptcy news, the chapter 7 trustee for the bankruptcy filed by former celebrity couple Duane Daniel Martin and Tisha Martin Campbell (the “Debtors”), brought suit against Roxe, LLC (“Roxe”) and others claiming that Roxe was formed by Martin and his brother (also a defendant to this suit) to conceal Martin’s ownership of valuable real estate in Chatsworth, California.  See Gottlieb v. Roxe, LLC, et al. (In re Martin, et al.), Bankr. C.D. Cal. Adv. No. 18-ap-01106, Docket No. 1.  The Debtors are actors who rose to fame on sitcoms in the 1990s.

California

The property at issue was purchased by Duane Martin in 2006 for $900,000 with a $650,000 loan from IndyMac.  Thereafter, Duane Martin borrowed an additional $1,950,000 from IndyMac to construct the Martin family home – a 9,000 square foot luxury residence.

The Trustee alleges that in 2009, Duane Martin quitclaimed the property to the Campbell-Martin Family Trust and thereafter caused the IndyMac loans to go into default “in order to negotiate a short sale” of the property.  To effectuate this, the Trustee claims that Duane Martin negotiated the short sale of the property from Indymac directly to Roxe for a discounted amount of only $1,380,000.

Purchase of the property by Roxe was allegedly funded by a loan of approximately $1.4 million by Will Smith and Jada Pinkett Smith, through their company TB Properties, LLC (“TB Properties”).

The Trustee alleges that, all on the same day in November 2012, TB Properties recorded a deed of trust on the property in the sum of approximately $1.4 million with Roxe listed as borrower, the IndyMac loans used for purchase/construction of the home were satisfied and Roxe obtained title to the property from the Debtors.

Thereafter, the Debtors leased the mansion for $5,000 per month from Roxe.  The Trustee alleges that in July 2018, Duane Martin caused the property to be listed for sale in the amount of $2,695,000 and that the sale proceeds in excess of the TB Properties loans totaled $1.3 million. The Trustee further alleges that the lease was a sham, not intended to be performed.

In the adversary case, the Trustee seeks (i) to quiet title to the property, claiming that the Debtors are the true owners of the property and (ii) a turnover of the property from defendants under Bankruptcy Code Section 542, claiming that the property is estate property.

Both because of the celebrities involved and the bankruptcy litigation claims asserted, this will be an interesting case to follow.  Check back for further updates as the case progresses.

Michael Temin writes:

Fiber optical network cableWhen deciding a motion to dismiss a complaint pursuant to Federal R. Bankr. 7008, which incorporates Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and construe all inferences from those allegations in favor of a plaintiff.  It was, therefore, unusual when a Michigan bankruptcy court dismissed a complaint alleging breach of fiduciary duty against a director based upon an affirmative defense.  The case is In re Great Lakes Comnet, Inc., 586 B.R. 718 (Bankr. W.D. Mich. 2018).

The debtor provided fiber optic telecommunication services to third party carriers.  The officers of the debtor schemed to charge national exchange carriers with illegal tariffs.  Six years after the scheme began the debtor filed for bankruptcy under chapter 11.  The liquidation trust formed pursuant to the plan of liquidation sued the officers and directors for breach of their fiduciary duties to the debtor.

One director moved to dismiss the breach of fiduciary duty claim as to him, arguing, inter alia, that the officers’ conduct as alleged in the complaint and supplemented by certain board meeting minutes, provided a defense to the claim.  The director attached to his motion, and relied on, minutes from board meetings and an annual shareholder meeting.  The bankruptcy court took the substance of the minutes under consideration, explaining:

The Complaint specifically refers to board meeting minutes and information provided by the officers to the board during those meetings.  All of the meeting minutes directly relate to the cause of action against [the director] for breach of fiduciary duty and are integral to the allegations in the Complaint.  Given the lack of objection and both parties’ reliance on these documents at the hearing, the court shall consider them in connection with the Motion.

The bankruptcy court further acknowledged:

Because a defendant has the burden of proof of demonstrating an affirmative defense, it is generally more appropriately considered after the pleadings stage. [citations omitted]. However, the Sixth Circuit has explained that a motion to dismiss may be granted on the basis of a meritorious affirmative defense if the facts in the complaint conclusively establish the existence of the defense as a matter of law.

The court held that the Trustee’s allegations in the complaint, as supplemented by the meeting minutes, demonstrate the affirmative defense of reasonable reliance under Michigan law.  Based upon the foregoing, the bankruptcy court granted the motion to dismiss as to the moving defendant.

Read the full opinion here.


Michael L. Temin is senior counsel in Fox’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.

Michael Temin writes:

Litigation DamagesOne of the commonly asserted defenses to preference avoidance actions is the “new value” defense set forth in 11 U.S.C. § 547(c)(4).  One issue considered by courts is whether the “new value” must remain unpaid.  In a recent opinion, the Eleventh Circuit joined the Fourth, Fifth, Eighth and Ninth Circuits in holding that it does not.

In Kaye v. Blue Bell Creameries, Inc., (In re BFW Liquidation, LLC), No. 17-13588, (11th Cir. Aug. 14, 2018), the Eleventh Circuit determined that section 547(c)(4) was unambiguous and that the statutory history of the section supports the conclusion that new value need not remain unpaid.

The Court acknowledged that one of the policy objectives underlying the preference provisions of the Bankruptcy Code is to encourage creditors to continue extending credit to financially troubled entities.  According to the Court, requiring new value to remain unpaid would hinder this policy objective.

To support its conclusion, the Court provided a simple illustration of why its interpretation of section 547(c)(4) encourages creditors to continue to extend credit to financially troubled entities:

A chart can perhaps best illustrate the above concepts. The following chart illustrates a scenario where the vendor-creditor ships $1,000 worth of goods to the debtor every other week, and the debtor pays for those goods one week after delivery.

Transfer from creditor to debtor Transfer from debtor to creditor
Transfer 1 $1,000 in goods
Transfer 2 $1,000 in cash
Transfer 3 $1,000 in goods
Transfer 4 $1,000 in cash
Transfer 5 $1,000 in goods
Transfer 6 $1,000 in cash
Transfer 7 $1,000 in goods
Transfer 8 $1,000 in cash
Transfer 9 $1,000 in goods
Transfer 10 $1,000 in cash

Even-numbered transfers—Numbers 2, 4, 6, 8, and 10—show five payments, in the amount of $1,000 each, by the debtor to the vendor-creditor within the 90-day preference period, meaning that each such payment is potentially avoidable by a trustee. Transfers 3, 5, 7, and 9, which show the shipment of goods by the vendor, constitute equivalent new value in the total amount of $4,000 provided by the vendor subsequent to payments 2, 4, 6, and 8, respectively. 

That being so, and under Blue Bell’s position, this $4,000 in new goods shipped would wash $4,000 of the previous payments made by the debtor, for purposes of avoidability. Yet, under the Trustee’s position, the vendor loses this new-value defense because, after conferring new value via the shipment of goods equivalent to the previous payment made by the debtor, the debtor later paid off the value of the shipped goods that constituted the new value. Specifically, Transfer 4 paid off Transfer 3; Transfer 6 paid off Transfer 5; Transfer 8 paid off Transfer 7; and Transfer 10 paid off Transfer 9. According to the position of the Trustee in this case, the vendor in the above scenario would be required to repay the entirety of the $5,000 paid to him by the debtor, even though new value was conferred on the debtor as to $4,000 of these payments.

Blue Bell argues that a subsequent payment by the debtor to the vendor-creditor for new value that was previously provided to the former does not negate the defense as to the particular new value in question. Adopting that position, the vendor in this scenario would be protected by the new-value defense as to debtor payments 2, 4, 6, and 8 because, subsequent to each of these payments by the debtor, the vendor provided new value to the debtor in the form of new goods shipped. It is only the last $1,000 payment by the debtor—Transfer 10—that Blue Bell concedes would be avoidable by the trustee because the vendor delivered no goods after this last payment by the debtor, meaning the vendor provided no subsequent new value. Because it would lack a new-value defense to the preference represented by this last payment, the vendor would have to repay the estate the $1,000; it would then have a corresponding unsecured claim against the estate for that same $1,000. But the vendor would be entitled to retain the remaining $4,000. See 11 U.S.C. §§ 547(b), 550(a), 502(h).

Notably, this is the same situation the vendor would have found itself in had it simply stopped doing business with the debtor after Transfer 2: it would have had to return that $1,000, and it would have had a $1,000 unsecured claim against the estate based on Transfer 2. It would have owed the estate no additional moneys as a clawback by the trustee for any preferences. Yet, the debtor (and the estate it leaves behind) would be in a worse position had the vendor decided to abandon the debtor after Transfer 2. Had that been the case, the debtor would not have received the $4,000 worth of future shipments of goods. With those additional shipments, however, the debtor had additional goods that it could sell to its customers, and thereby potentially increase the size of the estate available at the time of the later bankruptcy filing.

Consider, moreover, the strong disincentives for a vendor to continue supplying an ailing customer with goods if the Trustee’s position wins out. Under the interpretation the Trustee gives the new-value defense, the vendor would have to return all of the payments it subsequently received for the new value it provided the debtor. Were this the rule, a prudent vendor, sensing financial problems by the debtor, would be foolish to continue delivering goods to the debtor following Transfer 2. Cf. Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1091 (5th Cir. 1994) (noting that, without the protection of § 547(c)(4), “a creditor who continues to extend credit to the debtor, perhaps in implicit reliance on prior payments, would merely be increasing his bankruptcy loss”). Indeed, focusing on post-Transfer 2 events set out in the chart, not only would the vendor have to return the entirety of the payments it had received for goods it had delivered under the Trustee’s interpretation, but it would also be out $4,000 in the value of the goods it had provided the debtor: $4,000 worth of goods that it could have to sold to another grocery store.

In short, were the Trustee’s approach applicable, a sensible vendor should immediately cut off the debtor, which would likely hasten the latter’s financial demise and his ensuing bankruptcy. Yet, the bankruptcy estate would almost always be better off if a vendor continues to supply the debtor with goods to sell, and the new-value defense, as interpreted by Blue Bell, would encourage it to do so.

Read the full opinion here.


Michael L. Temin is senior counsel in Fox’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.

Yesterday, the Bankruptcy Panel of the Ninth Circuit Court of Appeals issued yet another decision related to standing and rights to appeal bankruptcy court orders.  In Bray v. U.S. Bank National Association, (In re Bray), the Ninth Circuit BAP considered a chapter 7 individual debtor’s appeal from an order reopening his involuntary chapter 7 bankruptcy case.  See Bray, B.A.P. No. CC-17-1373-SKuF (9th Cir. BAP Aug. 7 2018).

Our prior blog posts on similar decisions from the Ninth Circuit regarding rights and standing to appeal bankruptcy court orders are available here and here.

Appeal

In determining whether the debtor here had appellate standing, the Court explained that “reopening a closed case is a ‘ministerial act’ that primarily enables the clerk to manage the case as an active matter.”  Id. at 10 (citation omitted).  The Court further elaborated that a bankruptcy court order reopening a case “lacks legal significance and determines nothing with respect to the merits of the case.”  Id. (citation omitted).

The Court considered the person aggrieved standard, which provides that “‘those persons who are directly and adversely affected pecuniarily by an order of the bankruptcy court’ have standing to appeal.” Id. at (citation omitted).  In order to meet this standard, the debtor would have to show that the order on appeal “diminished his property, increased his burdens or otherwise detrimentally affected his rights.”  Id. at 11.

The Court found that the order reopening the case did not impact Bray in any of these ways, and thus he lacked standing to appeal the bankruptcy court’s order reopening the case.  Id. at 11 (dismissing appeal).