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.


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).

A recently issued opinion by the U. S Bankruptcy Court for the District of New Mexico provides some guidance on the relevant date for the transfer of real property for purposes of the statute of limitations applicable to fraudulent transfer claims.

In Gonzales v. Sexton (In re Esquibel), Adv. No. 17-1042-j (Bankr. D.N.M. July 23, 2018) the Bankruptcy Court considered a chapter 7 trustee’s summary judgment motion regarding the trustee’s claims for avoidance and recovery of actual and constructive fraudulent transfers under the Bankruptcy Code and state law.

real estate transferPre-petition, the Debtor owned unencumbered real property (the “Property”).  This Property was transferred to the Defendant on May 19, 2014 via a quitclaim deed.  In exchange for the Property, the Defendant (recipient of the Property) promised to maintain the property, provide the Debtor with a rent-free place to live, and care for Debtor if she was unable to care for herself.  Id. at ¶ 27.

Several years later, on September 7, 2016, just 177 days before the Debtor filed her voluntary bankruptcy petition, Defendant recorded the quitclaim deed.  Id. at ¶ 29.  The Trustee brought suit against the Defendant claiming that the transfer of the Property was avoidable under Section 548 of the Bankruptcy Code and state law because it constituted both actual and constructive fraudulent transfers.

The threshold issue for the Court was when the Property was transferred for purposes of statute of limitations – in 2014 when the deed was executed or in 2016 when the deed was recorded.  Section 548 allows a trustee to avoid transfers of estate property that occurred during the 2 years before the bankruptcy.  The Defendant asserted that the transfer occurred when the deed was signed in 2014, and the Court disagreed, finding that the transfer for the purposes of a Section 548 fraudulent transfer occurred when the deed was recorded, in 2016.

The Court looked to Section 548(d), which states “a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee.”  Id. at 10.  The Court further explained that the purpose of 548(d) is to “prevent fraudulent transfers from becoming impregnable to attack by keeping them secret until the limitation period has lapsed.”  Id. (citation omitted).

The Court then looked to New Mexico state law to determine when a real property transfer is perfected and found that such a transfer is perfected “when it is recorded with the county clerk of the state in which the real estate is situated.”  Id. at 11 (citation omitted).  Given this, the Court found that the transfer of the Property occurred upon recording in 2016, which was within 177 days of the chapter 7 filing, and therefore was “within the two-year look-back period under §548(a).”  Id. 


In Beskrone v. Int’l Educ. Corp., Adv. No. 17-50523 (CSS) (Bankr. D. Del. July 2, 2018), the Bankruptcy Court for the District of Delaware held that a chapter 7 trustee’s adversary proceeding to recover alleged prepetition accounts receivable fell under the Court’s “related to” jurisdiction. Pursuant to 28 U.S.C. §§ 1334 and 157(a), bankruptcy courts have jurisdiction over the following types of matters: cases under title 11 of the United States Code, i.e., the Bankruptcy Code; proceedings arising under title 11; proceedings arising in a case under title 11; and proceedings related to a case under title 11. In Beskrone, the Court assessed its jurisdiction under this last prong.

In this case, PennySaver USA Publishing, LLC and affiliated entities (the “Debtors”) filed voluntary petitions for relief under chapter 7 of title 11 of the United States Code and Don A. Beskrone was appointed to serve as the chapter 7 trustee of the Debtors’ bankruptcy estates (the “Trustee”). Before the close of the Debtors’ cases, the Trustee filed a single-count complaint against International Education Corporation (“IEC”), who had entered into a prepetition agreement with PennySaver for advertising services. Id. at 3. The Trustee sought to collect payments allegedly requested by PennySaver that IEC did not pay in full. Id. at 3-4. IEC moved to dismiss the Trustee’s complaint for lack of subject-matter jurisdiction. Although IEC made both facial and factual challenges to the Court’s jurisdiction over the Trustee’s claim, the Court held that it should hold IEC’s factual challenges for a later proceeding and evaluate only IEC’s “facial” challenge. Id. at 7. In a “facial” challenge to a court’s jurisdiction, a court accepts as true all factual allegations in the plaintiff’s complaint and only examines the pleadings to determine if jurisdiction exists.

In Beskrone, the Court held that it did have subject-matter jurisdiction. Principally, the Court reasoned that in assessing whether it had “related to” jurisdiction over the Trustee’s claim, the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1985) still provided useful guidance. In Pacor, the Third Circuit reasoned that a bankruptcy court had “related to” jurisdiction over a matter if the “outcome of [the] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” 743 F.2d at 994. The Court noted that the Pacor test is satisfied if a proceeding “may impact . . . debtor’s rights, liabilities, options, or freedom of action or the handling and administration of the bankrupt estate.” Op. at 9-10. As applied to the Trustee’s claim against IEC, the Court held that the claim satisfied the Pacor test. The claim was an action held by the debtor pre-petition, and thus was property of the estate, and the Trustee’s recovery under his claim might increase funds available to the body of the Debtors’ creditors. Id. at 10.

IEC argued that if the only conceivable effect on the Debtors’ bankruptcy estates was a greater dividend for creditors, that finding jurisdiction over such an action would overly extend “related to” jurisdiction in chapter 7 liquidations. Id. at 11. In support thereof, IEC cited cases applying jurisdictional analyses in post-confirmation proceedings. The Court acknowledged that a proceeding’s effect on a bankruptcy case may be different in a reorganization versus a liquidation, and pre-confirmation versus post-confirmation, but ultimately dismissed IEC’s argument.

First, the Court noted that the notion that the nature of a bankruptcy filing could create different scopes of jurisdiction has been criticized, and that the nature of a chapter 7 liquidation “does not upend the logic of Pacor.” Id. at 13. The Court reasoned that the Trustee’s action to recover accounts receivable would directly benefit the Debtors’ estates, and that there was nothing noteworthy about the Trustee’s claim that implicated characteristics “unique to a chapter 7 liquidation.” Id. at 14. Second, the Court rejected IEC’s contention that the Trustee’s claim should be dismissed for lack of jurisdiction because the matter did not satisfy the test established by the Third Circuit in Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154 (3d Cir. 2004) for determining jurisdiction over post-confirmation proceedings in chapter 11 cases.  In Resorts Int’l, the Third Circuit reasoned that a bankruptcy court has “related to” jurisdiction over certain post-confirmation proceedings that “affect an integral aspect of the bankruptcy process – there must be a close nexus to the bankruptcy plan or proceeding.” Op. at 14-15 (citing Resorts Int’l). But, as the Court noted, post-confirmation proceedings diminish connections to the bankruptcy estate when the parties “have purposefully and by agreement removed a debtor from court oversight.” Id. at 15. In contrast, pre-closing chapter 7 liquidations, such as the Debtors, are “less attenuated to the estate.” Id. at 16. Lastly, the Court found IEC’s argument that there are similarities between chapter 7 and chapter 11 liquidations that make the application of the jurisdictional standard set forth in Resorts Int’l proper, to be unpersuasive.

Ultimately, the Court denied IEC’s motion to dismiss for lack of subject-matter jurisdiction and found that the Trustee’s proceeding to recover prepetition accounts receivable fell within the Court’s “related to” jurisdiction.

Kerri Gallagher writes:

The Bankruptcy Court for the Southern District of New York recently dismissed claims in an adversary proceeding commenced by pilots against the pilots’ union and an airline in connection with the airlines’ rejection of an old collective bargaining agreement (“Old CBA”), and negotiation of a new collective bargaining agreement (“New CBA”) that eliminated certain job protections that the pilots held under the Old CBA.  In addition, the airline entered into a letter agreement with the pilots’ union that permitted an arbitration proceeding to create new job protections for the pilots who lost the protections under the Old CBA.

In prior proceedings the bankruptcy court dismissed many of plaintiffs’ claims, leaving only a claim for breach of duty of fair representation against the pilots’ union, and a collusion claim against an airline.  Defendants sought summary judgment and dismissal of these remaining claims, which the bankruptcy court granted.

In so holding, the bankruptcy court found, among other things: (i) plaintiffs failed to put forward evidence demonstrating a causal connection for their various claims under any causation standard, and (ii) plaintiffs failed to provide sufficient basis for their “sweeping denials” of the facts that defendants contended were undisputed.

With respect to the fair representation claim, the bankruptcy court rejected a number of plaintiffs’ arguments.  For example, plaintiffs argued that the pilots’ union breached its duty of fair representation by wrongfully structuring the arbitration to permit two separate pilot committees to submit two competing proposals rather than one unified pilot position. The bankruptcy court rejected this argument because it was raised for the first time in plaintiffs’ responses to the summary judgment motions. The court further reasoned that “[e]ven if this argument were not waived, however, it would fail because the lack of a unified position was not discriminatory, arbitrary, or in bad faith.”  In addition, the plaintiffs argued that the pilots’ union failed to replicate certain protections under the Old CBA. The bankruptcy court again rejected this argument noting that it had been raised and rejected in the prior proceedings.

With respect to the collusion claim, the bankruptcy court held that in order to prove collusion, plaintiffs must prove a breach of duty of fair representation. Since the breach of duty claim failed, the bankruptcy court determined that the collusion claim failed as well.

Read the full opinion here.

Kerri Gallagher is a summer associate in Fox Rothschild’s Philadelphia office.

Anahita Anvari writes:

In In re Beach v. Beach, the Fifth Circuit elaborated on its standard of review for adversary litigation settlements.  No. 17-10481 (5th Cir. May 16, 2018).

In this case, Debtor, a Dallas oil-and-gas businessman, formed a partnership to drill oil with a New York investment firm (“Creditor”).  Following a dispute between Debtor and Creditor, Debtor filed for bankruptcy.

Creditor and Trustee filed an adversary proceeding against Debtor, claiming he was not entitled to a discharge of his debts under Section 727 of the Bankruptcy Code. The Complaint alleged that Debtor fraudulently transferred assets from a family trust to a new trust to shield the assets from creditors. Section 727 prevents discharge of the debtor where the debtor has fraudulently transferred assets to hinder, delay, or defraud creditor or officer of the estate. 11 U.S.C. § 727(a)(2).

In mediation, Trustee reached an agreement with Debtor (the “Settlement”) while representatives of Creditor were not present.  Creditor objected to the Settlement, arguing that it did not maximize value for the creditors.  After a two-day hearing, the bankruptcy court approved the settlement.  Creditor appealed to the district court, which affirmed.

The bankruptcy court weighed the overall costs and benefits of the exchange, reasoning that Trustee would likely win the precise settlement amount in litigation, and that litigation would be complex and costly. As to Creditor’s argument that the Settlement did not maximize the value of one of Debtor’s assets, the bankruptcy court reasoned that the value was merely speculative and did not render the Settlement unfair.

The Fifth Circuit reviewed the bankruptcy court’s approval of the Settlement for any abuse of discretion. The Court held that “a trial court abuses its discretion when it makes an error of law or clearly erroneous assessment of evidence.”  The Court found that the bankruptcy court made findings showing its consideration of the three-part balancing test to determine if the Settlement is in the best interest of the estate. Specifically, the bankruptcy court considered: (1) the probability of success in litigation of the adversary claim; (2) the complexity and likely duration of litigation; and (3) other factors including (i) the best interest of the creditors and (ii) the extent to which the settlement is a product of bargaining, and not fraud or collusion.

The Fifth Circuit affirmed the findings of the lower courts.  In so ruling, the Court considered the evidence provided by Creditor, including costs and likely outcome of litigation. The Court reasoned that the bankruptcy court adequately considered the three-part test, and did not abuse its discretion or make any legal errors or clearly erroneous factual findings or assessments of the evidence.

Anahita Anvari is a summer associate in the firm’s Philadelphia office.

David Doty writes:

The U.S. Bankruptcy Court for the Northern District of California recently held that a Hong Kong resident who had made online purchases of wine through a California retailer was subject to personal jurisdiction. See Kasolas v. Yau, Adv. Pr. No. 18-04012 (N.D. Cal. Bankr. May 11, 2018).

The defendant, a Hong Kong resident, had been a frequent customer of the debtor’s California wine-retail business, which made wine shipments to Hong Kong upon the defendant’s request. Though the defendant maintained an active business relationship with the wine-retailer, most of his interactions were conducted online while he was physically present in Hong Kong.

The bankruptcy trustee commenced an adversary proceeding against the defendant for recovery of fraudulent transfers. In response, the defendant moved to dismiss for lack of personal jurisdiction, arguing that he had not purposefully availed himself to the fora of the United States or California because he had never been physically present in either when these transactions took place.

The hallmark guidance for determining personal jurisdiction was expressed in Burger King Corp. v. Rudzewicz, in which the Supreme Court held that the exercise of specific personal jurisdiction over a nonresident defendant is proper if the defendant purposefully directed his activities at the forum, and the litigation results from injuries arising out of those activities. 471 U.S. 462, 472-73 (1985).

The bankruptcy court addressed the defendant’s argument by applying the Ninth Circuit’s three-part test for personal jurisdiction over a nonresident defendant, which considers factors relating to (1) personal availment, (2) relational proximity between the activities and the underlying claim, and (3) the reasonableness of jurisdiction if exercised. Though the bankruptcy court ultimately found all three prongs to be satisfied, it is the bankruptcy court’s discussion and treatment of purposeful availment that merits particular attention for its implications on an ever-growing online market.

Although there was evidence suggesting that defendant had made in-person purchases in California on at least one occasion, the bankruptcy court found his online contacts with the wine-retailer to be sufficient in and of themselves for purposes of asserting personal jurisdiction. First, relying, in part, on Burger King, the bankruptcy court reiterated that physical presence in a forum is not a necessary prerequisite for a court in that forum to assert personal jurisdiction over a nonresident defendant. Second, the bankruptcy court attached significant weight to the notice the defendant had of his activities being directed toward California and, by extension, the United States. The bankruptcy court determined that the defendant not only had personal knowledge of the wine-retailer’s location being in California, but that his knowledge was further bolstered by the terms and conditions on the wine-retailer’s website which indicated that it was indeed a California company.

Here, the bankruptcy court extended personal jurisdiction across borders in an increasingly internationalized online market made possible by technological advances – progress that the bankruptcy court opined only “strengthens the underlying rationale” of Burger King and its jurisprudential lineage. While the practical implications of this decision can be easily imagined, this case nevertheless demonstrates one of many ways in which the law continues to adapt to growing commerce.

David Doty is a summer associate in the firm’s Philadelphia office.

Recently, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania clarified that funds returned to the debtor are not recoverable as intentional fraudulent transfers.  See Holber v. Nikparvar (In re Incare, LLC), Adv. No. 14-0248 (Bankr. E.D.Pa. May 7, 2018).

The Debtor, Incare, LLC, was a medical care provider that provided services to a variety of hospitals and medical facilities in Pennsylvania.  After Incare filed for bankruptcy in 2013, a chapter 7 trustee brought a fraudulent transfer case against the managing and sole member of Incare, his wife, and related entities seeking to avoid and recover fraudulent transfers pursuant to Sections 544 and 550 of the U.S. Bankruptcy Code.

Liberty Bell
Liberty Bell, Philadelphia, PA

Section 544 allows a trustee to avoid a transfer that would otherwise be avoidable by the debtor’s creditors under applicable state law, in this case, the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.C.S. § 5101, et. seq.  Like the Bankruptcy Code, PUFTA permits recovery for intentional or actual fraudulent transfers – transfers made with “actual intent to hinder, delay or defraud” creditors.  12 Pa.C.S. § 5104(a)(1).

In Holber, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania considered whether 13 transfers between the Debtor and an entity affiliated with the debtor’s sole member totaling approximately $1.8 million constituted intentional fraudulent transfers.  However, during the same time frame, the debtor received approximately $1.8 million from the same entity.  Holber at 30.

Section 550 of the Bankruptcy Code allows a transfer avoidable under Section 544 to be recovered “for the benefit of the estate.”  11 U.S.C. § 550(a).  The Court explained that Section 550 is remedial and not penal and “the bankruptcy court may reduce or eliminate a trustee’s recovery under §550 where some or all of the transferred property was returned to the debtor pre-petition.”  Id. at 35.

Here, the court applied an “equitable credit” for the money returned to Incare because the Court could not identify how the creditor body was harmed by the transfers that were reversed within the year and to allow the trustee to recover the returned funds would result in a windfall to the estate.  Id. (citing In re Kingsley, 518 F.3d 874, 877-78 (11th. Cir. 2008)).

As the Court recognized, this ruling creates the possibility that a party can avoid the consequences of an intentional fraudulent transfer by simply returning the funds or reversing the transaction.  Holber at 31.  It will be interesting to see if other courts follow suit.

Official Committees’ of Unsecured Creditors can, and often do, have significant impacts on cases under chapter 11 of the Bankruptcy Code.  Appointed pursuant to Section 1102 of the Bankruptcy Code, creditors’ committees ordinarily consist of creditors holding large claims against the chapter 11 debtor. The Bankruptcy Code (in, for example, Sections 1103 and 1104) provides Committees with a variety of powers and duties.  For examples, the Bankruptcy Code allows creditors’ committees to hire counsel, participate in the plan of reorganization and pursue bankruptcy litigation, including fraudulent transfers and preferential transfers.

Recently, the First Circuit Court of Appeals joined the Second and Third Circuits to find that Unsecured Creditors’ Committees have an “unconditional right to intervene” in bankruptcy adversary proceedings within the meaning of Federal Rule of Civil Procedure 24(a)(1), which applies in Bankruptcy Proceedings under Bankruptcy Rule 7024.  Assured Guar. Corp. v. Fin. Oversight and Mgmt. Bd. For Puerto Rico (In re Fin. Oversight and Mgmt. Bd. For Puerto Rico), 872 F.3d 57 (1st Cir. 2017).

Aerial view of San Juan, Puerto Rico and Caribbean Sea
San Juan, Puerto Rico

In this case, the First Circuit was considering the ability of the Unsecured Creditors Committee appointed in the quasi-bankruptcy proceedings by Financial Oversight and Management Board for the Commonwealth of Puerto Rico (the “Board”) related to the Puerto Rico debt adjustment case.  In these proceedings, large portions of the Bankruptcy Code were incorporated, including the entirety of the Federal Rules of Bankruptcy Procedure. In these quasi-bankruptcy proceedings, the companies that insure certain Puerto Rico bonds initiated an adversary proceeding claiming that the fiscal plan approved by the Board violated the U.S. Constitution, among other things.  Id. at 60.

After the Creditors’ Committee was appointed, it immediately sought to intervene in this action under Bankruptcy Code Section 1109(b), which provides that “(b) A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security  holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C. 1109(b).

The First Circuit reversed an opinion by the lower Court denying the committees’ motion for leave to intervene, following prior First Circuit precedent.  Here, the First Circuit explained that its prior precedent constituted dicta and explained that “the weight of persuasive authority has shifted considerably. ”  The Court ruled that “the UCC [unsecured creditors committee] was entitled to intervene under §1109(b) and Rule 24(a)(1),” which governs intervention as of right.  Id. at 63.  The Court found that the Committee had an “unconditional right to intervene,” but elaborated that this does not dictate the scope of participation in that proceeding.  Given that the lower court had not ruled on the scope of participation, the Court remanded that issue for further proceedings.

While Creditors’ Committees have seemingly always had substantial leverage to insert themselves in the debtor’s bankruptcy proceedings and make sure that creditors’ views are heard, this ruling provides further support for the robust rights of committees and a platform for their intervention in and pursuit of a variety of bankruptcy litigation matters to maximize recoveries.

In PAH Litigation Trust v. Water Street Healthcare Partners, LP (In re Physiotherapy Holdings, Inc.), Case No. 13-12965 (KG), Adv. No. 15-51238 (KG), 2017 WL 5054308 (Bankr. D. Del. Nov. 1, 2017), the debtor entered into bankruptcy after a leveraged-buyout transaction (“LBO”).  After a plan was confirmed, a resulting litigation trust brought actual and constructive fraudulent transfers against the defendants (seller shareholder in the LBO) seeking $248 million for actual fraud and at least $228 million for constructive fraud – funds that the defendants allegedly took from the debtors in connection with the LBO).

Cash in U.S. $100 bills, indicating litigation damages

The Defendants (seller/shareholder) to the litigation argued that the litigation trust should not be able to recover a windfall by recovering amounts in excess of the unpaid claims in the case.  Id. at *1.  The Litigation Trust claimed that it can “recover the full amount of the fraudulent transfers” because Section 550 of the bankruptcy code allows the trustee to recover “for the benefit of the estate, the property transferred, or, if the court so orders, the value of the transferred property.”  Id. at *4 (quoting 11 U.S.C. 550).  Here, the property transferred to the defendants and the value of it are the same – the millions of dollars sought to be recovered.

The Court considered various cases from other jurisdictions that have held that “Section 550 damages are not capped to permit creditors to receive only the amount of their claims,” noting that the Third Circuit Court of Appeals appeared not to have ruled on this issue.  PAH Litigation Trust, 2017 WL 5054308 at *4, *7(collecting cases).

The Court ultimately agreed with this line of cases because “[w]ere the Court to rule otherwise, it would mean that if Defendants are in fact liable for the fraudulent transfer, they would keep most if not all of the transferred money. The Court cannot countenance such an inequitable result if liability exists.”  Id. at *7.  Given the great quantity of bankruptcy cases filed in Delaware, it will be interesting to see if this holding is followed by other courts in the Third Circuit.

The New York Law Journal recently published an article on the growing trend of third-party litigation funding in bankruptcy litigation.

Often when there is no cash available under a plan, unsecured creditors are assigned the rights of the debtor to bring avoidance actions and other litigation claims against third parties. These claims have the potential to yield significant value, but only when there are resources available to prosecute the claims. Litigation funding is a tool for maximizing the value of a bankruptcy estate’s litigation claims when the estate itself lacks the resources to pursue the claims and traditional sources of financing are not available.

The article offers an overview of commercial litigation funding in the bankruptcy context.  For more detail, visit the New York Law Journal’s website. (subscription required).