Bankruptcy Case Summaries

This week, a electricity supplier, Starion Energy, filed for chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware and the case is pending before the Honorable Mary F. Walrath.

Electric Towers
 

The Debtor claims that it needs bankruptcy protection because of pending litigation that was brought by the Commonwealth of Massachusetts this fall alleging unfair and deceptive marketing practices, among other claims and seeking more than $30 million. In th action pending in state court, the Commonwealth of Massachusetts obtained an attachment and injunction on the Debtor’s cash, which the Debtor claims threatened its business and could put more than 20 people out of work.

In order to attempt to protect itself, the Debtor filed for chapter 11 and simultaneously brought an adversary proceeding in the Delaware Bankruptcy Court.  See Starion Energy, Inc. v The Commonwealth of Massachusetts, Bankr. Del. Adv. No. 18-50932.  In this adversary case, the Debtor is seeking a temporary restraining order and an injunction barring the Commonwealth of Massachusetts from seizing its assets in connection with the pending litigation.

It will be interesting to see how this case proceeds as it is a bankruptcy case filed with the primary goal of halting a pending litigation.

 

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.

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:

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).

In a recent opinion, the Fifth Circuit affirmed a district court ruling that found that a debtor was judicially estopped from claiming a stay violation by a mortgagee, who foreclosed on the debtor’s property, due to the debtor’s failure to disclose the affected property or his putative claims in his bankruptcy.

The Fifth Circuit explained that the “doctrine of judicial estoppel is equitable in nature and can be invoked by a court to prevent a party from asserting a position in a legal proceeding that is inconsistent with a position taken in a previous proceeding.” The Fifth Circuit further emphasized that judicial estoppel “is particularly appropriate where . . . a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.”

Examining the facts of the case, the Court determined that “Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition,” and the debtor failed to fulfill this duty.  By failing to amend his asset schedule the debtor “impliedly represented” to the bankruptcy court that his financial status was unchanged.

Read the full opinion here.

When a trademark licensor files for bankruptcy, can the licensees of their trademarks continue using those marks, or does the licensor have the right to prohibit their continued use? On Fox’s Above the Fold blog covering advertising law, partner Elizabeth Patton recently wrote a post discussing this open question, which sits at the heart of a case that may be heard by the U.S. Supreme Court.

We invite you to read Elizabeth’s post covering the case and its potential impact:

How Bankruptcy Effects Rights Under Trademark Licenses

An opinion issued yesterday by the U.S. Court of Appeals for the Ninth Circuit reiterates the importance of filing written objections and appearing in the Bankruptcy Court to preserve rights to appeal.  The opinion clarifies the Ninth Circuit’s recent opinion on this issue, which we covered in a recent blog post.  In Reid and Hellyer, APC v. Laski (In re Wrightwood Guest Ranch, LLC), No. 16-56856, D.C. No. 5:16-cv-07168-MFW, the Ninth Circuit considered an appeal of an order issued by the U.S. Bankruptcy Court for the Central District of California that approved a settlement between a chapter 11 trustee and a secured creditor.

GavelIn August 2015, an involuntary petition was filed against the Debtor, Wrightwood Guest Ranch, LLC (the “Debtor”) and a trustee was appointed.  The Trustee elected to settle a $9.6 million claim secured by the estate’s principal asset, a large piece of real estate, by allowing an affiliate of the secured creditor to purchase the property for $8.5 million and having the secured creditor limit its claim to that amount and also carve out funds for estate professionals, expenses and unsecured creditors.

The Official Committee of Unsecured Creditors (the “Committee”) and an individual creditor filed written objections to the proposed settlement.  The Debtor’s counsel and the Committee’s counsel (the “Administrative Claimants”) did not file any written objections on behalf of themselves despite that they had administrative claims in the case.

The bankruptcy court held a hearing on the sale of the property and the settlement and attorneys from the law firms representing the Committee and the Debtor appeared on behalf of the Committee and the Debtor, respectively.  Neither Administrative Claimant stated during the hearing that it was appearing on its own behalf.  The Bankruptcy Court granted the sale motion and approved the settlement under Federal Rule of Bankruptcy Procedure 9019.

Thereafter, Administrative Claimants both filed appeals of the settlement order.  The District Court for the Central District of California consolidated the appeals and the Trustee moved to dismiss the appeals claiming that neither Administrative Claimant / appellant had standing to appeal because neither, in its own capacity, objected to the settlement or appeared at the hearing.  The District Court agreed and dismissed the appeals.

In their appeals to the Ninth Circuit, the Administrative Claimants / appellants argued that despite their failure to “explicitly object” below, the Bankruptcy Court and Trustee were aware of their positions and their intent to object on their own behalves.  The Ninth Circuit noted its recent decision in In re Point Center Fin., Inc. wherein the Ninth Circuit “clarified that attendance and objection are not prudential standing requirements in bankruptcy cases, but rather relate to whether a party has waived or forfeited its right to appeal a given order of the bankruptcy court.”  Wrightwood, at 8.

Here, the Court found that “the law firms have forfeited their claims regarding the propriety of the settlement order because neither firm attended the hearing or objected to the settlement in its own capacity.”  Id. at 9.  The Ninth Circuit further explained its Point Center ruling – “[t]here, although the appellants did not file a written objection or attend the hearing, they quickly realized the error and ‘filed a motion to reconsider with the bankruptcy court before it had issued a written order on the motion,’ which the bankruptcy court considered and rejected on the merits.'”  Id. at 10 (citing Point Center).  Accordingly, the Ninth Circuit affirmed the judgement of the District Court.

The Ninth Circuit’s ruling in Wrightwood is a good reminder – “When a party has not objected to an order in writing and the record contains no explicit indication that a party meant to object, a party has normally failed to preserve its objection to that order.”  Id. at 16.