General Bankruptcy Litigation News & Updates

As a follow-up to our recent post about the Imerys Talc bankruptcy proceedings (the chapter 11 cases filed by a supplier of talc to cosmetic and other companies, like Johnson & Johnson), last week the Imerys Debtors brought suit in their Chapter 11 cases against two affiliated coal companies.

The new adversary proceeding relates to the ownership of insurance policies with proceeds estimated in the hundreds of millions of dollars.  The Debtor claims that pursuant to an agreement entered into in 1992, it owns the policies despite that the policies previously provided coverage to the coal mining companies (Cyprus Mines Corp & Cyprus Amax Minerals Co) between 1961 and 1986.

Prior to the Debtors’ filing suit, the Cyprus entities filed an emergency motion in the Debtors’ bankruptcy case seeking relief from the automatic stay to use the insurance policies and proceeds to cover their own costs and legal fees related to approximately 700 pending and future lawsuits in which plaintiffs claim that talc contained asbestos and caused cancer.  Generally, the automatic stay (section 362 of the Bankruptcy Code) prevents creditors from taking action against the debtor’s assets.

Before filing its chapter 11 case, Imerys had been involved in the Cyprus lawsuits and had been defending & indemnifying Cyprus.  In Cyprus’s emergency motion, the Cyprus entities claim that the Debtors’ bankruptcy filing was a “surprise” and that the any liability imposed on Cyprus in these lawsuits rests with the Debtors.  In the new adversary Complaint, the Debtors seek injunctive and declaratory relief that (1) the Debtors own all of the rights to the insurance policies and (2) the automatic stay prohibits the Cyprus companies from accessing the proceeds of such policies.

As these issues are just taking shape, we will continue to monitor them.  Insurance policies are often at the center of various bankruptcy litigation matters, including directors and officers liability and fiduciary claims, and accordingly, this case may result in new precedent and decisions out of the Delaware Bankruptcy Court that is relevant to our practice more broadly.  Stay tuned.

Effective February 1, 2019, a number changes to the local rules of the Delaware Bankruptcy Court became effective.  Practitioners in the jurisdiction should be sure to review the new rules as there are a number of revisions to motion practice, filings, and the calculation of deadlines. 

 A few notable changes include:

·   Shortened Notice for Motons: Motions may now be filed 14 days before a hearing (down from 18) unless the Federal Rules of Bankruptcy Procedure or the court’s local rules state otherwise.  See Del. Bankr. L.R. 9006-1(c)(i).

·   Service of Objection and Replies Eliminated: There is no longer a requirement that objections to a motion or replies to an objection, must be “served so as to be received” by the applicable deadline.  See Del. Bankr. L.R. 9006-1(c)(ii) and 9006-1(d).

·   Motion for a Late Reply Can Be Filed Without Motion to Shorten Notice:  The court will now consider motions to file a late reply at the hearing on the underlying motion.  There is no longer a requirement to file a motion to shorten notice with the motion to file a late reply.  See Del. Bankr. L.R. 9006-1(d).

·   Requirements for Motions to Shorten Notice:  A motion to shorten notice must be filed with an averment by movant’s Delaware Counsel that a reasonable effort was made to notify the debtor, the United States Trustee, any official committee, and any trustee whether such parties object or consent to the relief sought, or the basis why the movant did not make that effort.  See Del. Bankr. L.R. 9006-1(e).

·   7 Day Period for Filing Summonses:  A completed summons must be filed within 7 days of service.  See Del. Bankr. L.R. 7004-2.

·   Shortened Page Limit for Briefs:  Page limits for opening and answering briefs have been reduced to 30 pages (from 40) and reply briefs are down to 15 pages (20 before) unless the Court orders otherwise.  See Del. Bankr. L.R. 7007-2.

·   Filing Plan Supplements: Plan supplements must be filed at least 7 days prior to the earlier of the balloting deadline, or the deadline to object to confirmation of the proposed plan (unless otherwise ordered by the Court).  See Del. Bankr. L.R. 3016-2 and 3017-2; and

·   Retention of Professionals: 21 days has replaced the term “adequate notice time” as the minimum notice period for the hearing on retention applications.  See Del. Bankr. L.R. 2014-1(b).

Yesterday, Imerys Talc America and two affiliated entities filed for chapter 11 bankruptcy protection in the Delaware Bankruptcy Court (Case No. 19-10289). The case is pending before Judge Silverstein.

baby powderThe first day affidavit filed in support of the Debtors’ chapter 11 petitions reveals that the Debtors are in the business of mining, processing and distributing talc.  They supply it to third-party manufactures fur use in personal care and cosmetic products sold to consumers, such as baby powder, makeup and soap.  The Debtors filed their bankruptcy cases because they have been sued by thousands of plaintiffs alleging personal injuries as a result of exposure to talc.  In particular, these plaintiffs allege that they have been diagnosed with ovarian cancer, other gynecological diseases, and respiratory cancers as a result of exposure to talc.

Although the Debtors’ claim that talc is safe, more than 14,000 individuals have sued them for alleged injuries and the Debtors claim that they do not have the financial ability to defend these cases or to fund litigation and settlements.  Historically, the Debtors were the sole supplier of talc to Johnson & Johnson and have been routinely named as a co-defendant in cases brought against J&J related to alleged talc-related injuries.

We will continue to follow these cases as they progress and the impact on the pending litigation claims becomes more clear.  Here is some current news coverage on the Debtors’ recent filings from Reuters and Bloomberg.

In the Fyre Festival LLC chapter 7 bankruptcy case, pending in the US Bankruptcy Court for the Southern District of New York, the chapter 7 trustee was recently granted broad authority to conduct 2004 examinations related to a variety of transfers received by vendors of Fyre Festival totaling approximately $5.3 million.  A copy of the Court’s order is available here.

outdoor concertThe Fyre Festival was promoted as a concert experience in the Bahamas over two weekends in April and May 2017.  The festival was widely promoted on social media and yet the Debtor was failed to properly host the festival and ultimately postponed the it due to lack of preparation.  The Fyre Festival has been the subject of recent documentaries on Netflix and Hulu.

In the Trustee’s motion seeking authority to conduct such 2004 examinations, several high profile vendors and Instagram or social media influencers are identified, including IMG Models and Kendall Jenner Inc.  The Trustee seeks to determine what value Fyre Festival received in exchange for the transfers that these entities received.  The Trustee has previously obtained authority to conduct similar investigations in three other Court orders.

Under FRBP 2004, the trustee has the ability to subpoena testimony and documents on matters related to the bankruptcy case.  Such an examination is referred to as a 2004 examination and can cover a broad range of issues such as debts, transfers, financial condition, assets and liabilities, conduct, property and other issues.

In this case, the Trustee argued that because the Debtor failed to file bankruptcy schedules, did not have basic disclosures or books and recorders, the Trustee has been forced to seek financial information needed from third parties.

Following news of the federal Judiciary’s imminent shutdown earlier this month, the government branch now estimates that it has sufficient funding to stay open through January 25, 2019.

The delayed closure comes as a result of strong efforts to reduce spending and conserve resources so that court operations can function as long as possible, while the rest of the federal government is subject to the shutdown.  While non-essential travel and hiring has been deferred, Judiciary employees are reporting to work and being paid.

While the Judiciary remains open, however, the Justice Department has had to stay litigation in cases throughout the country, citing a federal act which precludes federal employees from working during the shutdown.  The suspension of civil litigation involving federal agencies will generally not apply to criminal cases or cases involving human life and the protection of property.

The Case Management/Electronic Case Files (CM/ECF) and PACER systems, meanwhile, remain operational, enabling the electronic filing and review of court documents.

According to the Administrative Office of the U.S. Courts, the Judiciary will continue to cut costs in hopes of staying open beyond January 25, but notes that the existing funds are set to run out soon if new, appropriated funds do not become available.

The government shutdown began on December 22, 2018 and continues.  Recent media covering the shutdown have begun to focus on how this is impacting the federal judiciary — including the federal district & United States bankruptcy courts.

According to the Administrative Office of the U.S. Courts, the courts can run through January 11, 2019, i.e., until the end of this week.  After that, nonessential workers may have to stay home.  Read more about the shutdown and how it is impacting our federal judiciary in the following articles.

We will continue to follow this closely and keep you updated on its impact on the U.S. Bankruptcy Courts.

The United States District Court for the Northern District of Texas recently considered the question of which statute applies when a district court seeks to transfer a case related to a bankruptcy proceeding:  28 U.S.C. § 1404 or 28 U.S.C. § 1412?  The answer to this venue question has split district courts across the country.

The general transfer-of-venue statute, Section 1404(a), provides that “[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”  Section 1412 states that “[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”

The court highlighted three important differences between the two transfer statutes:

First, under Section 1404(a), a district court may transfer “any civil action,” while under Section 1412, a district court can only transfer “a case or proceeding under title 11.”

Second, under Section 1404(a), a district court can only transfer a case to another “district or division where it might have been brought.” Section 1412 has no analogous restriction.

Third, under Section 1404(a), a district court can only transfer a case “[f]or the convenience of the parties and witnesses, in the interest of justice.” Section 1412 is disjunctive, allowing transfer for convenience of the parties or in the interest of justice.

The crux of the court’s analysis centered on the meaning of the phrase “a case or proceeding under title 11” in Section 1412 and whether said language renders the statute applicable only to core proceedings or whether it is also applicable to proceedings that are merely related to a bankruptcy i.e., non-core proceedings.

In concluding that Section 1412 does, in fact, apply to non-core proceedings, the court was persuaded by the reasoning of earlier decisions out of the Northern District of Texas.  These earlier decisions looked to 28 U.S.C. § 1409—the statute governing venue in title 11 cases—for guidance in interpreting the term “proceeding” in the context of Section 1412.  Because the term “proceeding” under Section 1409 explicitly includes actions related to core proceedings, the courts reasoned that the word “proceeding” in Section 1412 should encompass the same.  If Section 1412 did not include related claims, then a court could only transfer cases closely related to core proceedings under the more-restrictive Section 1404 to another “district or division where it might have been brought.”  These courts held that such a requirement would “hamper the well settled principle that the court in which the bankruptcy case is pending is the proper venue for adjudicating all related litigation.”

Courts that have instead applied section 1404(a) in evaluating whether a transfer of venue is appropriate for a non-core adversary proceeding point to the fact that the language of section 1412 does not reference proceedings “related to” title 11.  These courts reason that Congress intentionally omitted the “related to” language in section 1412 in order to limit the jurisdiction of the bankruptcy courts.

Federal courts across the country have issued a warning regarding the use of third-party services.  This warning is applicable to all CM/ECF filers:

CM/ECF filers should be aware of the potential to inadvertently share restricted documents when using third-party services or software.  Sharing CM/ECF filing credentials and PACER account credentials with a third-party service provider or designating that provider as a secondary recipient of a Notice of Electronic Filing (NEF) or Notice of Docket Activity (NDA) will give it access to sealed case information and documents in violation of court order.  You are urged to use caution in your computer security practices to ensure that sealed documents to which you have access are not disclosed. Fee exempt users should not share the documents they obtain from PACER under the exemption, unless expressly authorized by the court.

See e.g., Website for U.S. Bankruptcy Court for the District of Arizona.

 

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.

 

As I previously blogged about, there is a circuit split as to whether, when a trademark owner/licensor files for bankruptcy, the licensee of the trademark can legally continue use of the mark or whether the trademark owner/licensor can reject its obligations under the licensing agreement and effectively prohibit the licensee’s continued use of the mark.  A case arising from the First Circuit, Mission Product Holdings, Inc. v. Tempnology, LLC N/K/A Old Cold LLC, involves this precise question and has made its way to the United States Supreme Court.

At the end of last week, following the submission of briefs from the parties and others, the Supreme Court decided to grant certiorari in the case.  According to SCOTUS blog, the issue presented is: “Whether, under Section 365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C. § 365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.”

Not surprisingly, the Supreme Court did not provide any reasoning or insight into its decision to grant cert.  Nor did it directly respond to the parties’ positions regarding a recent order in Tempnology’s underlying bankruptcy case, which Tempnology argued (and Mission Product Holdings disagreed) may have a bearing on the Court’s decision to do so.