General Bankruptcy Litigation News & Updates

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.

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.

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).