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.

 

The Bankruptcy Appellate Panel of the Sixth Circuit recently held that a post-confirmation motion to dismiss a bankruptcy case is not a final order that is immediately appealable.

In this case, the appellants filed a judgment lien against debtor, who subsequently filed for Chapter 13 bankruptcy. Debtor sought to avoid the judgment lien, and appellants filed an objection to the confirmation plan. Appellants and debtor resolved the majority of appellants’ objections. The court confirmed the debtor’s plan, and appellants did not appeal from the confirmation order. Instead, they filed a motion to dismiss, seeking dismissal of the bankruptcy case.

The Panel acknowledged that Six Circuit’s recently prescribed two-step approach to determining whether an order of a bankruptcy court is immediately appealable under 28 U.S.C. § 158(a)(1), which provides that a bankruptcy court’s order may be immediately appealed if it is (1) entered in a proceeding, and (2) final — i.e., terminating that proceeding.” The Panel also acknowledged the Cyberco factors, which the Sixth Circuit endorsed as useful determinants of the meaning of finality in the bankruptcy context: (1) the impact on the assets of the bankrupt estate; (2) the necessity for further fact-finding on remand; (3) the preclusive effect of [its] decision on the merits of further litigation; and (4) the interest of judicial economy.

Applying the Sixth Circuit’s approach, the Panel held:

[T]he order denying the Deans’ motion to dismiss resolved the contested matter, it is true, but it did not resolve the relevant judicial unit and certainly did not change the rights of the parties as they existed when the Deans filed their motion. . . . The order has no impact on assets or the status quo. Because the decision does not affect anyone’s substantive rights or the status quo, the remaining three Cyberco factors also suggest that the denial of the motion should not be subject to immediate appeal. . . . The order denying the Deans’ dismissal motion is not itself preclusive on any issues because it simply enforced the preclusive effect of the confirmation order, which was no longer appealable given the passage of time. And, for similar reasons, judicial economy is not served by allowing what amounts to an untimely appeal of the confirmation order by disappointed unsecured creditors.

Therefore, when the Bankruptcy Court entered its confirmation order, it fixed the rights and obligations of the Debtor and her creditors and altered the status quo and the legal relationships among the parties. This was the final order from which the Deans should have appealed. But when the court denied the Deans’ motion to dismiss, the relevant “judicial unit” remained pending, and the status quo and the legal relationships of the parties, established at confirmation, remained unchanged. Although this way of looking at finality may seem unsatisfying because intuitively litigants and courts tend to prefer the tidiness of symmetry (e.g., any decision on a motion to dismiss is appealable) to asymmetry (e.g., the finality of an order is dependent on the outcome), and we assume that every order may be reviewed on appeal, the Supreme Court sees finality differently. That said, asymmetrical or outcome-dependent appellate rights already exist in ordinary civil litigation, such as the asymmetrical review of rulings under Rule 56.

Read the full opinion here.

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 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.