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Non-Bankruptcy Litigation in Bankruptcy Court

It seems to be a common misunderstanding, even among lawyers who are not bankruptcy lawyers, that litigation in federal bankruptcy court consists largely or even exclusively of disputes about the avoidance of transactions as preferential or fraudulent, the allowance of claims and the confirmation of plans of reorganization.  However, with a jurisdictional reach that encompasses “all civil proceedings . . . related to [bankruptcy] cases,” [1] bankruptcy courts see “related to” civil litigation of almost every type and flavor.

On any given day, there will be hundreds or perhaps thousands of adversary proceedings (as typical “P v. D” litigations occurring under the umbrella of a bankruptcy case are known) actively pending in the bankruptcy courts, including disputes over contracts or property that, but for the relationship to a bankruptcy case, are the bread-and-butter work of the state courts of general jurisdiction or federal district courts in diversity cases.  This blogger once represented a party in an adversary proceeding in the U.S. Bankruptcy Court for the Middle District of Florida [2] in which not a single disputed issue of fact or law (of which there were many) was decided under the Bankruptcy Code. [3]  Was a term included (or not) in a contract between a debtor and a non-debtor under Section 2-207(2) of the Uniform Commercial Code, what was the legal effect of the delivery of a cargo of crude oil into the tanks of a third party, and had a security interest been “created by the buyer’s seller” (or by someone else and, if so, was it an affiliate of the seller) within the meaning of UCC § 9-320(a)--these and other similar issues were the grist for over 20 depositions and a week-long trial.  Indeed, the disputed facts and non-jurisdictional issues underlying the very impactful decision of the Supreme Court in Stern v. Marshall [4] on bankruptcy jurisdiction seem to have been lifted straight out of a very soapy soap opera or a glossy magazine on display at the cash register or perhaps a family court proceeding.

Just such a proceeding has resulted in a recent decision by Bankruptcy Judge Michael Wiles on the legal impact of Covid-19 and its consequences on a real estate purchase contract. [5]  Condado Plaza Acquisition LLC and two of its affiliates (“Debtors”) entered into an agreement (“Agreement”) in November 2019 to purchase the Condado Plaza Hilton Hotel in San Juan from Posados de Puerto Rico Associates, L.L.C. (“Seller”), with a substantial deposit and a “time is of the essence” closing set for May 2020.  Of course the national health emergency resulting from Covid-19 intervened, with catastrophic effects on tourism and on travel generally and therefore on hotels. 

The Debtors began to maneuver to delay the obligation to close (and the loss of the deposit for failing to do so), including state-court litigation in New York and Puerto Rico, and finally in September they filed Chapter 11 petitions in the Southern District of New York.  The Seller sought various forms of relief from the Bankruptcy Court and, on October 5, Bankruptcy Judge Wiles ruled that the Agreement had terminated before the commencement of the bankruptcy cases in accordance with its terms, notices given by the Seller and applicable New York contract law.

Along the way, Judge Wiles deftly threaded his way through numerous provisions of the Agreement (guided by contract interpretation principles supplied by New York law) and arguments arising under legal doctrines pertaining to limitation of remedies, specific performance, frustration of purpose, failure of consideration, impossibility of performance and commercial impracticability.

From the days of Judge Proctor in the Middle District of Florida (and before) to the present, bankruptcy judges have been skillfully applying non-bankruptcy law to disputes being litigated in a bankruptcy court (but not arising under the Code) because they are “related to” a bankruptcy case.  It seems to this blogger that, with the impact of the Covid-19 emergency on the economy and the consequent increase in bankruptcy cases resulting therefrom, more such disputes are likely to be presented for resolution in bankruptcy courts.  There should be no fear that bankruptcy judges are categorically incapable of resolving such disputes correctly under non-bankruptcy law.  And, with the impact of the Covid-19 emergency on the tax revenues of the states and therefore on the budgets of the state courts, such disputes may be more expeditiously and attentively resolved in a bankruptcy court.

[1]  28 U.S.C. § 1334(b).

[2]  Texaco, Inc. v. Charter Oil (Bahamas) Inc., Charter Crude Oil Co. and Avant Petroleum Co. (In re Charter Oil (Bahamas) Inc.), Adv. Pro. 84-96 (Bankr. M.D. Fla.)(G. Proctor, J.).

[3]  Subsequent references herein to the “Code” denote the Bankruptcy Code, Title 11 of the U.S. Code.

[4]  564 U.S. 462 (2011).

[5]  In re Condado Plaza Acquisition LLC, No. 20-12094 (MEW) (Bankr. S.D.N.Y. Oct. 5, 2020).