We previously discussed Bankruptcy Judge Martin Glenn’s analysis of the Wagoner Rule in the Feltman v. Kossoff & Kossoff LLP (In re TS Empl., Inc.) case. The bankruptcy trustee (the “Trustee”) had asserted a fraud claim against the debtor’s outside accountant and its principal (the “Defendants”). The Defendants moved to dismiss the complaint, citing the Wagoner Rule. Judge Glenn held that the Trustee’s assertion of the adverse interest exception to the Wagoner Rule did not apply, but allowed the Trustee to amend the complaint to strengthen allegations concerning the insider exception. In a recent decision, Judge Glenn denied the Defendants’ motion to dismiss the amended complaint, concluding that the Trustee alleged sufficient facts concerning application of the insider exception.
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Bankruptcy Update Blog provides current news and analysis of key bankruptcy cases and developments in US and cross-border matters. Patterson Belknap’s Business Reorganization and Creditors’ Rights attorneys represent creditors’ committees, trade creditors, indenture trustees, and bankruptcy trustees and examiners in US and international insolvency cases. Our team includes highly skilled and experienced attorneys who represent clients in some of the most complex cases in courts throughout the US and elsewhere.
A bankruptcy trustee exercising her or his avoidance powers under Chapter 5 of the Bankruptcy Code may seek to recover the avoidably transferred property (or its value) from “the initial transferee,” “the entity for whose benefit such transfer was made” and “any immediate or mediate transferee of such initial transferee. Despite the authorization to seek recovery from multiple sources, “[t]he trustee is entitled to only a single satisfaction . . . .”
An Update on the Venezuelan Debt Crisis: A Lack of Regime Change and Continued U.S. Sanctions Delay Prospects for a Near-Term Debt Restructuring
Here’s an update on recent political, social, and economic developments in Venezuela. From our perspective as a blog focused on insolvency and restructuring topics, the upshot of what’s been taking place in Venezuela is that the chances of a debt restructuring in the coming months remain slim.
We’ve focused a lot on third-party releases lately, as bankruptcy courts across the country continue to evaluate whether and under what circumstances they are permissible. But, as a recent opinion of the United States Court of Appeals for the Fifth Circuit demonstrates, bankruptcy courts are not the only courts grappling with this issue.
Patterson Belknap Bankruptcy Update Blog Author Joins Debtwire Radio to Discuss Third-Party Releases
Bankruptcy Courts are divided on the permissibility of third-party releases. In some circuits, the proponent of a plan can win approval of third-party release provisions in “rare” or “exceptional” circumstances. But, some commentators have started to question just how rare and exceptional these seemingly ubiquitous plan provisions have become. Two recent decisions from Bankruptcy Courts located in jurisdictions that permit third-party releases have brought renewed focus to this often contentious aspect of the plan confirmation process. One of Patterson Belknap’s restructuring attorneys, Brian Guiney, recently sat down with Debtwire Radio to discuss third-party releases generally and these two cases in particular. Click here to listen.
Our May 22 post reported on the Supreme Court’s May 20 decision in Mission Product Holdings, Inc. v. Tempnology, LLC, an 8-1 decision holding that the rejection of a trademark license in which the debtor is the licensor does not terminate the license. Rather, the rights of the licensee survive the rejection, and it may continue to use the licensed mark.
New York Bankruptcy Judge Sean Lean recently denied a Rule 2004 request because the movant sought documents for use in an unrelated litigation. In re Cambridge Analytica LLC, No. 18-11500, 2019 Bankr. LEXIS 1824 (Bankr. S.D.N.Y. Jun. 14, 2019). Judge Lane said discovery sought through Rule 2004 should be used in the bankruptcy case and not in other disputes.
Delaware Bankruptcy Judged Brendan Shannon granted mechanic’s lien claimants $1.6 million for making a substantial contribution in a case by “demonstrably and materially facilitating the process of reorganization.” In re M & G USA Corp., No. 17-12307, 2019 Bankr. LEXIS 1398 (Bankr. D. Del. May 6, 2019).
Commonwealth Finds Common Ground: Deal with Bondholders May Be a Turning Point as Puerto Rico Seeks to Emerge in Early 2020
The Financial Oversight and Management Board for Puerto Rico (Oversight Board) announced Sunday that it had reached an agreement with bondholders regarding the terms of a plan of adjustment that would resolve $35 billion worth claims against the Commonwealth of Puerto Rico. If approved by the Bankruptcy Court, the deal would reportedly reduce the struggling island’s outstanding bond debt to less than $12 billion, a reduction of more than 60%.
Successful bankruptcy cases typically end with a court order releasing a debtor from liability for most pre-bankruptcy debts. This order, generally known as a “discharge order,” prohibits the debtor’s creditors from trying to collect on those now-discharged debts. See 11 U.S.C. § 524(a)(2). But it is not always clear which debts are covered by a discharge order. Some pre-bankruptcy debts are exempted from discharge by the Bankruptcy Code. For example, section 523 of the Bankruptcy Code exempts certain debts of individual debtors from discharge, and section 1141 exempts certain debts of corporate debtors from discharge under chapter 11. See 11 U.S.C. §§ 523(a), 1141(d)(6). For other debts, it may be unclear whether they arose before or after the bankruptcy. See In re Ybarra, 424 F.3d 1018 (9th Cir. 2005) (considering under what circumstances a discharge order covers an attorney’s fee award for fees incurred post-petition in an action brought before the bankruptcy petition). Courts enforcing a discharge order’s prohibition on debt collection have thus struggled with the appropriate standard for holding a person in contempt for attempting to collect on a discharged debt. Does it require that the person knew that the discharge applied to the debt, or is it sufficient that the discharge did in fact apply to the debt?
SDNY Bankruptcy Court Reaffirms the Low Bar of the Property Requirement for Filing a Chapter 15 Case
Last year, we discussed a decision by Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York concerning section 109(a) of the Bankruptcy Code. In a recent cross-border case, In re PT Bakrie Telecom Tbk, Judge Lane again addressed section 109(a) and held that an obligor on an indenture that contains New York governing law and forum selection clauses satisfies the eligibility requirement for filing a chapter 15 case in New York.
Our January 22, May 23, June 28, July 13, August 3, September 11 and October 29, 2018 and January 11, 2019 posts discussed the First Circuit’s January 12, 2018 decision in Mission Product Holdings, Inc. v. Tempnology, LLC. and the appeal therefrom to the Supreme Court. On May 20, the Supreme Court issued its decision reversing the First Circuit in a 8-1 opinion clarifying the consequences of the rejection of a trademark license by the licensor. Justice Kagan’s majority opinion was joined by every Justice except Justice Gorsuch, and Justice Sotomayor also filed a concurring opinion. Justice Gorsuch dissented.
Creditors’ recoveries often hinge on claw-back lawsuits that trustees bring under bankruptcy law and non-bankruptcy law. Trustees can file claims based on non-bankruptcy law because Bankruptcy Code section 544(b) allows them to assert claims that creditors have standing to file outside of bankruptcy. This powerful tool enables trustees to challenge transactions that date back years before a bankruptcy filing.
When we last checked in on the Puerto Rico restructuring case, we reported on the February 15 decision of the First Circuit Court of Appeals that the members of the Financial Oversight and Management Board were appointed in contravention of the Appointments Clause of the U.S. Constitution because they were never confirmed by the U.S. Senate. But, in recognition of the implications of its decision, the Court delayed the effectiveness of its ruling for 90 days. That 90-day deadline was set to expire on May 16, causing several commentators to express skepticism that a legislative solution could be achieved in the time allotted.
Two weeks ago, we discussed asset sales under Bankruptcy Code section 363. As that post noted, section 363 requires court approval for asset sales outside the ordinary course of business, with courts ensuring that sales reflect a reasonable business judgment and have an articulated business justification. Debtors may choose to sell assets via a public auction or through a private sale. In our last post, we considered a case where a debtor initially arranged for a public auction and then decided to sell the property via a private sale. What about the reverse case—what if a debtor agrees to sell property to a particular entity via a private sale, but then changes course and decides to hold a public auction instead? On Wednesday, the Fifth Circuit Court of Appeals considered such a case in In re VCR I, LLC, No. 18-60368 (May 1, 2019). The Fifth Circuit held that the prior agreement did not bar the change of course.
The subject matter jurisdiction of bankruptcy courts causes confusion and can be hard to understand. In a recent decision, the United States Court of Appeals for the Eleventh Circuit clarified the meaning of the phrase “related to” in 28 U.S.C. §1334(b), the federal statute that governs the subject matter jurisdiction of bankruptcy courts.
We now address assets sales under Bankruptcy Code section 363. The statute allows debtors to use, sell, or lease their property in the ordinary course of business without court permission. But a debtor’s use, sale, or lease of property outside the ordinary course of business requires court approval. And courts will usually approve a debtor’s disposition of property if it reflects the debtor’s reasonable business judgment and an articulated business justification.
It always amazes me when, after more than a half-century of Uniform Commercial Code (“UCC”) jurisprudence, an issue one thinks would arise quite commonly appears never to have been decided in a reported case. Such an issue was recently decided by the U.S. Court of Appeals for the Ninth Circuit in an adversary proceeding in the Pettit Oil Co. Chapter 7 case.
Impermissible Third-Party Release Provisions Render a Plan “Patently Unconfirmable” in the Sixth Circuit
Ruling from the bench on April 4, Bankruptcy Judge Alan Koschik of the United States Bankruptcy Court for the Northern District of Ohio denied approval of a disclosure statement proposed by FirstEnergy Solutions Corp. because the plan it described was “patently unconfirmable.”
Bankruptcy Court Applies Automatic Stay to Continuation of Removed State-Court Action Against Debtor
When a debtor files for bankruptcy, almost all proceedings to recover property from the debtor are automatically stayed by force of law. See 11 U.S.C. § 362(a). This provision, known as the automatic stay, is a central feature of the bankruptcy process, but uncertainty remains about aspects of its scope. Last month, we wrote about a decision from a New Mexico bankruptcy court holding that the automatic stay was not applicable to the removal of a state court action to bankruptcy court and to the continuation of that there. Earlier this week, in response to a motion for reconsideration, the court partially reversed itself, again holding that the automatic stay is not applicable to removal or to motions to remand the action back to state court, but holding that continuation of the action, beyond mere consideration of a motion to remand, was barred by the automatic stay. In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. March 26, 2019).
Under Section 1141(c) of the Bankruptcy Code, property “dealt with” in a confirmed plan is free and clear of the claims and interests of creditors, provided the holder of the claim or interest participated in the bankruptcy case. But what about assets that are not explicitly specified in a disclosure statement? United States District Court Judge Cathy Seibel of the Southern District of New York recently affirmed a decision by Bankruptcy Judge Robert D. Drain holding that Section 1141(c) can reach even assets that are not explicitly identified in a disclosure statement in certain circumstances.
It’s time for a primer on the Wagoner rule and the in pari delicto defense, two concepts that arise when a debtor’s fraud leads to bankruptcy. Trustees who replace a debtor’s management often sue those involved in the corporation’s misdeeds. But the Wagoner rule and the in pari delicto defense can shield third-party defendants from liability.
There have been two significant developments in the ongoing restructuring case for the Commonwealth of Puerto Rico. First, as was widely expected, District Judge Laura Taylor Swain entered orders on February 4 and 5, respectively, approving the Commonwealth’s entry into the Commonwealth-COFINA settlement (which we reported on here) and confirming the Title III Plan of Adjustment for COFINA. The dispute over ownership of the sales taxes pledged to pay the COFINA bonds has complicated the Commonwealth’s bankruptcy case since it was commenced in 2017. Had Judge Swain been forced to resolve the dispute it could have wiped out the COFINA bondholders entirely, or assured them a 100% recovery. But, with a settlement of this dispute in hand, and a confirmed plan of adjustment confirmed for COFINA, the Debtors were poised to pivot towards pursuing a consensual plan for the Commonwealth itself.
When a party files for bankruptcy, the Bankruptcy Code imposes an automatic stay of litigation against a debtor for claims arising prior to the commencement of the bankruptcy case. See 11 U.S.C. § 362(a). Where there is a basis for bankruptcy jurisdiction in federal court, federal law also permits parties to a state court action to remove the state court action to the federal district court for the district in which the state court action is pending. See 28 U.S.C. § 1452(a). (Usually, the action will then be automatically referred to a bankruptcy court in that federal judicial district.) Absent court action to modify the automatic stay, does the automatic stay block parties from carrying out such removal of state court actions against a bankruptcy debtor? In In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. December 12, 2018), a bankruptcy court considered an objection to removal on this ground by a chapter 7 trustee (“the Trustee”). While noting that courts have split on this issue, the bankruptcy court ruled that the automatic stay does not apply to removing a case to the bankruptcy court where the bankruptcy case is pending, nor to other proceedings in that court, including continuation of the removed action.
Can another vain attempt to mitigate a $1.5 billion mistake provide the occasion for a thorough review of the doctrine of earmarking? It did for Southern District Bankruptcy Judge Martin Glenn in the long tail on the General Motors bankruptcy case.
Indentures often provide that an indenture trustee’s expenses incurred after an event of default constitute administration expenses under applicable bankruptcy law. However, § 503(b)(5) requires indenture trustees to show that they have made a “substantial contribution” in a case in order to receive their fees and costs. This means that a trustee is held to a higher standard than the “actual, necessary” standard that other administrative expense claimants must satisfy pursuant to § 503(b)(1)(A). Even so, some courts permit trustees to be paid from estate funds under the terms of a chapter 11 plan without satisfying the substantial-contribution standard, although the case law is not uniform.
Bankruptcy and Labor Law: Decision by Appeals Court Permits Debtor to Discharge an NLRB Fine in Bankruptcy
If the National Labor Relations Board (“NLRB”) fines an employer for unlawfully firing workers who tried to unionize, can the employer discharge the fine in bankruptcy, or will the exception to discharge found in Bankruptcy Code section 523(a)(6) apply? That section bars discharge of debts that arise from “willful and malicious injury.” The issue was addressed recently in a decision by the United States Court of Appeals for the Seventh Circuit following proceedings before an administrative law judge (“ALJ”), the NLRB, a District Court, and a Bankruptcy Court. An individual debtor had sought to use bankruptcy to discharge a liability imposed by the NLRB. However, the NLRB argued that the discharge should be denied because the debtor had engaged in “willful and malicious injury,” citing 11 U.S.C. §523(a)(6). In a 2-1 decision, the Seventh Circuit held that the administrative finding that the debtor violated §158(a)(3) of the National Labor Relations Act —which prohibits an employer from discriminating an employee to encourage or discourage membership in any labor organization—did not bar the debtor from arguing that he had not acted with malice.
A court in New York has allowed offshore debtors to take control of an investment account in the U.S. over the objection of a shareholder. At stake was the court’s discretion to permit chapter 15 debtors to access the funds and to transfer them outside the U.S. The shareholder asserted that its interests weren’t fully protected, but the court ruled that on balance the debtors’ need for the money outweighed the shareholder’s concerns.
On January 14, 2019, facing “billions of dollars in liability claims from two years of deadly wildfires,” PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company, reported that they expect to file petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California on or about January 29, 2019. It is rare for a debtor to telegraph its filing so clearly in advance of the petition date, but a recently enacted California law required a 15-day advance notice period before the filing.
Fraudulent transfer law allows creditors and bankruptcy trustees, under certain circumstances, to sue transferees to recover funds received where a debtor’s transfers to the transferees actually or constructively defrauded its creditors. Under both the Uniform Fraudulent Transfer Act adopted by most states and the fraudulent transfer action created by federal bankruptcy law, a transferee of an alleged fraudulent transfer may assert a defense from such liability by establishing that it received the transfer in good faith and for reasonably equivalent value. See 11 U.S.C. § 548(c); Tex. Bus. & Com. Code § 24.009(a). Many courts have held that a transferee lacks good faith if it has “inquiry notice,” that is, if it has knowledge that would make a reasonable person suspicious and suggest a need for further investigation, even if it lacks actual knowledge of the fraudulent nature of the transfer. But some courts have held that even a transferee with inquiry notice can maintain a good faith defense if it establishes that an investigation into the facts would have been futile because it would not have revealed the fraud. In Javney v. GMAG, L.L.C., No. 17-11526, 2019 U.S. App. LEXIS 759 (Jan. 9, 2019), the Fifth Circuit held that such a futility defense was not available under the Texas Uniform Fraudulent Transfer Act (“TUFTA”).
Our January 22, May 23, June 28, July 13, August 3, September 11 and October 29, 2018 posts discussed the First Circuit’s January 12, 2018 decision in Mission Product Holdings, Inc. v. Tempnology, LLC and the pending appeal therefrom to the Supreme Court.
In a recent cross-border insolvency case, Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized an insurance company rehabilitation proceeding in Curaçao as a “foreign main proceeding” under Chapter 15 of the Bankruptcy Code.
Section 365(h) of the Bankruptcy Code provides considerable protection to a tenant in the event of a bankruptcy filing by its landlord. Despite rejection of its lease, the tenant can elect to retain its rights, including the right to possession, for the balance of the term of the lease, including any renewal or extension period. This is black-letter bankruptcy law reflecting a sound policy judgment: it would be ruinous to business (not to mention an individual or family) if a landlord could upend a tenant’s possession whenever economic circumstances made a bankruptcy filing necessary or desirable.
A sex-abuse scandal has landed another organization in bankruptcy court. USA Gymnastics (“USAG”) filed chapter 11 last week in Indiana following a team doctor’s conviction for abusing hundreds of girls.
Creditors’ Contractual Autonomy Does Not Trump the Value of Bankruptcy Law as a Collective Dispute Resolution Mechanism
In a recent cross-border insolvency case, In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018), Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized and enforced a restructuring plan approved by a Croatian court. Due to the nature of the debt to be discharged under the plan, the Court went through an in-depth analysis of international comity in the context of international bankruptcy law.
Let the Seller Beware? Debtor’s Attempt to Monetize its Own Default May Impact Sellers of Credit Default Swaps
The Sears bankruptcy case made headlines this month in the complex world of credit default swaps (CDS). A credit default swap is a contract pursuant to which the seller receives payment from a buyer in exchange for which the seller must compensate the buyer in the event of a default or other specified credit event. On November 9, in what it openly admitted was an attempt to take advantage of the abundance of default protection issued in the days leading up to its bankruptcy filing, Sears sought permission to auction certain “medium-term notes” (MTNs) that were issued by Sears Roebuck Acceptance Corp. (“SRAC”) prior to the petition date and held entirely by affiliates of Sears.
Defendants in a lawsuit didn’t waive their right to arbitrate even after moving to dismiss and answering a complaint, a court held last week. Arbitration wasn’t waived because the defendants hadn’t filed affirmative defenses or counterclaims and had taken no discovery. Trevino v. Select Portfolio Servicing, Inc. (In re Jose Sr. Trevino), Adv. Pro. No. 16-7024, 2018 Bankr. LEXIS 3605 (Bankr. S.D. Tex. Nov. 14, 2018).
Although it may be difficult to define precisely what an “executory contract” is (with the Bankruptcy Code providing no definition), I think most bankruptcy lawyers feel how the late Supreme Court Justice Potter Stewart famously felt about obscenity--we know one when we see it. Determining that a patent license was executory in the first place was an issue in the Fifth Circuit’s recent decision in RPD Holdings, L.L.C. v. Tech Pharmacy Services (In re Provider Meds, L.L.C.), but more interesting to this blogger was the issue, apparently decided by a Court of Appeals for the first time under the Code, of the effect of a timing provision that is unique in Chapter 7 cases.
As we reported last year, on August 10, 2017, Judge Swain entered an order establishing procedures to govern resolution of the Commonwealth-COFINA dispute (the “Resolution Stipulation”). In recognition of the fact that the Oversight Board acts for both the Commonwealth and COFINA, the Resolution Stipulation provided for appointment of agents to act independently for each of them: (i) the Creditors’ Committee, to serve as the Commonwealth’s representative (the “Commonwealth Agent”) and (ii) Bettina Whyte, an experienced restructuring professional with Alvarez & Marsal, LLC, to serve as the COFINA’s representative (the “COFINA Agent,” and, with the Commonwealth Agent, the “Agents”).
Our May 23, June 28, July 13, August 3 and September 11 posts discussed the First Circuit’s January 12 decision in Mission Product Holdings, Inc. v. Tempnology, LLC. and, most recently, the pending petition for certiorari. On October 26, the Supreme Court granted the petition, limited to the main question concerning the effect of the rejection of a trademark license.
We continue to monitor developments in what could become one of the most consequential Supreme Court cases on bankruptcy in decades.
 879 F.3d 389 (1st Cir. 2018), petition for cert. filed, No. 17-1657 (June 11, 2018).
Started as a mail-order retailer, evolved to brick-and-mortar stores in urban areas and expanded to a big-box retailer through merger, Sears is now facing the most turbulent time in its history. On October 15, 2018, Sears Holdings Corp.—the holding company of Sears and Kmart—along with its affiliated entities, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. With assets of approximately $6.94 billion and liabilities of approximately $11.34 billion in total, the fate of “Where America Shops” remains unclear.
It’s hard to find something positive to write about Venezuela. Some basic facts tell the story of the misery there.
Consumer prices this year might rise one million percent. The minimum wage was increased by 3,000 percent so that seven million workers will now receive $20 a month. And many others live on just $2 to $8 a month and eat one meal a day. The poverty rate is a crushing 82 percent. Medicine is scarce.
The failure of Toys ‘R Us to successfully reorganize in Chapter 11 sent shockwaves throughout the retail world and the restructuring community. Saddled with unsustainable debt and unable to chart a viable path forward, the company – in bankruptcy since late 2017 – conducted going-out-of-business sales and closed most of its more than 700 stores this summer. As part of the wind-down process, the debtors scheduled an auction to sell their existing intellectual property, including the name, website, and, of course, their celebrated brand mascot, Geoffrey the Giraffe.
In hindsight, it seems inevitable that constitutional and other jurisdictional problems would arise when Congress, in enacting the Bankruptcy Reform Act of 1978, created impressive new powers and responsibilities for the bankruptcy courts (along with a considerable degree of independence) but denied them the status of Article III courts under the Constitution (by denying its judges lifetime tenure, as Article III requires). And it didn’t take long for the problems to arise.
Bankruptcy Court Finds Arbitration Clause in Consumer Loan Contract to be Sufficient Cause to Grant Relief from Automatic Stay
When a bankruptcy petition is filed, an automatic stay comes into effect staying proceedings against the debtor or the debtor’s property. 11 U.S.C. § 362(a). The stay centralizes litigation regarding the debtor and its property in the debtor’s bankruptcy case. When contract entered into pre-bankruptcy contains an arbitration clause, a bankruptcy court will consider if the stay should be enforced or if the parties can resolve the matter in arbitration. In In re Argon Credit, LLC, No. 16-39654 (Bankr. N.D. Ill. Sept. 21, 2018), a bankruptcy court considered this question in a dispute between two non-debtor parties concerning the validity of loans issued by the debtor and part of the debtor’s estate. The bankruptcy court ruled that the arbitration clause was binding and ordered the stay lifted to permit arbitration to go forward.
The Third Circuit denied a $275 million break-up fee to a bidder that was unsuccessful in its attempt to buy the crown-jewel assets in the high-profile EFH bankruptcy case. In re Energy Future Holdings Corp., No 18-1109, 2018 U.S. App. LEXIS 25945 (3rd Cir. Sept. 13, 3018). The court held that the bidder’s efforts didn’t result in a benefit to the debtors’ estates. Therefore, the bidder’s request for an administrative expense in the form of the fee was rejected.
Our May 23, June 28, July 13 and August 3 posts discussed the First Circuit’s January 12 decision in Mission Product Holdings, Inc. v. Tempnology, LLC. and, most recently, the pending petition for certiorari. Since our last post, the respondent filed its response to the petition in opposition to granting cert., giving several reasons why cert. should be denied.
We generally advise clients to think carefully before commencing an involuntary bankruptcy petition against an alleged debtor. One of the primary reasons for our caution is section 303(i) of the Bankruptcy Code, which provides that “(i) If the court dismisses [an involuntary] petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—(1) against the petitioners and in favor of the debtor for—(A) costs; or (B) a reasonable attorney’s fee; or (2) against any petitioner that filed the petition in bad faith, for—(A) any damages proximately caused by such filing; or (B) punitive damages.” A recent unreported decision of the Third Circuit Court of Appeals underscores the serious consequences that can flow from an adverse judgment under this section of the Code.
Third Circuit Enforces Plan Releases Against Later-Purchasing Shareholders Bringing Claims Concerning Post-Confirmation Conduct
Bankruptcy plans often include provisions releasing debtors and their officers and directors from certain potential liability. In Zardinovsky v. Arctic Glacier Income Fund, No. 17-2522 (3d Cir. Aug. 20, 2018), the United States Court of Appeals for the Third Circuit held that such a provision bound shareholders who purchased the shares after confirmation, as to post-confirmation claims including securities fraud and breach of fiduciary duty. Because this decision was at the motion to dismiss stage, what follows are the court’s characterization of the facts as alleged in the complaint.
In January 2014, Lehman Brothers Holdings, Inc. (“Lehman”) settled claims filed by Fannie Mae and Freddie Mac arising out of each of their purchases of mortgage loans from Lehman and its affiliates. Lehman then sought to recoup the amounts paid to Fannie and Freddie by way of third-party indemnification claims brought in the Bankruptcy Court against financial institutions that it alleges sold or submitted the defective mortgage loans into Lehman’s loan sale and securitization channels in the first place. A number of the financial institutions moved to dismiss for lack of subject matter jurisdiction. Earlier this week, Bankruptcy Judge Shelley Chapman held that the Bankruptcy Court has “related to” jurisdiction over the indemnification claims pursuant to 28 U.S.C. § 1334(b) and therefore denied the motions to dismiss.
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