Bankruptcy and Restructuring Blog

On October 21, 2010, the Ninth Circuit overruled what many thought to be well-settled law, and held that a bankruptcy trustee does not have standing to pursue alter ego claims, at least in cases governed by California law. The court first held that California state law does not recognize a general alter-ego cause of action that allows an entity and its equity holders to be treated as alter egos for purposes of all of the entity’s debts. As a result, the court found that bankruptcy trustees (or debtors-in-possession) do not have standing to bring such a claim on behalf of a bankruptcy estate, even if the claim affects all of the bankrupt entity's creditors.

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A bankruptcy court recently held that in order for a supplier of goods on credit to establish an administrative claim under Bankruptcy Code section 503(b)(9) in the bankruptcy case of its buyer, the supplier will need to show that its buyer "physically" received the goods within 20 days prior to the buyer's bankruptcy filing, regardless of when title to the goods passed. In Re Circuit City Stores, Inc., et al., Case No. 08-35653, No. 7149 (Bankr. E.D. VA April 8, 2010).

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In Diamond Z Trailer, Inc. v. JZ, LLC (In re JZ, LLC), No. 07-1011 (9th Cir. B.A.P., June 18, 2007), the Ninth Circuit Bankruptcy Appellate Panel affirmed a Bankruptcy Court decision holding that an unscheduled executory contract rides through the bankruptcy if not assumed or rejected during the bankruptcy.  Further, a debtor has standing to sue for a breach of that executory contract when the breach occurred after the closure of the bankruptcy case.

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In Travelers Cas. and Sur. Co. of America v. Pacific Gas & Electric Co., 127 S. Ct. 199 (2007) ("Travelers"), the United States Supreme Court overturned a Ninth Circuit Court of Appeals opinion that had made pre-petition contractual provisions awarding attorneys' fees to the prevailing party unenforceable in bankruptcy to the extent the parties litigated issues peculiar to bankruptcy law. The Ninth Circuit opinion, Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991) ("Fobian"), was in conflict with other circuit courts that did not impose the same limitation on such contractual provisions in bankruptcy. The Supreme Court held that the Bankruptcy Code did not support the limitation and unanimously overruled Fobian.

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On October 4, 2006, the California Court of Appeals for the Fourth District held in Credit Managers Association of California v. Countrywide Home Loans, Inc., 2006 WL 2820882 (Cal.App.4 Dist.) ("CMAC") that Bankruptcy Code §§ 544 and 547, the provisions governing the avoidance of preferential transfers, do not preempt California Code of Civil Procedure § 1800 (" CCP § 1800"), which allows the assignee in a general assignment for the benefit of creditors to avoid certain preferential transfers under California law.  The CMAC panel reached the same conclusion as the California Court of Appeals for the Second District in Haberbush v. Charles & Dorothy Cummins Family Limited Partnership, (2006) 139 Cal.App.4th 1630 ("Haberbush").  Both CMAC and Haberbush directly conflict with the prior conclusion of the Ninth Circuit Court of Appeals in Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) ("Sherwood").  There, the Ninth Circuit held that the Bankruptcy Code does preempt CCP § 1800, which means, according to the federal court, that general assignees cannot avoid preferential payments to certain creditors under CCP § 1800.

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The Supreme Court recently granted certiorari to hear an appeal from the Ninth Circuit, arising out of the Pacific Gas and Electric ("PG&E") bankruptcy case, concerning a creditor's claim for attorney fees. The appeal, brought by Travelers Casualty and Surety Company of America (Travelers"), seeks review of the Ninth Circuit's holding that, in bankruptcy, creditors are only entitled to attorney fees for litigating substantive state law issues (if provided for by contract), but not issues "peculiar to bankruptcy law" including disclosure statement and chapter 11 plan objections. Travelers Casualty and Surety Co. v. Pacific Gas and Electric Co., 167 Fed. Appx. 593, 593-94 (9th Cir. 2006). Because there is substantial Ninth Circuit authority for this proposition, the appeal will test an entire line of cases underlying the recent Ninth Circuit decision. Continue Reading Questions & comments

In Busseto Foods, Inc. v. Charles Laizure (In re Laizure), No. 06-1112 (9th Cir. B.A.P., September 1, 2006), the Ninth Circuit Bankruptcy Appellate Panel affirmed a Bankruptcy Court decision holding that where a creditor receives a settlement payment on a nondischargeable debt within 90 days prior to bankruptcy but then is compelled to return that payment to the estate as a preference, the creditor's nondischargeable claim against the debtor is not revived.

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In Howard Delivery Service, Inc. v. Zurich American Ins. Co., 126 S.Ct. 2105 (2006), in a six-to-three decision, the Supreme Court has resolved a split in the circuits over whether claims for unpaid workers' compensation premiums are entitled to priority under Bankruptcy Code section 507(a)(5).  Relying primarily on the legislative history of Section 507, the Supreme Court held that such premiums are not entitled to priority as "contributions to an employee benefit plan arising from services rendered."

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On August 14, 2006, the Ninth Circuit Court of Appeals, Bankruptcy Appellate Panel, held in United Student Funds, Inc. v. Wylie (In re Wylie), 2006 Bankr. Lexis 2088 (9^th Cir. BAP 2006), that a claimant filing a motion to reconsider an order sustaining a claim objection, after the 10-day period for appeal, was not entitled to revisit the merits of its claim. Instead, the claimant was limited to the narrow grounds enumerated in FRCP 60(b), which generally require a showing that events subsequent to the entry of the judgment make its enforcement unfair or inappropriate, or that the party was deprived of a fair opportunity to appear and be heard in connection with the underlying dispute.

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On July 7, 2006, the United States Bankruptcy Appellate Panel for the Ninth Circuit, in Johnson v. TRE Holdings LLC (In re Johnson), BAP No. CC-05-1268 (9th Cir. B.A.P. 2006), held that bankruptcy courts do not have authority under section 105(a) of the Bankruptcy Code to preclude the application of the automatic stay in subsequent cases via an "in rem" order. Continue Reading Questions & comments

On June 12, 2006, the United States Bankruptcy Appellate Panel of the Ninth Circuit, in Berman v. Maney, (In re Berman), BAP No. AZ-06-1133, held that the direct appeal provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and the Interim Rules adopted to effectuate it do not apply to appeals arising from bankruptcy cases filed before October 17, 2005.  Continue Reading Questions & comments

On May 31, 2006, the California Court of Appeal for the Second Appellate District, in Haberbush v. Charles and Dorothy Cummins Family Ltd. Partnership, Case No. B175947, disagreed with the Ninth Circuit's majority opinion in Sherwood Partners v. Lycos, 394 F.3d 1198 (9th Cir. 2005) and held that California Code of Civil Procedure section 1800 is not preempted by the federal Bankruptcy Code.

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In Estate of Spirtos v. Estate of Spirtos, No. 03-56405 (9th Cir. April 12, 2006), the Ninth Circuit joins the 2nd, 4th, 5th, 6th, 8th, and 11th circuits by holding that 11 U.S.C. § 323 vests the bankruptcy trustee with the exclusive right to assert legal claims on behalf of the bankruptcy case. In Spirtos, family member creditors of the deceased debtor filed RICO claims against nearly everyone in the bankruptcy, including the chapter 7 and U.S. trustees, alleging a joint conspiracy to conceal assets belonging to the bankruptcy estate. The district court dismissed the creditors' action for lack of standing.

 

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The Ninth Circuit Court of Appeals held in Muegler v. Bening, 413 F.3d 980 (9th Cir. 2005) that collateral estoppel can be used to prevent a debtor from re-litigating the issue of fraud in a nondischargeability action in bankruptcy court. In Muegler, a federal district court found the debtor guilty of intentional fraud under Missouri law and awarded the creditor compensatory and punitive damages. After the debtor filed bankruptcy, the judgment creditor filed a complaint in the bankruptcy court asserting that its debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A) because it was procured by the debtor's fraud. The creditor further argued that the debtor was collaterally estopped from re-litigating the issue of fraud in the bankruptcy court. After applying Missouri collateral estoppel law, the Ninth Circuit agreed. Continue Reading Questions & comments

In In re Crown Vantage, Inc., 421 F. 3d 963 (9^th Cir. 2005), the Ninth Circuit Court of Appeals joined the First, Second, Sixth, Seventh, and Eleventh Courts of Appeal Circuit in applying the so-called "Barton Doctrine" to bankruptcy cases.  The Barton Doctrine, articulated by the Supreme Court in Barton v. Barbour, 104 U.S. 126 (1881), states that a receiver may not be sued in a court other than the court charged with the administration of the estate, absent leave of the court appointing the trustee.  The Ninth Circuit decision applies the Barton Doctrine in the bankruptcy context, such that a party must first obtain leave of the bankruptcy court before it initiates an action in another forum against a bankruptcy trustee or other officers (in its official capacity) appointed by the bankruptcy court.

Authored by:

Mette H. Kurth

(213) 617-5501

mkurth@sheppardmullin.com

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The Ninth Circuit Court of Appeals reversed the District Court and held that complaints filed by various state entitles against PG&E under Cal. Business & Professions Code Section 17200 were exempt from removal to Bankruptcy Court under 28 USC Section 1452(a).

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In "Boeing North American, Inc. v. Ybarra (In re Ybarra)", 424 F. 3d 1018 (9th Cir. 2005), the Ninth Circuit Court of Appeals has held that an award of attorney's fees and costs incurred post-petition in defending a cause of action commenced pre-petition is not discharged.

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On December 7, 2005, Ninth Circuit Court of Appeals issued an amended decision in Weinstein, Eisen & Weiss, LLP v. David A. Gill, Chapter 11 Trustee (In re Cooper Commons), 2005 U.S. App. LEXIS 26642 (9th Cir. December 7, 2005). In the original opinion, the court had held, inter alia, that based on its earlier opinion in In re Adam's Apple, Inc., 829 F. 2d 1484, it must begin with a presumption of the post-bankruptcy creditor's good faith and that it could not find facts to overcome the presumption in this case. Weinstein, Eisen & Weiss, LLP v. David A. Gill, Chapter 11 Trustee (In re Cooper Commons), 2005 U.S. App. LEXIS 19708 (9th Cir. September 13, 2005). In the amended opinion the discussion of the issue of good faith is much shorter and leaves out any analysis of precedent. Instead, the amended opinion reviews the bankruptcy court's finding of good faith for clear error and, finding none, accepts it.

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Ninth Circuit Court of Appeals recently issued its decision in Weinstein, Eisen & Weiss, LLP v. David A. Gill, Chapter 11 Trustee (In re Cooper Commons), 2005 U.S. App. LEXIS 19708 (9th Cir. September 13, 2005), holding that the provisions of an unstayed order approving a postpetition financing agreement could not be undone on appeal.

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On July 19, 2005, the Ninth Circuit Court of Appeals issued an opinion in AMB Property, L.P. v. Official Creditors for the Estate of AB Liquidating Corp. (In re AB Liquidating Corp.) that adopted the framework of the Second Circuit case Oldden v. Tonto Realty Co., 143 F.2d 916 (2nd. Cir. 1944), which held that a landlord must deduct a security deposit from its "capped" bankruptcy claim rather than from its total damages.

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On April 28, 2005, the Bankruptcy Appellate Panel for the Ninth Circuit issued an opinion in Movitz v. Baker (In re Triple Star Welding) that seemingly adopts the decision of the Third Circuit Court of Appeals in In re Pillowtex, Inc., 304 F.3d 246 (3rd Cir. 2002), which held that when a facially plausible preference claim exists with respect to prepetition payments received by a professional, the Bankruptcy Court must determine the merit of the preference claim, and the professional's disinterestedness, before approving its retention.

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