Bankruptcy and Restructuring Blog

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.

The Second Circuit has long held that nondebtor releases are proper only in rare cases where the injunction plays an important part in the debtor’s reorganization plan. See SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992). The Ninth and Tenth Circuits have gone still further, holding that nondebtor releases are prohibited by the Bankruptcy Code, except in the asbestos context. See Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02, 1402 n.6 (9^th Cir. 1995); Landsing Diversified Props.-II v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund, Inc.), 92 F.2d 592, 600-02 (10^th Cir. 1990) (per curiam).

In In re Ruehle, 412 F.3d 679 (6th Cir. 2005), the Court of Appeals for the Sixth Circuit joined a growing number of courts in rejecting the practice of “discharge by declaration.” The debtor in Ruehle had included provisions in her Chapter 13 plan purporting to discharge her student loan debt without an adversary proceeding and stating that excluding the loan from discharge would impose an undue hardship on her, a process known as “discharge by declaration.” On appeal, the debtor argued that the need for finality trumps the creditor’s due process rights, citing as support two cases from the Ninth and Tenth Circuits.

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).

The Eleventh Circuit Court of Appeals, in Justice Cometh, Ltd. v. Lambert, 426 F.3d 1342 (11th Cir. 2005), has held that federal district courts have subject matter jurisdiction to adjudicate claims relating to the willful violation of the Bankruptcy Code's automatic stay. The appellate court found no merit in the contention that the district court has only appellate jurisdiction over such matters and that, therefore, a stay violation claim must be brought in the bankruptcy court rather than in the district court. 28 U.S.C. §§ 1331 and 1334 grant federal district courts original jurisdiction over all civil actions arising under Title 11.

In "In Re: Submicron Systems Corporation," ___ F.3d ___ (3rd Cir. 1/6/06), the Third Circuit affirmed the approval of a Bankruptcy Code Section 363 asset sale (over the objection of the Plan Administrator (the "Estate")) to a newly formed company ("Newco") comprised of (i) a third party ("Sunrise"), and (ii) pre-petition secured lenders (the "Lenders"), where the winning and only bid was part cash and part credit bid. The Third Circuit rejected the Estate's argument that the sale should not have been approved because the secured debt alleged by the Lenders that formed approximately 73% of the purchase price (the cash component was only approximately 27%) should have been (i) recharacterized as equity, (ii) deemed unsecured, or (iii) equitably subordinated.

In April 2002, Robert Clauss, Esq., agreed to represent Randall Church in connection with a divorce decree. Clauss ultimately withdrew as Church's attorney, turning over all of his files to Church and releasing his attorney's lien. In September 2003, Church filed for bankruptcy relief, scheduling an outstanding debt to Clauss of approximately $32,000. Clauss asserted that this debt was nondischargeable under Bankruptcy Code section 523(a)(2)(A), contending that Church had obtained the benefit of his legal services by falsely representing that—regardless of whether he filed a bankruptcy case—he would not discharge the debt to Clauss but would pay it in full.

Late-filed claims are not automatically disallowed under the Bankruptcy Code, and under Section 502(b)(9), such late-filed, general unsecured claims are not invalidated to the extent excess funds remain after payment of timely filed claims. As stated by the Bankruptcy Appellate Court for the Eighth Circuit Court of Appeals: "The net effect of the foregoing is to subordinate the payment of late unsecured nonpriority claims to the payment of nonpriority unsecured claims for which proofs were timely filed." "In re Hollingsworth," 331 B.R. 399 (8th Cir. BAP 2005).

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.

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.

In the Owens Corning case, the Third Circuit Court of Appeals reversed an Order of the Delaware District Court substantively consolidating Owens Corning, certain of its subsidiaries that had received a $2 billion unsecured loan, and other subsidiaries that had guaranteed repayment of the loan. In Re Owens Corning, No, 04-4080, 2005 WL 1939796 (3d. Cir. Aug. 15, 2005).

On August 12, 2005, the United Bankruptcy Court for the District of Delaware held in Cooper v. Tech Data, (In re Bridgeport Holdings, Inc.) that clear and unambiguous provisions in a disclosure statement and reorganization plan, which specify the category of causes of actions to be preserved and the effect of any recovery, are sufficient to preserve those causes of action for post-confirmation adjudication. Bankruptcy Code Section 1123(b)(3) does not require "specific and unequivocal" identification of all preference claimants.

On September 20, 2005, the Eleventh Circuit Court of Appeals held in FINOVA Capital Corp. v. Larson Pharmacy Inc., et al. (In re Optical Technologies, Inc.), 2005 WL 2276420 (11th Cir. 2005), that an order confirming a plan of reorganization acts as a judgment given preclusive effect, and a bankruptcy court may not later void parts of its confirmation order based on "second thoughts" about its jurisdiction. The bankruptcy court "is bound to enforce the terms of the Plan as written" once confirmed. This case serves as a warning to all creditors that their rights and claims—even with respect to non-debtors—may be affected by a reorganization plan. Every party receiving a plan and disclosure statement should therefore carefully review these documents to determine whether their rights and claims may be affected and, if necessary, object to the plan or appeal the confirmation order before their rights are deemed waived.

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.

In Dewsnup v. Timm, 502 U.S. 410 (1992), the US Supreme Court held that a debtor cannot avoid an undersecured lien under Bankruptcy Code Section 506(d), known as "stripping down" a lien. The Court did not consider, however, whether a debtor can avoid a wholly unsecured lien under Section 506(d), known as "stripping off" lien. The Delaware bankruptcy court recently considered the latter issue in In Re Pistritto, USBC Del., Case No. 03-10245 (April 19, 2005), and concluded that a Chapter 7 debtor cannot avoid a wholly unsecured consensual lien under Section 506(d).

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.

On August 4, 2005, the Supreme Court of California held that pre-dispute waivers of the right to a jury trial are unenforceable under California law. "Grafton Partners L.P. v. Superior Court." The court based its ruling on California statutory construction and constitutional law principles. It held that the relevant statute, Section 631(d)(2) of the California Code of Civil Procedure, does not provide for pre-litigation jury trial waivers. It also held that the California Constitution does not permit the right to a jury trial to be waived absent an explicit statutory authorization.

In July 2005, the Fifth Circuit Court of Appeals held in Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba, Inc.), 2005 WL 1581076 (5th Cir.), that a creditor's agreement to dismiss an involuntary bankruptcy petition in exchange for a debtor's payment of pre-existing debt—because it does not provide a "direct benefit" to the debtor—does not fall within the "contemporaneous exchange" exception to preference actions under 11 U.S.C. § 547(c)(1). The Fifth Circuit Court of Appeals decided this issue as a matter of first impression.

A secured lender that is a party to a written loan agreement—even one that expressly provides that it may not be amended or altered except in writing—may nonetheless be surprised to find itself bound by a loan officer's oral promises if the difference between the written loan agreement and the verbal promises is "drastic" and if the parties' conduct indicates that they considered the promises to have extinguished and replaced the lender's written loan agreement. See Fanucchi & Limi Farms v. United Agri Products, 2005 WL 1645694 (9th Cir. 2005).

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.

In a unanimous decision, the United States Supreme Court recently reversed the Eighth Circuit Court of Appeals and held that debtors can exempt IRAs from the bankruptcy estate under section 522 (d)(10)(E) of the Bankruptcy Code. This decision now settles a division among the Courts of Appeal concerning the exemption of IRAs in bankruptcy cases.