Thursday, October 02, 2014

September's Bankruptcy and Related Decisions in the Fifth Circuit

The Fifth Circuit had several bankruptcy-related decisions during September.   This month, it dealt with jury trials, mootness, subject matter jurisdiction,  "quasi-estoppel" and the difference between civil and criminal contempt.   Click on the style of the case to read the underlying opinion.

U.S. Bank, National Association v. Verizon Communications, Inc., et al, No. 13-10752 (5th Cir. 7/30/14, revised 9/2/14).    Idearc, Inc. was spun off from Verizon Communications in 2006.  In March 2009, it filed for Chapter 11.  The litigation trust created under its plan sued Verizon and two of its subsidiaries for fraudulent transfers in connection with the amount of debt allocated to Idearc under the spin-off.    The District Court denied the litigation trustee’s request for a jury trial and concluded that Idearc was solvent on the date of the spin-off.   The Fifth Circuit affirmed the take-nothing judgment.    The 53 page opinion has extensive discussions of the right to a jury trial.   Where a claim is essential to the restructuring of the debtor-creditor relationship, it is equitable and there is not a right to a jury trial.   The jury trial issue depends on the nature of the claim rather than the identity of the party pursuing it.   The Fifth Circuit disapproved of the  contrary conclusion in Crescent Resources Litigation Trust v. Duke Energy Corp., No. A-12-CA-009-SS, 2013 WL 1865450 (W.D. Tex. May 2, 2013).   While there is a lot of additional discussion in the case, the most interesting part is the discussion of the right to jury trial.

TMTProcurement Corporation v. Vantage Drilling Company (Matter of TMT ProcurementCorporation), No. 13-20622 (5th Cir. 9/3/14).     This case started with a state court action brought by Vantage Drilling Company against Hsin-Chi Su alleging fraud among other claims.    Vantage had issued 100 million of its shares to F3 Capital, an entity controlled by Su.    Meanwhile, 23 shipping companies controlled by Su filed Chapter 11.   These did not include either Su or F3 Capital.    When creditors sought to dismiss the shipping company bankruptcies, the Su offered to place 25 million of the Vantage shares into an escrow to ensure the debtors’ compliance with court orders.   The Bankruptcy Court granted the motion and the District Court withdrew the reference.   The District Court authorized additional shares to be pledged and then re-referred the matter back to the Bankruptcy Court.   The Bankruptcy Court entered orders for post-petition financing and cash collateral involving the disputed Vantage shares.  

The Debtors argued that the appeal was moot for failure to obtain a stay pending appeal.  The Fifth Circuit decided the mootness issue prior to deciding whether the courts below had subject matter jurisdiction.   The Fifth Circuit found that the appeal was not moot because the DIP lender had knowledge that there was an adverse claim to the shares being pledged and therefore could not claim good faith status.

The Fifth Circuit found that the Bankruptcy Court lacked jurisdiction over the shares themselves because they were not property themselves.    The Debtors tried to argue that they had acquired an interest in the shares by virtue of the fact that they were deposited into custodia legis during the bankruptcy.   The Fifth Circuit held that third party collateral was not property of the estate even if it was pledged to secure DIP financing.    The Court found that the lower courts could not create in rem jurisdiction over the shares merely by exercising jurisdiction over them.

Finally, the Fifth Circuit found that the lower courts did not have subject matter jurisdiction to adjudicate Vantage’s claims to the Vantage shares.   Vantage was not a creditor of the Debtors and the shares were not property of the estate.   The outcome of the dispute could not have any conceivable impact on the estate.   Therefore there was not even related-to jurisdiction. 
This case is useful as an example of how convoluted the facts in a bankruptcy appeal can get.  It also has useful discussions of mootness and subject matter jurisdiction.

Highway82/Fannin Joint Venture v. Capital One Bank (Matter of Highway 82/Fannin JointVenture), No. 13-41146 (5th Cir. 9/9/14)(unpublished).   A joint venture purchased property that was subject to liens granted by the seller to Capital One Bank.    Although the JV made its payments to the seller, the seller did not pay the bank which posted for foreclosure.    The JV filed bankruptcy and brought a declaratory judgment action against Capital One based on “quasi-estoppel,” which is a state law doctrine.    The Bankruptcy Court dismissed the claim for failure to state a cause of action because Capital One had not taken inconsistent positions with regard to its cross-collateralization clause with the seller.   Specifically, Capitol One did not take an inconsistent position when it refused to allow the JV to pay off the seller’s debt. 

Janveyv. Brown, No. 13-10266 (5th Cir. 9/11/14).   This is not a bankruptcy decision, but deals with claims under the Texas Uniform Fraudulent Transfer Act arising from the Allen Stanford Ponzi scheme.   The Stanford Receiver sought to recover so-called fictitious profits from investors who received more than the amount of their investments back.    The District Court granted partial summary judgment and the Fifth Circuit authorized an interlocutory appeal.    The Court applied the Texas Uniform Fraudulent Transfer Act and rejected a number of defenses asserted by the defendants.    The Fifth Circuit affirmed the District Court. 

In re Glay H. Collier, No. 14-30887 (5th Cir. 9/19/14)(unpublished).     Don’t let the “In re” designation fool you.   This was not a bankruptcy appeal.   Rather, it was a mandamus action brought by a bankruptcy attorney who was held in contempt and sentenced to 48 hours of confinement.   Mr. Collier was a consumer bankruptcy lawyer who advertised “no money down” bankruptcy cases.   A client sued him in U.S. District Court for violating the automatic stay and the discharge.   The District Court found that he had violated the discharge and ordered him to take down all “no money down” advertisements within seven days.   Nine days later, the Court entered a show cause order threatening contempt for failure to comply with the order.   By the date of the hearing, the attorney had stopped all TV advertisements and had successfully canceled all but one internet ad (and the process for canceling that one was in process).   Nevertheless, the Court held Collier in contempt and sentenced him to 48 hours confinement.   The Fifth Circuit granted the mandamus on the basis that the order was for criminal contempt in that it was intended to punish rather than coerce compliance.   Because the Court did not afford Mr. Collier the procedural protections necessary for a criminal contempt hearing, the order was improper.   This case has two take-aways.   The first is that orders from federal courts should be taken seriously.   The second is that it is helpful to know the difference between civil and criminal contempt.

No comments: