Fifth Circuit Report: 2nd Quarter 2018

Franchise Services of North America v. United States Trustee (In re Franchise Services of North America), 891 F.3d 198 (5th Cir. 5/22/18)

This is easily the most important case of the quarter.   It involves whether a debtor may circumvent normal corporate governance provisions to file a voluntary petition.   In this case, the answer was no.

The Debtor purchased Advantage Rent-A-Car from Hertz.   The Debtor engaged an investment bank to help with the transaction.   The investment bank invested $15 million in the Debtor and received preferred stock.  The Debtor re-incorporated in Delaware and included a provision in its charter that it could not engage in a "liquidation event" without the consent of the preferred shares.  The Debtor also agreed to pay the investment bank $3 million.

The Debtor filed Chapter 11 without seeking the approval of the preferred shareholder.   The Debtor's theory was that this arrangement was similar to a "golden share" provision whereby a creditor would receive a blocking position as part of its loan transaction.   The preferred shareholder moved to dismiss.    The Bankruptcy Court granted the Motion to Dismiss but authorized a direct appeal to the Fifth Circuit.

The Fifth Circuit declined to answer the question as to whether "golden share" provisions were against public policy because the arrangement in this case was not a "golden share" transaction.  Instead, the investment bank invested $15 million into the Debtor and received preferred shares.   While there were fees outstanding which made it a creditor, those fees were separate and apart from the preferred share transaction.  As a result, the Fifth Circuit held that the Debtor could not circumvent its corporate documents and file a voluntary bankruptcy petition without the approval of the preferred shareholder.



Century Surety Company v. Seidel, Trustee, 2018 U.S. App. LEXIS 17252  (5th Cir. 6/25/18)

This was an insurance coverage dispute which arose in the context of a bankruptcy.   The owner of a restaurant gave alcohol and a date rape drug to an 18 year old girl.  He subsequently sexually assaulted her off-premises.    She sued the restaurant, among others, for providing her with alcohol.   The restaurant filed for chapter 11 and confirmed a plan creating a creditors' trust.   After a verdict against the restaurant, the plaintiff intervened in an insurance coverage declaratory judgment action.  The District Court granted summary judgment because the policy had a criminal acts exclusion.  Providing alcohol to a minor was a criminal act and therefore not covered.

Deeprock Venture Partners, LP v. Beach (Matter of Beach), 2018 U.S. App. LEXIS 13029 (5th Cir. 5/16/18)(unpublished)

A bankruptcy trustee and the largest unsecured creditor in the estate sued the debtor and his son for fraudulent transfers.  Following mediation, the trustee settled with the defendants.  Under the settlement, the estate would receive $1,015,000 and the debtor would waive his discharge.  The unsecured creditor objected but the bankruptcy court approved the settlement.    The Fifth Circuit, after considering the probability of success in litigating the claims, the complexity and expense of litigation and  other factors bearing on the wisdom of the settlement, found that the Bankruptcy Court did not abuse its discretion in approving the settlement.



Fallon Family, LP v. Goodrich Petroleum Corporation (Matter of Goodrich Petroleum Corporation), 2018 US. App. LEXIS 17661 (5th Cir. 6/27/18)

The Fallon Family and Goodrich Petroleum had a dispute over the validity of a mineral lease.  The parties settled and recorded a ratification of lease.   The ratification recited that good and sufficient consideration had been paid for the settlement.   Goodrich filed bankruptcy and the Fallon Family attempted to dissolve the settlement based on non-payment.   The Debtor successfully invoked its right to be considered as a good faith purchaser under 11 U.S.C. Sec. 544.   Because the recorded ratification stated that good and sufficient consideration had been paid, the ratification could not be undone based on non-payment.


Furlough v. Cage (Matter of Technicool Systems Incorporated), 2018 U.S. App. LEXIS 16852 (5th Cir. 6/20/18)


The first two paragraphs of this opinion written by newly-minted Fifth Circuit Judge Don Willett say all that needs to be said about this case:

In bankruptcy litigation, the mishmash of multiple parties and multiple claims can render things labyrinthine, to say the least. To dissuade umpteen appeals raising umpteen issues, courts impose a stringent-yet-prudent standing requirement: Only those directly, adversely, and financially impacted by a bankruptcy order may appeal it.

This appeal is from a bankruptcy court order approving a trustee's application to employ special counsel. Appellant Robert Furlough, owner of the Debtor, Technicool Systems, objects to Trustee Lowell Cage's application to employ Stacy & Baker, P.C. (SBPC), alleging that SBPC holds an interest "adverse to the estate" under 11 U.S.C. § 327(a). Both the bankruptcy court and the district court held that Furlough lacked standing to object. We agree. Furlough's indirect interest in the order fails to meet the strict requirements for bankruptcy standing. Because the order does not reach his wallet, he cannot reach this court.

Judge Willett's statement that "Because the order does not reach his wallet, he cannot reach this court" is one of the most concise definitions of standing that I have seen.

Valentine v. JP Morgan Chase Bank (Mater of Valentine), 2018 U.S. App. LEXIS 15957 (5th Cir. 6/14/18)(unpublished)

The Bankruptcy Court entered an order lifting the automatic stay.  The debtor filed a notice of appeal and an amended notice of appeal.   The debtor did not pay the filing fee or order the transcript.  The district court gave the debtor a notice of delinquency.   The debtor filed a motion to proceed in forma pauperis with a notarized affidavit.   The district court informed the debtor that she would need to use the prescribed form for an IFP motion or her appeal could be dismissed.   The debtor did not do so.  The case was dismissed.   The Fifth Circuit affirmed the dismissal.


OHA Invs. Corp. v. Schlumberger Tech. Corp. (In re ATP Oil & Gas Corp.), 888 F.3d 122 (5th Cir. 4/17/18)

This case dealt with liens under the Louisiana Oil Well Lien Act.    The Court found that a safe harbor provision in the Act extinguished the liens.   Specifically, the Court found that the Louisiana statute provided that the liens did not apply to a party that purchased an overriding royalty interest.   While the court took fifteen pages to resolve the statutory question, it ultimately relied on the principle that  "If the statutory text is unambiguous, our inquiry begins and ends with the text."