At the ABI Winter Leadership Conference, I attended a diversity and inclusion workshop put on by Elton Ndoma-Ogar of Alix Partners and Peter S. Salib of Perkins Coie, LLP. I wasn't sure that writing about an interactive workshop would be useful, but a friend encouraged me to try. At the end of the article, I have included a link to their materials, which you can access if you are an ABI member. If you are not an ABI member, contact me and I can send them to you.
Sometimes debtors get buyer's regret after filing a bankruptcy petition. However, once a bankruptcy petition is filed, it remains on the debtor's credit for ten years. One debtor sought to throw his attorney under the bus by claiming that the bankruptcy filing had never been authorized. Fortunately the debtor's attorney had retained his client's wet signatures and text messages which protected him from the Court's Order to Show Cause. In re Wilson, 2022 Bankr. LEXIS 3378 (Bankr. D. N.J. 11/30/22).
Distinguishing a precedent from his own district and disagreeing with the Fourth Circuit, Judge Craig Gargotta has ruled that non-dischargeability only applies to human Subchapter V debtors. Adv. No. 22-5052, Avion Funding, LLC v. GFS Industries, LLC (Bankr. W.D. Tex. 11/10/2022). The decision can be found here. The decision was especially sweet for me personally because the case it distinguished, New Venture Partnership v. JRB Consolidated, Inc. (In re JRB Consolidated, Inc.), 188 B.R. 373, 374 (Bankr. W.D. Tex. 1995), was one that I lost and always thought was wrongly decided.
Eric Eyre and Patrick McGinley from the West Virginia University College of Law, told the story of how a small town journalist discovered the cause of the opioid epidemic in Appalachia. Along the way, Mr. Eyre developed Parkinson's disease, won the Pulitzer Prize for his book and had his newspaper file for Chapter 11 relief. Prof. McGinley represented the newspaper pro bono in making open records act requests which were repeatedly rebuffed.
One of the big themes appearing in this year's National Conference of Bankruptcy Judges was the effect of mass tort cases on the bankruptcy system. The panel Mass Torts in Bankruptcy: Two Steps Forward or Two Steps Back focused on third party releases. The speakers were Hon. Craig Goldblatt (Bankr. D. Del.), Karen Cordry from the National Association of Attorneys' General, Prof. Douglas Baird and Sander Esserman.
Third party releases have been in the news a lot lately. In Purdue Pharma and Mahwah Bergen Retail Group, District Courts struck down overly broad provisions, while they were allowed in the Mallinckrodt PLC case.
Besides sweeping away the competition in ballroom dancing competitions and having been a law school dean at a young age, Prof. Nancy Rapoport is known as the teacher who can make ethics interesting. She gave the keynote address for the Commercial Law League luncheon titled Brave New World--Ethics Issues That We Never Knew We Had.
Judge Catherine McEwen (Bankr. M.D. Fla.) and panelists David Mawhinney (Bowditch, Framingham, Mass.), Amy Denton Mayer (Stichter Riedel Blain Postler, PA, Tampa, Fl) and Kirk Burkley (Bernstein-Burkley, P.C., Pittsburgh, PA) donned their wizard's hats to present 5 Secrets to a Magical Sub-V. Both David and Amy serve as Subchapter V trustees and represent SubV debtors, while Kirk offered the creditors' viewpoint. Their program covered five areas of Subchapter V law and practice.
When the nation's bankruptcy judges, academics and practitioners get together for the National Conference of Bankruptcy Judges, there are certain topics that tend to dominate. This year mass torts were a through line in many of the presentations. A presentation on pushing the boundaries of chapter 11 suggested that mass tort cases did not have the same urgency as melting ice cube operating businesses. A panel on third party releases noted the difference between the use of third party releases to protect guarantors as opposed to those developed in mass tort cases. ABI Editor at Large Bill Rochelle has nightmares about Congress seeing abuses in mass tort cases and passing legislation without the input of bankruptcy experts. His panel also delved deeply into the Texas Two-Step. There was even a presentation by a Pulitzer Award winning journalist and the law professor who helped him crack the source of the opioid epidemic. As I write up my articles from this year's conference, there will be many references to issues raised by mass tort cases.
Bankruptcy opinions tend to rely on two major tools for interpreting the Bankruptcy Code: the statutory text and pre-Bankruptcy Code practice. These two methods came into conflict in the Fifth Circuit's recent opinion in Ultra Petroleum Corp. v. Ad Hoc Committee (In re Ultra Petroleum), No. 21-20008 (5th Cir. 10/14/2022), which can be found here. The majority relied on pre-Code practice to allow creditors of a solvent debtor to recover their full contractual interest.
The Fifth Circuit is largely resistant to third party release provisions. The Circuit will enforce a clearly defined third-party release that is not objected to, Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987), but will not sustain such a provision if a timely objection is filed, Ad Hoc Group of Vitro Noteholders v. Vitro SAB De CV (In re Vitro SAB De CV), 701 F.3d 1031 (5th Cir. 2012). It is also resistant to bar orders, Feld v. Zale Corp., (In re Zale Corp). 62 F.3d 746 (5th Cir. 1995) and most exculpation clauses, Bank of New York Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009). (If you need more background on these different types of third-party releases, I would be happy to provide you with my paper from the last Western District Bench-Bar Conference which discusses these issues at length).
The Court recently rebuffed an attempt to distinguish its jurisprudence on exculpation clauses but offered other limited relief. The case is Nexpoint Advisors, L.P. v. Highland Capital Mgmt., L.P. (In re Highland CapitalMgmt., L.P.), 2022 U.S. App. LEXIS 25107 (5th Cir. 9/7/22).
What Happened
This is the story of a billion-dollar investment fund and its break-up
with one of its founders. Highland Capital Management, LP was a Dallas-based
investment fund co-founded by James Dondero. In 2019, Highland filed bankruptcy
in the U.S. Bankruptcy Court for the District of Delaware. The case was
transferred to the Northern District of Texas.
The Fifth Circuit noted that the case “did not proceed under the
governance of a traditional chapter 11 trustee.” Of course, having a chapter 11
trustee is the exception rather than the rule. What the court meant was that
the parties fashioned a bespoke remedy for control of the Debtor. Dondero stepped down as control person of the
Debtor’s general partner and was replaced by three independent directors approved
by the court, including a former bankruptcy judge. The Court barred any claims
against the independent directors without prior court approval. The Court
subsequently appointed a Chief Restructuring Officer. Thus, the parties obtained a de facto trustee of their own choosing.
Dondero proposed several plans which were not confirmed. The Committee
and the Independent Directors negotiated their own plan. When Dondero couldn’t
get his plans confirmed, “he and other creditors began to frustrate the
proceedings by objecting to settlements, appealing orders, seeking writs of mandamus,
interfering with Highland Capital's management, threatening employees, and
canceling trades between Highland Capital and its clients.” Eventually the
Bankruptcy Court held him in civil contempt and fined him $100,000. Dondero and the U.S. Trustee objected to the
plan’s exculpation provisions.
The Bankruptcy Court confirmed the Plan and appeals followed. The
Fifth Circuit generally affirmed the plan but pared back the exculpation
clauses.
Exculpation
Exculpation clauses are a subspecies of third-party releases. They
preclude any party from suing various parties associated with the plan except
for gross negligence or willful misconduct. Their practical effect is to bar claims
for ordinary negligence in connection with the plan process.
Exculpation clauses have both a proper use and an improper one. The
improper use is to shield professionals from their own negligence. The proper
use is to encourage parties to work together to confirm consensual plans safe
in the knowledge that they won’t get sued if things don’t work out. A third
reason to include an exculpation clause is that it’s part of an attorneys’
boilerplate and no particular thought went into including the clause.
The plan in this case had two provisions which protected the plan
participants: the exculpation clause and
the gatekeeper clause. The parties protected included the Debtor, its
employees, the Chief Restructuring Officer, the independent directors, the
Unsecured Creditors’ Committee, the professionals and the "Related Parties.”
According to the Fifth Circuit:
The Plan exculpates the protected parties from claims based on any conduct "in connection with or arising out of" (1) the filing and administration of the case, (2) the negotiation and solicitation of votes preceding the Plan, (3) the consummation, implementation, and funding of the Plan, (4) the offer, issuance, and distribution of securities under the Plan before or after the filing of the bankruptcy, and (5) any related negotiations, transactions, and documentation. But it excludes "acts or omissions that constitute bad faith, fraud, gross negligence, criminal misconduct, or willful misconduct" and actions by Strand and its employees predating the appointment of the Independent Directors.
The Fifth Circuit also explained the gatekeeper clause as follows:
Under the Plan, bankruptcy participants are enjoined "from taking any actions to interfere with the implementation or consummation of the Plan" or filing any claim related to the Plan or proceeding. Should a party seek to bring a claim against any of the protected parties, it must go to the bankruptcy court to "first determin[e], after notice and a hearing, that such claim or cause of action represents a colorable claim of any kind." Only then may the bankruptcy court "specifically authoriz[e]" the party to bring the claim. The Plan reserves for the bankruptcy court the "sole and exclusive jurisdiction to determine whether a claim or cause of action is colorable" and then to adjudicate the claim if the court has jurisdiction over the merits.
The Court’s Ruling
The Court upheld the exculpation clause as to the Debtor, the
Unsecured Creditors’ Committee and the independent directors. Under Pacific
Lumber, a release may only be approved if provided elsewhere in the Code. The Debtor
receives a release because it is discharged under the Plan. The Court in
Pacific Lumber found that the Code provisions relating to members of the Unsecured
Creditors’ Committee allowed their exculpation.
The Court found that the independent directors were entitled to
exculpation because they were acting in the role of a trustee. The Court stated
that:
That leaves one remaining question: whether the bankruptcy court can exculpate the Independent Directors under Pacific Lumber. We answer in the affirmative. As the bankruptcy court's governance order clarified, nontraditional as it may be, the Independent Directors were appointed to act together as the bankruptcy trustee for Highland Capital. Like a debtor-in-possession, the Independent Directors are entitled to all the rights and powers of a trustee. It follows that the Independent Directors are entitled to the limited qualified immunity for any actions short of gross negligence. Under this unique governance structure, the bankruptcy court legally exculpated the Independent Directors. (cleaned up).
Nevertheless, the Court found that outside of these three groups,
exculpation was improper and had to be reversed. This applied primarily to the
bankruptcy professionals, the CRO, the Debtor’s employees and the “Related
Parties.”
However, the Court did not leave then un-exculpated parties
without any protection. It upheld the gatekeeper provisions. The Court analogized
the gatekeeper provisions to the Barton Doctrine which protects Trustees from
being sued without prior court permission. The Court stated:
Courts have long recognized bankruptcy courts can perform a gatekeeping function. Under the "Barton doctrine," the bankruptcy court may require a party to "obtain leave of the bankruptcy court before initiating an action in district court when the action is against the trustee or other bankruptcy-court-appointed officer, for acts done in the actor's official capacity." In Villegas, we held "that a party must continue to file with the relevant bankruptcy court for permission to proceed with a claim against the trustee." Relevant here, we left to the bankruptcy court, faced with pre-approval of a claim, to determine whether it had subject matter jurisdiction over that claim in the first instance. In other words, we need not evaluate whether the bankruptcy court would have jurisdiction under every conceivable claim falling under the widest interpretation of the gatekeeper provision. We leave that to the bankruptcy court in the first instance. (cleaned up).
What Does It Mean?
The Fifth Circuit remains resistant to broad exercises of power untethered
to the Code. However, it is willing to
consider pragmatic expansions of existing precedent. Here, the problem was that
one party had proven himself to be unduly litigious. This meant that the plan
proponents and related parties had a legitimate concern that they might be sued
over the plan in a forum unfamiliar with the bankruptcy case. While the Barton
Doctrine is an equitable doctrine specifically intended to protect trustees
from being sued without permission, the Fifth Circuit was willing to endorse
its extension to a broad class of plan-related parties. This partial measure
protects the parties from frivolous suits without granting blanket releases.
This suggests that the Fifth Circuit would also consider other
partial measures that stop short of outright releases. In particular, it seems
likely that the Fifth Circuit would allow temporary injunctions against
collection of debts from insiders during the period of plan performance as was
done by Judge Barbara Houser in In re Seatco, 257 B.R. 469 (Bankr. N.D.
Tex. 2001).
Bankruptcy trustees often perform a thankless job, scrubbing through thousands of no-asset files looking for that one case that will earn them a sizeable commission. While Chapter 7 trustees are paid a commission on funds distributed to creditors, compensation for Chapter 11 trustees more closely resembles an hourly fee engagement. A recent case from Judge Tony Davis of the Western District of Texas illustrates how the two forms of compensation may dramatically differ. In re WC Met Center, LLC, Case No. 21-10698 (Bankr. W.D. Tex. 7/15/22). The opinion can be found here.
Faced with pending trials to establish liability for defamation, another Alex Jones entity has decided to test the waters of bankruptcy. On Friday July 29, 2022, Free Speech Systems, LLC, the company which actually produces the Alex Jones Show and his other programming, filed a petition under Subchapter V of Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Victoria Division. Case No. 22-60043. In April, three minor entities within the Jones organization filed bankruptcy in an attempt to channel liability away from Jones and Free Speech Solutions. Those cases met substantial resistance and were voluntarily dismissed.
When U.S. Sen Elizabeth Warren continued to speak at the confirmation hearing for AG Jeff Sessions after being cautioned by Majority Leader Mitch McConnell, it gave rise to the feminist slogan, "Nevertheless, she persisted." A new opinion from the Fifth Circuit adapts that slogan to the Federal Energy Regulatory Commission's attempts to prevent debtors from rejecting regulatory energy contracts. Judge Jerry Smith's opinion in Case No. 21-60017, Gulfport Energy Corporation v. Federal Energy Regulatory Commission (5th Cir. 7/19/22) points out that the Fifth Circuit and others have held that debtors "may 'reject' regulated energy contracts even if (FERC) would not like them to." Noting that FERC continued to press the issue, Judge Smith noted that "Nevertheless, FERC persisted." While many believe that Sen. Warren got the better of Majority Leader McConnell in their exchange, the Bankruptcy Code came out on top in the Fifth Circuit's new decision.
A short order crossed my desk the other day in In re Preferred Ready-Mix, Case No. 21-33369 (Bankr. S.D. Tex. 6/6/22), Dkt. #207. A creditor filed an application for administrative expense. No one objected. However, the Court reduced the fees requested by $73.50 to reflect time spent electronically filing documents. While this little case involves much smaller dollars than the Supreme Court opinion in Siegel v. Fitzgerald, No. 21-411 (U.S. 6/6/22), which came out the same day, it will affect many more cases.
A Little Background
When it comes to professional compensation, there are three types of services. First, there are professional services, which require the skill and knowledge of an attorney and, are compensable at rates which can exceed over $1,000 per hour in some cases. Then there are para-professional tasks, where are those which require skill and knowledge, but do not require a licensed attorney and are compensated at lower rates. Finally, there are clerical tasks, which do not require specialized knowledge and are not compensable because they are deemed to be part of a firm's overhead.
What Judge Norman Ruled
In his Judge Norman stated:
The Court notes that no objection to the application has been filed. However, the Court has an independent duty to review fee applications, notwithstanding the absence of objections by the United States Trustee, creditors, or any other interested party. The Supreme Court has held that the lodestar method of fee calculation is the method by which federal courts should determine reasonable attorney fees under federal statutes which provide for such fees. The lodestar is computed by multiplying the number of hours reasonably expended by the prevailing hourly rate in the community for similar work. The first step in the lodestar method is to evaluate the time entries submitted by the Applicant and determine which are allowable. This step involves considering whether the services which the Applicant billed were reasonable or necessary. The services performed must be legal in nature, rather than clerical. This application contains instances of the applicant’s billing for work which is routinely performed by secretaries and should not be billed to the client. Case law suggests that “ministerial tasks” (typing, file organization, document preparation, searching or filing documents on PACER, etc.) performed by a professional or paraprofessional should not be allowed as a separate charge because it is part of the office overhead, which should already be built into the counsel’s hourly rate. This Court considers ECF filing to be clerical work, and therefore, should not be allowed as a separate charge. The instant fee application contains several instances where counsel billed for filing ECF documents. Therefore, those entries containing secretarial tasks will be struck.
What are Clerical Tasks?
According to Judge Norman, filing documents on ECF is a secretarial task. This suggests that filing documents on CM/ECF is a routine task to be performed by a low level employee and certainly does not require the assistance of an attorney. When electronic filing first came out, there was a debate over whether it would ever be permissible for an attorney to give his staff access to his e-filing credentials. The logic was that the orders adopting e-filing expressly provided that inputting an attorneys' login and password constituted his signature upon the document. Since an attorney could not ethically allow his secretary to sign his name to a pleading, it was reasoned that an attorney could not authorize his secretary to file a pleading or motion on his behalf. However, when the courts began offering e-filing courses aimed at attorney staff, it was at least an implicit acknowledgement that the courts did not treat the use of e-filing credentials as being the same as a signature.
The consensus is now that e-filing in bankruptcy by attorney staff is ethical, but is it clerical? Judge Norman gave several examples of other tasks that are considered clerical: typing, file organization, document preparation and searching or filing documents on PACER. As someone who supervises clerical staff, I would add making copies, mailing documents and putting documents in the file to the list.
What distinguishes this list from compensable para-professional tasks? I think it is a matter of training and skill. While it does require training and skill to type a document in Microsoft Word or to print out postage on stamps.com, the skill required is not inherently legal. In other words, these are skills that anyone working in an office would be expected to know or learn. On the other hand, para-professionals may charge for tasks that require skills and knowledge unique to the legal field, and in particular, those unique to bankruptcy.
I would argue that e-filing documents requires sufficient skill and knowledge that a para-professional may charge for those services. In order to file a document electronically, a user must be able to know how the e-filing menu interacts with the local rules of the particular court. An example involving two first-day pleadings may help. In an operating chapter 11 case, it is common to file a motion for use of cash collateral and a motion to pay employee wages as first day motions. In the Southern District of Texas, any pleading requiring expedited consideration must be labelled as an emergency motion, be filed using the emergency motion event code and must contain special language as part of the negative notice. In the Western District of Texas, there is a specific event code for motions for use of cash collateral but not for motions to pay employee wages. Motions to pay employee wages must be uploaded as a generic document. In the Southern District proposed orders are attached to the associated motion but are not uploaded. In the Western District of Texas, proposed orders are both attached to the pleading and are uploaded. These are not distinctions that a mere secretary, someone who could just as easily work in a law office or a dentist's office, would know.
This was brought home to me when I filed a Chapter 11 case in the Southern District this week. I used to have a legal assistant who was skilled in e-filing. However, my current assistant has not received this training yet. As a result, I had to do the e-filing myself. Because I have not filed many Chapter 11 cases in the Southern District (yet), it took me some time to figure out how to formulate the pleadings and how to e-file them. It took me an hour to upload the case and three first day motions (one of which was rejected). For me, this was a throw-back to the days when only attorneys were allowed to e-file. (Since my case was in Judge Norman's court, I billed the time but no-charged it).
Judge Stacey C.G. Jernigan is best known for the writing she publishes from her office at 1100 Commerce Street. I was able to locate 270 of her opinions on LEXIS. Some of my favorites are In re Tinsley, 2010 Bankr. LEXIS 4156 (Bankr. N.D. Tex. 20100 about a cowboy trying to keep the ranch he inherited from his father and In re Pearson, 2020 Bankr. LEXIS 972 (Bankr. N.D. Tex. 2020) in which Judge Jernigan cited an article that I wrote. Lee v. Weatherford (In re Weatherford), 2022 Bankr. LEXIS 144 (Bankr. N.D. Tex. 2020) is an opinion about whether a debt arising from a bar brawl was nondischargeable and is just the type of case a Texas judge might encounter. However, Judge Jernigan is also a novelist. This summer I have enjoyed reading He Watches All My Paths (2019) and Hedging Death (2022).
The Fifth Circuit has issued a new decision restricting application of the Rooker-Feldman doctrine and repudiating a prior precedent. Miller v. Dunn, Case No. 20-11054 (5th Cir. 6/2/22), which can be found here. Under the new rule, which brings the Fifth Circuit in line with other courts, Rooker-Feldman does not apply to a state court decision which is the subject of a pending appeal.
Rooker-Feldman is one of several doctrines which enforces comity between state and federal courts. The Rooker-Feldman doctrine, which is based on Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) means that a federal court may not review and reverse a determination of a state court. Rooker-Feldman applies to "cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments." Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005).
While it is not pleasant to contemplate, sometimes a debtor passes away before his case is completed. This raises the question of whether the case can go to completion and how to complete the financial management class. Judge Michael Parker addressed this issue in one of his first published opinions as a judge. (This is actually his third opinion, but the first one that I had the time to write about). In re Ibarra, Case No. 19-52413 (Bankr. W.D. Tex. 6/1/2022), which can be found here.
What Happened
The Debtor filed Chapter 13 and confirmed a plan in 2019. The Debtor passed away on October 9, 2021 prior to completing payments under the Plan and before completing a personal financial management course. The debtor's probate estate representative and daughter made the remaining payments under the plan and moved for an order waiving the debtor's obligation to complete a financial management course. As the Judge succinctly stated, "Death prevents the Debtor from completing a financial management course." Opinion, p. 1.
No attorney wants to see his name mentioned prominently in an opinion. However, if it has to happen, it's better if its something like this: "Chance McGhee is an experienced and competent attorney that has practiced consumer bankruptcy law for many years." Adv. No. 21-5036; Wilson v. Silva (In re Silva) (Bankr. W.D. Tex. 5/19/2022). The opinion can be found here. As the opinion lays out, Mr. McGhee demonstrated how an experienced and competent attorney should handle a potentially difficult case.
While Alex Jones has created a lot of controversy through his decision to play three of his entities into voluntary bankruptcy, this was not his first brush with bankruptcy. In 2020, his ex-wife, Kelly R. Jones, initiated an involuntary bankruptcy petition against him. In re Jones, Case No. 20-10118 (Bankr. W. D. Texas). Ms. Jones filed the petition pro se, meaning that she did not have a lawyer. The case was dismissed after the bankruptcy court determined that Ms. Jones was not an unsecured creditor. Only unsecured creditors are entitled to bring involuntary bankruptcy petitions. The Bankruptcy Court determined that Ms. Jones's claim of $786,861 was secured by property worth at least $1,250,000. (Dkt. #92). Although Mr. Jones could have sought to recover his legal fees incurred in defending against the petition, he did not.
When Alex Jones filed bankruptcy for three of his entities holding intellectual property and contract rights, it wasn't immediately clear how these filings would help him resolve his larger legal problems. Now it has unfolded that Mr. Jones is using the bankruptcy filings as a vehicle for removing state court actions against him to federal court. On April 18, 2022, attorneys for the Debtors removed eight state court lawsuits to U.S. Bankruptcy Court: five in Texas and three in Connecticut.
In a widely misunderstood move, Alex Jones and his legal team have put three of his entities that own intellectual property assets into SubChapter V of Chapter 11. The move, if successful, will protect the domain name, infowars.com, and will delay entry of judgments against Jones personally. The move involves apparent forum shopping and clever use of SubChapter V. The cases are jointly administered under Case. No. 22-60020 in the Southern District of Texas, Victoria Division.
Every day bankruptcy clerks sent out millions of required notifications to creditors and parties in interest. Creditors can bypass the paper notification by designating an email address for service pursuant to Fed.R.Bankr.P. 9036. Now the Bankruptcy Court for the Southern District of Texas is seeking to compel high volume creditors to sign up for electronic noticing. On March 17, 2022, Judge Marvin Isgur instituted 328 orders requiring creditors to appear for a status conference through counsel to explain why they have not signed up for electronic noticing.
The Debtors argue that the Claimants’ and their counsel’s failure to act diligently throughout the bankruptcy proceeding was so severe that it undermines their argument that they acted in good faith. We agree. To be sure, we have not held authoritatively that lack of diligence constitutes bad faith per se. Nor do we do so now. But other courts have held, in persuasive fashion, that lack of diligence can at least cast doubt on a claim of good faith.
Granted, the majority of circuits that have addressed the issue permit class proofs of claim. (citation omitted). However, this court has not spoken definitively on the issue. Yet, since 2016, the Claimants have ostensibly proceeded under the assumption that a class proof of claim would ultimately be available to them. Such is not settled law in this Circuit, and the Claimants’ reliance on unsettled law casts serious doubt on their claim of good faith.
Second, even if the Claimants had moved the bankruptcy court to apply Rule 23 to their purported class proof of claim, they had a second hurdle to overcome. Namely, the bankruptcy court would still have had to certify the class proof of claim. Only once the bankruptcy court determines, in its discretion, that Rule 23 applies does it then evaluate whether the proposed class meets Rule 23’s requirements.Opinion, pp. 20-21. There are many things that can go wrong when individual creditors rely on a putative class rep to file a class claim. First, the jurisdiction might conclude that there is no authority for class claims. The class rep might fail to seek class certification in the bankruptcy court. If class certification is sought and denied, it would likely be after the bar date.
A trustee who sought "turnover" of amounts owed under a construction contract had an arbitration clause in that contract enforced against him. The Bankruptcy Court found that the bankruptcy exception to enforcement of an arbitration clause was narrow and did not apply to a construction dispute. Satija v. Kella (In re Davila General Contractors, LLC), Adv. No. 21-1047 (Bankr. W.D. Tex. 3/9/22). The order can be found on CM/ECF at Docket #23.
One of the benefits of holding property or doing business through a limited liability company is that "entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor's membership interest." Tex.Bus.Org. Code Sec. 101.112(d). But just how exclusive is that right? A recent Fifth Circuit opinion holds that a court may impose additional conditions on a judgment debtor's LLC in the name of carrying out the court's orders. Thomas v. Hughes, Case No. 20-50827 (5th Cir. 3/3/22), a copy of which can be found here.
Supreme Court nominee Judge Ketanji Brown Jackson has played a variety of roles in her legal career. She has been a public defender, an attorney in private practice, a member of the U.S. Sentencing Commission, a U.S. District Judge and a Court of Appeals Judge. Unfortunately, these jobs have given her scant exposure to bankruptcy law. I will explore all three of her bankruptcy related opinions (out of a total of about 600) as well as a handful of her other jurisprudence.
In a case involving multiple parties and proceedings, the Fifth Circuit has affirmed lower court rulings which prohibited one non-debtor from suing a second non-debtor and awarded sanctions against a party that told a state court to disregard the Bankruptcy Court's orders. In the Matter of PFO Global, Incorporated, Case No. 20-10885 (5th Cir. 2/9/22), which can be found here. While the result may sound extreme, it appears to be an unintended consequence of an agreed order entered years earlier.
While bankruptcy subject matter jurisdiction is broad, sometimes an order can just go too far as shown by the recent opinion from the U.S. District Court for the Eastern District of Virginia in Patterson v. Mahway Bergen Retail Group, Inc., 2022 U.S. Dist. LEXIS 7431 (E.D. Va. 2022).
The Three Types of Jurisdiction
Bankruptcy practitioners can usually recite the three types of bankruptcy jurisdiction in their sleep: arising in, arising under and related to. Of these, related to is the broadest. In the Fifth Circuit, related to jurisdiction is present if the matter being addressed could have a conceivable effect on the debtor or the bankruptcy estate. Thus, if the debtor owned a store at the bottom of a hill and a property owner had allowed a boulder at the top of the hill to work precariously loose, an adversary proceeding to force the other property owner to secure the boulder would have a conceivable effect on the bankruptcy estate and related to jurisdiction would be present. Why is this? If the boulder rolled down the hill, it could smash the debtor's store. On a more mundane note, there is related to jurisdiction to collect accounts receivable owed to the debtor because collecting money would make it easier to reorganize.
In the past, there were many arguments about whether bankruptcy courts had jurisdiction to grant third-party releases. The Supreme Court put this controversy to rest in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010). In that case, the Supreme Court drew a distinction between having statutory authority to take an action and having jurisdiction to do so. The Bankruptcy Code does not allow a court to grant a hardship discharge on a student loan without filing an adversary proceeding. However, there is clearly jurisdiction to do so because granting the discharge would have a conceivable effect on the debtor. What this means is that if a plan contains a provision which should not be approved, the parties have to challenge it directly as opposed to coming back years later and saying that there was no jurisdiction to approve the provision.
A new opinion from the Fifth Circuit shows multiple mishaps in connection with a bankruptcy-related auction. However, its most important holding has to do with authenticating evidence. The bottom line is that a trial court decision limiting a defaulting bidder's damages based on a webpage found on the Wayback Machine was reversed. Weinhoffer v. Davie Shoring, Inc., Case No. 20-30568 (5th Cir. 1/20/22). You can find the opinion here.
